Item 1. Business
Overview
Greenhill is a leading independent investment bank that provides financial and strategic advice on significant domestic and cross-border mergers and acquisitions, divestitures, restructurings, financings, capital raising and other transactions to a diverse client base, including corporations, private equity sponsors, institutional investors, family offices, and governments globally. We serve as a trusted advisor to our clients throughout the world on a collaborative, globally integrated basis from our offices in the United States, Australia, Canada, France, Germany, Hong Kong, Japan, Singapore, Spain, Sweden and the United Kingdom.
At Greenhill, we are singularly focused on providing conflict-free advice to clients on a wide variety of complex financial matters, using our global resources to provide a combination of transaction experience, industry sector expertise and knowledge of relevant regional markets. We work seamlessly across offices and markets to provide the highest caliber advice and services to our clients.
Greenhill was established in 1996 by Robert F. Greenhill, the former President of Morgan Stanley and former Chairman and Chief Executive Officer of Smith Barney. Greenhill was formed as a limited liability company and converted to a Delaware corporation in 2004 at the time of our IPO. Since our founding, Greenhill has grown significantly, by recruiting talented and diverse managing directors and other senior professionals, acquiring complementary advisory businesses and training, developing and promoting professionals internally. We have expanded beyond merger and acquisition advisory services to include financing, restructuring, and private capital advisory services, and we have expanded the breadth of our sector expertise to cover substantially all major industries. Since the opening of our original office in New York, we have expanded globally to 15 offices across four continents.
As of December 31, 2022, we had 382 employees globally. At that date, we had 79 client facing managing directors.
Advisory Services
Greenhill is a unique global investment banking Firm. Greenhill’s singular focus on advisory services differentiates us from other investment banks, and enables us to offer best-in-class, conflict free service to each of our clients. Many of our peers as well as the large integrated, or “bulge bracket” institutions engage in commercial lending, underwriting, research, sales and trading and other businesses and investment management, all of which can create conflicts with clients’ interests.
•Advising clients is our only business. We do not engage in investing, trading, lending, underwriting, research or investment management businesses. Our clients’ interests are our sole priority.
•We provide unbiased, conflict-free advice. We have no products or additional services to cross-sell and, thus, no inherent conflicts of interest. We also have no lending, prime brokerage or other relationships with activist investors.
•We offer a globally integrated, collaborative approach to client service. Our professionals around the globe work together on a fully-integrated, one-firm, one-team approach to advance the interests of our clients.
•We maintain the highest levels of confidentiality. Our advisory-only business model and minimal conflicts enable us to maintain greater client confidentiality.
•Senior level attention is fundamental to our model. Our managing directors, who are seasoned professionals with both transaction expertise and sector and regional knowledge, are actively engaged in our client mandates from origination through execution and closing.
We provide comprehensive financial advisory services primarily in connection with mergers and acquisitions, divestitures, restructurings, financings, private capital raising and other similar transactions. We also provide advice in connection with shareholder defense preparedness, activist investor response strategies and other critical strategic matters. For all of our advisory services, we draw on the extensive experience, senior relationships and industry expertise of our managing directors and senior advisors.
Mergers and Acquisitions. On merger and acquisition engagements, we provide a broad range of advice to global clients in relation to domestic and cross-border mergers, acquisitions, divestitures, spin-offs and other strategic transactions, through all stages of a transaction’s life cycle, from initial structuring and negotiation to final execution. Our focus is on providing high-quality, unbiased advice to senior executive management teams, boards of directors and special committees of prominent large and mid-cap companies, financial sponsors and key decision makers in governments and at large institutions on transactions that typically are of the highest strategic and financial importance to our clients. We have specialists in nearly every significant industry sector who work closely with our transaction and regional specialists to provide the highest quality advice and transaction execution. In addition to merger and acquisition transactions, we advise clients on a full range of critical strategic matters, including activist shareholder defense, special committee projects, licensing deals and joint ventures. We provide advice on valuation, negotiation tactics, industry dynamics, structuring alternatives, timing and pricing of transactions, as well as financing alternatives. In appropriate situations, we also provide fairness opinions with regard to merger and acquisition transactions.
Financing Advisory and Restructuring. Our financing advisory and restructuring practice encompasses a wide range of advisory services. In restructurings, we advise debtors, creditors, governments, and other stakeholders, as well as potential acquirers of companies experiencing financial distress. We provide advice on and, as applicable, assist in negotiations with respect to, valuation, debt capacity, liability management, restructuring or other capitalization alternatives, capital structures, financing alternatives and M&A in both in-court and out-of-court processes. In financing advisory, we structure tailored solutions for our clients by advising on private placements of debt and structured equity, refinancing of existing debt facilities, negotiating the modification and amendment of covenants and acting as an independent advisor. In this role we either assist clients in raising capital through a structured process conducted by us or we serve as an independent advisor providing advice as to the terms and conditions of financings from incumbent lenders or relationship banks and lenders.
Private Capital Advisory. We are one of the leading global financial advisors to pension funds, endowments, institutional investors and financial sponsors on primary and secondary transactions involving alternative assets. Using our primary capital formation expertise, we provide clients with customized fundraising solutions, including single asset capital transactions, blind pool funds and co-investment syndications, and targeted investor outreach through our global team of senior distribution professionals. Fundraising mandates are focused on general private equity, specialist sector funds, credit strategies, real assets and venture capital. Greenhill advises such institutions globally on secondary sales of interests in private equity and similar funds, and provides advice to alternative asset fund sponsors for private capital raising, restructuring, financing, liquidity options, valuation and related services.
Revenues
Our revenues are derived from both corporate advisory services related to mergers and acquisitions ("M&A"), financings and restructurings and private capital advisory services related to sales or capital raises pertaining to alternative assets. Revenues from corporate advisory are primarily driven by total deal volume and the size of individual transactions. While fees payable upon the successful conclusion of a transaction generally represent the largest portion of our corporate advisory fees, we also earn other fees, including on-going retainer fees, substantially all of which relate to non-success based strategic advisory, financing advisory, and restructuring assignments, and fees payable upon the commencement of an engagement or upon the achievement of certain milestones such as the announcement of a transaction or the rendering of a fairness opinion. Additionally, we generate private capital advisory revenues from sales and/or the restructuring of alternative assets in the secondary market and from capital raises for new private funds where we act as private placement agents.
Human Capital
As an independent investment bank focused solely on advisory services, our people are our primary asset. We strive to develop and promote a culture that fosters collegiality, teamwork, professionalism, excellence, diversity and collaboration among our employees worldwide to deliver high quality results to our clients and create long term career development opportunities for our personnel. Our day to day conduct, as embodied by our Code of Ethics, seeks to ensure that everyone feels welcome, respected and valued so that they can contribute to their fullest potential.
Approximately 35% of our advisory managing directors have worked at Greenhill for more than 10 years; as a group our managing directors average more than 20 years of varied and relevant experience, which they leverage to provide the highest quality advice on a globally-integrated basis across our full range of services. Our managing directors are supported by a strong team of more junior professionals, and we spend a significant amount of time and resources recruiting, training and mentoring them. As an equal opportunity employer, all qualified applicants receive consideration without regard to race, color, religion, gender, sexual orientation, gender identity, national origin or ancestry, age, disability or veteran status, or other protected status.
Employee development is an important element of our human capital management program. We seek to provide our junior professionals with high quality technical training as well as broad exposure to a variety of assignments involving mergers and
acquisitions, divestitures, restructurings, financings, capital raisings and other transactions. This approach provides us with the flexibility to allocate resources depending on the transaction environment and provides our bankers with a wide variety of experiences to assist in the development of their business and financial judgment. We utilize a comprehensive evaluation process at the end of each year to measure performance, determine compensation and provide guidance on opportunities for continued development.
