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Moelis & Company (NYSE:MC)
Q3 2020 Earnings Call
Oct 26, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Moelis & Company Q3 2020 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would like now to turn the conference over to Mr. Chett Mandel, Head of Investor Relations. Please go ahead.

Chett Mandel -- Head of Investor Relations

Good afternoon, and thank you for joining us for Moelis & Company's third quarter 2020 financial results conference call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer.

Before we begin, I'd like to note that the remarks made on this call may contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC and in our earnings release. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements.

Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods to better understand our operating results. A reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com.

I will now turn the call over to Joe to discuss our results. Joe?

Joseph Simon -- Chief Financial Officer

Thanks, Chett. Good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will discuss our business further.

We achieved a strong third quarter, earning $208 million of revenues. This resulted in sequential growth for the second consecutive quarter, since the onset of COVID-19. The general M&A landscape dramatically improved in the third quarter, leading to a solid contribution from both strategic and sponsors. Our restructuring-related activity was the highest it's ever been exceeding last year's record third quarter contribution.

We experienced particular strength in out-of-court restructurings, a specialty of ours. We continue to excel in offering innovative solutions, which in certain cases can accelerate the timeline to resolution and avoid a lengthy Chapter 11 process. In addition, our restructuring retainers remain significantly elevated over the prior year, and our capital markets business continues to make a steady contribution to revenues.

Moving to expenses. Adjusted compensation expense was accrued at 61% in the third quarter. Our non-comp ratio was 14% in the third quarter, and we reported $28 million of non-comp expenses due to continued low travel and continued expense discipline. Our normalized corporate tax rate remained at approximately 25%. This quarter's effective tax rate was higher than the normalized rate due to the reversal of some CARES benefits previously accrued due to current quarter profitability.

Regarding capital allocation, the Board declared a dividend of $0.3825 per share, an increase of 50% from the second quarter, which is halfway back to our former regular dividend. We've always operated from a position of financial discipline and remain committed to returning 100% of our excess capital. And lastly, we continue to maintain a fortress balance sheet with substantial liquidity and no debt. We ended the quarter with $266 million of cash and liquid investments and an undrawn revolver.

And I'll now turn the call over to Ken.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Good afternoon, and thank you all for joining the call. I know from looking that a lot of our people listening to our calls, the internal people, so I just wanted to say how grateful I am to the dedication and focus you showed during the unusual time. You've all worked together to come up with innovative solutions for our clients, which has created a powerful and positive energy within the Company even though everyone has been working remotely. I'm awed by the breadth and depth of the leadership throughout the firm during this crisis.

Our unique culture is set to support and allowed our people to come together creatively to solve client problems, which is why our business has been able to rebound so quickly. The fact that we have no debt and a fortress balance sheet enabled everyone in the organization to put their heads down and concentrate on clients. Nobody was concerned about the financial health of our Company and everybody was busy helping clients focus on opportunities. Also without the friction of an internal commission structure, we were able to rapidly form new teams to deal with client matters, many of which we have never seen before, even thought of or faced.

And lastly, I do believe COVID-19 will continue to reshape the global economy for years to come. The ramifications of the pandemic will force companies to make large scale decisions about their marketing position, growth strategy and capitalization. And they will need an advisor who can quickly pivot their resources in stride with the changing environment. This is exactly what we do. I believe we are the best at it, and that is why I feel so great about the future of the firm.

And with that, I'll open it up for questions.

Questions and Answers:

Operator

We will begin the question-and-answer session. [Operator Instructions] Our first question comes from Ken Worthington with J.P. Morgan. Please go ahead.

Ken Worthington -- J.P. Morgan -- Analyst

Hi. Good morning -- I'm sorry, good afternoon. Thank you for taking the question. You mentioned an accelerated path to restructuring resolutions. How big a driver was that accelerated path to the restructuring success that you had this quarter? And in terms of the restructuring outlook, did you continue to see a ramp in activity levels throughout the quarter or has restructuring started to kind of level off given the environment?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

No, our -- Joe said it was on a current basis that our retainers remain elevated, so restructuring continues. It's really a bifurcated economy. 75% of it is really headlong looking in M&A 25% of it is having troubles and something like that. And so, we are -- continue to elevate and find a restructuring -- and Ken, we were just pointing out, we always do out of courts. It's sort of a specialty of ours. It's a continuation there was really nothing unusual about it other than people prefer and we've done a lot of -- and we've always done that. I forgot the exact percentage. But a significant percentage of our restructuring is done without doing out of court, and we think it's innovative and it's -- as far as we're concerned, most companies prefer to stay out of Chapter 11. I found very few that like going in, yeah, especially after the fact -- after they have been through it.

