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LAZARD (NYSE:LAZ)
Q4 2019 Earnings Call
Jan 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to Lazard's earnings report meeting. This call is being recorded. [Operator instructions] At this time, I will turn the call over to Alexandra Deignan. Please go ahead.

Alexandra Deignan -- Director of Investor Relations

Thank you, Ian. Good morning, and welcome to Lazard's Earnings Call for the full year and fourth quarter of 2019. I'm Alexandra Deignan, the company's head of investor relations. In addition to today's audio comments, we posted our earnings release and an investor presentation, which you can access on our website at www.lazard.com.

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 about our business and performance. There are important factors that could cause our actual results, level of activity, performance or achievements 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 these forward-looking statements.

Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful in evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our earnings release and investor presentation. Hosting our call today are Kenneth Jacobs, Lazard's chairman and chief executive officer; and Evan Russo, chief financial officer. They will provide opening remarks, and then we will open the call to questions.I will now turn the call over to Ken.

Kenneth Jacobs -- Chairman and Chief Executive Officer

Thank you, Allie. Good morning. Today, we reported record fourth quarter operating revenue, reflecting solid performance across our businesses. The quarter was driven by increased M&A revenue and higher management and performance fees in Asset Management.

We entered 2020 in a strong position with a global platform that incorporates diverse revenue streams and significant scale, innovative client solutions, and growth opportunities in which we continue to invest. In Financial Advisory, full year operating revenue reflected increasing momentum in the second half. Our volume of announced European M&A transactions has risen sharply in the last 6 months. Our M&A activity has been especially strong in the $1 billion to $10 billion range.

In 2019, our number of announced transactions increased by 10% over the prior year, even as the market decreased. We continue to be a leader in global restructuring and debt advisory assignments, with significant pockets of opportunity globally. We've been especially active in the retail and energy sectors. All of our Financial Advisory practices remained active in 2019.

Our investments in Shareholder Advisory and data analytics are having a significant impact on our business by helping us identify opportunities faster and provide innovative advice for clients. Our sovereign capital and private capital advisory businesses continue to advise governments, corporations, and partnerships on financing strategy and capital raising around the world. We continue to see growth opportunities across our advisory businesses and have been aligning our professional base accordingly. In 2019, we made leadership transitions, including global -- new global heads of Financial Advisory and M&A as well as new country heads in France, U.K.

and Brazil. We also recruited a new venture and growth banking team based in London. Our Asset Management business had a strong fourth quarter with higher management and incentive fees, reflecting AUM growth and the performance of our strategies. We achieved modest net inflows during the quarter.

Our assets under management increased by $17 billion, or 7%, during the quarter. We entered 2020 with AUM of $248 billion, up 15% from the start of 2019. Overall, our investment performance was strong across most of our platforms in 2019. Our investments in new strategies and product extensions continue to provide new avenues of growth.

Our quantitative business achieved net inflows for both the fourth quarter and full year as did our local equity and our global and multiregional fixed income platforms. We continue to invest in growth of asset management through investments in people, technology, and distribution as well as the development of new funds and the scaling-up of existing platforms. In 2019, we reinforced our ESG expertise with the hiring of a new Global co-head in New York and London and expanded our quantitative investment platform with the addition of two investment teams in San Francisco. We continue to add to our European and Asian distribution and are gaining new clients across these regions.

And we have launched new funds in international and global equities as well as fixed income. Evan will now provide color on our results, then I will comment on our outlook.

Evan Russo -- Chief Financial Officer

Thank you, Ken. Lazard's full year operating revenue for 2019 was $2.55 billion, 8% lower than the record level achieved in 2018. This reflected higher revenue in the second half of the year versus the first half, as we anticipated. Our record fourth quarter revenue of $708 million was 3% higher than the prior year's period.

In Financial Advisory, we completed the year with $1.36 billion in revenue. In the fourth quarter, our advisory revenue was in line with the prior year quarter, reflecting a substantial increase in revenue from Europe and Asia Pacific. In Asset Management, we generated $1.16 billion in revenue for the year. In the fourth quarter, operating revenue increased by 7% over the prior year's quarter, reflecting higher management fees and incentive fees.

Fourth quarter management and other fees increased 2% sequentially from the third quarter, reflecting higher average AUM. For full year 2019, our average fee was 49 basis points, down from 51 basis points in 2018. This reflected a shift in our mix of assets. We had net inflows for the year in our quantitative and fixed income strategies while, at the same time, we experienced net outflows in our emerging markets platform.

