Lazard Q2 2026 Earnings Call Transcript

Lazard (NYSE:LAZ) reported second-quarter financial results on Thursday. The transcript from the company's second-quarter earnings call has been provided below.

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The full earnings call is available at https://event.on24.com/wcc/r/5405524/CAD2F24FE7C95EDCDEB5BA001760CFA5

Summary

Lazard reported firmwide adjusted net revenue of $786 million for Q2 and $1.5 billion for the first half of 2026, with strong performances in Financial Advisory and Asset Management.

Strategic initiatives include the acquisition of Campbell Lutyens to enhance Lazard's capabilities in private capital advisory and the adoption of AI technologies to improve client service and productivity.

The company anticipates stronger revenue in the second half of 2026, driven by Financial Advisory, and expects continued momentum in asset management with net inflows of $7.4 billion in the first half.

Operational highlights include significant M&A completions and strong performances in restructuring and liability management, with notable deals such as Altice France's proposed sale of SFR and NextEra's combination with Dominion Energy.

Management highlighted the successful execution of the Lazard 2030 strategy, with increased client engagement and significant progress in upgrading talent, which is expected to drive future growth and profitability.

Full Transcript

Chelsea, Operator

Good morning and welcome to Lazard's second quarter 2026 earnings conference call. This call is being recorded. Currently all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time. If anyone should require assistance during the call, please press the star key followed by zero on your telephone keypad. At this time, I will turn the call over to William Murdoch, Lazard's Head of Strategy and Investor Relations.

Please go ahead.

William Murdoch, Head of Strategy and Investor Relations

Thanks, Chelsea. Good morning and welcome to the Lazard earnings call for the second quarter and first half of 2026. I'm William Murdoch, Head of Strategy and Investor Relations. In addition to today's audio comments, we have posted our earnings release on our website. A replay of this call will also be available on our website later today. Before we begin, let me remind you that we may make forward-looking statements, statements about our business and performance.

There are important factors that could cause our actual results, level of activity, performance, achievements or other events to differ materially from those expressed or implied by the forward-looking statements, including but not limited to those factors discussed in the company's SEC filings, which you can access on our website. Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update them.

Please also note that unless we state otherwise, all financial measures we discuss today are non-GAAP adjusted financial measures. We believe these non-GAAP financial measures are meaningful when evaluating the company's performance. Reconciliation of these non-GAAP financial measures to the comparable GAAP measure is provided in our earnings release and our investor presentation. Hosting our call today are Peter Orszag, Lazard's Chief Executive Officer, and Tracy Barr, Lazard's Chief Financial Officer.

After our prepared remarks, Chris Hausen, Chief Executive Officer of Asset Management, will join as we open for questions. I'll now turn the call over to Peter.

Peter Orszag, Chief Executive Officer and Chairman

Thank you, William, and thank you to everyone for joining our call today. Firmwide adjusted net revenue was $786 million for the second quarter and $1.5 billion for the first half of the year. Before Tracy takes you through the numbers, it has now been almost three years since we issued our Lazard 2030 plan, and so it seems appropriate to discuss where we are in our efforts to transform our firm for long-term profitable growth. When we laid out our vision for Lazard 2030, we said we would measure success through relevance, revenue, and returns.

We're seeing tangible progress across all three in the first half of this year. Financial Advisory achieved its strongest announced league table position since 2014. Asset Management delivered its best first-half net inflows in nearly 20 years and reached its highest reported AUM level ever. That progress is driven by the role we play for clients. Increasingly, boards, CEOs, and asset owners are turning to Lazard for their most consequential decisions and investments.

We believe this expanding client activity is due to our ability to deliver what we call contextual alpha by combining business analysis with broader insight into geopolitics and the regulatory environment. Clients also value that we can connect capital, distribution, and technology across a broader platform. With our acquisition of Campbell Lutyens, we will establish a third business that will be the leader in global private capital advisory, providing us with a full array of capabilities in private markets to complement our strength in public markets.

At the same time, we are rapidly adopting AI and other technologies to serve clients more effectively and enhance productivity as part of our commitment to being the leading AI-enabled independent financial firm on Wall Street. In short, our work to advance Lazard's legacy is well underway. Tracy will now discuss our financial results along with the near-term effects of the investments we've made. Then I'm going to come back to provide more details on the progress we have made that is reinforcing our confidence in increased growth, productivity, and profitability over time.

Tracy Barr, Chief Financial Officer

Thank you, Peter. Financial Advisory adjusted net revenue was $445 million for the second quarter and $801 million for the first half of 2026. Financial Advisory revenue during the quarter was driven primarily by M&A completions in North America, across Europe, and the Middle East. Our business continued to perform well despite ongoing geopolitical uncertainty, with our advisory team in London performing particularly well during the quarter. Globally, restructuring and liability management delivered strong results, achieving its best first-half performance in almost a decade.

And our private capital advisory business also saw increased client demand, particularly in primary fundraising, highlighting the opportunity ahead with our launch of Lazard CL later this year, demonstrating increased client engagement and activity across the business. Completed transactions include SynOpta on its $1.1 billion sale, Cresco and Network Connect's sale to Olympus Partners. Recently announced transactions include Altice France's proposed sale of SFR for up to 21 billion euros and NextEra's landmark deal with its combination with Dominion Energy, creating an enterprise value of approximately $420 billion.

Liability management and restructuring assignments include Republic National Distributing Company, Searles, Raleigh Minerals, and Trendio. And in private capital advisory, recent assignments include advising Coursera Capital and G Square on continuation funds and advising Regal Healthcare on the raise of Fund 4. We're encouraged by the growth opportunities across Financial Advisory overall, with continued strength in our forward indicators and client engagement supporting a stronger second half of the year.

