Cowen Inc (COWN) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Inc. conference call to discuss the financial results for the fourth quarter and the 12 months ended December 31, 2009. By now, you should have received a copy of the Company's earnings release, which can be accessed at the Cowen Group, Inc. website at www.Cowen.com. If you do not have Internet access and would like a copy of the press release, please call Cowen Group, Inc. investor relations at 646-562-1880.

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 Group, Inc. has no obligation to update the information presented on the call. A more complete description of these and other risks and uncertainties and assumptions is included in the Company's filings with the SEC, which are available on the Company's website and on the SEC website at www.SEC.gov.

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 these 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. Peter Cohen, Chairman and Chief Executive Officer, who is joined by Mr. Greg Malcolm, Chief Executive Officer of Cowen and Company, and Mr. Jeffrey Solomon, Chief Strategy Officer; and Mr. Christopher White, Chief Operating Officer. Please proceed.

Thank you, Operator. Good morning, everyone, and thank you for taking the time to join us today. This is the first call since the completion of the merger between Ramius and Cowen. We thought we'd spend a little time reviewing, again, the background of the Cowen/Ramius merger, as well as the market opportunities we see for the new Cowen.

Greg Malcolm, the CEO of Cowen and Company, will discuss the activities of the broker-dealer, including recent developments on that side of the business. And Jeff Solomon, Chief Strategy Officer, will discuss our alternative investment management business, including some of the recent developments in that business and our proprietary investing.

And finally, Chris White, Chief Operating Officer, will go into further detail on our 2009 full-year and fourth-quarter financials. At the end of our prepared remarks, we will turn the call over to the audience and answer any questions that you may have.

The 2009 was clearly a year of change within Cowen, which means Cowen and Ramius. The most obvious, of course, was the merger to form a diversified financial services firm, offering very high-quality alternative asset management services, domain knowledge-driven investment banking, sales and trading and research services, and in each case, primarily to institutions and corporate clients.

The events of the last 24 months have created and will continue to create, we believe, substantial opportunities for financial service firms that are able to adopt to the new changing environment. Consolidation among the few remaining large firms has created an opportunity we believe for smaller focused firms to gain investment banking market share with growth-oriented clients.

The thing that we absolutely know for sure is that these people want relationships. They are more important today than they have ever been. I think that we all know and recognize that companies need to re-equitize, and there has been a dearth of equity financing over the last three years in this country.

As evidenced by activity this week, with the last few weeks, M&A activity will continue to increase as company-specific organic growth opportunities are harder and harder to come by. And age will be a significant growth opportunity where we are well-positioned to be a participant.

The alternative investment management industry we can say without a doubt, the growth in hedge fund investment has resumed for asset managers who can provide customized solutions, institutional quality infrastructure, and use their capital to invest alongside clients.

Institutional investors and advisory platforms definitely are seeking in their managers scale, stability, institutional quality infrastructure, increased transparency with emphasis on transparency, given the events of 2008, and breadth of products.

The combined firm creates a more diversified financial services platform of complementary businesses. There are three main revenue drivers to the business, which makes us look similar to the successful firms that existed as I grew up in the industry and many successful firms today. They are banking research, sales and trading, asset management, and then investing of the firm's capital.

The third revenue driver, which allows us to make money investing the firm's capital is the fourth differentiator for many of our peers. In that regard, we raised $82 million net of additional equity capital last year through a follow-on offering. As of December 31, Cowen's balance sheet had over $470 million in total equity, with just $25 million of debt. Jeff Solomon will discuss later in the call, a significant portion of our shareholders equity is available for investment purposes.

The new Cowen has financial stability, diversified revenue streams, the ability to grow its existing businesses, and if appropriate, expand into new business. Prior to the merger, neither Cowen nor Ramius had the ability to take full advantage of the changing landscape, but together we have the resources to opportunistically build and invest for the future with a lot of flexibility.

