Piper Sandler Companies (NYSE:PIPR) Q3 2020 Earnings Conference Call October 30, 2020 9:00 AM ET

Company Participants

Chad Abraham – Chairman & Chief Executive Officer

Deb Schoneman – President

Tim Carter – Chief Financial Officer

Conference Call Participants

Devin Ryan – JMP Securities

Michael Brown – KBW

Mike Grondahl – Northland Securities

Operator

Good morning, and welcome to the Piper Sandler Companies Conference Call to discuss the Financial Results for the Third Quarter of 2020. [Operator Instructions] The company has asked that I remind you that statements on this call are not historical or current facts, including statements about beliefs and expectations are forward-looking statements that involve inherent risks and uncertainties.

Factors that could cause actual results to differ materially from those anticipated are identified in the company’s earnings release and reports on file with the SEC, which are available on the company’s website at www.pipersandler.com and on the SEC website at www.sec.gov.

This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. Please refer to the company’s earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the Investor Relations page of the company’s website or at the SEC website. As a reminder, this call is being recorded.

And now, I’d like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.

Chad Abraham

Good morning, everyone. Thank you for joining our third quarter 2020 call. I hope you and your families continue to be in good health during this difficult period. Deb Schoneman, our President; Tim Carter, our CFO; and I will go through our prepared remarks and then open up the call for questions.

Let me start by providing some overall comments on our financial results before turning to our corporate investment banking businesses. The scale and diversity of our business model, resiliency of our employees and deep client relationships have generated strong and consistent results this quarter and throughout a turbulent 2020.

Adjusted net revenues for the third quarter of 2020 were $298 million up on a sequential basis and year-over-year. Our record revenues during the quarter were led by exceptional capital raising. We generated a pre-tax margin of 20.4% and adjusted earnings of $2.38 per share.

Year-to-date, we have achieved impressive results with revenues of $835 million and EPS of $5.73 both representing high watermarks for the firm for the first nine months of the year. Our operating margin was also strong at 17% for the year-to-date period.

While many of the challenges presented by the global pandemic persist, corporations and public entities continue to adapt and our clients are consistently turning to us for advice. We are raising capital for clients as they consider current financial conditions, we are helping clients reposition balance sheets and portfolios, and we are advising clients on how to best achieve their strategic goals in the current market environment.

We are delivering on the investments we have made in the business and benefiting from current market trends, which is driving strong growth for our shareholders. Looking forward, we expect to finish the year strong as advisory revenues start to rebound and our other businesses continue to generate strong results.

Turning now to our corporate investment banking results. We generated total corporate investment banking revenues, including advisory services and corporate financing of $177 million in the third quarter of 2020, up 5% sequentially. Revenues of $482 million for the first nine months of 2020 were up 34% year-over-year.

The range of our product expertise and the multiple ways we can assist clients is demonstrated in our year-to-date revenues with M&A activity generating 44% of revenues, equity financings contributing 38% and debt and capital advisory engagements producing 18% of total corporate investment banking revenues.

Specific to corporate financing, we generated $100 million of revenues in the third quarter of 2020 and $208 million during the first nine months of the year. Both are all-time records for our firm. Capital markets remained very active during the third quarter as strong investor demand, rising valuations and stable markets fueled near-record new issuance volumes.

Activity for us during the third quarter was principally in the healthcare sector with contributions from financial services and technology. Our healthcare team completed 26 transactions during the quarter and served as a book runner on all 26, which reflects the strength of our franchise and the trust clients place in our expertise and execution capabilities.

Within healthcare capital raises were concentrated in biopharma one of our areas of strength. For sub $5 billion market cap companies in biopharma, we book ran 20 equity deals during the quarter ranking in the top 3. And during the first nine months of 2020, we book ran 43 deals and maintained our top 5 ranking.

In financial services, activity was focused on debt financings as banks raise capital at historically low interest rates and position balance sheets for future uncertainty. We offer a comprehensive differentiated value proposition for our banking clients where we maintain nearly 60% market share in debt issuance for community and regional banks.