We strive to provide comprehensive packages of competitive compensation and benefits in each market in which we operate, which we believe is important to ensure our employees’ health, well-being and financial security. We review the competitiveness of our compensation and benefits frequently. With respect to our senior employees, we seek to align their compensation with the interests of our shareholders through stock-based incentive compensation programs.
The safety of our employees has always been a priority. As a result of the COVID-19 pandemic, work-place safety and employee well-being assumed even greater importance and our employees were given the flexibility to manage their work place and personal priorities. As COVID-19 "work from home" government mandates eased we encouraged our employees to return to the office in order to continue to build their professional skills and development and feel more connected to each other as well as the Firm. Each of our offices has continued to prioritize work place safety and our employee benefits continue to include mental health services. Regardless of the pandemic our senior personnel have continued to demonstrate leadership by, among other things, proactively reaching out to our more junior professionals to mentor and offer their support both professionally and personally when necessary. A combination of our efforts has yielded positive results and we have been able to retain much of our talent as planned in 2022 following a higher than usual attrition rate, which was consistent with our peers and across our industry, as a consequence of "The Great Resignation" .
As of December 31, 2022, Greenhill employed a total of 382 people, of which 219 were located in our offices in North America, 111 were based in our European offices, and 52 in the rest of the world. The vast majority of our finance, legal and operational employees are located in the United States.
Competition
We operate in a highly competitive environment where there are no long-term contracted sources of revenue. Each revenue-generating engagement is separately awarded and negotiated. Our list of clients with whom we have an active engagement changes continually. To develop new client relationships, and to develop new engagements from historic client relationships, we maintain, on an ongoing basis, business dialogues with a large number of clients and potential clients. We have gained a significant number of new clients each year through our business development initiatives, through recruiting additional senior investment banking professionals who bring with them client relationships and expertise in certain industry sectors or geographies and through referrals from members of boards of directors, attorneys and other parties with whom we have relationships. At the same time, we lose clients each year as a result of the sale or merger of a client, a change in a client’s senior management team, competition from other investment banks and other causes.
The financial services industry is intensely competitive, and we expect it to remain so. Our competitors are global and regional integrated banking firms, mid-sized full service financial firms, other independent financial services firms and specialized financial advisory firms. We compete with some of our competitors globally and with others on a regional, product, industry or niche basis. We also compete on the basis of a number of factors, including the quality of our advice and service, our range of sector expertise, strength of relationships, innovation, reputation and price.
The global and regional integrated banking firms offer a wider range of products, from loans, deposit-taking and insurance to brokerage, hedging, foreign exchange, asset management and corporate finance and securities underwriting services, which may enhance their competitive position. They also have the ability to support their investment banking operations with commercial banking, insurance and other financial services revenues in an effort to gain market share, which could result in pricing pressure on our business. In addition to our larger and mid-sized full service competitors, we compete with a number of independent investment banks which offer independent advisory services on a model similar to ours. A number of the independent banks with whom we compete are larger and have greater general and industry-specific coverage resources.
We believe our primary competitors consist of both large, diversified financial institutions such as Bank of America Corporation, Barclays Bank PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley, and UBS AG, as well as publicly listed boutique investment banking firms such as Evercore Partners Inc., Jefferies Group, Inc., Lazard Ltd., Moelis & Co., Perella Weinberg Partners and PJT Partners.
Competition can be intense for the hiring and retention of talented employees. Our ability to continue to compete effectively in our business will depend upon our ability to attract new employees and retain and motivate our existing employees.
For a discussion of risks related to the highly competitive environment in which we operate, see “Item 1A. Risk Factors” in this annual report.
Regulation
Our business, as well as the financial services industry generally, is subject to extensive regulation in the United States and elsewhere. As a matter of public policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of parties participating in those markets.
Certain of our operations are subject to compliance with laws and regulations of U.S. federal and state governments, non-U.S. governments, their respective agencies and/or various self-regulatory organizations or exchanges, and any failure to comply with these regulations could expose us to liability and/or damage our reputation. Our businesses have operated for many years within a legal framework that requires us to monitor and comply with a broad range of legal and regulatory developments that affect our activities. However, additional legislation, changes in rules promulgated by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect our mode of operation and profitability. Our activities are subject to financial markets regulation in the following jurisdictions:
United States
In the United States, the Securities and Exchange Commission (“SEC”) is the federal agency responsible for the administration of the federal securities laws and the protection of investors who invest in Greenhill. Greenhill & Co., LLC (“G&Co LLC”) is a wholly-owned subsidiary of Greenhill through which we conduct our U.S. advisory business. It is registered as a broker-dealer with the SEC, is a member of the Financial Industry Regulatory Authority (“FINRA”) and is subject to regulation and oversight by the SEC. In addition, FINRA, a self-regulatory organization that is subject to oversight by the SEC, adopts and enforces rules governing conduct, and examines the activities of its member firms such as G&Co LLC. State and local banking and securities regulators also have regulatory oversight authority over G&Co LLC.
Broker-dealers are subject to regulations that cover all aspects of the securities business. Our business model is exclusively focused on providing strategic advice to clients and we do not hold customer funds or securities, or carry on research, securities trading, lending or underwriting activities. While this means that certain broker-dealer regulations, such as those pertaining to the use and safekeeping of customers’ funds and securities and the financing of customers’ purchases, may not be applicable to us, we remain subject to other applicable broker-dealer regulations, including regulatory capital levels, record keeping and reporting requirements, and the conduct and qualifications of officers and employees. In particular, as a registered broker-dealer and member of a self-regulatory organization, G&Co LLC is subject to the SEC’s uniform net capital rule, Rule 15c3-1. Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant portion of a broker-dealer’s assets be retained in liquid financial instruments relative to the amount of its liabilities. The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SEC’s uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital.
Europe
Greenhill & Co. International LLP, our wholly owned affiliated partnership with an office in the United Kingdom, through which we conduct a large portion of our European advisory business, is authorized and regulated by the United Kingdom’s Financial Conduct Authority (“FCA”). The current UK regulatory regime, that governs all aspects of our advisory business in the United Kingdom, is based upon the Financial Services and Markets Act 2000 (the “FSMA”), together with secondary legislation and other rules made under the FSMA.
Greenhill Europe GmbH & Co. KG houses our offices in Frankfurt, Madrid and Paris, with particular focus on our European advisory business. Greenhill Europe GmbH & Co. KG is authorized and regulated by the Bundesanstalt fur Finanzdienstleistungsaufsicht (“BaFin”) and the Deutsche Bundesbank. In addition, the Firm has a regulated branch in Spain, which is regulated and authorized by the Comisión Nacional del Mercado de Valores (“CNMV”), and in France, which is authorized and regulated by the Autorité de Contrôle Prudentiel et de Régulation (“ACPR”).
Greenhill & Co. Sweden AB, our wholly-owned Swedish subsidiary with an office in Stockholm, provides financial advice to clients in Sweden and the wider Nordic region. It is currently unregulated.
Australia
Greenhill & Co. Australia Pty Limited (“Greenhill Australia”), our wholly-owned Australian subsidiary, is licensed and subject to regulation by the Australian Securities and Investments Commission (“ASIC”) and must also comply with applicable provisions of the Corporations Act 2001 and other Australian legal and regulatory requirements, including capital adequacy rules, customer protection rules, and compliance with other applicable trading and investment banking regulations.
Hong Kong
Greenhill & Co. Asia Limited, a wholly-owned Hong Kong subsidiary, is licensed under the Hong Kong Securities and Futures Ordinance with the Securities and Futures Commission (“SFC”) and is regulated by the SFC. The compliance requirements of the SFC include, among other things, net capital, stockholders’ equity and periodic reporting requirements, and also the registration and training of certain employees and responsible officers.
