Piper Sandler Companies (PIPR) Q3 2021 Earnings Call Transcript

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Piper Sandler Companies (PIPR -0.28%)
Q3 2021 Earnings Call
Oct 29, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Piper Sandler Companies conference call to discuss the financial results for the third quarter of 2021. During the question-and-answer session, securities industry professionals may ask questions of management. The company has asked that I remind you that statements on this call that 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 or 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 and at the SEC website. As a reminder, this call is being recorded. And now I would like to turn the call over to Mr. Chad Abraham.

Sir, you may begin your call.

Chad R. Abraham -- Chairman & Chief Executive Officer

Good morning, everyone. Thank you for joining our call to review our results for the third quarter of 2021. I am here with Deb Schoneman, our President; and Tim Carter, our CFO. We will go through our prepared remarks and then open up the call for questions. We recorded the fourth consecutive quarter with net revenues at or above $400 million, as we're experiencing strong demand for our services across the platform. We generated adjusted net revenues of $440 million for the third quarter, a 26.3% operating margin and adjusted EPS of $4.55.

For the first nine months of 2021, we recorded adjusted net revenues of $1.3 billion, a 26.4% operating margin and adjusted EPS of $14.08, all record-setting activity. Our success in the marketplace and the strength of our platform continue to present opportunities for us to add high-quality teams. We were very pleased to announce our combination with Cornerstone Macro earlier in October. Deb will provide more details on the acquisition in her remarks. Turning to our corporate investment banking business. We generated total corporate investment banking revenues of $293 million in the third quarter of 2021, representing our fourth consecutive quarter with revenues in excess of $250 million. Performance during the quarter was strong across industry verticals and product offerings, highlighting the strength of our platform the benefits from the economic recovery and demand from market participants across industries.

Our financial services, healthcare, consumer, chemicals and technology teams, all had good results in the quarter. Highlights for the quarter included: our Financial Services Group posted strong results across multiple subsectors, including banks, asset management, real estate and insurance. Bank M&A has been very strong in 2021, and we ranked as the number one advisor to banks based on number of announced deals and have worked on six of the 10 largest bank mergers announced in 2021. Our market-leading healthcare team continues to put up consistently strong results with balanced contributions from both advisory and financing activity. Our chemicals team closed on a couple of high-profile M&A engagements in the third quarter and the pipeline remains robust with transactions slated to close later this year or early next year.

Thus far in 2021, this team has advised on deals with an aggregate announced value of $22 billion and has solidified their position as a global leader in chemicals M&A. The team is also building a pipeline of financing transactions. When we acquired Valence last year, we were optimistic of capitalizing on the team's sector expertise with our broader suite of product offerings, and we are starting to see these synergies play out. We are pleased that the Valence team is exceeding our expectations. Within Corporate Investment Banking, our Advisory Services business generated another strong quarter with revenues of $214 million. While this number is down 14% from an exceptionally strong second quarter, it is up 177% from the slow third quarter of last year. M&A activity was strong across industry verticals with high volumes and increased transaction sizes.

During the third quarter, we completed 68 M&A and restructuring transactions and 31 capital advisory deals. On a year-to-date basis, Advisory Services generated $616 million, up 125% over the prior year. During the first nine months of the year, we have either closed or announced more than 200 M&A deals with an aggregate transaction value of over $72 billion. The demand for advisory services has been robust throughout 2021 as we assist clients to navigate a changing landscape. We continue a trend of advising on larger and larger transactions, and our top 10 announced or closed M&A transactions for the first nine months of 2021, averaged $3.5 billion in deal value. We believe the M&A market is experiencing strong secular growth. And with the diversity of our platform, we are well positioned to benefit.

A segment of our business that continues to be a growth driver for us is our advisory work with private equity firms. Private equity firms are responsible for a significant portion of middle-market M&A activity. The PE firms hold near record amounts of capital and have a tremendous backlog of portfolio companies that require exits to generate liquidity. We expect that private equity firms will continue to account for a meaningful portion of M&A activity for the foreseeable future. This trend is evident in our M&A business as well. Private equity firms or private equity portfolio companies have been either a client, a counter-party or both on over 2/3 of our M&A activity during the last 12-month period. The increase to our PE advisory activity has largely been driven by the investments we have made to expand our industry expertise and product capabilities.

