Cowen Inc (COWN) 2010 Q3 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 2010 third quarter. 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 those measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release. Now I would like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer. Please proceed.

Good morning. Thank you, operator, and welcome, everyone, to Cowen's third-quarter and 2010 earnings call.

I am joined here today by Jeff Solomon, our Chief Operating Officer and currently Head of Investment Banking, with Chris White, our Chief of Staff and Steve Lasota, our CFO and Owen Littman, our General Counsel, will be able to respond to any questions.

Later on the call, Jeff will discuss our individual operating businesses and Chris will follow up and take you through third-quarter financials. Before that, though, I would like to briefly discuss some of the developments and progress that have been made over the past 12 months since the Cowen and Ramius business combination was completed, which is exactly a year ago last week.

During the 12 months, our goal has been to build a foundation for a streamlined and growth-oriented financial institution and, as many of you know, we have taken a number of steps during the course of the year to evaluate and restructure certain aspects of both the alternative investment management business and our broker dealer business. And as we have said on earlier calls, it has taken us some period of time to assess who were the right people to be part of this going forward and what was the right structure going forward.

At Ramius, consolidation of certain infrastructure, integration of senior management and dedicated focus on products and services that satisfy current client demand has been successful as reflected in our results in assets under management having increased by about $680 million over the past 12 months, including an increase of $330 million in the third quarter and that is net of assets that have been returned to clients.

Overall, our ability to attract new investors is a strong indicator of the success of our platform and our team. And we are very pleased to report that we continue to see strong interest in exciting opportunities for our alternative platform and believe that we are building up a very healthy backlog.

As a broker dealer, we have taken significant steps to reorient and focus the business end's leadership. We recently announced the employment of Jeff Solomon as Head of Investment Banking. Jeff has had a long history of building successful businesses for this firm and also brings broad investment experience to our investment banking effort.

In addition to the new leadership, we recently announced the reorganization of our Capital Markets area by combining Equity Capital Markets, Private Equity Capital Markets, and Debt Capital Markets into one unified Global Capital Markets Group which now allows cross-selling across a whole banking platform with a [variety] of products that actually didn't exist six months ago. This is in addition to the development of the Credit Fixed Income Group, the addition of a senior M&A banker, a very senior M&A banker that's building out of our presence in the convertibles market and the increase in -- of our technology REIT in the China-based research platforms.

With the right product sense of the clients in markets we serve and our strong relationship bank as I believe we are building an investment banking platform that can support profitable growth by providing a robust set of solutions to specific clients, you know, that's kind of going to be in our sweet spot.

We have also continued to improve the way we managed to [grow] this balance sheet by enabling our talented investment professionals to manage capital in a manner commensurate with the risks we collectively believe are appropriate to the firm. The interaction between our portfolio management leadership and our risk management continues to evolve.

As a result, we have improved upon our ability to allocate across strategies and use our deep knowledge of the global marketplace to improve our returns. These efforts are partially responsible for our investment performance in the third quarter and are likely to result in very solid risk-adjusted returns as we move forward.

With all these new developments and changes over the course of our first year as a combined organization, I am pleased to report that in the third quarter, we began to see the progress of our efforts. During the quarter, our Economic Income Loss was reduced to $12.9 million as compared to $15.3 million in the 2009 third quarter and a loss of $17.9 million in the second quarter of this year, and that's with an environment of reduced volume in the third quarter.

If you look at our results on a cash basis, our Economic Loss was $3.9 billion -- million in the third quarter, and this represents a meaningful improvement from our cash Economic Loss of $6.3 million and $12.8 million in the 2009 third quarter and 2010 second quarter, respectively. When we look at actual operating results by excluding our quarterly cash severance and comp expenses, which get reimbursed, our Economic Loss was only $1.4 million.

I would also like to mention that these numbers do not exclude the $2.5 million in compensation expenses related to the buildout of the various new businesses and products this year. In other words, we've hired a bunch of people, those expenses are running through the P&L, and the revenue is just starting to flow from those investments.

Our progress is also evidenced in our non-comp expenses which are down by 8% over the past quarter and have steadily declined for three consecutive quarters as we continue to realize the benefits of cost saving opportunities. And as we talk further, you'll see that we will continue to make progress on that as we move into the fourth quarter and next year.

We are already over a month in the fourth quarter and I am pleased with the activity levels in all parts of our business. While we still have significant work to do, I am more and more confident that we have established a really strong platform and look forward to creating value for our shareholders in 2011.

Now I will turn the call over to Jeff Solomon, who will talk in much more granular detail about the alternative investment and broker dealer businesses.

Thank you, Peter. I will begin by discussing the various developments that took place in our Alternative Investment Management Group during the third quarter followed by a brief discussion of our Broker Dealer Group.

We are pleased to report that assets in our management increased for the third consecutive quarter. AUM increased to $8.23 billion as of October 1, 2010, compared to $7.89 billion as of July 1, 2010. The increase resulted from net subscriptions of $225 million during the quarter and a performance-related appreciation in assets of $108 million.

I would also like to point out that every one of our investment platforms was either flat or experienced an increase in assets over the three-month period. This increase in assets under management is net of the $137 million in hedge fund distributions related to the liquidation of the Multi-Strategy Funds.