Ken Worthington -- J.P. Morgan -- Analyst

Okay. Fair enough. And then, maybe your thoughts about a special dividend this year, maybe it's a little bit of a -- the croup for the horse. But given potential changes to the dividend tax rate under certain election scenarios, would you consider pulling forward a special dividend into 2020? Or is the policy really to wait until March of the following year, if you should choose to move in that direction?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Let's put this way. I think our balance sheet -- and we know we brought the dividend back, but we still have a substantial amount of liquidity, no leverage and our balance sheet is fortress. Yeah, again, we're pretty conservative with the virus floating around, in case, look people have a different read on and we just don't know if we're done or it feels like we're done. Business wise, I mean things are picking up pretty dramatically.

If there would be a substantial, I think you're thinking substantial change in the election and an indication that there were some relevance in bringing the dividend forward that would be a benefit, we would definitely think about it. I don't want to say anymore because that involves our Board that we have the capabilities of thinking quickly, be nimble. And if there were something in the tax future that we can foresee that this was a real benefit, yeah, we would respond to it.

Ken Worthington -- J.P. Morgan -- Analyst

Okay, Great. Thank you very much.

Operator

Our next question comes from Devin Ryan from JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities -- Analyst

Great. Good afternoon, guys.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Hi, Devin.

Devin Ryan -- JMP Securities -- Analyst

So maybe talk a little bit about the M&A environment and what you guys are seeing there. Could you maybe put just a little bit more flavor around the tone for business today and maybe how that compares relative to the pre-pandemic levels when business was obviously quite healthy. And really what I'm getting at here is, it feels like M&A is getting back to kind of similar levels we were at restructuring, is it a higher level, which would seem to come together for a pretty strong outlook for 2021, but really the M&A piece, just trying to get a flavor for how you would frame that relative to call the pre-pandemic pace?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

I think our M&A pace feels as high as it's ever been. Our backlog is strong totally as it's ever been. We -- I think, when was our second earning quarter was in late July, we said we started to -- we really felt it. It may be that it's -- we deal with a little bit of a growth year middle -- a lot of what we do is in the sponsor community and possibly they responded quicker. I think the larger transactions are a little more affected by -- maybe by the election and tax policy and what happens globally. And if you're growing 20% to 40% a year, I think those types of clients tend to -- the election doesn't make big difference, if the growth rate is high and you're in that kind of a market.

So, we felt it -- starting in June, July, I think we talked about on our second quarter call. And right now, we feel like it's exceptionally busy and two things are happening. One is we're getting extraordinary efficiency in the way the bankers use their time. I mean literally, our bank -- I talked to bankers, and they are on their Zoom from like 7:00 AM to 7:00 at night.

I used to ask banker, were you busy this week, and they said well, yeah, I had to travel to Germany, and then I came back, and then I had to get to the West Coast, and then I came back. So we were literally talking about two-thirds of their -- 90% of the work time was getting to it from an airport. I think we're getting more production per hour, but because of -- dramatically because of where people are and actually, we're getting less expenses. So, it's pretty interesting what's going on right now. So the short answer is, I feel like M&A might be the strongest -- strong as we've ever thought, let's put it that way.

Devin Ryan -- JMP Securities -- Analyst

Yeah. Okay. Terrific. And then this ties into the point just made Ken, and I guess for Joe just around expenses. So your non-comp costs are down 20% year-over-year, at least in the third quarter, and clearly, some tailwinds there just with the limited travel. But as business starts to or continues to recover hopefully and your travel, hopefully, at some point here starts to pick back up, where do you see that I guess balancing out and how should we think about non-compensation cost trending into next year, just contemplating kind of maybe some recovery, but at the same time maybe you pulled back in some spending areas, travel may not quite get back to where it was and also contemplating some of the headcount expansion that you're also talking about?

