Houlihan Lokey reported strong fiscal Q3 2026 results, with revenue rising 13% year-over-year to $717 million and adjusted EPS increasing 18% to $1.94. The performance was broad-based, led by a 19% increase in Financial Restructuring revenue to $156 million and a 12% rise in Corporate Finance revenue to $474 million. Management highlighted a 'positive inflection' in M&A activity driven by improving investor sentiment and private equity liquidity needs, bolstering confidence for fiscal 2027. Strategic initiatives, including the acquisition of Mellon Capital's real estate advisory business and a controlling interest in O'Dare Partners in France, are expanding the firm's European footprint. While Restructuring faces potential revenue pressure in fiscal 2027 due to market improvements, the firm maintains a robust balance sheet with $1.2 billion in cash and continues to deploy capital towards strategic acquisitions and share repurchases.
| Metric | Value | Change |
|---|---|---|
| Total Revenue | $717 million | +13% YoY |
| Adjusted EPS | $1.94 | +18% YoY |
| Corporate Finance Revenue | $474 million | +12% YoY |
| Financial Restructuring Revenue | $156 million | +19% YoY |
| Financial & Valuation Advisory Revenue | $87 million | +6% YoY |
| Adjusted Compensation Ratio | 61.5% | Flat YoY |
| Adjusted Non-Compensation Ratio | 13.1% | Flat YoY |
| Cash and Investments | $1.2 billion | N/A |
| Share Repurchases | 418,000 shares | N/A |
Houlihan Lokey is aggressively expanding its European footprint to match the scale of its US operations. The announced acquisition of a controlling interest in O'Dare Partners in France, combined with the recent purchase of Mellon Capital's real estate advisory business in Germany and the UK, signals a strategic pivot to capture growth in Europe. Management stated, 'This transaction is expected to close in our fourth quarter... This transaction is structured as a combination between our French operations and Audem and will result in Houlihan Lokey owning 51%.' This geographic diversification reduces reliance on the US market and capitalizes on cross-border M&A flows.
The firm is prioritizing the build-out of its Capital Solutions platform, viewing it as a key growth engine still in its 'early innings.' Management noted, 'We are still in very early innings on capital solutions... And that business is growing really nice.' This segment is benefiting from demand across traditional business, secondaries, and directs. By expanding capabilities in real estate and other capital solutions, HLI is diversifying revenue streams and enhancing its ability to offer comprehensive advisory services, thereby increasing client stickiness and fee potential.
Management is leveraging the current M&A recovery to capture market share, emphasizing that their strategy is independent of the macro cycle. Lindsey Alley remarked, 'The sizzle is market share. We believe we continue to take market share in the middle market every single year regardless of whether the market is up or the market is down.' This focus on share gains, coupled with 'positive inflection in the activity levels,' suggests that HLI is structurally outperforming peers and is poised for significant revenue growth as private equity activity accelerates.
The firm is actively monetizing its proprietary data assets, launching the 'DataBank' product. While currently a small part of the business, Scott Adelson noted, 'The ability to monetize some of our proprietary data is something that is certainly top of mind to us.' This initiative represents a strategic shift towards high-margin, recurring revenue streams and technological differentiation, potentially creating a new moat around their advisory services.
Financial Restructuring, a significant revenue driver, is showing signs of cyclical deceleration. Management explicitly warned, 'Looking ahead to fiscal 2027, we expect restructuring to face some revenue pressures as it adjusts to an improving market environment.' Additionally, Q4 results are expected to be weaker than typical seasonality due to accelerated deal closings in Q3. This anticipated decline could offset growth in Corporate Finance, creating a headwind for overall revenue growth in the coming fiscal year.
Integration risks and rising expenses are evident as the firm pursues an aggressive M&A strategy. Adjusted non-compensation expenses increased 11% year-to-date, driven by 'integration and acquisition-related costs' and 'Project Solo.' Management noted, 'Probably a little bit higher than expected in terms of rent, particularly in Europe and particularly around the acquisitions.' If revenue growth slows or integration synergies fail to materialize, elevated expense levels could pressure margins.
While management is optimistic about the M&A cycle, they acknowledged the unpredictability of geopolitical events. Scott Adelson stated, 'Recent geopolitical events introduce a new variable that could potentially drive restructuring activity levels higher,' but also noted that visibility on these specific drivers is not clear. Reliance on a 'pent-up demand' thesis that has yet to fully materialize into broad-based large-cap M&A leaves the firm exposed to external shocks if the recovery stalls.
Capital allocation remains a balancing act between share repurchases and acquisitions. While the firm repurchased 418,000 shares, Lindsey Alley emphasized, 'Our strong preference is to put money to work, excess cash to work through strategic acquisitions.' Investors seeking immediate returns via buybacks may find the company's preference for deal-making over aggressive buybacks a drawback, especially given the $1.2 billion cash pile.
