Perella Weinberg Partners 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” and elsewhere in this Form 10-Q. Executive Overview We are a leading global independent advisory firm that provides strategic and financial advice to clients across a range of the most active industry sectors and international markets. Our wide range of global clients include large public multinational corporations, mid-sized public and private companies, individual entrepreneurs, private and institutional investors, creditor committees and government institutions. PWP OpCo serves as the Company’s operating partnership as part of an umbrella limited partnership C-corporation (Up-C) structure and is jointly owned by Perella Weinberg Partners, Professional Partners and certain other partners of PWP OpCo. The Company shareholders are entitled to receive a portion of PWP OpCo’s economics through their ownership interests in shares of Class A common stock of Perella Weinberg Partners, which holds PWP OpCo Units. The non-controlling interest owners of PWP OpCo receive a portion of its economics through their ownership of PWP OpCo Units. For further information regarding our business, refer to “Part I. Item 1. Business” and “Part I. Item1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on February 28, 2023. Business Environment and Outlook While the market environment remains challenging, conditions improved during the most recent quarter and we are experiencing an increase in the level of M&A advisory dialogue across our industries and geographies. Headwinds which have hampered industry volumes include rising interest rates and inflation, credit spreads, market volatility, lower liquidity and capital availability, recession risk and geopolitical tensions, amongst others. Notwithstanding these headwinds, our core advisory services benefit from macroeconomic changes that impact our client base and lead them to consider business combinations, acquisitions and divestitures, capital raises and restructurings. These changes can include a broad range of economic factors in global or local markets, technological advancements which alter the competitive landscape, regulatory and political policies, globalization, changing consumer preferences, commodity and financial market movements, among many other factors. Economic and global financial conditions can materially affect our operational and financial performance. See “Risk Factors” included in our Annual Report on Form 10-K for a discussion of some of the factors that can affect our performance. Key Financial Measures Revenues We operate in a highly competitive environment, and each revenue-generating engagement is separately solicited and negotiated. Our fee-paying client engagements are not predictable, and we may experience fluctuations in revenues from quarter to quarter. To develop new business, we maintain an active business dialogue with existing and potential clients, and we expect to add new clients each year through expanding our relationships, hiring senior advisory professionals, and receiving introductions from our relationship network. However, we also lose clients each year due to various factors, such as sales or mergers, changes in clients’ senior management, and competition from other financial services firms. Our revenue recognition is often tied to the completion of a transaction, which can be delayed or terminated due to various reasons, including failure to obtain regulatory or board approval, failure to secure financing, or adverse market conditions. Larger transactions may take longer to close, adding unpredictability to the timing of revenues. Despite our efforts, we may receive lower advisory fees or no fee at all if a transaction is not completed. Other barriers to the completion of restructuring transactions include a lack of anticipated bidders, failure to obtain court approval, or a failure to reach an agreement with creditors. In such cases, our advisory fees may be limited to monthly retainer fees plus the reimbursement of expenses. 25 We do not present our revenue by the type of advice we provide because of the complexity of the transactions on which we may earn revenue and our holistic approach to client service. For instance, a traditional M&A engagement may require additional advisory services, such as capital markets or capital solutions advice or a private capital raise, which may call for cross-functional expertise from our professionals. We focus on dedicating the necessary resources and expertise to each engagement, regardless of product lines, to achieve the desired outcome for our clients. Consequently, tracking the type of advisory service offered in each instance is not practical. Operating Expenses Our operating expenses are classified as (i) total compensation and benefits expenses including equity-based compensation and (ii) non-compensation expenses. Headcount is a primary driver of the level of our operating expenses. Compensation and benefits expenses account for the majority of our operating expenses. Compensation expenses also include expense associated with hiring which has been a significant focus of the Company in all of the historical periods described herein. Non-compensation