Technology issuance volumes remained strong in the market and we participated in 13 offerings during the quarter. On a year-to-date basis, we participated in 19 offerings up 138% over the prior year. We have eight publishing research analysts covering over 120 technologies stocks, a 50% increase in coverage since the beginning of last year driven by a significant expansion of our software footprint. The technology sector is a large fee pool where we are underpenetrated, representing a growth opportunity for us. Supported by our recent activity in October, we believe that our corporate financing results will remain relatively strong in the fourth quarter.

Turning to advisory. Our advisory practice slowed in the early months of the pandemic as many engagements were put on hold until business conditions became more clear. That said, we maintained our market position and we believe Q3 will mark the trough in the cycle.

We’re seeing a nice increase in the number of new M&A assignments and older assignments that were paused have been restarted. Further, active discussions with clients remain very encouraging, increasing our confidence as our M&A pipeline builds.

Valuations remain strong, financing markets are open with historically low interest rates for debt capital and CEO confidence is building. We generated $77 million of revenues for the third quarter of 2020 down 10% sequentially. We completed a total of 66 transactions during the quarter consisting of 31 M&A deals spread across our industry verticals and 35 capital advisory transactions, which were concentrated in financial services, as the team continues to advice on a high-volume of debt transactions.

Revenues for the first nine months of the year were $274 million down 8% compared to an M&A market that was down approximately 30%. We believe that this demonstrates the quality of our team, as well as the breadth and scale of our advisory business. A key component of our strategy is to drive overall market share gains through accretive combinations and selective hiring and our strong relative performance on a year-to-date basis illustrates successful execution of this strategy.

As an example we’ve retained our leading position in bank M&A this year having worked on 7 of the 10 largest bank mergers by deal value in the U.S. and every bank merger in the U.S. with an announced deal value greater than $1 billion. Secular drivers of M&A, like innovation, a changing market landscape and low organic growth are driving client activity.

Also pointing to an improved outlook M&A deal announcements market-wide increased during the third quarter. And more recently we’ve seen several announcements of large-cap transactions. We also have seen an increase in new M&A deal announcements in our areas of strength specifically, healthcare, financial services consumer and energy.

As I noted earlier, our M&A pipeline continues to build and we expect to see advisory revenues grow in the fourth quarter and continue into 2021. Before turning the call over to Deb, I want to reiterate the importance of investing in and growing our corporate investment banking platform.

Our investment banking Managing Director headcount of 137 is up 7% from the beginning of the year and represents one of the deepest and broadest platforms amongst our peers. Just as our strong relative performance market leadership and broad product capabilities are helping us to build client relationships, they are also making our platform a destination of choice for talent looking to best serve their clients.

Our pipeline of hires is robust with several bankers looking to partner with us to help grow our product sector and geographic capabilities. Now I will turn the call over to Deb to discuss our public finance and brokerage businesses.

Deb Schoneman

Thanks Chad. Let me begin with an update on our equity brokerage business. We generated revenues of $33 million for the third quarter of 2020 down 18% on a sequential basis. As expected, equity market volumes declined in the third quarter as the market took a breather from the tumultuous first half of the year.

Early August marked the 1-year anniversary of our combination with Weeden and we couldn’t be more pleased with the success of integrating the team onto our platform. With Weeden’s trading expertise and our research capabilities, we are a premier destination for clients. Our institutional vote ranks continue to improve with clients of all sizes and we are capturing mind and market share. On a year-to-date basis, we recorded $122 million of revenues, up 120% from the prior year. The quality of our research and specialized equity sales distribution are key differentiators for us in supporting our record equity financing activity.

We continue to build out our research platform and based on number of stocks under coverage we are ranked number 1 in small cap and number 3 in smid cap. And based on the Greenwich survey of smid cap portfolio managers, our sales force is ranked number 1 in the healthcare, financials and consumer sectors. We expect our equity brokerage revenues to increase in the fourth quarter as market volumes pick up and there is potential for increased volatility stemming from the upcoming U.S. elections.