In 2015, our investment banking business consisted of 65 managing directors, primarily covering four industry segments: healthcare, consumer, diversified industrials and services and technology. Today, we have 146 managing directors across seven industry segments, having added best-in-breed practices in energy and power, chemicals and materials and financial services. In addition, we have increased our restructuring capabilities, we have continued to enhance our debt capital markets capabilities and we have expanded our financial sponsors coverage team during this time period. As a result of this strategy, our deal flow, relevance and reach into the private equity community has grown significantly. As for an outlook, our advisory pipeline of deals is very strong with a number of larger fee deals announced and expected to close in Q4.

Turning to corporate financing. During the third quarter of 2021, we generated $79 million of revenues and completed 66 equity, debt and preferred financings, raising $30 billion in new capital for our clients. Corporate financing revenues moderated some in the third quarter from the robust levels seen over the past several quarters. However, the market remains strong on a relative historical basis. Our healthcare team led the quarter followed by financial services, technology and consumer. In healthcare, we continue to be a market leader. We ran the books on 14 of the 15 deals we completed during the quarter. Healthcare remains a very large and growing fee pool in equity capital markets. Year-to-date, we have participated in 83 equity offerings raising over $18 billion for our clients. Healthcare clients, especially those in the biopharma space, are serial capital raisers in the equity markets, and we have experienced excellent client retention.

For example, since the beginning of 2020, we have been hired on 100% of follow-on activity for biopharma clients where we were a lead manager on the IPO financing. The strength of our platform across banking, research and distribution make us a premier service provider for the entire life cycle of our clients. In financial services, we continue to be active in debt and preferred financings, pricing 15 deals, raising $6 billion for clients during the quarter. Our superior execution and strong distribution remain a key differentiator for us in the marketplace. We were also active in the technology and consumer sectors. During the quarter, we priced 19 deals for technology companies and nine deals for consumer companies, raising a combined $17 billion in capital. We are focused on growing both sectors and have made significant progress in 2021, not only participating in more deals, but increasingly winning book-run mandates.

Lastly, we finished the quarter with 146 MDs in investment banking and capital markets, representing the eighth consecutive quarter of net MD growth, which includes the addition of one new managing director to strengthen our financial sponsors coverage in Europe.

Now I will turn the call over to Deb.

Debbra Lynn Schoneman -- President & Managing Director

Thanks, Chad. Before I review our quarterly performance, let me provide some background on our recently announced acquisition of Cornerstone Macro, an independent research firm that offers best-in-class macro research and equity derivatives trading to institutional investors. Cornerstone brings over 50 professionals, including 21 research analysts to Piper Sandler. They specialize in producing high-quality, thought-leading macro thematic and quantitative research on global economics fiscal and tax policy, monetary policy and global asset allocation, portfolio strategy, energy and renewables and technology.

In addition, Cornerstone Macro's Option Strategy team provides derivative strategy advice and trading capabilities. We believe this research product and option trading strategy will fit perfectly within our broader platform, featuring industry-leading deep company and sector-focused research coverage, broad trading capabilities and an experienced distribution team. Together, we will have approximately 1,700 clients, of which nearly 1,300 have no overlap, highlighting the opportunity to cross-sell each other's products. The acquisition further strengthens our position as a top institutional equities platform and represents a significant step toward building a durable $200 million institutional equities business. The transaction is expected to close in the first quarter of 2022. Now turning to equity's operating performance.

For the third quarter of 2021, we generated equity brokerage revenues of $34 million, down 2% sequentially and up 2% from the third quarter of last year. Equity markets saw reduced volumes during the first half of the third quarter. However, the tone of the equity markets has shifted toward the end of the quarter with increased volatility and volumes in September. We believe volatility and volumes will remain elevated heading into year-end. We typically see an uptick in activity in the fourth quarter, and there are a number of catalysts that could elevate client activity, including higher energy prices, inflationary labor and supply chain constraints impacting company earnings and the enactment of significant new spending and tax legislation.

