Houlihan Lokey's Diversified Strength: Capitalizing on Market Shifts with Strategic Acumen (NYSE:HLI) - HLI Stock Research Report

## Executive Summary / Key Takeaways * Record-Setting Performance & Diversified Resilience: Houlihan Lokey achieved record annual revenues of $2.39 billion in fiscal year 2025, driven by its diversified business model across Corporate Finance, Financial Restructuring, and Financial and Valuation Advisory, which allows it to thrive in volatile markets. * Strategic Acquisitions & Talent Growth: The firm's aggressive acquisition strategy, including Triago, Prytania Solutions, and Waller Helms, significantly expanded its industry, geographic, and technological reach, complementing robust organic MD hiring and internal promotions. * Technological Edge in Valuation: The integration of Prytania Solutions' "superior technology" for structured product valuation enhances HLI's non-cyclical Financial and Valuation Advisory segment, providing a competitive moat through tech-enabled precision and efficiency. * Elevated Restructuring & M&A Rebound: Financial Restructuring is expected to remain elevated throughout fiscal 2026 due to persistent high interest rates, while Corporate Finance and Financial and Valuation Advisory anticipate continued year-over-year growth as M&A markets steadily improve, particularly post-Labor Day. * Disciplined Financial Management: HLI maintains a long-term adjusted compensation expense ratio target of 61.5% and projects a fiscal 2026 adjusted effective tax rate between 25% and 26%, alongside a recently increased quarterly dividend, demonstrating strong capital allocation. ## A Foundation of Strategic Diversification Houlihan Lokey, Inc., established in 1972, has evolved into a global investment banking powerhouse, operating through more than thirty offices across the Americas, Europe, the Middle East, and Asia-Pacific. The firm's core business is built upon three distinct yet synergistic segments: Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA). This diversified structure is not merely an operational choice but a foundational strategic pillar, enabling HLI to advise both "winners and losers" across varying market conditions.

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\ The company's history is marked by a consistent focus on the mid-cap market, a segment that has historically demonstrated greater resilience in M&A volumes compared to large-cap transactions. This strategic positioning, combined with a relentless pursuit of talent and strategic acquisitions, has been instrumental in shaping HLI's competitive landscape. The firm's ability to adapt to market complexities and uncertainties, as evidenced by its performance in dynamic macro environments, underscores the strength of its business model. ## Technological Edge in Valuation and Advisory A critical, yet often understated, component of Houlihan Lokey's competitive advantage lies in its technological differentiation, particularly within its Financial and Valuation Advisory (FVA) segment. The acquisition of Prytania Solutions in the second quarter of fiscal year 2025 introduced a "tech-enabled valuation platform" specializing in structured products, based in the U.K. This integration has significantly enhanced HLI's portfolio valuation capabilities, a "constant grower" within its non-cyclical FVA business. Prytania's "superior technology" provides HLI with a distinct edge, offering greater precision and efficiency in complex asset valuations. While specific quantitative metrics for its performance benefits are not publicly detailed, the strategic intent is clear: to leverage technology for enhanced service delivery, particularly in non-U.S. geographies where many of Prytania's clients are focused. This technological infusion not only strengthens HLI's competitive moat against broader advisory firms but also positions it to capitalize on the increasing demand for sophisticated, tech-driven valuation services, contributing to higher-value deals and improved profitability. The firm believes there may be opportunities to deploy this technology in other areas over time, indicating a long-term technological roadmap aimed at continuous innovation. ## Competitive Landscape and Strategic Positioning Houlihan Lokey operates in a highly competitive investment banking and financial advisory market, vying with independent advisory firms such as Evercore (TICKER:EVR), Lazard (TICKER:LAZ), PJT Partners (TICKER:PJT), and Moelis & Company (TICKER:MC). HLI's strategic focus on the mid-cap market, coupled with its deep expertise in financial restructuring and valuation, provides distinct competitive advantages. While larger bulge-bracket banks may offer greater scale and broader capital markets execution, HLI differentiates itself through specialized, client-centric services. HLI's strength in financial restructuring, for instance, often leads its peers in advisory depth, offering tailored solutions in complex debt restructurings. Its valuation advisory precision, bolstered by tech-enabled platforms like Prytania, enhances its market positioning against firms like Evercore and Moelis, which may have broader offerings but potentially less specialized depth in this niche. The firm's Capital Solutions Group, rebranded to reflect its comprehensive private capital offerings, is considered the largest in its space, benefiting from the significant growth in private capital as an asset class. This group primarily competes with other mid-cap companies, allowing HLI to maintain its focus without direct, intense competition from bulge-bracket firms entering the space. ## Fiscal 2025: A Year of Record Achievements Fiscal year 2025 marked a historic period for Houlihan Lokey, with the firm achieving its highest annual revenue ever at $2.39 billion, representing a 25% increase over the prior year. This performance surpassed its previous high-water mark from fiscal year 2022, underscoring the effectiveness of its diversified strategy. Both the Financial Restructuring and Financial and Valuation Advisory segments delivered record revenues for the year, while Corporate Finance achieved its second-best year.