Incentive fees for the year were $21 million, the same amount as in 2018. Fourth quarter incentive fees were $14 million, reflecting strong relative and absolute performance across a mix of our equity and fixed income strategies. Key strategies generating incentive fees included quantitative and global equities and convertibles and emerging markets debt. Average AUM for the fourth quarter was $238 billion, up 6% from last year's period and up 2% sequentially in the third quarter of 2019.

The sequential increase was driven by market appreciation of $13 billion, foreign exchange appreciation of $4 billion, and net inflows of approximately $500 million. For the full year, we experienced net outflows of $9 billion, driven primarily by outflows in emerging markets equity and debt as well as multiregional equity. Other platforms had strong net inflows for the year, including quantitative and local equities and our global and multiregional fixed income platforms. We finished 2019 with AUM of $248 billion.

And as of January 28, AUM was approximately $247 billion. The decrease reflected foreign exchange depreciation of $2.4 billion and net outflows of $1.1 billion, offset by market appreciation of $2.3 billion. Market volatility has been increasing in January, and we anticipate additional near-term outflows of approximately $500 million for the month. Looking ahead across our franchise.

Asset Management is off to a good start with AUM well above the average level for 2019. In Financial Advisory, we have momentum entering the first half of the year. Our current level of activity is higher than at this time last year, and we are encouraged by the increase in European M&A where we have a deeply established presence and growing opportunities driven in part by shareholder activism. We're seeing strong demand across our advisory practices globally, including restructuring engagements.

Turning to expenses. We continue to demonstrate our cost discipline and ability to manage the firm through cycles. Our compensation ratio for 2019 on an adjusted basis was 57.5%, up from a record low of 55.1% in 2018. On an awarded basis, our annual comp ratio was 57.7% compared to 55.8% for 2018.

Our comp ratio was well within our targeted range. Adjusted noncompensation expense for the year rose 3% to $499 million, reflecting our increased investments in the business, primarily in our technology infrastructure, which we have highlighted throughout the year. For the full year 2019, our noncomp expense ratio of 9 -- 19.6% remains within our targeted range. Our effective tax rate for 2019 was 24.1%, compared to 22.7% a year ago.

This was in line with our expectations of an annual effective tax rate in the mid-20s. For the coming year 2020, we continue to expect an effective tax rate in the mid-20% range. Turning now to capital allocation. We continue to generate strong cash flow and return capital to our shareholders.

In 2019, we returned $850 million, primarily through a combination of share repurchases and dividends. During the year, we repurchased 13.7 million shares, which included 1.7 million in the fourth quarter. As a result, our fourth quarter diluted weighted average share count declined by 9% from the prior year to 115.5 million shares. In 2020, we expect to continue our share repurchase program at a minimum to offset potential dilution from our year-end equity grants.

Our total outstanding repurchase authorization is now 370 -- $379 million. Ken will now conclude our remarks.

Kenneth Jacobs -- Chairman and Chief Executive Officer

Thank you, Evan. The year is off to a strong start. Overall, the global macroeconomic environment remains constructive. Fundamentals for global equity markets are steady, and credit conditions remain favorable.

We're seeing momentum in global M&A, including Europe, as business confidence grows. And despite global trade tensions, we've seen an increase in cross-border transactions around the world. The forces driving global strategic activity remain in place. Technology-driven disruption continues to be a catalyst for M&A across industries.

Shareholder activism has become a global phenomenon. Last year, almost half of all activist campaigns had an M&A thesis. In addition, climate risk is becoming increasingly relevant to company valuations and is an emerging catalyst for strategic activity. Our ESG expertise is well-entrenched in our Asset Management business, and we are building out this expertise as a firm.

In Financial Advisory, we are well-positioned. We have the most sophisticated strategic and Shareholder Advisory capabilities, deep relationships in local markets around the world, and the expertise of global sector and specialty teams. In Asset Management, institutional investors are increasingly dividing the portfolios between low-cost passive strategies and high-value-added active strategies. We have a world-class investing franchise in markets that reward deep fundamental research, and our quantitative strategies are competing effectively in the market for low-cost products.

We see opportunities for growth across our businesses, and we are allocating our resources accordingly. We remain focused on serving all of our clients well while we manage the firm for profitable growth and shareholder value over the long term.Now let's open the call to questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] We can take our first question from Brennan Hawken of UBS. Please go ahead. Your line is open.

