Cowen Inc (COWN) 2021 Q4 法說會逐字稿

Good morning. Thank you for joining us to discuss Cowen's results for the fourth quarter and full year 2021. By now, you should have received a copy of the earnings release, which can be accessed at investor.cowen.com. After the speakers' presentation, there will be a question-and-answer session. As a reminder, today's call is being recorded.

I would now like to hand the call over to Mr. J.T. Farley, Cowen's Head of Investor Relations.

Thank you, operator. Before we begin, I would like 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 our 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, we will be referencing certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliations of those measures to GAAP are presented in today's earnings release.

As a reminder, we make available quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release.

Joining us on today's call are Cowen's Chair and Chief Executive Officer, Mr. Jeffrey Solomon; and our Chief Financial Officer, Mr. Stephen Lasota.

Now I would like to turn the call over to Jeff.

Thank you, J.T. Good morning, and thank you all for joining us on Cowen's earnings call for the fourth quarter and full year 2021.

Today, I will provide some highlights on our extremely strong operating performance during the fourth quarter as well as our record full year earnings. Then Steve will review the financial results in more detail. And after that, I will share some thoughts on the outlook for 2022 and beyond and why we remain confident in our ability to continue delivering strong results to our shareholders. Then we'll be happy to answer your questions.

2021 was a record year for Cowen. In terms of both revenues and profitability, we earned $10 per share in after-tax economic operating income, which is nearly 35% after-tax return on common equity, well above our guidance of targeting at least mid-teens after-tax return on common equity on an annual basis.

We generated record revenues in our broker-dealer, powered by investment banking and markets revenues, while the management fees in Cowen Investment Management hit their highest level since 2008.

Given our strong operating performance, we returned nearly $160 million to shareholders through a record amount of stock buybacks over the full year 2021. We are keenly focused on optimizing our capital structure, and we'll continue to do so out of our cash flows, utilizing a combination of share buybacks and dividends.

As we announced this morning, Cowen's Board increased the quarterly cash dividend by 20% to $0.12 per common share, reflecting our view of the positive outlook on long term for our operations.

We are returning this capital to shareholders even as we continue to invest in the business organically and through acquisitions that we believe will drive long-term revenue growth and diversification. This includes the recent purchase of Portico Capital Advisors, which closed in mid-December. It has long been a stated objective of ours to grow our advisory business in banking to augment our world-class capital markets financing and advisory activities. We were able to do that in a meaningful way in 2021 as advisory revenues were the highest percentage of our banking revenue since 2008. The Portico transaction accelerates this strategy as we head into 2022 and beyond.

We also delivered on our expense guidance, coming in modestly below our comp to revenue ratio for a second consecutive year, even as we increased our headcount by 12%.

Cowen has become an employer of choice in our industry. It is the place where talented people want to come to do what they do best. This can be evidenced by looking at both the strategic hires we've made in key revenue areas as well as the acquisitions we've made and successfully integrated over the past decade. We are after all a people business, which means that culture, talent, acquisition and retention have been and will continue to be instrumental to our success.

Now let's look at the fourth quarter operating highlights more specifically. In banking, we had a very strong quarter despite headwinds from reduced capital markets activity as well as the drop-off in SPAC activity. Banking revenues were up slightly compared to the very active fourth quarter of 2020, and it was our second-best quarter on record for M&A revenues. It was the third quarter in a row that advisory, which combines our M&A and capital markets advisory revenues represent the majority of banking revenues at 65%.

The industry breadth of our banking franchise was on display this quarter. Sectors outside of health care comprised 58% of total banking revenues, including particularly strong results from the TMT, consumer and tech-enabled services sectors.

Within health care, non-biotech areas, including tools and diagnostics, med tech and health care services as well as health care IT made up 47% of our total healthcare banking revenues.

Our sustainability effort also continues to gain traction. Sustainability-related banking efforts more than doubled in 2021, making up 10% of total banking revenues in the fourth quarter and over 15% in the full year of 2021.

SPAC-related revenues accounted for 29% of banking revenues in the fourth quarter and 32% of banking revenues for the full year of 2021. As a reminder, our SPAC revenues are weighted towards business combination or back end. In other words, pipe financings, capital markets advisory and M&A advisory. While SPAC-IPO activity has slowed considerably, there is still nearly 600 SPACs continuing and currently seeking acquisitions. And we expect to continue to capitalize on the associated fee pool from that product in 2022.

As I mentioned earlier, towards the end of the fourth quarter, we completed the acquisition of Portico Capital. The Cowen Portico team, as they're now known, provides deep industry knowledge and strong client relationships in the high-growth verticalized software data analytics sector, an area that has seen tremendous interest from both financial sponsors and strategic buyers. This transaction adds to the momentum of our investment banking platform and empowers the Cowen Portico team to provide clients with the full breadth of our capital markets advisory and research capabilities. Thus far, we are very encouraged by the strength of their core business and the multitude of new client situations emanating from joint marketing between our new partners and our existing bankers.

Looking ahead, with global economic activity continuing to be strong and disruptive technologies creating new opportunities in every sector, we remain very constructive and positive about the underlying fundamentals for both M&A activity and capital raising over the intermediate and long term, even as 2022 is off to a more challenging start.

We entered this year with more mandated transactions at the start of 2021, which is a great testimony to both the overall deal activity and the growth of our client franchise given the record levels of activity we experienced last year.

The diversification of backlog also continues to increase with a healthy mix of public and private M&A mandates as well as capital markets transactions. SPAC-related mandates now make up less than 30% of the backlog. Note that our backlog now includes mandates from Cowen Portico.

While the number of mandated deals is higher, the timing of conversions is being impacted by market conditions, namely increased market volatility, inflationary pressures, geopolitical uncertainty and rising interest rates as global central banks shift away from their decades long accommodative stance. These factors have led to increased equity market volatility, which has in turn slowed capital markets activity for the first 6 weeks of 2022. But as the market digests the macro news flow, we anticipate the volatility will subside. And when it does, we are confident in our ability to convert the vast majority of our mandated backlog.