Through the end of the third quarter, we have returned $438 million from these funds. Of this amount, we have transferred approximately $21.9 million of third-party capital back into other Ramius products.

During the third quarter, we reported incentive income of $1.8 million compared to a slight incentive loss in the 2009 third quarter and an incentive [C] loss of $450,000 in the second quarter of 2010. This increase in incentive income is largely the result of our deep value fund which broke through its high-water mark level for many investors during the period.

Additionally, we continued to receive incentive income from our global credit trading platform and from certain fund of funds products. We had strong performance across nearly all of our funds during the quarter.

To highlight a couple of our more important funds, our deep value fund increased 10.1% in the third quarter and is up 18% over the first nine months of 2010. Our global credit trading platform increased by 6% in the quarter and is up 14.3% on the year. Our activist fund to fund portfolio with a hedging overlay product was up 1.5% in the third quarter and is up 3.9% over the nine-month period.

To give you a benchmark, the S&P 500 was up 11% during the quarter and is up 4% during the beginning -- since the beginning of the year. Thus far, performance has been strong in the fourth quarter as well.

During the third quarter, we remained focused on marketing our liquid investment strategies, including the deep value and global longshore credit trading strategies which we believe have compelling performance records in pipelines. One mandate recently -- we recently won includes a $40 million commitment for our global credit trading platform from a sophisticated European asset management firm, which we believe provides a foundation for us to raise additional capital.

In our fund of funds and alternative solutions business, Ramius was recently awarded an important mandate from a global investment bank to construct and manage a new product for global distribution. As part of this mandate, Ramius will manage a portfolio comprised of systematic algorithm-based strategies, developed by the bank as well as custom hedge fund replication indices developed by Ramius.

The product is designed to provide liquid and transparent access to a diversified group of uncorrelated returns streams for the clients of this global investment bank. This was of a project that we undertook over the course of the past quarter and that we won in the last quarter and we expect this product to launch in early 2011.

As I discussed in the last call, we announced the creation of our first mutual fund, the Ramius Dynamic Replication Fund. I am pleased to report that this product has quickly gained traction in the marketplace and that we have already executed selling agreements with four major retail institutions.

In our real estate business, we have recently formalized a relationship with one of the long-standing operating partners that will allow us to potentially benefit from investor demand for cash flow in multifamily assets across the United States. We are also continuing to take steps to streamline and improve operations on the Ramius side of the business, and as Peter mentioned earlier, at the beginning of this year we consolidated certain infrastructure functions and integrated senior management.

More recently, as we've changed our products we've adjusted our team to best accommodate our new focus; and moving forward, we will continue to refine our platform where it makes sense in order to ensure that our resources are aligned completely with the firm's strategy.

I would now like to turn to our Broker Dealer, starting with our Investment Banking department. In terms of the number of equity underwriting transactions, the marketplace experienced a 50% decline in the third quarter year over year compared to 2009. In the sectors we cover, this decline was much more subdued at about 30%.

However, despite the market weakness, we participated in eight underwriting transactions during the quarter versus four transactions in the prior year period. And we continued to build our backlog.

Our underwriting backlog has increased 13% since our last earnings call and has more than doubled since the beginning of the year. As it stands today, our capital raising backlog consists of 27 transactions, of which 70% or 18 transactions are filed. We are lead manager on about 25% of these transactions, which are mainly IPOs.

On the advisory side of our business, we currently have 25 transactions in backlog and executed on two transactions in the third quarter. We are also seeing some nice progress in our recently established credit fixed income group, which has already increased its backlog to a total of six transactions from a standing start in July. In our PIPES and registered direct group, we completed one transaction in the third quarter and have another 11 transactions in the mandated pipeline today.

We have taken a number of important steps in Investment Banking to streamline our coverage model to industries where we can deliver the most value and create a product set that best meets the needs of our clients. Our model is built on the ability to offer a range of capital markets' execution and strategic advisory services that rival larger firms, while providing a senior level client focus that allows us to discuss solutions that are better tailored for clients than they would find at a large institution. That is how we differentiate ourselves.

In unifying our capital markets area, we felt it was important because with the personnel changes we completed, we now believe we have a strong group of senior partners that are focused on meaningful transactions that can have a real impact on the groups and on the firm's bottom line.

In addition to the tactical moves we are making to add quality relationship-driven product to our banking model, we are doing something even more fundamental. We are creating a partnership model, one that allows for a concerted coordinated calling effort. One that blurs the lines between transaction-driven calling and relationship-driven calling because our investment professionals understand the value of having a collective approach to solving problems for clients is a winning strategy.

Now this is not a novel approach on Wall Street, but it is one -- it's a difficult one to manage when there are legacy members of the team who do not give credit to the value of cooperation across the platform. Our actions during the course of the year have focused on establishing a platform for individuals who want to be a part of building that kind of culture.

And we have done so by bringing new folks in and parting ways with those who do not share that vision.