Brennan Hawken -- UBS -- Analyst

Hi. Good morning. Thanks for taking the question. Just wanted to ask on expenses.

Noncomp really looked quite good versus at least what I had been expecting. Was there some onetime -- any onetime noise in there that we should adjust or think about when we're considering a baseline on which to build here into 2020?

Kenneth Jacobs -- Chairman and Chief Executive Officer

Evan?

Evan Russo -- Chief Financial Officer

Yeah. Hey, Brennan. Good morning. Look, as we said, the noncomp came in about $130 million in Q4.

We continue to focus on maintaining the cost discipline as we talked about throughout the year. This year, noncomp increases reflected a couple of things. One is the continued rolling in of our technology investments as well as some additional marketing and business development as we started ramping up more marketing in the middle of this year. And it was offset, as you mentioned, by a couple of other items, most notably, lower pension costs in this year versus last year.

Last year Q4, we had some higher pension costs that got accrued in that quarter, and this year, we had less pension costs that accrued. So I guess that's the one component. But I'd say it's a combination of the cost discipline that we've been working through throughout the year. But for the year, on an ongoing basis, I think we expect to remain at elevated levels for the next few quarters, as we've mentioned, as we continue to roll in our technology projects, we expand hiring and continue to grow our real estate -- our footprint -- grow our real estate footprint to ready expansion as we invest for the future.

I think -- look, Brennan, it's always important to remember, our spending in our noncomp. The way we think about it is it's very much strategic spending. We're creating a stronger platform, a strong and more vibrant platform to accelerate growth. So I think this quarter was a good quarter.

We got a couple of components in there that were helpful, but I think it's sort of in line with the way we've been managing costs throughout the year.

Brennan Hawken -- UBS -- Analyst

Great. That's really helpful. Appreciate the time.

Operator

Thank you. We can now take our next question from Chris Walsh of Wolfe Research. Please go ahead. Your line is open.

Chris Walsh

Hey, guys. Good morning.

Evan Russo -- Chief Financial Officer

Morning.

Chris Walsh

Just wanted to ask one quick one on the share count, recognizing that amortization of historical stock accruals generally higher in the first half of each year and that 2019 may have seen elevated net buybacks. After the net debt issuance and with a lower stock price, how should we think about appetite for buyback and kind of the cadence of buyback over the course of 2020?

Evan Russo -- Chief Financial Officer

Sure. Hey, Chris. I'll take that one. I mean, look, we continue to focus on -- as we've been saying, focus on returning the excess cash to our shareholders.

As you mentioned, we had accelerated a lot of buybacks earlier in this year. As we mentioned, we bought back 13.7 million shares over the course of the year. Frankly, almost 20 million shares over the last 15 months. So I mean, at a minimum, as we always say, we're going to offset the dilution we get.

This quarter, we bought back enough shares to offset the amortization of shares, effectively keeping the weighted average share count flat. I think if you think out into 2020, we're going to continue to use the excess cash flow to buy back shares. The first couple of quarters, we focus on buying back the dilution. And then as we get later into the year, we see what kind of excess cash we have, we'll be putting it to work to work to reduce the share count as best we can.

Chris Walsh

Got it. Thanks. And then just one more on flows in the Asset Management business. You saw a much better flow in December.

And I don't want to read it too much into one data point, and I heard your color around expectations for negative flows in January. So just kind of wanted to see if anything has changed in your outlook there at all. Can you speak to the uptake of some of your newer launches and comment on any allocation trends you're seeing across your client base?

Evan Russo -- Chief Financial Officer

Sure. So look, I think when you think about our flows, as you said, we had positive net flows in Q4, and we've had some outflows -- net outflows at the beginning of this year as well. Look, you have to remember, as we always say, we are in a lot of -- most of our assets, 85% of our assets, are in institutional side. It's pretty lumpy.

So you're going to get some movement from time to time. Plus, important to remember, I mean, we had over $13 billion of gross inflows just in Q4. So inflows and outflows, there's always material movements in every given quarter. So I think our outlook remains the same as it's been.

We've seen some outflows, as we called out, in the EM platform in the quarter and the full year. And then specifically, as we've said in the past, specifically in the value part of our platform, we've talked about value underperforming growth and quality. Value has been under pressure out of favor, as you well know. The growth part of our platform is performing really well.