It is also worth noting that there have been 2 6-week periods in each of the last 2 years, in which market volatility significantly interrupted capital markets activity. Both of these periods were followed by a rush of transactions from companies that needed capital, particularly in industries where Cowen is well positioned.

It is also worth noting that Cowen's banking franchise is in a very different place than it was just a few short years ago. We've made meaningful strides in our strategy to become a provider of holistic financing advice by offering companies alternatives to funding in the public markets, and we've grown our advisory business significantly. In fact, in recent weeks, we've seen an uptick in our clients seeking less dilutive alternatives given the current equity market conditions, hence, our confidence that we remain well positioned to benefit as our clients consider how best to match their aspirations with the challenging market realities.

Turning now to our markets business. It was a strong quarter, averaging $2.7 million per day in revenues, up 7% from the previous quarter. While average daily revenues were down 8% year-over-year, much of that drop, about $4.7 million was due to the wind down of most of our clearing operations in 2021.

As a reminder, the clearing business required significant amounts of equity and regulatory capital in order to support it. And we made the decision that the returns on equity were not attractive enough in that business to retain it.

Highlights for the fourth quarter included year-over-year gains in cash trading, prime services, non-U.S. execution and ADR trading. For the full year 2021, we also had solid gains in securities finance and electronic trading. We have plenty of strong momentum in prime services in our swaps business, given the decision by a number of competitors to scale back or exit these areas. With these shifts and competitive dynamics, we are being opportunistic in adding new talent to our team.

Overall, we continue to see higher highs and higher lows in our markets business. Third-party industry surveys demonstrate our momentum as we have increased our share of the institutional commission pool consistently over the last few years. This is borne out by our revenue growth.

Since the start of 2018, our markets revenues have generated a compound annual growth rate of 13%, which is double the average of comparable revenues in our peer group. We are also making progress on the buildout of Cowen Digital, our digital asset initiatives. And despite the recent volatility in cryptocurrencies, the engagement level among clients remains extremely high, and there is clear demand for institutional quality capabilities and infrastructure in that sector.

We will have additional updates on Cowen Digital throughout 2022.

Looking at the current quarter, we're off to a very strong start, with average daily revenues running above our fourth quarter and full year 2021 averages.

In research, our fourth quarter, we initiated coverage on 53 stocks. Today, we are actually close to covering almost 1,000 stocks, and we are firmly in the top-10 in terms of U.S. stocks under coverage.

In the fourth quarter, we also published 12 of our flagship Ahead of the Curve series reports, including a primer on cell and gene therapy tools and a deep dive on edge computing. Clients continue to value our differentiated research.

As part of our focus on thematic research, in the fourth quarter, we released a new version of our well-regarded themes outlook, highlighting 14 investment themes to watch this year.

We are also taking a leadership role in ESG and sustainability research and are proud to have been recently named Best ESG Research by a leading third-party publication.

Our research team continues to produce excellent results. And during the fourth quarter, we saw another meaningful gain in brokerage votes from our institutional clients.

In investment management, our fourth quarter results were strong, and we increased the size of our business even in the face of a challenging investment environment for our growth strategies. Total assets under management grew $15.8 billion, up 7% quarter-over-quarter and an impressive 26% year-over-year. Incentive income for the quarter was at $13.5 million and $33.4 million for the full year. The biggest full year contributors were from sustainability and the activist strategy.

Management fees were up 20% year-over-year to $20.1 million for the quarter and full year management fees rose to 36% to $80.5 million, the highest level since 2008 due largely to higher AUM in the health care, sustainability and activist strategies. The growth and consistency of our management fees is a valuable and, I would argue, underappreciated part of Cowen's core earnings power.

Looking at our 5 strategies. Our sustainability strategy had almost $1.4 billion in AUM at the quarter end. Performance remained strong even when factoring in the volatility of the Proterra investment.

Our health care investment strategy completed 2 new investments and ended the quarter with just under $1.2 billion in assets under management. Long-term performance remains strong despite the declines in the value of public positions during 2021. The activist strategy grew assets to almost $8.5 billion and the strategy outperformed its benchmark for the full year 2021.

And finally, the merger arbitrage strategy had $319 million in AUM, and that strategy outperformed the HFRX merger Arm Index during the quarter and the full year of 2021.

The health care royalty strategy also ended the quarter with over $3.6 billion in total AUM.

As a reminder, our balance sheet does not reflect the value of our investment strategies in any meaningful way. In the coming quarters, we'll be working on ways to better highlight the value of the investment management business in order to present you with a clear understanding of its substantial work.

Turning to our balance sheet. We had investment income losses of $5.9 million this quarter due primarily to negative quarterly marks in the value of investments in our health care strategy and in our merchant banking portfolio. Our investment income was positive for the full year of 2021 at $14.6 million. And as a reminder, Cowen has always had quarterly fluctuations on our incentive and investment income lines. But in every year since the global financial crisis in 2008, we've had positive contributions on an annual basis from our combined incentive and investment income.

Looking at other items on our balance sheet. We had some developments during the quarter in Linkem, the largest investment in our Asset Co segment. In late December, the retail unit of Linkem announced plans to merge with an Italian fixed line operator named Tiscali, in exchange for a majority stake in the company, and this pending agreement would effectively separate the retail operation of Linkem from the network operations and the wireless spectrum. We are hopeful that this will help move us closer to monetization of this noncore asset.

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

Thanks, Jeff. GAAP results for the fourth quarter of 2021 were as follows: Total revenues were $494.3 million, down 16% year-over-year from $591.7 million. Net income attributable to common stockholders was $63.3 million or $2.02 per diluted share, down from net income of $90.5 million or $2.98 per diluted share in the prior year period. Compensation and benefit expenses were $237.3 million, a decrease of $40.1 million from the prior year period. Expenses, excluding compensation and depreciation and amortization were $130.7 million for the fourth quarter and D&A expense was $5.3 million.

