In this Management's Discussion and Analysis of Financial Condition and Results of Operations, "we", "our", "firm" and "us" refer to Greenhill & Co., Inc.
Cautionary Statement Concerning Forward-Looking Statements The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this report. We have made statements in this discussion that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may", "might", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in our Report on Form 10-K under the caption "Risk Factors" and any updates to such risks discussed in subsequently filed quarterly reports on Form 10-Q.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date hereof. Overview
Greenhill is an independent investment banking firm that (i) provides financial advice on significant mergers, acquisitions, restructurings and similar corporate finance matters as well as fund placement services for private equity and other financial sponsors and (ii) manages merchant banking funds and similar vehicles and commits capital to those funds and vehicles. We act for clients located throughout the world from offices in New York, London, Frankfurt, Toronto, Tokyo, Chicago, Dallas, Houston, Los Angeles, and San Francisco. Our activities constitute a single business segment with two principal sources of revenue:
• Financial advisory, which includes engagements relating to mergers and acquisitions, financing advisory and restructuring, and fund placement advisory; and

• Merchant banking, which includes the management of outside capital invested in the firm's merchant banking funds and other similar vehicles, primarily Greenhill Capital Partners ("GCP I"), Greenhill Capital Partners II ("GCP II"), Greenhill Capital Partners Europe ("GCP Europe"), and Greenhill SAV Partners ("GSAVP" together with GCP I, GCP II, and GCP Europe, the "Greenhill Funds"), and the firm's principal investments in the Greenhill Funds, Iridium Communication Inc., other merchant banking funds and other investments.

Historically, our financial advisory business has accounted for the majority of our revenues, and we expect that to remain so. There have been periods such as third quarter of 2009, the second quarter of 2008 and the first quarter of 2006, in which the revenues of our merchant banking business have outweighed our financial advisory revenues. Since our initial public offering our financial advisory business has generated 80% of total revenues and our merchant banking and other business has generated 20% of our total revenues.
The main driver of the financial advisory business is overall mergers and acquisitions, or M&A, and restructuring volume, particularly in the industry sectors and geographic markets in which we focus. We have recruited and plan to continue to recruit new managing directors to expand our industry sector and geographic coverage. We expect these hires will, over time, add incrementally to our revenue and income growth potential. In 2009 we have announced the recruitment of fourteen Managing Directors who bring

us additional sector expertise in Financial Services, Infrastructure, Insurance, Energy, Consumer and Retail, and Gaming and Lodging. We opened an office in Los Angeles in the second quarter and an office in Houston in the third quarter.
The principal drivers of our merchant banking revenues are management fees paid by the Greenhill funds and realized and unrealized gains on investments and profit overrides, the size and timing of which are tied to a number of different factors including the performance of the particular companies in which we invest, general economic conditions in the debt and equity markets and other factors which affect the industries in which we invest, such as commodity prices. Presently, we have three merchant banking funds which are actively investing and we have assets under management in those funds of $1.3 billion. The amount of profit override we recognize will depend upon the underlying fair value of each portfolio company and is subject to volatility based upon the factors mentioned above. Profit overrides are generally calculated as a percentage of profits over a specified threshold earned by such fund on investments of each fund. At September 30, 2009, the net internal rate of return of each of GCP II, GCP Europe and GSAVP was negative. Unless we have significant gains in the portfolio companies in each fund it is not likely in the near-term that we will exceed the profit threshold for each fund and recognize profit override revenue.
In 2007, we formed GHL Acquisition Corp. ("GHLAC"), a special purpose acquisition company, which completed an initial public offering in early 2008. Prior to the completion of the acquisition of Iridium and the related equity offering by GHLAC, the firm owned approximately 17% of GHLAC. On September 29, 2009, the firm announced that GHLAC completed its acquisition of Iridium Holdings LLC. The combined company has been renamed Iridium Communications Inc. (NASDAQ: IRDM, IRDMW, IRDMU, IRDMZ) ("Iridium"). Following the planned conversion of the firm's convertible note in Iridium in the fourth quarter 2009, the firm will own 8,924,016 shares of Iridium common stock and warrants to purchase 4,000,000 additional shares of common stock of Iridium at $11.50 per share, each of which are restricted from sale for one year from the acquisition date (or six months in the case of a registered offering). Upon completion of the acquisition of Iridium by GHLAC, the firm's fully diluted ownership in Iridium is approximately 12%.
As a result of its investment in Iridium the firm has reported cumulative investment gains of approximately $72.0 million, including approximately $66.0 million in the third quarter of 2009. Because Iridium is a publicly traded company in which we have a significant investment we are exposed to significant increases or decreases in our revenues due to changes in Iridium's market value. Since GHLAC acquired Iridium on September 29, 2009 the share price of Iridium has ranged between $7.80 and $11.70. The closing price at September 30, 2009 was $11.41.
Business Environment
Economic and global financial market conditions can materially affect our financial performance. See the "Risk Factors" in our Report on Form 10-K filed with the Securities and Exchange Commission and any updates to such risks discussed in subsequently filed quarterly reports on Form 10-Q. Net income and revenues in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year-to-year and quarter-to-quarter.
Financial advisory revenues were $42.4 million for the three months ended September 30, 2009 compared to $37.0 million for the three months ended September 30, 2008, which represents an increase of 15%. Financial advisory revenues were $153.0 million for the nine months ended September 30, 2009 compared to $156.3 million for the nine months ended September 30, 2008, which represents a decrease of 2%. At the same time, worldwide completed M&A volume decreased by 46%, from $2,123 billion in the first nine months of 2008 compared to $1,141 billion in the first nine months of 2009.2