Singapore
Greenhill & Co. Asia (Singapore) PTE. LTD., a wholly-owned Singapore subsidiary, is regulated by the Monetary Authority of Singapore (“MAS”) and licensed under the Securities and Futures Act to conduct the regulated activities of dealing in capital markets products and advising on corporate finance. The compliance requirements in relation to the capital markets services license include, among other things, capital adequacy, business conduct rules, periodic reporting requirements and ensuring representatives are fit and proper to carry out the regulated activities.
Our business may also be subject to regulation by other governmental and regulatory bodies and self-regulatory authorities in other countries where Greenhill operates or conducts business.
Anti-money laundering, Sanctions and Bribery Legislation
Federal anti-money-laundering laws make it a criminal offense to own or operate a money transmitting business without the appropriate state licenses, which we maintain, and require registration with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”), where we are registered. In addition, pursuant to the USA PATRIOT Act of 2001 and the Treasury Department’s implementing federal regulations, as a “financial institution,” we have established and maintain an anti-money-laundering program. We are generally prohibited from dealing with “Specially Designated Nationals” or SDNs, that are identified by the Treasury Department’s Office of Foreign Assets Control, or OFAC. In addition, OFAC administers a number of comprehensive sanctions and embargoes that target certain countries, governments and geographic regions. Similar restrictions have been issued in the U.K. by HM Treasury. We are prohibited from engaging in transactions involving any country, region or government that is subject to such comprehensive sanctions.
We also are subject to the Foreign Corrupt Practices Act ("FCPA"), which prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. We are also subject to applicable anti-corruption laws in the United States and in the other jurisdictions in which we operate, such as the U.K. Bribery Act. We have implemented policies, procedures, and internal controls that are designed to comply with such laws, rules, and regulations.
Data Privacy
As part of our business we routinely receive sensitive and confidential information from our clients. We also collect personal information from our prospective and current employees, as permitted by employment laws and regulation. As a result, we are subject to the laws and regulations in relation to privacy of the U.S. federal and state governments (such as the California Consumer Privacy Act (“CCPA”) and California Privacy Rights Act ("CPRA")) as well as those of several non-U.S. governments, their agencies and self-regulatory organizations, such as the U.K. and E.U.’s data privacy and security framework titled the General Data Protection Regulations (the “GDPR”).
For a discussion of risks related to the regulations to which we are subject, see “Item 1A. Risk Factors” in this annual report.
Where You Can Find Additional Information
Greenhill & Co., Inc. files current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov.
Our public internet site is http://www.greenhill.com. We make available, free of charge, through our internet site, via a link to the SEC’s internet site at http://www.sec.gov, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website in the “Corporate Governance” section, and available in print upon request of any stockholder to our Investor Relations Department, are the charters for our Audit Committee, Compensation Committee and Nominating & Corporate Governance Committee, our Corporate Governance Guidelines, Related Party Transaction Policy and Code of Business Conduct & Ethics governing our directors, officers and employees. The information on our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the SEC.
Item 1A. Risk Factors
Risks Related to our Business and Operations
Our ability to retain our managing directors and other professionals is critical to the success of our business
The success of our business depends upon the personal reputation, judgment, integrity, business generation capabilities and project execution skills of our managing directors. Our managing directors’ personal reputations and relationships with our clients are a critical element in obtaining and maintaining client engagements. Accordingly, the retention of our managing directors, who are not obligated to remain employed with us, is particularly crucial to our future success. Managing directors have left Greenhill in the past and others may do so in the future, and we cannot predict the impact that the departure of any managing director or a group of managing directors would have on our business. For example, in late 2020 a number of managing directors in our U.S. private capital advisory business departed the Firm to join a competitor. The departure or other loss of a number of our managing directors could materially adversely affect our ability to secure and successfully complete engagements, which could materially adversely affect our results of operations.
We depend on the efforts and reputations of Mr. Bok and our other executive officers. Our senior leadership team’s management efforts and relationships with clients and potential clients are critical elements in the success of our business. The loss of the services of our senior leadership team, in particular Mr. Bok, could have a material adverse effect on our business, including our ability to attract clients.
In addition, if any of our managing directors were to join an existing competitor or form a competing company, some of our clients could choose to use the services of that competitor instead of our services, or some of our managing directors or other professionals could choose to follow the departing managing director in joining an existing competitor or forming a competing company. Although we have entered into industry-standard non-competition agreements with our managing directors there is no guarantee that these agreements are sufficiently effective to prevent our managing directors from resigning to join our competitors or that the non-competition agreements would be upheld in either federal or state courts or locally in jurisdictions outside the US if we were to seek to enforce our rights under these agreements. For example, in January 2023 the Federal Trade Commission proposed a rule that would ban employers from imposing non-compete agreements on employees.
Principally all of our revenues are derived from advisory fees, which results in volatility in our revenues and profits
We are entirely focused on the financial advisory business and we earn principally all of our revenues from advisory fees paid to us by each of our clients, in large part upon the successful completion of the client’s transaction, the timing of which is outside of our control. Unlike diversified investment banks, which generate revenues from commercial lending, securities trading and underwriting, or other advisory firms who also generate revenues from their asset management and other businesses, we only generate revenues from investment banking advisory fees. As a result, a decline in our advisory engagements, the number and scale of successfully completed client transactions or the market for advisory services generally would have a material adverse effect on our business and results of operations.
Our engagements are singular in nature and do not provide for subsequent engagements, which could cause our revenues to fluctuate materially from period to period and translates into potential volatility in our stock price
We operate in a highly-competitive environment where our clients generally retain us on a non-exclusive, short-term, engagement-by-engagement basis in connection with specific transactions or projects, rather than under long-term contracts covering potential additional future services. As these transactions and projects are singular in nature and subject to intense competition, we must seek out new engagements when our current engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in the next-succeeding period or any future period. In addition, we generally derive most of our engagement revenues at key transaction milestones, such as announcement and closing, the completion and timing of which are beyond our control. Extended
regulatory and other delays in the closing of announced transactions can create increased volatility in our revenues from period to period, since the largest portion of our fees is typically paid upon closing. Further, a transaction can fail to be completed for many reasons, including failure to agree upon final terms with the counterparty, failure to secure necessary board or shareholder approvals, failure to secure necessary financing, failure to achieve necessary regulatory approvals, adverse macro-economic events and market conditions. Cross-border deals may also require numerous agency and regulatory approvals in numerous jurisdictions, and the likelihood and timing of such approvals may be difficult to predict. In cases where an engagement is terminated prior to the successful completion of a transaction or project, we may earn limited or no fees and may not be able to recoup the costs we incurred prior to the termination.
Our business is not just highly dependent on market conditions but also on the decisions and actions of our clients and interested third parties. In addition to the variables noted above that can adversely impact our mergers and acquisitions business, in our financing advisory and restructuring business anticipated bidders for assets of a client in financial distress may not materialize or our clients may not be able to restructure their operations or indebtedness due to a failure to reach agreement with their principal creditors. In our private capital advisory business, our clients may not be able to raise new capital in primary transactions or sell their existing fund interests in secondary transactions because anticipated investors or buyers may decline to invest due to perceived or actual lack of liquidity, change in strategic direction of the investor, geo-political risks, or other factors beyond our control. In all these circumstances we may receive limited or no advisory fees and may not be able to recoup all of our expenses despite having committed substantial time and resources to an engagement.