Income tax expense was $25.2 million, down from $37.8 million in the prior year period. As a reminder, we utilized all available net operating losses during 2020. However, we have been a cash taxpayer since the beginning of 2021, and we do still have a small deferred tax asset.

Now turning to our non-GAAP financial measures. We had total economic income proceeds of $454 million, down 11% year-over-year. For the quarter, economic investment banking proceeds were up 0.3% year-over-year to $255.2 million. Economic brokerage proceeds were down 8% year-over-year to $170.3 million. Economic management fees for the quarter were up 20% year-over-year to $20.1 million and economic incentive income was $13.5 million in the fourth quarter of '21 versus income of $44.4 million in the fourth quarter of 2020. Economic investment income was a loss of $5.9 million versus income of $10.3 million in the prior year period. And turning now to our expenses.

Compensation and benefit expense for the quarter was $238.9 million compared to $279.9 million in the prior year period. Our comp to proceeds ratio decreased year-over-year from 54.6% to 52.6% of economic income proceeds.

For full year 2022, absent any major prolonged decline in capital market activity, we are targeting an annual compensation ratio between 56% and 57%, although it may vary from quarter-to-quarter and is dependent on revenue mix.

Fixed non-comp expenses totaled $43.9 million in the fourth quarter, up from $38.9 million in the prior year period and variable non-comp expenses in the fourth quarter of 2021 were $50.3 million versus $45 million in the prior year period. The increase in non-comp expenses were due primarily to higher travel and entertainment expenses, business development expenses and professional service fees. The non-compensation ratio increased to $20.7 million of revenues, up from $16.4 million in the fourth quarter of 2020.

Depreciation and amortization expenses were $5.3 million compared to $5.9 million in the fourth quarter of 2020. And economic income tax expense for the fourth quarter of 2021 was $24.6 million.

We generated economic income of $82.6 million in the fourth quarter of 2021. Economic operating income was $86.7 million or $2.77 per common share, which includes the impact of taxes at an effective rate of 22.6%. In future quarters, we expect our effective tax rate to be in the range of 25% to 28%, depending on the nature and geographic sources of our income. This estimate is a lower range than our previous tax rate guidance of 25% to 29%. For full year 2021, we generated economic operating income of $326.4 million or $10 per common share.

Turning to the balance sheet. At quarter-end, Cowen had invested capital in Op Co totaling $734.8 million, up $677.7 million at the end of September 2021. In Asset Co, we had invested capital totaling $121.2 million at the end of December, up from $120.2 million at the end of September 2021.

Turning to our equity. Common equity, which prior to this quarter was stockholders' equity less preferred equity, was $1.02 billion, up from $981.8 million at the end of September 2021. During the fourth quarter of 2021, we made an irrevocable election to cash settle part of our convertible preferred stock upon any conversion or redemption. And therefore, the preferred stock was reclassified from stockholders' equity to temporary equity. As a result, common equity at the end of December 2021 equals GAAP equity.

Common book value per share, which is common equity divided by total shares outstanding, rose to $36.57 as of December 31, 2021, up from $35.4 as of the end of September 2021.

Tangible book value per share was $26.56 at quarter-end, down from $29.17 at the end of September 21, due in part to the Portico acquisition. After-tax return on common equity was 34.7% for the fourth quarter of 2021, well above our target of generating at least mid-teens after-tax return on common equity on an annual basis.

In mid-December 2021, we closed on our acquisition of Portico Capital Advisors for an aggregate estimated purchase price of $112 million, of which Cowen paid $91.3 million in upfront consideration. The acquisition increased Cowen's goodwill by $86.9 million and intangible assets of $19.9 million with a weighted average useful life of between 1 and 4 years. For full year 2022, we expect $9.6 million in intangible amortization expenses related to this acquisition. Full details on the purchase price and the accounting treatment of future contingent consideration will be available in Cowen's 2021 10-K filing.

Regarding capital returns to shareholders, as Jeff noted, we increased our quarterly cash dividend to $0.12 per common share. During the fourth quarter, we repurchased $36.9 million in stock, a total of 1.04 million shares, including purchases executed according to our existing 10b5-1 plans. That is equivalent to 43% of our economic operating income.

For the full year of 2021, we purchased shares at a value equal to 49% of our economic operating income, well above our minimum annual guidance range of 25% to 35%.

Our fully diluted share count at year-end was 32.6 million shares. Note that due to the change in accounting rules regarding convertible instruments starting in the first quarter of 2022, we are required to use the if-converted method for our convertible preferred stock and our diluted share calculations. We expect this rule change to increase our first quarter 2022 diluted share count by approximately 1.5 million shares.

Looking ahead, we will continue to be opportunistic in share buybacks depending on market conditions and available cash flow. We'll also prioritize additional capital returns when we're able to monetize assets on the balance sheet.

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

Thanks, Steve. The fourth quarter was strong across the board, and it caps a record year for Cowen. This success is the result of the hard work of our team, who outperform every day to help our clients reach their goals. We're grateful not only for your dedication, hard work and adaptability particularly over the last few years, but we are also proud of how we have done so while staying committed to a culture based on our core values of vision, empathy, sustainability and tenacious teamwork.

Before we take questions, I'd like to briefly outline some of the reasons why we remain confident about the sustainability of Cowen's core earnings power.

We believe we built a firm which can generate at least mid-teens after-tax return on common equity on an annual basis. Although there will be quarterly fluctuations depending on overall market conditions, the organization is built to earn those kinds of after-tax returns over the business cycle.

In investment banking, multiple years of organic growth, along with targeted acquisitions have provided us with depth across public and private M&A as well as capital markets and strong relationships with middle market financial sponsors.

As an employer of choice, we will continue to add people and teams opportunistically, especially during times of uncertainty when many of our competitors are doing the opposite. So much of our record revenues in banking last year emanated from our One Cowen approach to client service, mandates for private placements or M&A deals that turned into IPO or SPAC transactions, SPAC transactions morphed into private capital raises or follow-on offerings that became debt advisory assignments.