2 Global M&A completed transaction volume for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. Source:
Thomson
Financial as
of
October 12,
2009.

Since July 2007 the financial markets have experienced a sharp contraction in credit availability and global M&A activity. Recent levels of capital markets volatility and an uncertain macroeconomic outlook have further contributed to a volatile and uncertain environment for evaluating many assets, securities and companies, which has created a more difficult environment for M&A activity. There is considerable uncertainty as to how much longer this difficult economic environment may last, although the firm agrees with many market participants and observers who have noted the beginning of a potential upturn in transaction activity. Depending on transaction timing, we believe this increased activity is likely to impact our revenue more in 2010 and beyond than in the final quarter of 2009. Because we earn a majority of our financial advisory revenue from fees that are dependent on the successful completion of a merger, acquisition, restructuring or similar transaction or the closing of a fund, our financial advisory business has been negatively impacted and may be further impacted by a reduction in M&A activity. We believe, however, that our simple business model as an independent, unconflicted adviser, in a period of instability of many of our larger banking-focused competitors, will create opportunities for us to attract new clients and has provided us with excellent recruiting opportunities to further expand our industry expertise and geographic reach.
The firm earned $73.9 million in merchant banking and other revenues in the third quarter of 2009 compared to negative revenues of ($51.9) million in the third quarter of 2008. We recognized an unrealized investment gain of approximately $66.0 million during the current quarter as a result of the successful completion of the acquisition of Iridium by our special purpose acquisition company, GHL Acquisition Corp. In the third quarter of 2008, the firm reversed previously recognized unrealized merchant banking gains and related accrued profit overrides principally resulting from mark-to-market gains on two publicly traded energy companies which had been recorded in the second quarter of 2008.
For the nine months ended September 30, 2009, we earned $79.2 million in merchant banking and other revenues compared to $12.8 million in the same period of 2008. The increase in merchant banking revenues for the nine months ended September 30, 2009 resulted principally from the unrealized gain on the acquisition of Iridium.
Adverse changes in general economic conditions, commodity prices, credit and public equity markets, including a decline in the share price of Iridium, could impact negatively the amount of both financial advisory and merchant banking revenue realized by the firm.

$169.1 million for the comparable period in 2008, representing an increase of $63.1 million, or 37%. The increase resulted principally from the increase in merchant banking revenues resulting from the completion of the acquisition of Iridium by our special purpose acquisition company.
Our third quarter net income of $30.1 million compares with a net loss of ($12.2) million for the third quarter of 2008. For the nine months ended September 30, 2009, net income was $54.1 million compared to net income of $36.3 million for the comparable period in 2008, which represented an increase of $17.8 million, or 51%. The increase in net income for both the three and nine month periods ended September 30, 2009 as compared to the same periods in 2008 was principally attributable to the improvement in merchant banking revenues.
The firm's quarterly revenues and net income can fluctuate materially depending on the number and size of completed transactions on which it advised, the number and size of merchant banking gains (or losses) and other factors. Accordingly, the revenues and net income in any particular period may not be indicative of future results.
Revenues By Source
The following provides a breakdown of our total revenues by source for the three and nine month periods ended September 30, 2009 and 2008, respectively:

                                                                     For the Three Months Ended
                                                     September 30, 2009                      September 30, 2008
                                                Amount             % of Total           Amount             % of Total
                                                                      (in millions, unaudited)
Financial advisory fees                       $      42.4                   36 %      $      37.0               NM
Merchant banking and other revenues                  73.9                   64 %            (51.9 )             NM