Our dependence on a relatively small number of successfully completed transactions for a large percentage of our revenues in each quarterly or annual reporting period also impacts our earnings rather significantly in any particular quarter or year. As a result it may be difficult for us to achieve consistent results and steady earnings growth on a quarterly basis, which could also adversely affect our stock price.
A high percentage of our revenues is derived from a small number of clients, and the termination of any one engagement could reduce our revenues and harm our operating results
Each year, we advise a limited number of clients. Our top ten client engagements accounted for 38% of our total revenues in 2022 and 28% in 2021. In 2022 and 2021, no client represented greater than 10% of our revenues. While the composition of the group comprising our largest clients varies significantly from year to year, we expect that our engagements will continue to be limited to a relatively small number of clients, compared to some of our larger competitors, and that an even smaller number of those clients will account for a high percentage of revenues in any particular year. Our dependence on a relatively small number of transactions for a large percentage of our revenues in each quarterly or annual reporting period also impacts our earnings significantly in any particular quarter or year. As a result, the adverse impact on our results of operation from lost engagements or the non-completion of transactions on which we are advising can be significant.
We generate a substantial portion of our revenues from our services in connection with mergers and acquisitions; in the event of a decline in merger and acquisition activity, it is unlikely we could offset lower revenues with revenues from other financial advisory services
The majority of our bankers are focused on covering clients in the context of providing merger and acquisition advisory services and those activities generate a substantial portion of our revenues. In the event of a decline in merger and acquisition activity, we may seek to generate greater business from our financing advisory and restructuring and/or private capital advisory services. However, it is unlikely that we will be able to completely offset lower revenues from our merger and acquisition activities with revenues generated from either financing advisory and restructuring or private capital advisory assignments. Both our financing advisory and restructuring businesses, which provides financing, restructuring and bankruptcy advice to companies in financial distress or their creditors or other stakeholders, and our private capital advisory business, which advises on primary and secondary transactions for fund sponsors and alternative assets, are smaller than our mergers and acquisitions advisory business, and we expect that they will remain that way for the foreseeable future.
If the number of debt defaults, bankruptcies or other factors affecting demand for our restructuring services is at a low level, our financing advisory and restructuring business could suffer
We provide various financing advisory and restructuring and related advice to companies in financial distress or to their creditors or other stakeholders. A number of factors affect demand for these advisory services, including general economic conditions, the availability and cost of debt and equity financing, governmental policy and changes to laws, rules and regulations, including those that protect creditors. In addition, providing restructuring advisory services entails the risk that the transaction will be unsuccessful, takes considerable time and can be subject to a bankruptcy court’s discretionary power to disallow or discount our fees. If the number of debt defaults, bankruptcies or other factors affecting demand for our restructuring advisory services is at a low level, our financing advisory and restructuring business would likely be adversely affected.
Our private capital advisory business is dependent on the availability of capital for deployment in the alternative asset classes in which our clients are invested
Our primary private capital advisory business provides clients with customized fundraising solutions, including single asset capital transactions, blind pool funds and co-investment syndications, and targeted investor outreach through our global team of senior distribution professionals. With respect to secondary capital activities we advise institutional investors and general partners of investment funds on the sale of alternative assets funds in secondary transactions, restructuring of those assets in continuation vehicles and/or capital raising transactions. Our ability to find suitable engagements and earn fees in this business depends on the availability of private and public capital for investments in illiquid assets such as private equity.
Our ability to assist fund managers and sponsors in raising capital from investors and to assist investors in selling their interests in secondary transactions depends on a number of factors, including many that are outside our control, such as the general economic environment and impact on the valuation of the alternative asset(s), changes in the weight investors give to alternative asset investments as part of their overall investment portfolio among asset classes, market liquidity and volatility. To the extent private and public capital focused on alternative investment opportunities for our clients is limited, the results of our private capital advisory business may be adversely affected.
Our business may be adversely affected by difficult market conditions and adverse economic conditions which may cause a decline in transaction activity, the extent of which is not known, predictable or under our control
Adverse market or economic conditions caused by external factors may impact the number, size and timing of transactions on which we provide advice and therefore could adversely affect our advisory fees. For instance, we were impacted, particularly in 2020, by the significant disruption of global markets and economies caused by the COVID-19 global pandemic. More recently deal activity was impacted by higher inflation, rising interest rates, less liquid credit markets, less active equity capital markets, and geopolitical and economic consequences of the Ukraine-Russia war. Other business disruptions may be caused by additional geopolitical events, unanticipated economic, fiscal or political events, health or climate change events. In addition, changes in policies, laws, regulation or technology may impact our clients or market opportunities in the future. Furthermore, rapid changes in equity valuations, the uncertainty of available credit or financing and the volatility of the debt and equity markets can also adversely affect the size, volume and timing of, as well as the ability of our clients to successfully complete M&A transactions, which can affect our advisory business. For example, when there is a disruption in the financial markets there may be an increase in the number of pending deals that are terminated prior to closing or where one party seeks not to close. In these cases, we may receive only a portion of our fee, or in some cases no fee, if the deals on which we advise are terminated or otherwise do not close.
While we operate in North America, Europe, Australia, and Asia, our operations in the United States and Europe have historically provided most of our revenues and earnings. Consequently, our revenues and profitability are particularly affected by market conditions in these locations.
We face strong competition from far larger firms and other independent firms, which could adversely affect our market share of the advisory business
The investment banking industry is intensely competitive, and we expect it to remain so. We compete on the basis of a number of factors across the U.S. and internationally, including the quality of our advice and service, our range of sector expertise, strength of relationships, innovation, reputation and price. We are a relatively small investment bank, with 382 employees as of December 31, 2022 and total revenues of $258.5 million for the year ended December 31, 2022. Most of our competitors in the investment banking industry have a far greater range of products and services, greater financial and marketing resources, larger customer bases, greater name recognition, more managing directors to serve clients’ needs, greater global reach and broader relationships with current and potential clients than we have. These larger and better capitalized competitors may be better able to respond to changes in the investment banking market, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Further, we may experience pricing pressures in the future if some of our competitors seek to obtain market share by reducing prices.
Our integrated investment banking competitors and other large commercial banks, insurance companies and other broad-based financial services firms that have established or acquired financial advisory practices and broker-dealers, or that have merged with other financial institutions, have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage, hedging, foreign exchange, asset management and investment banking services, which may enhance their competitive position. Their ability to support investment banking with commercial banking, insurance and other financial services revenues in an effort to gain market share could result in pricing pressure in our businesses. In particular, the ability to provide financing as well as advisory services has become an important advantage for some of our larger competitors; and,
because we are unable to provide such financing, we may be unable to compete for advisory clients in a significant part of the advisory market.
In addition to our larger competitors, a number of independent investment banks offer independent advisory services and most of these firms are larger and have greater general and industry specific coverage resources and larger financing advisory and restructuring groups than we do. Furthermore, a number of such independent firms may have greater financial resources than us. Additionally, independent advisory firms require minimal capital to operate and there are few obstacles to forming a new firm. As these independent firms seek to gain market share, our share of the advisory business could diminish and there could be pricing pressure, which would adversely affect our revenues and earnings.
Our future growth is dependent on both our ability to identify, attract and hire additional managing directors and other professionals and our ability to identify, acquire and successfully integrate complementary advisory businesses
The future growth of our business is dependent upon our ability to recruit new personnel, develop our existing and new personnel and expand through strategic investments or acquisitions. To successfully expand our workforce we must identify, attract and hire professionals, or teams of professionals, to join our Firm, who not only will be able to function as trusted advisors to our clients without the support of a large suite of products but also will be able to fit into our collegial culture. The recruitment, development and training of professionals requires large commitments of time and resources. It may take a substantial amount of time to determine whether new professionals will be effective and, during that time, we may incur significant expenses on compensation, integration and business development activities. Furthermore, there can be no certainty that our personnel will develop the skills necessary to advise our client base or that we will be able to retain those high achieving personnel.