expenses, which include the costs of professional fees, technology and infrastructure, rent and occupancy, travel and related expenses, general, administrative and other expenses and depreciation and amortization generally have been lower in comparison with compensation and benefits expenses. Compensation and Benefits Expenses Our compensation and benefits expenses consist of base salary, benefits, payroll taxes, cash bonus awards, deferred compensation awards, and amortization of equity-based compensation awards. Compensation is determined by management based on revenues earned, the competitiveness of the prevailing labor market and anticipated compensation requirements for our employees, the level of recruitment of new partners, the amount of compensation expense amortized for equity awards, and other relevant factors. Such factors can fluctuate, and as a result, our compensation expenses may fluctuate materially in any particular period and may not be consistent with prior periods or indicative of future periods. We intend to compensate our personnel competitively in order to continue building our business and growing our Company. Equity-based awards are subject to a service vesting condition, and in some cases, a market-based performance vesting condition. The expense amortization of Legacy Awards and Professional Partners Awards is allocated to non-controlling interests as these awards have no economic impact on, and do not dilute, PWP shareholders relative to Professional Partners. The Business Combination Awards, which were granted outside the Company's normal and recurring compensation process, have $82.3 million of remaining amortization, which will be recognized over the next three years. The accounting for equity-based compensation expense, and potentially other factors as well, may cause the Company to experience operating losses in future periods. Non-Compensation Expenses Our non-compensation expenses include the costs of professional fees, technology and infrastructure, rent and occupancy, travel and related expenses, depreciation and amortization and general, administrative and other expenses. Our non-compensation expenses include certain co-advisory fees and expenses reimbursed by our clients. Revenues related to co-advisory fees and expenses reimbursed by clients are presented within revenues on our Condensed Consolidated Statements of Operations. Historically, our non-compensation expenses associated with business development have increased as we have increased our headcount. These costs include costs such as travel and related expenses which have increased due to increasing headcount, increasing prices charged by travel vendors and an increased volume of travel as COVID-19 pandemic-related travel restrictions have eased and we return to more normalized travel levels. Further, as we near completion of the renovations and relocation of our New York and London offices, depreciation and amortization expense is expected to continue to increase as leasehold improvements and other assets are placed into service. This increase will be partially mitigated by an expected decrease in rent and occupancy costs in the fourth quarter of 2023 once we no longer have overlapping rent costs. Non-Operating Income (Expenses) Non-operating income (expenses) includes the impact of income and expense items that we consider to be non-operational in nature, including related party income, interest income and expense, and other income (expense), which includes gains (losses) on foreign exchange rate fluctuations. Prior to the completion of the Warrant Exchange Offer on August 23, 2022, non-operating income (expenses) also included the change in fair value of warrant liabilities. The Warrant Exchange Offer resulted in the exchange of all outstanding warrants for shares of the Company’s Class A common stock with a minimal cash settlement in lieu of partial shares. As a result, the warrant liabilities were removed from the Condensed Consolidated Statements of Financial Condition and the issuance of shares of Class A common stock was reflected within equity. There will be no future change in the fair value of warrant liabilities. Refer to Note 11—Warrants in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for additional information. 26 Results of Operations The following is a discussion of our results of operations for the respective periods indicated: Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Revenues $ 165,545 $ 151,104 10% $ 296,971 $ 302,980 (2)% Expenses Compensation and benefits 106,216 90,587 17% 176,179 177,832 (1)% Equity-based compensation 42,212 36,427 16% 89,883 77,317 16% Total compensation and benefits 148,428 127,014 17% 266,062 255,149 4% Non-compensation expenses 38,869 33,103 17% 75,351 67,203 12% Total operating expenses 187,297 160,117 17% 341,413 322,352 6% Operating income (loss) (21,752) (9,013) 141% (44,442) (19,372) 129% Non-operating income (expenses) Related party income 276 950 (71)% 549 1,508 (64)% Other income (expense) (1,337) 3,776 NM (1,054) 5,619 NM Change in fair value of warrant liabilities — 10,094 NM — 22,100 NM Total non-operating income (expenses) (1,061) 14,820 NM (505) 29,227 NM Income (loss) before income taxes (22,813) 