Cowen Inc (COWN) 2020 Q3 法說會逐字稿

Good morning. Thank you for joining us to discuss Cowen's results for the third quarter of 2020. By now, you should have received a copy of the earnings release, which can be accessed at investor.cowen.com.

Before we begin, the company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Cowen has no obligation to update the information presented on today's call.

Also, on today's call, our speakers will reference certain non-GAAP financial measures, which the company believes will provide useful information for investors. Reconciliation of those measures to GAAP is consistent with the company's reconciliation as presented in today's earnings release.

Now I would like to turn the call over to Mr. Jeffrey Solomon, Cowen's Chair and Chief Executive Officer.

Thank you, operator. Good morning, everyone, and welcome to Cowen's Third Quarter 2020 Earnings Call. This is Jeff Solomon, and joining me today on the call is our CFO, Steve Lasota. As a reminder, we make available a quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release.

Today, I'm excited to talk about the tremendous results we have put up in the third quarter and why we believe the earnings momentum that we have experienced over the past 6 months is sustainable. Then, Steve will review the third quarter financial results. And after that, we will be happy to answer any of your questions.

For perspective, our economic operating income in the past 2 quarters, combined, is higher than any 2 full years in Cowen's history, even before factoring in the unrealized gains on our Nikola investment. In these last 2 quarters, we generated over $6 per share of economic operating income, which demonstrates just how compelling Cowen's valuation is at the current trading multiples. This success is a result of years of planning and dedication as we have built a focused, innovative and resilient business through key strategic investments.

Our recent performance is due largely to the strategy we put in place over the past few years, following the mantra of simpler, fewer, deeper. We have concentrated our efforts towards industries undergoing disruption, partnering with companies that are often the agents of that disruption as well as investors and ecosystems that are at the center of creating value through fundamental change. We have built, acquired or developed the right mix of products that meets the needs of those clients and, in many cases, have become essential to their success.

We have developed a culture focused on empathy, tenacious teamwork, both of which foster the kind of creative collaboration that drives valuable insights and product innovation. And we believe that promoting this empathetic culture is essential to helping our clients outperform. Our shared success is proof that it is indeed possible to do well by doing good. And we know that every time we serve our colleagues, clients and communities, we are serving our shareholders as we work to deliver more consistent profitability and higher returns.

Let me provide two illustrations of how we summon our entire platform to help these stakeholders win. In the health care sector, in particular, biotechnology, tools and diagnostics, med tech and digital health, it is a good example of how we can do well by serving the needs of the greater community. 2020 has highlighted the importance of therapeutic and vaccine development as getting the global economy back on track depends on the drug discovery ecosystem where Cowen has a leading position. But you should also know that the explosive growth in capital formation for life sciences companies has led to the approval of over 400 new drugs over the past decade, improving or saving the lives of countless patients. Today, there are over 500 publicly traded companies in biotech, health care tools and diagnostics, and we believe that we are still in the early innings of this long-term trend. Over the past decade, there have been 400 IPOs in the biotech sector alone and more than 1,200 follow-on offerings. This is a robust addressable market of repeat clients for Cowen, and we believe we have capitalized on it, ranking as a top book runner for biotech equity offerings.

We have also expanded our reach in equity capital markets fees in the broader health care sector as well, ranking ahead of many banks far larger than Cowen. In addition, we were ranked #2 in terms of the number of deals we managed. As many of you are aware, health care is the biggest sector in the ECM fee pool, amounting to 40% of total fees so far this year.

At Cowen, we had specific insights early in the past decade that moved us to invest heavily in life sciences. Our success this year not only reflects those strategic decisions, but our ability to attract world-class talent to execute on those opportunities in this space in all of our businesses. Another major investment theme beginning to accelerate is sustainability. It is driven by companies around the world adopting ESG standards. The investor community is finally beginning to recognize the importance of these changes and the next generation of employees entering the workforce for whom sustainability is critical. At Cowen, we are well positioned to take advantage of this long-term trend because of our capital-raising expertise and our understanding of the industry trajectory. In the first 9 months of the year, we executed 15 sustainability-focused transactions alone.

Our belief in the positive long-term trends for both health care and sustainability extends to our investment management division as well, where we have raised meaningful amounts of money in private equity structures in both industries over the past few years. The actions of the Federal Reserve have forced investors into risk assets like equities where Cowen excels, while we believe the Fed's stance will continue to be accommodative for the foreseeable future, regardless of the outcome of the election.

Our base case for post-COVID recovery looks more like a K than a W, U or V, meaning that there will be winners and losers within each industry, making it more challenging for investors to outperform by simply tracking indices. We are seeing increased interest in our research among active managers as they navigate the new opportunity sets emerging from the events of 2020. As a result, our cutting edge, collaborative industry and integrated Washington policy research has become even more critical to our clients.

2020 has also been a period of heightened market volatility. For years, Cowen has advocated for the importance of a nonconflicted access-to-market liquidity, and we have built an independent, industry-leading execution platform. Our clients tell us that our technology and market structure insights are helping them to navigate the intricacies of the U.S. and European markets. MiFID II had already made broker selection a premium game, and 2020 has only accelerated that move. We believe we are well positioned to continue to succeed.

In short, our products and services have become more essential to our clients across banking, markets and investment management. We are thrilled to be in a position where we can help them to outperform now and for the foreseeable future. And the success shows in our earnings. The third quarter was a powerful demonstration of the strength and staying power of our operating businesses with the second best quarterly results ever. And economic operating income was more than 45% higher than the third most profitable quarter on record, which was the first quarter of 2015. And this impressive performance comes even after putting aside the mark-to-market impact of Nikola on our investment income.