Turning to municipal financing. For the third quarter of 2021, our public finance business generated an all-time record of $42 million of financing revenues, up 17% from the second quarter and 60% compared to the third quarter of last year. We underwrote 221 municipal negotiated issuances during the quarter, raising $5.2 billion for our clients. We're recording great results from both our governmental and specialty sector clients. As we've noted on prior calls, we've been building our specialty sector client base, which includes special districts, senior living, healthcare, project finance, education, hospitality, housing and transportation. The breadth of our high-yield platform within public finance centered around these specialty sectors, differentiates us in the marketplace and provides diversification from our governmental business.

An illustration of this high-yield expansion is our recently added special district Group. We entered this space in late 2020 with six senior hires and have added more than 20 dedicated professionals over the last year. The team currently has market leadership in Colorado and has served as lead manager on $1.5 billion of par value through the first nine months of 2021. We see opportunity to expand this expertise to more states and leverage our geographic reach and local relationships. On a year-to-date basis, municipal financing revenues of $106 million represent our strongest first nine months on record. Our performance relative to peers was also strong, with revenues up 32% from the first nine months of 2020 as compared to a 4% decline in the overall market based on par value of municipal negotiated issuances. With low interest rates and a positive credit outlook, municipal market issuance continues to remain healthy.

Looking forward, we expect another strong quarter to finish the year. Turning to fixed income. For the third quarter of 2021, we generated fixed income revenues of $56 million, down 8% on a sequential basis and up 5% compared to the third quarter of last year. The reduction in yields early in the quarter drove some market participants to the sidelines awaiting more clarity in the direction of rates. As rates bottomed and then headed higher, we experienced increased activity within our financial services clients as banks flush with excess liquidity put money to work. Our deep expertise has enabled us to advise these clients on repositioning their balance sheets and investing in a changing rate environment. Our fixed income platform benefits from some built-in synergies with our financial services banking clients.

We are adept at helping bank clients reposition loan portfolios and balance sheets following a merger combination. These post-business combination assignments can generate significant revenue opportunities as we advise clients on optimizing balance sheets following a merger. With increased bank M&A activity, we have seen an increase in these assignments. Activity among many of our public entity and municipal-focused clients has been softer as tight spreads and low yields, combined with the decline in refunding activity, has led clients to remain on the sidelines, resulting in a decline in secondary trading, particularly in tax exempt municipals.

We continue to build our fixed income sales team focused on hiring highly productive individuals who have deep relationships and product expertise, and you can leverage our platform capabilities to grow their book of business. As part of that initiative, we have a deliberate effort focused on credit unions, and we recently hired a senior salesperson to join that team. We're looking to continue growing this team and leveraging our financial strategies group to provide differentiated analysis and advice. From an outlook perspective, we expect the fourth quarter to be similar to our prior strong quarters this year.

Now I will turn the call over to Tim to review our financial results and provide an update on capital use.

Timothy Lee Carter -- Managing Director & Chief Financial Officer

Thanks, Deb. Before reviewing our non-GAAP financial results, let me highlight an item impacting our GAAP results this quarter related to the acquisition of Valence. Consistent with all prior periods, our GAAP results include compensation expense from acquisition-related agreements consisting of restricted consideration and retention awards that contain service conditions. Our GAAP results for the third quarter of 2021 include a cumulative adjustment related to our expectations of Valence achieving their earnout revenue threshold over the three-year measurement period.

As Chad mentioned, the team closed on a couple of high-profile engagements in the third quarter and have additional transactions slated to close in the fourth quarter or first quarter of next year. Given their positive momentum and our belief that they will exceed our revenue expectations, we are estimating they will achieve the earnout and, therefore, recorded a cumulative adjustment within acquisition-related compensation expense. Now let me turn to our adjusted non-GAAP financial results. We generated net revenues of $440 million for the third quarter of 2021, a decrease of 11% from the second quarter and an increase of 48% from the third quarter of last year. This quarter represents the fourth consecutive quarter with net revenues at or above $400 million.