5,807 NM (44,947) 9,855 NM Income tax expense (benefit) (4,543) 3,141 NM 743 6,137 (88)% Net income (loss) (18,270) 2,666 NM (45,690) 3,718 NM Less: Net income (loss) attributable to non-controlling interests (18,629) (6,599) 182% (40,926) (14,441) 183% Net income (loss) attributable to Perella Weinberg Partners $ 359 $ 9,265 (96)% $ (4,764) $ 18,159 NM NM = Not meaningful 27 Revenues The following table provides revenue statistics for the three and six months ended June 30, 2023 and 2022: Three Months Ended June 30, Six Months Ended June 30, (Dollars in millions) 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Total Advisory Clients 88 77 11 124 114 10 Total Clients with Fees Greater than $1.0 million 36 32 4 64 62 2 Average Fee Size $ 1.8 $ 1.9 $ (0.1) $ 2.3 $ 2.6 $ (0.3) For the three months ended June 30, 2023 as compared with the same period in 2022, revenues increased by 10%, which was driven by increased mergers and acquisition activity. Revenues attributed to financing and capital solutions were largely flat, though the composition was more weighted towards restructuring and liability management relative to the second quarter of 2022. The increase in revenues was supported by a meaningful increase in the number of advisory transaction completions, despite a slight decrease in average fee size per client. For the six months ended June 30, 2023 revenues decreased by 2% from the six months ended June 30, 2022. There was a modest increase in mergers and acquisition activity period-over-period that was offset by lower financing and capital solutions revenues due to certain large fee events in the prior year period. Relative to the six months ended June 30, 2022, the six months ended June 30, 2023 experienced an increase in the number of advisory transaction completions with a decrease in average fee size per client as well as fewer transactions with outsized fee events. Operating Expenses The following table sets forth information relating to our operating expenses: Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Expenses Compensation and benefits $ 106,216 $ 90,587 17 % $ 176,179 $ 177,832 (1) % % of Revenues 64 % 60 % 59 % 59 % Equity-based compensation $ 42,212 $ 36,427 16 % $ 89,883 $ 77,317 16 % % of Revenues 25 % 24 % 30 % 26 % Total compensation and benefits $ 148,428 $ 127,014 17 % $ 266,062 $ 255,149 4 % % of Revenues 90 % 84 % 90 % 84 % Non-compensation expenses $ 38,869 $ 33,103 17 % $ 75,351 $ 67,203 12 % % of Revenues 23 % 22 % 25 % 22 % Total operating expenses $ 187,297 $ 160,117 17 % $ 341,413 $ 322,352 6 % % of Revenues 113 % 106 % 115 % 106 % Compensation and Benefits Expenses The increase in total compensation and benefits expenses for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to an increased bonus accrual associated with higher revenues coupled with a higher year-to-date compensation margin. During the first quarter of 2023, the Company granted additional equity-based awards which led to the increase in equity-based compensation. Business Realignment costs of $5.1 million also contributed to the increase in total compensation and benefits, which included separation and transition benefits and the acceleration of equity-based compensation amortization (net of forfeitures) for terminated employees. Additional Business Realignment costs are expected during the remainder of 2023, as referenced below. 28 The increase in total compensation and benefits expenses for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to a higher year-to-date compensation margin. Also, Business Realignment costs of $5.1 million were incurred for the six months ended June 30, 2023 and higher equity-based compensation was a result of awards granted during the first quarter of 2023, both contributing to the overall increase. Approximately $18 million of additional Business Realignment costs are expected to be incurred during the second half of 2023, which is based on our current assumptions, and actual results may differ materially if unanticipated costs are incurred related to the Business Realignment. Non-Compensation Expenses The increase in non-compensation expenses for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 included a $1.8 million increase in technology and infrastructure primarily related to certain investments, a $1.3 million increase in professional fees related to legal spend, and a $1.1 million increase in travel-related expenses due to the return to more normalized travel levels and increased headcount. As a result of the New York and London office renovations and relocation, rent and occupancy increased $1.3 million due to overlapping rent costs and depreciation and amortization expense increased $1.0 million as leasehold improvements and other related assets were placed into service. General, administrative, and other expenses decreased slightly primarily due to lower D&O insurance costs. The increase in non-compensation expenses for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 included a $3.6 million increase in travel-related expenses due to the return to more normalized travel levels, increased costs of airfare and lodging, and increased headcount, and a $2.7 million increase in technology and infrastructure