We're having great performance there. And indeed, performance is pretty strong across most of the AUM that we have. Over 70% of our funds are outperforming on a one-year basis. And so I think our trends will continue.

I think we expect to see some muted outflows, some additional outflows, as we said, in some of the emerging markets products in this quarter. And I think -- but I think our outlook for the business continues to remain the same. We're focusing on performance, and we expect the flows will follow.

Chris Walsh

Great. Thanks for answering my questions.

Operator

Thank you. We can now take our next question from Devin Ryan of JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities -- Analyst

Great. Good morning, guys. How are you?

Evan Russo -- Chief Financial Officer

Good morning.

Devin Ryan -- JMP Securities -- Analyst

First one here, just on operating leverage in the model and just expectations in how we should think about incremental margins, just given some of the moving parts with some of the headcount changes late last year. But then I also hear your commentary around investment into the business continuing, and then hopefully, there's some revenue growth in 2020 as well. So just trying to put that all together and get an update on any moving parts that we should be thinking about for incremental margins.

Kenneth Jacobs -- Chairman and Chief Executive Officer

Sure. So I'll take the first part of it. And then if there's a follow-up, with Evan, on some of the specifics. What I'd say is, look, it's pretty straightforward.

When there's revenue growth, we tend to get pretty good operating leverage in the business and revenue declines. It's more difficult to get that kind of operating leverage. And I think we do a pretty good job in the revenue decline to manage the real cost of compensation, which were reflected in the awarded comp on both sides of the business. So what I'd say is this year feels better than last year at the start.

We've got strong momentum going into 2020. It feels a lot better to me than it did at the same time last year. So we would get revenue growth this year. You should expect to see improved operating leverage in the business.

Devin Ryan -- JMP Securities -- Analyst

Got it. Terrific. OK. And then just one on the advisory backdrop.

And great to see the improved momentum relative to a year ago. And when I talk to investors, one thing that continues to come up is just how the U.S. elections could start to affect the markets, if at all, and I think there's some concern that as we get closer, it could start to create a little bit of paralysis. And so I'm curious if you're hearing about that at all from clients, if you have a view of whether it feels like that's going to be a big factor or the trends that are driving conversations today, both in the U.S.

and outside the U.S., kind of stronger than potential disruption from that.

Kenneth Jacobs -- Chairman and Chief Executive Officer

Well, I think right now the drivers of the market are related to the macroenvironment, the economy as a whole, which is -- remains pretty robust in the U.S. and has stabilized and probably improving in parts of Europe. And if you look at the traditional factors that drive activity, credit valuation, confidence levels, credit remains widely available. Rates are at historic lows.

Spreads are reasonable. Financing, again, widely available. Valuations, probably a little rich in parts of the market, a little more reasonable in other parts of the market. I think in terms of confidence levels, trade tensions have been reduced with the Phase 1 of the China trade agreement and then the Mexico and Canada agreement is now signed.

I think that helps. And the election itself, as we get closer, perhaps there's volatility around that. But again, I think one of the lessons of the last 12 years is, oftentimes, less gets done after election than people expect because of the nature of majorities and supermajorities in Congress and the inability to get that much through. So I think, in some ways, there obviously could be concerns around election, but there are also issues that kind of moderate that.

And I think as we get closer to the election, we'll see. But for the moment, we don't see much commentary around the elections affecting deal activities.

Devin Ryan -- JMP Securities -- Analyst

Great. That's helpful color. Thanks, Ken.

Operator

Thank you. We can now take our next question from Richard Ramsden of Goldman Sachs. Please go ahead.

Richard Ramsden -- Goldman Sachs -- Analyst

OK. Good morning, guys. I was hoping that you could expand a bit on some of the momentum that you're seeing in the European business. And I guess, specifically, the question is, now there's a clearer path for Brexit, do you think activity is going to accelerate from here? Or do you think that would be more of the drivers to the strength that you've seen over the last 6 months? Thanks.

Kenneth Jacobs -- Chairman and Chief Executive Officer

Sure. So I think we saw us a pickup in activity in Europe in the first half of '19 that reflect -- that was reflected in closings in the – in our completions in the fourth quarter for us, and things feel a little more robust right now than they did a year ago, even in Europe, and obviously, for us as a whole full firm right now. In terms of Brexit, clearly, having more certainty around Brexit is helping the investment client and the decision-making climate in the U.K., in particular. And I would expect that we expect that there will be a pickup activity in the U.K.