So we will continue to be opportunistic in hiring skilled professionals and enter verticals where we believe we can truly add value to a group of clients. Indeed since we have made some of the staffing changes in banking, there has been an influx of resumes from talented bankers who want to join our platform. But as we have demonstrated with our recent hires in capital market and in healthcare banking, we are committed to finding individuals who will make great partners with the talented professionals we already have in our banking, research and sales and trading areas.

Turning to sales and trading, we continue to maintain our market position despite an aggregate 15% decline in New York Stock Exchange and NASDAQ trading volumes. Past equities volumes remained depressed compared to 2009 and decrease customer activity resulted in a 20% year-over-year decline in our brokerage revenue.

While volumes remain depressed, we have been successful in maintaining our equities market share throughout 2010, particularly with the top 100 institutional accounts which we view as a core client base. Our traders and sales people are focused on a high-touch model that not only benefits our institutional clients but also serves our banking and capital market clients as well.

With the new Cowen partnership model that we are developing, we are leveraging their expertise to help us win business and that's already shown some real signs of success.

Before I go on here, I'd just like to take a minute to comment on the efforts of our research team. When we were looking to merge with Cowen over a year ago, it was clear to many of us, just as it was to many of you on this call, that our research analysts are immensely talented and have a degree of insight in their sectors that is the envy of the Street. We continue to believe that our research franchise gives us a distinct advantage over our peers as we continue to grow.

In the Research Group, we continued to take steps in the third quarter to expand our China-focused coverage universe. In August, we announced the hire of a senior research analyst who will be stationed in Beijing and will focus on Chinese healthcare companies.

We are excited that the recent developments in these groups and are confident that our efforts will continue to translate into the delivery of superior research and execution for our clients.

Finally, I would like to turn to our balance sheet, which remains conservatively invested. We ended the quarter with $441 million in equity, of which a significant portion is invested across a diverse array of strategies. As I have said on previous calls, these investments are not highly levered. On a blended basis, our liquid investments were only levered 1.9 times at the end of the quarter and our liquid investments remain unlevered.

In terms of the balance sheet performance, we benefited from the favorable market conditions that persisted in the strategies we pursued throughout the third quarter and imported investment income of $14.1 million as compared to income of $15.3 million in the third quarter of 2009 and invested income loss of $2.9 million the second quarter of 2010.

Balance sheet performance has been strong thus far in the fourth quarter as we've benefited from continued dollar weakness, strong equity and credit and commodity performance.

I will now turn the call over to Chris who will provide an overview of the results for the 2010 third quarter. Chris?

Thanks a lot, Jeff. I would first like to note that, as a result of the Cowen Ramius merger which closed last November, the third-quarter 2009 GAAP financials reflect three- and nine-month standalone Ramius only. The 2010 GAAP results reflect the performance of the combined Company.

For the three months ended September 30, 2010, we reported a GAAP loss of $15.4 million or $0.21 a share compared to a loss of $5.9 million in 2009 or $0.16 a share. For the nine-month period we reported a GAAP loss of $49.5 million or $0.68 a share compared to a loss of $31.9 million in 2009, which represented $0.85 a share.

Management utilizes economic income when analyzing our business performance as we believe that economic income provides a more complete view of how we generate revenue and where we incur expenses. More specifically, economic income excludes the impact of consolidating any of our funds; it excludes the expenses associated with one-time equity awards made in connection with the transaction which totaled $2.1 million for the third quarter and $6.9 million for the first nine months of the year. Also in the 2009 period, transaction-related expenses of $2.9 million for three months and $8.7 million for the nine months are excluded.

In an effort to provide more detailed disclosure, we have made pro forma adjustments to economic income for the 2009 period, such as you see in our release and we will discuss today fully combined results for both the 2009 and 2010 period.

For the three months ended September 30, 2010, the Company reported a pro forma Economic Loss of $12.9 million or $0.17 a share compared to a loss of $15.3 million or $0.28 a share in the prior year period. If we adjust economic income to exclude certain non-cash items such as depreciation and amortization, share-based and other non-cash deferred compensation expense and our real estate incentive [d] loss, our pro forma Economic Loss for the third quarter was $3.9 million compared to a $6.3 million loss in the third quarter of 2009.

These adjustments include deferred compensation expense of $6 million and $6.9 million in the 2010 and 2009 periods, respectively. They also include depreciation and amortization expense of $2.2 million and $1.9 million, respectively, during those periods.

Finally, non-cash negative incentive fees of $900,000 and $200,000 are included as well. When cash severance and reimburse compensation expense of $1.1 million and $1.4 million are excluded, our loss for the quarter was further reduced to $1.4 million.

Turning to our summary results for the nine-month period. The Company reported a pro forma Economic Loss of $42 million or $0.56 a share compared to a loss of $46.9 million or $0.85 a share in the prior year period. Excluding certain non-cash items, pro forma Economic Loss for the first nine months of 2010 was $23.1 million compared to $9.6 million in the prior year period. For the nine-month period, our loss was $15.5 million when we exclude $2.8 million of cash-based severance and $4.8 million of reimbursed compensation expense.

We would now like to run through the different components of pro forma economic income starting with revenues. Our third-quarter revenues were $61.3 million, down 17% or $12.5 million compared to the third quarter of 2009.

