Ken Moelis has engineered the transaction of his lifetime. The veteran investment banker is taking his eponymous seven-year-old advisory firm public.
Revenue and net income have grown at a fast enough clip to potentially justify a valuation of $2 billion or more. But investors will be granting the founder an exceptional degree of control for the opportunity to ride his coattails.
Moelis & Company brought in $411 million in revenue last year, putting it right in between the smaller Greenhill and larger Evercore. The firm’s $70 million profit is flattered by an almost nonexistent tax rate. Replacing that with a 35 percent levy and then using Evercore’s multiple of almost 40 times 2013’s earnings puts the company worth around $2 billion.
That’s just above the $1.9 billion valuation set when Sumitomo took a 5 percent stake in Moelis two years ago. And that may look conservative if the top line continues growing and management can keep costs under control - the pretax margin improved from under 10 percent in 2012 to 17 percent last year, in line with Evercore’s.
Unlike his rivals, Mr. Moelis is stretching the limits of corporate governance to a degree that could even make Silicon Valley blush. As a baseline, he is issuing two classes of shares, with the Class B stock carrying a turbocharged 10 votes a share. Only partners will own these shares, which will be placed into an entity called Partners Holding. Mr. Moelis will control that, leaving him holding easily more than half the voting rights to the entire company.
That means that Moelis & Company does not have to bother meeting some of the disclosure and other governance standards that its rivals do. The firm does not need a majority of its board to be independent, nor does it need to put any independent directors on its compensation, nominating and corporate governance committees. It does at least intend to appoint three independent directors in the next year or so, but their power will be limited.
And there is more. If Mr. Moelis leaves the firm bearing his name, he only has to wait on the sidelines for a mere 90 days before being allowed to set up a rival advisory service.
Over the course of his career, from Drexel Burnham Lambert to Donaldson, Lufkin & Jenrette to UBS and now his own shop, Mr. Moelis has displayed an exceptional ability to advocate for his clients’ interests. With his firm’s I.P.O., he is showing he’s capable of negotiating in extraordinary ways for his own benefit, too.
Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