Next let me turn to fixed income services. The Federal Reserve continues to inject liquidity into the market and has signaled low interest rates will extend into 2023. We generated fixed income revenues of $53 million in the third quarter of 2020, up 10% sequentially. And on a year-to-date basis revenues totaled $143 million up 145% over the prior year.

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We continue to benefit from the synergies of our combination with Sandler by capitalizing on our expanded client base and successfully cross-selling the unique product and strategic capabilities of both of our firms. All of our client verticals were active in the quarter. Clients have continued to reposition their balance sheets and portfolios as they adjust their strategies to accommodate the prolonged low-rate environment by putting more cash to work and seeking any available yield curve or spread opportunities.

In addition our market leadership in both public finance and community bank debt underwriting continues to provide proprietary deal flow that differentiates us with clients and drives incremental secondary sales and trading activity. We expect our fixed income revenues to remain strong as clients continue to strategically reposition in a changing market barring a potential pause in activity related to the upcoming U.S. elections.

Turning to our public finance business. For the third quarter of 2020, we generated $26 million of municipal financing revenues, down 14% sequentially and up 21% year-over-year. Our public finance business is benefiting from a stable market, low-yield, strong investor demand and market share gains. We completed 200 negotiated transactions the number 2 issuer nationally, raising $4.5 billion for clients during the quarter.

We saw strong governmental issuance especially for school districts where we have market leadership in multiple states. For the first nine months of 2020, we generated revenues of $80 million an increase of 53% over the prior year. Through negotiated and private placement transactions. we raised an aggregate par value of $14.1 billion for clients up 83% year-over-year relative to the market that was up 36% demonstrating significant market share gains.

We expect Q4 revenues to remain strong as market conditions are conducive to new issuance and refinancing. Now I will turn the call over to Tim to review our financial results and provide an update on capital use.

Tim Carter

Thanks Deb. As a reminder my comments will be focused on our adjusted non-GAAP financial results. We generated revenues of $298 million for the third quarter of 2020 up 2% sequentially and 47% year-over-year. Corporate financing revenues which hit a record high for our company and strong fixed income brokerage activity drove the sequential improvement. While as expected revenues from advisory services and equity brokerage moderated during the quarter.

Revenues on a year-to-date basis totaled $835 million up 53% compared to the prior year reflecting the investments, we have made through our acquisitions and organic growth from the market leadership we have achieved in many of our businesses. We remain well positioned to serve our clients in more ways than ever while generating strong financial results for our shareholders.

Turning to operating expenses. Our compensation ratio for the third quarter of 2020 was 61% down from the sequential quarter as the result of strong performance and an improved outlook. Our comp ratio is largely variable to revenues and we continue to manage compensation levels, while considering investments, employee retention and business outlook. This can drive some additional variability in our compensation ratio from quarter-to-quarter as we have seen this year.

Our year-to-date compensation ratio was 63%, and we expect that on a full year basis our comp ratio will end the year near this level. Non-compensation expenses for the third quarter of 2020, excluding reimbursed deal expenses, were $42 million reflecting the continued pause on travel and entertainment as well as lower trade execution and clearing expenses from reduced equity volumes.

On a year-to-date basis, excluding deal expenses, non-comp costs were $138 million, up 28% over the prior year compared to a 53% increase in revenues. We expect non-comp expenses to remain at or close to these levels in the near term, and we will continue to actively manage costs as they are an important driver of margin expansion.

For the third quarter of 2020, we generated an operating margin of 20.4%, a 270 basis point improvement from the second quarter. Our operating margin for the first nine months of 2020 was 17%, up 240 basis points over the prior year period, driven by the increased scale of our platform and the successful integration of both Weeden and Sandler.

Our tax rate for the third quarter of 2020 was 26.9%. On a year-to-date basis, our tax rate of 23.7% reflects income tax credits recorded in the first half of 2020, related to provisions in the CARES Act. We continue to expect our tax rate will be within our targeted range of 26% to 28% going forward.

We generated $2.38 of diluted EPS for the third quarter of 2020, an increase of 23% on a sequential basis, driven primarily by record revenues and our improved margin. Diluted EPS, on a year-to-date basis, was a record $5.73, up 28% over the prior year, resulting from our strong revenues, expense discipline and the accretive impact of our acquisitions.

