# Lazard, Inc. (LAZ) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Lazard, Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1311370/000156459023002334/laz-10k_20221231.htm Accession: 0001564590-23-002334 Filing date: 2023-02-23 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/LAZ/ All MD&A years: /company/LAZ/mda/ Previous year: /company/LAZ/mda/fy2021/ (FY 2021) Next year: /company/LAZ/mda/fy2023/ (FY 2023) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with Lazard Ltd’s consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”). This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and elsewhere in this Form 10-K. Business Summary Lazard, one of the world’s preeminent financial advisory and asset management firms, operates from 43 cities across 26 countries in North and South America, Europe, Asia and Australia. With origins dating to 1848, we have long specialized in crafting solutions to the complex financial and strategic challenges of a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals. Our primary business purpose is to serve our clients. Our deep roots in business centers around the world form a global network of relationships with key decision-makers in corporations, governments and investing institutions. This network is both a competitive strength and a powerful resource for Lazard and our clients. As a firm that competes on the quality of our advice, we have two fundamental assets: our people and our reputation. We operate in cyclical businesses across multiple geographies, industries and asset classes. In recent years, we have expanded our geographic reach, bolstered our industry expertise and continued to build in growth areas. Companies, government bodies and investors seek independent advice with a geographic perspective, deep understanding of capital structure, informed research and knowledge of global, regional and local economic conditions. We believe that our business model as an independent advisor will continue to create opportunities for us to attract new clients and key personnel. Our principal sources of revenue are derived from activities in the following business segments: [[GREPCENT_TABLE]] [["","\u2022","Financial Advisory, which offers corporate, partnership, institutional, government, sovereign and individual clients across the globe a wide array of financial advisory services regarding strategic and mergers and acquisitions (\u201cM&A\u201d) advisory, capital markets advisory, shareholder advisory, restructuring and capital solutions, sovereign advisory, geopolitical advisory, capital raising and placement, and other strategic advisory matters, and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Asset Management, which offers a broad range of global investment solutions and investment and wealth management services in equity and fixed income strategies, asset allocation strategies, alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries and private clients."]] [[/GREPCENT_TABLE]] In addition, we record selected other activities in our Corporate segment, including management of cash, investments, deferred tax assets, outstanding indebtedness, certain contingent obligations and certain assets and liabilities associated with (i) Lazard Group’s Paris-based subsidiary, Lazard Frères Banque SA (“LFB”), and (ii) a special purpose acquisition company sponsored by an affiliate of the Company, Lazard Growth Acquisition Corp. I (“LGAC”). Our consolidated net revenue was derived from the following segments: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Financial Advisory","","","60","%","","","55","%","","","55","%"],["Asset Management","","","43","","","","45","","","","46"],["Corporate","","","(3",")","","","-","","","","(1",")"],["Total","","","100","%","","","100","%","","","100","%"]] [[/GREPCENT_TABLE]] 40 We also invest our own capital from time to time, generally alongside capital of qualified institutional and individual investors in alternative investments or private equity investments, and make investments to seed our Asset Management strategies. Business Environment and Outlook Economic and global financial market conditions can materially affect our financial performance. As described above, our principal sources of revenue are derived from activities in our Financial Advisory and Asset Management business segments. Our Financial Advisory revenues are primarily dependent on the successful completion of merger, acquisition, restructuring, capital raising or similar transactions, and our Asset Management revenues are primarily driven by the levels of assets under management (“AUM”). Weak economic and global financial market conditions can result in a challenging business environment for M&A and capital-raising activity as well as our Asset Management business, but may provide opportunities for our restructuring business. The global macroeconomic environment remains uncertain, characterized by global inflation at multi-decade highs, rising interest rates, and turbulent capital markets. Our outlook with respect to our Financial Advisory and Asset Management businesses is described below. [[GREPCENT_TABLE]] [["","\u2022","Financial Advisory\u2014The global scale and breadth of our Financial Advisory business enables us to advise on a wide range of strategic and restructuring transactions across a variety of industries. In addition, we continue to invest in our Financial Advisory business by selectively hiring talented senior professionals in an effort to enhance our capabilities and sector expertise in M&A, capital structure and public and private capital markets."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Asset Management\u2014Given our diversified investment platform and our ability to provide investment solutions for a global mix of clients, we believe we are positioned to benefit from opportunities across the asset management industry despite uncertain global macroeconomic conditions. We are continually developing new investment strategies that extend our existing platforms and assessing potential product acquisitions or other inorganic growth opportunities."]] [[/GREPCENT_TABLE]] We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge continuously, and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable 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. See Item 1A, “Risk Factors” in this Form 10-K. Furthermore, net income and revenue in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year to year and quarter to quarter. Overall, we continue to focus on the development of our business, including the generation of stable revenue growth, earnings growth and shareholder returns, the evaluation of potential growth opportunities, the investment in new technology to support the development of existing and new business opportunities, the prudent management of our costs and expenses, the efficient use of our assets and the return of capital to our shareholders. Certain market data with respect to our Financial Advisory and Asset Management businesses is included below. 41 Financial Advisory As reflected in the following table, which sets forth global M&A industry statistics, the value and number of all completed transactions, including the subset of completed transactions involving values greater than $500 million, decreased in 2022 as compared to 2021. With respect to announced M&A transactions, the value and number of all transactions, including the subset of announced transactions involving values greater than $500 million, decreased in 2022 as compared to 2021. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","% Incr / (Decr)"],["","","($ in billions)"],["Completed M&A Transactions:"],["All deals:"],["Value","","$","3,954","","","$","5,492","","","","(28",")%"],["Number","","","35,932","","","","43,284","","","","(17",")%"],["Deals Greater than $500 million:"],["Value","","$","3,057","","","$","4,239","","","","(28",")%"],["Number","","","1,284","","","","1,789","","","","(28",")%"],["Announced M&A Transactions:"],["All deals:"],["Value","","$","3,752","","","$","5,917","","","","(37",")%"],["Number","","","38,438","","","","43,781","","","","(12",")%"],["Deals Greater than $500 million:"],["Value","","$","2,758","","","$","4,624","","","","(40",")%"],["Number","","","1,244","","","","1,982","","","","(37",")%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Source:","Dealogic as of January 4, 2023."]] [[/GREPCENT_TABLE]] Global restructuring activity during 2022, as measured by the number of corporate defaults, increased as compared to 2021. The number of defaulting issuers was 90 in 2022, according to Moody’s Investors Service, Inc., as compared to 55 in 2021. Net revenue trends in Financial Advisory are generally correlated to the level of completed industry-wide M&A transactions and restructuring transactions occurring subsequent to corporate debt defaults, respectively. However, deviations from this relationship can occur in any given year for a number of reasons. For instance, our results can diverge from industry-wide activity where there are material variances from the level of industry-wide M&A activity in a particular market where Lazard has significant market share, or regarding the relative number of our advisory engagements with respect to larger-sized transactions, and where we are involved in non-public or sovereign advisory assignments. Asset Management The percentage change in major equity market indices (i) at December 31, 2022, as compared to such indices at December 31, 2021, and (ii) at December 31, 2021, as compared to such indices at December 31, 2020, is shown in the table below. [[GREPCENT_TABLE]] [["","","Percentage Changes December 31,"],["","","2022 vs. 2021","","","2021 vs. 2020"],["MSCI World Index","","","(18","%)","","","22","%"],["Euro Stoxx","","","(9","%)","","","24","%"],["MSCI Emerging Market","","","(20","%)","","","(3","%)"],["S&P 500","","","(18","%)","","","29","%"]] [[/GREPCENT_TABLE]] 42 The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM and the nature of the AUM product mix. Accordingly, market movements, foreign currency exchange rate volatility and changes in our AUM product mix will impact the level of revenues we receive from our Asset Management business when comparing periodic results. A substantial portion of our AUM is invested in equities. Movements in AUM during the period generally reflect the changes in equity market indices. Financial Statement Overview Net Revenue The majority of Lazard’s Financial Advisory net revenue historically has been earned from the successful completion of M&A transactions, capital markets advisory, shareholder advisory, restructuring and capital solutions, sovereign advisory, capital raising and placement, and other strategic advisory matters. The main drivers of Financial Advisory net revenue are overall M&A activity, the level of corporate debt defaults and the environment for capital raising activities, particularly in the industries and geographic markets in which Lazard focuses. In some client engagements, often those involving financially distressed companies, revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction. In addition, Lazard also earns fees from providing strategic advice to clients, with such fees not being dependent on a specific transaction, and may also earn fees in connection with public and private securities offerings. Significant fluctuations in Financial Advisory net revenue can occur over the course of any given year, because a significant portion of such net revenue is earned upon the successful completion of a transaction, restructuring or capital raising activity, the timing of which is uncertain and is not subject to Lazard’s control. Lazard’s Asset Management segment principally includes LAM, LFG and Edgewater. Asset Management net revenue is derived from fees for investment management and advisory services provided to clients. As noted above, the main driver of Asset Management net revenue is the level and product mix of AUM, which is generally influenced by the performance of the global equity markets and, to a lesser extent, fixed income markets as well as Lazard’s investment performance, which impacts its ability to successfully attract and retain assets. As a result, fluctuations (including timing thereof) in financial markets and client asset inflows and outflows have a direct effect on Asset Management net revenue and operating income. Asset Management fees are generally based on the level of AUM measured daily, monthly or quarterly, and an increase or reduction in AUM, due to market price fluctuations, currency fluctuations, changes in product mix, or net client asset flows will result in a corresponding increase or decrease in management fees. The majority of our investment advisory contracts are generally terminable at any time or on notice of 30 days or less. Institutional and individual clients, and firms with which we have strategic alliances, can terminate their relationship with us, reduce the aggregate amount of AUM or shift their funds to other types of accounts with different rate structures for a number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. In addition, as Lazard’s AUM includes significant amounts of assets that are denominated in currencies other than U.S. Dollars, changes in the value of the U.S. Dollar relative to foreign currencies will impact the value of Lazard’s AUM and the overall amount of management fees generated by the AUM. Fees vary with the type of assets managed and the vehicle in which they are managed, with higher fees earned on equity assets and alternative investment funds, such as hedge funds and private equity funds, and lower fees earned on fixed income and cash management products. 