This diversity of expertise has differentiated Cowen in the ecosystem. And clients we advised have benefited from our being a lot less dependent on any one product or industry. And we've created that with a degree of intentionality that enables us to be versatile as we provide advice to our clients.

In markets, we built on our strength in U.S. cash equities, expanding into non-U.S. execution, options, swaps and less volume dependent areas such as prime services and securities finance. Our special situations across asset teams help our clients capitalize on opportunities, which are less well understood or where liquidity is challenging. Overall, our markets business has generated more than $2.5 million in average daily revenues for the past 7 quarters, and we believe we can sustain at least that level and likely higher, absent any huge market dislocations.

Moreover, not only do we have the revenues in that division, which have proven to be consistent, but the opportunity for us to continue to take share will provide us with attractive long-term growth opportunities, particularly in disruptive areas like digital assets, where our institutional clients have only barely begun to engage.

In investment management, we have built an impressive roster of private equity-style strategies with steady management fee streams and our management fees are now on an annual run rate of approximately $80 million, with potential upside from additional increases in AUM. We also expect our incentive income 2022 to be up year-over-year.

Overall, our capabilities have never been stronger. In addition, Cowen has a larger client set than ever before. In short, we are in a very different position as an organization than we were just 4 years ago. That's why we remain confident that we are well positioned to succeed in delivering for our clients and for our shareholders year in and year out.

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

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

Just wanted to start with the banking side of things. I appreciate the commentary kind of on the uncertainty and optimism around that, but we're seeing kind of industry ECM volumes trend down about 70% below last year's start to the year, and public data shows you guys are doing some activity in biotech and maybe some in semiconductors as well.

Can you update us on some of the trends you're seeing across those focus sectors? I know there are some concerns around potential regulation for drug pricing weighing on biotech. What are the catalysts you're looking for today in that sector? And then maybe when you think those could come through?

So great question, Sumeet, and thank you. So a couple of things. First of all, I would say, when you look at the calendar for underwriting, historically, January outside of biotech and SPACs has actually been a relatively slow time. The fact that biotech has slowed down in the first quarter this year, it's really more a function of the fact I think that, honestly, the valuations have come in so significantly. And it takes time for management teams to -- it takes time for them to make the commitment to actually go out and raise the capital.

We've also seen a significant amount of activity and less dilutive financing. So many of these are clients that would have otherwise tapped the equity market at higher valuations they're looking at, royalty deals and debt deals. And in fact, in the month of January, we actually added meaningfully to the backlog and those opportunities. Those don't show up in places like Dealogic or mandated M&A backlog. But when you talk about the versatility of the business we built, that's why we remain confident.

Drug pricing, I think for as long as I've been in this business, it's always been a sector that's been an overhang in the industry. Sometimes it appears to be more serious than others. The industry has done a really good job though at getting out in front of it. And our belief is that any drug pricing regulation will not be geared towards impeding the growth part or growth innovation, and that's really critical. So what we expect to see is some degree of drug pricing from Congress this year. But I think it will be much more targeted towards the larger pharmaceutical companies who really make their living off of increased drug prices year in, year out, not from the companies that we bank, which are doing really innovative things. So my conversations would suggest that's how that's going to play out.

I will also say, there's one thing I know about this industry, everyone wants to wait to see a better day on stock prices to do offerings. And they want to do it off the back of good positive clinical results. Already in February, we've seen more activity than we saw in January. We have to wait, obviously, for a number of companies that once their numbers go sail to actually announce their earnings and then they'll be free to raise money. They continue to do so in other ways too. At-the-market offerings, that business has grown significantly for us.

So again, as I said in my script earlier, we've seen these periods of time, 4 to 6 weeks of disruption in the capital markets and what we've seen in each of the last 2 years, in particular, is once that subsides and markets find their levels, everybody who needs to finance, finances. That's what happens. And so whether that happens in the first quarter or the second quarter, I'm not smart enough to know, but I do know what's coming because every one of them needs to raise money and Cowen is the best of that. So we expect that when you look at it over a full year, that's why we remain as confident as we do.

Great. That's helpful. And then just one quick follow-up here, kind of a 2-parter on capital allocation. Just kind of first on the dividend. I appreciate the increases over the last year, just kind of maintaining that 1% yield roughly. How are you thinking about that rate going forward as the firm kind of continues to earn at a new much higher level compared to just a couple of years ago? And then secondly, I appreciate that the monetization should drive a lot of the future demand for buybacks. But is there room for in the near term to increase that pace ahead of these monetizations, considering you guys are trading at a wider gap to earnings today than you did 4 years ago when you took over?

I think we'll be -- we talk about capital optimization all the time, and you and I have talked about this as well. I think it's our stated objective to balance both return of capital to shareholders using both dividend payments as well as stock buybacks. And we also have some stated objectives and we want to continue to grow the diversification of the business. And I would argue that some of the decisions we made in the middle part of the last decade to invest in certain businesses to really drive -- driven our outperformance significantly and where we made meaningful revenue, we're seeing meaningful revenue growth in 2019, 2020 and then 2021.

So I think we'll continue to return capital, particularly as we trade at discounts to book value, that is an easy way for us to create value to shareholders. We'll continue to do that. We'll also continue to raise the dividend incrementally as we see our business continue to scale.

And I would say -- a lot of people ask the question, sort of where things normalize out. I look at the growth we've had over the past few years, and I recognize that it's been exceptional. I also recognize the firm is structurally in a very, very different place than it was even in 2018 and 2019, given the number of MDs we've hired in banking, the acquisitions we've done, the sustained growth in our markets business and the growth in our AUM. And so as investors look at where will Cowen be, I often times say, "Look at where we were in 2016, '17 and '18, and it is a materially different firm." And I think, certainly, you and some of you compatriots do a good job of articulating that. But I think the rest of the world will ultimately catch up to that.

Our next question comes from Steven Chubak with Wolfe Research.

