Houlihan Lokey’s rain delay: software and geopolitics stall the mid-cap cycle

Houlihan Lokey’s fiscal first-quarter results were a blunt reminder that the middle-market M&A cycle remains hostage to macro noise. Revenue came in at $511 million with adjusted EPS of $1.35 — a “temporary disruption, not a fundamental resetting” — Scott Joseph Adelson, Chief Executive Officer · 2026-07-29 per CEO Scott Adelson, but the market took note: the stock has fallen roughly 19% over the past 90 days and sits 21% below its April peak, with the full drawdown from September 2025 at 38%.

What actually changed

The headline is Corporate Finance: revenues fell 24% year over year to $303 million, even though the number of closed transactions was basically flat at 127. The culprit was deal-size mix. “Headwinds that started in February and March persisted into April and May, as software sector valuations were reassessed and consumer-facing sectors grew skittish,” Adelson explained, causing “a significant number of transactions that were expected to close in the quarter to be delayed into subsequent quarters” — Scott Joseph Adelson, Chief Executive Officer · 2026-07-29. These delays hit larger fee deals disproportionately — a nuanced point: volume held, but average transaction fees dropped sharply.

This is not entirely new. On the prior call, management had already flagged software as a fiscal ’27 drag: CFO Lindsey Alley said “we have assumed that software will be affected in fiscal year '27 in our comments” — J. Alley, Unknown · 2026-05-06, while Scott noted the “throwing the baby out with the bath water” dynamic. What’s new this quarter is the breadth: the geopolitical uncertainty from the Middle East is now directly delaying closings, and the impact has become company-specific given HLI’s sponsor-heavy and software-heavy mix.

The middle-market tarp

Management is leaning hard on the “rain delay” metaphor, arguing the problems are timing, not structure.

I mean, as Scott said it best, the large-cap space has done extremely well. We're seeing it a little bit in our FVA business. And the macro events of really the last few months have had a small impact on our Q4 and a bigger impact on our Q1.

The K-shaped market is central to their thesis. “The party has been going on for a while in the large cap and the party is either hasn’t started or is just about to start on the mid-cap side,” Adelson said on the call, contrasting with FVA, which grew 13% with a 9% increase in fee events. That strength is reflected in the fundamentals: Gross profit was $231 million in the quarter, up 16% year-over-year despite the overall revenue decline, a sign that valuation and advisory work is carrying the firm through the M&A trough.

Competitive edge: the boutiques and the bulge

Adelson pushed back on competitive threats from bulge-bracket firms moving down-market, saying new entrants are usually “visitors to the space” — Scott Joseph Adelson, Chief Executive Officer · 2026-07-29. Lindsey Alley went further, arguing the real share donors are small boutiques that can’t match Houlihan’s scale, geographic reach, or technology spend. “We just have broader geographic reach. We have more depth in terms of private equity coverage. We're able to invest in technology that the smaller boutiques can't,” she said. This is the same middle market share story that has been a pillar of the equity thesis for years, and the bulge bracket firms are portrayed as boom-and-bust entrants who “move back out when the markets change.”

On the technology front, the Morningstar partnership to create a CLO benchmark is positioned as a baby step toward monetizing HLI’s proprietary data. CFO Lindsey Alley downplayed near-term revenue but framed it “as a series of steps over the coming years to get to ultimately where we want to go” — J. Alley, Chief Financial Officer · 2026-07-29. The longer-term ambition is that AI and data tools enlarge the addressable market even as unit pricing pressures — and that’s a key differentiator when competing against smaller valuation shops.

Valuation and the path forward

With the stock down sharply, the valuation entry point is becoming more interesting. Price to operating income has fallen to 13.8x from a peak of 20.2x in 2025Q3, and despite the revenue dip, the long-term uptrend in operating income remains intact — it’s still up 484% over eleven years. The company is also buying back stock (~1.1 million shares in the quarter) while maintaining a fortress balance sheet with $961 million of effective net cash.

The real test is whether the rain clears. Management repeatedly emphasized that backlog, pipeline, and new mandate activity are at record levels — the deal momentum metrics that historically forecast revenue. “We have seen market disruptions like this in the past, and like others, we expect this one to be temporary.” If the Middle East stabilizes and software valuation floor forms, the delayed deals could cluster into a strong fiscal second half. But investors have heard that tune before; the prior call also promised a pickup after the noise subsided. The market will be watching close rates and the average transaction fee in Q2 as the first real evidence.