In that regard, over the last six months of the year ended 2010, we've taken advantage of opportunities that we likely would not have pursued as separate companies, such as the banking side of the business as both a REIT and a FIG practice in our broker-dealer. We added new distribution expertise to our alternatives investment platform, which has the potential for very significant asset raising over time.

We added talented individuals within both sides of the business, which Greg and Jeff will talk about later. We have utilized our balance sheet to make certain small opportunistic investments that we believe offer an attractive return profile, but maybe more importantly will also offer the potential to enhance our ability to gather assets and pursue investment banking businesses in the relevant sectors that relate to the investments.

We've also been able to eliminate over $10 million of comp and non-comp expenses from the combined businesses, some of which is being reinvested in revenue-generating personnel.

These are just some of the examples of the ways in which we've begun to execute on many of the opportunities presented through the merger. While we are proud of the progress we have made to date, we realize there is much, much more that can be done. Rest assured, we will keep pursuing the opportunities to reduce expenses, grow our core businesses and expand into new areas if we can do so profitably as we move forward.

I would like now to turn the microphone over to Greg Malcolm who will talk about our broker-dealer business.

Thank you, Peter. Good morning, everyone. I'd like to briefly highlight just some of the recent developments in the broker-dealer. On a personnel issue, last week we announced that Don Meltzer has decided to step down as co-head of our Investment Banking business in order to pursue his academic interests. I am pleased to say that in that regard, Don will remain in an advisory capacity with us as a senior advisor. Scott Ryles will now assume sole responsibility as Head of Investment Banking.

As Peter mentioned at the beginning of the call, we recently announced the expansion of our platform to cover new verticals, including financial institutions and REITs. The FIG group, we have built out that team in Investment Banking led by four senior bankers, and we are very close to making some decisions and announcements on the research side of the house for FIG.

In REITs, it's just the opposite. We've hired a talented research team, have already rolled out on a number of names with more to come in the second quarter, and we are currently looking to fill out the Investment Banking side of our REIT real estate team.

We also expanded our Investment Banking capabilities with the addition of a senior professional focused on structured and other debt financings, primarily in the healthcare sector, a senior technology M&A banker, and a senior banker focused on healthcare services.

These new additions have already begun to produce mandates, and we are increasing the level of activity and dialogue with these clients. We are confident that they will be meaningful contributors as we move forward.

Over the course of 2009, we've also strengthened our product offerings in electronic trading and have added capabilities in trading ETFs. We are confident that these new sources of revenue will contribute in 2010.

Our backlog in both capital raising transactions and M&A continued to build throughout the quarter, and that positive momentum is carried into the first quarter of this year. Our current backlog consists of 16 underwriting transactions which is more than double our backlog in June, including 8 filed transactions, and we are lead manager on approximately 20% of these deals, all of which are IPOs. On the advisory side of our business, we currently have 20 transactions in backlog as compared to 17 in June of '09.

Market conditions have not been favorable for the new issue business thus far in 2010, but I must say when I look at the companies that are in our backlog compared to many of the companies that have come to market or tried to come to market, I believe that quality executions will pick up later this month and into the second quarter.

In sales and trading, volumes were down significantly last year for everyone in our business. NASDAQ and New York Stock Exchange volumes were off approximately 14% for the year on an aggregate basis, and that only tells part of the story. Funds flow information is also telling us the same as equity funds had net outflows of over $30 billion in 2009, excluding ETFs.

All that said and importantly, we increased our market share in the cash equities business through the first three quarters of the year and more than held our own in this quite difficult market.

So now I will turn this call over to Jeff Solomon who will talk to you about our alternative investment business and our balance sheet investment activities. Jeff?

Thank you, Greg. Turning to our Alternative Investment Management group, I'd like to discuss for a few minutes how we are positioning the business going forward.

First, we recently announced some changes to the management of our alternative solutions and internal hedge fund businesses. Morgan Stark has been named the Chairman of Ramius Alternative Management and the Head of Macro Strategies, and Tom Strauss has been named President and CEO of the combined unit.

