Houlihan Lokey's Strategic Push into Capital Solutions Positions It for Growth in Fragmented Markets

Houlihan Lokey (HLI), a global leader in M&A advisory and restructuring services, is leveraging its market dominance to expand into customized financing solutions—a move that could redefine its role in an evolving financial landscape. Recent hires of seasoned executives Kevin Ryan (ex-Blackstone) and Bill Scheuerer (formerly of Morgan Stanley) signal a deliberate shift toward private credit, structured finance, and capital markets advisory. This strategic pivot capitalizes on surging demand for tailored financing amid a fragmented institutional investor landscape, positioning HLI to diversify its revenue streams and solidify its valuation.

The Foundation: Leadership in M&A and Restructuring

HLI's 2024 performance underscores its resilience and sector clout. Despite a sluggish M&A environment, the firm maintained its #1 global ranking by transaction count, closing 450 M&A deals in fiscal 2024 (ended March 31, 2024). While M&A revenues dipped 2% year-over-year to $1.11 billion, restructuring advisory surged, with 126 deals closed and revenue jumping 32% to $522 million. This dichotomy highlights HLI's ability to balance cyclical headwinds in M&A with structural tailwinds in restructuring—a testament to its diversified advisory model.

Why the Expansion into Capital Solutions Matters

The hires of Ryan and Scheuerer reflect HLI's ambition to move beyond transaction advisory and into the origination and structuring of financing solutions. Ryan, now Head of Capital Solutions, brings deep expertise in private credit and structured products, while Scheuerer, leading the firm's markets division, strengthens its capabilities in liquidity management and capital raising. Together, they aim to tap into a $10 trillion+ private credit market that is increasingly fragmented, with institutional investors seeking specialized solutions to navigate low yields and volatility.

HLI's existing advantages in sector-specific knowledge—such as healthcare, technology, and industrials—will be critical. For example, its restructuring expertise in distressed debt can now be paired with tailored financing for companies needing liquidity without traditional bank loans. The firm's $1.91 billion in total 2024 revenues (up 6% year-over-year) and strong balance sheet provide ample runway to invest in this growth area.

The Investment Case: Diversification and Valuation

HLI's expansion into capital solutions addresses a key investor concern: reliance on cyclical M&A activity. By embedding financing origination into its advisory services, HLI reduces its vulnerability to M&A downturns while capitalizing on the $5.4 trillion private credit market, which grew 12% annually since 2020.

Financial metrics reinforce the thesis. HLI's adjusted EPS rose to $4.49 in 2024, despite M&A headwinds, while its restructuring segment's 32% revenue growth (2023–2024) signals scalability. The firm's $0.57 quarterly dividend, a 3% increase from 2023, reflects confidence in its cash flow stability.

Critics may question whether HLI can scale its new offerings without diluting its advisory focus. However, the firm's #1 global ranking in fairness opinions (a cornerstone of M&A trust) and its 10-year streak as top restructuring advisor provide a robust platform. The integration of financing solutions into its client relationships—such as pairing M&A advice with post-merger liquidity planning—could create sticky revenue streams.

Risks and Considerations

• Market Fragmentation: While a tailwind for specialized players, fragmentation could also lead to pricing pressures as competitors enter niche markets.
• Regulatory Scrutiny: Expanding into credit origination may expose HLI to new compliance risks.
• Economic Cycles: Private credit demand often correlates with economic stress. A sustained recovery could temper restructuring activity, though the shift to financing origination diversifies this risk.

Conclusion: A Compelling Play on Institutional Demand

HLI's strategic moves into capital solutions align with a clear industry trend: institutional investors increasingly demand tailored financing, not just advisory services. With its sector expertise, global scale, and now enhanced financing capabilities, HLI is well-positioned to capture this demand.

Investors should view HLI as a defensive growth stock with asymmetric upside. While its current P/E ratio of 18x (vs. 15x for peers) reflects this optimism, the firm's ability to grow recurring revenue streams in private credit and structured finance could justify further valuation expansion.

Investment Recommendation: Buy HLI for a balanced portfolio seeking exposure to financial services resilience. Monitor restructuring deal flow and capital solutions revenue growth as key metrics to validate the strategy's success.

In a world of fragmented capital needs, Houlihan Lokey's blend of advisory strength and financing innovation makes it a standout player. The next few quarters will test whether this pivot can transform HLI into a full-cycle financial solutions powerhouse.