In the event we grow by strategic investment or acquisition, we face numerous risks and uncertainties similar to those of hiring and developing internally our individual professionals. We also face the challenge of integrating a large number of personnel into our global organization and ensuring a good cultural fit. Management and other existing personnel will spend considerable time and resources working to integrate the acquired business, which may distract them from other business operations.
If we are unable to successfully attract, recruit, retain and train new and existing professionals or make strategic investments and integrate the personnel into our business and retain them, our financial results could suffer.
Employee misconduct could harm Greenhill and is difficult to detect and deter
There have been a number of highly publicized cases involving fraud, insider trading or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur at Greenhill. For example, misconduct by employees could involve the improper use or disclosure of confidential information.This may result in regulatory sanctions, material fines, or in the case of insider trading to criminal charges.
Our advisory business often requires that we deal with highly confidential information of great significance to our clients, the improper use of which may have a material adverse impact on our clients. Any breach of our clients’ confidences as a result of employee misconduct may harm our reputation and impair our ability to attract and retain advisory clients, which could adversely affect our business. We also face the risk that our employees engage in workplace misconduct, such as sexual harassment or discrimination, despite our implementation of policies and training to prevent such misconduct and implementation of controls to detect this type of misconduct. In addition to impairing our ability to attract and retain clients, such misconduct may also impair our ability to attract and retain talent resulting in a materially adverse effect on our business and/or reputation. Yet another example of misconduct is the use of unauthorized communication devices and platforms that prevent the Firm from complying with its record keeping and record retention obligation. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent misconduct may not be effective in all cases.
The U.S. Department of Justice and the SEC also devotes significant resources to the enforcement of the Foreign Corrupt Practices Act. In addition, the United Kingdom has significantly expanded the reach of its anti-bribery laws. While we have developed and implemented policies and procedures designed to ensure strict compliance with anti-bribery and other laws, such policies and procedures may not be effective in all instances to prevent violations. Any determination that we or our employees have violated these laws or other applicable anti-corruption laws could subject us to, among other things, civil and criminal penalties, material fines, profit disgorgement, injunction on future conduct, securities litigation and reputational damage, any one of which could adversely affect our business prospects, financial position or the market value of our common stock.
We may face damage to our professional reputation and legal liability to our clients and affected third parties if our services are not regarded as satisfactory or if conflicts of interests should arise
As an independent investment banking firm, we depend to a large extent on our relationships with our clients and our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, it may be more damaging in our business than in other businesses. Further, because we provide our services primarily in connection with significant or complex transactions, disputes or other matters that usually involve confidential and sensitive information or are adversarial, and because our work is the product of myriad judgments of our financial professionals and other staff operating under significant time and other pressures, we may not always perform to the standards expected by our clients. In addition, we may face reputational damage from, among other things, litigation against us, our failure to protect confidential information and/or breaches of our cybersecurity protections or other inappropriate disclosure of confidential information, including inadvertent disclosures, and social and environmental activism related to our relationships with clients in sensitive industries.
We may experience negative publicity from time to time relating to our business and our people, regardless of whether the allegations are valid. Our reputation and businesses may be adversely affected by negative publicity or information regarding our businesses and personnel, whether or not accurate or true, that may be posted on social media or other internet fora or published by news organizations. The speed and pervasiveness with which information can be disseminated through these channels, in particular social media, may magnify risks relating to negative publicity. Such negative publicity may adversely affect our business in a number of ways, including whether potential clients choose to engage us and our ability to attract and retain talent.
In addition, our clients are often concerned about conflicts of interest that may arise in the course of engagements. While we have adopted various policies, controls and procedures to reduce the risks associated with the execution of transactions, the rendering of fairness opinions and potential conflicts of interest, these policies may not be always adhered to by our employees or always be effective in reducing these risks. Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation. We are unable to estimate the amount of monetary damages which could be assessed or reputational harm that could occur as a result of any such regulatory sanction or client litigation.
Our failure to prevent a cyber-security attack may disrupt our businesses, harm our reputation, result in losses or limit our growth
Our clients typically provide us with sensitive and confidential information, which in the course of due diligence may include data of customers of our clients and personal information of our clients, counterparties and other stakeholders. As a result, we are subject to various risks and costs associated with the collection, handling, storage and transmission of sensitive information. We rely heavily on our technological and communications infrastructure to securely process, transmit and store such information among our locations around the world and with our professional staff, clients, alliance partners and vendors. If any of our technology systems or those of our third-party service providers (or providers to such third-party service providers) do not operate properly, are compromised or are disabled, we could suffer financial loss, a disruption of our businesses, regulatory intervention or reputational damage. Further, our information systems and technology may not continue to be able to accommodate our business needs and the cost of maintaining such systems may increase from its current level. A failure to implement new technology or appropriate levels of protection of our infrastructure, or an increase in costs related to such information systems, could have a material adverse effect on us.
We may also encounter attempted security breaches and cyber-attacks on our critical data, and we may not be able to anticipate or prevent all such attacks. We are not aware of any such occurrence that may have had a material impact to date, but a successful breach of our systems, or the systems used by our clients and other third parties, could lead to shutdowns or disruptions of our systems or third-party systems on which we rely and potential unauthorized disclosure of sensitive or confidential information. Breaches of our or third-party network security systems on which we rely could involve attacks that are intended to obtain unauthorized access to our proprietary information, destroy data or disable, degrade or sabotage our systems, often through the introduction of computer viruses, cyber-attacks and other means and could originate from a wide variety of sources, including unknown third parties outside the Firm. We may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss. Although we have policies and procedures designed to prevent or limit the likelihood and effect of the possible failure, interruption or security breach of our information and communication systems, there can be no assurance that any such failure, interruption or security breach will not occur. If such interruptions or breaches do occur there can be no assurance that they will be adequately addressed especially because the cyber-attack techniques are increasingly more sophisticated, change frequently or are not identifiable until launched. As cyber threats continue to multiply, become more sophisticated and threaten additional aspects of our businesses, we may also be required to expend additional resources on information security and compliance measures in order to continue to modify or enhance our cyber protection or to investigate and remediate any information security vulnerabilities or other exposures. The occurrence of any failure, interruption or security breach of our information or communication systems could damage our reputation, result in a loss of business, subject us to additional regulatory scrutiny, or expose us to civil litigation and financial liability.
We depend on our headquarters in New York City, where a large number of our personnel are located, for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including catastrophic weather events and natural disasters such as hurricanes, floods or other larger scale climate-related catastrophes, acts of terrorism, or a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. The incidence and severity of catastrophes and other disasters are inherently unpredictable. Our disaster recovery programs, although reasonably planned, may not be sufficient to mitigate the harm that may result from such a disaster or disruption. Although we carry insurance to mitigate our exposure to certain catastrophic events, our insurance and other safeguards might only partially reimburse us for our losses, if at all, and will not cover related reputational harm.
As a result of the COVID-19 pandemic, the use of remote communication devices, applications, software and other forms of technology to facilitate "work from home" was accelerated and has continued. Our employees continue to rely heavily on technology to perform their jobs and as a result we have increased operational risks arising from our reliance on remote communications, virtual meetings and other forms of technology. This change in work behavior results in elevated cybersecurity risks, risks associated with the protection of Company and client confidential communications, and risk of reliance on certain technology we employ for virtual meetings or other remote communications systems.