Unifying the senior management for these two businesses will allow us to streamline our operations and integrate and enhance our marketing efforts and client service efforts through improved product coordination. This change sets us up very well for 2010 and beyond, as we take a more focused approach to product and service delivery based on our client needs.

Looking back to 2009, I am happy to say that in the fourth quarter, we booked incentive fee income for the first time in over four quarters. This occurred as certain of the fund of funds products eclipsed their high water marks, and the impact of the clawback in subordination provisions relating to the real estate funds wound down.

We also made good progress last year on getting our value and opportunity funds back closer to its high water mark. Redemptions have slowed and for the first time in a year, we are seeing investors seriously consider making new allocations to alternative investments broadly, and for us in our fund of funds areas and our division businesses specifically.

In that vein, our pipeline of potential new investment mandates is quite strong, and the new assignments are being realized. For example, during the beginning of 2010, we're happy to report that we closed on a $100 million managed account for our new credit product.

While we believe the primary growth drivers will be in our Alternative solutions business, that would be our fund of funds product offering, especially on the customized completion side of the business, we also are seeing our single strategy credit funds and our value and opportunity products show continued incremental traction. And we are hopeful that we will begin to receive commitments from a number of prospective clients in the pipeline. These offerings play to our core competencies in the credit arenas and in the event-driven arena respectively.

As for our Cowen Healthcare Royalty Partners business, the healthcare royalty financing market remains strong with companies continuing to evaluate this attractive source of capital to finance their commercialization and development efforts. Cowen Royalty remains at the forefront of this niche market, having committed over $300 million in 9 investment opportunities over the past two years.

In 2009, in August of 2009, we closed on a $300 million co-investment fund, which capitalizes on the growing pipeline of investment opportunities. And while the Cowen Group is not an investor in this fund, the capital gives the team added flexibility to do larger deals which we as an investor in the main fund will benefit from significantly.

Cowen Royalty's main fund has performed above our expectations, returning consistent distributions since the end of 2008, and we are bullish on the growth prospects for this business in 2010 and beyond.

As for the distribution side of the asset management business, we are continuing to work out on building -- to work on building out our Platform Distribution business. We're making progress on our 1099 fund of funds product, which is our first product to be distributed through platforms.

This is a multi-strategy fund of funds product with a 1099 tax reporting, which avoids complex K-1 tax disclosures and we think is differentiated in the marketplace for high net worth individuals. We anticipate marketing this primarily for two important channels which are new channels for us. One is a network of independent financial advisors and the other are the large platforms at commercial and investment banks. And this dovetails with the investment we have made in building out the platform business.

Finally, I'd like to take a few minutes to talk about our investment, our balance sheet investment activity. Investment income was again a positive contributor in the fourth quarter, notwithstanding markdowns we took on private investments in the fourth quarter.

As we've said previously, we believe that having capital on the balance sheet is a strategic advantage, and we're able to invest in products to generate both returns on invested capital and additional earnings streams as we receive new products and businesses. We've continued to explore ways to deploy our capital to meet these objectives.

As has been discussed before, our balance sheet has over $470 million in total equity, with just $25 million in debt at the beginning of the year. Of this total equity, the balance sheet was invested across a broad range of strategies at the end of December. The majority was invested in liquid trading strategies, which themselves carried a blended leverage ratio of about 2.3 times. That's long market value over equity. The remainder was invested in private investment strategies, which we do not leverage.

Our largest investment allocations include credit trading and event driven, reflecting our core competencies in those areas and our belief that those returns look attractive in those spaces.

On the private side, we have our investments in traditional privates, real estate which actually represents less than 5% of our total equity, Cowen Healthcare Royalty Partners; and private investments and public equities, which is a business that we've been in for a long time.

As it relates to real estate, while we marked our positions down significantly in 2009, we've had little permanent impairment to date as our positions are mainly financed longer-term. Where we have taken back properties in our lending business, we are actively managing those properties to provide us with strong recurring cash flows.

However, should the difficult conditions persist in the commercial real estate market, some of the impairments that we have taken to value are likely to become realized over time.