So maybe just to start off, I know you're planning to host an Investor Day a little bit later this year. I was hoping you could just speak to what prompted the decision to host the event? And can you speak to what you're planning to unveil as part of the upcoming Investor Day?

So I think a part of it, Steve, is what I just mentioned in the last answer. I don't think that shareholders fully -- or potential shareholders fully recognize the transformation that's gone on here. So many people ascribe our success over the past few years to market conditions, and we've definitely benefited from those to be fair. But I think Cowen would not have benefited for them nearly as much as we did if we hadn't made the strategic moves we've made. And so our goal is to be able to articulate with, I think, a greater degree of clarity, the things that drive our business. And it's easier for us to do that in an Investor Day than it is for us to do that on a quarterly call.

Quarterly calls are meant to give people periodic updates. We'll lay out strategy and try to give you some sense as to why we remain highly confident in our ability to deliver on the business, which we do. But if you really want to dig in and understand the core drivers of the business, it takes some time. And we've got things that we're working on. We've mentioned certainly, things like Cowen Digital, as that progresses, ways for folks to think about our asset management business and how to model that up with a greater degree of transparency. Those are all the kinds of things that we're going to cover.

From our standpoint, knowing what we know at Cowen, it isn't that hard to make the case for why Cowen is significantly undervalued and why we think the core drivers remain in place. We see that every day from the inside. And I just think it takes some time for us to really level set with everybody who doesn't know the story and help them to understand why we think there's a lot of value creation still here on the table. So that's the primary impetus for that, Steve.

Thanks for that perspective, Jeff. And I guess following up on -- well, it's maybe a little bit of a softball question, but figuring now is the opportune time just to unpack some of the commentary around expense. And this quarter, you certainly -- and even for the full year, you demonstrated good expense discipline. And as we look ahead, given the inflationary environment, just the challenging revenue backdrop to start the year at least, how should we be thinking about the comp flexibility if we do see a material and sustained slowdown in activity? And also in terms of the non-comps, how should we be handicapping the noncomp inflation, given continued normalization in T&E in particular?

So I'll handle the first one, and I'll turn over the second part of the question to Steve. Listen, obviously, if revenues slow down, we'll be at the higher end of the comp range we've articulated. I also think a lot depends on revenue mix. And as you know, the more we skew to advisory, in terms of our revenue mix, the higher the comp to revenue ratio is. And I think you cover the industry, so you can see what the comp to revenue ratios are for advisory firms. And so the more we do in advisory, the more comp we'll pay. But of course, the less noncomps, I think we'll probably incur as a percentage of those revenues.

So I think we've given a good range, and I'm confident that we should be able to hit that range. Obviously, if there is a meaningful slowdown, it could be at the higher end. But I'm not -- we're not planning on that because again, we look at the backlog that we have and the shadow backlog that we have of companies that we know need to finance, and that's why we remain confident in the guidance that we've given.

On noncomps, I'll turn it over to Steve, who's done all the work on that.

So Steven, the noncomp is a similar story, right? It's dependent on revenue. But if a lot of that revenue comes from M&A, then you have less noncomps. Although with that being said, T&E and client development and conferences are picking up. I don't think they're going to return to 2019 levels, but they're picking up because people want to get back out and see clients, and it's just going to be good for our business.

Specifically, we're -- our health care conference, which is always a fairly significant expense is virtual again this year. That's the first quarter expense, which has driven some of the -- if you look at 2020, even we had higher noncomps in the first quarter because of that. And we'll continue to look at the flexibility around virtual conferences. So I think that's something we've all learned is that some of the conferences that we used to do in person are actually better done virtually, and we'll continue to do that.

I think looking at the difference between -- in travel as well as entertainment, I think those are -- we tend to lump them together, but they are really 2 different drivers. I would say travel probably doesn't increase anywhere close to the level that it was in prior years, because so much of we've learned we can do so much in the business without actually having to get on a plane and go. We will get on a plane and go see coins, but the amount of times that we had to do that in any given year, probably doesn't return to prior levels.

For entertainment, though, I do think people will be out. And that's a good thing, because that really drives connectivity in the business. And I've been -- post-Omicron or as the things have slowed down, we've been out pretty meaningfully just reconnecting with people. And that is part of what drives the revenue in the business. So again, it will be higher than it was probably in 2021, but I don't think it approaches the levels that it was in 2018 or '19 in an absolute sense.

And just one final question on the advisory business. You talked about the strength in the shadow backlog, certainly encouraging to hear given some of the weakness that we've seen, at least in some of the public data, which doesn't seem representative of what you're seeing internally. Last quarter, you talked about the advisory business running at $100 million per quarter sustainably with the addition of Portico. I know there's going to be some volatility quarter-to-quarter, but wanted to just gauge your confidence level around that $100 million-plus level being sustainable over the medium to long term?

Yes. So I think when we look at that number, obviously, quarter-to-quarter, it will vary just like all the advisory businesses do. But I think when we look at that number, that's a good number for us to think about on an annual basis and on a rolling 12-month basis. And the reason is that when you look at the Dealogic number, so much of what we knew just doesn't even show up there. So if a company -- if we're engaged on a buy side or on the sell side transaction, and the company decides not to sell, sell, but decides to do a cash out refi. And that shows up -- those fees show up as a debt capital markets advisory transaction. And honestly, we're in the business to serve the needs of our clients. What falls out in Dealogic is just the way people account for it all and how they categorize it all. And so much of our revenues, including our SPAC advisory revenues don't show up that way, like a pipe that we're engaged on a pipe to help a back-end SPAC transaction happening. Like those are not things that show up in Dealogic. This is why we remain very confident in our advisory business and maybe it's harder to see relative to some of our peers.

And that versatility is a difference maker at Cowen. This is why our clients have continued to choose us because we're not just pushing one product. And I think the challenge that a lot of our competitors have is the only thing they do is M&A. And if you are faced in an environment where that's not your best alternative, you got to go to a place like Cowen that has that versatility. And that's really what helps to drive that business for us. And that's why we remain as confident as we do about our ability to hit the numbers that you talked about on a rolling 12-month basis.