43 The Company earns performance-based incentive fees on various investment products, including traditional products and alternative investment funds, such as hedge funds and private equity funds. For hedge funds, incentive fees are calculated based on a specified percentage of a fund’s net appreciation, in some cases in excess of established benchmarks or thresholds. The Company records incentive fees on traditional products and hedge funds at the end of the relevant performance measurement period, when potential uncertainties regarding the ultimate realizable amounts have been determined. The incentive fee measurement period is generally an annual period (unless an account terminates or redemption occurs during the year). The incentive fees received at the end of the measurement period are not subject to reversal or payback. Incentive fees on hedge funds are often subject to loss carryforward provisions in which losses incurred by the hedge funds in any year are applied against certain gains realized by the hedge funds in future periods before any incentive fees can be earned. For private equity funds, incentive fees may be earned in the form of a “carried interest” if profits arising from realized investments exceed a specified threshold. Typically, such carried interest is ultimately calculated on a whole-fund or investment by investment basis and, therefore, clawback of carried interest toward the end of the life of the fund can occur. As a result, the Company recognizes incentive fees earned on our private equity funds when it is probable that a clawback will not occur. Corporate segment net revenue consists primarily of investment gains and losses on the Company’s “seed investments” related to our Asset Management business and principal investments in private equity funds, net of hedging activities, as well as gains and losses on investments held in connection with Lazard Fund Interests (“LFI”) and interest income and interest expense. Corporate net revenue also can fluctuate due to changes in the fair value of debt and equity securities, as well as due to changes in interest and currency exchange rates and in the levels of cash, investments and indebtedness. Corporate segment total assets represented 64% of Lazard’s consolidated total assets as of December 31, 2022, which are attributable to cash and cash equivalents, restricted cash associated with LGAC, investments in debt and equity securities, interests in alternative investment, debt, equity and private equity funds, investments accounted for under the equity method of accounting, deferred tax assets and certain other assets associated with LFB and LGAC. Operating Expenses The majority of Lazard’s operating expenses relate to compensation and benefits for managing directors and employees. Our compensation and benefits expense includes (i) salaries and benefits, (ii) amortization of the relevant portion of previously granted deferred incentive compensation awards, including (a) share-based incentive compensation under the Lazard Ltd 2018 Incentive Compensation Plan, as amended (the “2018 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”) and (b) LFI and other similar deferred compensation arrangements (see Note 15 of Notes to Consolidated Financial Statements), (iii) a provision for discretionary or guaranteed cash bonuses and profit pools and (iv) when applicable, severance payments. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our actual and forecasted operating and financial performance, staffing levels, estimated forfeiture rates, competitive pay conditions and the nature of revenues earned, as well as the mix between current and deferred compensation. We believe that “awarded compensation and benefits expense” and the ratio of “awarded compensation and benefits expense” to “operating revenue,” both non-GAAP measures, when presented in conjunction with accounting principles generally accepted in the United States of America (“U.S. GAAP”) measures, are appropriate measures to assess the annual cost of compensation and provide a meaningful and useful basis for comparison of compensation and benefits expense between present, historical and future years. “Awarded compensation and benefits expense” for a given year is calculated using “adjusted compensation and benefits expense,” also a non-GAAP measure, as modified by the following items: [[GREPCENT_TABLE]] [["","\u2022","we deduct amortization expense recorded for U.S. GAAP purposes in the fiscal year associated with deferred incentive compensation awards;"]] [[/GREPCENT_TABLE]] 44 [[GREPCENT_TABLE]] [["","\u2022","we add incentive compensation with respect to the fiscal year, which is comprised of:"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(i)","the deferred incentive compensation awards granted in the year-end compensation process with respect to the fiscal year (e.g., deferred incentive compensation awards granted in 2023 related to the 2022 year-end compensation process), including performance-based restricted stock unit (\u201cPRSU\u201d) and performance-based restricted participation unit (\u201cPRPU\u201d) awards (based on the target payout level);"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(ii)","the portion of investments in people (e.g., \u201csign-on\u201d bonuses or retention awards) and other special deferred incentive compensation awards that is applicable to the fiscal year the award becomes effective; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(iii)","amounts in excess of the target payout level for PRSU and PRPU awards at the end of their respective performance periods; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","we reduce the amounts in (i), (ii) and (iii) above by an estimate of future forfeitures with respect to such awards."]] [[/GREPCENT_TABLE]] We also use “adjusted compensation and benefits expense” and the ratio of “adjusted compensation and benefits expense” to “operating revenue,” both non-GAAP measures, for comparison of compensation and benefits expense between periods. For the reconciliations and calculations with respect to “adjusted compensation and benefits expense” and “awarded compensation and benefits expense” and related ratios to “operating revenue,” see the table under “Consolidated Results of Operations” below. Compensation and benefits expense is the largest component of our operating expenses. We seek to maintain discipline with respect to compensation, including the rate at which we award deferred compensation. Our goal is to maintain a ratio of awarded compensation and benefits expense to operating revenue and a ratio of adjusted compensation and benefits expense to operating revenue over the cycle in the mid- to high-50s percentage range, while targeting a consistent deferral policy. While we have implemented policies and initiatives that we believe will assist us in maintaining ratios within this range, there can be no guarantee that we will continue to maintain such ratios, or that our policies or initiatives will not change, in the future. Increased competition for professionals, changes in the macroeconomic environment or the financial markets generally, lower operating revenue resulting from, for example, a decrease in M&A activity, our share of the M&A market or our AUM levels, changes in the mix of revenues from our businesses, investments in our businesses or various other factors could prevent us from achieving this goal; however, in future periods we may benefit from pressure on compensation costs within the financial services industry. Our operating expenses also include “non-compensation expense”, which includes costs for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and other expenses. Our occupancy costs represent a significant portion of our aggregate operating expenses and are subject to change from time to time, particularly as leases for real property expire and are renewed or replaced with new, long-term leases for the same or other real property. We believe that “adjusted non-compensation expense”, a non-GAAP measure, when presented in conjunction with U.S. GAAP measures provides a meaningful and useful basis for our investors to assess our operating results. For calculations with respect to “adjusted non-compensation expense”, see the table under “Consolidated Results of Operations” below. Our operating expenses also include our “provision (benefit) pursuant to the tax receivable agreement” and “amortization of intangible assets related to acquisitions”. We do not believe inflation will have a significant effect on our compensation costs as they are substantially variable in nature. However, the rate of inflation may affect our other expenses. To the extent inflation results in rising interest rates and has other effects upon the securities markets or general macroeconomic conditions, it may adversely affect our financial position and results of operations by impacting overall levels of M&A activity, reducing our AUM or net revenue, or otherwise. 45 Provision for Income Taxes Lazard Ltd, through its subsidiaries, is subject to U.S. federal income taxes on all of its U.S. operating income, as well as on the portion of non-U.S. income attributable to its U.S. subsidiaries. In addition, Lazard Ltd, through its subsidiaries, is subject to state and local taxes on its income apportioned to various state and local jurisdictions. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes in foreign jurisdictions. Lazard Group is also subject to Unincorporated Business Tax (“UBT”) attributable to its operations apportioned to New York City. See “Critical Accounting Policies and Estimates—Income Taxes” below and Notes 17 and 19 of Notes to Consolidated Financial Statements for additional information regarding income taxes, our deferred tax assets and the tax receivable agreement obligation. Noncontrolling Interests Noncontrolling interests primarily consist of (i) amounts related to Edgewater’s management vehicles that the Company is deemed to control but not own, (ii) LGAC interests (see Note 1 of Notes to Consolidated Financial Statements), (iii) profits interest participation rights and (iv) consolidated VIE interests held by employees. See Notes 14 and 22 of Notes to Consolidated Financial Statements for information regarding the Company’s noncontrolling interests and consolidated VIEs. Consolidated Results of Operations Lazard’s consolidated financial statements are presented in U.S. Dollars. Many of our non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. Dollar, generally the currency of the country in which the subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. Dollars using exchange rates as of the respective balance sheet date, while revenue and expenses are translated at average exchange rates during the respective periods based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of stockholders’ equity. Foreign currency remeasurement gains and losses on transactions in non-functional currencies are included in the consolidated statements of operations. The consolidated financial statements are prepared in conformity with U.S. GAAP. Selected financial data derived from the Company’s reported consolidated results of operations is set forth below, followed by a more detailed discussion of both the consolidated and business segment results. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Net Revenue","","$","2,773,571","","","$","3,193,048","","","$","2,566,138"],["Operating Expenses:"],["Compensation and benefits","","","1,656,451","","","","1,895,859","","","","1,550,684"],["Non-compensation","","","601,421","","","","571,082","","","","511,957"],["Amortization of intangible assets related to acquisitions","","","60","","","","60","","","","1,795"],["Provision (benefit) pursuant to tax receivable agreement","","","(1,209",")","","","2,199","","","","(439",")"],["Total operating expenses","","","2,256,723","","","","2,469,200","","","","2,063,997"],["Operating Income","","","516,848","","","","723,848","","","","502,141"],["Provision for income taxes","","","124,365","","","","181,303","","","","99,449"],["Net Income","","","392,483","","","","542,545","","","","402,692"],["Less - Net Income Attributable to Noncontrolling Interests","","","34,966","","","","14,481","","","","231"],["Net Income Attributable to Lazard Ltd","","$","357,517","","","$","528,064","","","$","402,461"],["Operating Income, as a % of net revenue","","","18.6","%","","","22.7","%","","","19.6","%"]] [[/GREPCENT_TABLE]] The tables below describe the components of operating revenue, adjusted and awarded compensation and benefits expense, adjusted non-compensation expense, earnings from operations and related key ratios, which are non-GAAP measures used by the Company to manage its business. We believe such non-GAAP measures in 46 conjunction with U.S. GAAP measures provide a meaningful and useful basis for comparison between present, historical and future periods, as described above.  [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Operating Revenue:"],["Net revenue","","$","2,773,571","","","$","3,193,048","","","$","2,566,138"],["Adjustments:"],["Interest expense (a)","","","76,528","","","","74,375","","","","74,516"],["Distribution fees, reimbursable deal costs, bad debt expense and other (b)","","","(76,229",")","","","(85,053",")","","","(64,983",")"],["Revenue related to noncontrolling interests (c)","","","(49,073",")","","","(31,624",")","","","(11,497",")"],["(Gains) losses on investments pertaining to LFI (d)","","","44,261","","","","(35,494",")","","","(40,634",")"],["Losses associated with restructuring and closing of certain offices (e)","","","-","","","","23,645","","","","-"],["Operating revenue","","$","2,769,058","","","$","3,138,897","","","$","2,523,540"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(a)","Interest expense (excluding interest expense incurred by LFB) is added back in determining operating revenue because such expense relates to corporate financing activities and is not considered to be a cost directly related to the revenue of our business."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(b)","Represents certain distribution, introducer and management fees paid to third parties, reimbursable deal costs and bad debt expense relating to fees that are deemed uncollectible for which an equal amount is excluded for purposes of determining adjusted non-compensation expense."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(c)","Revenue or loss related to the consolidation of noncontrolling interests is excluded from operating revenue because the Company has no economic interest in such amount."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(d)","Represents changes in the fair value of investments held in connection with LFI and other similar deferred compensation arrangements for which a corresponding equal amount is excluded from compensation and benefits expense."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(e)","Represents losses related to the reclassification of currency translation adjustments to earnings from accumulated other comprehensive loss associated with restructuring and closing of certain of our offices in the year ended December 31, 2021."]] [[/GREPCENT_TABLE]] 47 [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Adjusted and Awarded Compensation and Benefits Expense:"],["Total compensation and benefits expense","","$","1,656,451","","","$","1,895,859","","","$","1,550,684"],["Adjustments:"],["Noncontrolling interests (a)","","","(10,855",")","","","(9,216",")","","","(7,927",")"],["(Charges) credits pertaining to LFI (b)","","","44,261","","","","(35,494",")","","","(40,634",")"],["Expenses associated with senior management transition (c)","","","(33,019",")","","","-","","","","-"],["Expenses associated with restructuring and closing of certain offices","","","-","","","","(14,922",")","","","-"],["Adjusted compensation and benefits expense","","","1,656,838","","","","1,836,227","","","","1,502,123"],["Deduct - amortization of deferred incentive compensation awards","","","(370,960",")","","","(400,238",")","","","(384,064",")"],["Total adjusted cash compensation and benefits expense (d)","","","1,285,878","","","","1,435,989","","","","1,118,059"],["Add:"],["Year-end deferred incentive compensation awards (e)","","","436,207","","","","389,670","","","","364,410"],["Sign-on and other special incentive awards (f)","","","79,254","","","","48,501","","","","54,830"],["Deduct - adjustments for estimated forfeitures (g)","","","(33,505",")","","","(28,481",")","","","(27,251",")"],["Awarded compensation and benefits expense","","$","1,767,834","","","$","1,845,679","","","$","1,510,048"],["Adjusted compensation and benefits expense, as a % of operating revenue","","","59.8","%","","","58.5","%","","","59.5","%"],["Awarded compensation and benefits expense, as a % of operating revenue","","","63.8","%","","","58.8","%","","","59.8","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(a)","Expenses related to the consolidation of noncontrolling interests are excluded because Lazard has no economic interest in such amounts."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(b)","Represents changes in fair value of the compensation liability recorded in connection with LFI and other similar deferred incentive compensation awards for which a corresponding equal amount is excluded from operating revenue."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(c)","Represents expenses associated with senior management transition reflecting the departure of certain executive officers."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(d)","Includes base salaries and benefits of $827,973, $773,594 and $682,718 for 2022, 2021 and 2020, respectively, and cash incentive compensation of $457,905, $662,395 and $435,342 for the respective years."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(e)","Deferred incentive compensation awards applicable to the relevant year-end compensation process (e.g., deferred incentive compensation awards granted in 2023, 2022 and 2021 related to the 2022, 2021 and 2020 year-end compensation processes, respectively)."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(f)","Represents special deferred incentive awards that are granted outside the year-end compensation process, and includes grants to new hires, retention awards and performance units earned under PRSU grants."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(g)","An estimate, based on historical experience and future expectations, for future forfeitures of the deferred portion of such awards in order to present awarded compensation and benefits expense on a similar basis to that under U.S. GAAP, which also considers estimated forfeitures."]] [[/GREPCENT_TABLE]] 48 [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Adjusted Non-Compensation Expense:"],["Total non-compensation expense","","$","601,421","","","$","571,082","","","$","511,957"],["Adjustments:"],["Expenses relating to office space reorganization (a)","","","(3,764",")","","","(4,611",")","","","(12,646",")"],["Distribution fees, reimbursable deal costs, bad debt expense and other (b)","","","(76,229",")","","","(85,053",")","","","(64,983",")"],["Noncontrolling interests (c)","","","(3,255",")","","","(7,932",")","","","(2,430",")"],["Expenses associated with restructuring and closing of certain offices","","","-","","","","(1,539",")","","","-"],["Adjusted non-compensation expense","","$","518,173","","","$","471,947","","","$","431,898"],["Adjusted non-compensation expense, as a % of operating revenue","","","18.7","%","","","15.0","%","","","17.1","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(a)","Represents building depreciation and other costs related to office space reorganization."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(b)","Represents certain distribution, introducer and management fees paid to third parties, reimbursable deal costs and bad debt expense relating to fees that are deemed uncollectible for which an equal amount is included for purposes of determining operating revenue."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(c)","Expenses related to the consolidation of noncontrolling interests are excluded because the Company has no economic interest in such amounts."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Earnings From Operations:"],["Operating revenue","","$","2,769,058","","","$","3,138,897","","","$","2,523,540"],["Deduct:"],["Adjusted compensation and benefits expense","","","(1,656,838",")","","","(1,836,227",")","","","(1,502,123",")"],["Adjusted non-compensation expense","","","(518,173",")","","","(471,947",")","","","(431,898",")"],["Earnings from operations","","$","594,047","","","$","830,723","","","$","589,519"],["Earnings from operations, as a % of operating revenue","","","21.5","%","","","26.5","%","","","23.4","%"]] [[/GREPCENT_TABLE]] Headcount information is set forth below: [[GREPCENT_TABLE]] [["","","As of December 31,"],["","","2022","","","2021","","","2020"],["Headcount:"],["Managing Directors:"],["Financial Advisory (a)","","212","","","","179","","","","171"],["Asset Management","","120","","","","110","","","","105"],["Corporate","","25","","","","22","","","","21"],["Total Managing Directors","","357","","","","311","","","","297"],["Other Business Segment Professionals and Support Staff:"],["Financial Advisory (a)","","","1,463","","","","1,349","","","","1,384"],["Asset Management","","","1,105","","","","1,088","","","","1,012"],["Corporate","","","477","","","","431","","","","413"],["Total","","","3,402","","","","3,179","","","","3,106"]] [[/GREPCENT_TABLE]] 49 [[GREPCENT_TABLE]] [["(a)","Financial Advisory headcount reflects that, in addition to customary year-end changes, 20 employees were reclassified in the first quarter of 2022 from professionals to managing directors due to a consolidation of the Lazard Middle Market LLC broker-dealer license."]] [[/GREPCENT_TABLE]] A review of our operating results for the year ended December 31, 2022 compared to our operating results for the year ended December 31, 2021 appears below. A detailed review of our operating results for the year ended December 31, 2021 compared to the year ended December 31, 2020 is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Results”. Operating Results Year Ended December 31, 2022 versus December 31, 2021 The Company reported net income attributable to Lazard Ltd of $358 million, as compared to net income attributable to Lazard Ltd of $528 million in 2021. Net revenue decreased $419 million, or 13%, with operating revenue decreasing $370 million, or 12%, as compared to 2021. Fee revenue from