Peter will speak more about this in a moment. Turning to Asset Management: Asset Management adjusted net revenue was $331 million for the second quarter and $640 million for the first half of the year. Our revenues included management fees of $310 million for the second quarter, 23% higher than the second quarter of 2025 and up 5% on a sequential basis. During the quarter we had market appreciation of $27 billion, foreign exchange depreciation of $1 billion, net outflows of $1.6 billion, and a $1 billion increase attributable to acquiring a controlling interest in Alliant Partners.

We delivered net inflows of $7.4 billion in the first half of the year. As of June 30, we reported AUM of $285 billion, 15% higher than June 2025 and up 10% compared to the prior quarter. Average AUM for the quarter was $279 billion, 17% higher than the second quarter of 2025. Client engagement remains strong. New mandates in the quarter reflect ongoing demand for our quant platform, emerging markets, Japanese equity, international equities, fixed income, and private markets.

Our quantitative equity business, the Lazard Advantage Platform, has more than doubled to $50 billion in assets under management in the past year. The Lazard Advantage Platform provides fundamental insights with a systematic approach, and it has delivered strong performance that is resonating with clients. We continue to develop our asset management platform, and during the second quarter we filed initial registration statements for three additional active ETFs, including our first fixed income ETFs.

This February, in less than a year after launching, our US ETF platform surpassed $1 billion in AUM, which had already doubled to $2 billion in July. Our asset management leadership is also advancing our broader Lazard 2030 objectives. We're embedding AI across research, portfolio construction, and client servicing, and we have recently hired senior roles including a Head of Global Product to help us focus on our investment product set and a Head of Corporate Development to help us pursue targeted growth opportunities.

Going forward, as we look ahead, firmwide total revenue in the second half of the year is usually stronger than the first half, driven by Financial Advisory. This year our current projections suggest that pattern will be somewhat more pronounced. Turning to firmwide expenses, our adjusted non-compensation expense was $172 million for the second quarter, resulting in a non-compensation ratio of 21.8%. Our adjusted compensation expense was $550 million for the second quarter, resulting in a compensation ratio of 69.9%.

Given several factors that could reduce our compensation ratio this year that are still evolving, we continue to accrue compensation in the second quarter at the same level we did in the first. Factors that could reduce compensation on a constant deferral rate include the closing of the Campbell Lutyens transaction, which we anticipate will reduce our adjusted compensation ratio over time, the degree to which we moderate hiring below last year's level, and whether our advisory pipeline continues to build at the current pace.

Our leading indicators suggest we'll have more to say about our full-year compensation ratio when we report third quarter results. Turning to taxes, our adjusted effective tax rate for the second quarter was 69.7%. This was a primary driver of the earnings reduction this quarter, anomalous and associated with a catch-up adjustment with the vesting of equity. It is not indicative of the full-year effective tax rate, which we still expect to be in the high-20s percent range on a GAAP basis.

Regarding capital allocation, in the second quarter 2026, we returned $103 million to shareholders, including a quarterly dividend of $49 million and share repurchases of $50 million. After pausing last quarter due to the Campbell Lutyens transaction, we are pleased to restart our share buybacks with a current repurchase authorization of just over $250 million. We expect to continue buybacks throughout the year, balancing investment in growth with further offsetting share issuances from compensation over time.

In addition, yesterday we declared a quarterly dividend of $0.50 per share. Now let me turn the call back to Peter.

Peter Orszag, Chief Executive Officer and Chairman

Thank you, Tracy. Let me now provide details on our progress which reinforce our confidence that the Lazard 2030 strategy will increasingly translate into revenue returns as our growth investments pay off in asset management. Over the past few years we have sharpened our strategy, enhanced our investment platform and distribution efforts, and transformed our leadership. The result is a renewed focus on the products and strategies where we believe active management delivers advantage and where we can capture client demand.

With this progress, asset management revenue is up 23% from one year ago. Even with our strong net inflows in the first half of the year, ongoing client demand has supported our won but not yet funded pipeline, which continues to replenish and is higher than it was at year end 2025. Looking ahead, we remain on track to deliver positive net flows for the year, and we remain confident in the sustained momentum of the business in the second half of the year and beyond.

In financial advisory, the repositioning of our business by upgrading our managing directors has been guided by the core conviction that raising the bar on talent and productivity would unlock shareholder value over time. Transformation at this scale is unusual, and since we are now emerging from the period during which we made the strategic choice to turn over 40% of our advisory managing directors, we want to provide more context on our progress.

While we do not necessarily intend to provide this level of detail on an ongoing basis, we are doing so now to help investors understand where we are in this transition and what we are seeing as we move through it. To that end, a number of our forward indicators are increasingly encouraging. Conflict clearances are up almost 40% year over year on a dollar-weighted basis and up over 100% for deals above $5 billion. Our weighted backlog for this year is building more rapidly than last year.

Our weighted pipeline for 2027, while at an early stage as is typical for July, is already more than twice the level it was for 2026 at this same time last year, and achieving our best position since 2014 in announced league tables is also a net positive for future revenue. We also see evidence of our strategy in client activity and market position. We have invested in talent in our healthcare and power, energy and infrastructure groups over the past few years as some examples—areas where we already have strength and see room to grow.

This quarter we were involved in eight announced biopharma transactions over $1 billion, while our role as lead financial advisor to NextEra on the largest energy transaction in history demonstrates the expanding global leadership of our PEI group. Taken together, these indicators reinforce our belief that the repositioning of our advisory business is proceeding as we planned. They also increase our confidence in our MD-by-MD analysis, which shows we are now exiting the transitional period in which the hard decisions required to upgrade our talent created a headwind and moving toward a phase in which the investments we have already made shift to a meaningful tailwind for future growth. While progress in this business is not linear and we may experience a slight dip in productivity this year given the large number of new MDs we added last year, our MD-by-MD analysis also shows we remain fully on track to meet our next target of $10 million per MD by 2028. Moving forward, the ramping of our new hires and promotes is increasingly less burdened by the elevated level of separations we made the decision to undertake.