primarily related to certain investments. The $3.0 million increase in rent and occupancy and $0.9 million increase in depreciation and amortization expense was due to overlapping rent costs and new assets being placed into service, respectively, from the office renovations and relocation. This overall increase was partially offset by a decrease in professional fees of $1.4 million related to a decrease in co-advisory consulting fees and recruiting fees despite an increase in legal fees, as well as a slight decrease in general, administrative and other expenses. Non-Operating Income (Expenses) The decrease in non-operating income (expenses) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 is primarily related to the $10.1 million gain from the change in fair value of warrant liabilities in the three months ended June 30, 2022 as the warrant price fell prior to the Warrant Exchange Offer. Other income (expense) includes foreign exchange rate fluctuations which resulted in a $1.1 million loss for the three months ended June 30, 2023 as opposed to a $3.8 million gain for the three months ended June 30, 2022, primarily related to U.S. dollar-denominated intercompany receivables held by our foreign subsidiaries as the U.S. dollar value fluctuated period over period. For the three months ended June 30, 2023, the foreign exchange loss combined with a $1.4 million non-operating loss on certain investments was partially offset by $1.4 million of interest income earned largely on cash and investments in U.S. Treasury securities. The decrease in non-operating income (expenses) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is primarily related to the $22.1 million gain from the change in fair value of warrant liabilities in the six months ended June 30, 2022 as the warrant price fell prior to the Warrant Exchange Offer. Other income (expense) includes foreign exchange rate fluctuations which resulted in a $2.2 million loss for the six months ended June 30, 2023 as opposed to a $5.2 million gain for the six months ended June 30, 2022, primarily related to U.S. dollar-denominated cash and intercompany receivables held by our foreign subsidiaries as the U.S. dollar value fluctuated period over period. For the six months ended June 30, 2023, the foreign exchange loss and the non-operating loss on investment of $1.4 million was partially offset by $2.7 million of interest income earned largely on cash and investments in U.S. Treasury securities. Income Tax Expense (Benefit) The Company’s income tax benefit and effective tax rate were $4.5 million and 19.9%, respectively, for the three months ended June 30, 2023 compared to income tax expense and an effective tax rate of $3.1 million and 54.1%, respectively, for the three months ended June 30, 2022. The Company’s income tax expense and effective tax rate were $0.7 million and (1.7)%, respectively, for the six months ended June 30, 2023 compared to income tax expense and an effective tax rate of $6.1 million and 62.3%, respectively, for the six months ended June 30, 2022. 29 The Company’s overall effective tax rate in each of the periods described above varies from the U.S. federal statutory rate primarily because (i) a portion of the Company’s income is allocated to non-controlling interests held in PWP OpCo in which the majority of any tax liability on such income is borne by the holders of such non-controlling interests and reported outside of the condensed consolidated financial statements and (ii) a portion of the Company’s compensation expense is non-deductible for tax purposes and (iii) during the three and six months ended June 30, 2023, the Company recognized a previously unrecognized tax benefit at one of its foreign subsidiaries as a result of the favorable resolution of an inquiry from a taxing authority, which caused the Company to change its assessment of the technical merits of this tax position The change in the effective tax rate between the three and six months ended June 30, 2023 and the three and six months ended 2022 was primarily due to the relative impact of permanent differences on changes in pre-tax income, particularly the year-over-year change from pre-tax income to a pre-tax loss, as well as the recognition of a previously unrecognized tax benefit at one of the Company’s foreign subsidiaries during the three and six months ended June 30, 2023. Cash Flows Our operating cash flows are primarily influenced by the amount and timing of receipt of advisory fees, which generally have net terms of 30 days, and the payment of operating expenses, including payments of incentive compensation to our employees. We pay a significant portion of incentive compensation during the first quarter of each calendar year with respect to the prior year’s results. Our investing and financing cash flows were primarily influenced by the payment of dividends, distributions to partners, purchases and maturities of treasury shares, purchase of fixed assets and withholding payments for vesting of PWP Incentive Plan Awards during the six months ended June 30, 2023. A summary of our operating, investing and financing cash flows is as follows: Six Months Ended June 30, (Dollars in thousands) 2023 2022 Cash Provided By (Used