I think we've already seen some of it starting, and dialogues are increasing. And I think with credit conditions, the way they are and such, I think we will see a pickup there.

Evan Russo -- Chief Financial Officer

Well, I think with the amount of capital that's going into private equity, activity levels in private equity are going to remain high. Credit conditions are robust, as I said before. And the need to invest and also the need to find realizations on portfolios keep that to be a very robust market. And strategic market remains active.

So I think, overall, both markets are healthy.

Richard Ramsden -- Goldman Sachs -- Analyst

OK. Thanks a lot.

Operator

Thank you. We will now take our next question from Michael Brown of KBW.

Michael Brown -- KBW -- Analyst

Hi. Good morning, Ken and Evan.

Kenneth Jacobs -- Chairman and Chief Executive Officer

Morning.

Michael Brown -- KBW -- Analyst

So I appreciate the color on the activity levels and any additional color on Europe. You had mentioned that cross-border has kind of improved as well. I was looking to get a little more color as to kind of which regions you're kind of seeing that. And I would also appreciate some additional color on what you're seeing in some of the other regions outside of kind of Europe.

But what are you seeing in Latin America, Canada, other parts of Asia as well?

Kenneth Jacobs -- Chairman and Chief Executive Officer

OK. I think – yeah, there's been, for us, at least, some pickup in cross-border activities in Europe. Cross-border into the U.S., we had a couple of nice transactions announced in the second half of the year. And some activity on the part of some of the large Chinese companies into Latin America.

I think activity in Asia has been more muted. And activity from Asia into the U.S., obviously, much more muted, particularly in China into the U.S., much more muted. And China into Europe, still some transactions. I think we'll see a little bit of a pickup into the U.K.

perhaps over the course of the year,but not at the level they were a few years back. But overall, it's OK.

Michael Brown -- KBW -- Analyst

OK. Thanks. And if I could just follow up on the capital return question. I appreciate that you probably kind of reevaluate as you get to the second half of the year.

But I guess, as we think about kind of your current valuation, at what level would you look to maybe do less buybacks and shift back to more of a special dividend to return any excess cash to investors?

Evan Russo -- Chief Financial Officer

Sure. So I think we've been pretty clear all year about the way we've been thinking about it, shifting our focus a little bit more toward the share repurchases after some discussions with shareholders, and obviously looking at the value that we've been trading at. And I don't think we have a hard value that we would say, "hey, we trigger one to the other." I think we were in this mode where we see significant value in the shares, and we're going to continue to use our excess cash flow for share repurchases over that period, and I think that served us well. I think what we're going to continue to do as we've always done.

Have a balanced approach to our capital management strategy, which starts, obviously, with our common dividend. And we've been gradually increasing it over the years. And I think we would expect to continue to gradually increase it to match the growth rate of the business, of course, to offset any compensation dilution. And after that, after we figure out whatever cash we need in the business, the rest will be returned to shareholders.

And we make those decisions as we go throughout the year. But right now, we're very -- we feel good about the business. As Ken said, we feel good about the outlook as we go into this coming year. And I think that'll -- our goals will be to continue on our current plan of repurchasing shares.

Look, I would say our capital management strategy as a whole, our goal is very clear: you know, to be prudent, but as well as opportunistic in capital structure and capital management. And I think we've been doing that.

Michael Brown -- KBW -- Analyst

Great. Thanks, guys.

Operator

Thank you. We'll now take our next question from Jeff Harte of Piper Sandler.

Jeffery Harte -- Piper Sandler -- Analyst

Good morning, guys. A couple for me. Looking at noncomp expense, I mean, really only being up 3% year over year in 2018 despite all the investments, is, I think, pretty good. Should we be thinking about a similar growth rate in 2020, given that you're still investing?

Evan Russo -- Chief Financial Officer

Yeah. So look, as we've said, that we expect the noncomp to come out even a little higher than it did. I think we focused, as we've gone through the beginning of this year, with revenues falling, to really tighten up a little bit. I think some of the benefits came from pushing out some of the expenses into next year.

And so I think we're expecting to see additional growth in noncomp. We expect it to remain at elevated levels over the coming quarters as more of the technology projects that we've really started over the last 18 months start to roll in into the noncomp line and we start amortizing those expenses. So I think we would expect to see it continue to grow or probably at or above that level and going back to sort of where the averages have been for most of this year.