Now turning to capital. Our capital and liquidity positions are strong and our leverage remains low. For the first nine months of 2020, we generated $103 million of adjusted net income, up 59% over the prior year, reflecting our scale and ability to generate significant amounts of cash from operations.

Turning to dividends. Given our strong performance and improved outlook, the quarterly dividend will return to pre-pandemic levels. The Board approved a quarterly dividend of $0.375 per share to be paid on December 11, 2020 to shareholders of record as of the close of business on November 24, 2020.

On a full year basis, we expect to maintain our dividend policy of returning 30% to 50% of our adjusted earnings through a special make-whole dividend, paid in the first quarter of each year. Consistent with the prior year, we anticipate the payout ratio for fiscal year 2020, to be at the low-end of the range.

We are pleased with our strong results for the first nine months of 2020. Our combinations with Weeden and Sandler have added material scale and operating leverage to our business. We remain focused on investing in our business to grow revenues and earnings.

With significant opportunity to grow market share across cycles, our proven financial performance and leadership across several franchises, we believe we represent a unique opportunity to drive shareholder value over the long-term.

Thanks, and we can now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Devin Ryan with JMP Securities.

Devin Ryan

Great. Good morning, everyone.

Chad Abraham

Hi, Devin, good morning.

Deb Schoneman

Good morning.

Devin Ryan

Maybe to start here on some of the commentary on the M&A outlook. Just be great to put a little bit of a finer point on the tone for business right now and how it’s recovered over the past few months. And I’m really just trying to get a sense of whether we’re back to call it the pre-pandemic pace or what feels different today, if we’re not. And just also, the deals that you’re seeing are they deals that were temporarily put on hold with the pandemic, or are you seeing deals maybe even pulled forward because of potential tax changes that come with the different administration? Just trying to get a little more flavor for what you guys are seeing in the M&A outlook.

Chad Abraham

Yeah. Thanks, Devin. I definitely think, we’re certainly more upbeat about the M&A pipeline, and what we’re seeing and that really started to change at the end of the summer and September, and has really continued. And I would say, as we said, it’s sort of a combination of both.

We have definitely restarted some of the deals that were put on hold, but we also have several new pitches. So I think the interesting question is going to be, September October has been very busy starting a lot of deals and it will just be a race to the finish to see how much we get done by December and how much gets done in Q1.

Specific to the tax question, I can definitely think of a few transactions that are driven by trying to get something done this year, but I wouldn’t say that’s the vast majority. And then, just relative to the — are we back at pre-pandemic run rates, I think it has significantly improved, but not in every sector and in all areas. So, no, I wouldn’t say we’re back at the pre-pandemic run rates, but a lot better than where we’ve been.

Devin Ryan

Okay terrific. Very helpful. And then, just another one here just on potential implications of the election next week and to the extent there was a change administration, and obviously, people are talking about the potential for higher tax rates. Any thoughts around how that could impact the public finance business? It was clearly when we had tax reform kind of a big topic of conversation. And so anything that you guys are gearing internally around potential for changes that could impact the munis underwriting business or on the trading side as well?

Deb Schoneman

Devin, I think the main aspect that impacts is really the appetite for municipals relative to other products, and so that’s where we may have seen some decline historically, although maybe not even as much as we may have anticipated. So while it is part of the discussion around what could be helpful for the business going forward, I wouldn’t say it’s been a dramatic topic that we’ve talked about, but obviously would have some positive impact just on the appetite for that security.

Chad Abraham

Yeah. And I guess, Devin I would just add relative to the — just public finance obviously, we’ve seen a really nice nine months in public finance and a lot of people taking advantage of low interest rates. I think there’s an argument to be made depending on the election, next year could be really big on infrastructure spend. So even though a lot of companies have — or a lot of entities public entities have refinanced, there’s certainly an argument that it’s going to be very active next year with lots of projects and frankly, continued low tax rates.