Regarding our stake in Nikola, as you may recall, this was a small investment in the VectoIQ SPAC, which acquired the truck maker Nikola Corporation. We intend to monetize the Nikola stake when we are able to regionally do so, just as we have done with other post-IPO investments in previous years where we have had significant gains including Tilray and Livongo. We highlight the impact of the Nikola stake on our results because we don't want its performance to distract from the incredibly strong performance of our core operating businesses.

And I will turn to those specific outcomes in our operating company segment now. In investment banking, we had continued momentum, with robust capital markets activity, particularly biotech tools and diagnostics, where we also posted record M&A revenues for the quarter. We managed a total of 61 capital markets transactions during the quarter, including 18 IPOs and 4 debt transactions. It was our strongest quarter for debt capital markets since 2014.

The health care sector comprised 78% of banking revenues, up from 72% in the prior quarter. We also had strong performance outside of health care, completing 17 transactions in other sectors during the quarter. M&A fees were 18% of total banking revenues. Capital markets advisory, which includes private placements, PIPEs and private debt financings, were up nearly 70% year-over-year and made up 16% of total banking revenue.

2020 has demonstrated that corporate financing decisions are actually strategic ones, and we have a purpose-built platform that incorporates in-depth industry knowledge with world-class execution capabilities. And please note that our advisory revenues do not include contributions from our new team members joining us from MHT Partners as that acquisition closed on October 1. This acquisition expands our coverage of the middle market sponsor universe and provides additional sector expertise.

Overall, we have had a stellar year in investment banking, with revenues through September up 85% versus the first 9 months of 2019. While the surge in capital markets activity has benefited Cowen, I'll reiterate that a lot of our success this year comes down to the investments and strategic decisions we've made over the past few years such as building out our product offerings to complement our coverage teams, adding resources across sectors and acquiring Quarton to bolster our middle market M&A and private equity coverage capabilities.

Our approach is to look horizontally, to get beyond traditional industry classifications by developing capabilities in new growth areas that span multiple industries. By building out domain knowledge and expertise, we can advise clients attempting to capitalize on the disruptive multiyear trends. These insights have informed our move to develop the cannabis banking practice long before the rest of The Street, to create a leading sustainability franchise and embrace the importance of SPAC as a strategic alternative to more M&A and IPO pads.

Through September of this year, we ranked #8 across all industries in terms of ECM fees, which means we're punching well above our weight for a firm our size. One key to the strength, while less than 25% of the capital markets revenues is from IPOs, more than 50% now comes from follow-on offerings, and we have a strong record of attracting repeat business. Year-to-date 2020, nearly 70% of the transactions where we were a book runner were with existing Cowen clients.

Looking ahead, the future looks bright for our banking franchise. The fourth quarter is off to a great start, with October banking revenues well above the third quarter monthly average. And in addition, our deal backlog has hit record highs. As a reminder, that backlog does not include most follow-on offerings as they are executed too quickly to enter the backlog.

In markets, we had our second strongest quarter on record despite a 20% quarter-over-quarter decline in U.S. trading volume. Our daily revenues were $2.6 million per trading day, just shy of the record set in the second quarter of nearly $2.7 million per day. We have built a powerful, independent multi-asset execution platform, and our impressive growth in both revenues and profitability over the past year demonstrates our momentum. We saw a particularly strong performance by special situations, securities finance, cross-asset trading, outsourced trading and prime brokerage.

Non-U. S. execution has been a fantastic area for us, with revenue growth exceeding our forecast by a long shot. We continue to build out our team, and we think there are ample opportunities for us to gain more market share. Other highlights in the quarter included growth in SPAC trading, where we have an unrivaled industry-leading market share and onboarding of new clients on our swap trading desk.

In October, U.S. trading volumes dropped approximately 10% from third quarter levels. Cowen average daily revenues for the month are broadly in line with the change in market-wide trading activity, and our competitive position remains solid.

In research, we continued our intense period of research production and client engagement, holding 125 conference calls for clients, which attracted thousands of attendees. More than 200 corporates participated in our virtual events during the quarter, including summits on communications, infrastructure, liquid biopsy and cannabis policy. Our research team was prolific, with total reports published in the third quarter up 12%. We published 10 of our marquee Ahead Of The Curve Series reports, including a deep dive on COVID vaccine and therapy development, a multi-sector look at competition between the U.S. and China and an exploration of the future of mobility. This intense productivity yielded a year-over-year increase in institutional client votes, continuing our trend of double digit gains. In investment management, management fees are at the highest annual run rate in over 4 years, while total assets under management are up $1 billion year-over-year to $11.8 billion.

Looking at our 5 investment strategies. Our health care strategy ended the quarter with $807 million in assets under management. While incentive fees were negatively impacted by mark-to-market valuations and several recent IPOs in that strategy, the overall investment environment remains favorable for deploying capital.

Our sustainability strategy had $385 million in AUM at quarter end. And during the third quarter, the strategy made its second investment, a $150 million lead investment in Proterra, a leading U.S. manufacturer of electric buses and commercial vehicle power trains.

The merger arm strategy has $413 million in AUM at quarter end, and the strategy outperformed the benchmark HFRX Merger Arb Index for the quarter. The HealthCare Royalty strategy ended the quarter with $3.5 billion in total AUM, and the strategy has committed over $700 million of capital year-to-date across a number of funds. HCR's most recent main fund had a final closing in November of 2019 and is currently 40% committed.

The activist strategy had $5.9 billion in assets at quarter end, up from $5.8 billion in the prior quarter, and the strategy was modestly positive in the third quarter and year-to-date is strongly outperforming the benchmark Russell 2000 Index. Starboard Value acquisition company, a SPAC, successfully raised $360 million in September.