We established a robust investment process centered around the investment committee that we mentioned in our previous discussion. That includes members that come throughout the firm, and we consider both the allocation of capital for investment purposes as well as strategic business initiatives and investments.

Our belief is that we need to look specifically both at the investment side of the firm as well as acquisitions and joint ventures, because we intend to use our capital to be very ROE driven.

I will now turn the call over to Chris White who will provide an overview of the results for 2009, in the fourth quarter and the full year.

Thanks a lot, Jeff. So I'd like to spend a moment going through our results in 2009, but first I'd direct people also to this morning's press release as most of the numbers covered today are included in the release.

The new Cowen Group is the result of the merger of Ramius and Cowen, which closed at the beginning of November. The GAAP accounting associated with the merger resulted in Ramius being deemed to be the purchaser and, therefore, all pre-November GAAP figures represent only legacy Ramius information.

As a result, our 2009 GAAP financials reflect 12 months of Ramius' operations and two months of Cowen's operations. Likewise, the fourth-quarter GAAP numbers reflect three months of Ramius and two months of Cowen operations. All of 2008 GAAP information is Ramius standalone.

For the 12 months ended December 31, 2009, we reported a GAAP loss of $55.3 million or $1.35 a share, compared to a loss of $141.8 million in 2008, or $3.78 a share. For the fourth quarter of 2009, we reported a GAAP loss of $23.4 million or $0.46 a share compared to a loss of $76.3 million in the fourth quarter of 2008, which represented $2.03 a share.

As expressed previously, we believe that economic income, which in a straightforward and understandable way shows how we make money and how we spend money, is the best way to view our results of operations. More specifically, economic income excludes the impact of consolidating any of our funds. It excludes in 2009 $19.2 million of transaction-related expenses, $10.5 million of which were incurred in the fourth quarter.

It excludes expenses associated with the one-time equity awards made in connection with the transaction which totaled $3.4 million for the year, all of which was incurred in the fourth quarter. And it excludes in 2008 the impact of writing off $60 million of goodwill.

In an effort to provide more detailed disclosure, we have made pro forma adjustments to economic income such that you see in our release, and we will discuss today fully combined results, meaning 12 months and three months of both Cowen and Ramius operations for the full year and fourth quarter of 2009 and 2008.

For the 12 months ended December 31, 2009, the Company reported a pro forma economic loss of $67.9 million or $1.66 per share, compared to a loss of $146.9 million or $3.91 a share in 2008. In the fourth quarter, we reported a pro forma economic loss of $21.1 million or $0.41 a share, compared to a loss of $76.9 million or $2.05 a share in the prior-year period.

The numbers in 2009 are somewhat confusing due to a handful of non-cash and nonrecurring items that had a significant impact on our results. These items include the following -- legacy non-cash deferred compensation expense of $26.9 million and $3.8 million in the full year and fourth quarter respectively. Most of these expenses have been eliminated, although a portion will be replaced in future years with expense associated with equity awarded as part of annual compensation.

We also had nonrecurring expenses of $7.2 million in 2009, the vast majority of which were incurred in the first three quarters of the year. These expenses relate primarily to the closing of certain businesses and an arbitration case that was concluded in the Company's favor in 2009.

The 2009 figures also include $8.9 million of non-cash negative incentive fees due to the reversal of previously booked incentive income for our real estate funds and the impact of the subordination agreement with an investor in one of those funds. $700,000 of this amount was incurred in the fourth quarter.

Moving forward, there will be no further reductions associated with the previously-booked incentive fees, and we expect the impact if any of the subordination provision to be minimal.

The final reduction is for depreciation and amortization expense of $8.3 million in 2009, $600,000 of which is related to amortization of intangibles from the transaction. Depreciation and amortization in the fourth quarter was $2 million. We expect to have approximately $4 million in amortization related to intangibles in 2010.

When adjusted for these non-cash and nonrecurring items, pro forma economic loss for the year was $16.6 million compared to $120.3 million in 2008. I would also note that we took $12.5 million of net unrealized markdowns related to our private investments, including real estate, during 2009.