Joseph Simon -- Chief Financial Officer

Yeah. So I think thinking about non-comp, if I think about just the next quarter, I'm thinking that it's fell probably in the $30 million [Phonetic] level thereabouts. Again, that's assuming that travel stays at current levels. I have no idea how to predict travel, but I'm fairly sure that it's not going to resort back to where we were in 2021 or I don't believe it will be. I think that's probably something on the order of at this point $8 million per quarter that we see in terms of the decrement in travel. So -- and then on top of that, you should also know that the new New York lease expense is fully taken into account in that $30 million [Phonetic] run rate. So, the real swing factor is going to be travel.

Devin Ryan -- JMP Securities -- Analyst

Okay. Got it. I just want to make sure the $8 million is where we get back to you or that's the ongoing benefit?

Joseph Simon -- Chief Financial Officer

No, no. I don't think if you want to think about a boundary, it's -- we're currently spending modest amounts on travel, couple of million dollars a quarter, used to be probably $10 million a quarter. So there is a $8 million delta on a quarterly basis. I don't know how to judge how much of that is going to return. I'm assuming that it's going to be quite a bit less than the full $8 million gap right now.

Devin Ryan -- JMP Securities -- Analyst

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

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Thank you.

Operator

Our next question comes from Manan Gosalia from Morgan Stanley. Please go ahead.

Manan Gosalia -- Morgan Stanley -- Analyst

Hi, good afternoon. Maybe just a follow up on the prior line of questions. Do you think that we're on the start of another like two to three-year cycle in M&A. Your comments earlier in the call are pretty bullish overall, but basically what I'm trying to get at is, we typically saw two to three-year downcycles when we had a recession. This time, it was two to three months. So how robust do you think this inflection is that we're seeing right now? And does this rebound have a lot more room to go from here?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Well, look, there is a lot of things up in the air, right. There is an election next week, and there is a virus out there. But what I'm seeing would lead me to believe we're in a long-term M&A cycle, two years to three years easy. And one of the reasons is, I think you have all this part of the economy, you have 25%, or whatever it is 15% to 20% that's going through restructuring just affected so negatively by the virus.

So they will restructure and maybe and I don't know what happens there, they might consolidate. I think size showed that size mattered in this downturn, Number 2. And lastly, and I think most importantly, the scope of the economy really changed -- the pandemic has really -- I look at our own business, and I said, maybe, we're a kind of a Zoom economy, but maybe we did save $8 million in travel or maybe it will be $4 million and maybe our productivity went up.

And I think -- I think every business is looking at your business and is going to make -- that's what I said at the end, it's going to make large decisions. If you're a winner in this environment and your stock, you're booming you might make a decision to change or to continue to grow. And if you're a company that was marginally, you're not on restructuring, but you're kind of marginally off center and you weren't ready for the digital economy, maybe you have to do something quick and change your strategy in the go to market.

I think what I said at the end is very important, the COVID will change everything, whether -- whether it's to the extent we believe today, but it will change a lot of businesses. And those businesses will have to make decisions around a capitalization, go to market, and that's what we do for living. We help corporations make really big decisions and implement them. I think it will go on for a while.

Manan Gosalia -- Morgan Stanley -- Analyst

That's helpful. And then, last quarter, I think you spoke about you have done 14 deals on the capital raising side. I don't know if I caught it, but did you mention how much you did on the capital raising side this quarter? And how much of it -- how much of a deal when do you have in that business?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

We like that business. We hired two really seasoned veterans that joined us over the summer. But I'd say the third quarter -- the second quarter, if you remember, I pointed out because it was so immediate, people needed liquidity and we were there to raise it. The third quarter continued that the business is good. It wasn't quite -- the second quarter was an outlier. The third quarter was strong. And I don't -- Joe might have the number, but we pointed it out in the second because it was one of the reasons, it was big enough to point out. Now we think that business though will continue to grow. We see lots of new markets opening up and opportunities in places for us to play, and we really stepped up our game. So, I don't know -- Joe, I don't know if you have the numbers in the past.