Our next question comes from Chris Allen with Compass Point.

I guess just starting off, you mentioned, also opportunistically add people, teams. Just wondering how the current environment is impacting the willingness there? And then is there any change in terms of buy versus build opportunities as you kind of look to build the franchise further?

So great question. And I will just say, Cowen is definitely a place where people want to come work. There are more people that want to come than we can possibly hire. I'm flattered by that. And it's good that you asked this question because I often say, if you really want to test the health and the sustainability of a franchise, all you need to do is figure out whether or not people want to work there or not, in our business. And people want to work at Cowen across the board. And that makes me feel -- gives me a great deal of confidence in our ability to attract and retain the right kind of talent.

We will continue to look for opportunities where the product capability that we have fits really well with the people that want to come on board. And I say that because everybody who comes to Cowen on a revenue-producing area has a franchise of some sort. The question is whether or not that franchise, whatever they do for their clients, can we augment or add to that franchise. Again, whether that's an organic hire of an individual, a lift-out of a team or an acquisition of a firm that does something really well that can be bolstered by the product capability and the engagement that we have at Cowen.

And so we're continuing to do opportunities like this. I think what you've seen, for example, in the growth and our ability to do more banking in what I would say, digital assets. Again, that dovetails -- so there are a handful of folks in that industry who are making great strides at covering clients, whether it's the miners or it's the payment processing folks who are using digital assets in crypto as a way to navigate their business models, there are very few places on the street where they can go for full-service investment banking capability.

And so when we see teams that want to join or individuals that want to join our platform just in that particular area, it's emblematic of what we're seeing. There are very few firms around the street that get around, what I would call, growth the way that we do and can provide the products and capabilities that bankers and frankly, sales traders, that they need in order to execute for their clients. And so I would say it will be both organic acquisitions, organic hires as well as targeted acquisitions, but no shortage of opportunities on that front.

Understood. And then maybe some color on the markets business, noted a decent start to the first quarter up relative to fourth quarter and full year '21. Is this broad-based, you're seeing strength in specific areas? And any color just in terms of the impact some of the teams that you added I'm thinking the European team and I think just on the securities finance side, whether there's been an impact that you're seeing yet?

Well, so yes, I mean, the short answer to that is yes. I mean, first of all, Europe, for us, has been a real growth area. Again, we really had no meaningful presence in Europe prior to a few years ago. But obviously, some of the larger firms have decided to exit that business or scale it back significantly. And we're the happy beneficiary of these amazing teams who, again, can come in and plug into our core capability, whether it's algorithmic trading or cash equities, or frankly, prime brokerage and outsourced trading and all these things that sort of all work collectively in tandem. So we're seeing that.

I think we're continuing to see the build-out of the securities finance business. That is something that I don't think people really fully appreciate the consistency of that business. And in terms of its ability to generate revenues for us 7 days a week, 365 days a year, because it's an interest spread business, but it also enables us to do things like swaps and provide hard borrowers for our clients in prime brokerage. These are key drivers for us as we look at -- and if you look at the growth in that business, as we break it out in our financial supplement, I don't see why that would abate actually because there are fewer providers of those, as some of the bigger firms have scaled back meaningfully. And so if anything, we're gated maybe by the size of our capital base. And I think that is part of the tension, I think, that we have in terms of returning capital to shareholders as well as retaining capital to be able to provide, again, attractive client service capability on that front. So no shortage of opportunity for us to get bigger in that business.

Our next question comes from Devin Ryan with JMP Securities.

So I think most questions have been asked, but I'm going to try to take a little bit of a different angle on the investment banking outlook question.

So health care revenues were down 3% in 2021. You still grew investment banking revenues by 40%. So I think that's clearly highlighting the increased scale and diversification of the business. So it would be helpful just to -- if you can give us the number of investment banking management directors today versus 1 year ago and kind of give some more flavor for that kind of growth of the franchise.

And then as we think about some of the puts and takes over the intermediate term in the outlook, so you have SPAC contribution, that might come off a bit, but there's still a lot of revenues to realize. Health care, the bar isn't necessarily high given what we talked about. And it sounds like there's still a lot of deals that are eventually going to come there. You're still very early days of ramping sustainability, the M&A backdrop still reasonable, and you added 20 bankers from Portico at the end of last year. So it feels like everyone is expecting that there should be a pretty healthy drop off in 2021 and the outlook just given how strong 2021 was. But on the other hand, you've added a lot of capacity into the business just over the past year. So I'm just trying to think about what are some of the biggest areas of revenue upside off of the 2021 base, and maybe what areas we're thinking about kind of over contributed last year, if at all?

Great questions. I appreciate that because I don't think we actually have talked about this much, but it's a great opportunity to do so. So just to give you an idea, when we look at -- and I'm happy to give you the MD growth because I think that's really more emblematic, Managing Director growth is probably more emblematic of revenue drive. In 2018, we had bank 42 MDs. And this year, we'll close with 89. So it's obviously -- when you look at MD growth, it's over 110% growth in the number of managing directors on the platform account. And that's both organic hires as well as acquisitions. So meaningful, yes, this is part of the reason why we said we're structurally in a very different place than where we were prior to the pandemic and really, frankly, prior to 2018. If you look at total banker growth over that same period, it's around the same. So building in those teams to actually execute, it's roughly the same amount. And so when you look at year-over-year growth for us, we exited the year last year with 73 MDs in banking in 2020. And this, as I said, 89% for this year. So still meaningful, and that's a combination of both organic hires as well as acquisitions.

Okay. Great. And then a follow-up as well on the brokerage side of the business. So you highlighted in the presentation you guys published this morning that over the past 3 years, you've expanded revenues there by 13%, and so that's more than 2x your peers. And when you think about the addressable market that you're going after today and kind of how that's evolving just based on all the comments you made, including new areas like digital assets and what you're doing in Europe as well. I think there's an expectation and just kind of a view in the market that brokerage is obviously lower growth and there are some challenges in parts of the market. But on the other hand, you've identified a number of areas for expansion for the firm and some of these areas are coming from a very small base. So I guess it would be very helpful to just think about, Jeff, if you can. How are you contemplating growth in the industry in the brokerage business - And then how do you think Cowen can perform relative to that, just given all these other initiatives that are kind of ancillary to maybe how people think about the core brokerage business.