(technical difficulty) On a sequential basis, our revenues increased by 26% or $12.7 million compared to the second quarter.

The year-over-year decline in revenue was primarily due to lower brokerage revenue as cash equity volumes remained depressed in the 2010 period. Lower investment banking revenue, lower management fees due primarily to a change in the mix of assets under management between periods and lower investment income in the 2010 period, relative to 2009, the increase on a quarter-over-quarter basis was primarily attributable to an increase in investment income.

Turning to specific revenue line items. Investment Banking revenues were $7.2 million during the quarter, a decrease of $4.6 million or 39% and $2.7 million or 28% as compared to the 2009 third quarter and the second quarter of this year. The year-over-year and sequential decline was driven primarily by lower M&A revenue which were $2.7 million in the quarter versus $5.3 million and $5.6 million in the 2009 period in the second quarter respectively.

In terms of the number of transactions, our M&A activity was flat on a year-over-year basis at two completed transactions while we completed three transactions in the second quarter. On the underwriting side of our business, revenues were $3.5 million for the quarter, a decrease of $500,000 compared to the prior year period and flat compared to the second quarter.

In terms of underwriting activity, as Jeff mentioned, the marketplace in our four sectors experienced a relatively slow three months. On a year-over-year basis, the number of transactions in Cowen's sectors decreased by approximately 30%. On a quarter-over-quarter basis, underwriting activity decreased by 27% in our sectors.

Despite this slowdown, we continued to execute on our growing backlog and completed eight underwriting transactions for the period, or twice as many as were completed in the prior year period and the same number as we completed in the second quarter. Our private placement revenue was $1 million in the third quarter down from $2.6 million in the third quarter of 2009, but up from $750,000 in the second quarter.

In the PIPEs and registered direct area, the marketplace experienced a year-over-year decline of approximately 30% in Cowen's four sectors in terms of the number of completed transactions. As compared to activity levels in the second quarter, we saw a decline of 24% in our sectors.

In the third quarter of 2010, we executed one when private transaction as compared to four transactions in the third quarter of 2009, and one transaction in the second quarter of 2010. We have seen a pickup in capital raising activity in the fourth quarter.

Thus far, this week, we have priced one transaction, we expect another to price this morning, and have an additional two underwriting transactions on the road. In addition, we have seven private transactions in the market, primarily emanating out of our fixed income and private equity areas.

Moving to sales and trading, revenues decreased by $6.4 million or 20% to $26 million compared to $32.4 million in the third quarter of 2009. On a quarter-over-quarter basis, revenues declined by 13% compared to the $29.8 million booked in the second quarter.

As previously mentioned, we continued to face a difficult cash equity environment in the third quarter particularly relative to the 2009 period. Thus far in the fourth quarter, we have experienced a slight pickup in commission business and equity fund flows turned positive recently.

While activity levels are not back to those of 2009, we are encouraged by these developments in the fourth quarter.

On the Alternative Investment Management side of our business, we recorded management fees of $11.5 million in the third quarter of 2010, a decrease of $2.7 million or 19% as compared to the third quarter of 2009 and a decrease of 5% compared to the second quarter.

A decrease in fees on a year-over-year basis was primarily due to a change in mix of assets under management over the two periods, as we said significantly increased AUM in our fund of funds area including advisory services. Edge fund AUM at the end of the third quarter was up from the end of the second quarter, but remained below AUM levels at the end of the third quarter of 2009.

The decline in management fees on a year-over-year basis and a sequential basis also reflects fee reductions on unit credit assets based on both the July modification agreement and the original agreement executed at the time of the merger.

On a blended basis over the quarter, our average management fee was 57 basis points which includes lower fee paying products such as our cash management products and our mortgage advisory business, where we are not currently collecting management fees. This compares to a blended average management fee of 73 basis points in the third quarter and 62 basis points in the second quarter.

Activity levels in all of our Alternative Investment Management products remained robust in the fourth quarter.

During the third quarter, we reported incentive income, incentive fee income of $1.8 million compared to a slightly negative incentive fee amount in the prior year period, and negative incentive fees of $450,000 in the second quarter. The improvement was a result of an increase in fees generated from our deep value edge fund, certain fund of fund products and our global credit funds.

During the quarter, our deep value fund back through its high water marks for all investors other than those who transferred assets over into that fund from our Multi-Strategy funds. These investors carried over there high water marks when they collected to transfer assets into our single strategy products.

As Jeff noted earlier, on a relative basis performance in the first nine months of the year were strong in our single strategy product, as our deep value fund credit funds were up 18% and 14.3%, respectively. Performance across the fund has also been positive thus far in the fourth quarter.

We recorded investment income of $14.1 million during the quarter compared to investment income of $15.3 million in the third quarter of last year and investment loss of $2.9 million during the second quarter of this year. Investment income was driven by positive performance across our various investment strategies particularly our credit, event-driven and commodity trading strategies.

On the expense side, compensation and benefits expense for the third quarter of 2010 was $45.9 million, a 24% decrease as compared to the $60.2 million in the third quarter of 2009. Our aggregate compensation to revenue ratio was 75% for the quarter compared to 82% in the third quarter of 2009.