Devin Ryan

Got it. Okay. And then just another one here on the brokerage business. I think this environment has really validated the business model and the diversification and resiliency of your model. And clearly coming into this year with the volatility, as the investment banking outlook maybe soured a bit, even though it’s I think done better than people thought the brokerage business has been tremendous and picked up a lot of slack here.

And what I’m trying to think about is the fact that you have a couple of acquisitions in here, it kind of makes the comparisons relative to last year, difficult as we’re trying to think about what maybe a more normal brokerage backdrop could look like to the extent volatility does decline if that’s the assumption we want to make here.

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So is there any way to think about kind of what a pro forma the business has done over the past nine months relative to last year, if you were to include the acquisitions last year? And how are you guys thinking about the potential for that business to potentially moderate, if obviously the environment improves and some of the other businesses that are procyclical continue to improve like M&A?

Deb Schoneman

Yes. I’ll take that Devin, and I’ll take it in two pieces both equity and then fixed income. On the equity side, we definitely benefited from the market in Q1, obviously with the extreme level of volatility. When we originally talked about the combination of really all the businesses, we spoke to that, because there wasn’t good historical data to it being somewhere around $130 million business.

What I would say is we are seeing less dissynergies than we may have originally anticipated. And so I think if you look at the last two quarters run rate here, after we got past the volatility of Q1, you’re going to see something that’s a little more normalized. I mean to your point will ultimately depend on the level of activity in the market but just to give you some sense of that.

On the fixed income side, we had talked about that nearly doubling our revenue. I think we had somewhere around an $80 million business, in 2019 prior to the Sandler acquisition. And here too I would say, while the market has been very conducive to fixed income business, you’re seeing a lot of prepayments, refinancings, driving cash into our clients’ balance sheets and portfolios and their need to redeploy that trying to go out a little in duration to capture some yield that they’re losing through that, there’s still refinances and prepayments. So there is a conducive market.

The other thing I would say though is we have done a lot of work to fully combine the fixed income businesses, integrate the trading desk and integrate the analytics team so that we’re able to capture and leverage the complementary both products and skill sets across the expanded client base. So that one is a little trickier for me to determine exactly how much is market-driven, given what I spoke to versus having the one plus one equal two. But I would say we continue to believe at least as we go into 2021 that we’ll see the strength that we’re seeing today.

Devin Ryan

Okay. Thanks, Deb. Just last one here on thinking about operating margins moving forward. And appreciate this quarter maybe the comp ratio was a little bit below normal as the outlook for the full year improved and so there was some adjustment there. But the firm generated over 20% operating margin, so I’m trying to think about kind of where that margin can go.

Is 20% a level that you potentially could be operating at, as we look out and then if we were to assume the revenue backdrop remains healthy? And what I’m getting at is the mix of business may shift around a little bit and so the bigger driver probably is on the comp ratio here and trying to think about can the comp ratio move down from the 2020 level and is around 20% operating margin may be an aspirational-type level, or is that a reasonable level that the firm could be operating at in a better revenue backdrop?

Tim Carter

Yes. Devin, maybe I’ll take that. I think you certainly see the leverage that we can get in the business as we did this quarter. I think it’s also informative to think about it from a year-to-date basis and at a 17% level. That margin has continued to move up over the last several years. But I do think, if you look out a couple of years, a 20% margin is where we’re marching towards. And I think you’re right in terms of thinking about the comp ratio, I mean for this year, yes we’re likely to end within our guided range.

But if things begin to normalize we’re always thinking about investment and what we do through the comp ratio but there is an ability I think if things normalize that you can think of next year maybe moving towards the lower end of that range and you continue to get some leverage through the comp ratio. But that’s always going to be a little dependent on what we’re doing from an investment standpoint and how we think about the business. But yes, getting to a 20% margin is sort of where we’re moving to.

Chad Abraham

Yes. And I would just add Devin, when we did the Sandler deal and we announced the deal, we certainly felt like a conservative range for our operating margin was 17% to 19% and we thought it would be aspirational to get to 20%. I definitely think in this current operating environment with some of the expenses that aren’t going to go back and the fact that we’re seeing a bit of an increased scale – I think when we did Sandler, we knew we’d be real happy if we were having $300 million quarters, which we’ve come close to the last couple of quarters.

