Jordan Licht: Sure. A couple of pieces there. And so I’ll try not to go too deep, but answer all of your questions. Generally speaking, when you think about our long-term incentive compensation, there is a lot of different movements into that, but it is generally aligned with the fair value associated with the assets. But I think it’s important to note that we did have different — we use the term carry every once in a while as a synonym, it’s important to note that there are different carry percentages against different vintages. So it’s not a perfect tie out – and so depending on what vintage is moving and the fair value of that vintage based on milestones and so forth, you won’t see a one-to-one necessarily relationship to top line revenue.
But generally, that moves with fair value. The other piece that we have is the legacy asset recovery business. As a reminder, there were just two assets that remain in that. And so as those come to a conclusion, we won’t be seeing those accruals anymore, and this has to do with the purchase of that business. And then finally, the other piece is with respect to our annual incentive compensation, this is in carry. This is more aligned with cash bonuses. And as I mentioned earlier, while it’s an accrual now, we true that up in the fourth quarter based off of both quantitative and qualitative metrics of our employees and then pay that out the following year.
Christopher Bogart: So the next webcast question is from [indiscernible]. How should we think about operating costs over the very long term? Can you detail which costs are fixed and which are variable and how we should think about operating leverage over the long term? Before I let Jordan do that, just a couple of overlay comments from me as well. I’ve talked about this in the past over time. And I’ll just make a couple of comments. One is in terms – the vast – like most knowledge firms like ours, the bulk of our costs leading interest to side are human capital costs. And we have been very careful to structure a compensation system where a significant amount of our compensation expense is both variable and tied to the performance, the cash performance of our investment portfolio, which is why you see this mismatch between cash payments and accrual payments.
So for example, if a case is doing very well indeed, and let’s take YPF for example, the case is customary judgment now it’s passed a financial judgment, but we don’t have any cash yet. So nobody is getting paid on the 2023 success of YPF because we haven’t generated the cash yet, but we’re accruing compensation expense associated with YPF. So we have base salaries, which are obviously fixed cost. But if you are working here in the more senior you get, the more true this is, more and more and more of your comp is going to be performance-based based on cash-driven outcomes until you get to Jon and me, where all of our compensation accept a base salary is totally dependent on the business’ cash performance. And in terms of operating leverage, yes, there’s some operating leverage both in terms of sheer scale of the business and also in terms of increasing deal size.
Our average ticket size in this business has gone up by multiple factors over the last decade. And it – like most investing businesses, it doesn’t – it’s not a linear function. So it doesn’t require 5x as much effort to do a deal that is 5x larger. It requires significantly less effort than that. So that’s where we get the operating leverage. That said, as the business continues to expand, you do need to continue to hire more people in the business. There is certainly an element unlike a hedge fund that could double its size without adding any people just by doubling its current physician sizes. We double the size of our business by adding new unique assets, and those do require additional people. So much of my introductory comments.
Jordan Licht: I think the previous question – the previous question hit on a couple of these elements. So I’ll try and summarize it. I mean look, when you think about compensation and benefits, obviously, the salary and you’re thinking about projecting the salaries and benefits and annual incentive comp are generally tied to the number of people. Obviously, as I mentioned, the annual bonuses are not given and are tied to the performance of the business, both on a quantitative and qualitative metrics with respect to our employees. I talked about the legacy asset recovery business and we talked about carry, the long-term incentive comp. I think the other piece is just to talk about the G&A. We haven’t seen – I mean, obviously, we mentioned the $3.3 million expense this past period with respect to the restatement and moving to quarterly.
And so I don’t foresee that as repeating itself, and we haven’t seen those significantly move year-over-year. And then the final piece is the case related expenditures, and this is obviously a cork in some of the accounting. There are some cases in which those expenses cannot be capitalized into the asset. And so we do expense those. I don’t foresee those growing much larger, and I expect those to come down. But it is idiosyncratic. And so what I say today, just like Chris can’t predict the outcome of all the legal cases, he can’t also predict where there might be expenses on some of them that we weren’t anticipating. So – but I see that normalizing more towards levels that we’ve seen in previous years.
Christopher Bogart: And I think we’re close to the top of the hour, but we can squeeze one last question in. So operator, do you have one on the phone?
Operator: Our last question today comes from Matthew Howlett from B. Riley. Matthew, your line is now open. Please proceed.
Matthew Howlett: Thanks for taking the final question. Chris and Jordan, I mean, you are having a great ’23. And congrats on getting in compliance with GAAP. I know it was not a small task. My question is in terms of – we see all the time this noncore reconciliation where companies tend to back out fair value adjustments or noncash compensation. Has there been any discussion with SEC or internally, whether you would adopt some type of core number where we could look at it every quarter and not see a fair value mark.
Jordan Licht: Yes. I think I mean, that the another way of saying, hey, can we go back to the old method? Look, at the end of the day, I think we came to the conclusion with the SEC and upon our own reflection is that there is the concept of time value of money and duration associated with these assets. And so it is appropriate to reflect those in the fair values. I know that it then can be frustrating that the asset in and of itself, then is going to experience some change in fair value just because rates change and rates have been more volatile in recent past than they have over other periods. But I’m not sure that going to a method of removing all of the overlays that we just put in is exactly where we want to go when we do believe that duration and time value are part of the asset.
Matthew Howlett: Got you. It was more whether you give a GAAP number, then you give sort of a core number showing the adjustments and give kind of both, but I realize –
Jordan Licht: Yes. Sort of going back to what I said earlier, like rather than adjusting GAAP numbers, I just look at the cash numbers.
Matthew Howlett: Right.
Jordan Licht: So when you see us reporting return numbers, realization numbers, those are all cash numbers. And so Jon and I – Jon and I sit and look at cases and we basically are asking, so when is the money coming? Like it’s nice that these things happen along the way. But the fact that we – in a random case, the fact that we win a motion is certainly positive for the direction of travel in that case, but it’s not until we win the trial and get the judgment paid. That we get the cash, and that’s how we think about it as opposed to coming up with another metric. If you don’t like the GAAP metrics, which I don’t look at the cash. Over time –
Christopher Bogart: Thanks, Matt. I appreciate it. So we’re over time, thank you all very much for your attention. If you have questions, and we didn’t get to you, please be in touch with us. Always happy to assist. And once again, thank you all very much for your support in what is turning out to be a pretty super fantastic year for us.
Jon Molot: Thank you.
Operator: That concludes today’s conference call. Everybody, thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.
