Cowen Inc (COWN) 2011 Q2 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 2011 Second 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 646-562-1983.

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 you full 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.

Thanks, operator and good morning, everyone. Welcome to our second quarter earnings Call. With me today are Jeff Solomon, our Chief Operating Officer and head of --(technical difficulty) backing Steve Lasota, our CFO and Pete Poillon, Head of Investor Relations and Corporate Communications. Later in this call Jeff will take you through some of the operating business detail more granularly than I will. We tried to put as much as we could in the press release recognizing that this is a Friday in the summer and it comes on the heels of a pretty ugly day yesterday. But the look in general, I am pleased to report this is our third consecutive quarter of positive income despite what has been fairly difficult market conditions. As we all know the markets hate uncertainty and effects of the European debt crisis and the whole US debt ceiling have caused increased market volatility which has affected our business of late. Not terribly, but certainly I think everyone has felt it.

Our cash equity business continues to suffer from lower volumes as investors are reducing risk across-the-board in equities and are just really sitting on their hands. I think equity volume in the second quarter was down 30% over the same quarter a year ago, butwe did considerably better than that. But on the flip side of it, this volatility is going to produce opportunities for us to bring in more talented people and continue to build out our suite of activities.

Our asset management business, alternative investment management has been much less affected by these short term swings. The kind of suite of product that we have seems to be in the right spot for our clients needs right now, and you have it in the press release more information about asset growth. It was very, very good second quarter in terms of asset growth and in terms of building backlog for future asset growth. We are continuing to win mandates. While it may take awhile for those mandates to get funded, this volatility isn't going to really affect us that much.

Finally, something which we emphasize all the time our balance sheet continues to be managed very well, we had excellent second quarter results. While this volatility has it's short term effects it really gives us the ability to take advantage of some of the dislocation and make money there. So despite difficult conditions we are making a lot of progress at Cowen as we did in the second quarter and we will continue in the third quarter and we are just building on a lot of momentum that we have been able to create over the last year as we have really retooled the firm.

As you all know in June we closed the LaBranche merger. Has a lot of benefits for us, but I suppose the greatest significance is it puts us in a really strong capital position. We have no long-term debt. We have significant amount of liquidity, and are really in a great position to deploy that liquidity in any number of ways to help grow the businesses and make money on our capital. The integration of their technology is underway which is going to advance our sales and trading activities, we think, substantially.

Secondly, we did announce a $20 million share repurchase program. Everyone should be aware that has not gone into effect yet because we were in the blackout period pending the release today of these earnings, so some number of days in the future that blackout period will be over, and we would probably commence that buy back program, assuming that we can do it at prices that we think produce the right rate of return for us.

We try to maintain a very active dialogue with all of you, our investor base, and listen to your suggestions. We know the stock sells at a pretty big discount to tangible book value. We'll pick and choose our spots to try and create value by buying stock back cheaper if the market gives us the opportunity.

Lastly, , as a continuation from prior quarters, we announced there were strategic hires during the quarter to enhance both the alternatives business as well as our broker dealer activities, particularly in investment banking. We made some very important hires, building out our tech practice, expanding our Asia practice and our consumer practice. And as we've said in the past calls, we are really reconstructing our whole sales and trading effort bringing in a number of different portals of businesses that will allow us to get paid for research. Some of these are taking longer to get themselves up and running and get all of the paperwork done, but we are starting to see revenue in the third quarter and that will accelerate into the fourth quarter.

With that I am going to turn it over to Jeff who will take you through -- a little bit more granularly, some of the details. We will try and keep this a little bit briefer than past calls to give you a opportunity to ask more question because we know everybody is probably anxious to get back to their screens. Jeff, you want to take it from

Thank you, Peter. I would like to start by discussing some of the recent developments at Ramius, our alternative investment management group. As compared to the end of the quarter, assets under management increased by 9%, or approximately $900 million. This marks the sixth consecutive quarter of asset increases as our traditional and recently developed products continue to gain traction in the marketplace.