Strategic investments and acquisitions, or foreign expansion, may result in additional risks and uncertainties in our business
To the extent that we pursue business opportunities in certain markets outside the United States, we will be subject to political, economic, legal, operational, regulatory and other risks that are inherent in operating in a foreign country, including risks of possible nationalization or expropriation, excessive taxation, licensing requirements and other restrictive governmental actions, as well as the outbreak of hostilities and pandemic diseases.
If we expand to new geographic locations, we will incur additional compensation, occupancy, integration, legal and business development costs. Additionally, it may take significant time for us to determine whether new managing directors will be profitable or effective, during which time we may incur significant expenses and expend significant time and resources on compensation, integration and business development. Accordingly, the additional costs and expenses of an expansion may be reflected in our financial results before any offsetting revenues are generated. Depending upon the extent of our expansion, and whether it is done by recruiting new managing directors, strategic investment or acquisition, the incremental costs of our expansion may be funded from cash from operations or other financing alternatives. There can be no assurance that we will be able to generate or obtain sufficient capital on acceptable terms to fund our expansion needs, which would limit our future growth and could adversely affect our share price.
If we grow, we will also be required to commit additional management, operational, and financial resources to maintain appropriate operational and financial systems to adequately support expansion. There can be no assurance that we will be able to manage our expanding operations effectively or that we will be able to maintain or accelerate our growth, and any failure to do so could adversely affect our ability to generate revenues and control our expenses.
The unknown future impact of the COVID-19 pandemic and the exacerbation of many of the risks described above
The extent to which the COVID-19 pandemic and the related global economic uncertainty further adversely affects our business, results of operations and liquidity and financial condition, will depend on future developments that are both unknown and beyond our control. These developments include the resurgence, duration, spread and evolution of the pandemic and any recovery period; the actions taken to contain the spread of the disease or mitigate its impact; and future actions taken by governmental authorities, central banks and other third parties in response to the pandemic or to disruptions to the financial markets as a result of the prolonged recovery from the pandemic. If the health and welfare of client-facing professionals or executive officers providing critical corporate functions deteriorates, or the number of employees ill with COVID-19 becomes significant, our ability to win business, provide client services and manage operations could be materially adversely affected on a temporary basis.
Risks Related to our Indebtedness and Financial Condition
We currently have a substantial amount of long-term debt that could adversely affect our business
At December 31, 2022, the outstanding principal balance of our term loan facility was $271.9 million. As a result of voluntary repayments of debt in 2020 and 2021 we have now made all required quarterly installment payments of our long term debt that will be due prior to maturity on April 12, 2024. In addition to required amortization payments we may also be required to make annual repayments of principal on the term loan within ninety days of year-end of up to 50% of our annual excess cash
flow as defined in the credit agreement. For the year ended December 31, 2022, a payment of $1.8 million is required to be made by March 31, 2023.
The amount of our long-term debt could have adverse consequences. For example, it:
•increases our vulnerability to general adverse economic and industry conditions;
•requires us to dedicate a substantial portion of our cash flow from operations to make interest and principal payments on our debt, thereby limiting the availability of our cash flow to fund our operating activities, including deferred compensation arrangements, working capital, and other general corporate requirements;
•limits our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•places us at a competitive disadvantage compared with our competitors; and
•limits our ability to borrow additional funds, even when necessary to maintain adequate liquidity and meet regulatory capital requirements.
As a financial advisory firm we are principally dependent on transaction closings for our revenues and consequently our cash flow generation can be volatile. At the same time our operating expenses are mostly recurring and remain relatively consistent period by period except for annual cash bonus and deferred compensation payments, which are greatest in the first calendar quarter of the year. While we seek to maintain a cash balance adequate to fund our operating and financing needs, there is no assurance that our cash flow will be sufficient to allow us to meet all operating needs and make timely interest payments under the credit agreement or the payment due at maturity. Since we are limited in our ability to borrow additional amounts to fund our operating and debt obligations, we may need to consider taking other actions, including extending the maturity date with our current lenders, refinancing the debt obligation with a new debt obligation, issuing additional securities, seeking strategic investments, reducing operating costs or consider taking a combination of these actions, in each case on terms which may not be favorable to us. Further, failure to make timely principal and interest payments as required under the credit agreement or at maturity could result in a default. A default would permit lenders to accelerate the maturity for the debt and to foreclose upon any collateral securing the debt. In addition, the limitations imposed by the financing agreements on our ability to incur additional debt could limit our business opportunities, which could in turn have a material impact on our operations and a material adverse effect on our share price.
Our borrowings bear interest at variable rates, subject to, at our election, either the U.S. Prime Rate plus a margin of 2.25% or LIBOR plus a margin of 3.25%. For the year ended December 31, 2022 we incurred interest expense of $15.5 million, and our borrowing rate ranged from 3.4% to 7.6%. We do not hedge our borrowing rate and consequently we are subject to unanticipated interest rate and currency exchange rate fluctuations. Our borrowing rate as of February 15, 2023 was 7.8% and based on that rate and the current amount of debt outstanding our annual interest expense would be $21.2 million. Rising interest rates have increased the portion of our cash flow used to service our indebtedness and those along with future interest rate increases could have a material adverse effect on our liquidity and our ability to meet our obligations in a timely manner, which could have a material adverse effect on our stock price.
The FCA, which regulates LIBOR, has announced that it will not compel panel banks to contribute to LIBOR after 2021. In November 2020, the ICE Benchmark Administration Limited announced a plan to extend the date as of which most U.S. LIBOR values would cease being computed from December 31, 2021 to June 30, 2023. On July 29, 2021, the Alternative Reference Rates Committee announced that it is formally recommending the forward-looking Secured Overnight Financing Rate (“SOFR”) term rate. Our credit agreement includes alternative rate fallback provisions, which provides for use of a broadly accepted market convention to replace LIBOR as the rate of interest and are triggered by a notification from the Administrative Agent. We have not yet received such notification, but expect that we will likely convert to a SOFR term rate based facility in the first half of 2023. There can be no assurance the LIBOR phase out will not increase our cost of capital.
The credit agreement contains various covenants that impose restrictions on us that may affect our ability to operate our business
The credit agreement as most recently amended in April 2019 contains covenants that may limit our ability to take actions that might be to the advantage of the Firm and our shareholders. Among other things, subject to certain exceptions, the credit agreement limits our ability to:
•incur additional indebtedness (including guarantees and other contingent obligations);
•make certain investments (including loans and advances);
•make certain acquisitions;
•merge or make other fundamental changes;
•sell or otherwise dispose of property or assets;
•pay dividends and other distributions, repurchase shares and prepay certain indebtedness; and
•enter into transactions with our affiliates.
Under the terms of the credit agreement, in addition to our requirement to make timely principal and interest payments, we are also subject to certain other non-financial covenants. Failure to comply with any of the covenants in our credit agreement could result in a default.
We may not be able to refinance our indebtedness on favorable terms, or at all. Our inability to refinance our indebtedness could materially and adversely affect our liquidity and our ongoing results of operations.
Our term loan indebtedness will mature on April 12, 2024, and our ability to refinance such indebtedness will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing could increase our financing costs and future interest cost. A refinancing of our indebtedness could also require us to comply with more onerous covenants and further restrict our business operations. Our inability to refinance our indebtedness or to do so upon attractive terms could have a material adverse effect on our liquidity and result in our inability to meet our obligations, which could have a material adverse effect on our business operations and our stock price.
The value of our goodwill may decline in the future, which could adversely affect our financial results
A significant decline in our expected future cash flows, a significant adverse change in the business climate, a sustained economic downturn or slower growth rates, any or all of which could be materially affected by many of the risk factors discussed herein, may require that we take charges in the future related to the impairment of goodwill. If we were to conclude that a future write-down of our goodwill and other intangible assets is necessary, we would record the appropriate charge which could have a material adverse effect on our results of operations, our ability to make share repurchases or pay dividends and the market value of our common stock.