So I think we do a pretty good job of breaking down our supplement the growth in the core brokerage, which we think is more volume-driven and institutional services, which we think is not as much driven by volume, right And so if you look at the growth, it's come from both areas. But obviously, the faster growing part of that business has been the institutional services part of the business. That's prime brokerage, that's outsourced trading that is security finance our swaps business. So obviously, those were places where we're adding -- we're taking a bigger piece of the wallet from existing clients. I think everyone always thinks about the brokerage business as you've got to go out and get more clients, more clients, more clients. And our view is, once you get to scale in terms of the number of clients, not that we wouldn't be adding new clients, we are, but new fund formation is the primary driver there. The question is, are you taking share from other people that are interexiting the business or don't do as well as you. And what we've done with our top clients is take a bigger share. And we think that trend continues in part because the buy side is making decisions as they have been for the better part of the last decade plus to do business with fewer counterparties. So this is what that paradox that we've talked about, Devin, which is we know that the overall pie may be shrinking as people look to reduce their expense loads. -- but the distribution of that pie skews to the best performers. So the ones that are the weakest performers get disproportionately hurt and their share goes to close to 0. And the ones at the top end of that take meaningful share from everybody else. And if you're in the middle, you're probably going to end up at one side or the other. You're either going to end up as a top revenue or you're probably going to get eliminated over time. Our view is that we are, as we've demonstrated, I think -- and we've mentioned this in the call earlier, we're a top 10 provider of services - then we're well within that, what I would call, that circle of critical vendors for the buy side. That means that when they skew their boats towards the best performers, whether that's in execution, cash equities, electronic, European, ADRs, options and events, right, prime brokerage capability, swaps, they're going to be looking for reasons to do business with Cowen because they'd rather do business to ensure that they continue to be top of mind at Cowen. And that's taken years to build, and it doesn't get unbuilt or doesn't dissipate quickly at all. In fact, the trend is moving much more towards us in this area. And that's why we continue to make the strides that we've made in and that's why we feel -- again, I think it's underappreciated. The stability of our business, and we made a quantum leap pre-pandemic to post-pandemic. Everyone keeps waiting for our daily average revenues to go back to what they were prepaid. It's not going to happen in part because of the structural changes that we made, the investments in people, the new products we've added and this overarching trend where the buy side is allocating to the top performers of which we are one. And I think it's really interesting to sort of highlight, we do not run a central risk book at Cowen. So when you look at equity markets, in particular, it really -- it falls into those who are willing to use their balance sheet to position and take risk i.e., the bulge and they do a good job at that. And they make up the bulk of the top 10, right And then people like us, very few who don't have to use their balance sheet in order to get market share. Ours is agency, largely agency driven. And that is hugely capital efficient from us.

Yes. So just to put it all together, Jeff, so there's been a structural shift that has been happening in the market. Cowen has been on the right side of that and made good decisions and as a result, has outperformed the industry. How do you react to the perception that brokerage is low growth within Cowen I mean 13% revenue growth over the past few years is not low growth in my opinion, but how do you react to view that brokerage is low growth based on all those things that you just said

I just think that's a perception in the market. Again, I have told people for years to tell all your friends equities is a hard business. So we'd like to see more people get eliminated because there's more share to be taken. And that remains true. Again, just look at our numbers and how they've grown meaningfully. And it tells you all you need to know about what not the strategy we pursued even going back a decade, then in 2012, people told me us that we were crazy for buying an electronic algorithm trading platform. We couldn't disagree more. And when you look at the growth of our electronic trading platform and how it's spun into all of the different areas, including our cash equities business, which is up meaningfully from 2012. That is a huge testament to the trend that we identified 10 years ago. I will also tell you, and again, we're not prepared to go into more detail yet. But we believe over the next 3 to 5 years, the growth in digital asset trading is going to be meaningful. I don't know when the tipping point will occur, but it's sooner now than it was a year ago when we set out to make an investment in PolySign to do digital asset custody to build out our own digital asset trading capability at Cowen Digital, right That is not -- the value of that as it begins to take shape as revenues begin to come in, not fully appreciated. So when we look out over the next, again, 3 to 5 years, so the same way we looked out in 2012 over where the business was going, we have really good insights into the asset classes that we think the institutions are going to trade in, and we want to be there. And there is not a world-class institutional digital asset trading firm. There's a lot of retail, but not a lot of institutional quality, digital asset trading firms. We intend to be one of them. And so that is nowhere in our numbers today in terms of revenue. But when you talk about legs of growth, I just will tell you, all of the people that are trading equities with Cowen are considering what their strategy is going to be for digital asset trading. I know that to be the case because I've talked to many of them. When they do it and how they do it and who they do it with is still to be determined, which has put us in a position where we can take meaningful share when that happens. And that's really why I get so excited about it is I know that's going to happen, and I know we're going to be a winner there. And it's nowhere in our numbers today.

(Operator Instructions) Our next question comes from James Yaro with Goldman Sachs.

I'd like to touch on the trajectory of your capital markets advisory business. You were near the all-time record this quarter. Can you just speak to what drove the results of this quarter in particular, and then the sustainability of these results and the run rate to build off from here.