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\ The firm's strategic acquisitions played a significant role in this growth. Fiscal year 2025 was the most active year for acquisitions, expanding HLI's industry, geographic, and product reach. These included the integration of Triago into Capital Solutions, Prytania Solutions into FVA, and Waller Helms Advisors, which added 48 financial professionals and 13 managing directors to its financial services industry group, particularly in insurance and wealth management. The firm also continued its robust talent acquisition, hiring 37 managing directors and promoting 16 colleagues to Managing Director in the fiscal year. ## Q1 Fiscal 2026: Momentum Continues Houlihan Lokey commenced fiscal year 2026 with strong momentum, reporting revenues of $605 million for the first quarter, an 18% increase year-over-year. Adjusted earnings per share surged by 75% to $2.14, reflecting solid performance across all business lines. The Corporate Finance segment saw revenues climb 21% to $399 million, primarily driven by an increase in the average transaction fee on closed deals, despite muted activity from financial sponsors. Financial Restructuring revenues increased 9% to $128 million, benefiting from a higher number of closed transactions and increased average transaction fees, supported by persistently elevated interest rates and macro uncertainty. The Financial and Valuation Advisory segment grew 16% to $79 million, propelled by a 13% increase in fee events and continued strength in its non-cyclical services, alongside improving M&A conditions in the U.S. Operating expenses reflected this growth. Employee compensation and benefits increased 19% to $392.8 million, maintaining the adjusted compensation expense ratio at a targeted 61.5%. Non-compensation expenses rose 38% to $122.7 million, largely due to the inaugural Houlihan Lokey ONE Conference, a major brand-building event that showcased the firm's "one firm approach and global scope" to over 4,000 attendees. The adjusted effective tax rate for Q1 FY26 was negative 0.8%, influenced by increased stock-based compensation deductions and a policy change in how these are accounted for in the adjusted rate. ## Financial Health and Capital Allocation As of June 30, 2025, HLI maintained a robust liquidity position with approximately $867 million in unrestricted cash and investment securities. While cash declined due to significant fiscal 2025 bonus payments, the firm's liquidity remains strong, supported by client cash receipts typically collected within 60 days. The company's syndicated revolving line of credit, with a borrowing capacity of up to $100 million (expandable to $200 million), had no outstanding principal, indicating prudent debt management.

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\ Houlihan Lokey's capital allocation strategy prioritizes dividends, followed by acquisitions, and then maintaining share balance. The board recently approved a 5.3% increase in the quarterly cash dividend to $0.60 per share, payable in September 2025, signaling confidence in future cash flows. Share repurchases, including 763,553 Class B common shares to cover tax obligations and 48,828 Class A common shares under its program, demonstrate a commitment to offsetting dilution.

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\ ## Outlook and Key Risks Management expresses confidence in its fiscal year 2026 outlook, anticipating continued momentum. Corporate Finance is "cautiously optimistic" for sustained growth, with expectations for increased activity post-Labor Day, particularly from financial sponsors. Financial Restructuring revenues are projected to remain "elevated throughout fiscal 2026," with management suggesting the current environment might represent a "new trough" for this segment, indicating sustained activity even amid improving M&A. FVA is also expected to see continued year-over-year growth. The firm targets a 61.5% adjusted compensation expense ratio and high-single-digit growth for adjusted non-compensation expenses in fiscal 2026, driven by headcount growth and strategic investments. The full-year adjusted effective tax rate is projected to be between 25% and 26%. However, potential headwinds include tariffs, inflation, and geopolitical volatility. While transaction velocity is improving, it remains slower than in past recoveries, requiring time for full normalization. The U.S. market is expected to continue outpacing EMEA activity through the summer. ## Conclusion Houlihan Lokey's journey from its 1972 founding to its current standing as a global investment bank is a testament to its deeply ingrained strategy of diversification, specialized expertise, and strategic growth. The firm's record fiscal year 2025 performance and strong start to fiscal 2026 underscore the resilience of its business model, which adeptly navigates dynamic market conditions by serving a broad client base across varied economic cycles. Its technological advancements, particularly in valuation services, further fortify its competitive moat, offering enhanced precision and efficiency that differentiate it from peers. The outlook for HLI remains positive, supported by sustained restructuring activity, a gradual rebound in M&A, and disciplined financial management. While macroeconomic uncertainties persist, the firm's strategic focus on the mid-cap market, coupled with its robust acquisition pipeline and commitment to talent development, positions it for continued market share gains and profitability. For discerning investors, Houlihan Lokey represents a compelling opportunity, offering a balanced and resilient investment banking platform poised for sustained growth through strategic acumen and a differentiated service offering.