Fiscal 2022 Was A Challenge, But We Would Rather Be Us

Yesterday was the end of Jefferies’ 2022 fiscal year, and today we start anew in 2023. These past 12 months have been incredibly volatile, frustrating, confusing, and somewhat exhausting. With all this in mind, it would be easy to conclude that we (and our industry) had a terrible year in which we individually and collectively all lost ground. While we are realists who always embrace the cold hard facts as we see them, we’d like to focus our first note to all of you in Jefferies’ 2023 year on how fortunate, thankful, and appreciative we should all be despite the difficulties and stress of 2022:

1. Strategy Intact. The IPO and Leveraged Finance markets, two of the largest and most important drivers of our business at Jefferies, have been shut for most of this year. Inevitably, this also affects the M&A market, our other important investment banking business. Despite these undeniable facts, we have grinded our way through the year and have come out the other side with not only our core strategy of being the best full-service global investment banking firm intact, but more committed to it than ever. Despite the challenging 2022, we know sales, trading, research, investment banking, asset management and every discipline that supports these businesses are all critical to our future. These businesses leverage each other, work incredibly well together, and are integrated to represent everything that is important and vital to Jefferies, our clients and all other stakeholders. Every one of you work in one of these businesses. Yes, we will always make adjustments, tweaks and necessary pivots. But for the past two decades, we have never had to revisit our core business plan and make wholesale changes that would undo decades of hard work and progress. That’s because together we have developed a very good plan that all of you are executing flawlessly, regardless of the environment.

2. Learning to Deal With Increased Interest Rates. About a year ago, we were worried that very few of us knew what to expect or how to deal with rising interest rates, since most folks at Jefferies were not on Wall Street in 1994, the last time it happened. That’s why we wrote our “A Boomer’s Guide To Rising Interest Rates,” for all of you to read. Well, thank you 2022, because when it comes to experiencing higher interest rates, we are all Boomers now! In 2022, we learned (or relearned) that the cost of capital matters and that rising rates cause inferior strategies, investments and companies to stumble/fail and always separate quality from the wannabees. We all see this now and it is one of the most valuable (and often expensive) career lessons to learn. It is a little early, but even now we can see the green shoots that will start to appear when there is a general acknowledgement of where the new interest rate regime will eventually land. Only then will we all start to understand how to better price risk. This is when capital formation will once again occur regularly, albeit at a higher cost and with more discerning care. The good news is that we have all now experienced what happens when rates increase dramatically and are better for it. Who knows, maybe one day one of you will write your own notes on this topic for others to learn from. 

3. Wealth Creation. 2019 was a decent year for Jefferies and our industry. Despite COVID, 2020 was a very good year and we all know 2021 was the type of year that comes along very rarely in a finance professional’s career. We discussed all three honestly and realistically during each year, and everyone at Jefferies did their very best to share fair and just compensation for all. The two of us believe we achieved it for all three of those years. Plain and simple, 2022 feels more like 2019. Fortunately, the firm has made major investments across the board that have allowed us to gain credible market positions that make us more excited about our strategic direction than ever. But the trade-off for the enhanced research, supercharged technology investment, critical hires for future growth, and expanded global footprint, is that there are many more of us driving our growth, success, and sustainability than we had back in 2019. As always, we will do the right thing for the long-term success of everyone at Jefferies and to continuously invest in our people and our firm, so we can continue to build and prosper. Let’s just spell it out here: “This is going to be a more difficult compensation season at Jefferies, just like it will be for every firm in our industry.” We will work through the compensation process fairly, expeditiously and as transparently as possible. For those of you who look at the big picture and think long term like the two of us, you will look back on these past four years (and the 30 behind them) and be appreciative and thankful, and put everything in its proper perspective. Fortunately, and not by coincidence, Jefferies is not overpopulated by those who focus on one narrow period or ignore how the entire firm is doing. One of our core advantages at Jefferies is we know that we must invest in each other and build our firm to keep our foundation strong and maximize our future opportunities.  

4. Dealing with COVID and the Future of Work at Jefferies. Nobody got this puzzle exactly right, but we believe nobody has done it better than all of us at Jefferies. We are substantially where we want to be in terms of people being in our offices together the right number of days. And we are deeply appreciative of our seniors, juniors and everyone in between, as we all work to strike the right balance. It is abundantly clear that we need to be together as much as possible for cohesion, training, creativity, culture, and execution. It is also clear that if we are all committed to being together as much as possible in the office, we should also have the ability to selectively and appropriately work from home and have the life flexibility that so many of us need and deserve. The fact that we can travel, see clients, and host our incredible conferences in person is truly a blessing. In 2022, each of us has learned how much we really need to be with each other and how our ability to maintain flexibility is dependent on us not abusing it or thinking the cost of working apart is insignificant. 

5. Balance Sheet and Risk. Every one of us who manages risk is better off for having lived through 2022. That doesn’t mean we did a perfect job managing risk last year. In fact, we had distinct challenges in just about every single business in 2022, as we navigated efforts to serve our clients, generate revenues, protect our firm, and skillfully manage volatility. The good news is that despite some individual issues, the aggregate result was reasonable. More importantly, we enter 2023 with our leverage statistics as conservative as ever and with our bond ratings in solid shape. If 2022 taught us anything, it is that we can never let our guard down or get arrogant or sloppy because everything can change in the blink of an eye. We are all smarter and wiser risk managers because of 2022. Let’s appreciate this and live it. 

6. Compassion. We lived through a significant war in real time in 2022, and the end does not appear to be in sight. We see distressing stories and images every day on our televisions and on our phones. Jefferies did more than our fair share from the start to help those most in need. It is clear all of us at Jefferies strive to do more than our fair share whenever we see injustice. The countless individual and collective fundraisers and volunteering that happen across our firm makes the two of us incredibly proud. In 2022, each of you have once again shown the world that the people of Jefferies are good, caring, compassionate, motivated, engaged, and making a real difference. At the end of the day, each of you and our Firm stands for something we should all take great pride in. Thank you for this. 

7. Nothing in Our Way for 2023. Because of how we dealt with a very challenging 2022, we are one of the handful of investment banking firms in our industry that can honestly claim that there is nothing in our way to having a great 2023, environment permitting. Of course, we cannot control the markets, geopolitics, or other macro forces, but everything that we can affect in 2022, we did our very best to navigate. The result is, that starting today, we could not be more optimistic about our opportunity for 2023. Thanks to our focus and dedication for decades, but also because of our incredible work in a challenging 2022. As we begin 2023, Jefferies:

•  Is a stronger firm with a never-better brand

•  Has our best market share and competitive position ever

•  Has our strongest human capital in our 60-year history

•  Has the best and most diversified clients we have ever enjoyed

•  Has the strongest foundation and infrastructure ever

•  Has a truly global footprint that operates as one firm

•  Has a culture that is the envy of so many

2022 was tough. We are not eager to repeat it (but we could handle it–even if it was worse). Let’s all embrace the lessons we learned and be thankful that we all overcame the challenges and adversity together.  

With sincere appreciation and focus only on today and the future,

Rich and Brian