Joseph Simon -- Chief Financial Officer

Yeah. In the past, like, if I look at last year, it was probably a couple of points of -- 2% to 4% of revenues. This quarter, I think it's probably around 8% to 10%.

Manan Gosalia -- Morgan Stanley -- Analyst

Got it. That's helpful. Thank you.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

And that's capital markets advisory. Remember, we don't have any trade, but it's all advisory we're having.

Operator

Our next question comes from Steven Chubak from Wolfe Research. Please go ahead.

Steven Chubak -- Wolfe Research -- Analyst

Hi, good afternoon.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Hi.

Steven Chubak -- Wolfe Research -- Analyst

So I wanted to start off with just a question on MD productivity. Just looking at the historical performance, MD productivity for you guys peaked in 2018, just above $7 million per -- the five-year average is just above $6 million per MD. Just given the optimistic outlook in the release, how should we be thinking about the productivity looking out to next year. And just given what you're seeing in the current pipeline, how quickly do you believe that you can get to that $7 million plus productivity level?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

I'm not going to give guidance, but I think that's a good analysis. Remember, when we were growing fast, we always had a new fresh -- whenever you're growing too fast, you've always taken out some of the new people that the -- the new people don't add. So one of the things 2018 did was, it was the end of our very significant growth period. So our revenue per MD statistic catched up -- caught up.

I don't really think of it that way, but I do think, and I've said this before that we -- there is a lot of people talking about, do we had a comp problem. We had a revenue shortfall in the first half of '19 that followed us for a while. And then COVID hit in March. So, we didn't get to show what we thought was a pretty significant backlog coming into 2020, just it came to a halt.

I think some of what you're seeing now is that backlog is coming to market because we were involved with it to begin the year. And it's a long way of saying, I don't want to give guidance, but I don't -- I think the fact that was revenue per MD. And if we can get more productivity by Zoom calling and I would hope -- I would hope that's the path we're on. But I don't want to give a time frame or we're not giving guidance.

Steven Chubak -- Wolfe Research -- Analyst

No, I could certainly appreciate that Ken, but thanks for all that color. Just a follow-up on the -- since you brought up the topic of compensation, through the first nine months, revenues are tracking flat year-to-date. I understand that the fixed comp base is going to grow as the firm grows. But want to just get some insight in terms of why that variable comp piece is higher since the revenue production is tracking flat with last year and any specific factors that maybe you could speak to?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Well, because it's really a nine-month -- the quarter was 61% for the revenue we produce. And I think that's -- if you look at the firm, we're not back to full normal. We're still the first month of the third quarter was just beginning. Now we're getting back to full stride. I think you can see us get right back to where we want to be on top.

I want to put out one thing too. I have always said, we really aim for 25% pre-tax margin. We beat that right now. And that's -- I don't think we're full stride yet. And so, you see -- you look you're seeing -- looking at the nine months, you're looking at there is a quarter in there, where March, April, May, nothing happened. There was no M&A. Restructuring was just getting started. So again, I keep telling people do not look at this year stats, there was a three-month complete black hole, but you can start to look at what we're doing on a run rate. And I think you can see what we're doing.

Steven Chubak -- Wolfe Research -- Analyst

Right. And just one quick clean-up for me. Can you speak to the contribution from ratchet fees, whether that was a meaningful contributor in the quarter, and also just provide the MD headcount?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

MDs are 127, if I had it correct. Joe might know exactly and -- I would -- yeah, 127. And I don't have a specific number. And one of the reasons is, I don't think ratchets played a major role in the third quarter. I mean, I'm sure, there was a deal or two, but I am usually knowledgeable of when we've had something really hit the top end of a ratchet or change it. It's probably -- I thought it was kind of minor. But Joe, you have a flavor?

Joseph Simon -- Chief Financial Officer

I agree. I don't know that number off the top of my head. But it's not something that -- was something that struck us as being something that popped off the page.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Right. Because I mean look there have been a lot of deals, so if it's meaningful, we would know. So that's why it's not meaningful. If it's meaningful, we would know the numbers.