I realize that we just walked through a long list of numbers, but we thought it was important to share them with you to help you gain a better understanding of how the business performed in 2009.

We'd now like to run through the different components of pro forma economic income, starting with revenues. In 2009, revenues were $260.8 million, up 32% or $63.2 million as compared to 2008. During the fourth quarter, we recorded revenues of $69 million, an increase of $72.6 million compared to the fourth quarter of 2008, when we reported negative revenue of $3.6 million.

Turning to specific revenue line items, Investment Banking revenues for the year were $44.6 million, down just over $6 million or 12% from the prior year. The decline was driven primarily by lower M&A revenue, offset partially by higher revenues from capital raising activities. M&A revenue was down approximately 40%, which was in line with the growth sector M&A market generally.

We did observe a rebound in Investment Banking in the fourth quarter with revenues of $15.7 million, up $10.5 million from the fourth quarter of 2008. This rebound was largely driven by an increase in our underwriting and other capital raising businesses, as growth financing picked up dramatically. Underwriting revenue in the quarter was the best it has been since the fourth quarter of 2007.

Moving to our sales and trading business, revenue decreased by approximately $22 million or 14% to $133.7 million, compared to $155.9 million in 2008. Sales and trading revenue in the fourth quarter was $31 million compared to $35.3 million in the fourth quarter of 2008.

We, like others, suffered as volumes decreased over the course of the year. Notwithstanding the reduced volumes, we continue to increase market share which should help us when trading volumes return to more normalized levels.

On the Alternative Asset Management side of our business, we reported management fees of $61.4 million in 2009, a decrease of approximately $36 million or 37% as compared to 2008. Management fees in the fourth quarter were $14 million compared to $21.4 million in the corresponding period in 2008. The decrease in fees was the result of the net decline in assets under management over the course of the year.

As Jeff discussed, we are pleased with the interest we are seeing in some of our existing hedge fund products as these tend to be among the higher management fee products we offer. On a blended basis over the course of the year, our average management fee was 0.65%, including lower fee-paying products such as cash management and our mortgage advisory business where we are not currently collecting management fees.

During both 2009 and 2008, we reported non-cash negative incentive income due to the reversal of previously booked incentive fees from our real estate fund and the impact of a subordination agreement with an investor in one of these funds.

However, as was mentioned earlier, we booked incentive fee income in the fourth quarter for the first time in over four quarters, as one of our larger fund of fund products went through its high water mark in December, and the impact of the real estate clawback in subordination provisions wound down.

Good progress was also made last year on getting our value and opportunity fund back to its high water mark. As of December 31, we were 8% below that high water mark. We also made steady progress against the multi-strategy high water mark where as of year-end, we needed to increase net asset value by 25.8%, down from 34.7% at the beginning of the year.

Investment income improved dramatically in 2009, as we recorded revenue of $24.5 million for the full year and $5.2 million in the fourth quarter, compared to negative investment income in both periods in 2008. Investment income was largely driven by our interest in the enterprise fund during 2009.

As previously noted, performance in this area was negatively impacted by net unrealized markdowns of approximately $12.5 million for the year in our private investment portfolio. We are very comfortable with our current marks on the private investments and feel fortunate that we have no reason to dispose of these assets that we believe are depressed values.

Other revenue decreased slightly on a year-over-year basis as we exited the fund placement agent business during 2009. Other revenue in the fourth quarter increased by approximately $850,000, due primarily to the favorable resolution of the previously mentioned arbitration proceeding.

On the expense side, we wanted to take a few minutes walking through compensation. Compensation and benefits expense for the full-year 2009 was $206.7 million, a 5% decrease as compared to $218.7 million in 2008. Compensation and benefits expense in the fourth quarter was $57.5 million compared to $44.1 million in the fourth quarter of 2008.

On an absolute basis, our compensation to revenue ratio was 79%. This ratio excludes one-time equity award expense of $3.4 million from grants made in connection with the merger. The ratio includes $27.5 million of legacy non-cash deferred compensation expense booked in 2009.