This allows their expanding productivity to translate more powerfully into net revenue growth, delivering the longer-term structural improvement aligned with our Lazard 2030 vision and goals. Two other points are worth emphasizing. First, we are very pleased with the quality of talent we have at the firm, including those we have been able to attract to Lazard and from within. Even after only two years on our platform, the average annual productivity of our newly hired MDs has already exceeded the productivity of the MDs we parted with during our strategic repositioning.

Our tenured MDs set the standard for global excellence, and it is encouraging to see the commercial and collegial integration taking place across the firm. Second, we are committed to bringing the compensation ratio down over time, not only through the operating leverage associated with higher productivity, but also through efficiency initiatives that more directly reduce expenses, including through our expanded use of technology. Stepping back, there are broader, longer-term dynamics supporting our financial advisory outlook.

Companies continue to pursue scale amid rapid technological change and see a constructive regulatory environment. Boards and C-suites increasingly treat geopolitical uncertainty as a feature of the landscape rather than a reason to wait, and an ongoing focus on corporate portfolio composition continues to drive both divestiture activity and M&A. While M&A activity has been robust, it has been concentrated in strategic transactions, and private equity M&A has remained subdued.

Our forward indicators would be even more encouraging beyond their current levels if private equity M&A were to become more active. Together, market conditions, client activity, and strong evidence internally on our progress further validate the trajectory that we see. Integration planning is well underway for the Campbell Lutyens acquisition. As our teams have spent more time together, we have even greater conviction in the strategic logic and cultural fit behind the combination.

We also are even more impressed by the quality of talent Campbell Lutyens brings to complement our world-class PCA bankers. In addition to the revenue opportunity with Lazard CL alone, we expect the broader connectivity between our M&A, restructuring, and fundraising businesses to compound over time. Without including revenue or expense synergies, as we said in the announcement, we expect this acquisition to be accretive to earnings in 2027 and thereafter, with clear potential for further upside.

In sum, we are confident in our path toward our Lazard 2030 objectives, and I would like to thank our colleagues for their hard work and commitment to our clients. Before I close, I'd also like to welcome Kathy Elsesser to our Board of Directors. A retired Goldman Sachs partner with more than three decades of investment banking experience, Kathy has a broad perspective across both public and private markets. We're excited to have her join us as we build on our momentum in financial advisory, asset management, and firmwide.

Now we'll open the call to questions.

Chelsea, Operator

Thank you. At this time, if you have a question, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly, we do ask that you please pick up your handset for best sound quality. We'll take our first question from Gabe Angelini with Bank of America. Please go ahead.

Gabe Angelini, Analyst at Bank of America

Hi. Good morning. Like you said, there's been a divergence year to date in strategic versus sponsor M&A activity. So maybe you can give us a mark to market on why we're seeing that divergence and what, in your conversations with sponsors and strategics, is causing that. And then also, if you can talk about the outlook for sponsor activity in the second half of this year and first half next year.

Peter Orszag, Chief Executive Officer and Chairman

Sure. I think the core challenge really involves valuations. The rise in interest rates that we saw from the exceptionally low period of rates that had existed for a while caused the net present value of cash flows to decline. And that disconnect in valuations, I think, has led to some hesitation to sell portfolio companies that are held by private equity firms, especially if they're marked at a different level or if the return is not what the sponsors had hoped to achieve.

And so I think that's what's causing the delay. Now, there is a counter pressure, which is that LPs would like to see some cash. And so there's building pressure both as this period of higher interest rates persists—and we can talk about the inflationary outlook and the rate environment, but I think that's likely to continue for some period of time—and so there's a bit of, well, what are we waiting for, that's starting to emerge. And also this demand from LPs for distributions.

On the latter point, I would note that one of the accelerants in continuation funds and secondary activity is exactly that. And so we are well positioned, not only with our existing PCA business, but with the Campbell Lutyens transaction and the new Lazard CL leg of Lazard, to meet client demand for secondaries, which we see as quite robust. But it's the interplay between this valuation effect and the demand for cash that I think is at the heart of the question of when private equity M&A will really pick up again.

Beyond that, what I would say is—and to your question about the second half and into 2027—if you listen to both private conversations and public conversations, the heads of the large alternative asset managers, which are the biggest players in private equity, are suggesting that this is about to shift. So we will await those words converting into action, but that's kind of how I would characterize the state of play right now.

Gabe Angelini, Analyst at Bank of America

Great, thank you, that's helpful. And maybe just one for Chris. Obviously you started in the asset management business in December, and I think there have been a number of changes that you've made since joining the business. So maybe if you can walk us through some of the most important changes and maybe some KPIs that we can

Chelsea, Operator

Thank you. Our next question will come from Vernon Hawken with BMO. Please go ahead.

Vernon Hawken, Analyst at BMO Capital Markets

Good morning. Thanks for taking my question. You've spoken to a stronger second half in advisory. Peter, I believe you referenced that you expected it to be somewhat more pronounced than typical. Would be great if you could add some further color to that. What kind of magnitude would be reasonable when you look at your pipelines and think about what is expected to close, and which businesses do you expect to drive the greater-than-normal seasonality in the back half?