And finally, turning to our asset company, which, as a reminder, includes noncore investments that we intend to monetize, the value of our stake in the Italian wireless company, Linkem, was marked up by $4.5 billion to $77.4 million as the company experienced an increase in demand for its services. The net asset value of our LP investments in Formation8 and Eclipse funds rose $200,000 to $39.1 million. And at the end of August, wish.com filed a confidential IPO registration. As a reminder, Wish is the largest portfolio investment in Formation8. And as of the end of September, it represented just over half of our $32 million investment in Formation8.

And now I will turn the call over to Steve Lasota for a brief review of our financial results for the quarter. Steve?

Thanks, Jeff. For the third quarter of 2020, GAAP revenue was up 54% year-over-year to $387.7 million from $252 million. We reported GAAP net income attributable to common stockholders of $18.6 million, up from GAAP net income of $2.1 million in the prior year period. In the third quarter of 2020, GAAP compensation and benefit expenses were $153.4 million, an increase of $33.1 million from the prior year period. GAAP expenses, excluding compensation and D&A, were $90.1 million for the third quarter. G&A expense was $5.7 million. Third quarter operating and general, administrative and other expenses were $84.8 million, an increase of $900,000 from the prior year period. And third quarter income tax expense was $8.8 million compared to $1.4 million in the prior year period.

Now turning to our non-GAAP financial measures, which we refer to as economic income and economic operating income. Please consult the earnings release and our quarterly filings for a definition of these terms as well as an explanation about how the company uses this non-GAAP measure and how investors find this measure useful. To provide more transparency, we now provide a reconciliation in our quarterly earnings release, showing the 3 categories of adjustments made to GAAP to arrive at economic income. The first 2 categories, management reclassifications and fund consolidation reclassifications, do not have any effect on economic income. The third quarter income statement -- the third category, income statement adjustment, does impact economic income, with most of the current impact coming from the exclusion of taxes. All explanations of these adjustments are available in the earnings release. The remainder of my remarks will be based on these non-GAAP financial measures.

Please note that we have adjusted prior periods of economic income for certain previously recorded economic income revenue recognition timing differences. These prior period adjustments reduced full year 2018 economic income revenue by approximately $0.4 million and full year 2019 economic income revenue by $4.9 million. All the adjustments have been applied to our quarterly financial supplement. There are no changes to any prior period GAAP financials.

As a reminder, Cowen has 2 reportable business segments, Op Co and Asset Co. The Op Co segment consists of Cowen investment management, investment banking and markets and research. The Asset Co segment consists of private investments and other legacy investment strategies. As Jeff noted, we had our second best quarter, both overall and in the Op Co segment. Op Co had total revenues of $272.8 million, economic income of $32.8 million and economic operating income of $38.5 million in the third quarter of 2020. Asset Co had economic income revenue of $1.5 million and an economic operating loss of $1 million in the third quarter.

On an overall basis, we reported economic income of $31.8 million for the third quarter of 2020 compared to income of $5 million in the prior year period. Third quarter economic operating income was $37.4 million compared to income of $10.1 million in the prior year period. Revenues increased 27% year-over-year to $274.3 million.

For the quarter, investment banking revenue was up 167% year-over-year to $185.2 million. Brokerage revenues were also very strong, up 52% year-over-year to $167.1 million. Management fees for the quarter were $14.6 million compared to $10.9 million in the prior year period.

Incentive income was a loss of $1.3 million in the third quarter versus income of $14.4 million in the third quarter of 2019. Investment income was a loss of $90.5 million versus income of $11.7 million in the prior year period. Third quarter investment income includes a negative mark-to-market on our Nikola stake of $96.6 million. Consistent with the past 2 quarters, our financial supplement now provides additional transparency into our investment banking revenues by breaking out our capital markets revenues into underwriting revenues and capital markets advisory revenues.

Turning now to our expenses. Compensation and benefit expense for the quarter was $153.8 million compared to $122.6 million in the prior year period. Our comp-to-revenue ratio declined year-over-year from 56.6% to 56.1% of economic income revenue. In the third quarter of 2020, we reversed $48.3 million in compensation expense accrued against the Nikola mark-to-market gains in the second quarter. We will continue to adjust that accrual in future quarters as needed as we mark the investment to market until the investment is sold. We are targeting an overall annual comp-to-revenue ratio range of 56% to 57%. Please note that overall target range takes into account compensation accrued and any Nikola investment gains.

Fixed noncomp expenses totaled $34.4 million in the third quarter, down from $37.1 million in the prior year period. The decrease was due in part to decreased service fees and occupancy and equipment costs. Variable noncomp expenses in the third quarter of 2020 were $37.7 million compared to $37.3 million in the third quarter of 2019. The modest increase was due to higher brokerage and trade execution costs from increased volumes, partially offset by lower travel, entertainment and business development expenses. Third quarter depreciation and amortization expenses were $5.7 million compared to $5.1 million in the third quarter of 2019.

Taking a look at our year-to-date 2020 results. They have also been very strong, with economic operating income of $197.2 million or $6.65 per common share. Excluding the impact of our Nikola investment, year-to-date 2020 economic operating income was $180.3 million or $6.08 per common share.

Turning to the balance sheet. At quarter end, the company had invested capital in Op Co totaling $784.1 million. That includes the Nikola position, which was valued at $41.6 million at the end of September, down from the prior quarter, but still up significantly from our original cost basis of approximately $5 million. In Asset Co, we had invested capital totaling $127.7 million at the end of September.

Turning to our equity. Common equity, which is stockholders' equity less preferred equity, was $809.9 million compared to $708.5 million as of December 31, 2019. Common book value per share, which is common equity divided by total shares outstanding, rose 23% to $30.48 as of September 30, 2020 compared to $24.77 as of December 31, 2019. Tangible book value per share was $24.32 at quarter end, up 30% from $18.72 at the end of 2019. Return on common equity was 18.6% in the third quarter of 2020, up from 5.6% in the third quarter of 2019, above our long-term target of mid-teens annual ROCE. Excluding the impact of Nikola, return on common equity was 42.6% in 3Q '20.