Overall: Management exhibited a highly confident and optimistic demeanor throughout the call, particularly regarding the M&A recovery and the firm's positioning for fiscal 2027. Scott Adelson and Lindsey Alley were direct and detailed in their responses, shifting from cautious optimism in previous periods to a more assertive stance on market share gains and growth visibility. The tone during the Q&A was assured, with management emphasizing 'positive inflection' and 'good visibility' while acknowledging the cyclical nature of the restructuring business.
Confidence: HIGH - Management used strong, definitive language such as 'positive inflection,' 'accelerating rate,' and 'good visibility' when discussing future prospects. They provided specific details on deal pipelines and strategic rationale for acquisitions, indicating a high degree of certainty in their execution and the market environment.
Q4 will look more like the first two quarters of the fiscal year and won't have the same typical seasonality associated with that quarter due to accelerated deal closings in Q3.
Expect restructuring to face some revenue pressures as it adjusts to an improving market environment, though geopolitical events could drive activity higher.
Expect fiscal fourth quarter year-over-year growth in adjusted non-compensation expenses to be consistent with year-to-date growth (11%).
Expect to maintain the long-term target of 61.5% for the adjusted compensation expense ratio for the balance of the year.
Adjusted effective tax rate was 30.6% in Q3; decrease primarily due to decreased state taxes.
Hedging & Uncertainty: Management generally used direct language regarding current performance but employed hedging when discussing the timing and magnitude of the M&A recovery. Phrases like 'should continue,' 'likely declining,' and 'potential to drive' indicate reliance on external market factors. However, confidence increased when discussing internal execution, using terms like 'we expect' and 'we are thrilled.' Notably, regarding restructuring, management used softer language like 'I don't think we're in the first [inning]' and 'it's not clear enough that it is showing up,' reflecting uncertainty about the exact timing of the next cycle turn.
"We enter our last fiscal quarter with positive inflection in the activity levels that increase our optimism for fiscal year 2027." - Scott Adelson, CEO
"The sizzle is market share. We believe we continue to take market share in the middle market every single year." - Lindsey Alley, CFO
"We are still in very early innings on capital solutions... And that business is growing really nice." - Scott Adelson, CEO
"We expect restructuring to face some revenue pressures as it adjusts to an improving market environment." - Scott Adelson, CEO
"There is an enormous amount of pent-up demand." - Scott Adelson, CEO
"Our pipeline is very strong... fair to say we have more than we have planned to do over time." - Scott Adelson, CEO
Analyst Sentiment: Analysts were inquisitive and focused on the sustainability of the recovery, specifically drilling into the 'inning' of the M&A cycle and the contrasting outlooks between Corporate Finance and Restructuring. Questions were detailed, touching on sponsor engagement, regional growth differentials, and capital allocation priorities.
Management Responses: Management responses were characterized by high specificity and a focus on market share over macro cycles. They deflected concerns about the restructuring slowdown by emphasizing the firm's diversified platform and long-term visibility. Executives were open about the 'early innings' of the recovery but firm in their belief of structural outperformance.
Discussion on the 'third inning' of the M&A cycle and the sustainability of private equity-driven activity.
Detailed breakdown of the European strategy, specifically the rationale behind the O'Dare Partners acquisition in France.
Analysis of the restructuring outlook, specifically the 'revenue pressures' expected in fiscal 2027.
Inquiry into capital deployment, balancing the $1.2B cash position between buybacks and a 'strong' M&A pipeline.
Questions regarding the new DataBank product and the strategy for monetizing proprietary data.
Houlihan Lokey is executing exceptionally well, demonstrating its ability to gain market share regardless of the macro environment. The Q3 results validate the resilience of the firm's diversified business model, with Corporate Finance and Capital Solutions poised to drive growth as the M&A cycle enters the 'third inning.' While Restructuring faces headwinds in fiscal 2027, the strategic expansion in Europe and the build-out of Capital Solutions provide multiple avenues for long-term revenue expansion. The firm's strong balance sheet and disciplined capital allocation further de-risk the investment thesis. We view the current valuation as attractive given the clear visibility into an accelerating M&A recovery and management's high confidence in fiscal 2027.
Management believes the M&A market is in the 'third inning' of a recovery, characterized by 'enormous pent-up demand' and accelerating private equity activity. The recovery is being fueled by expectations of declining interest rates and a need for sponsors to deploy record dry powder.
Geopolitical events are acknowledged as a 'new variable' that could drive restructuring activity, but clients are largely looking through the noise. Management noted that the 'willingness and ability to just look through that noise and just get on with business is stronger than it has ever been.'
Expectations of declining interest rates are cited as a key driver for improving investor sentiment and M&A activity, creating a favorable backdrop for Corporate Finance.
There is an awareness of 'increasing concerns around the private credit markets,' which could create opportunities for restructuring, though visibility on this impacting current results remains low.