Risks Related to Our Capital Structure and Common Stock
Our decision to return cash to our shareholders through repurchases of our common stock may not prove to be the best use of our capital or result in the effects we anticipated, including a positive return of capital to stockholders
In 2022, we repurchased $39.9 million of our stock, or 3.0 million shares and share equivalents at an average price of $13.47 per share. During 2023 (through February 15, 2023) we repurchased $7.9 million of our stock, or 577,349 shares and share equivalents at an average price of $13.61 per share. For the year ahead, through January 31, 2024, our Board has approved share repurchase authority, for shares and share equivalents, of $30 million of which $22.7 million remains available under that authorization.
We may repurchase our common stock through various means, such as open market purchases (including pursuant to 10b5-1 plans) and privately negotiated transactions. The price and timing of share repurchases, as well as the total funds ultimately expended, will be subject to market conditions and other factors, such as our results of operations, financial position and capital requirements, general business conditions, legal, tax and regulatory constraints or restrictions, any contractual restrictions and other factors deemed relevant. There can be no assurances of the price at which we may be able to repurchase our shares or that we will repurchase the full amount authorized for the period through January 2024 or the amount authorized in any future period. Our ability to repurchase shares for 2023 and future years is also limited by covenants in our credit agreement and Section 160 of the Delaware General Corporation Law that requires repurchases only be made out of surplus (as defined under Delaware law).
There can be no assurance that any past or future repurchases will have a positive impact on our stock price or enhance shareholder value, or that share repurchases provide the best use of our capital because the value of our common stock may decline significantly below the levels at which we repurchased shares of common stock.
Our decision to repurchase shares of our common stock will reduce our public float, which could cause our share price to decline
As a result of any past or future share repurchases we will likely reduce our “public float,” (i.e., the number of shares of our common stock that are owned by non-affiliated stockholders and available for trading in the securities markets), which will
most likely reduce the volume of trading in our shares and result in reduced liquidity which may cause fluctuations in the trading price of our common stock unrelated to our performance.
Furthermore, certain institutional holders of our common shares (including index funds) may require a minimum market capitalization of each of their holdings in excess of our market capitalization and therefore be required to dispose of our common stock, which may cause the value of our common stock to decline. There can be no assurance that this reduction in our public float will not result in a lower share price or reduced liquidity in the trading market for our common shares during and upon completion of our share repurchase plan. As a result of a lower stock price and reduction in our outstanding shares we are no longer a “well-known seasoned issuer”, which otherwise would allow us to, among other things, file automatically effective shelf registration statements. As a result, any attempt to access the public capital markets could be more expensive or subject to delays.
Our executive officers, directors, founder and other employees, together with their affiliated entities, hold a significant percentage of our common stock, and their interests may differ from those of our unaffiliated shareholders
Our executive officers, directors, founder and other employees and their affiliated entities collectively owned approximately 39% of the total shares of common stock outstanding as of February 15, 2023 (or approximately 53%, assuming vesting in full on February 15, 2023 of all restricted stock units they hold).
As a result of these shareholdings, our executive officers, directors, founder and employees, together with their affiliated entities, currently are able to exercise, and may increasingly be able to exercise, significant influence over the election of our Board of Directors, the management and policies of Greenhill and the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, and their interests may differ from those of our unaffiliated shareholders. In addition, this concentration of ownership could have the effect of delaying, preventing or defeating a third party from acquiring control over or merging with us.
In addition, sales of substantial amounts of common stock by our executive officers, directors, founder, and other employees, or their affiliated entities, or the possibility of such sales, may adversely affect the price of the common stock and impede our ability to raise capital through the issuance of equity securities. Though such persons are subject to certain restrictions on sales of our common stock by applicable securities laws and our internal policies and procedures, they may nonetheless sell a substantial number of shares over time during open trading windows.
A significant portion of the compensation of our managing directors is paid in restricted stock units, and the shares we expect to issue on the vesting of those restricted stock units could result in a significant increase in the number of shares of common stock outstanding and if sold at vesting could cause the market price of our common stock to decline.
As part of annual bonus and incentive compensation, we award restricted stock units to managing directors and other employees. Generally, restricted stock units vest annually in the first and second quarter of each year. We also award restricted stock units as a long-term incentive to new hires at the time they join Greenhill. During the year ended December 31, 2022, 2,628,619 restricted stock units vested related to awards granted in prior years and net of the units that we settled for withholding taxes, 1,408,780 common shares were delivered to our managing directors and other employees. To the extent that there are substantial sales of our common stock by our managing directors and other employees in the days and weeks after the vesting of our restricted stock units, or the perception that such sales might occur, the market price of our common stock could decline.
At February 15, 2023, which takes into account the vesting in early February 2023 but does not yet take into account the grant of new awards as part of our compensation payable in respect of 2022, 5,415,278, restricted stock units were outstanding. The number of RSUs that will be granted later in the first quarter is dependent on our share price at the time of grant. During 2022 and 2021, we made total restricted stock unit awards of 1.9 million and 2.6 million, respectively. Each restricted stock unit represents the holder’s right to receive one share of our common stock or a cash payment equal to the fair value thereof, at our election, following the applicable vesting date. Awards of restricted stock units to our managing directors and other employees generally vest ratably over a three to four-year period, with the first vesting on the first anniversary of the grant date, or do not vest until the third or fourth anniversary of their grant date, when they vest in full, subject to continued employment on the vesting date. Shares will be issued in respect of restricted stock units only under the circumstances specified in the applicable award agreements and the equity incentive plan, and may be forfeited in certain cases. Vesting of restricted stock units will be accelerated and immediately vested upon a participant’s death, disability or retirement, as defined in the relevant agreements. Assuming all of the conditions to vesting are fulfilled, shares in respect of the restricted stock units that were outstanding as of February 15, 2023 are scheduled to be issued as follows: 997,707 additional shares in 2023, 1,710,408 shares in 2024, 1,670,402 shares in 2025, 687,846 shares in 2026, and 348,915 shares in 2027.
The market price of our common stock is volatile and may decline
The market price of our common stock has and may continue to fluctuate widely. For example the closing market price of our common stock on the New York Stock Exchange fluctuated during 2022 between $5.65 per share and $20.62 per share, and the closing stock price on February 15, 2023 was $12.30 per share. The price of our common stock may continue to be volatile, depending upon many factors, including the perceived prospects of Greenhill and the financial services industry in general, differences between our actual financial and operating results and those expected by investors, changes in general economic or market conditions, broad market fluctuations, the impact of increased leverage on our financial position, the reduction in float as a result of our share repurchase plan, the volume of our shares traded and movements in or out of passive investment indexes. For example, during 2022, we did not satisfy the criteria for inclusion in the Russell 2000 and S&P Small Cap 600 based on our market capitalization. Exclusion of our common stock from market indices in the future could reduce the ability of certain investment funds to own our common stock and put short-term selling pressure on our common stock. The volatility of our share price may affect the ability of shareholders to sell our common stock at an advantageous price.
Additionally, since a significant portion of the compensation of our managing directors and certain other employees is paid in restricted stock units, and our employees rely upon the ability of share sales to generate additional cash flow, a decline in the price of our stock may adversely affect our ability to retain key employees, including our managing directors. Similarly, our ability to recruit managing directors and other professionals may be adversely affected by a decline in the price of our stock.