Steven Chubak -- Wolfe Research -- Analyst

Great. Thanks for taking my questions.

Operator

Our next question comes from Brennan Hawken with UBS. Please go ahead.

Brennan Hawken -- UBS Investment Bank -- Analyst

Good afternoon. Thanks for taking the question.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Hi, Brennan.

Brennan Hawken -- UBS Investment Bank -- Analyst

How are you doing, Ken?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Good. How are you?

Brennan Hawken -- UBS Investment Bank -- Analyst

Good. Good. Thanks. Just wanted to start it out on the dividend. I appreciate your comments before in considering maybe a special, but this has been quite a roller-coaster for the -- for even the regular for you all. So, I'm really curious about how your experience in this year maybe might inform how you think about a regular dividend -- your -- how you manage the regular dividend, how your approach is going to be to the regular dividend going forward. Clearly, you're feeling a lot better about your business, which is -- raising the dividend by 50% is a very powerful way to state that. But just could you maybe help us think about what you might be instilling as far as guardrails go or overall philosophy around the regular dividend going forward?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

I think we will go back to where we were -- our goal over time is to go back to the regular dividend and the same philosophy we like it. We ended up with excess capital even at the end and paid it out in specials. Look I can't -- if you tell me when the next time the entire world will shut down and locked themselves and anybody who didn't take emergency actions in March, what we said in the past, I run the company as if I own the whole. I run it as if it's my -- I own every share. I did, but I would do to protect what is one of the great franchises that we're building.

And by the way, I said it during the call, we are rebounding much more. I think we're on a rapid rebound because there was not one person in this Company was concerned about the future of the Company or its own stability. And if you remember, on April 1st by the way, it's hard to reremember that moment. People work is scared and at least, I could look everybody on our internal and say you're fine, you're fine, pick up the phone when the clients call, you're fine, don't worry about us. That's worth a fortune, and we will -- we will bank that over the next few years, as we picked up great people, we thanked our clients, and we'll see that in -- for five years now of the focus we were able to have.

So yeah, it was a rollercoaster, but you tell me the next time we shut the entire global economy down and that's the time I might go through that again. But in the interim, I'll assume we won't do that again, and I'll go back to regular way dividend. And by the way and it's the same thing, it was March 15th again, I do the exact same thing until I knew the Coast was clear.

Brennan Hawken -- UBS Investment Bank -- Analyst

Yeah. I am totally appreciate that April wasn't very different period, and I'm not trying to -- I wasn't trying to imply any kind of question about the decision whether or not it was a good one, just was more the business that you're in is a great business. It kicks off a ton of cash as is evidenced by your capital return policy, but some time the trajectory of the revenue can change pretty dramatically whether it's cyclically driven or what have you. And so, I'm just -- my question was more based around that whether or not you might approach raising the dividend at a more measured pace as you grow? That's all.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

No, I think we'll try to bring it back too soon. If you tell me the virus was cured tomorrow, I know where I would be and it would look like pretty -- again, I'm speaking out of turn because I have to talk to the Board. But we would try bring it back pretty quick and we want to go back to that. We have a great balanced business. We have a great restructuring team, and they usually it's countercyclical, and our cash flow is balanced for that reason. We also have a very nimble team, and they all move to do -- like in the second quarter, they all move to help do the capital market side of the business. So I have a lot of faith in any -- in them to do things like that. I just had no idea of what would happen when we all went home and sat on a couch that -- that concerned me because I've never done it before.

But I do know in regular way, if you've got a great restructuring team, and you've got great bankers, I know what we can do with cash. By the way -- and we have no debt. So if there is a quarter -- if there is a quarter of downturn, I don't mind because that we have such a fortress balance sheet, quarters don't matter. So I'm pretty comfortable with it. We generate that kind of free cash flow. That's why for all those years, we were shedding cash, we were having to do two specials, one mid-year, one at the beginning of the year because the cash buildup is so quick. So I think I'd be -- if you told me Brennan that you had cured the virus, I think I know what I'd recommend to the Board and it would be very, very similar to what it was prior.

Brennan Hawken -- UBS Investment Bank -- Analyst

That is very, very clear.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Yeah. I can't say the Board would approve it. May have to speak for them, but I know what I would recommend.