Peter Orszag, Chief Executive Officer and Chairman

I think that was Tracy. So I'm going to let him characterize things, but on the different lines of business I'll give a little color, maybe a couple different pieces that are relevant. Our M&A/non-M&A balance is staying roughly 60/40, so that has not really evolved. We are seeing a bit more shift towards North America in the overall mix of our revenue. That's not to be too surprising because just coming back to this J-curve and the ramping of our managing directors, you look at the number of tenured managing directors—so that's MDs on our platform for more than three years—we're going to be more than tripling that number between the base of 2023 to 2025 and 2028. Those people are already on the platform. They're just ramping. And so that's a large number of productive, increasingly productive MDs that are showing up in revenue, and those are disproportionately people that we've added in healthcare, industrials, technology, and then also in some other areas. We made a defense tech hire that will be coming online we're excited about, and more broadly in private capital. So those are some of the areas where we're seeing increased activity.

You're also seeing that show up in the league tables. I mentioned the statistic about the increased activity that we're seeing in healthcare with those people that we're bringing on ramping nicely. And Tracy, I'll let you characterize your comments.

Tracy Barr, Chief Financial Officer

Yeah, Brendan, I think the comment was—and I think you know this actually pretty well—if you were to look historically, primarily on the financial advisory side of the business, the second half is usually stronger than the first half. My comment was simply to say that given the first half being lighter on revenue than we had maybe expected at the end of last year, which we've talked at length about, but the growth in some of those factors Peter just mentioned, the strong performance in some of these ramping MDs and the tenured MDs that we've had, the pace of that pipeline build, we probably talked about in the past that that first half versus second half trend might be more pronounced this year. That's what I was trying to highlight there, and Peter highlighted the reasons for that. I think the only thing I would add to that is that pace of growth into the second half has been at a higher pace than in years past. And it's part of the reason that when, you know, sure, there may be a question on comprehension, it's part of the reason that we think that there's probably some potential for improvement in that.

It's just at this point in the year that pace, that revenue growth continuing at that pace is higher than the years past. And so we have a slightly lower visibility to how much that comp ratio could improve in the second half.

Vernon Hawken, Analyst at BMO Capital Markets

Got it. Okay, thanks. Sorry, Tracy, I messed up. Who?

Tracy Barr, Chief Financial Officer

That's okay.

Vernon Hawken, Analyst at BMO Capital Markets

That's right. I sure hope not. I'll really kick you off if that's the case at different times. So one more—my follow-up. You touched on this a little bit in your comments, Peter. MD headcount. So we saw MD headcount decline a bit quarter over quarter. Can you talk about what drove that and how we should think about headcount for the rest of the year? You commented on the J-curve and improving some of the ramp. You spoke in your answer to my other question on the quantum of MDs that you guys have added.

So what are some of the important things we should think about in that front?

Peter Orszag, Chief Executive Officer and Chairman

Yeah, first, I wouldn't focus too much on the quarter-to-quarter fluctuations in the MD count because that involves some idiosyncratic things about exactly when garden leave expires and someone can join the platform, and also exactly when, on the separation front, the departures happen. I guess the key point is at the end of the first quarter, I believe the number of our advisory managing directors was 238. I'm getting a nod. Okay, so 238. We will be at least at 248, if not more, by the end of the first quarter of 2027.

So we remain on track to continue adding 10 to 15 net MDs per year. And we already have visibility into achieving that objective. And so that's what I would say about the managing directors. And then in terms of where we're hiring, I already gave a little bit of context—healthcare, industrials, technology. But we have a very active recruitment effort. We are getting talent in Europe also, and you should expect it to be disproportionately in the United States, but still adding talent elsewhere in the world.

I don't know if that answers what you were asking.

Vernon Hawken, Analyst at BMO Capital Markets

Yeah, I mean, I was kind of hoping to understand a little bit about the ramping.

Peter Orszag, Chief Executive Officer and Chairman

Oh, sure. Okay, let me talk about that. So look, Brandon, we've done a very detailed analysis of the separations that we strategically made the choice to do and then the new people that we're bringing on. And what I think is important to realize is—and I kind of feel for you on this, so we're providing more clarity at this moment in time—because what we've done is unusual on purpose, again, with a significant amount of basically turnover on purpose in our MD ranks.

And so specifically, the ramping that we're seeing from our new managing directors is very encouraging. For you, it may be a little bit—or anyone on the outside, I don't mean you specifically—that is a little bit obfuscated by this J-curve that we've talked about where there is some, not proportionate to the number of managing directors that we separated with because they were disproportionately lower productivity, but still some revenue loss associated with those separations.

And then you have the ramping of the new managing directors, and that is, I don't want to say unique to Lazard, but we have done something that is unusual and exceptional. Again, we're excited about the evidence that we're seeing that it's playing out as we hoped it to do. So two more comments on this. One, if you look at the managing director-by-managing director ramp, it is looking very encouraging. I give you one statistic that even after two years on the platform, they're already above the separated MDs.

But that's consistent with the pattern that we would like to be seeing and very encouraging. And that was only one data point among many that we have about the ramping occurring in a constructive way and on the schedule that we expected. Second point is that will all be increasingly visible to you as we are now exiting this transitional J-curve moment. So we've done a very detailed analysis of the net impact, if you will, of the separations and the new hires.

That was a significant tailwind—I mean, sorry, headwind, excuse me—in 2024. It was moving more towards neutrality in '25 and '26, but still weighing on our results to some degree. And as we move into 2027, it becomes a quite significant tailwind when you go MD by MD very granularly. And that is consistent with the forward indicators that we're seeing. So from roughly this point forward, as there are more indicators that we're emerging from this transitional J-curve moment, you should see the external results of the ramping more consistent with the patterns that you may have seen at other firms because they did not have the large number of necessary separations. So going forward, you'll just see the ramping of new hires increasingly translate into net revenue growth and then into earnings and comp leverage.

Chelsea, Operator

Thank you. Our next question will come from Mike Brown with UBS. Please go ahead.