investment banking and other advisory activities decreased $127 million, or 7%, as compared to 2021. Asset management fees, including incentive fees, decreased $229 million, or 17%, as compared to 2021. In the aggregate, interest income, other revenue and interest expense decreased $63 million, or 122%, as compared to 2021. Compensation and benefits expense decreased $239 million, or 13%, as compared to 2021. Adjusted compensation and benefits expense (which excludes certain items and which we believe allows for improved comparability between periods, as described above) was $1,657 million, a decrease of $179 million, or 10%, as compared to $1,836 million in 2021. The ratio of adjusted compensation and benefits expense to operating revenue was 59.8% for 2022, as compared to 58.5% for 2021. Awarded compensation and benefits expense in 2022 was $1,768 million, a decrease of $78 million, or 4%, when compared to $1,846 million in 2021. The ratio of awarded compensation and benefits expense to operating revenue was 63.8%, as compared to 58.8% for 2021. The year-end deferred incentive compensation awarded for 2022 was $436 million, representing an increase of $47 million, or 12%, as compared to 2021. As described above, when analyzing compensation and benefits expense on a full-year basis, we believe that awarded compensation and benefits expense provides the most meaningful basis for comparison of compensation and benefits expense between present, historical and future years. Non-compensation expense increased $30 million, or 5%, as compared to 2021, primarily due to increased marketing and business development expenses from higher travel, and investments in technology. Adjusted non-compensation expense increased $46 million, or 10%, as compared to 2021. The ratio of adjusted non-compensation expense to operating revenue was 18.7% for 2022, as compared to 15.0% in 2021. Operating income decreased $207 million, or 29%, as compared to 2021. Earnings from operations decreased $237 million, or 28%, as compared to 2021, and, as a percentage of operating revenue, was 21.5%, as compared to 26.5% in 2021. The provision for income taxes reflects an effective tax rate of 24.1%, as compared to 25.0% in 2021. See Note 17 of Notes to Consolidated Financial Statements. Net income attributable to noncontrolling interests increased $20 million as compared to 2021.  See Note 14 of Notes to Consolidated Financial Statements. Business Segments The following is a discussion of net revenue and operating income for the Company’s segments: Financial Advisory, Asset Management and Corporate. Each segment’s operating expenses include (i) compensation and 50 benefits expenses that are incurred directly in support of the segment and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourcing, and indirect support costs (including compensation and benefits expense and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, human resources, legal, information technology, facilities management and senior management activities. Such support costs are allocated to the relevant segments based on various statistical drivers such as revenue, headcount, square footage and other factors. Financial Advisory The following table summarizes the reported operating results attributable to the Financial Advisory segment: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Net Revenue","","$","1,666,156","","","$","1,764,509","","","$","1,420,501"],["Operating Expenses","","","1,304,715","","","","1,356,567","","","","1,130,850"],["Operating Income","","$","361,441","","","$","407,942","","","$","289,651"],["Operating Income, as a % of net revenue","","","21.7","%","","","23.1","%","","","20.4","%"]] [[/GREPCENT_TABLE]] Certain Lazard fee and transaction statistics for the Financial Advisory segment are set forth below: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Lazard Statistics:"],["Number of clients with fees greater than $1 million:"],["Financial Advisory","","","304","","","","370","","","","261"],["Percentage of total Financial Advisory net revenue from top 10 clients (a)","","","19","%","","","15","%","","","19","%"],["Number of M&A transactions completed with values greater than $500 million (b)","","","90","","","","104","","","","70"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(a)","No individual client constituted more than 10% of our Financial Advisory segment net revenue in the years ended December 31, 2022, 2021 and 2020."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(b)","Source: Dealogic as of January 4, 2023."]] [[/GREPCENT_TABLE]] The geographical distribution of Financial Advisory net revenue is set forth below in percentage terms and is based on the Lazard offices that generate Financial Advisory net revenue, which are located in the Americas (U.S., Canada, and Latin America), EMEA (primarily in the U.K., France, Germany, Italy and Spain) and the Asia Pacific region and therefore may not be reflective of the geography in which the clients are located. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Americas","","","59","%","","","62","%","","","67","%"],["EMEA","","","40","","","","37","","","","31"],["Asia Pacific","","","1","","","","1","","","","2"],["Total","","","100","%","","","100","%","","","100","%"]] [[/GREPCENT_TABLE]] The Company’s managing directors and many of its professionals have significant experience, and many of them are able to use this experience to advise on M&A, restructuring and other strategic advisory matters, depending on clients’ needs. This flexibility allows Lazard to better match its professionals with the counter-cyclical business cycles of mergers and acquisitions and restructurings. While Lazard measures revenue by practice area, Lazard does not separately measure the costs or profitability of M&A services as compared to restructuring or other services. 51 Accordingly, Lazard measures performance in its Financial Advisory segment based on overall segment operating revenue and operating income margins. Financial Advisory Results of Operations Year Ended December 31, 2022 versus December 31, 2021 Financial Advisory net revenue decreased $98 million, or 6%, as compared to 2021. The decrease in Financial Advisory net revenue was primarily a result of a decrease in the number of fees between $1 million and $5 million as compared to 2021. Operating expenses decreased $52 million, or 4%, as compared to 2021, primarily due to decreased compensation and benefits expense associated with decreased operating revenue, partially offset by increased marketing and business development expenses from higher travel. Financial Advisory operating income was $361 million, a decrease of $47 million, or 11%, as compared to operating income of $408 million in 2021 and, as a percentage of net revenue, was 21.7%, as compared to 23.1% in 2021. Asset Management Assets Under Management AUM primarily consists of debt and equity instruments, which have a value that is readily available based on either prices quoted on a recognized exchange or prices provided by external pricing services. Prices of equity and debt securities and other instruments that comprise our AUM are provided by well-recognized, independent, third-party vendors. Such third-party vendors rely on prices provided by external pricing services which are obtained from recognized exchanges or markets, or, for certain fixed income securities, from evaluated bids or other similarly sourced price. Either directly, or through our third-party vendors, we perform a variety of regular due diligence procedures on our pricing service providers. 52 The following table shows the composition of AUM for the Asset Management segment (see Item 1, “Business—Principal Business Lines—Asset Management—Investment Strategies”): [[GREPCENT_TABLE]] [["","","As of December 31,"],["","","2022","","","2021","","","2020"],["","","($ in millions)"],["AUM by Asset Class:"],["Equity:"],["Emerging Markets","","$","21,557","","","$","31,227","","","$","33,254"],["Global","","","46,861","","","","59,516","","","","56,246"],["Local","","","47,504","","","","56,310","","","","48,672"],["Multi-Regional","","","51,473","","","","73,953","","","","71,560"],["Total Equity","","","167,395","","","","221,006","","","","209,732"],["Fixed Income:"],["Emerging Markets","","","8,944","","","","12,231","","","","13,651"],["Global","","","11,029","","","","14,410","","","","11,962"],["Local","","","5,352","","","","6,022","","","","5,600"],["Multi-Regional","","","18,061","","","","13,623","","","","12,571"],["Total Fixed Income","","","43,386","","","","46,286","","","","43,784"],["Alternative Investments","","","3,812","","","","4,203","","","","2,748"],["Private Equity","","","1,038","","","","1,290","","","","1,420"],["Cash Management","","","494","","","","954","","","","958"],["Total AUM","","$","216,125","","","$","273,739","","","$","258,642"]] [[/GREPCENT_TABLE]] Total AUM at December 31, 2022 was $216 billion, a decrease of $58 billion, or 21%, as compared to total AUM of $274 billion at December 31, 2021 due to market and foreign exchange depreciation and net outflows. Average AUM for the year ended December 31, 2022 decreased $45 billion, or 16%, as compared to 2021. As of December 31, 2022, approximately 85% of our AUM was managed on behalf of institutional clients, including corporations, labor unions, public pension funds, insurance companies and banks, and through sub-advisory relationships, mutual fund sponsors, broker-dealers and registered advisors, compared to 87% as of December 31, 2021. As of December 31, 2022, approximately 15% of our AUM was managed on behalf of individual client relationships, which was principally with family offices and individuals, compared to approximately 13% as of December 31, 2021. As of both December 31, 2022 and 2021, AUM with foreign currency exposure represented approximately 65% of our total AUM. AUM with foreign currency exposure generally declines in value with the strengthening of the U.S. Dollar and increases in value as the U.S. Dollar weakens, with all other factors held constant. The following is a summary of changes in AUM by asset class for the years ended December 31, 2022, 2021 and 2020: [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2022"],["","","AUM Beginning Balance","","","Inflows","","","Outflows","","","Net Flows","","","Market Value Appreciation/ (Depreciation)","","","Foreign Exchange Appreciation/ (Depreciation)","","","AUM Ending Balance"],["","","($ in millions)"],["Equity","","$","221,006","","","$","23,495","","","$","(39,319",")","","$","(15,824",")","","$","(30,438",")","","$","(7,349",")","","$","167,395"],["Fixed Income","","","46,286","","","","9,890","","","","(10,488",")","","","(598",")","","","(688",")","","","(1,614",")","","","43,386"],["Other","","","6,447","","","","2,645","","","","(3,138",")","","","(493",")","","","(418",")","","","(192",")","","","5,344"],["Total","","$","273,739","","","$","36,030","","","$","(52,945",")","","$","(16,915",")","","$","(31,544",")","","$","(9,155",")","","$","216,125"]] [[/GREPCENT_TABLE]] Inflows in the Equity asset class were primarily attributable to the Global and Multi-Regional platforms, and inflows in the Fixed Income asset class were primarily attributable to the Multi-Regional and Global platforms. 