Compared to the record second quarter of 2021, we experienced a moderation in some of our businesses, including some M&A closings slipping from the third quarter into the fourth quarter. This moderation was offset in part by record municipal financing revenues and higher investment income. Net revenues for the first nine months of 2021 totaled $1.3 billion, an increase of 61% over the prior year period as we benefited from the significant recovery of M&A activity, strong execution in our corporate and municipal financing and robust brokerage activity. Our net revenues also reflect strong relative performance across most businesses. Turning to operating expenses and margin. Our compensation ratio was 60.2% for the third quarter of 2021, down from 60.7% for the second quarter this year. The ratio was lower on a sequential basis driven by business mix and our continued strong performance for the quarter and year-to-date period.

For the first nine months of 2021, our compensation ratio was 60.8%. Our philosophy to managing compensation levels continues to be a balance of investment considerations, employee retention and business outlook. Non-compensation expenses, excluding reimbursed deal expenses, were $48 million for the third quarter of 2021, essentially flat compared to the second quarter of this year. For the third quarter of 2021, we generated operating income of $116 million and an operating margin of 26.3%. These strong results represent the fourth consecutive quarter with over $100 million of operating income and the fifth consecutive quarter with an operating margin in excess of 20%.

On a year-to-date basis, we generated operating income of $355 million, an increase of 151% over the prior year. Our margin for the first nine months of 2021 was 26.4%. We continue to demonstrate our ability to drive operating margin expansion while growing revenues and generating significant levels of excess cash from operations. Our adjusted tax rate for the third quarter of 2021 was 27.2% and 26.3% for the first nine months of the year, both within our guided range. We continue to expect our full year adjusted tax rate will be within our targeted range of 26% to 28%.

Turning to earnings. For the third quarter of 2021, we generated net income of $83 million and diluted EPS of $4.55, both down from the record second quarter as a result of lower net revenues and a slightly lower margin. For the first nine months of 2021, net income totaled $257 million and diluted EPS was $14.08. Compared to the first nine months of 2020, we more than doubled our net income and diluted EPS, driven by the significant improvement in markets and our strong execution. Let me finish with an update on capital. We remain committed to returning capital to our shareholders to drive total returns. With our capital-light business model and strong earnings, we continue to build excess cash.

Given our level of earnings, strong capital position and positive outlook, the Board approved a special cash dividend of $3 per share related to our year-to-date results. In addition, the Board approved a quarterly dividend of $0.55 per share to be paid alongside the special dividend on December 10 to shareholders of record as of the close of business on November 23. Our dividend policy is to return 30% to 50% of adjusted net income to shareholders, and we expect on a full year basis to be near the midpoint of the payout range. We expect this to result in payment of another special dividend related to fiscal year 2021, which would be declared in conjunction with our fourth quarter earnings release.

During the first nine months of 2021, we paid an aggregate of $49 million to our shareholders through our quarterly and special dividends and repurchased approximately 564,000 shares or $68 million of common stock, which more than offset dilution from annual stock grants. This includes a more active third quarter during which we repurchased 243,000 shares. Lastly, we recently repaid our $50 million of Class A notes upon maturity on October 15. The remaining $125 million of Class B notes mature on October 15, 2023.

Overall, we are pleased with our third quarter and first nine months results. Our business continues to be well positioned for growth against a strong market backdrop, and we are confident in our ability to grow and deliver shareholder value by executing on our long-term strategic objectives. Thanks, and we can now open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is going to come from the line of Devin Ryan with JMP Securities.

Chad R. Abraham -- Chairman & Chief Executive Officer

Hey, Devin.

Debbra Lynn Schoneman -- President & Managing Director

Hey.

Timothy Lee Carter -- Managing Director & Chief Financial Officer

Good morning, Dev.

Devin Ryan -- JMP Securities -- Analyst

Maybe just start with just some of the comments, Chad, you made about kind of larger deal sizes. So I think that's interesting just because obviously, that implies larger fees per deal and you're doing effectively the same amount of work or similar amount of work. And I just want to dig in a little bit whether some of that's going to be driven by just higher market values overall and so deal values are going higher. But at the same time like are sponsors feeling more comfortable with Piper on kind of larger transactions than maybe otherwise would have gone to larger banks?