So I think all of that combined has certainly moved in our thinking that we should have several 20% margin quarters. It may take a year or two for that to be consistent and show up on a full year basis but yes, we’ve definitely moved that target in.

Devin Ryan

Great. Appreciate all the color guys. I’ll hop back in the queue.

Deb Schoneman

Thanks, Devin.

Operator

Your next question comes from the line of Michael Brown with KBW.

Michael Brown

Hi, good morning, everyone.

Chad Abraham

Hi.

Tim Carter

Hey, Mike.

Michael Brown

So capital raising has just remained red hot and it really sounds like it can continue here. So I think the challenge is really how long can it go. And so what I was interested in hearing from your perspective is what is kind of the bull-bear case here that could cause levels to stay – stay where they’re at or even accelerate? And what could cause it to just kind of fall off from here?

Chad Abraham

Yes. I think for us it was going to be very industry-specific. I mean there is no question that the amount of stimulus and capital and the fact that people don’t have great places to invest. I mean it is definitely pushing money in the equity markets and pushing valuations.

For us, specifically, you have to look at where we’re driving a lot of that business. By far the two biggest areas for us in financing; number one, by a vast, vast margin is health care. That’s the vast majority of our ECM revenues. So, you’d have to have a perspective on the health care market. I think, we’ve said for a while, there’s a long-term trend with a lot of new technology and things going right in the biotech market and investors that have made a lot of money, still have a lot of dry powder. So we in the health care market and with innovation certainly see that continuing.

If I was to paint a bear case, sometimes, when you get a lot of new regulation in health care, there’s going to be tons of commentary on drug prices, tons of regulation. And if you see health care stocks go down, that’s not going to be good for our health care financing business. The other part of our financing business that is just doing incredibly well is the — lots of small and medium community banks are financing. And in this capital wave, they’re doing it through debt financing and we have high share.

And we certainly still think, we’re in the middle innings for that. I mean, there’s lots of banks that haven’t refinanced. So those are the two biggest pieces for us. There’s other markets. Obviously, technology is fantastic and tech stocks and software stocks and new IPOs, we’ve participated, but that’s a big opportunity as well. So, yes, I think people like to say, well, hey is this just a financing bubble and is it one quarter or two, but I do think with the stimulus and capital backdrop, this potentially has some legs.

Michael Brown

Yes. Great. I appreciate the color, Chad. I wanted to ask about your fixed income trading business. I guess, what I’m trying to think about is, the operating backdrop for fixed income next year. And you talked about the Fed committing to low rates through ’23 and so, how does that lower rate environment play out for you and your mix on the fixed income side? And then, as we think about the transition away from LIBOR, do you expect that to drive elevated trading activity in 2021?

Deb Schoneman

So first of all, just on the overall lower rates, I think this is really going to be a function of as I was speaking to before the amount of refinancing and prepayments on the mortgage side that continue to come in. And so, if these rates stay low, we do expect that to continue, which obviously also is a function in the capital raising side as Chad was speaking to on the corporate debt and also in our municipal business, which tends to have a helpful impact on the overall trading environment, when you’re having a strong issuance. Relative to LIBOR, I think for our business specifically, I don’t see it having a huge impact in our trading activity going forward, so I guess that’s what I would say about that. Not a huge impact.

Michael Brown

Okay. Great. I appreciate the color on that. I wanted to ask about capital return. So, going into the pandemic, you guys reduced the dividend; you had very conservative action at that time. And as a result, it really exceeded expectations you’ve now brought them back to where they were pre-COVID. So one, how should we think about your capital return plans going forward? And then two, just from RC given the difference between the adjusted net income and the GAAP net income from RC, how should we think about what your capital return potential is in terms of buybacks and dividends, if we’re thinking about like a payout perspective?