Jeffery Harte -- Piper Sandler -- Analyst

OK. And something I don't tend to ask much about, but the corporate segment. Revenues were pretty strong there relative to at least what we were expecting. Are there items to highlight there? And is there also kind of a starting point as far as the run rate that we should think about for that line?

Evan Russo -- Chief Financial Officer

Sure. So look, we had higher corporate revenues this year. As you know, there's lots of components that go into the corporate line for us. It's everything that doesn't really go into the businesses.

And there's just a lot of components. Everything from the cash and returns that we get on cash, as you know that that's been changing as rates have gone up around the world and our cash position starts to earn some benefits, FX revaluations, any insurance proceeds. But most importantly, it's related to other investments. So legacy private equity that we have on the balance sheet as well as all of our seed portfolio that we have for our Asset Management business.

Any of the hedged and unhedged components, any gains or losses go through the corporate revenue line. So -- and as you know, it can be a little bit of volatility from quarter to quarter. This quarter, I think a lot of those things kind of moved in our direction, and so we have about $12 million of corporate revenue. I'd say, for the year, $29 million, certainly at the higher end of where we've been historically.

I think from a framework of when we start at the beginning of the year, we kind of think, on average, if you go back over the last two or three years, $3 million to $5 million is probably the right area. But again, there's going to be a lot of volatility because there's a lot of components there that move, and they're just not controllable in many cases.

Jeffery Harte -- Piper Sandler -- Analyst

OK. And on kind of little kind of deeper thought, I guess. You mentioned earlier, and you have been mentioning about systems and kind of data and investments there and the ability to identify opportunities early. I get that in Asset Management.

Can you talk a little bit about how that's may be helping the advisory business, which had kind of historically I thought of as more pure relational?

Kenneth Jacobs -- Chairman and Chief Executive Officer

Yeah. So I think -- let me step back. The advisory business, you're right, relationships matter enormously. But if you sort of think about what we're effectively doing in the advisory business, on one hand, we're helping guide boards, senior managements in making big strategic decisions and then helping execute those decisions.

And in many respects, we're trying to predict the outcomes before they happen. And one of the key outcomes we're trying to predict is stock price performance around specific events, and those events can be anything from a sale, a spin-off, an acquisition of an asset or of a company, a repurchase program, change in allocation of capital, among other things. And a big part of that is prediction and event prediction, what's going to happen around this event. And part of that is predicting shareholder behavior.

And so a lot of our efforts are going into seeing if we can develop tools that better predict what is going to happen around these events. And if you think of many of the advances in data science and machine learning and AI, it's really to improve your capacity to predict better. And that's where we're focusing our entry -- energy.

Jeffery Harte -- Piper Sandler -- Analyst

OK. Thank you.

Operator

Thank you. We'll now take our next question from Jim Mitchell of Buckingham Research.

Jim Mitchell -- Buckingham Research -- Analyst

Hey, good morning. Ken, maybe just a bigger-picture question on – You seem, obviously, a little bit better about the environment going into the year. I guess given all the different pockets of revenue, whether it's Capital Advisory, Sovereign Advisory, M&A, what are you, I guess, most excited about in terms of the growth prospects from here over the next 12 to 24 months? Where do you see the greatest opportunity? And where are you investing the most?

Kenneth Jacobs -- Chairman and Chief Executive Officer

Good question. So one of the great things about our franchise in the advisory side is we have enormous white space, so there's a plethora of places where there's opportunity to invest. And so part of our challenge is just drilling down on the places where we think there is the most opportunity and the best chance for success. I think a few areas that sort of jump out or following the trends of where capital is going, and one of the things that's happening is, obviously, an enormous amount of capital is going toward alternative investments, private equity, private investments.

And one of the things which we are really focused on is making sure that we're well-positioned to capitalize on that trend. On the advisory side, that means making sure that we are really well positioned with what we describe as the crosscut market, what we think of as private owners of assets. That could be the sponsored universe, but increasingly, it's families, and many of the large pension funds and positioning ourselves. And net flow of capital is very important, that also helps drive our PCA business.

So that's another area which is very important, and of course, making sure that we're really focused on the things that drive our business as a whole, which are relationships with big important companies doing the most important things they do. And then also making sure that we're sort of on the cutting-edge in terms of capabilities around advice, which we've demonstrated, I think, in making sure that our shareholder activism practice is on the cutting edge, both in the United States and now especially in Europe, where I think we're easily the market leader there.