Most of that expense has been eliminated as a result of the merger, and that which remains relates to the one-time awards made in connection with the transaction.

Going forward, we will also incur expense related to equity awards made in connection with annual compensation. If the $27.6 million is backed out of compensation, the ratio drops to 68.9%.

As mentioned earlier, 2009 full-year revenues include $8.9 million of non-cash negative incentive fees. Excluding the impact of this non-cash item, the ratio drops to 66.6%.

I would also note that compensation and benefits expense includes $7.6 million of severance in 2009. Excluding the severance in addition to the other items discussed, the ratio drops to 63.4%.

The significant severance expense was caused by reduction in headcount over the course of the year. We currently have 569 full-time employees, which represents a 14% reduction from December 31, 2008, and a 24% reduction from September 30, 2008.

Looking at non-comp expenses, non-comps in 2009 were $130.7 million, an 11% decrease from $147.3 million in 2008. Non-comp expenses in the fourth quarter were $35.2 million, a 1% decrease from the fourth quarter of 2008. These measures exclude transaction-related expenses associated with the merger of $19.2 million in 2009, and $10.5 million in the fourth quarter.

The decline in 2009 non-compensation expense was driven primarily by lower professional fees and communications expenses. We continue to focus on non-compensation expenses and expect to bring this number down again in 2010.

Taking a look at taxes, which although they are not -- economic income is a pretax measure, we at least wanted to briefly address this matter. In 2009, we recorded a $2.2 million tax benefit, which equates to approximately a 3% effective tax rate. Based on existing tax assets, we do not expect to incur meaningful taxes in 2010. On a go-forward basis, we believe that an effective tax rate of approximately 30% is reasonable.

Finally, turning to the balance sheet, book value per share was $6.33 at year-end, and tangible book value per share was $5.75 a share.

With that, I'll turn it back over to Peter for closing remarks.

Thanks, Chris. You've heard just an awful lot of information being thrown at you, and we appreciate it will take some time to parse through this. But in summary, we are pleased with the progress we have made following the close of the merger in November of 2009. We are going to continue to be very opportunistic with our business and build on the cost savings and revenue-enhancing opportunities presented by this combination.

I think we are very positive on the future and look forward to delivering the value for all of our shareholders. As I think you all know, employees of the Company own one-third of the Company.

With that, I'd like to thank you and turn it over to all of you for Q&A.

(Operator Instructions) Devin Ryan, Sandler O'Neill.

Hey, good morning. You guys spoke a bit about the redemptions in the funds, but can you give a bit more color on exactly where they came from? It sounds like the tide is turning on that front, so would it be realistic to think about positive net flows as this quarter? Just want to get some color there.

Well, I can tell you the bulk of the redemptions came early in the year last year, and we staggered redemptions out in negotiations with our investors, primarily in our multi-strategy funds, and some of our fund of funds products.

We are not really giving forward guidance, but I think what we can give is the pipeline that we have in terms of actively engaged mandates that we are seeking from clients has grown significantly. And those are always kind of tricky to predict when those kinds of commitments fall.

Our distribution network is primarily one where we've gone direct and through the consultancy network, and so they tend to come in bunches where the significant -- or they tend to come in size. So you'll get mandates that get awarded at less than regular times.

So what I can say is the pipeline has certainly increased. The amount of actively engaged dialogues we are having with clients on the product array that we have has increased significantly, and that we'd expect to close on those if history is any guide.

Okay.

And if I could add one thing, and Jeff, correct me if I'm wrong, a year ago we were seeing a lot of people show interest, but we weren't seeing people actually make decisions. And as the year has progressed, people are actually coming to fruition now and making decisions.

Yes, we've certainly narrowed our focus. I think one of the things that we tried to do with the reorganization of our asset management business is we understand the dialogues we are having with clients are far more about figuring out solutions for them and how we can help them with their investment portfolios.

So when our sales force is dialoguing with clients, we are really trying to ascertain if we have solutions for them and engaging them in a way that we can be more value-added and strategic longer-term.