I'm just trying to understand like the dynamic there and the ability to continue to win larger mandates on the advisory side. Or is it just you've worked with companies for a long time and they may be traded a couple of times and so now as they get larger, you're still working with them? Because it feels like that something that's changing here that's slightly different, but could be meaningful to the ability to generate larger fees per deal over time?

Chad R. Abraham -- Chairman & Chief Executive Officer

Yes. Devin, I think it's a combination of all of those things. It's -- not many years ago when we had, in a particular year, just a handful of deals north of $1 billion, and now we certainly are having more and more of those and even larger. And I would say the biggest reason is, in our strongest franchises, healthcare, financial services, obviously, we added chemicals. We are doing some larger strategic and private equity deals. And yes, I think just given the strength of the franchise, our ability to go upmarket in our strongest franchises is pretty evident.

I would also say we have plenty of examples now in our diversified and industrial business, that's a heavily sponsor-related business. And yes, there are examples this year where we're now selling companies for a second and third time and the deal values are getting larger. So across the board, that's pushed our average fee up. We still -- we're still very focused in the middle market. We still do volume across our sectors, but I do think it's just evidence of some of the stronger franchises and our ability to do large deals in those sectors.

Devin Ryan -- JMP Securities -- Analyst

Got it. Okay. Thanks, Chad. And then a follow-up. I appreciate this is a little bit of a crystal ball question here. But looking at consensus expectations for 2022, they suggest revenues will decline. And I know Tim said at the end of the call, you're kind of positioned for growth, and I know that's a longer-term comment. But as you guys just think about kind of the individual businesses, where do you feel like maybe the bar is high for growth into 2022? And then where does it feel like based on what you're seeing today that there should be revenue growth all else equal?

And I appreciate the environment can shift from here. But just given that you're in a number of different areas that are kind of being affected by different crosscurrents, just love some color there and then also appreciated that you've added to the footprint quite a bit over the past year. So that does position some areas for growth as well. Any additional color there would be helpful.

Chad R. Abraham -- Chairman & Chief Executive Officer

Yes. I'll take that and Tim can certainly add. I mean, I think you're right, this is a difficult crystal ball question. I mean I think six of our seven industry teams are all going to have really great years with pretty big records in terms of just revenue results. I think we're also participating in a few segments of the market. Our debt capital markets business for Financial Services is operating at a very high level. Obviously, our public finance results are at a high level. We've talked about advisory.

Healthcare ECM is at the highest level. So it's just one of those questions where it's very tough to predict market conditions in all of those segments. And so I don't think we're going to sit here and say, yes, we can grow all of those segments every quarter, every year. But we certainly continue to see, I would say, especially in the advisory business, a good building of backlog and really just the breadth across those products. So we're not, on this call, going to predict that all of these segments we can grow next year, but we're really feeling good about the momentum in the business.

Devin Ryan -- JMP Securities -- Analyst

Okay. Terrific. And I guess maybe outside of kind of capital markets and advisory, municipal underwriting or public finance, just how brokerage, how those businesses are positioned here heading out of year-end? I know some of the positive drivers remain in place. So just trying to think about kind of footprints in those businesses and how they're positioned as well?

Debbra Lynn Schoneman -- President & Managing Director

Devin, I'll take that one here. This is Deb. So in -- on the municipal side, as Chad said, we have really strong results. We have added the special district team, primarily focused in Colorado today. And when you look at the year-over-year improvement in the business, a meaningful part of that is coming from that group. And we do look to continue to expand that over time into other states. We're starting with Utah. There needs to be some -- the right legislative environment in states to do that type of business, but that hopefully gives you some color. At the same time, issuance is very high at a peak last year.