We saw net cash in-flows across many of our investment products including alternative solutions, cash management, healthcare royalties, credit and Starboard Value and Opportunity platforms. While some of the increase came in our higher fee paying products, which would be the credit and the Starboard hedge funds and our healthcare royalty funds, our average annualized management fee remained flat to the first quarter of 2011 at 61 basis points which is slightly down from 62 basis points in the second quarter of last year. Keep in mind that we are moving the average annualized management fee off of a fairly significant base, but based on our current backlog of mandates that are not yet funded, we expect to see improvement in this measure in the near future.

We also reported incentive fees for the second quarter of $5.7 million as compared to the incentive fee loss of $500,000 in the prior year period. The improved incentive fees resulted in a testament to our exceptional portfolio managers as certain of our funds were able to generate positive risk adjustment returns even during the periods when the broader markets declined as they did in the second quarter.

To highlight a couple of our notable funds performances in the second quarter our the global credit fund was increased by 3.4%, our equity real estate group increased by 12.1% following several positive valuation adjustments during the quarter, the Starboard Fund declined only 50 basis points, but out performed the Russell 2000 with strong 1.6%. To give you a benchmark the HFRI Fund Weighted Composite Index was up 92 basis points and the Merrill Lynch High Yield Master II Index was up 99 basis points.

We remain focused on marketing existing investment strategies and to build a sold pipeline. During the second quarter we continued to execute on this pipeline and brought in gross new funds over $800 million in our platform. Notable wins include the Australian asset management firm, Advance Asset Management which is a member of the BT Financial Group, which funded a $400 million customized hybrid portfolio. Advance was recently honored as the Funds Manager of the Year in Australia.

A European insurance company client added $100 million to their existing investment in our global credit strategy and the Florida SBA began funding it's $125 million mandate for Starboard which we've mentioned on previous calls. We are proud to be partnered with such high quality clients and we believe that their choosing us, is a testament to our teams and our well regarded institutional approach to managing investments.

Also our health care royalties platform continued to make progress in the quarter, closing on their 14th investment. The group continues to enhance this robust portfolio of royalty agreements with assets under management now exceeding $1.2 billion.

As for our real estate funds, amongst several positive valuation adjustments during the quarter, the clear highlight of the period was the announcement of a significant lease signing at Worldwide Plaza, an iconic Class A office tower located in Midtown Manhattan and one of the largest investments held by the RCG Longview Equity Fund. At least representing over 900,000-square feet was signed by one of the largest global investment banking and securities firms in the world and will become it's America's headquarters.

The lease will take the occupancy of Worldwide Plaza to over 95%, and this had considerable impact on the value of this asset which has been reflected in the operating results for both the fund and the firm in the second quarter. Finally, the Ramius platform still has significant capacity for asset growth so along those lines we have hired two senior marketing individuals during the quarter to bolster our asset gathering efforts in both real estate and alternative solutions, in particular.

I now would like to turn to Cowen and Company, our investment bank, but before I walk you through the business I want to reiterate our stated objective that we put forth through the [team and talented company] back in September as that took over the head of investment banking, and that is to be the preeminent, profitable, mid tier investment bank. That may sound unoriginal or even cliche to some of you, but I can't tell you how remarkable it has been to have such a helpful and straight forward goal.

As we set out to remake the business over the past nine months, we are using this statement as a lens through which we are making decisions, forging partnerships across the platform and establishing strategy. More importantly, we are using it as an aspiration to retain and recruit talented people, something we have done quite well thus far in 2011. Following our robust first quarter, our investment banking segment delivered a solid second quarter in-line with our expectations.

We made progress in the banking effort, but the cash equities business challenge so remains challenged as it does in almost every other firm on the street. While it may not be obvious from reading our financials, we have done a good job at reducing noncomp expenses, however, we've reinvested some of those savings in businesses where we believe we either have significant growth opportunities or where we need to round out what we believe to be a very thin product offering.

As a reminder those initiatives include the expansion of our cash equity and sales platform into fixed income sales and trading equity derivatives, electronic products and our expanded program trading. Those products or initiatives are in various stages of execution. Additionally, we added head count in research and investment banking in the areas such as healthcare and TMT as well as in debt and equity capital markets which are also important new initiatives.

We are not able to publicly break out our financial statements between business that were in place 12 months ago versus the new investments that we are making in initiatives, but we do analyze that business internally, that kind of information. And what we see is that the core businesses that we were in for the first 6 months of 2010 versus 2011, the fixed noncomp expenses have declined significantly. When combined with strong revenues from banking, in particular, we have been able to improve economic income.