Mike Brown, Analyst at UBS

Great. Good morning. Thanks for taking my questions. So I wanted to start on the asset management side. So the first half, $7.5 billion of net inflows, clearly a really positive start to the year, clearly tracking to the positive net flows for the year. I guess what's clear is you had that successful first half, but it's also clear that you have a large cushion here for the second half. I assume you're not expecting the second half to be kind of the mirror image or opposite of the first half.

Maybe any comments on the puts and takes for flows in the second half

Tracy Barr, Chief Financial Officer

Thanks, Mike. That's a great question. So look, we are very confident in the sustained commercial momentum we're seeing in the asset management business. As you said, it is a very strong first half. Underlying that, there's a real breadth to what's contributing. You're seeing that notably from our systematic equities, from our Advantage platform that has doubled in size to $50 billion over the last year. But there's a large number of other services contributing: emerging markets, listed infrastructure, Japan, robotics, and then some fixed income strategies as well.

So there's real breadth to it from a product perspective. There's real breadth to it from a geographic perspective. We're seeing net inflows in Asia, we're seeing that in Europe, we're seeing that in the US. If we look at our looking forward, if we look at our won-but-not-funded pipeline, it is at a level today that is higher than we had at the end of last year. That gives us a lot of confidence in this sustained momentum going forward. As you track through month by month, you can kind of split the business in half.

There's a retail business that's been a very steady contributor to the net flow picture. And then we have institutional that, by its nature, is lumpier with big mandates that we can win and also big mandates we can see redeemed. So that will give us some volatility month to month. But given the level of commercial activity I'm seeing, very confident as we look through the remainder of the year.

Mike Brown, Analyst at UBS

Okay, great. Thank you, Tracy. And if we just shift back to the comp leverage discussion, comp ratio discussion a little bit. Lots of good color there. And I know you don't have a crystal ball and it's going to be very kind of revenue dependent. If asset management continues on the path it's on, I guess it'll be kind of FA-driven here. Clearly, optimism is high in the second half. So I guess if I frame it this way, if financial advisory is up say 40% or so in the second half versus the first half, or call it 20% versus the second half of last year, can you get to that 65 and a half level for the comp ratio that you were at last year?

Thank you.

Tracy Barr, Chief Financial Officer

Yeah, this is a really good question. And I think we're probably going to get a few more questions. So if you don't mind, I'm actually going to get into a bit more detail here because, to Peter's point, I know that there are certain things that we're seeing in the business that you don't have around that forward momentum. And then secondly, and actually I would point out—I don't know if we mentioned it—but there was a new slide in the investor presentation that exactly highlights graphically some of the volume of change in the MDs and some of the curve that I'll talk to in just a second; I think it was on page 24 of the investor deck. So I might point that out because that could be helpful to some people. So let me just take a minute. I mentioned first off a few factors that would limit visibility at this point in the year. Let me flag that, with perhaps one exception: in the past decade, our Q2 accrual has always kind of mirrored our Q1 accrual. And if you went back to our Q1 accrual, we had a lighter Q1 on revenue. We had higher fixed costs.

The vast majority, if not almost all, of the Q1 accrual was due to fixed comp—significantly more than in 2025. And that ties back to Peter's comment about the hiring. And so to maintain that consistent vacancy, that's partly why we had this due-to accrual. But that's regular practice on our end. And so it's not really until the second half of the year that we have better visibility. But you're right: if revenue performs—and that's partly why we had that caveat—if revenue continues to perform, that comp ratio can come down in the second half of the year.

I'm not going to get into specifics about where it could end up, but I think you're thinking about it the right way—that it is kind of indexed to FA performance in the second half of the year, and we'll get more visibility in that second half, or certainly into Q3. But I do want to step back and address something I continue to think that people may be underappreciating. Peter just highlighted this: the significance of that repositioning and that J-curve impact that Peter mentioned.

I want to just touch on that briefly. It exists on both the revenue and expense sides of the comp ratio. So on the revenue side, Peter just mentioned this: revenue from our new MDs takes time to build. We're very excited about the pace of that and the MD productivity, even by cohort. But the revenue that we lost from the separated MDs is more immediate. On the expense side, there's a related but inverted dynamic—basically an inverted curve—because lateral MDs, which were a higher proportion of rebuilding that, you know, over 90 MDs hired since 2023, that's very different.

That gross impact is very different than kind of the 10 to 15 net MDs per year that I think a lot of people focus on. I think the impact to the comp ratio largely comes from the accounting impact and delayed accrual amortization related to that gross change in the MD pool that really happened between, effectively, end of '23 and '24. And so just as a reminder, since '23 we separated with over MDs and replaced them with roughly 90 new hires and promotes.

That gross impact is far more significant than that net. So if you're only focused on that 10 to 15 or the elevated hiring that Peter focuses on, you're probably underappreciating and may not be accounting enough for the higher amortization levels. And if you dig into—and I could get into this more if we wanted to—the kind of fixed costs related to guarantees and the amortization from prior periods, if you look at first half of '26 versus first half of '25, there's a pretty big difference.

That's again contributing to that. So I just wanted to highlight that gross emphasis on the MD pool change. That drives a lot of it. But to tie back to your original question, I think you're thinking about it right: the improvement in the comp ratio in the second half of the year is really indexed to FA performance in the second half of the year, and Peter highlighted all of that positive momentum that we're seeing.

Chelsea, Operator

Thank you. Our next question will come from James Yarrow with Goldman Sachs. Please go ahead.

James Yarrow, Analyst at Goldman Sachs

Thanks for taking the question. I want to touch a little bit on AI impacts on investment banking. I would posit that much of the AI impact on investment banking activity appears to be in financing markets rather than M&A. So I'd just love to get your perspective on the ways in which Lazard's strategic advisory business can benefit from AI, and specifically on M&A, but more broadly on strategic advisory and maybe in the secondary business as well.