Total revenues                                $     116.3                  100 %      $      14.9                  100 %



                                                                     For the Nine Months Ended
                                                     September 30, 2009                      September 30, 2008
                                                Amount             % of Total           Amount             % of Total
                                                                      (in millions, unaudited)
Financial advisory fees                       $     153.0                   66 %      $     156.3                   92 %
Merchant banking and other revenues                  79.2                   34 %             12.8                    8 %

Total revenues                                $     232.2                  100 %      $     169.1                  100 %

Financial Advisory Revenues
Financial advisory revenues were $42.4 million in of the third quarter of 2009 compared to $37.0 million in the third quarter of 2008, which represents an increase of 15%. The increase in our financial advisory fees in the third quarter of 2009 as compared to the same period in 2008 generally reflected an increase in the volume of transaction activity offset in part by a decrease in the scale of the completed assignments.
For the nine months ended September 30, 2009, advisory revenues were $153.0 million compared to $156.3 million for the comparable period in 2008, representing a decrease of 2%. The slight decrease in our advisory revenues in the nine months ended September 30, 2009 as compared to the same period in the prior year reflected the completion of fewer large transactions offset by an increase in our client engagement activity in a much slower global M&A market. Completed assignments in the third quarter of 2009 included:
• the acquisition by Barnes & Noble, Inc. of Barnes & Noble College Booksellers, Inc.;

• the representation of Groupe Aeroplan Inc. on its participation in a credit facility for Air Canada;

• the acquisition by Laboratory Corporation of America of Monogram Biosciences, Inc.;

• the representation of Quebecor World Inc in connection with its restructuring under Canada's Companies' Creditors Arrangement Act and Chapter 11 of the U.S. Bankruptcy code;

• the representation of Rexam plc on its rights issue; and

• the acquisition by Validus Holdings Ltd. of IPC Holdings Ltd.

Merchant Banking and Other Revenues
   Our merchant banking fund management activities currently consist primarily
of the management of and our investment in Greenhill's merchant banking funds:
GCP I, GCP II, GCP Europe and GSAVP. We generate merchant banking revenue from
(i) management fees paid by the funds, (ii) gains (or losses) on our investments
in the merchant banking funds and other principal investment activities, and
(iii) merchant banking profit overrides. The following table sets forth
additional information relating to our merchant banking and other revenues:

                                                 For the Three Months               For the Nine Months
                                                  Ended September 30,               Ended September 30,
                                                 2009              2008             2009             2008
                                                                (in millions, unaudited)
Management fees                               $      4.2         $    5.1        $     13.2         $  14.7
Net realized and unrealized gains
(losses) on investments in merchant
banking funds                                        4.5            (21.8 )            (1.8 )          (2.5 )
Net realized and unrealized merchant
banking profit overrides                            (0.7 )          (35.5 )            (0.3 )          (0.9 )
Other realized and unrealized investment
income (loss)                                       65.9             (0.5 )            67.8            (1.8 )
Interest income                                      0.0              0.8               0.3             3.3

Total merchant banking and other
revenues                                      $     73.9         $  (51.9 )      $     79.2         $  12.8

The firm earned $73.9 million in merchant banking and other revenues in the third quarter of 2009 compared to negative ($51.9) million in the third quarter of 2008. During the third quarter of 2009 we announced that GHL Acquisition Corp., the special purpose acquisition company sponsored by the firm, had completed its acquisition of Iridium.
As a result of the completion of the acquisition of Iridium by GHLAC we recognized an unrealized investment gain of approximately $66.0 million during the quarter. Following the planned conversion of the firm's convertible note in Iridium, we will own 8,924,016 shares of Iridium common stock and warrants to purchase 4,000,000 additional shares of common stock of Iridium at $11.50 per share, each of which are restricted from sale for one year from the acquisition date (or six months in the case of a registered offering). We also recognized investment gains during the quarter from an increase in the fair market value of investments held through our merchant banking funds.
In the third quarter of 2008 we reversed previously recognized unrealized merchant banking gains and related accrued profit overrides of approximately $53.8 million principally resulting from mark-to-market gains on two publicly traded energy companies which had been recorded in the second quarter of 2008. During the third quarter of 2009 our merchant banking funds (and the firm) recognized gains from eight of our portfolio companies and recorded losses on two of our portfolio companies.
For the nine months ended September 30, 2009, the firm earned $79.2 million in merchant banking and other revenues compared to $12.8 million in the nine months ended September 30, 2008, an increase of $66.4 million. The increase in merchant banking and other revenues in the first nine months of 2009 compared with the same period in 2008 resulted primarily from the unrealized gain on the firm's investment in Iridium offset by lower interest earned on cash balances and a slight reduction in management fee revenue.