As we noted in the release this morning, our Board of Directors doubled our quarterly cash dividend to $0.08 per common share, up from $0.04 per share.

During the third quarter, we repurchased 1.14 million Cowen shares for $18.9 million, including purchases executed according to our existing 10b5-1 plan, at an average cost of $16.49 per share. That marks the largest quarterly buyback in 5 years. We will look to make additional share repurchases on an opportunistic basis, weighing the impact of buybacks on our available cash flow as well as prevailing market and business conditions. Even though we bought a significant amount of shares in the quarter and our basic share count is down, the increase in the dilutive share count is due to the 40% increase in average stock price over the quarter.

With that, I'll turn the call back over to Jeff.

Thanks, Steve. As we have outlined, Cowen is focused on promising areas of growth within the sectors we serve. As a result, our company is one of the few true growth stories to be found in financial services. We believe the market has not yet caught up with this reality, given that Cowen is still trading below tangible book value and at very attractive earnings multiples. This is why we are aggressive in repurchasing our shares in the third quarter and why our Board has chosen to increase our dividend as we believe in the consistency of our earnings power and our ability to generate solid returns for our shareholders.

While the third quarter results are remarkable, they are even more so considering that the bulk of the Cowen team continued to operate via remote work during the quarter. While some of our team members, particularly in trading, banking and research, have returned to our offices, more than 90% of our team is currently working outside of the office while still maintaining exceptionally high levels of productivity. The safety and well-being of our teams and their families remains our top priority.

As we continue to monitor the rise in COVID cases in a number of geographies where we have a presence, we are also optimistic about the pharmacological effects to manage COVID epidemic in the long term. In a recent Ahead Of The Curve Series report, our research team said they expect 1 or more vaccines to be granted Emergency Use Authorization before year-end, with broader access for the general population likely in mid-2021. They also expect antibody therapies to play a major role in supplementing vaccines. We monitor these developments daily, and these insights inform our back-to-the-office approach.

Even as we wait for more developments and work remotely, we are taking conscious steps to nurse the culture at the heart of Cowen, embodied in our core values of vision, empathy, sustainability and tenacious teamwork. We hold weekly leadership roundtable webinars attended by hundreds of Cowen employees and have started holding virtual hallways to encourage unstructured interactions among colleagues in different departments who normally would work near each other. Many of our groups have also held social or team-building events, either virtually or in person.

We are also furthering our efforts to make Cowen's culture more inclusive. Last month, I joined more than 1,300 Chief Executives in signing the CEO Action pledge, committing to cultivating an open dialogue on questions about inclusion and diversity, expanding our cross-cultural awareness and unconscious bias training and engaging our Board of Directors in the development of inclusion and diversity strategies. While making this commitment is important, we recognize that inclusion and diversity is key to our future success and that we still have a lot of work ahead of us.

Overall, we remain closely connected and cohesive as a firm, and we are focused on serving our clients, our colleagues and our communities. And we all look forward to a time when biomedical advances, coupled with ongoing public health measures, will allow us to gather again in person once again.

And with that, I will open it up for questions. Operator?

(Operator Instructions) Our first question will come from Sumeet Mody with Piper Sandler.

I actually wanted to start with one here on capital markets advisory. How are you guys viewing that opportunity on the private side? And can you talk about the growth strategy for that area? And how big can that segment get over the next couple of years? And is that an area you wish to kind of grow organically? Or is there an opportunity to grow a little bit more quickly through kind of inorganic means as well?

Yes. So thanks, Sumeet, for the question, and thanks for getting your note out early this morning. Appreciate that. It is -- when I look at capital markets advisory, it's really a function of what our clients want to do. And increasingly, we're being asked to take on private placements, private investments in public equities. Those are really the biggest areas of growth. I think we've always chosen to be more selective in that area, meaning that those are, generally speaking, heavier lifts, but bigger fees. And so I think the constraints around the growth in that area is oftentimes around staffing. As we see the demand increase, and we are certainly -- if you look at opportunities related to our SPAC business, in our crossover business, and we'll continue to step up in that area. And I would expect that it's going to be a bigger percentage of what we do just as the ebb and flow of public markets on IPOs sort of happens. So I think you'll see quarters in which it becomes more meaningful and then quarters like this quarter where the opportunities in the public markets are so overwhelming that we're taking advantage of those. And this is what I would say about all the things we're doing.

When we talk to clients, we are talking to clients around the full service of products that we can offer to meet their needs. And so in many cases, we're walking in with a full suite of financing alternatives that match the strategic objectives of the company. And so what falls out in our numbers is really where our clients want to go to access that capital. And sometimes it makes more sense for them to choose the private markets where they can stay out of the public limelight for a while and develop their strategies, and sometimes it makes sense for them to be in the public markets. And so we look at that, and we feel equally comfortable being able to execute for clients in both. But what you're seeing here is, I think, a function of the product mix, really driven by what our clients are looking to do at any given moment in time.

Okay. Great. Just a follow up there on the public side, talking kind of nonbiotech-related banking areas like consumer, industrials technology. How are you guys feeling about the potential for growth in this environment there? Are you seeing opportunities arise? Or is it kind of more cyclical to the business?

Yes. I mean I think outside of health care, we're seeing more companies sort of accessing the public markets today and whether they are accessing them through traditional IPOs or, frankly, back-end SPAC mergers, which has become an increasing part of certainly our business and an increasing part of the marketplace. And so again, health care has had an amazing run here this year. And we think that's sustainable over the long haul.