We may hit that same level this year, a little dependent on fourth quarter. So market environment is good. On the equity brokerage side, our focus had been on having the Piper and Weeden and Sandler come together and have this one plus one plus one equals three. And I'm happy to say we are very close to retaining the full market share of all three of those. So that feels good. Now it's about making sure that our votes continue to improve, which we're seeing and then monetizing that through our trading desk and of course, Cornerstone now being added in the first quarter of next year.

Fixed income, is -- maybe the last business to talk about, we've seen a lot of strength coming from the bank client space and our ability to help those clients, especially in somewhat dynamic interest rate environment, position their portfolios as well as when we mentioned this earlier on the call, leveraging where we see bank consolidations happen and being able to help with the combination of those balance sheets and any restructuring that needs to happen. When I think about fixed income, we're spending a lot of time on developing the other client verticals and the expertise and advisory services we can provide to those and now credit unions being another one that we are starting.

It might seem like there would have been more business from credit unions, given the strength in banks, but it hasn't been an area that either Piper previously or Sandler had focused a lot on. And so that's an area where we have started hiring, and we'll continue to grow. We can leverage a lot of the analytics but need somewhat of a unique team to be able to go after that client space. Maybe I'll stop there. See if you have any additional questions.

Devin Ryan -- JMP Securities -- Analyst

Yes. No, I appreciate. It's hard to predict the future here, but great context just around the evolution of the business. So I appreciate it. I'll leave it there.

Debbra Lynn Schoneman -- President & Managing Director

Thanks, Devin.

Operator

Thank you. And our next question will come from the line of James Yaro with Goldman Sachs.

James Yaro -- Goldman Sachs -- Analyst

Good morning.

Debbra Lynn Schoneman -- President & Managing Director

Good morning.

James Yaro -- Goldman Sachs -- Analyst

Premier biotech franchises out there. So I just wanted to touch on how much of your ECM and perhaps M&A results were driven by this sector? And then longer term, your views for the subsector. We've obviously seen a bit of a slowdown for parts of this year. And I think there are reasons for the slowdown are known, but I guess sort of the longer-term outlook for that business.

Chad R. Abraham -- Chairman & Chief Executive Officer

Yes, I'll take that. I mean, yes, obviously, our strongest by far in revenue mix of ECM is healthcare. And within healthcare, biotech and biopharma is the biggest business. It's frankly been fairly strong all year. We will have these pockets where of time where deals might get more difficult. So there's not as much business, but those pockets of slowdown haven't lasted that long. I would say, in general, obviously, Q3 was a little slower than the first couple of quarters. We're definitely seeing good but more difficult ECM market in healthcare here in Q4.

I think all of that said, we're still in this heavy innovation period, lots of interest in healthcare in general. So this is a business that's very hard to predict out two, three quarters. But I also think sometimes people like to look back at what were levels four and five years ago. And I think that leaves out just how much new capital, how much innovation is out there, how many new biotech companies have been created through IPOs. So regardless of market conditions go, lots of those companies need to raise money.

James Yaro -- Goldman Sachs -- Analyst

Okay. That makes a lot of sense. And then you've talked about robust activity across the investment bank, but sort of what's been top of mind in the market over the past few months has been the impact of supply chain disruption, inflation at potentially higher rates. So could you just speak to whether this has been part of your dialogue with your clients and whether you expect those to have any sort of impact on activity going forward?

Chad R. Abraham -- Chairman & Chief Executive Officer

Yes. I would say -- I mean look, we have certain clients that have been impacted by supply chain. We have other clients that are impacted by certain inputs on pricing. I would say it's hard for us with these results to sort of point to any of those sort of having a huge impact on large number of deals. But I think we recognize those three factors. There are certainly things our clients are talking about. But none of those by itself has really slowed down deal activity.

James Yaro -- Goldman Sachs -- Analyst

Okay. That makes sense. And then my last one is just regarding the hiring environment. So it's obviously becoming extremely competitive. So what are your expectations for hiring, especially heading into next year?

Chad R. Abraham -- Chairman & Chief Executive Officer

Yes. It has -- I think it has become more competitive for hiring. I mean, frankly, it's been that way, the last few years. What I would say is, in that vein though, our platform, I think, is getting more appealing. I think people are seeing us do larger deals, more and more franchises, I think, are becoming market-leading. So that offsets obviously the competitive environment. The other thing I would say is we have many, many more bankers doing significantly more revenue.