For the nine months ended September 30, our compensation to revenue ratio was 72%. This ratio, as well as economic income, excludes one-time equity award expense from grants made in connection with the transaction of $2.1 million and $6.9 million for the third quarter and nine months, respectively.

Excluding our quarterly reimbursed compensation expense of $1.4 million and severance expense of $5.3 million, compensation and benefits expense was 64% of revenue in the third quarter. Similarly, for the nine-month period, we recorded reverse compensation expense of $4.8 million and severance expense of $7.3 million. Excluding these two amounts, compensation and benefits expense was 65% of revenue in the first nine months.

Furthermore, as Peter mentioned, if we exclude year-to-date compensation of $4.4 million, attributable to investments made in professionals associated with new businesses and products, our compensation and benefits expense was 62% of revenue for the first nine months. Our severance expense is a result of the decrease in headcount which declined by approximately 4% over the quarter. We expect to incur additional severance expense in the fourth quarter as headcount is currently down an additional 1% from the end of last quarter. Severance expense will not be at the levels recorded in the third quarter and we do not currently expect to have further reductions over the remainder of the year.

Non-compensation expenses in the third quarter were $29.6 million, a 4% decrease from $30.9 million in the third quarter of 2009, and an 8% decrease from $32.2 million in the second quarter of 2010. During the third quarter, our non-compensation expense included $23.9 million of fixed expenses and $5.7 million of variable expenses, primarily related to floor brokers and trade execution expenses.

In the third quarter, we decreased our fixed expenses by 3%, both on a year-over-year and a sequential basis. The year-over-year decrease was primarily due to the realization in non-compensation expense savings over the quarter, as cost-cutting measures taken in connection with the transaction and over the first half of the year began to take effect.

Variable expenses were down 10% and 24% from the third quarter of 2009 and the second quarter of this year as our sales and trading team continued to focus on reducing trade execution costs.

Although economic income is a pretax measure we wanted to briefly address taxes. In the third quarter, we recorded approximately $300,000 of tax expense which equates to effective tax expense of approximately 3%. As we have mentioned on previous calls, on a go-forward basis we believe that an effective tax rate of approximately 30% is reasonable.

Looking at the balance sheet, book value per share was $5.85 at the end of the quarter and tangible book value per share was $5.31.

Finally, as previously disclosed in connection with the one-year anniversary of the Cowen Ramius business combination, we are obligated to distribute up to 1/3 of the shares of common stock currently held by RCG Holdings, certain former members of Ramius including [DAL Time Holdings]. In order to satisfy our obligation in this regard we will need to register the distribution of shares by RCG Holdings.

We are also obligated to register for retail the shares held by RCG Holdings that are attributable to BA Alpine Holdings, as well as the shares held directly by HVB Alternative Advisors.

Accordingly we intend to file an S-3 Registration Statement in the coming days that will cover both the registration of the distribution by RCG Holdings and the resale by certain affiliates of UniCredit. In the aggregate, the Registration Statement will cover approximately 17 million shares of which approximately 8.5 million are attributable to BA Alpine Holdings and approximately 2.7 million are held by HVB Alternative Advisors.

At this time we have no knowledge of whether the holders of these shares intend to retain or sell the shares into the market.

With that, I will now turn the call back over to Peter for closing remarks.

Well, at this point, ladies and gentlemen, [what] I really would like to do is open it up to any questions that you may have. I think you have got a pretty clear picture of what's gone on here in the third quarter and year to date. I hope you get the sense of how much progress we've made. It's been considerable and we start off 2011 as a considerably different firm than the firm that merged a year ago.

So with that, why don't I open it up to any questions?

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

Just have a few questions here. In terms of the new mandates, you know that there's been some wins I guess in Alternative Investment Management that you mentioned. Are there still a number of mandates that haven't been funded yet? And just want to get some sense of the trends you are seeing on commitments being funded right now.

Well, the answer is yes. There are a number of mandates that have not been funded yet. In fact, I probably would say more than haven't been have. And so, we are optimistic that we are building up a pretty good backlog of potential revenue-generating assets that will be coming in over the next 12 months.

Great. And then just in terms of the performance in the funds, you guys have made a lot of progress and number of funds are now above the high-water mark. Just want to get a sense of which funds are not currently above the high-water marks or -- I don't know, maybe you put it another way. Just give us a sense of what percentage of the assets or AUM currently are above high-water marks?

Our Multi-Strategy products that we've announced on previous calls that we are basically returning assets are still not above the high-water marks, but people have rolled over from -- there have been some rollovers from that funds into our Single-Strategy products. And in that case, you know, as Chris mentioned in that case there are individuals that have not -- that are not above their high-water marks. But the fund itself, the Single-Strategy itself is above the high-water mark.

The bulk of our assets under management in terms of the growth products we have going forward are above their high-water marks. Again you have to back out the Multi-Strategy assets because they are not above their high-water marks nor are they going to be because we are going to return those assets. So --.

Obviously the new assets coming in don't come with legacy high-water mark problems so --.

And I think if you look at the chart that is in the release, all of our hedge fund products are eligible for performance fees. A portion of our fund to funds products are eligible for performance fees. The advisory business is not. The real estate is, but it is back end loaded, because we have to return capital and we have to go over our hurdle rate.