In) Operating Activities Net income (loss) $ (45,690) $ 3,718 Non-cash charges and other operating activity adjustments 107,214 69,585 Other operating activities (112,363) (218,543) Total operating activities (50,839) (145,240) Investing Activities 56,477 (118,960) Financing Activities (49,611) (77,220) Effect of exchange rate changes on cash, cash equivalents and restricted cash 2,217 (10,331) Net increase (decrease) in cash, cash equivalents and restricted cash (41,756) (351,751) Cash, cash equivalents and restricted cash, beginning of period 174,166 504,775 Cash, cash equivalents and restricted cash, end of period $ 132,410 $ 153,024 Six Months Ended June 30, 2023 The Company’s cash and restricted cash were $132.4 million as of June 30, 2023, resulting in a decrease of $41.8 million from December 31, 2022. Cash, restricted cash and short-term marketable debt securities (U.S. Treasuries) were $182.4 million as of June 30, 2023, a decrease of $131.9 million from December 31, 2022. The Company’s net loss for the six months ended June 30, 2023 included non-cash charges and other adjustments, largely comprised of equity-based awards vesting expense, depreciation and amortization, and non-cash operating lease expense. The Company’s net operating cash outflow was predominantly due to the payment of the prior year’s annual bonus compensation. Accounts receivable, net of allowance balance declined from the December 31, 2022 balance due to the timing of collections. Investing activities resulted in a net inflow as a result of the maturities of investments of certain U.S. Treasury securities. This inflow was partially offset by additional investments of excess cash in U.S. Treasury securities and the purchase of fixed assets largely related to the New York and London office renovations and relocation. Financing activities resulted in a net outflow related to the repurchase of shares pursuant to the stock repurchase program, withholding payments for vesting of PWP Incentive Plan Awards, distributions to partners, and the payment of dividends. 30 Six Months Ended June 30, 2022 Cash and restricted cash were $153.0 million as of June 30, 2022, a decrease of $351.8 million from $504.8 million as of December 31, 2021. The Company recorded net income of $3.7 million for the six months ended June 30, 2022 which includes $69.6 million of non-cash charges, largely comprised of the equity-based compensation, depreciation and amortization and the change in fair value of warrant liabilities. This operating cash inflow was offset by working capital needs predominantly due to the payment of the annual bonus compensation which occurs in the first quarter of each year, resulting in a net outflow to cash of $145.2 million during the six months ended June 30, 2022. Investing activities resulted in a net outflow of $119.0 million largely attributable to investments of cash in treasury securities as well as the purchases of fixed assets. Financing activities resulted in a net outflow of $77.2 million primarily related to the repurchase of shares pursuant to the stock repurchase program, distributions to partners, withholding payments for vesting of incentive awards and the payment of dividends. Liquidity and Capital Resources General We regularly monitor our liquidity position, including cash and cash equivalents, working capital assets and liabilities, commitments and other liquidity requirements. Our primary sources of liquidity are our cash balances, our investments in short-term marketable debt securities, the net cash generated from operations and the available borrowing capacity under our Revolving Credit Facility. Our current assets are primarily composed of cash, investments in short-term marketable securities, receivables related to fees earned from providing advisory services, certain prepaid expenses and certain amounts due from related parties. Our current liabilities are primarily composed of accrued employee compensation, accounts payable and other accrued expenses. We generally pay a significant portion of our annual incentive compensation, in the form of cash bonuses, during the first quarter of each calendar year with respect to the prior year’s results. Therefore, levels of cash and/or investments in short-term marketable securities generally decline during the first quarter of each year after our annual incentive compensation has been paid to our employees and typically builds over the remainder of the year. The Company makes quarterly partner tax distributions as required under the PWP OpCo LPA. Additionally, we intend to pay dividends throughout each year and intend to continue our share repurchases under the share repurchase program described below. The Company has utilized its option to net settle shares upon the vesting of PWP Incentive Plan Awards in order to remit required employee withholding taxes by using cash on hand as well as purchasing shares of Class A common stock pursuant to the stock repurchase program described below. We evaluate our cash needs on a regular basis in light of current market and business conditions and regulatory requirements. Cash includes both cash and interest-bearing money market accounts and cash equivalents are defined as short-term