Peter Orszag, Chief Executive Officer and Chairman

Okay, so let me answer that in a couple different ways. So first, with regard to client activity, we have, through Lazard Capital Solutions, a lot of capabilities in matching strategics with sources of private capital, including insurance capital. And that is a very active vector for a lot of investments, frankly even beyond AI—a lot of corporate balance sheet optimization. So that's one piece. I think, secondly, especially as we move towards the Lazard CL third leg of Lazard in Private Capital Advisory, there's an exceptionally good data asset that the combined businesses will have in terms of insight into GPs and LPs.

And deploying our AI technologies to that data is going to—we already know—provide lots of insight that is commercially relevant and valuable to clients. So one of the things we haven't talked a lot about but that we're excited about is ways of deploying that data asset, if you will, with the scale that the Lazard CL combination will bring. And then the third piece I'd say is with regard to how we serve our clients. I've spoken about this before and I mentioned it briefly, but we are committed to being at the forefront of this ongoing revolution in technology, and it is an exciting moment because the tools continue to advance quite rapidly.

So the deployment of AI within Lazard to our banking teams and to the asset management side of the business is very encouraging, and every day there are new use cases. And so I'm very excited about the ability of our adoption of this technology to help us better serve clients and serve clients in new and innovative ways. So a lot more to come on that topic as we continue to pursue new opportunities. And, you know, I would just call out the exceptional AI team we have internally, and then also the fact that we've got Dmitry Shevalenko, the deputy at Perplexity, on our board, who is a fantastic resource for helping guide us to where the puck is going and not just where it currently sits.

James Yarrow, Analyst at Goldman Sachs

That's very helpful. I just wanted to zoom in and clarify one point on the advisory strength in the quarter. I would argue a strong result here and ahead of what we had at least forecasted. Was there anything that changed relative to your commentary at the intra-quarter conference? Whether that be in terms of faster closings, pull-forwards, or something else? Just trying to put this quarter's results into context relative to your—what I would characterize as—quite constructive second half outlook for strategic advisory.

Peter Orszag, Chief Executive Officer and Chairman

Look, what I would say is there was no exceptional pull-forward or that sort of thing. I think the point is, instead, it's not really a quarterly business because things can bounce around, and what we're seeing is increasing momentum across the business, some of which showed up in this quarter. And there wasn't any particular, you know, M&A/non-M&A mix shift, et cetera. I think it's just an indication of a bit more strengthening as we're emerging from this J-curve period in our momentum.

Chelsea, Operator

Thank you. Our next question will come from Connell Schmitz with Morgan Stanley. Please go ahead.

Connell Schmitz, Analyst at Morgan Stanley

Good morning. Thanks for taking my question. So I guess sticking with the AI point, you've added a new piece to your progression timeline with the rollout of Claude, but you have not spoken much about it. Does this mark a bit of a shift in your strategy from a provider standpoint? And then broadly, this involves increased tech investment—how should we think about the model around non-comp expenses trajectory for the remainder of the year, and has there been any progress made so far regarding the reduction in corporate overhead expenses that have been talked about?

Peter Orszag, Chief Executive Officer and Chairman

Okay, I'll take the first part and Tracy can take the second part. We have always been, throughout this AI journey, committed to not locking into a single model—not having a kind of sole-source vulnerability or choke point, if you will. So we've been very explicit in having a variety of models that sit inside of our firewall and that can be used by our banking teams. And I think the rollout of Claude is just consistent with that general philosophy.

And Claude is not the only model inside the firewall, as it were. So we've got multiple different models. I think the important thing that we're trying to drive is the cultural change in terms of how work is undertaken and to be able to easily swap out the underlying model as we do That work is very explicitly part of our AI strategy. So I wouldn't make too much of Claude or any of the other models other than to say the progression and the quality of the output is remarkable and it's exciting to see. One final comment is I'd say at this point our AI spend and token costs is still quite modest and so not really material from any non-comp expense perspective. But I'll let Tracy comment more broadly about non-comp. So just before I close out relative to the opportunity, the spend here is still quite modest and we will obviously watch that.

But we see huge opportunity here and are trying to drive the adoption culturally, and we're pleased with what we're seeing.

Tracy Barr, Chief Financial Officer

Yeah, Peter, I'd echo that same point. I mean we track the AI spend really closely and as Peter mentioned, we have access to a lot of models and we can track that actually by vendor. I may actually come back to that point around non-comp spend at the end. But you asked about some of the cost efficiency things. So firmwide we're kind of trying to simplify our corporate and support function processes and structure broadly. But before I talk about that, when you think about the two businesses, in asset management we already talked about streamlining our research platform, portfolio managers and analysts working more efficiently and closer coordination across the equity businesses. In asset management there was already in the past month a series of headcount reductions reflecting that efficiency and some just business-as-usual improvement, which I think is positive. In financial advisory, Peter's already mentioned this, but we're looking towards smaller deal teams and, as we've talked about in the past, really a lower total associate-equivalent MD ratio. So really speaking to that MD headcount.

So as far as whether it's AI or team structures affecting the front offices, if you want to think about it that way from an expense perspective, we'll have a lot more detail in the second half of the year but that's where the focus is. Right now in the back office or in corporate we've launched an in-depth review and there's a lot of work being done on that. As I highlighted before, when you think about the corporate expense, what we're most interested in is structural change that is sticky, that delivers a kind of a divorce in the relationship of inflation and those corporate and support functions from revenue growth.

As Peter's highlighted, we're very positive on the forward-looking trajectory on revenue. My hope is that the efforts we're doing in corporate lower the growth rate in that corporate expense as the total revenue grows for the firm. That is a long-term project. We will have a lot more detail towards the end of the year on that, but that's where the efforts are going. The only point I would make on coming back to the AI spend, as Peter mentioned, it's not material but the promising indicator is more cultural if anything.