The same is true of Cowen Healthcare Royalty Partners and then the other is not eligible for performance fees.

So you are really focused at least in terms of current income on the first two line items within the AUM platform chart.

And then I know it is relatively early in the quarter, but is there any way you can give us some color or sense of how the funds are performing thus far in the fourth quarter?

I think we said that they are performing well. I mean I -- we had positive performance in all the funds for the quarter.

Great. I didn't realize that was for this quarter. And then on the expense front, you guys have made quite a bit of progress there. I'm just trying to get some additional sense of how much room is left to go and how would you think about 2011, relative to some of the numbers that you put off this quarter on especially the non-comp side?

The -- we really prefer getting into the big meat of the cost savings in the fourth quarter and as we move into next year. The big thing that is about to happen is the consolidation of all the space into 599 Lexington Avenue. I think we said on the last call and if not, say it now that we were able to escape two floors of lease obligations over 1221, Cowen's old space at no cost. Meaning, we didn't have to buy our way out of it. The master landlord there or tenant attendance basically wanted this space and they just took it from us, relieved of our obligations there.

And we were able to fit almost everybody into our space with having to take part of one floor. So there's a very substantial occupancy savings that is yet to start to roll through which we will see next year.

Yes. I would also say that in terms of the non-comp expenses works is where we are primarily focused today. Many of the expense reductions we've identified start to really kick in really first quarter of next year. It has been a lot of renegotiating contracts with vendors or canceling contracts with vendors or allowing certain vendor contracts to expire.

And so, you'll see a little bit of that in the fourth quarter and then you'll see more of it in the first quarter.

I would also say that there are certain investments that we are making in businesses we think are going to be critical revenue drivers. And so you may not see 100% of that flow through, but what we've done is clearly identified fixed cost savings and then we can spend a smaller portion of that to invest in things that will drive revenue.

Okay, I've got you there. And then can you guys give some detail on the front put, just figured I would ask anyways in terms of the headcount reduction you had last quarter. Just want to get some color on some specific things you are doing internally to keep morale high and just make sure that the core people that you have today are really dedicated to Cowen and the opportunities they have at Cowen.

Well, I think that that is kind of an easy -- sort of an easy thing to answer. You know, people who want to be part of building something are here and the people who for whatever reason couldn't contribute, didn't want to contribute or, for their own economic pressure, personal reasons needed to sort of try and cure something someplace else. You know, they left.

So morale probably I would say today is the best it has been since the merger has taken place is and getting everybody moved together which will all happen by Christmas, everybody will be here, it's got everybody really kind of pretty well juiced up about the idea of being able to walk between floors and communicate and pretty excited about it. So frankly I don't see -- we don't see morale as a problem.

Everyone sees the progress we're making. They see the backlog building they seek the assets coming in, they see the space consolidation. They're getting new space, bright space, easier communication. You know, it's not an issue.

That's helpful. And then in terms of the recruiting landscape, obviously late in the year right now, but maybe laying the ground work for 2011 in any select areas that you guys are looking at. I mean, how are conversations going? Are there a lot of good people out there that you are having conversations with? And just any color there would be great.

Well, I mean we've said very clearly the areas we are going to focus on particularly as it relates to the Investment Bank and we have -- we are in a lot of dialogues with a lot of folks. There has been a tremendous amount of reverse inquiry into us since we made some of the management changes in the middle of the year. And some of the changes we made internal personnel wise have opened up opportunities for others to come and be on our platform.

So it's certainly been refreshing to see the number of folks that wanted to come to our organization and build, and I think that that is something that we will be selective about. Just the same way as we built out some of the product capability in capital markets, you know, we have some opportunities to do some things that build on the core and to build around the team that we have. I think that is really critical.

So most of what we're doing in these discussions is looking for people who want to be partners and who want to grow as part of an organization where they can get as much out of the organization as they give to the organization. And while that may sound clich, it's really a wonderful screen when you think about it.

And so, we are actively discussing a number -- with a number of folks and we will make some decisions as the turn of the year occurs.

Okay, great. And then just lastly, where does the deferred tax asset valuation allowance in the quarter --? Just I don't know if you have that number handy.

We have a full valuation allowance and the valuation allowance is $70 million.

(Operator Instructions). Lauren Smith of KBW.

Couple of questions and some easy ones first. What did the headcount end at the quarter --? I mean I know you said it was down 4%, but what is the total?

I think it's 553 is the number.

(multiple speakers) 541.

And you know in terms of the $5.3 million [severance] expense you know how many are asked differently -- you know how many -- I know you have been hiring, but you let people go. So I mean I just want to get a sense of how many people -- you know, we know the net number, but can you give us the components? Like so how many people were associated with that $5.3 million and I know you said we should expect additional severance percents in 4Q. Sorry if I missed it, but did you quantify that?

We didn't qualify it other than to say that it will be far less than the $5.3 million. The $5.3 million was a little bit of an anomaly because we had certain individuals, managing director level individuals, that were let go in the third quarter, who had significant stock components and that stock vested upon us terminated them without cause.