53 Outflows in the Equity asset class were primarily attributable to the Global, Multi-Regional, and Emerging Markets equity platforms, and outflows in the Fixed Income asset class were primarily attributable to the Global, Emerging Markets and Multi-Regional platforms. [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2021"],["","","AUM Beginning Balance","","","Inflows","","","Outflows","","","Net Flows","","","Market Value Appreciation/ (Depreciation)","","","Foreign Exchange Appreciation/ (Depreciation)","","","AUM Ending Balance"],["","","($ in millions)"],["Equity","","$","209,732","","","$","27,229","","","$","(44,372",")","","$","(17,143",")","","$","34,730","","","$","(6,313",")","","$","221,006"],["Fixed Income","","","43,784","","","","12,597","","","","(8,517",")","","","4,080","","","","704","","","","(2,282",")","","","46,286"],["Other","","","5,126","","","","3,005","","","","(1,515",")","","","1,490","","","","(50",")","","","(119",")","","","6,447"],["Total","","$","258,642","","","$","42,831","","","$","(54,404",")","","$","(11,573",")","","$","35,384","","","$","(8,714",")","","$","273,739"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2020"],["","","AUM Beginning Balance","","","Inflows","","","Outflows","","","Net Flows","","","Market Value Appreciation/ (Depreciation)","","","Foreign Exchange Appreciation/ (Depreciation)","","","AUM Ending Balance"],["","","($ in millions)"],["Equity","","$","205,541","","","$","30,514","","","$","(43,973",")","","$","(13,459",")","","$","13,613","","","$","4,037","","","$","209,732"],["Fixed Income","","","38,263","","","","11,255","","","","(9,509",")","","","1,746","","","","2,550","","","","1,225","","","","43,784"],["Other","","","4,435","","","","1,075","","","","(730",")","","","345","","","","235","","","","111","","","","5,126"],["Total","","$","248,239","","","$","42,844","","","$","(54,212",")","","$","(11,368",")","","$","16,398","","","$","5,373","","","$","258,642"]] [[/GREPCENT_TABLE]] As of January 31, 2023, AUM was $230.6 billion, a $14.5 billion increase since December 31, 2022. The increase in AUM was due to market appreciation of $11.6 billion, foreign exchange appreciation of $2.0 billion, net inflows of $1.1 billion, partially offset by other decreases of $146 million. Average AUM for the years ended December 31, 2022, 2021 and 2020 for each significant asset class is set forth below. Average AUM generally represents the average of the monthly ending AUM balances for the period. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in millions)"],["Average AUM by Asset Class:"],["Equity","","$","179,178","","","$","220,146","","","$","182,308"],["Fixed Income","","","42,093","","","","46,252","","","","38,575"],["Alternative Investments","","","4,167","","","","3,492","","","","2,221"],["Private Equity","","","1,165","","","","1,318","","","","1,402"],["Cash Management","","","841","","","","843","","","","855"],["Total Average AUM","","$","227,444","","","$","272,051","","","$","225,361"]] [[/GREPCENT_TABLE]] The following table summarizes the reported operating results attributable to the Asset Management segment: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Net Revenue","","$","1,204,927","","","$","1,424,985","","","$","1,167,466"],["Operating Expenses","","","963,640","","","","1,032,825","","","","861,031"],["Operating Income","","$","241,287","","","$","392,160","","","$","306,435"],["Operating Income, as a % of net revenue","","","20.0","%","","","27.5","%","","","26.2","%"]] [[/GREPCENT_TABLE]] 54 Our top ten clients accounted for 27%, 29% and 27% of our total AUM at December 31, 2022, 2021 and 2020, respectively, and no individual client constituted more than 10% of our Asset Management segment net revenue during any of the respective years. The geographical distribution of Asset Management net revenue is set forth below in percentage terms, and is based on the Lazard offices that manage and distribute the respective AUM amounts. Such geographical distribution may not be reflective of the geography of the investment products or clients. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Americas","","","48","%","","","48","%","","","52","%"],["EMEA","","","41","","","","42","","","","37"],["Asia Pacific","","","11","","","","10","","","","11"],["Total","","","100","%","","","100","%","","","100","%"]] [[/GREPCENT_TABLE]] Asset Management Results of Operations Year Ended December 31, 2022 versus December 31, 2021 Asset Management net revenue decreased $220 million, or 15%, as compared to 2021. Management fees and other revenue was $1,138 million, a decrease of $167 million, or 13%, as compared to $1,305 million in 2021, primarily due to a decrease in average AUM. Incentive fees were $67 million, a decrease of $53 million, as compared to $120 million in 2021. Operating expenses decreased $69 million, or 7%, as compared to 2021, primarily due to decreased compensation and benefits expense associated with decreased operating revenue. Asset Management operating income was $241 million, a decrease of $151 million, or 38%, as compared to operating income of $392 million in 2021 and, as a percentage of net revenue, was 20.0%, as compared to 27.5% in 2021. Corporate The following table summarizes the reported operating results attributable to the Corporate segment: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in thousands)"],["Interest Income","","$","19,135","","","$","2,819","","","$","3,623"],["Interest Expense","","","(77,068",")","","","(75,351",")","","","(75,623",")"],["Net Interest Expense","","","(57,933",")","","","(72,532",")","","","(72,000",")"],["Other Revenue (Loss)","","","(39,579",")","","","76,086","","","","50,171"],["Net Revenue (Loss)","","","(97,512",")","","","3,554","","","","(21,829",")"],["Operating Expenses (Credits)","","","(11,632",")","","","79,808","","","","72,116"],["Operating Loss","","$","(85,880",")","","$","(76,254",")","","$","(93,945",")"]] [[/GREPCENT_TABLE]] Corporate Results of Operations Year Ended December 31, 2022 versus December 31, 2021 Net interest expense decreased $15 million, or 20%, as compared to 2021, primarily due to higher interest income which reflected rising interest rates as compared to 2021. Other revenue decreased $116 million as compared to 2021, primarily due to losses in 2022 as compared to gains in 2021 attributable to investments held in connection with LFI. 55 Operating expenses decreased $91 million, as compared to 2021, primarily due to decreased compensation and benefits expense which reflected credits in 2022 as compared to charges in 2021 pertaining to LFI. Cash Flows The Company’s cash flows are influenced primarily by the timing of the receipt of Financial Advisory and Asset Management fees, the timing of distributions to shareholders, payments of incentive compensation to managing directors and employees and purchases of common stock. M&A and other advisory and Asset Management fees are generally collected within 60 days of billing, while Restructuring fee collections may extend beyond 60 days, particularly those that involve bankruptcies with court-ordered holdbacks. Fees from our Private Capital Advisory activities are generally collected over a four-year period from billing and typically include an interest component. The Company makes cash payments for a significant portion of its incentive compensation during the first three months of each calendar year with respect to the prior year’s results. Summary of Cash Flows: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in millions)"],["Cash Provided By (Used In):"],["Operating activities:"],["Net income","","$","392","","","$","543","","","$","403"],["Adjustments to reconcile net income to net cash provided by operating activities (a)","","","551","","","","623","","","","495"],["Other operating activities (b)","","","(110",")","","","(300",")","","","(322",")"],["Net cash provided by operating activities","","","833","","","","866","","","","576"],["Investing activities","","","(56",")","","","(39",")","","","(63",")"],["Financing activities (c)","","","(1,382",")","","","196","","","","(547",")"],["Effect of exchange rate changes","","","(186",")","","","(162",")","","","147"],["Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash","","","(791",")","","","861","","","","113"],["Cash and Cash Equivalents and Restricted Cash (d):"],["Beginning of Period","","","3,430","","","","2,569","","","","2,456"],["End of Period","","$","2,639","","","$","3,430","","","$","2,569"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(a)","Consists of the following:"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","($ in millions)"],["Depreciation and amortization of property","","$","42","","","$","38","","","$","35"],["Noncash lease expense","","","61","","","","74","","","","65"],["Currency translation adjustment reclassification","","","-","","","","24","","","","-"],["Amortization of deferred expenses and share-based incentive compensation","","","406","","","","394","","","","347"],["Deferred tax provision","","","43","","","","91","","","","47"],["Amortization of intangible assets related to acquisitions","","","-","","","","-","","","","2"],["Provision (benefit) pursuant to tax receivable agreement","","","(1",")","","","2","","","","(1",")"],["Total","","$","551","","","$","623","","","$","495"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(b)","Includes net changes in operating assets and liabilities."]] [[/GREPCENT_TABLE]] 56 [[GREPCENT_TABLE]] [["(c)","Consists primarily of purchases of shares of common stock, tax withholdings related to the settlement of vested RSUs, vested RSAs and vested PRSUs, common stock dividends, changes in customer deposits, distributions to noncontrolling interest holders, and in 2021, contributions from redeemable noncontrolling interests and payments of underwriting fees and other offering costs associated with the LGAC IPO."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(d)","Consists of cash and cash equivalents, deposits with banks and short-term investments and restricted cash."]] [[/GREPCENT_TABLE]] Liquidity and Capital Resources The Company’s liquidity and capital resources are derived from operating activities, financing activities and equity offerings. Operating Activities Net revenue, operating income and cash receipts fluctuate significantly between periods and could be affected by various risks and uncertainties. In the case of Financial Advisory, fee receipts are generally dependent upon the successful completion of client transactions, the occurrence and timing of which is irregular and not subject to Lazard’s control. Liquidity is significantly impacted by cash payments for incentive compensation, a significant portion of which are made during the first three months of the year. As a consequence, cash on hand generally declines in the beginning of the year and gradually builds over the remainder of the year. We also pay certain tax advances during the year on behalf of certain managing directors, which serve to reduce their respective incentive compensation payments. We expect this seasonal pattern of cash flow to continue. Liquidity is also affected by the level of deposits and other customer payables, principally at LFB. To the extent that such deposits and other customer payables rise or fall, this has a corresponding impact on liquidity held at LFB, with the majority of such amounts generally being recorded in “deposits with banks and short-term investments”. In the year ended December 31, 2022, as reflected on the consolidated statements of financial condition, both “deposits with banks and short-term investments” and “deposits and other customer payables” decreased as compared to December 31, 2021, and reflect the level of LFB customer-related demand deposits, primarily from clients and funds managed by LFG. Lazard’s consolidated financial statements are presented in U.S. Dollars. Many of Lazard’s non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. Dollar, generally the currency of the country in which such subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. Dollars at the respective balance sheet date exchange rates, while revenue and expenses are translated at average exchange rates during the year based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of stockholders’ equity. Foreign currency remeasurement gains and losses on transactions in non-functional currencies are included on the consolidated statements of operations. We regularly monitor our liquidity position, including cash levels, lease obligations, investments in U.S. Treasury securities, credit lines, principal investment commitments, interest and principal payments on debt, capital expenditures, dividend payments, purchases of shares of common stock and matters relating to liquidity and to compliance with regulatory net capital requirements. At December 31, 2022, Lazard had approximately $1,235 million of cash, including approximately $655 million held at Lazard’s operations outside the U.S. Lazard provides for income taxes on substantially all of its foreign earnings. We expect that no material amount of additional taxes would be recognized upon receipt of dividends or distributions of such earnings from our foreign operations. As of December 31, 2022, the Company’s remaining lease obligations were $79 million for 2023, $143 million from 2024 through 2025, $116 million from 2026 through 2027 and $264 million through 2033. As of December 31, 2022, Lazard had approximately $204 million in unused lines of credit available to it, including a $200 million, three-year, senior revolving credit facility with a group of lenders that expires in July 2023 (the “Amended and Restated Credit Agreement”). 