Jim Mitchell -- Buckingham Research -- Analyst

OK. That's helpful. And is there any long-term opportunity for -- in China as they open up their markets? Is that something that you think you need to start positioning for or feel well-positioned for if that happens?

Kenneth Jacobs -- Chairman and Chief Executive Officer

Well, I think, on the advisory side, we're very well-positioned for that. We have an outstanding team in China that I think is probably easily one of the handful of best advisory practices in China, with a full team built out based in a mix of Beijing and Hong Kong. And then on the asset management side of the business, I think some of the changes in the regulatory environment in China opened up some significant opportunities for all asset managers in terms of distribution, and that's something we are keeping our eye on.

Jim Mitchell -- Buckingham Research -- Analyst

Great, great. Thanks.

Operator

Thank you. We'll now take our next question from Manan Gosalia of Morgan Stanley. Please go ahead. Your line is open.

Manan Gosalia -- Morgan Stanley -- Analyst

Hi. Good morning.

Kenneth Jacobs -- Chairman and Chief Executive Officer

Morning.

Manan Gosalia -- Morgan Stanley -- Analyst

I was wondering if you could just give us an update on the business realignment that you had took last quarter. So on the Asset Management side, I think you previously mentioned that there would be a $300 million to $400 million drag on AUM growth associated with the strategies that you were closing down. So is that already in the run rate now? And maybe separately, you can also talk about how you're thinking about reinvesting some of the dry powder that you created from that realignment.

Evan Russo -- Chief Financial Officer

Sure. So as you mentioned, we announced in Q3 business realignment. We expected it to go through Q3 and Q4. We completed our program in Q4.

As we said, it impacted approximately 200 employees, split between Financial Advisory, Asset Management and corporate. I think, as you mentioned, I mean, given the current environment for the first half of this year, we saw the business performance. We wanted to get ahead of the curve. We thought it was a good opportunity to take a hard look and identify areas of business strategies, some of the debts we've made that we're performing slower or had less opportunity in the future, to take the initiative to kind of take those off the table and redeploy them in other areas.

Now we're -- we've been continuously reinvesting throughout the year, and you can see that in the fact that our -- even with the impacted employees relating to business realignment, our headcount is roughly flat, within 1% of where we started the year. So we've been continuously to reinvesting this into the areas that we continue to see as bigger opportunities. So this is more -- for us, is sort of self-funding some of the growth opportunities and the investments we've been wanting to make. And I think a lot of that has to relate to the areas where Ken has mentioned that we see bigger opportunities in the future.

Some of the components of Financial Advisory, where we think the biggest opportunity is from a white space perspective, as we've talked about in the past. And also the Asset Management, just making sure we're putting resources in areas of growth, such as alternatives and others and just redeploying on a consistent basis into the areas that are doing well and have greatest opportunity.

Manan Gosalia -- Morgan Stanley -- Analyst

Got it. And then just a quick one for me on the noncomp side. You mentioned you increased marketing and business development this quarter. Where are you spending the incremental dollars? And is that a change in strategy at the margin? Or is that just normal quarter to quarter volatility?

Evan Russo -- Chief Financial Officer

Yeah. It's normal quarter to quarter volatility. I mean it's really marketing business development throughout this year was a little bit higher than it's been in the past. As we saw the slowdown in revenue, specifically in the Financial Advisory business, we had higher marketing costs as we spent more time on the road engaging with clients, and that's just natural in the business there.

I don't think there's any material change in the way in which we're managing the business or seeing the tight spend we're doing. This has always – it kind of comes up and down, depending on business activity, depending on closing, the kind of the types of reimbursements we get from clients. So I think it's sort of in that range. And I don't think there's anything specific there that I would call out.

Manan Gosalia -- Morgan Stanley -- Analyst

Got it. Thanks very much.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Alexandra Deignan -- Director of Investor Relations

Kenneth Jacobs -- Chairman and Chief Executive Officer

Evan Russo -- Chief Financial Officer

Brennan Hawken -- UBS -- Analyst

Chris Walsh

Devin Ryan -- JMP Securities -- Analyst

Richard Ramsden -- Goldman Sachs -- Analyst

Michael Brown -- KBW -- Analyst

Jeffery Harte -- Piper Sandler -- Analyst

Jim Mitchell -- Buckingham Research -- Analyst

Manan Gosalia -- Morgan Stanley -- Analyst

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