So that was, I think, an aberration and I think you'll see levels return to the kind of $1 million, $1.5 million -- which is where they were previously. And I would be surprised if it is even that much in the fourth quarter.

Yes, we are starting to get thin on people left to be let go. I mean we are getting down to our [core fighting] right here.

So, again, just how many people did you let go in the quarter and did what was the net add?

It was -- on a net basis we were down 4% in the third quarter.

So that is about 20 some odd people. That's down.

And as far as compensation mix of cash versus stock, could you just walk us through that? Where does that sort of stand now? I'm guessing it's pretty tiered. And has there been any meaningful change in that mix over the past year as you've integrated the two organizations?

That determination isn't made until the end of the year when we finally finalize compensation and we make the determination how much is going to be cash and then what kind of stock we are going to use. So we are fully [accrued] with comps as we see it, but how it breaks down we haven't decided yet.

Okay so there's no sort of, you know, I don't -- stipulation if you will is the right word that, say, your most senior level people or executive management are going to get at least X percent in stock?

No. I mean, we have historically and I suspect we will in the future use basically a tax table which meaning the more income you receive, the more stock you are going to receive as part of that. But the compensation committee of the Board sets that grid at the end of the year and that discussion hasn't happened yet for this year.

Okay. Great. And then can we just circle back on the backlog numbers? I mean, I just -- those numbers, I mean, really big at least relative to what I think we can see. So can you maybe just give us a little more color around that? And is that really more sort of your internal probability weighted pipeline and you know in the different buckets between [ECM], advisory and debt? In particular that you know, I think you said 25 in the backlog on the advisory side and that just, you know, seems like, you know, a really big number?

Well, I think that number hasn't changed much over the course of the year.

It's actually been where we've seen the changes, primarily, have been in our private investment, sort of the PIPEs cross offering, [register direct] business. We have seen a pickup in a mandated equity underwriting, public equity underwritings and of course, the increase in the credit. I mean, we had no credit business since the beginning of the quarter really.

And so by the end of the quarter, we mandated on six deals. Now I think there's a number of things that have happened and some of them have already occurred in the fourth quarter and that's been a good thing. We use backlog as sort of just an -- mostly as an indication of the health of the business. It's good to win mandates but you've got to them closed.

I would say that the -- just to give you a little bit of color, I'd say that the public markets are selective in some cases. We expect to do a lot, a lot of business. And then, in other sectors it's going to be harder and so we're seeing that, today, it's not just wide open.

I think we'll give you a lot more color on how much of that we get closed as we get into the fourth, as we report our fourth-quarter earnings. But I can tell you just from a business standpoint, that the amount of work that we're doing in terms of getting things executed and the number of pitches that we are making this up significantly over the second quarter and certainly up year over year.

And that is in the face of essentially letting 30 people go in Investment Banking, but hiring another 10 in our product areas. And so I'm pleased with the activity and the efforts that everybody is putting forth, but we have got to get them over the goal line.

Thanks for the color.

I think it is also fair to say that this backlog is a pretty well scrubbed probability weighted backlog. Much more so than it might have been six months ago.

Well, we've gone through -- I mean these are mandated. So, it means we have to have to -- and so this doesn't include what I consider to be the shadow backlog. There's any one of a number of transactions we could be actively involved in where they kind of get in and out of the backlog really quickly. You know the PIPEs and register direct space you know yield -- you know we could mandate and print a bunch of those intra-quarter and in fact, in two cases, we have already done that. So (multiple speakers) they don't even show up in backlog.

And as far as you know, you added your credit group in July and you know, is there any products that where you stand today at [added] convertibles? I mean, you know, certain areas -- is there any products that today that, you know, you think is sort of noticeably absent in your mosaic of businesses that you are thinking about over, you know, the next three to six months, or is it really just about, you know, executing and growing, you know, what you already have?

Well, I think what -- what we set out to do I would say three things that really felt -- we felt were critically important to make sure we had a full product suite. Credit, registered -- PIPEs and register direct and convert. Those are three pretty significant areas to grow.

We are squarely focused on execution in those areas. We think we've picked the right ones, and we can see that by increased discount and mandate wins. The buildout of our convertible trading effort, which really didn't get going until September is now a five-person team as we build out our capability in equity derivatives, include converts and options for aftermarket support for a lot of these transactions that we may originate or participate in.

You know, I think if we can just focus on those three areas today, there is a lot of low-hanging fruit for us to win. I'm not saying that we won't look at other things. It has to be pretty compelling, but those are three pretty big initiatives that we want to make sure we get right.

Okay, last one for me. On the commission, the brokerage business it was down, but I was pleased to see -- you know, down a lot less than a lot of others. So I'm just -- just maybe any color there. I mean, what are you seeing? You know, is that part of your business in terms of turnover being more stable, do you feel you know with changes of management and a lot of changes of the firm? You know, are you -- do you feel like you are gaining or penetrating accounts that perhaps maybe you weren't before? Or you changed any of your risk profile at all there?

No. We haven't changed our risk profile. We haven't had any significant turnover in that area and I think what we are doing better is integrating and driving our research product through the sales force and there's just a whole different attitude towards how we are going to deliver research more effectively to more accounts across the whole platform. And that's like a big initiative here.