57 The Amended and Restated Credit Agreement contains customary terms and conditions, including limitations on consolidations, mergers, indebtedness and certain payments, as well as financial condition covenants relating to leverage and interest coverage ratios. Lazard Group’s obligations under the Amended and Restated Credit Agreement may be accelerated upon customary events of default, including non-payment of principal or interest, breaches of covenants, cross-defaults to other material debt, a change in control and specified bankruptcy events. Borrowings under the Amended and Restated Credit Agreement generally will bear interest at LIBOR plus an applicable margin for specific interest periods determined based on Lazard Group’s highest credit rating from an internationally recognized credit agency. As long as the lenders’ commitments remain in effect, any loan pursuant to the Amended and Restated Credit Agreement remains outstanding and unpaid or any other amount is due to the lending bank group, the Amended and Restated Credit Agreement includes financial covenants that require that Lazard Group not permit (i) its Consolidated Leverage Ratio (as defined in the Amended and Restated Credit Agreement) for the 12-month period ending on the last day of any fiscal quarter to be greater than 3.25 to 1.00, provided that the Consolidated Leverage Ratio may be greater than 3.25 to 1.00 for two (consecutive or nonconsecutive) quarters so long as it is not greater than 3.50 to 1.00 on the last day of any such quarter, or (ii) its Consolidated Interest Coverage Ratio (as defined in the Amended and Restated Credit Agreement) for the 12-month period ending on the last day of any fiscal quarter to be less than 3.00 to 1.00. For the 12-month period ended December 31, 2022, Lazard Group was in compliance with such ratios, with its Consolidated Leverage Ratio being 1.63 to 1.00 and its Consolidated Interest Coverage Ratio being 14.82 to 1.00. In any event, no amounts were outstanding under the Amended and Restated Credit Agreement as of December 31, 2022. In addition, the Amended and Restated Credit Agreement contains certain other covenants (none of which relate to financial condition), events of default and other customary provisions and also contains customary LIBOR-replacement mechanics. At December 31, 2022, the Company was in compliance with all of these provisions. Lazard’s annual cash flow generated from operations historically has been sufficient to enable it to meet its annual obligations. We believe that our cash flows from operating activities should be sufficient for us to fund our current obligations for the next 12 months. See also Notes 13, 15, 16, 17 and 19 of Notes to Consolidated Financial Statements regarding information in connection with commitments, incentive plans, employee benefit plans, income taxes and tax receivable agreement obligations, respectively. Financing Activities The table below sets forth our corporate indebtedness as of December 31, 2022 and 2021. The agreements with respect to this indebtedness are discussed in more detail in our consolidated financial statements and related notes included elsewhere in this Form 10-K. [[GREPCENT_TABLE]] [["","","","","Outstanding as of"],["","","","","December 31, 2022","","","December 31, 2021"],["Senior Debt","","Maturity Date","","Principal","","","Unamortized Debt Costs","","","Carrying Value","","","Principal","","","Unamortized Debt Costs","","","Carrying Value"],["","","","","($ in millions)"],["Lazard Group 2025 Senior Notes","","2025","","$","400.0","","","$","1.0","","","$","399.0","","","$","400.0","","","$","1.5","","","$","398.5"],["Lazard Group 2027 Senior Notes","","2027","","","300.0","","","","1.6","","","","298.4","","","","300.0","","","","2.0","","","","298.0"],["Lazard Group 2028 Senior Notes","","2028","","","500.0","","","","4.9","","","","495.1","","","","500.0","","","","5.7","","","","494.3"],["Lazard Group 2029 Senior Notes","","2029","","","500.0","","","","4.8","","","","495.2","","","","500.0","","","","5.6","","","","494.4"],["","","","","$","1,700.0","","","$","12.3","","","$","1,687.7","","","$","1,700.0","","","$","14.8","","","$","1,685.2"]] [[/GREPCENT_TABLE]] 58 The indenture and supplemental indentures relating to Lazard Group’s senior notes contain certain covenants (none of which relate to financial condition), events of default and other customary provisions. At December 31, 2022, the Company was in compliance with all of these provisions. We may, to the extent required and subject to restrictions contained in our financing arrangements, use other financing sources, which may cause us to be subject to additional restrictions or covenants. See Note 12 of Notes to Consolidated Financial Statements for additional information regarding senior debt. Stockholders’ Equity At December 31, 2022, total stockholders’ equity was $675 million, as compared to $1,078 million and $999 million at December 31, 2021 and 2020, respectively, including $556 million, $975 million and $912 million attributable to Lazard Ltd on the respective dates. The net activity in stockholders’ equity during the years ended December 31, 2022 and 2021 is reflected in the table below: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2022","","","2021"],["","","($ in millions)"],["Stockholders\u2019 Equity - Beginning of Year","","$","1,078","","","$","999"],["Increase (decrease) due to:"],["Net income (a)","","","378","","","","546"],["Other comprehensive income (loss)","","","(72",")","","","15"],["Amortization of share-based incentive compensation","","","241","","","","234"],["Purchase of common stock","","","(692",")","","","(406",")"],["Settlement of share-based incentive compensation (b)","","","(55",")","","","(70",")"],["Common stock dividends","","","(182",")","","","(196",")"],["Change in redemption value of redeemable noncontrolling interests","","","6","","","","(44",")"],["Distributions to non-controlling interests, net","","","(32",")","","","(11",")"],["Other - net","","","5","","","","11"],["Stockholders\u2019 Equity - End of Year","","$","675","","","$","1,078"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(a)","Excludes net income (loss) associated with redeemable noncontrolling interests of $14 million and $(4) million in 2022 and 2021, respectively."]] [[/GREPCENT_TABLE]] (b)     The tax withholding portion of share-based compensation is settled in cash, not shares. The Board of Directors of Lazard has issued a series of authorizations to repurchase common stock, which help offset the dilutive effect of our share-based incentive compensation plans. During a given year the Company intends to repurchase at least as many shares as it expects to issue pursuant to such compensation plans in respect of year-end incentive compensation attributable to the prior year. The rate at which the Company purchases shares in connection with this annual objective may vary from period to period due to a variety of factors. Purchases with respect to such program are set forth in the table below: [[GREPCENT_TABLE]] [["Year Ended December 31:","","Number of Shares","","","Average Price Per Share"],["2020","","","2,912,035","","","$","32.70"],["2021","","","9,124,295","","","$","44.51"],["2022","","","19,666,798","","","$","35.17"]] [[/GREPCENT_TABLE]] 59 As of December 31, 2022, a total of $302 million of share repurchase authorization remained available under Lazard Ltd’s share repurchase program, which authorization will expire on December 31, 2024. During the year ended December 31, 2022, Lazard Ltd had in place trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), pursuant to which it effected stock repurchases in the open market. On February 1, 2023, the Board of Directors of Lazard declared a quarterly dividend of $0.50 per share on our common stock. The dividend is payable on February 24, 2023, to stockholders of record on February 13, 2023. See Notes 14 and 15 of Notes to Consolidated Financial Statements for additional information regarding Lazard’s stockholders’ equity and incentive plans, respectively. Regulatory Capital We actively monitor our regulatory capital base. Our principal subsidiaries are subject to regulatory requirements in their respective jurisdictions to ensure their general financial soundness and liquidity, which require, among other things, that we comply with rules regarding certain minimum capital requirements, record-keeping, reporting procedures, relationships with customers, 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. See Note 20 of Notes to Consolidated Financial Statements for further information. These regulations differ in the U.S., the U.K., France and other countries in which we operate. Our capital structure is designed to provide each of our subsidiaries with capital and liquidity consistent with its business and regulatory requirements. For a discussion of regulations relating to us, see Item 1, “Business—Regulation” included in this Form 10-K. Critical Accounting Policies and Estimates The preparation of Lazard’s consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, Lazard evaluates its estimates, including those related to revenue recognition, the allowance for credit losses, income taxes (including the impact on the tax receivable agreement obligation), and goodwill. Lazard bases these estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments, including judgments regarding the carrying values of assets and liabilities, that are not readily apparent from other sources. Actual results may differ from these estimates. The following is a description of Lazard’s critical accounting estimates and judgments used in the preparation of its consolidated financial statements. Revenue Recognition Lazard generates substantially all of its revenue from providing Financial Advisory and Asset Management services to clients. Lazard recognizes revenue in accordance with the criteria in Note 2 of Notes to Consolidated Financial Statements. Assessment of these criteria requires the application of judgment in determining the timing and amount of revenue recognized, including the probability of collection of fees. Allowance for Credit Losses We maintain an allowance for credit losses to provide coverage for estimated losses from our receivables. We determine the adequacy of the allowance under the current expected credit losses (“CECL”) guidance by (i) applying a bad debt charge-off rate based on historical charge-off experience; (ii) estimating the probability of loss based on our analysis of the client’s creditworthiness and specifically reserve against exposures where we determine the receivables are uncollectible, which may include situations where a fee is in dispute or litigation has 60 commenced; and (iii) performing qualitative assessments to monitor economic risks that may require additional adjustments. The allowance for credit losses involves judgment including incorporation of historical loss experience and assessment of risk characteristics of our clients. The bad debt charge-off rate based on historical charge-off experience was an average annual rate estimated using the most recent two years of charge-off data. When assessing risk characteristics of individual clients, we considered the macroeconomic environment in the local market, our collection experience and recent communication with the client, as well as any potential future engagement with the client. We have also considered risks associated with the COVID-19 pandemic that started in early 2020 and have made necessary adjustments to the allowance for risks associated with certain clients that had been adversely impacted. Income Taxes As part of the process of preparing our consolidated financial statements, we estimate our income taxes for each of our tax-paying entities in its respective jurisdiction. In addition to estimating actual current tax liabilities for these jurisdictions, we also must account for the tax effects of differences between the financial reporting and tax reporting of items, such as basis adjustments, compensation and benefits expense, and depreciation and amortization. Differences which are temporary in nature result in deferred tax assets and liabilities. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, any valuation allowance recorded against our deferred tax assets and our unrecognized tax benefits. We recognize a deferred tax asset if it is more likely than not (defined as a likelihood of greater than 50%) that a tax benefit will be accepted by the relevant taxing authority. The measurement of deferred tax assets and liabilities is based upon currently enacted tax rates in the applicable jurisdictions. At December 31, 2022, on a consolidated basis, we recorded gross deferred tax assets of approximately $598 million, with such amount partially offset by a valuation allowance of approximately $88 million (as described below). Subsequent to the initial recognition of deferred tax assets, we also must continually assess the likelihood that such deferred tax assets will be realized. If we determine that we may not fully derive the benefit from a deferred tax asset, we consider whether it would be appropriate to apply a valuation allowance against the applicable deferred tax asset, taking into account all available information. The ultimate realization of a deferred tax asset for a particular entity depends, among other things, on the generation of taxable income by such entity in the applicable jurisdiction. We consider multiple possible sources of taxable income when assessing a valuation allowance against a deferred tax asset.  See Note 2 of Notes to Consolidated Financial Statements for additional information on sources of taxable income, and the information considered when assessing whether a valuation allowance is required. The weight we give to any particular item is, in part, dependent upon the degree to which it can be objectively verified. We give greater weight to the recent results of operations of a relevant entity. Pre-tax operating losses on a three-year cumulative basis or lack of sustainable profitability are considered objectively verifiable evidence and will generally outweigh a projection of future taxable income. Certain of our tax-paying entities have individually experienced losses on a cumulative three-year basis or have tax attributes that may expire unused. In addition, some of our tax-paying entities have recorded a valuation allowance on substantially all of their deferred tax assets due to the combined effect of operating losses in certain subsidiaries of these entities as well as foreign taxes that together substantially offset any U.S. tax liability. Taking into account all available information, we cannot determine that it is more likely than not that deferred tax assets held by these entities will be realized. Consequently, we have recorded valuation allowances on $88 million of deferred tax assets held by these entities as of December 31, 2022. 61 We record tax positions taken or expected to be taken in a tax return based upon our estimates regarding the amount that is more likely than not to be realized or paid, including in connection with the resolution of any related appeals or other legal processes. Accordingly, we recognize liabilities for certain unrecognized tax benefits based on the amounts that are more likely than not to be settled with the relevant taxing authority. Such liabilities are evaluated periodically as new information becomes available and any changes in the amounts of such liabilities are recorded as adjustments to “income tax expense.” Liabilities for unrecognized tax benefits involve significant judgment and the ultimate resolution of such matters may be materially different from our estimates. In addition to the discussion above regarding deferred tax assets and associated valuation allowances, as well as unrecognized tax benefit liability estimates, other factors affect our provision for income taxes, including changes in the geographic mix of our business, the level of our annual pre-tax income, transfer pricing and intercompany transactions. See Item 1A, “Risk Factors” and Note 17 of Notes to Consolidated Financial Statements for additional information related to income taxes. Amended and Restated Tax Receivable Agreement The Second Amended and Restated Tax Receivable Agreement, dated as of October 26, 2015 (the “TRA”), between Lazard and LTBP Trust (the “Trust”) provides for payments by our subsidiaries to the owners of the Trust, who include certain of our executive officers. The amount of the TRA liability is an undiscounted amount based upon current tax laws and the structure of the Company and various assumptions regarding potential future operating profitability. The assumptions reflected in the estimate involve significant judgment, and if our structure or income assumptions were to change, we could be required to accelerate payments under the TRA. As such, the actual amount and timing of payments under the TRA could differ materially from our estimates. See Note 19 of Notes to Consolidated Financial Statements for additional information regarding the TRA. The cumulative liability relating to our obligations under the TRA recorded as of December 31, 2022 and 2021 was $191 million and $213 million, respectively, and is recorded in “tax receivable agreement obligation” on the consolidated statements of financial condition. The Company currently expects that approximately $32 million of such obligation will be paid within the next 12 months. 62 Goodwill In accordance with current accounting guidance, goodwill has an indefinite life and is tested for impairment annually, as of November 1, or more frequently if circumstances indicate impairment may have occurred. The goodwill associated with each business combination is allocated to the related reporting units for impairment testing. The Company performs a qualitative evaluation about whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount in lieu of actually calculating the fair value of the reporting unit. The qualitative evaluation includes significant judgment on the business outlook assumptions of each reporting unit based on historical data, current economic conditions, stock performance and industry trends. The goodwill impairment test as of November 1, 2022 indicated that no reporting units were at risk of impairment. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding goodwill. Consolidation The consolidated financial statements include entities in which Lazard has a controlling interest. Lazard determines whether it has a controlling interest in an entity by first evaluating whether the entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”) under U.S. GAAP. [[GREPCENT_TABLE]] [["","\u2022","Voting Interest Entities. VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance itself independently and (ii) the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity\u2019s activities. Lazard is required to consolidate a VOE if it holds a majority of the voting interest in such VOE."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Variable Interest Entities. VIEs are entities that lack one or more of the characteristics of a VOE. If Lazard has a variable interest, or a combination of variable interests, in a VIE, it is required to analyze whether it needs to consolidate such VIE. Lazard is required to consolidate a VIE if we are the primary beneficiary having (i) the power to direct the activities of the VIE that most significantly impact the VIE\u2019s economic performance and (ii) the obligation to absorb losses of, or receive benefits from, the VIE that could be potentially significant to the VIE."]] [[/GREPCENT_TABLE]] Lazard’s involvement with various entities that are VOEs or VIEs primarily arises from LFI investments, investment management contracts with fund entities in our Asset Management business and LGAC. Lazard is not required to consolidate such entities because, with the exception of certain seed and LFI investments, and LGAC, as discussed below, we do not hold more than an inconsequential equity interest in such entities and we do not hold other variable interests (including our investment management agreements, which do not meet the definition of variable interests) in such entities. Lazard makes seed and LFI investments in certain entities that are considered VOEs and VIEs and often require consolidation as a result of our investment. The impact of seed and LFI investment entities that require consolidation on the consolidated financial statements, including any consolidation or deconsolidation of such entities, is not material to our financial statements. Our exposure to loss from entities in which we have made such investments is limited to the extent of our investment in, or investment commitment to, such entities. Generally, when the Company initially invests to seed an investment entity, the Company is the majority owner of the entity. Our majority ownership in seed investment entities represents a controlling interest, except when we are the general partner in such entities and the third-party investors have the right to replace the general partner. To the extent material, we consolidate seed and LFI investment entities in which we own a controlling interest, and we would deconsolidate any such entity when we no longer have a controlling interest in such entity. Seed investments held in entities in which the Company maintained a controlling interest were $112 million in thirteen entities as of December 31, 2022, as compared to $74 million in ten entities as of December 31, 2021. LFI investments held in entities in which the Company maintained a controlling interest were $139 million in nine entities as of December 31, 2022, as compared to $175 million in ten entities as of December 31, 2021. 