We're also seeing meaningful growth in other areas in some of the industries that you mentioned because we've developed product capability and obviously have research capabilities, sales and trading capability in that area as well as banking capability. And so to me, the markets are open, the Fed has provided a backdrop where really any company that wants to access capital this year should be and is doing it. I think that extends well beyond the election if the Fed will continue to be accommodative, and that has enabled really, a lot of companies to get themselves well financed regardless of the outcome of the virus or when that actually begins to resolve itself.

And I think that's one of the big lessons learned this year is that this virus is going to resolve itself at some point. We are going to be in a better position. We are every day living with the virus. And so the challenge for companies is to make sure that you have enough financing until that demand comes back and until you drive your top line revenues. And so for many of our clients, the goal is to get themselves well financed enough to get through that valley. And as we start to see economic activity pick back up again and much the way we've seen it already pick back up again in 2020, our companies are going to be well positioned. Our clients are going to be well positioned to take advantage of that.

Great. And if I could just slip one more in here. On the capital priorities, it was nice to see the increased buyback in the quarter and doubling of the dividend. But just wanted to think about the -- maybe the pace of the dividend increase going from here, kind of what's the strategy?

And on the inorganic growth side, I mean, how are conversations going? Are you looking for potential targets? And how are you balancing kind of all those things?

Yes. So it's been a year in which we've generated a lot of cash flow. And I think if you look at the performance over the last 2 quarters and what we expect for the not-too-distant future, we feel very comfortable increasing our dividend to this size. I don't think we'll continue to increase it at the same size all the time. But to not acknowledge the incredible progress that we've made, building the equity of the firm, to not acknowledge the amount of cash flow that we've generated would be a mistake. And our view is that we have an opportunity here to reward our shareholders, both by increasing our stock buyback as well as providing a dividend yield. And that, in a 0 interest rate environment, can start to be very meaningful.

So going forward, we'll continue to look at using both levers as a way to return capital to shareholders. We are very focused on total shareholder return. That's a big metric that we want to make sure that we're driving. And as our business continues to improve and we see continued growth and continued cash flow, we're going to continue to use both of those levers to make sure that our shareholders are getting the returns they deserve.

Our next question will come from Devin Ryan with JMP Securities.

Great. So first question here, I want to focus on productivity. And just looking at revenues at a firm level, on a trailing 12-month basis, you're north of $1 billion. But actually, even more interesting to me, you're approaching $1 million of production per employee, which I've always used as a benchmark for very successful firms. $1 million, you can pay employees well, you can invest for growth, you could still deliver strong margins. So I think that's impressive. And I know the backdrop clearly has been good for business. But how do you guys think about benchmarking what an appropriate level of productivity is? And really, where I'm going with this is if we think about the framework in the model today and future growth, how do you think about the ability to both expand headcount and what that could look like and also productivity? Is there room for more productivity from here in addition to expanding headcount? And if there is, where is there more productivity opportunity?

Well -- so I would say that metric is an output, right? It's sort of looking at the scoreboard. And I think it's a valid metric when you're looking at how to value us compared to our competitors. I think -- and so I don't minimize the importance of it. I just don't think it's something we can manage to, right?

I think we have been very tactical in making smart investments, either organic or inorganic investments that drive ROE. And that's really been the primary metric that we've used, which is over a business cycle, whether that's 2 or 3 years or any year like this year, when you can have significant -- when you can garner significant share, are you making the right kind of investments in the teams to grab that share.

When we think about hiring, we're thinking about markets that are expanding, where the total addressable market for our products and services is increasing or where we can take share from weaker competitors. And so when you look at the various places where we've made hires, what -- obviously, health care jumps off the page, those are investments that we began to make over a decade ago because we had a fundamental belief in the growth of that space. And we still think there's plenty of room to go on that. And so I can certainly see us adding capability in that area, most likely inorganically through -- as the industry continues to expand and we leverage off of the success that we've had. That's something I can certainly see us doing.

I think we highlighted sustainability as another growth area, we think has legs for the next several decades as we're starting to see -- those were investments we started making 2 or 3 years ago. And so going forward, I can certainly see us adding capability in that area. Though one of the things that's interesting is if you think about sustainability, it really -- each of the industries we cover is actually going through their own sustainability upgrades. So we look at industrials and transportation and workforce automation in all of these areas where we're going to see meaningful investment, and a big chunk of that investment is going to come from sustainable investing, whether that's agricultural investing or ag tech or any one of a number of these key themes. And so we will continue to add people that drive that revenue because of their relationships.

The last thing I would say is I think product capability is really important for us. And so we've chosen, in the SPAC business, for example, to be more of an exclusive player in SPAC. So it's not about the number of deals we do. It's about the quality of the deals that we do and the outcomes we generate.

And so I think we have been inundated with demand in that area as well as a number of other areas. And so for us, the most, I'd say, critical thing we can do is continue to hire high-quality people who fit our culture amazingly, who can get on the platform and really drive revenue very quickly. And if that means maintaining -- that we can continue to extend that $1 million a year per employee grade, if it dips a little bit, that could happen, too. But again, our eyes are focused on the bottom line here. And we have the opportunity to make the kind of investments we've made over the years. So I've seen it happen and come together in a year like this year, gives us a lot of confidence in our ability to continue to invest.

Got it. That's very helpful color. And then maybe just to pick up on some of the points you just made there. As you continue to diversify the investment banking breadth, whether that be products like SPAC where account has a great footprint already or areas like sustainability, as those continue to elevate in the conversation, are there any sectors that the firm is not in right now where they would fit more with some of the connectivity of whether it be products or themes like sustainability? I'm just trying to think about whether there's room for additional sector focus with some of these emerging trends in the market.