Brennan Hawken -- UBS Investment Bank -- Analyst

Great. Thank you. Thank you for that. And then, I just want to do follow-up on the MD headcount question. So you said 127, I think that's up one year-to-date, but you've either promoted or hired a total of 13. So can you help us square, was that just the idea that maybe you had realized at the end of 2019 that you had previously gone through too faster growth spurt, and you needed to make some adjustments or was that just regular way departures that happen all the time. Can you maybe -- was there anything unusual that was happening on the MD count side?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

No. But a lot of time what happens is, we manage our -- we manage our headcount actively every year. And what usually happens is, we start talking to people like sometime around now, and we give them to the end of the year. And a lot of those then hedged drop off in January and February -- they are December 30, not -- they are still on the payroll formally, and we give them time and then they go.

So -- and we don't -- look the reason, no way we don't do extraordinary charges or our comp ratio includes all our hiring, which is investment spend, and all of our people management. We view people management as the core competency of what we do. So we don't -- we don't segment it out. It's just a mirror to mirror every year. And look and in the year like this, I don't know how to look if some people left midyear. I don't think it was a lot of this year because we really tried not to do anything during the pendency of the beginning of the crisis, we really didn't want to any headcount. So if there was, it was -- it was people we talk to at the end of 2019 gave time to find their way out.

Brennan Hawken -- UBS Investment Bank -- Analyst

Okay. Great. Thanks for answering my questions.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Thanks.

Operator

Our next question comes from Michael Brown with KBW. Please go ahead.

Michael Brown -- Keefe, Bruyette & Woods -- Analyst

Great. Thank you, operator. So Ken, I just wanted to follow-up on the compensation discussion earlier. So as mentioned before, revenues are kind of flat year-to-date. Now that we are toward the end of October, I'm just kind of curious how you think about that full year comp ratio. I know there was a lot of uncertainty earlier in the year, but now that we're kind of closer to the end of the year, any sense as to where that could end up? Last year, you ended at 63% comp ratio for the full year. I understand there's greater fixed and variable costs embedded in the comp structure this year. But just trying to get a sense if we could kind of get down into that ballpark perhaps something in the mid-60% range, obviously knowing, there's an election around the corner, which could certainly be a wildcard here?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Well, look, I'm not going to give guidance for the fourth quarter. We think we have a very -- we have a great -- we've said our backlog is strong. And I think if you look at the third quarter, third quarter is pretty clean. And it's not -- it's not back up to our run rate of 2018, but it's clean. So I think you can see how we think about comp. When we don't have a virus -- when we don't have a shutdown going on or a complete stoppage of business, look very hard to say the second quarter and even the first quarter, the second quarter especially of 2020 reflected any natural business environment. So again, you're trying to blend the whole year into what was three distinct Lego blocks coming together for the year, the first. The second was completely different. The third is clean. And the fourth will be what it is. But I think if you look at the third, you can see the way we think about the business on natural basis.

Michael Brown -- Keefe, Bruyette & Woods -- Analyst

Okay. Great. You mentioned the backlog and -- because of this pandemic, the drivers of this turnaround and M&A have been quite different and we've seen certain areas that have been a lot stronger and areas that have been a lot weaker here and so across the board has been weak, large cap strategics that had pockets of strength, we haven't seen a full bounce back there, at least not yet. So how would you characterize some of the key themes supporting your backlog at this time? What are some of the key strengths there? And then, I also wanted to hear about what you're seeing in Europe, obviously the cases there have been spiking. And just curious if that has started to impact deal activity over there in Europe? Thanks.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

The interesting part is I can't -- almost everywhere is strong. I go around the world. I think Asia is fairly strong. Our even -- even our joint venture, which nobody talks about, we do have significant exposure to Australia. They are doing well. The Middle East is booming. I'll tell you that, that franchise since we were involved with the Saudi Aramco IPO has lead -- the lead advisor on that, I think our activity there has never been higher.