highly liquid investments that have original maturities of three months or less from the date of purchase. As of June 30, 2023 and December 31, 2022, the Company had cash balances of $129.8 million and $171.6 million, respectively, maintained in U.S. and non-U.S. bank accounts, of which most bank account balances exceeded the U.S. Federal Deposit Insurance Corporation (“FDIC”) and U.K. Financial Services Compensation Scheme (“FSCS”) coverage limits. Additionally, as of June 30, 2023 and December 31, 2022, the Company held investments in short-term marketable debt securities, consisting entirely of U.S. Treasury securities, of $50.0 million and $140.1 million. Our liquidity is highly dependent upon cash receipts from clients, which generally require the successful completion of transactions. Accounts receivable generally have net terms of 30 days. Accounts receivable were $51.0 million, net of a $2.0 million allowance for credit losses balance as of June 30, 2023. Accounts receivable were $67.9 million, net of a $1.1 million allowance for credit losses balance as of December 31, 2022. Line of Credit The Company has a Revolving Credit Facility with Cadence Bank with an available line of credit of $50.0 million. Additionally, up to $20.0 million of incremental revolving commitments above the $50.0 million commitment amount may be incurred under the Credit Agreement. On June 30, 2023, the Company amended the Credit Agreement in order to provide for Term SOFR as the replacement benchmark rate for LIBOR, and to make certain other technical changes to the Credit Agreement related thereto. As of June 30, 2023, the Company had no outstanding balance related to the Revolving Credit Facility and no incremental revolving commitments were incurred. For further information on the Revolving Credit Facility, refer to Note 10—Debt in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q. Based on current market conditions, we believe that our cash on hand, the investments in short-term marketable debt securities, the net cash generated from operations and the available borrowing capacity under our Revolving Credit Facility will be sufficient to meet our operating needs and commitments for the next twelve months; however, if these sources of liquidity are not sufficient, we may seek additional debt or equity financing. 31 Share Repurchase Program The Company’s board of directors approved a stock repurchase program under which the Company is authorized to repurchase up to $200.0 million of the Company’s Class A common stock with no requirement to purchase any minimum number of shares. During the three and six months ended June 30, 2023, the Company purchased 919,379 and 2,376,683 shares, at a cost of $7.7 million and $22.5 million, respectively. As of June 30, 2023 $108.8 million remains of the $200 million share repurchase authorization. Other Commitments and Contractual Obligations Regulatory Capital We actively monitor our regulatory capital base. Our principal subsidiaries are subject to regulatory requirements in their respective jurisdictions to ensure general financial soundness and liquidity. This requires, among other things, that we comply with certain minimum capital requirements, record-keeping, reporting procedures, experience and training requirements for employees and certain other requirements and procedures. These regulatory requirements may restrict the flow of funds to and from affiliates. Refer to Note 6—Regulatory Requirements in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information. These regulations differ in the United States, United Kingdom, Canada, France and other countries in which we operate a registered broker-dealer or regionally similar construct. The license or regulatory framework under which we operate in each such country is meant to comply with applicable laws and regulations to conduct an advisory business. We believe that we provide each of our subsidiaries with sufficient capital and liquidity, consistent with their business and regulatory requirements to effectively operate in each jurisdiction. Exchange Rights In accordance with the PWP OpCo LPA, PWP OpCo Unitholders (other than the Company) may exchange these units for (i) shares of Class A common stock on a one-for-one basis or (ii) cash from an offering of shares of Class A common stock with the form of consideration determined by the Company. See Note 9—Stockholders’ Equity in the notes to the condensed consolidated financial statements included elsewhere in the Form 10-Q for further information. Sponsor Share Surrender and Share Restriction Agreement Concurrent with the Business Combination Agreement, FTIV, PWP OpCo and certain other parties entered into the Sponsor Share Surrender and Share Restriction Agreement with the Sponsor, which was amended on May 4, 2021. See Note 11—Stockholders' Equity in the notes to the audited consolidated financial statements for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for further information. Tax Receivable Agreement In connection with the Business Combination, the Company entered into a tax receivable agreement with PWP OpCo, Professional Partners and ILPs that provides for payment of 85% of the amount of cash savings, if