And I think on certain platforms, I mean, obviously, that increases your ability to pay more for the right kind of talent. So I think we would expect the environment to be difficult, but I also think our approach has really been to add talent three ways. We're first and foremost focused on developing our own managing directors. For the last five or six years, we've been focused on adding five to seven sort of net MDs through hiring. And then we've also -- we get some big chunks when we do a team lift out or an acquisition. So I think even in the sort of more difficult hiring environment, we've shown we can continue to grow that MD headcount, and we anticipate being able to do that again next year.

James Yaro -- Goldman Sachs -- Analyst

Okay. Thanks a lot.

Operator

[Operator Instructions] Your next question will come from the line of Michael Brown with Keefe, Bruyette, & Woods.

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

Hi, Chad. And, how is everyone?

Debbra Lynn Schoneman -- President & Managing Director

Great.

Chad R. Abraham -- Chairman & Chief Executive Officer

Hey Mike.

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

So this quarter, I noticed the investment income line had a nice performance, and it sounds like there were some gains in your merchant banking portfolio. Can you just touch on that a little bit? What were the key drivers there? And then can you just talk about the longer-term strategy here, you said that you made an MD hire during the quarter? And I just wanted to kind of better understand what the ultimate strategy here from that merchant banking business?

Timothy Lee Carter -- Managing Director & Chief Financial Officer

Yes. Chad, maybe I can take that. You're right, Mike, the marks that we had during the quarter actually were the result of a couple of liquidity events that occurred within the portfolio. So typically, when we see something come through and have a liquidity event, we'll have some mark up based on that. And that's really what occurred in the third quarter.

We did add an additional partner in that group. I think, for us, it's a nice business. It's complementary to our banking business. It's a business that actually where we've continued to bring down the amount of our capital in that business, and it's much more driven by capital that comes from outside. So my overall take is, again, nice business, complementary to banking. I don't think there's any big shift in that as we go forward. And it's pretty consistent with where we've been over the last several years.

Operator

Okay. And our next -- sorry, go ahead.

Chad R. Abraham -- Chairman & Chief Executive Officer

Any follow-up on that, Mike? Or did that answer the question?

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

Yes. Thanks, Chad. Yes, I was on mute there. I appreciate that, Tim. The business development expenses, I didn't pick up all that much this quarter relative to last quarter. Have you started to see that rise in the fourth quarter? I guess, like, have you seen travel picking up here? And I guess, what are your expectations there as to where that could go to and what level that may reach longer term?

Timothy Lee Carter -- Managing Director & Chief Financial Officer

Yes. You're right, I mean, in the third quarter, it was still pretty modest. I would say there's been a slight pickup in that going into Q4. But still -- for this year, it certainly doesn't look like it's going to be back to the -- to what we would think is the more normalized levels. The last couple of quarters now, we've -- excluding reimbursed deal expenses, we've run right around $48 million. I still think and we've talked sort of about a quarterly run rate on this in the past, what I think is a more normalized level is probably something that's closer to 52 or 53. So at what point does that come in next year, based on what we're seeing to start the fourth quarter, maybe it's picking up here a little bit. But yes, I think that's the more normal run rate on a longer-term basis when travel does get back to more normal levels.

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

Okay. Thanks. Appreciate that. And just one last one for me. You referenced the goal for the equities brokerage revenues to reach $200 million longer term. So you did $161 million last year, it doesn't sound like there's really major revenue dissynergies from Cornerstone Macro. So how much do you anticipate Cornerstone adding to your full year equities revenue, if we think about next year?

Debbra Lynn Schoneman -- President & Managing Director

Yes. Now obviously, it won't be an entire yield will come in during the first quarter. So a little bit will be timing based on when we have that closed, but we've been looking at this a little bit. You look at an LTM basis, we're slightly over 150, and we think that Cornerstone brings in about a 30% growth in revenues, which gets us pretty darn close to that goal again on a full year basis. So we just have to make that adjustment. So -- and you're correct, the revenue dissynergy, I mean we had definitely a gap, which is why this made a ton of sense to us relative to macro research and frankly, their derivatives platform as well, which combines both strategy with trading. And as you rightly pointed out, not a lot of dissynergies do we see there.