Now the downside to that is it may take longer for us to get the assignment, but once we are embedded with the client, we then can follow up with other products and services. So our view is we are spending time on bigger opportunity sets where the revenue stream can be a lot longer and a lot more strategic in nature.

Okay, got you. And thinking about the capital levels and opportunities there, you have obviously recently ceded some investments and done some hiring, and it sounds like all of that will continue. Can you talk about what other opportunities you are looking at to deploy capital potentially, like into acquisitions or anything else like that?

Well, we are certainly going to be opportunistic. I think if you look at our balance sheet, we can be very nimble with the things that we choose to do. Certainly, if we had opportunities in the alternative space to acquire assets under management and good talented teams, we would continue to look at those, and there are some of those in the marketplace.

So generally speaking, you've got to work out the culture more than anything else. There are lots of opportunities, but you've got to make sure you have the right kind of cultural fit.

On the broker-dealer side, there are some things where if we had opportunities and we can fit it in, again culturally with our organization, we would certainly look to do that. But this has got to be really laid off against the ROE we think we can generate on the balance sheet with the investment portfolio.

So one of the reasons we've set up the investment committee the way we have is to be able to look at both investment opportunities and strategic opportunities, so that when we are analyzing this we can really compare them against one another and make the best, we think, possible decision from an ROE standpoint.

Okay, got you. In terms of hiring, I don't know if you can answer it this way, but just in thinking about where headcount is going, that's kind of what I'm getting to. Is there any thoughts of where you'd like to see it by say the end of 2010?

You know, I think -- this is Peter speaking -- we don't have any targets on headcount per se. We have reductions that we still can affect across the organization. At the same time, we are seeing an awful lot of very talented people who could fill important roles for the combined organization. We have a very active, call it, interviewing process going on.

So you know net-net, might we be sort of flat to up a little bit? Yes, I think that could happen. I don't see us growing headcount very substantially. And by the same token, I don't see it declining very substantially, because we are bringing people in. And what we are trying to do is take advantage of the infrastructure savings and invest those savings back into revenue-producing people. And we are seeing some really attractive people.

Okay, great. That's helpful. Then just lastly on the cost initiatives, I think you were tracking for somewhere around $10 million. Can you just give any update on how that is progressing and where you guys are on that front?

Sure. We've already realized in excess of $10 million of cost savings between comp and non-comp. And I think as we move through the course of the year, we will be able to realize even more. So I think we are ahead of the game in terms of what we indicated to people that we could do. And I think the culture of both firms is one in which we try to reduce non-comps and we try to reduce expense wherever we can.

So I think over the last three years, we brought down non-comps by over 20% on a combined basis, and there is more that we can do because there are redundancies within -- certainly on the infrastructure side. Not people, I'm talking now about systems and things that take a little longer to actually extract them from the system, but I think we will do that over the course of 2010.

Okay, great. I'm going to hop back into queue. Thanks for taking my questions.

Justin Evans, Cinema Capital.

Just real quickly, would you guys ever be a buyer of a plain-vanilla asset management business? Is that something you'd never think about?

I don't think we would rule out anything. The answer is sure, but it's going to be a function of whether or not we think that we can apply the marketing capability to grow that business and whether or not that business brings some unique capability to us that we presently don't have.

But in this environment, we don't rule out anything. We are going to look at everything and kind of very carefully figure out how we can leverage the organization and the firm's capital.

Okay. And also, just I wanted to ask about the prop book a little bit. Is that still mostly invested in the enterprise fund, or should we think about that as being deployed kind of more broadly across the firm?

Well, the bulk of that is invested directly in the enterprise fund. Now within that fund, we obviously have our private investments and our public investments. So when I talked about it, I was really talking about how we look at managing risk on a look-through basis. So the bulk of the assets are still invested through the enterprise fund.

Well, except there is more capital in the broker-dealer today.

Yes, outside of the investment portfolio, we are managing -- are actively managing our broker-dealer capital, which is something that Cowen historically did not do. There, we are obviously -- we have regulatory capital needs and we maintain a significant access to that regulatory capital in the broker-dealer, and we are actually able to generate positive carry on that as well.