We could change our existing dividend policy in the future, which could adversely affect our stock price
We began paying quarterly cash dividends to holders of record of our common stock in June 2004. During 2022, our Board of Directors declared quarterly dividends of $0.10 per share and has declared a quarterly dividend of $0.10 per share payable in March 2023. We intend to continue to pay quarterly dividends, subject to capital availability, cash flows and periodic determinations that cash dividends are in the best interest of our stockholders. Future declaration and payment of dividends on our common stock is at the discretion of our Board of Directors and depend upon, among other things, general financial conditions, capital requirements and surplus, cash flows, debt service obligations, our recent and expected future operations and earnings, contractual restrictions and other factors as the Board of Directors may deem relevant. For example, in the event that there is deterioration in our financial performance and/or our liquidity position, a downturn in global economic conditions or disruptions in the credit markets and our ability to obtain financing, our Board of Directors could decide to reduce or even suspend dividend payments in the future. As a Delaware corporation, we are required to meet certain surplus thresholds for our Board of Directors to declare a dividend in accordance with the Delaware General Corporation Law. We cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction or suspension in our dividend payments could have a negative effect on our stock price.
Risks Related to Legal or Regulatory Environment
We are subject to extensive regulation in the financial services industry, which creates risk that could adversely affect our business and reputation
As a participant in the financial services industry, we are subject to extensive regulation in the United States, the UK, Europe, Australia and Asia. Many of the requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us and are not designed to protect our stockholders. Consequently, these regulations may serve to limit our activities, including through net capital requirements, customer protection and market conduct requirements. For example, in 2021 our UK and European businesses were required to implement the new UK and European investment firm prudential regulations, respectively; one of the principal impacts as a result of these new regulatory capital requirements is the significant increase in the amount of regulatory capital that needs to be held by our UK and European legal entities. Any additional capital required to be retained in the UK or Europe will reduce the amount of cash available to fund other corporate needs which could adversely impact our business operations.
Regulatory and self-regulatory agencies, as well as securities commissions, in various jurisdictions in which we do business are empowered to conduct periodic examinations and administrative proceedings that can result in censure, fine, issuance of cease-and-desist orders, suspension of personnel or other sanctions, including revocation of our license or registration or the registration of any of our regulated subsidiaries. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation and cause us to lose existing clients or fail to gain new clients.
As a broker dealer we are required to maintain, preserve and produce communications and records for all client and business matters. In 2021 and 2022, the SEC imposed substantial fines on several broker dealer firms for failing to maintain and preserve records related to off-channel communication of business matters by employees on their personal electronic devices. Although we have policies in place that require our employees to conduct all business communications only on approved platforms, there can be no assurance that all employees will comply with such policies or that we will not be alleged to have violated the record keeping and record retention obligations and therefore become subject to monetary fines, which could be material.
If the existing regulations under which we operate are modified or interpreted differently, or new regulations are issued and we are unable to comply with these regulations or interpretations, our business could be adversely affected or the cost of compliance could significantly increase. For example, as noted above, in 2021 the new UK and European investment firm prudential regulations, not only increased the level of regulatory capital required, the new rules also resulted in an increase in the regulatory and risk assessment documentation requirements, increased our supervisory responsibilities and increased our external audit requirements.
Compliance with any new laws or regulations could also make our compliance efforts more difficult and expensive, affect the manner in which we conduct our business and adversely affect our profitability, such as the laws and regulations related to privacy and data collection. For example, the European Union’s GDPR has changed how businesses can collect, use and process the personal data of European Union residents. Non-compliance with the GDPR’s requirements can result in significant penalties, which may have a material adverse effect on our business, expose us to legal and regulatory costs, and impair our reputation.
Legal restrictions on our clients may reduce the demand for our services
New laws or regulations, or changes in enforcement of existing laws or regulations, applicable to our clients may also adversely affect our businesses. For example, changes in antitrust enforcement or increase in anti-trust regulation could affect the level of mergers and acquisitions activity, and changes in regulation could restrict the activities of our clients and their need for the types of advisory services that we provide to them.
As a financial advisor on significant transactions, we face substantial litigation risk
Our role as advisor to our clients on important mergers and acquisitions or restructuring transactions involves complex analysis and the exercise of professional judgment, including rendering fairness opinions in connection with mergers and other transactions. Our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including shareholders of our clients, who could bring actions against us. In recent years, the volume of claims and amount of damages claimed in litigation and regulatory proceedings against financial advisors has been increasing, including claims for aiding and abetting client misconduct. Moreover, judicial scrutiny and criticism of investment banker performance and activities has increased, creating risk that our services in a litigated transaction could be criticized by the court. These risks often may be difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time.
Our engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us fully or may not be enforceable in all cases. The effectiveness of these indemnities in limiting our financial exposure is also dependent on our client’s capacity to pay the amounts claimed. As a result, we may incur significant legal expenses in defending against litigation. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which could seriously harm our business prospects. We depend to a large extent on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses.
Uncertainty regarding the outcome of future arrangements between the European Union and the United Kingdom may adversely affect our business
We have a presence in certain European Union countries, as well as the U.K. On January 31, 2020, the U.K. withdrew from the European Union, commonly referred to as "Brexit". While a trade deal was agreed, and despite the passage of time, there continues to remain uncertainty with regards to the nature of the long-term relationship between the European Union and the U.K. Such uncertainty could adversely affect European and worldwide economic and market conditions, contribute to instability in global financial and foreign exchange markets, and introduce significant legal uncertainty and potentially divergent national laws and regulations.
Notwithstanding the agreement reached, conditions arising from Brexit could, even now, adversely affect our U.K. business and operations, including by reducing the volume or size of mergers, acquisitions, divestitures and other strategic corporate transactions on which we seek to advise, and further, likely increasing our legal, compliance and operational costs.
Cautionary Statement Concerning Forward-Looking Statements
We have made statements under the captions “Business”, “Risk Factors”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Annual Report on Form 10-K that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “could”, “expect”, “plan”, “outlook”, “potential”, “anticipate”, “believe”, “estimate”, “intend”, “predict”, “potential” or “continue”, the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include current views and projections of our operations and future financial performance, growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements including, but not limited to:
•our ability to attract and retain key talent;
•our ability to attract and maintain clients;
•the level of merger and acquisition activity;
•general market or economic conditions (for example, economic developments, changes in government or central bank policy, the impact of war and regional conflict or, the spread of pandemic diseases);
•the competitive environment in our industry;
•our ability to manage and integrate strategic investments and acquisitions;
•political, economic, legal, regulatory, operational, and other risks presented by our business operations;
•risks and uncertainties that affect whether parties are able to complete a given transaction;
•our ability to make payments on, or repay or refinance, our debt, and to fund other contractual obligations;
•events that adversely affect our reputation, such as employee misconduct, litigation, negative press, failure to protect confidential information, cybersecurity breaches, or conflicts of interest that arise in the course of an engagement;
•legal and regulatory costs and risks, including those related to litigation, compliance, regulatory proceedings, enforcement actions, and regulatory scrutiny;
•the impact of any introduction of or any changes in laws, regulations, rules or government policies on our business or our clients;
•international trade policies and conditions;
•the cost and resilience of our information systems, technology, and communications infrastructure;
•cybersecurity risks;
•catastrophic events, particularly those impacting our headquarters in New York City;
•the impact of inflation and interest rate risk on our business, operations and cash flow;
•our decision to repurchase shares of our common stock and any impacts on our capital structure and public float; and
•fluctuations in our stock price due to market conditions or other factors.
The risks presented above are not exhaustive. Other sections of this Annual Report on Form 10-K may include additional factors which could impact our business and financial performance. In particular, you should consider the numerous risks outlined in the foregoing paragraphs of this “Risk Factors” section.
Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot give assurances that those expectations will be achieved, nor can we guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update or review any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations, whether as a result of new information, future developments or otherwise.