I would say we're looking at adjacencies. That's actually a better way to think about it in our view. So if you look at adjacencies, you can see how biotech leads -- blends into tools and diagnostics, blends into future health. Like that's -- there are some nuances that if you're in this industry, you recognize the difference between those 3 categories, but we tend to lump it all together. Certainly, if we look at adjacencies in and around health care, health care impacts just about every industry also. That's another theme that we've talked about.

I don't have anything specifically on sort of our agenda that says, "Hey, we're not in fill in the blank, and we should go do that." I think we've done a very good job at focusing on areas where we have deep domain expertise and then figuring out where the activity is occurring in and around those industries. And I think sort of the necessary and essential ingredients to our success is seeing where there's industry disruption, seeing where the new company formation is actually occurring and who's likely to be a disruptor, bringing to bear both strategic and financing advice to actually deliver.

And it has helped us to compete very significantly against firms, both larger than us and smaller than us. And a lot of our bigger competitors are balance sheet dependent in terms of their ability to win business. That's been a strategy that, for the last decade, has worked really well for the big banks. That's not really available to us at Cowen. So we compete on intellectual capital. And a number of the smaller firms just don't have the breadth of capability that we have. So they may have industry expertise or relationship depth but -- and they can go deep in 1 product area like M&A advisory, for example. But once it gets into marrying M&A advisory with a financing capability, then they get a little out away from their core competency. And so the strategy for us has been to look for those industries where there's disruption, look for adjacencies as those businesses grow organically, make sure that we find the disruptive companies that are evolving in those industries and then bring to bear our industry expertise as well as our financing expertise to win business.

And that takes time. So we've been talking, Devin, for the better part of the last decade about the investments we've been making. And there's just -- there's no shortcut to bringing people on to the platform and having them integrate. And what you're seeing this year, I think, is the benefits of having made a number of those investments over the course of the past half a decade or so. And they're really starting to congeal as people are looking at ways to deliver for their clients. That's what this is really about for us.

Okay. Terrific. And then just last quick one for me. I think a big talking point through this earnings season is just the efficiency that companies are seeing through the pandemic here as everyone's gotten used to working remotely, but also just the lack of travel and how that's allowing firms to do more in terms of bankers not being on airplanes half the week and actually spending, in some cases, more time with clients or executives spending more time with key clients because they could be in more meetings. And so I'm curious around kind of how that interplays with spending, so the cost structure, kind of longer term, if there's any opportunities or if you think that some of this could be lasting to reduce non-comp costs. And then just if there is any view around that kind of comment of is there a world where we all kind of become a little bit more productive because some of that travel that wasn't necessary historically is replaced with more, call it, client face time.

So I think there's definitely more efficiency. I mean you can be across time zones in a matter of seconds as you migrate from 1 video call to the next, and that's something that I don't think any of us could have contemplated.

And being relatively stationary allows you to stay focused on delivering for clients. Like I hadn't really focused in my own personal life about how much time I spend in transit and how difficult it is to focus on key elements, particularly when you're delivering for clients when you're moving from one place to another. So I don't underestimate the power of that efficiency and its impact here.

I do think, though, it's important to -- over time, for us to be back together again. And I do expect that in the future, we will see travel pick up, though I don't expect it to be quite at the same level that we saw. I just think there's a fundamental shift on the part of both clients and our team internally here, our colleagues that where -- travel will be more because we want to travel, not necessarily because we have to travel.

And I think we'll go through a phase there where people are going to want to get out to see clients. Clients are going to want to see us. We're going to want to see each other. We have had a few instances or opportunities over the course of the past quarter for some of our senior management to get around and see a couple of our offices in different geographies, and there's nothing like being together. Obviously, we did that in appropriate ways, where there's social distancing and mask wearing and all the things to protect ourselves. We obviously -- we've been doing testing when people are traveling, too. So we're being thoughtful about it. But when you actually see people that you haven't seen for 6 months and you're in the same space with them, there is an electricity there that is not replicable remotely. So I expect that we will see as we move into 2021, probably the back half of 2021, any meaningful amount. You'll see a pickup in things like -- in travel expense.

I think one of the things, and I want to turn it over to Steve here in a second. We've had tremendous productivity gains around that. And one of the things with Cowen is because we've seen so much growth in our trading businesses, our variable costs have continued to increase in an absolute sense. And we -- our T&E is also a variable expense so the reductions in T&E have been offset by transaction costs. And when you look at -- that's why we haven't seen a reduction in the variable expense line in any meaningful way. And I think Steve can quantify that for you in a moment. But when you look at the direct drive revenue gains associated with those transaction costs, I would say we have a much better handle on our overall noncomp-to-revenue ratio. And obviously, you've seen that come in significantly. I mean, Steve, maybe you can give a little bit of a guidance on that.

Yes. Just this quarter alone, Devin. Our T&E and client entertainment budget was down over $7 million from what we would have been expected and what we budgeted for, but that was obviously offset by -- our revenues in the markets businesses were so high that our trade and execution costs were up that offset the savings in travel and entertainment and things like that.

But in budgeting for next year, I would expect, as Jeff was saying, maybe 25% will come back in the first half of the year and then maybe 50%. But we're working with others to determine how much they think their teams will travel. But it's going to pick up, but not -- we don't expect it to be back to the levels that we were experiencing in the past for all the reasons you stated. I mean I don't think bankers are going to travel as much as they did in the past because they are efficient working either in the office or from home and not having -- they don't have to go visit everybody all the time.