So I think a lot of the capital markets advisory business is driven off the fact that when equity markets -- so we've been in a bear market for what I would call speculative growth for like 9 months. The rest of the broader market indices may have simply caught up in the month of January, but let's be really clear, it hasn't exactly been a great equity raising environment for a lot of the businesses since really April 1, 2021. So what are we doing? We're talking to our clients about alternative ways for them to finance themselves. So debt transactions, private placements, companies that may have otherwise looked at the SPAC market and said, I don't really want to be in the SPAC market, but I need to do a financing. And so we've done a number of private placements, private offerings that would have otherwise been SPAC deals. So as some of the traditional business that count has been in both in public equity underwriting and maybe the SPAC-back-ends, as that has -- as that has flattened out a bit, our clients are doing other things. And so you're seeing the growth come in particular, capital markets advisory from our ability to help our clients to pivot to other things. The need for financing doesn't change just because the markets aren't there. What changes is the way you finance yourselves. And what we've built at Cowen, which I continue to think is unique in terms of the Street is the ability to offer clients a multitude of ways to get the capital they need to execute on their business plans. And that's why you're seeing the growth in capital markets advisory as some of the other businesses may appear softer.

Okay. And then I just wanted to ask about the overall leverage in the business. I know there have been changes in terms of swap margining rules. But if I compare your tangible assets versus tangible common equity, you significantly increase the leverage on the balance sheet over the past few years to about 12x versus less than 6x in 2018. What's the level of leverage in your business that you feel comfortable operating at And should that change from where you are as of this quarter?

So I think the primary driver and the biggest driver of that has been the growth of the securities finance business. So just to be clear, that's a match book business. So you've seen the balance sheet go up on both sides, which I think is really driving that. That is largely an overnight funding business that we've said for years, we're very comfortable with. It's not a huge risk business for us as we have both sides of the trade, and we're acting as an intermediary there. And so I think where we ended the year as a comfortable level for us. I think it could go up or down modestly. Actually, if you look at where we ended the year, it was down from the third quarter. And so I think you will continue to see us play in and around this area. Obviously, we have the ability to reallocate within that. But the leverage targets we have are in and around where we are, not much more meaningful than this. But the primary driver has been the securities finance and obviously, the growth in that business has been a meaningful contributor.

Our next question comes from Sumeet Mody with Piper Sandler.

Just following up here, curious on the debt side of the banking business. With interest rates set to increase. Can you maybe just talk about the activity levels you're seeing there on that kind of smaller portion of the banking business and update us on the view of that business opportunity going forward more kind of medium to long term?

So actually, we've seen increased activity, like meaningfully increased activity. So a lot of the debt that we're doing might be floating rate in nature. And a lot of it has to do with things that are a little further out maybe in terms of speculative growth or middle market. What I will say is the primary driver of that business is really the number of -- the amount of dollars in both credit funds as well as the growth in, what I would call, middle market and speculative growth companies that are looking at debt as an alternative to equity finance. So supply and demand. And despite the increase in rates, there's been more money raised by the providers of that in alternative forms. So the alternative lending business, right, the direct lenders. And so there's more money in that space than there ever has been. And I think people tend to project forward, Sumeet, what they think will happen. We are still, as of this discussion in a 0 interest rate environment, even though the market might be pricing in 6 or 7 rate hikes over the course of next year, if it's 6 or 7 rate hikes, we will be in an almost 0 short end of the curve. And if you look at that activity and the growth of that activity, even in the last rate rising cycle, those funds got bigger because people are looking for yield. People will continue to look for yield for the foreseeable future and the providers of that capital will fall over themselves to get that money deployed. So still a very robust market, and we're seeing it because the number of mandates and the increased pitch count; again, every time the equity market has a little bit of a hiccup, everybody looks to the debt market to get themselves financed. And so we've seen it in an increase in the number of mandates so far this year in 2022. And the pitch count - the inbound request for us to come and pitch those capabilities has increased meaningfully.

Our next question comes from Stephen Jubilee.

Fomenting the follow-up. Jeff, you admit didn't give much airplay to the monetization plans for noncore assets. I was hoping you could just give an update on planned IPO of health care royalty partners and any other plan monetization, especially in light of some of the recent volatility that we've seen.

Well, so I think we mentioned, I think in Asseco, we mentioned that there was a meaningful structural change in what we're doing, hopefully, this year at Lincoln. The announcement of the split of the retail operations away from the network. I think there's a good prestage to ultimately realizing value from that investment, which I know -- for those of you who have been tolling shareholders for a while. It's been a long time coming. You also -- I will remind you, we don't control the timing on that. I'm just looking at the fact that we're finally reaching a point here in which the 5G build-out has occurred. There's a real structural change in terms of the way the business is running and our partners at Jefferies are more inclined to pursue the monetization path, I think, than they have been, again, by their own -- if you look at their own Investor Day deck, they say the same thing. So that makes you feel good about the probability of that happening at some point this year. As far as Healthcare Royalty Partners is concerned, we're continuing to work through that. And if you look at the demand for what they're doing, again, it's the same thing we're seeing in the banking side of the business. They have been focusing on growing their asset base. So when they could get public in the middle of the year, they went back to simply putting more money to work and raising a bunch of capital in side-pocket vehicles ultimately that -- where they can deploy that capital. And that's actually part of the driver of our future performance. I think that they will, at some point, continue to look -- it makes a lot of sense for this to be a permanent capital vehicle. It just does. And when that happens and how that happens, again, I think is market dependent. But the value to Cowen doesn't change. It's still a a very valuable franchise for us that is not remotely recognized. As you all know, the investments we have in our asset managers are not on the balance sheet. And so we'll continue to work with them to figure out when the optimal time is to access the public markets, if that's the right thing to do. But in the meantime, we're just going to continue to grow the business because the demand, especially in an environment where equity financing is expensive, given the values of some of these companies, they'll continue to do business. So we remain really constructive on that. And my hope is that at some point, we'll be able to tap the public markets if that's the right thing to do; to realize value.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Jeffrey Solomon for any closing remarks.

Well, look, we appreciate everybody's time on this morning's call, and we obviously appreciate your support. We look forward to following up with you on our next quarterly earnings call, and we really hope that you will join us for our Investor Day, where we will be hosting on May 19. So please put that in your calendars. We'll spend a lot more time going in depth on a lot of the topics we covered today, spend some much more time on strategy and value unlock strategies for Cowen in the future. So we do encourage you to sign up for that. So until next time, be safe, be healthy and good luck.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.