We have the data as we look at the non-comp spend in the AI piece that shows this cultural adoption of AI within Lazard and we're pretty confident about the return on investment there. One thing that I don't think will be a near-term impact but will be something industry-wide to watch is as we shift more of those expenses toward technology over time. Nothing near term. You might see actually some shift between comp expense and non-comp expense as the workflow streams, but that's not anything near term.

Right now what we're observing is just a cultural adoption of AI. Let me first, I wouldn't characterize it the way that you mentioned. You know, we were excited to restart our buyback activity after we were kind of precluded from doing that with the Campbell Lutyens transaction. We expect that to continue. But even I think it's a fair characterization that actually our buyback activity, while healthy, is still at a modest level versus historical levels and wouldn't preclude any kind of investment from a strategic or an inorganic perspective.

Peter Orszag, Chief Executive Officer and Chairman

I think the question was different, if I understood it, which is: does this signal that you're not at a stage in an inorganic process that precludes current buybacks? And I think that would be a fair conclusion from our statements. But we've also said we are actively looking at lots of inorganic options, and so it depends on what you mean by the timetable. We're actively looking at lots of different options.

Tracy Barr, Chief Financial Officer

I think that's all fair.

Peter Orszag, Chief Executive Officer and Chairman

Was that the nature of the question?

Chelsea, Operator

Thank you. Our next question will come from Steven Chubak with Wolfe Research. Please go ahead.

Steven Chubak, Analyst at Wolfe Research

Hi, good morning and thanks for taking my questions. So appreciate all the detail unpacking some of the underlying business momentum that admittedly is obscured by the MD J-curve. Also recognize the comp flex that you spoke to in the second half is certainly going to be contingent on the magnitude of the FA ramp. But looking beyond '26, was hoping you could speak to expectations for the comp trajectory, if you just extrapolate based on the current ramp that you're seeing in productivity from new hires while still staying the course in terms of the commitment to adding talent in line with the 2030 targets.

Peter Orszag, Chief Executive Officer and Chairman

That is a great question. And we see, obviously, the comp ratio coming down as we continue to pursue the Lazard 2030 plan while also making the new investments. Because again, to Tracy's point, I think the underappreciated point here is that elevated level of separations on a one-time basis that we had to do then necessitated—or it was always part of the plan—was matched with an elevated level of gross lateral hires, not net, gross lateral hires.

That creates a temporary bump in the comp ratio. So there are kind of three things to highlight as we move into 2027 and 2028. One is just with time, the comp ratio comes down because the one-time effects of those buyouts, if you will, fade out of the equation. Secondly, as we continue to raise productivity—and again, I underscored our conviction that we're on track to hit our $10 million per MD productivity target by 2028—we get operating leverage out of the non-MD comp pool because as productivity for MDs goes up, the non-MD comp-to-revenue ratio goes down.

And then the third is that we do see the opportunity for efficiencies in how we go to market and in some of our corporate and other functions. So there's a time effect, there's an operating leverage effect, and then there's a direct efficiency effect. And the combination suggests a significant decline in '27 and '28 in the comp ratio. I don't know, Tracy, if you wanted to elaborate.

Tracy Barr, Chief Financial Officer

No, I think that's really helpful. I think just to maybe even dig in a bit deeper on that timeline expectation—Peter and I have talked about these J-curves and Peter highlighted how in '26 you're kind of seeing the headwind from a revenue perspective die out and that turning into a tailwind in 2027. From a timing perspective, and this is really just accounting, I would emphasize this again. A lot of the compensation expense that is driving some of the comp story already happened.

It happened as those elevated hiring levels on a gross basis that Peter highlighted, which has really kind of already happened. And as you know, given our deferrals and our vesting schedules and everything else, a lot of that comp expense amortizes over three years. As Peter highlighted, with the revenue growth we're kind of seeing, even in the second year these ramping MDs exceed their productivity versus the MDs that were separated. So what does that all mean from a timing—just trend wise?

I think what you'll see is that there'll be a revenue tailwind in '27. On the comp side, I think you really see it revert back to a normalized basis really in 2028 because it's kind of a lag when you think about comp expense on its own as its layer of the comp ratio. It's got a little bit of a lag versus the revenue showing up simply because of the accounting amortization. So I agree with the way that Peter just characterized it—that there's this downward trend that is going to be evident both in '27 and '28 and that it's really material over that two-year period.

And part of it is just a better appreciation for the unwind of the amortization that's happening from an accounting perspective on the comp ratio and this dramatic build on the revenue side from the J-curve that Peter highlighted earlier.

Steven Chubak, Analyst at Wolfe Research

Thank you both. That's really helpful color. And just for my follow-up, wanted to just get an update on the non-M&A businesses, whether it's private capital advisory or restructuring—just how you see momentum trending across the different geographies.

Peter Orszag, Chief Executive Officer and Chairman

Yeah, so on the geographies I mentioned that we've seen a bit of a shift towards North America. I think that's partly market driven. It's partly driven by our MD mix which is growing disproportionately in North America on purpose. And then with regards to the non-M&A businesses, just to give you again that we're at roughly 60% M&A and 40% non-M&A in the advisory business. The non-M&A piece will expand as we move to integrating Campbell Lutyens. Just as one indicator of that, we have said previously—and we still believe—that the Lazard-CL combination will produce $500 million in revenue in 2027 next year.

And underlying trends that we're seeing this year: PCA often has a lot of activity in the fourth quarter, but it's trending in the ways that we expected in a healthy fundraising business. And I'd say the same thing in restructuring where the restructuring team is flat out—sorry, I should say restructuring and liability management, since most of it's liability management.