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

Great Thank you, Deb. I appreciate the color.

Debbra Lynn Schoneman -- President & Managing Director

Yes.

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

Thanks for taking my questions.

Operator

Thank you. Our next question will come from the line of Mike Grondahl with Northland Securities.

Mike Grondahl -- Northland Securities -- Analyst

Hey, good morning, everyone.

Debbra Lynn Schoneman -- President & Managing Director

Good morning.

Mike Grondahl -- Northland Securities -- Analyst

Chad, it sounds like the pipeline, the backlog is pretty robust, if not very robust kind of across the board for the businesses and your visibility into 4Q is great. Can you go as far as say you have really good visibility into 1Q? Can you extend that another quarter? Or how do you feel as we're kind of going to be looking at 1Q '22 pretty quick?

Chad R. Abraham -- Chairman & Chief Executive Officer

Yes. Thanks, Mike. I mean what I would say, obviously, this is always the toughest time of year to sort of predict out two and three quarters. Everybody is charging hard. There's lots of clients that want to close transactions for Q4. So how the mix of revenue between Q4 and Q1 depends on some of those closings. We're certainly seeing in certain business segments, some of the regulatory review taking a little bit longer, but again, the backlog is very good we expect and have good visibility in what we see to close for Q4.

I would say the other thing for us that's a little more complicated is just -- Q1 is over the years our softer quarter. So what happens will depend on how much business slides into Q1. But right now, we are starting to build that backlog. We are starting to identify the deals that are going to close in Q1, and so certainly feel good about relative to other years, how early next year is shaping up.

Mike Grondahl -- Northland Securities -- Analyst

Got it. Got it. Anything to call out with us, the SPAC transactions or kind of your appetite for continuing to kind of push in that area?

Chad R. Abraham -- Chairman & Chief Executive Officer

I would say our answer has sort of been consistent the last year on this. We weren't overweighted on our SPAC activity relative to capital raising. Obviously, much of that has dried up. All of that being said, they're very active in our advisory business. And I think our levels in the back half of the year relative to SPAC work are probably even greater than the beginning. But for us, that's still a relatively small segment. It's not what's driving either our ECM business or our advisory business, but it's become an important component.

Mike Grondahl -- Northland Securities -- Analyst

Got it. And then just lastly, on the acquisition front, are you still looking at a few things, considering a few things? Kind of how does that pipeline look or just activity in general?

Chad R. Abraham -- Chairman & Chief Executive Officer

Yes, I would say, Mike, we're always looking. We had a number of conversations this year. There's a couple of transactions that we looked at closely that got, in our opinion, too pricey for us. All of that being said, I would say our strategic priorities and areas that we've identified were still very interested in doing more in technology. We think some of our European expansion come through team lift-outs or acquisitions and even in some of our best franchises, they're small teams and boutiques. So we continue to be very active and that -- and I think just with our track record, we've proven we can drive returns from those. So we would expect to continue there.

Mike Grondahl -- Northland Securities -- Analyst

Okay. Hey. Great. Congrats again.

Debbra Lynn Schoneman -- President & Managing Director

Thanks, Mike.

Chad R. Abraham -- Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. I would now like to turn the call to Mr. Chad Abraham for his closing comments.

Chad R. Abraham -- Chairman & Chief Executive Officer

Okay. Thank you, operator, and thanks to everyone that joined. We look forward to updating you on our fourth quarter and full year results. Have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Chad R. Abraham -- Chairman & Chief Executive Officer

Debbra Lynn Schoneman -- President & Managing Director

Timothy Lee Carter -- Managing Director & Chief Financial Officer

Devin Ryan -- JMP Securities -- Analyst

James Yaro -- Goldman Sachs -- Analyst

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

Mike Grondahl -- Northland Securities -- Analyst

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