Chad Abraham

Yes. Maybe, I’ll start and let Tim take the second part, Mike. I mean our view has sort of returned to where we were. We really need all of the tools. I think, at the scale we are and with the cash we’re generating, we certainly look at buybacks. We look at the regular quarterly dividend, we look at the special and then obviously, we’re going to keep trying to deploy capital through investing and acquisitions. And there’s no question had we — we used a lot of excess capital with Sandler and Valence and so, certainly had put a lot of cash to work there, which probably put a little pressure on our buybacks in other ways, we were going to use capital.

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All of that being said now, we’re back to generating a lot of cash. And I think, in hindsight, you could criticize should we have cut the dividend. I think, we were just looking at that in a point of time and being conservative. And so, I think our perspective now is, we need all of the avenues to deploy cash. It will depend on what the bigger opportunities are on the acquisition and investment side, but we’ll continue to look at the rate of our quarterly dividend. We’ve said all along, we’re going to continue to pay the special and we’ll be active with buybacks.

Tim Carter

Yes. And Mike, maybe just on the GAAP versus non-GAAP. Obviously, the expense that’s coming through from a GAAP perspective is significantly related to all of our acquisitions. And that is really a non-cash amortization charge, whether it’s the amortization of deal consideration or amortization of intangible. Those are the primary components of that.

So, we really think about yes, sort of that ability to deploy capital based off of those — based off of our adjusted non-GAAP results. So that really becomes the driver that’s how we set the dividend payout of the 30% to 50%. And those items are taken into account when we think about it from a GAAP perspective. So, again yes, it’s really the focus on that cash generation which generates the capital that we’ve got the ability to deploy.

Michael Brown

Okay. Great. So speaking with the 30% to 50% payout ratio relative to the adjusted earnings is kind of the right way to think about it. And then just a quick follow-up on the non-GAAP adjustments. So with acquisitions of Sandler and Valence and Weeden, I guess those expenses if I remember correctly, a lot of the restricted stock consideration and that retention rolls off over — I think the average was roughly three years or so. Can you just remind us, if that’s right? And then, is the intangible asset amortization — how does that tend to trend down over the next like two years or so? I just want to make sure, I kind of have the pieces correct there.

Tim Carter

Yes, Mike. So you’re right. In terms of the deal consideration, we’ve got things going out sort of three to five years. A lot of that is more heavily weighted over the first three to four years. So, you’ll see that come through in a little bit more of a recurring way over that time period. I think on the intangible more specifically that can become a little bit of longer term, but it’s much more front-end weighted. So you see a significant component of that come through in the first two years and then it drops off significantly after that.

Michael Brown

Okay. Great.

Chad Abraham

Yes. Mike, I would just say, said another way over the next four or five years, you’ll see the GAAP and non-GAAP converge.

Michael Brown

Right. Okay, okay. Great. And just one thing on capital return, just to kind of close the loop on that. One thing, I guess, we didn’t talk about is potential for other acquisitions. Is that something that — now you’ve kind of integrated the Sandler and Valence and Weeden acquisitions, would you consider going back out and looking to make any other bolt-on acquisitions here, or are you still at the point where you’re trying to get the synergies out of each of those acquisitions and feel comfortable with your strategic mix?

Chad Abraham

Yes. I think, what we’d say — what I said last quarter, which is, frankly they’re all going quite well. We think having been pretty active that we know how to integrate acquisitions. We know how to create opportunities based on the acquisitions. We’re really pleased with the results. Obviously, we’ve got a good track record here now of a few quarters with Sandler and Weeden results.

All of that being said, we’re conscious of the fact that we did a few big things. And so, I think, it’s unlikely in the next couple of quarters for us to look at larger transactions, but we’re going to continue to be opportunistic. And I think like we’ve done in the past, we will continue to look at smaller boutiques and things that give us product expertise, industry expertise, places where it’s just not going to be possible for us to grow fast enough organically.

And so, I do think, we’ll continue to be active. And I think just given our relative strength and performance and revenue and cash generation, we think we’re in a position of strength. So we do think we’ll be active over the next six or nine months, but I think it will be on some of the smaller stuff.