Chelsea, Operator

Thank you. Our next question will come from Devin Ryan with Citizens Bank. Please go ahead.

Devin Ryan, Analyst at Citizens Bank

Thanks. Good morning, Peter, Tracy, Chris. I'll just ask one question here. Peter, you mentioned conflict clearances are up over 100% for deals over $5 billion. That stood out to us. I know that's a material acceleration from the 50% you mentioned last quarter. Obviously, Lazard's always been involved in large, complex deals, but can you just talk about some of the recent acceleration and whether that's a function of a kind of diverging backdrop between strategics and sponsors versus being a result of maybe a concerted effort under your leadership within Lazard to concentrate on larger deals and perhaps maybe the mix is shifting within the firm and even increasing market share there? Thanks.

Peter Orszag, Chief Executive Officer and Chairman

Yeah. A couple comments on this. First, I think you may be mixing and matching slightly. We'll get back to you. But the hundred up 40% overall dollar weighted conflict clearances and 100% for deals above $5 billion is a fee weighted estimate. The prior number you may be citing was the number of conflict clearances. We'll get back to you to make sure. But I believe that that's. But the broader point holds, regardless of that detail. We'll get back to you on that, which is we are seeing a significant uplift in our large cap activity. I think that's the reflection of three things. The first is that we, you know, that's what's happening in the marketplace. So coming back to the private equity discussion we were just having, disproportionately strategic activity is the thing driving M and A right now. And disproportionately large deals are driving the strategic activity.

So that's partly market. Second, and I think we articulated this on one of the prior earnings calls we had. We were pleased with investments that we had been making in our private capital coverage efforts, but we set ourselves the task of lead table prominence and large cap prominence, including in 2026. So this is partly a kind of leadership and management initiative. It's always been core to Lazard to play in that arena. And then the third thing I think is the operating model that we've adopted, the increased level of relationship building and convening and also the hiring that we've been doing. We are in an increasing number of boardrooms and C suites and we're pleased with the progress that isn't even in the conflict clearance numbers, which is the traction we're getting with large clients.

And I just highlight they are also Lazard's historical ability, which has been refreshed and renewed and reinforced to deliver contextual alpha, that is to incorporate the geopolitical piece into the analysis, I think is part of what's giving us traction there. But partly market, partly leadership initiative, and partly our talent and our competitive advantage in what I call contextual alpha.

Devin Ryan, Analyst at Citizens Bank

Yeah, got it. Thank you, Peter. And you're correct. Yeah, I was citing the conflict clearances, about five from last quarter. So slightly different.

Peter Orszag, Chief Executive Officer and Chairman

Yeah, that was a number comparison. But the point, the point still holds. There's disproportionate activity there.

Devin Ryan, Analyst at Citizens Bank

Yeah, appreciate it. Okay, I'll leave it there. Thank you guys. Appreciate it.

Chelsea, Operator

Thank you. And our last question will come from Alex Bond with KBW. Please go ahead.

Alex Bond, Analyst at KBW

Hey, good morning everyone. Thanks for squeezing me in here. Follow up to the last question. Actually around deals in the 1 to 5 billion dollars range you obviously cited. The 5 billion plus range has been quite strong year to date, but wondering if you've seen any pickup in activity in sub $5 billion range. I know part of the equation here is obviously the still depressed sponsor activity, but is there anything else that you'd point to here that might help get this deal cohort more active here moving forward?

Peter Orszag, Chief Executive Officer and Chairman

I think a lot of that activity is going to come back to the private equity dynamic we talked about. The reason we gave you the overall dollar weighted conflict clearances is to give a sense of overall activity. It is still skewing somewhat towards the very large transactions. But if private equity in particular were to become even, you would see a significant pickup in smaller deal sizes coexisting with those large strategic ones. And so I guess the way I would characterize it is the forward indicators that are very encouraging are encouraging despite the fact that private equity M and A has not yet kind of fully reawakened. And if it were to do so, the forward indicators would be even stronger.

Alex Bond, Analyst at KBW

Okay, makes sense there. And then maybe one more just quickly on the non comp side, just wondering if your previous guide of mid to high single digits year over year for non comp growth still holds. And just any, any commentary on upward pressures on things like travel expense from higher energy prices. And I think you touched on this a little bit earlier, but related costs on the tech side would be helpful as well. Thank you.

Tracy Barr, Chief Financial Officer

Yeah, on the non comp, that guidance still holds. I think it might be up a point or two, but from what I said before, but still in that mid to high single digit increase, I think the point on that there might be a little bit more noise in it this year also because of the Campbell Legends transaction and some of the advisory that related to that. We'll try our best to kind of carve that out or at least identify it. On the AI spend, Peter mentioned that that will be increasing.

Again, we've highlighted that adoption, but it's not yet material. And again, the return there is very, very strong. You mentioned travel. I mean, this is an area where I'm not too sure I want to distinguish between actual energy costs versus actual. What I would highlight is travel activity. Convening client meetings is on the rise, as Peter mentioned. We are very bullish on that. And that's probably an area of non comp that, you know, while we always want to be efficient, it's not something we're trying to dial back.

We're trying to make sure our bankers and our portfolio managers are with their clients, that there's a lot of activity. We see that as a differentiator for Lazard. Particularly in an environment where AI is increasing, we view the client relationship as paramount. And so that convening activity, that higher T and E spend will be offset by some of the savings that we're trying to do in other areas of non comp. But we actually see that as almost a revenue driver, if anything else.

Alex Bond, Analyst at KBW

Great, thank you.

Chelsea, Operator

This now concludes Lazard's second quarter 2026 earnings conference call. We appreciate your time and participation. You may disconnect at this.

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