63 As of December 31, 2022 and 2021, the Company did not consolidate any seed investment entities or LFI investment entities, with the exception of the consolidation of certain LFI funds (see Note 22 of Notes to Consolidated Financial Statements). As such, seed investments and substantially all of LFI investments included in “investments” on the consolidated statements of financial condition represented the Company’s economic interest in the seed and LFI investments. See Note 1 of Notes to Consolidated Financial Statements for additional information on the consolidation of LGAC. Risk Management Investments Investments consist primarily of debt and equity securities, and interests in alternative investment, debt, equity and private equity funds. These investments are carried at fair value on the consolidated statements of financial condition and any increases or decreases in the fair value of these investments are reflected in earnings. The fair value of investments is generally based upon market prices or the net asset value (“NAV”) or its equivalent for investments in funds. Investments also include those investments accounted for under the equity method of accounting. Any increases or decreases in the Company’s share of net income or losses pertaining to its equity method investments are reflected in earnings. See Note 6 of Notes to Consolidated Financial Statements for additional information on the measurement of the fair value of investments. Lazard is subject to market and credit risk on investments held. As such, gains and losses on investment positions held, which arise from sales or changes in the fair value of the investments, are not predictable and can cause periodic fluctuations in net income. Data relating to investments is set forth below: [[GREPCENT_TABLE]] [["","","December 31,"],["","","2022","","","2021"],["","","($ in thousands)"],["Seed investments by asset class:"],["Equities (a)","","$","126,632","","","$","121,627"],["Fixed income","","","14,774","","","","10,343"],["Alternative investments","","","31,634","","","","30,495"],["Private equity","","","18,508","","","","-"],["Total seed investments","","","191,548","","","","162,465"],["Other investments owned:"],["Private equity","","","18,876","","","","30,127"],["U.S. Treasury securities","","","-","","","","299,990"],["Fixed income and other","","","23,337","","","","24,226"],["Total other investments owned","","","42,213","","","","354,343"],["Subtotal","","","233,761","","","","516,808"],["Add:"],["Private equity consolidated, not owned","","","16,438","","","","16,462"],["Equity method","","","15,481","","","","16,250"],["LFI","","","433,297","","","","457,819"],["Total investments","","$","698,977","","","$","1,007,339"]] [[/GREPCENT_TABLE]] 64 [[GREPCENT_TABLE]] [["(a)","At December 31, 2022 and 2021, seed investments in directly owned equity securities were invested as follows:"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","December 31,"],["","","2022","","","2021"],["Percentage invested in:"],["Financials","","","15","%","","","16","%"],["Consumer","","","34","","","","32"],["Industrial","","","12","","","","14"],["Technology","","","17","","","","26"],["Other","","","22","","","","12"],["Total","","","100","%","","","100","%"]] [[/GREPCENT_TABLE]] The Company makes investments primarily to seed strategies in our Asset Management business or to reduce exposure arising from LFI and other similar deferred compensation arrangements. The Company measures its net economic exposure to market and other risks arising from investments that it owns, excluding (i) investments held in connection with LFI and other similar deferred compensation arrangements, (ii) investments in funds owned entirely by the noncontrolling interest holders of certain acquired entities and (iii) investments accounted for under the equity method of accounting. The market risk associated with investments held in connection with LFI and other similar deferred compensation arrangements is equally offset by the market risk associated with the derivative liability with respect to awards expected to vest. The Company is subject to market risk associated with any portion of such investments that employees may forfeit. See “—Risk Management—Risks Related to Derivatives” for risk management information relating to derivatives. Risk sensitivities include the effects of economic hedging. For equity market price risk, investment portfolios and their corresponding hedges are beta-adjusted to the All-Country World equity index. Fair value and sensitivity measurements presented herein are based on various portfolio exposures at a particular point in time and may not be representative of future results. Risk exposures may change as a result of ongoing portfolio activities and changing market conditions, among other things. Equity Market Price Risk—At December 31, 2022 and 2021, the Company’s exposure to equity market price risk in its investment portfolio, which primarily relates to investments in equity securities, equity funds and hedge funds, was approximately $147 million and $138 million, respectively. The Company hedges market exposure arising from a significant portion of our equity investment portfolios by entering into total return swaps. The Company estimates that a hypothetical 10% adverse change in market prices would result in a net decrease of approximately $2.0 million and $0.3 million in the carrying value of such investments as of December 31, 2022 and 2021, respectively, including the effect of the hedging transactions. Interest Rate/Credit Spread Risk—At December 31, 2022 and 2021, the Company’s exposure to interest rate and credit spread risk in its investment portfolio related to investments in debt securities or funds which invest primarily in debt securities was $53 million and $351 million, respectively. The Company hedges market exposure arising from a portion of our debt investment portfolios by entering into total return swaps. The Company estimates that a hypothetical 100 basis point adverse change in interest rates or credit spreads would result in a decrease of approximately $0.1 million and $0.6 million in the carrying value of such investments as of December 31, 2022 and 2021, respectively, including the effect of the hedging transactions. Foreign Exchange Rate Risk—At December 31, 2022 and 2021, the Company’s exposure to foreign exchange rate risk in its investment portfolio, which primarily relates to investments in foreign currency denominated equity and debt securities and, at December 31, 2022, private equity investments, was $63 million and $68 million, respectively. A significant portion of the Company’s foreign currency exposure related to our equity and debt investment portfolios is hedged through the aforementioned total return swaps. The Company estimates that a 10% adverse change in foreign exchange rates versus the U.S. Dollar would result in a decrease of approximately $3.0 million and $2.4 million in the carrying value of such investments as of December 31, 2022 and 2021, respectively, including the effect of the hedging transactions. 65 Private Equity—The Company invests in private equity primarily as a part of its co-investment activities and in connection with certain legacy businesses. At December 31, 2022 and 2021, the Company’s exposure to changes in fair value of such investments was approximately $37 million and $30 million, respectively. The Company estimates that a hypothetical 10% adverse change in fair value would result in a decrease of approximately $3.7 million and $3.0 million in the carrying value of such investments as of December 31, 2022 and 2021, respectively. For additional information regarding risks associated with our investments, see Item 1A, “Risk Factors—Other Business Risks—Our results of operations may be affected by fluctuations in the fair value of positions held in our investment portfolios.” Risks Related to Receivables We maintain an allowance for credit losses to provide coverage for expected losses from our receivables. We determine the adequacy of the allowance by estimating the expected credit losses based on our analysis of the client’s creditworthiness and specifically provide for exposures where we determine the receivables are uncollectible. At December 31, 2022, total receivables amounted to $653 million, net of an allowance for credit losses of $18 million. As of that date, Financial Advisory and Asset Management fees, and customers and other receivables comprised 75% and 25% of total receivables, respectively. At December 31, 2021, total receivables amounted to $806 million, net of an allowance for credit losses of $34 million. As of that date, Financial Advisory and Asset Management fees, and customers and other receivables comprised 83% and 17% of total receivables, respectively. See also “Critical Accounting Policies and Estimates—Revenue Recognition” above and Note 4 of Notes to Consolidated Financial Statements for additional information regarding receivables. LFG and LFB offer wealth management and banking services to high net worth individuals and families. At December 31, 2022 and 2021, customers and other receivables included $129 million and $122 million, respectively, of LFB loans. Such loans were fully collateralized and closely monitored for counterparty creditworthiness. Therefore, there was no allowance for credit losses required at those dates related to such receivables. Credit Concentrations The Company monitors its exposures to individual counterparties and diversifies where appropriate to reduce the exposure to concentrations of credit. Risks Related to Derivatives Lazard enters into forward foreign currency exchange contracts and interest rate swaps to hedge exposures to currency exchange rates and interest rates and uses total return swap contracts on various equity and debt indices to hedge a portion of its market exposure with respect to certain seed investments related to our Asset Management business. Derivative contracts are recorded at fair value. Net derivative assets amounted to $15 million and $1 million at December 31, 2022 and 2021, respectively, and net derivative liabilities, excluding the derivative liability arising from the Company’s obligation pertaining to LFI and other similar deferred compensation arrangements and the derivative liability for warrants exercisable for LGAC Class A ordinary shares that were issued in connection with the LGAC IPO (the “LGAC Warrants”), amounted to $1 million and $3 million at December 31, 2022 and 2021, respectively. The Company records the LGAC Warrants as derivative liabilities at fair value, which amounted to $0.1 million and $10 million at December 31, 2022 and 2021, respectively, with remeasurement gains and losses recorded in earnings. See Note 1 of Notes to Consolidated Financial Statements. The Company also records derivative liabilities relating to its obligations pertaining to LFI awards and other similar deferred compensation arrangements, the fair value of which is based on the value of the underlying investments, adjusted for estimated forfeitures. Changes in the fair value of the derivative liabilities are equally offset by the changes in the fair value of investments which are expected to be delivered upon settlement of LFI 66 awards. Derivative liabilities relating to LFI amounted to $326 million and $359 million at December 31, 2022 and 2021, respectively. Risks Related to Cash and Cash Equivalents and Corporate Indebtedness A significant portion of the Company’s indebtedness has fixed interest rates, while its cash and cash equivalents generally have market interest rates. Based on account balances as of December 31, 2022, Lazard estimates that its annual operating income relating to cash and cash equivalents would increase by approximately $12 million in the event interest rates were to increase by 1% and decrease by approximately $12 million if rates were to decrease by 1%. As of December 31, 2022, the Company’s cash and cash equivalents totaled approximately $1,235 million. Substantially all of the Company’s cash and cash equivalents were invested in (i) highly liquid institutional money market funds (a significant majority of which were invested solely in U.S. Government or agency money market funds), (ii) in short-term interest bearing and non-interest bearing accounts at a number of leading banks throughout the world, and (iii) in short-term certificates of deposit from such banks. Cash and cash equivalents are constantly monitored. On a regular basis, management reviews its investment profile as well as the credit profile of its list of depositor banks in order to adjust any deposit or investment thresholds as necessary. Operational Risk Operational risk is inherent in all of our businesses and may, for example, manifest itself in the form of errors, breaches in the system of internal controls, employee misconduct, business interruptions, fraud, including fraud perpetrated by third parties, legal actions due to operating deficiencies, noncompliance or cyber attacks. The Company maintains a framework including policies and a system of internal controls designed to monitor and manage operational risk and provide management with timely and accurate information. Management within each of our operating subsidiaries is primarily responsible for its operational risk programs. The Company has in place business continuity and disaster recovery programs that manage its capabilities to provide services in the case of a disruption. We purchase insurance policies designed to help protect the Company against accidental loss and losses that may significantly affect our financial objectives, personnel, property or our ability to continue to meet our responsibilities to our various stakeholder groups. See Item 1A, “Risk Factors” above for more information regarding operational risk in our business.