Tim Carter

And, Mike, maybe just as a follow-up to that. Related to the dividend payout ratio 30% to 50%, I mean, we certainly take into consideration what we’re thinking about from an acquisition perspective. I mean, Chad referenced on your first question around all of the levers. I mean, it’s the dividend, it’s the buybacks and it’s the ability to have capital to do acquisitions. So we think about all of those in combination when we set some of these levels.

Michael Brown

Okay, great. That’s a helpful clarification. Thank you for taking my questions.

Chad Abraham

Thank you.

Deb Schoneman

Thank you.

Operator

And your next question comes from the line of Mike Grondahl with Northland Securities.

Mike Grondahl

Hey. Good morning, guys, and congrats on the quarter. Three questions and I’ll just maybe ask them all. One, the M&A pipeline today, how does that kind of compare to maybe the three-year average? Are you kind of sitting at 60% of it, 90% of it?

Secondly, I saw you recently led a SPAC deal in the financial services area, kind of what’s your kind of thought on that area going forward? And any thoughts on maybe a healthcare deal or an energy deal?

And then, lastly, clearly, there’s less travel going on with COVID. Do you think that’s affecting the business at all? Do you think you didn’t get on any deals because of a lack of travel? So those three, if you don’t mind.

Chad Abraham

Yes. And maybe, I’ll just take those in order. Relative to the pipeline, it’s grown a lot the last couple of months. As I said, I don’t think its back to sort of where we were sitting in January, whether that’s 80% or 90%, it’s probably close. With certain industry teams, it’s certainly back or even greater. And certain industries, it’s not necessarily at full capacity.

One of the areas we’ve — where we’re pretty heavily weighted in certain of our industry teams is private equity. And I would say, in Q2, we just weren’t seeing a lot of that come back. In Q3, activity has really picked up. Private equity is very active, looking at transaction, so it will be interesting.

We’re conscious of the fact that a lot of this will depend on what happens with the virus and shutdowns and travel and how private equity looks at doing deals in the next three months. But if the last couple of months are an indication and we have a couple of months like that, I do think we’ll be back at a full M&A pipeline relatively early into next year.

Secondly, on the SPAC question. Yes, we did a SPAC in financial services. I think you know this, but this has been an incredibly active year. We do not have a history of doing a lot of SPAC transactions. We’re much more active now. The market’s become much more mainstream.

You look at the investors in the SPACs, that has certainly evolved and the list is much longer. Some of that’s just being driven by, there’s so much extra liquidity in cash that it’s viewed as a good place to put your money. So I do think parts of that market are here to stay.

Where we’re going to participate is where we really believe in the management teams, where we have experience with those teams and in sectors that we know incredibly well. So you sort of said, would we look at energy and health care? Yes. We did this one in financial services. So those are the logical places where we’ve got that expertise and those relationships with the team that we will be active.

And the last question? Oh, yes, the last question was travel. Yes. That’s still at really low levels. I will say in Q4, I’m definitely seeing more and more bankers more research analysts, more sales people travel. Certainly, not everybody and certainly not every client base is sort of open to that. I think, I’ve said this before, I do think there is roughly half of our travel that will only come back in some capacity or some fraction and then some half of our travel that will come back in a big way.

I had a couple of conversations with certain bankers this week and they were traveling every week and having no problems with clients wanting to see them and felt like that was a real competitive advantage. So we’re obviously staying very flexible with what our clients want, what our producers want to do. But, as I said, I don’t think that expense will come back the way it was. I think there will be permanent savings, but I don’t think our current run rate is going to stay where it is.

Mike Grondahl

Got you. Okay. Hey, thanks a lot.

Deb Schoneman

Thanks Mike.

Operator

And we have no further questions on the phone lines. I’d like to turn the call back to Mr. Abraham for any closing remarks.

Chad Abraham

Okay. Thanks, operator. We’re very happy with our results through the nine months and we’re encouraged that we’re seeing increased advisory activity. We very much look forward to updating you all in Q4 and our full year 2020 results early next year. Thank you, everyone. Have a nice day.

Operator

Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation. You may now disconnect.



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