So another big savings, Devin, as we head into the first quarter next year, our biggest conference expense -- our conference expenses is a seasonal game. And our biggest expenses happen in the first quarter because of number of events we have. Also, our largest health care event happens. And that happened this year, right? So when you look at the savings we've had this year, the savings includes having already spent in our biggest quarter. There were no noncomp savings in the first quarter next year. When we get to the first quarter of next year and that quarter rolls off, you will see what the full year savings is because that's such a meaningful part of our conference spend. And virtual conferences, obviously, are a lot less expensive.

And the last thing I would say is it's not just banker travel, it's analyst travel. And if you look at the efficiency from our analyst teams, and I'm sure you're experiencing this yourself, virtual NDRs, virtual corporate events are really -- can be really impactful and are a lot less expensive to do. So there'll be some, I'd say, long-term efficiency gains there that probably don't return -- the costs don't return.

Our next question will come from Steven Chubak with Wolfe Research.

So I wanted to start off on the brokerage business. So looking at how revenues are tracking relative to peers, you guys continue to see really nice momentum. Can you remind us, Jeff, just what you believe is a sustainable run rate for that business?

And separately, just recognizing institutional brokerage is going to be tethered to the operating environment, other market indicators like volatility, but how should we be thinking about that services line? You've seen a nice step-up there. I'm trying to just gauge what the sustainability of that higher run rate is.

Well -- so a couple of things. So what's driving the services line and certainly the growth in our prime brokerage businesses and the growth in our securities lending business, so I -- that -- particularly the growth in things like outsourced trading and our securities lending and prime spaces, we continue to add capabilities on a selected basis like the Delta One book and the swap capability for some of our clients. So that -- all of those operate as we take share from other competitors. They operate independent from the market volumes business. I mean they're somewhat market volume dependent, but they are a lot less market volume dependent, and there's room to grow.

I think one of the things that you've seen this year that also is different than what people are seeing in the rest of their businesses is we've grown organically in Europe. The European growth trajectory has been pretty significant. That team has been here for exactly 1 year. And it shows that there's real share gains to be made in Europe with a very focused trading product. And so one of the reasons why I think we're winning in our business as opposed to some of our other competitors is because clients want to have both the trading capability as well as the research sales capabilities. So there have been others of our competitors who have really strong research franchises, whose equity businesses have not actually shown market share improvement or have declined in revenues. And that's just a function of the fact that you have to be in both sides of the business. It's something we've been saying for over 8 years. And so you have to make it really easy for clients to pay you. I know you know this because you're in the business.

And so I would say we can continue to show share growth in those areas. But obviously, we're still volume dependent. And the guidance that we gave or the comment that we made here is that we expect to be a little bit more volume -- tied to volume. Certainly, in this quarter so far, with the slowdown in October, we're seeing our business slow down in line with that. But yet, we still see our ability to garner market share. And so I would expect that you'll see -- just like in the third quarter, when we saw 20% declines, we didn't decline. And so it gives us this buffering, I'd say, is probably the best way to say it -- that makes us a little less dependent on purely tracking market volumes. Is that helpful?

No. That is helpful. But I know, Jeff, in the past, you framed it as like a base level, either it's a $2.1 million of revenue per day. I didn't know if that was something you guys were comfortable underwriting here.

I think we can -- we've been doing that pretty comfortably.

Okay. Fair enough. And maybe just a follow up on the expense discussion from earlier, but maybe just focusing a little bit more on the comp side. You guys have done a really nice job, as was noted earlier, of staying disciplined on noncomps. Now I'm just wondering how we should be thinking about the potential for comp leverage just given the strength of the revenue momentum that we're seeing. I know that you guys have been hitting on your targets. I'm just thinking, over the long term, is there room to deliver more meaningful comp leverage, especially as some of these areas like SEC lending that should be higher incremental margin continue to scale?

I think we've actually stated pretty clearly where we think we're going to be in terms of comp. I don't -- I think it's very important in years like this year that we make sure that we deliver for our colleagues. And we have the margins. I mean I think that's a really critical thing.

As I mentioned earlier in the call, we -- constant revenue ratio is an output. It's an output of revenue mix. It's an output of profitability. Our view is we should make sure that we deliver for shareholders, for our clients and our colleagues. And I think when you look at where we are and the guidance that we've given and where we expect to land, that allows us to do all of that.

Got it. And just one final one for me, just on the election. I was hoping to get some perspective on how you're thinking about the election impact and just implications from changes in the tax regime. And any early signs you're seeing of just changes in potentially capital gains treatment, driving some front-loading of deal activity?

So you're presuming there's a blue wave coming. And I would say we'll take a step back for a second and say, regardless of what the election outcome is, there's some real underpinnings that will ignite growth. First of all, the Fed stays accommodative regardless of who's in control. I also think there'll be a significant fiscal spending package that happens regardless of who's in control. The difference will be where the money is and the size of the money.

I think from a blue wave standpoint, if that actually occurs, I think it's fantastic for the market, to be clear, because there will be a much bigger spending package that occurs that will more than offset any drag from tax -- from a tax increase. So people tend to pick and choose what they want to focus on. A tax increase could impair valuations or reverse some of the gains that we saw from the last tax cut. But effectively, we're going to go back to where we were a few years ago. That's really what we're talking about here from a tax standpoint, on capital gains at least anyway. And I think that will be more than offset by the amount of fiscal spend that's going to happen in areas like sustainability, right?

And the interesting thing is it's hard to say that we're seeing increased deal activity ahead of that. I think the increased deal activity has been a function of the fact that everybody has learned that they got a reprieve here from the Fed, lubricating the capital formation and enabling people to raise the money to do what they need to do in order to execute on their business long-term regardless of the virus.

And we said this over and over again. Within industries, there are going to be winners and losers. That's a big theme for us. So if you look historically, what's happened is you could asset allocate based on what you thought about where there were tailwinds or headwinds in various businesses. That's the growth in passive investing is essentially that, if you will. The proliferation of passive funds is what enables people to do tactical asset allocation based on relative weightings of how they feel about industries without picking winners and losers.