Europe is as good as it's been a long time, and we did a lot of headcount. We brought in some great people. We've done some maneuvering around Europe. Does it have the profitability of the U.S.? No. It doesn't have the velocity of deals that the U.S. does. But I feel much better about what we're doing in Europe. The U.S. is strong, and the U.S. is unbelievable how it recovers from these things. I think it's a real testament to our economy.

And I think as we said, all the businesses are really doing well. I can't think of M&A is doing fine, doing very well. Restructuring is elevated and even debt markets continues to go fairly well. I think if I had maybe a mark, I don't have that -- really that everybody seems to be doing pretty good. I can't really think of a bad market.

Michael Brown -- Keefe, Bruyette & Woods -- Analyst

Okay. Yeah. I appreciate the color. Thank you again.

Operator

Our next question comes from Jeff Harte from Piper Sandler. Please go ahead.

Jeffery Harte -- Piper Sandler Companies -- Analyst

Hey. Good afternoon, guys. Most have been asked, but just a couple of follow-ups. When we look at the M&A business, is it reasonable to think that the worst is kind of behind us now from the COVID announcement drop off?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Yes.

Jeffery Harte -- Piper Sandler Companies -- Analyst

Okay.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

From my viewpoint, the answer is not only yes, but I also think people are, I admitted that people are leaning into things and really are. It seems like -- and I know it sounds strange, right, because we're in the middle. We're still holding them. There's still a lot of uncertainty. But I can't -- I believe that the amount of people who -- when companies and institutions and especially private equity that want to do things is significant.

Jeffery Harte -- Piper Sandler Companies -- Analyst

Okay. And as we look from the outside kind of the industry data, we can see shows mega deals and really big deals being awfully strong, but deal counts kind of lagging a bit. Are you starting to see some spillover from kind of the mega deals into more of the middle market?

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

And I see it the other way around. I thought the middle market -- when I was on the call in July, and I said, I saw the M&A market come back. I've got feedback that all you guys said, well, what can we -- I thought I was seeing something different than everybody else. So I saw the first mover being sponsor community coming back quickly. And then, I saw -- I thought that then went to the big deal market, that may just be me. But that's what I saw.

Jeffery Harte -- Piper Sandler Companies -- Analyst

Okay. Interesting.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

I do think -- by the way, I want to be -- I do think that it's the -- it's the market that is big enough to access institutional financing and that's important. I think that the subscale deals, the smaller deal flow, I think does have trouble. The bank market is kind of like, banks aren't fully back. There is going to be a real price to pay here in the general economy. And so, I do think you have to be careful.

I do think M&A started and it was what we now call sponsor middle market, which could be anywhere from $1 billion to $10 billion. But that's -- they can access the institutional money markets and credit markets, which is a little different than having to go to banks. Banks are not fully backed in the financing. And I think that you might see that lag a little bit because there might -- there is some -- I think there is some troubles coming from just credits in the banking system.

Jeffery Harte -- Piper Sandler Companies -- Analyst

Okay. Thank you. You mentioned earlier the relative contribution kind of from the capital markets business, and I thought, I heard you say something earlier about restructuring. Did I hear you right to say that restructuring was kind of close to the top of that 25% of revenue range that it's been in historically in 3Q '20?

Joseph Simon -- Chief Financial Officer

I think that's right, yes.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

For Q3, that's right.

Jeffery Harte -- Piper Sandler Companies -- Analyst

Okay. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ken Moelis for any closing remarks.

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Thank you all for getting on. Next time we talk, election will be behind us. It will be 2021 hard to believe. And I hope we're talking from an office somewhere and not from home. So good luck, stay safe, and we'll see you in 2021. Thank you.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Chett Mandel -- Head of Investor Relations

Joseph Simon -- Chief Financial Officer

Kenneth Moelis -- Chairman of Board of Directors and Chief Executive Officer

Ken Worthington -- J.P. Morgan -- Analyst

Devin Ryan -- JMP Securities -- Analyst

Manan Gosalia -- Morgan Stanley -- Analyst

Steven Chubak -- Wolfe Research -- Analyst

Brennan Hawken -- UBS Investment Bank -- Analyst

Michael Brown -- Keefe, Bruyette & Woods -- Analyst

Jeffery Harte -- Piper Sandler Companies -- Analyst

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