any, in U.S. federal, state and local and foreign income taxes that the Company is deemed to realize as a result of (a) each exchange of interests in PWP OpCo for cash or stock of the Company and certain other transactions and (b) payments made under the tax receivable agreement. See Note 16—Related Party Transactions in the notes to the condensed consolidated financial statements included elsewhere in the Form 10-Q for further information as well as the expected timing of payments. Leases and Capital Expenditures We have various non-cancelable operating leases in connection with the leases of our office spaces and equipment. See Note 4—Leases in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information as well as the expected timing of payments. The Company signed new lease agreements for the London office and the New York office spaces, which expand our square footage meaningfully in both locations in order to accommodate our anticipated growth. This expansion increased our contractual obligations as well as required capital contributions towards construction of these spaces (mitigated in part by free rent periods and tenant improvement allowances). Construction of the London space was completed in February 2023 and completion of the New York space is expected by the end of 2023. As of June 30, 2023, the Company estimates spending approximately $14 million to complete the construction of the New York space, net of tenant improvement allowances. Business Realignment We currently estimate that approximately $18 million of cash payments remain related to the Business Realignment, which are expected to be paid by or soon after December 31, 2023. 32 Market Risk and Credit Risk Our business is not capital-intensive and we do not invest in derivative instruments. We are not subject to significant market risk (including interest rate risk and commodity price risk) or significant credit risk. Risks Related to Cash and Cash Equivalents Our cash and cash equivalents include any short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. Cash is maintained in U.S. and non-U.S. bank accounts. Most U.S. and U.K. account balances exceed the FDIC and FSCS coverage limits. We believe our cash and cash equivalents are not subject to any material interest rate risk, equity price risk, credit risk or other market risk. Credit Risk We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality, age of the accounts receivable, and the current economic conditions that may affect a client’s ability to pay such amounts owed to the Company. We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover current expected credit losses. Refer to Note 3—Revenue and Receivables from Contracts with Customers in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information. With respect to investments, we manage our credit risk exposure by holding investments primarily with investment grade credit quality. As of June 30, 2023, the Company held investments of $50.0 million in U.S. Treasury securities with maturities of less than 12 months. Exchange Rate Risk The Company is exposed to exchange rate risk as a result of having foreign subsidiaries with non-U.S. dollar functional currencies as well as from entering into transactions and holding monetary assets and liabilities that are not denominated in the functional currency of its operating subsidiaries. Specifically, the reported amounts in our consolidated financial statements may be affected by movements in the rate of exchange between the pound sterling, Euro, and Canadian dollar and our reporting currency, the U.S. dollar. For the six months ended June 30, 2023 and 2022, the net impact of non-functional currency related transaction gains and losses recorded in Other income (expense) on our Condensed Consolidated Statements of Operations was a $2.2 million loss and $5.2 million gain, respectively, primarily related to U.S. dollar-denominated cash and intercompany receivables held by our foreign subsidiaries as the U.S. dollar strengthened. For the six months ended June 30, 2023 and 2022, the net impact of the fluctuation of foreign currencies recorded in Foreign currency translation gain (loss) within our Condensed Consolidated Statements of Comprehensive Income (Loss) was a $3.5 million gain and $7.3 million loss, respectively. We have not entered into any transactions to hedge our exposure to these foreign currency fluctuations using derivative instruments or other methods but may do so if we deem appropriate in the future. As of June 30, 2023, we held balances of $35.8 million of non-U.S. dollar denominated currencies, composed of pound sterling, the Euro, and Canadian dollars. Critical Accounting Estimates This Quarterly Report on Form 10-Q should be read together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Annual Report on Form 10-K filed on February 28, 2023 regarding these critical accounting estimates. For changes to our critical accounting estimates during the six months ended June 30, 2023, refer to Note 2—Summary of Significant Accounting Policies in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosures about market risk are set forth above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk and Credit Risk”.