The problem is you're seeing dispersion of returns now on that strategy. And there are winners and losers within industries because people have been in position to garner market share and people have been out of position to garner market share. And I think if you look at your own coverage universe, you'll see probably one of the widest dispersion of returns based on how people's business models look. That's a fantastic outcome for us at Cowen, for you, at Wolfe, people who focus on fundamental analysis and picking winners and losers.

And so regardless of what the outcome is of the election, that probably persists. And that's our base case analysis. And so I think we're -- we think, regardless of whether or not policy changes are spurring more activity, I don't think I'm smart enough to know that. I just see this as an -- a fundamental shift in the way that our clients are doing business, and we're well positioned to handle it.

Our next question will come from Michael Brown with KBW.

So I wanted to -- most of my questions have been asked and answered. I guess I wanted to just start with the buybacks, though. So obviously, you guys really acted this quarter. You were using a 10b5-1, and you purchased a shy of kind of $20 million of common stock. Does that represent kind of your ceiling for a quarter? Just trying to think about going forward if you can start to monetize the Nikola shares later this quarter and how you might deploy some excess cash. And obviously, you're throwing off a lot of cash from your operating businesses. Is that the right way to think about roughly what you can kind of do on a quarterly basis? Just kind of help frame that for modeling.

So I think -- first of all, it's a good question. And obviously, we had some decent insight on how in the quarter was shaping up so we had opportunities to buy the stock cheap, we were able to do that.

First of all, you should also recognize that our Board did authorize replenishment of our stock buybacks. So we're fresh up to $25 million because we bought so much stock back in the last quarter. So that should give you an indication as to how opportunistic we will be.

We've spent for the year about 25% of our cash flows. And I think I've been very consistent, as I said, we will buy back stock and return capital to shareholders based on our cash flow generation. Most of that cash flow generation this year has come from operations. And so I feel very comfortable continuing to maintain that pace as long as we continue to have the same kind of cash flow that we're generating from an operating standpoint.

When we have onetime events like the sale of some of the assets in Asset Co or the monetization of Nikola, we'll take a look at that. And there could be opportunities for us to do other things. And we won't commit to it at this juncture, but I think we've already demonstrated in word and in deed that, as we generate cash flow, regardless of whether or not it's from operations or from onetime events, they were going to do the right thing to improve total shareholder return. And if you go back a few years, that was always a challenge with Cowen, which is how is the TSR going to work. We had so much equity tied up in these illiquid assets that we weren't willing to potentially leverage ourselves or put ourselves at harm's way by getting ahead of ourselves on a cash flow standpoint.

One of the things that's happened over the last 2 quarters is we've generated more cash flow from operations in just the last 2 quarters than we would have had if we had liquidated the asset company at or close to the marks. We're in a very different position today, and we still own those assets. So to me, it gives us a tremendous amount of flexibility to think about how we can reward shareholders in the future when those assets monetize. And I think we've demonstrated in the last quarter and we'll continue to demonstrate our belief that when we're generating positive cash flow, we should be doing things with that to enhance total shareholder return.

Okay. Great. And thanks for the clarification on the share buyback authorization. Just one more for me. I just wanted to follow up on that comp leverage question. And yes, when you look at the year-to-date performance and your revenues are up over 50% year-over-year, but your comp expense is up almost 50% as well. And so I hear you that you certainly want to reward your top talent for kind of producing such strong revenue results, but it just seems to me that there should probably be some better operating leverage against that. And you talked about a little bit of the revenue mix. But could you just put a finer point on that just because it seems like you should be able to kind of run with a lower comp ratio given the results. And yes, sticking to 56% to 57% just seems a little bit high for a year like you've seen in 2020.

Yes. I would say it's been a remarkable year in a lot of ways. And when you look at the ROEs we're generating, which are way in excess of our targeted returns, so shareholders are going to get ROEs way in excess of what they expected. And when I look at all of our stakeholders, including our employees, the same kind of rules apply. This is a year that is an exceptional year in a lot of ways.

And we certainly are delivering for shareholders in ways that they couldn't have imagined, and we're driving margins. And those margins are sustainable even at these comp levels. And so we're very comfortable with the guidance that we've given because it makes sense to us in terms of the sustainability of our business.

Just to be clear, there will be other firms on The Street that can't do this, this year. And when we're playing for the long game, we're doing the right things by the people who deliver for us every day. Every day. And that -- without them, we don't get the kind of returns off of the bottom that shareholders are expecting or receiving in a year like this year. So it's about -- there's always a balance. But when we sat down to talk about it with our Board, and we sat down and talked about it internally as a management team, this is the right place for us to be. And so whatever the future holds, the future holds. But for right now, the guidance that we've given makes a lot of sense, and everybody is winning.

And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Jeffrey Solomon for any further remarks.

Thank you, operator. In closing, I do want to thank the team here at Cowen. I feel like that's sort of understating the efforts that everyone has made. Not only has our team demonstrated continued commitment to our core values into our clients during this difficult time -- and I say this as clearly as I can, it is an inspiration to be in the seat that I'm in. I get this -- it's an inspiration I get from all of you when I see the efforts that people are making and the way they're extending themselves for one another. And when I see the lengths at which people are going to deliver for clients, it makes me proud to be on the team here at Cowen. And I'm proud to be in a position where I get to talk about it on calls like this. And at the end of the day, it's been an amazing quarter from a financial standpoint, but none of that happens without the amazing activities of our team at Cowen. And so I just want to be really clear when I say it on a public call like this how grateful we all are for those activities and for that effort that everyone is making.

So with that, I thank you all for joining us, and I look forward to speaking with you on our next call. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.