On a year to date basis in 2009, our merchant banking funds (and the firm) recognized gains from ten of our portfolio companies and recorded losses on nine of our portfolio companies.
The values at which our investments are carried on our books are adjusted to fair value at the end of each quarter based upon a number of factors including the length of time the investments have been held, the trading price of the shares (in the case of publicly traded securities), restrictions on transfer and other recognized valuation methodologies. Significant changes in general economic conditions, stock markets and commodity prices, as well as capital events at the portfolio companies such as initial public offerings or private sales of securities, may result in significant movements in the fair value of such investments. Accordingly, any such changes or capital events may have a material effect, positive or negative, on our revenues and results of operations. The frequency and timing of such changes or capital events and their impact on our results are by nature unpredictable and will vary from period to period. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - Revenue Recognition - Merchant Banking and Other Revenues".
Moreover, the aggregate value of our merchant banking investments may fluctuate depending on the timing of the investment and liquidation events and the life cycles of each of the funds. For example, the commitment period for GCP I expired on March 31, 2007, and the investments in GCP I have been largely sold or otherwise monetized, while the commitments made to GCP II, GCPE and GSAVP are still in the process of being invested (with approximately 82% of the commitments in GCP II, 39% of the commitments in GCPE, and 48% of the commitments in GSAVP having been drawn down as of September 30, 2009). The time elapsed between making and monetization of investments in our merchant banking funds can vary considerably and the fair value of the investments may fluctuate significantly over that time.
Additionally, because Iridium is a publicly traded company in which we have a significant investment we are exposed to significant increases or decreases in our revenues due to changes in Iridium's market value. We are currently restricted from sale of our holdings in Iridium for one year from the acquisition date (or six months in the case of a registered offering). At September 30, 2009 the carrying value of our investment in Iridium was $102.7 million, discounted for legal and contractual restrictions on the sale of securities held by the Company.
At September 30, 2009, the firm had principal investments of $178.5 million, including our investment in Iridium. Of that amount, 17% of our investments related to the financial services sector, 8% to the energy sector, 17% to other industry sectors and 58% to the investment in Iridium. We held approximately 96% of our total principal investments in North American companies, with the remainder in European companies. Our investments in merchant banking companies that became publicly traded after we first invested in them, including Iridium, represented 66% of our total principal investments.
In terms of new investment activity in our merchant banking funds, during the third quarter of 2009, our funds invested $5.5 million, 11% of which was firm capital. In the same period in 2008, our funds invested $106.0 million, 11% of which was firm capital. On a year to date basis in 2009, our funds invested $14.3 million, 11% of which was firm capital. In the same period in 2008 our funds invested $134.1 million, 11% of which was firm capital.
The investment gains or losses in our merchant banking and other investment portfolio may fluctuate significantly over time due to factors beyond our control, such as performance of each company in our portfolio, equity market valuations, commodity prices and merger and acquisition opportunities. Revenue recognized from gains (or losses) recorded in any particular period are not necessarily indicative of revenue that may be realized and/or recognized in future periods.
Operating Expenses
We classify operating expenses as compensation and benefits expense and non-compensation expenses.
Our total operating expenses for the third quarter of 2009 were $65.0 million, compared to $4.0 million of total operating expenses for the third quarter of 2008. Total operating expenses in the third quarter of 2008 were significantly lower than in the same period in 2009 as a result of a reduction in accrued

compensation due to the negative revenue reported in the third quarter of 2008 and is more fully described below. The pre-tax income margin for the quarter ended September 30, 2009 was 44%.
For the nine months ended September 30, 2009, total operating expenses were $141.3 million, compared to $111.0 million of total operating expenses for the same period in 2008. The increase of $30.3 million, or 27%, relates principally to an increase in compensation expense described in more detail below. The pre-tax income margin for the nine months ended September 30, 2009 was 39% compared to 34% for the comparable period in 2008.
The following table sets forth information relating to our operating expenses, which are reported net of reimbursements of certain expenses by our clients and merchant banking portfolio companies:

                                                     For the Three Months                 For the Nine Months
                                                      Ended September 30,                 Ended September 30,
                                                    2009              2008               2009              2008
                                                                      (in millions, unaudited)
Employee compensation and benefits expense       $   53.2           $   (6.6 )        $   106.8          $  77.9
% of revenues                                          46 %            NM                    46 %             46 %
Non-compensation expense                             11.8               10.6               34.5             33.1
% of revenues                                          10 %            NM                    15 %             20 %
. . .