Yes, I mean I also think building on our equity derivatives capability as a growth initiative around our core competency and cash equities is also pretty significant and it gives us a chance to repurpose our research footprint into new accounts; also the growth of our middle markets effort is happening. I mean, that is an effort that we really just started within the last 12 months.

We certainly have enhanced it over the last 12 months.

And but as is stated, growth initiatives, so we are adding accounts there and so, look, this is about being able to withstand a period of time in which volumes have come in or declined. I think what's really telling for us is that we have increased our position. We've maintained our position with relevant accounts, and so, as volumes return or as we are able to add new product into those existing clients, we have a distribution network unlike anybody else of our size. And that's really -- it speaks volumes about what our critical strategic advantage is.

Errol Rudman of Rudman Capital.

The shares you've just registered represent a large percentage of the shares outstanding, and you've made -- you're not planning to give to make any comments as to the distribution. But what are your thoughts as to having an organized offering as opposed to allowing for spontaneous sales?

Well, I think the answer to that is if there were start of a great movement on the part of the shareholders to want to have a distribution, we'd certainly consider it, but we were just obligated to do this and so as far as -- I mean, I can account for a lot of the stock other than the UniCredit portion in terms of people who were original LPs in the firm who have no intention right now of selling the stock.

I mean, they've been investors with us for 15 years and their attitude is that you're only one year into this and so I'm an investor and I am going to be here for a while. So -- and the UniCredit people have shown no evidence of willingness or desire in liquidating their stock at this level.

And they also have a representative on our Board currently. So --.

So you don't feel it is an overhang? Basically.

No. This is something that really we were just -- we were obligated to do it. It was part of the merger, but we had agreed to do post merger. So and in reaching out and having conversations with those folks, you know, we were basically just informing them that this is their right and that we were going to register their shares.

I understand it's an obligation. I was just talking about the practical. I was just thinking that the practical effects of having a large number of shares represented by a potential seller without any organized plans. So you're saying in effect that if you get an indication of sale, you might consider?

Yes I think it -- I don't think there is just going to be a seller on the market. If they wake up one day and decide they want to sell their stock, I think they are going to sit down with us and say what's the best way to make this distribution?

Which [might mean] UniCredit.

UniCredit, yes.

The rest of the shareholders are relatively -- I mean, small. I mean it's a bunch of shareholders. So and you'll see it when the S-3 gets filed, but UniCredit is the single largest and then, you know, the rest of the shares are held by individuals.

Devin Ryan of Sandler O'Neill.

Devin Ryan Yes, just had a couple of quick follow-ups here. Just, one, with hedge fund AUM increasing looks like 6% sequentially, just want to see if you know it's reasonable to assume that the overall [fields] on those assets should be improving just given the better economics on the hedge fund products?

I mean, I think, the answer -- the short answer is yes. We are seeing traction particularly in product that's unique where -- or capacity-constrained. I want to point out that in the other assets category, we still include about [$500 million] in CDO assets which we carry no fees on. And I expect that those over a period of time will go away as those structures unwind. What you'll see is as those go away, you'll see the revenue obviously or the management fees increase significantly. So you know on wins, it really depends on the product, but we are not seeing a deterioration of fee streams. And in fact where we have had some good wins in areas where we have a unique product, we have been holding price, which is good.

And then just in terms of new products and anything that you are working on in the Alternatives business. Is there anything that you think could be meaningful that they currently are working on?

I think it's not so much about individual products as it is about distribution and we have been working very hard to really get on to a number of financial intermediary platforms. I mean, this is a huge initiative that we've been working for over a year and we are starting to see both take us on negotiating these selling agreements take a long time, but once you have negotiated the selling agreement, you can't really put multiple product through those intermediaries. And so if I am looking out over the course of the next six to 12 months, I'm looking at how we are adding distribution capability and then developing products to fit through that distribution capability. And that is what I would say is probably the single biggest opportunity for us to generate meaningful AUM flows.

But I mean particularly in our fund to funds areas they are developing new products all the time. And the reason they do it is because they think there are significant revenue opportunities and because they think there's a significant need in the marketplace.

But you are -- we're not, some of those never come to fruition. So, we only talk about the things where we actually have a partner or we have actually launched something.

And I think this one large financial intermediary that we mentioned earlier on the call, I mean, this is something that at the beginning of the quarter, I'm not even sure we were aware of them going out with an RFP to look for a manager like us. The -- we got a reverse inquiry. We got the call in to come and bid and it was only a handful of people that were there. It was not a particularly robust pitch process because there are only a handful of people that can do what we do in that regard.

And so, our ability to win that is a function of the fact that we are known in that space so we get the call first and foremost, and then we have the ability to deliver on it. And so, you know that's the kind of thing I like to see because it shows that there is brand equity and it shows that we are top of mind at some large financial institutions who will call on us when they see an opportunity to work with us.

There are no further questions. At this time, I would like to turn it over to the management team for closing remarks.

Well, I think we have covered it all. Appreciate everybody who dialed in and the questions asked. I hope that we can have an even more productive call after the fourth quarter and we are working hard to do that and stay tuned. We appreciate your interest. Thank you all.

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