Got you. In your release, I noticed there wasn't any guidance, and I think you mentioned it. Can you guys give any kind of maybe color on what you think this business can earn, maybe backing out the prop book? Obviously, the prop book is going to have a lot of variability to your earnings each quarter, depending on what the market is doing and how you are doing there. But kind of generally speaking for the rest of the business, how can that do without that prop book?

I was going to refer to the -- you can look at history and see it by business in our prior filings, but we do have a lawyer sitting with us in the room here. I should move over so he can kick Peter.

The only thing I would say on that is how the business does ex the prop book is, to a certain extent, going to be a function of the environment that we are in. I don't think it comes as any surprise to anyone how much volume is contracted and how new issuance and the follow-on business have been affected by the lack of volume in the environment.

We had this flurry in the fourth quarter of new issuance, and then it slowed down again. A number of deals, not ours per se, but deals that were filed by other banks got pulled in the last six, eight weeks.

I think suffice it to say that we wouldn't -- this merger wouldn't make any sense if we couldn't make money ex our prop capital in a more normalized environment. The one thing that I think will happen and I hope we will participate is the M&A environment is going to continue to be and maybe growingly be robust, and we've got the ability to participate in our space or spaces, in our sectors. So I hope that attempts to answer the question without getting myself in a pickle.

No, I appreciate it. I'm just trying to figure out how different your model going forward will be from kind of the historical investment bank model. Do you envision using some leverage at some point for this model?

I think if we could -- I mean the key here is matching duration to asset type, right? So I think we can and have used leverage. We are more likely to use leverage against things where we have significant liquidity. And, of course, we'd like to be in a position where we have a lot of liquidity on the asset side, and maybe term debt at some point in the future if we were to put some debt into the portfolio -- into the balance sheet.

So it's really could we scale? Sure, we can scale, but I think we are far more focused on managing the liquidity on the balance sheet and generating the rates of return on an unlevered basis. Because our view is if we can do that well, then adding a modicum of leverage will enhance returns, but we will not be a slave to having to lever the balance sheet in order to generate returns.

Got you. And I guess just with the lack of guidance, I'm just a little bit nervous about the burn rate. Can you address that at all? Is there any likelihood that you're going to have to raise additional equity at some point?

We don't anticipate having to come to the back to the market to generate additional equity unless we see an opportunistic reason to do so.

It would have to be in conjunction with some kind of proactive event which requires more capital perhaps then we have available, but that it would have a real benefit.

Got you. Okay, thank you, guys. I'll jump off. Thank you.

Ryan Krueger, KBW.

Good morning. Quick question on the high water marks that you touched on. Are there any funds in the largest ones that you break out with at least $200 million in AUM that are not capable of recapturing high water marks because of when they were created or started investing?

Every fund that we have is capable of being able to recoup its high water marks. I mean it's a little misleading, because high water marks are specific to the investors themselves. So to the extent that new assets come in to any of those existing funds, those are not subject to high water marks.

Right.

So the numbers that we put in there are -- if you were a generic investor and you were an investor as of January 1, 2008, where would your returns have to go in order to recoup the high water mark.

Okay. And then one more for me. In terms of future potential redemptions, are there any notable lockups coming off? I think you have touched on it before maybe within the enterprise fund, or have those pretty much expired at year-end?

Well, there are several -- the enterprise fund was a two-year rolling lockup fund, is a two-year rolling lockup fund. So there are several -- really through March and June are the last two significant redemption dates. To date, we have relatively small redemptions that we are seeing that. And then like you said, the people that haven't redeemed, they would be rolling for another two years.

Okay. Of any of the people that have not redeemed to this point, are any large contributors, or you don't really disclose that?

We haven't really disclosed that.

Okay. Thanks for taking my questions.

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Operator, then I'd like to thank everybody for their patience and thank you for your help, and look forward to speaking to you with brighter stories in the future. Thank you all very much.

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.