The expense of investing in the new initiatives, which you would expect, has just not generated material revenues to date as it takes some time for those businesses to take hold. But none of that should come as a surprise to any of you who have listened in on the previous calls and investor meeting where we have been consistent about discussing the need to retrend certain aspects of our business. To do this we need to make investments in the platform in new businesses that we believe will drive our market position even if they may reduce our current bottom line on a quarterly basis.

Now to list specific highlights of the quarter. Starting with our investment banking capital market segment, I am pleased to note that through the second quarter we have already generated more on equity under writing revenue than we brought in for all of 2010. During the period we closed a total of 13 transactions across all products, generating $14 million in revenues compared to revenues of $10 million for a total of 12 actions in the comparable prior year period. The increase was primarily driven by our lead managed public equity business which continues to account for an increasing larger share of our backlog.

During the quarter we completed a total of eight under writing transactions, three of which were lead managed. To compare this to last year's second quarter, we completed the same number of under writing transactions, however none of these were lead managed. In fact, through the first half of 2011, we have already completed more lead managed equity transactions than were completed by Cowen in any full year since 2007.

When we started to rebuild our capital markets and investment banking team in 2010 this was a critical aim for us. In order to improve our efficiency, we knew that we needed a team with knowledgeable, motivated bankers who were willing to go head to head with larger banks and comparable banks to win these coveted positions.

Clearly our clients are beginning to recognize our strength as well, and I don't really want to over state our success in two quarters of performance because there is a lot of room for growth here, but this is a very positive development for us. I do want to caution that despite some of these positive trends, we are still very much market sensitive and the current market volatility increases the likelihood that our banking backlog may get pushed out as financing and merger transactions are more likely to get delayed if we continue to have the kind of volatility that we have been witnessing over the past several weeks.

We did also complete two private transactions in the quarter compared to one private transaction in the second quarter of last year. During the quarter we also completed three merger advisory assignments which is a trend we see continuing for the second half of the year, particularly in China, where our team is actively engaged in a number of advisory discussions. This is roughly flat compared to the prior year period when we completed three advisory assignments as well.

Moving to our debt and capital markets group, we did not complete any credit transactions in the second quarter as a number of our liability management transactions actually did not occur. Frankly, the up take from our clients has been slower than we like, but the presence of this capability has improved our strategic dialogue with clients tremendously as we are now pitching holistic client-focused solutions up and down the capital structures of our clients, and there is no question that our ability to do that is helping win business in the equity markets as well.

Our capital markets pipeline both mandated and shadow are still promising, but are highly dependent on functioning financing markets, which as I've mentioned, have not been particularly favorable so far in the third quarter.

I would like to update you on the efforts to enhance certain of our sector based banking platforms as well as our Asia team. During the quarter we announced the hiring of several senior bankers, including a new Head of Consumer; three senior bankers in TMT, including a new Sector Head and a senior banker to further ramp up our presence in industrials. I think it is important to remind you it will take some time for these new additions to settle in and generate new business, however,I am confident that we are making investments in the right personnel, and those investments will generate returns relatively quickly in the quarters to come and certainly next year. I look forward to announcing those successes on future calls.

In short, we continue to look for opportunities to expand our footprint, particularly given the fact there has been a slow down in financing. There is some opportunities for us to hire some talented individuals from other platforms that may be trimming their head count. We are being opportunistic there and I think you can expect to see us take advantage of some of that dislocation in the weeks and months to come.

Turning to our sales and trading business. Cash equity volumes remained low in the second quarter with aggregate New York Stock Exchange and NASDAQ volume down 28% from the second quarter of 2010. Once again, we fared better than the general market by having experienced a 17% year-over-year decline in broker's revenues, but obviously, those results are disappointing. We expect cash equity volumes to continue to come under heavy pressure for the foreseeable future and are focused on adjusting the platform accordingly, as Peter mentioned earlier.

In the second quarter we began to execute on a number of initiatives that will reshape the platform and allows us to expand into nontraditional trading businesses. For example, in April we announced several important new hires in areas such as electronic products, quantitative trading solutions, institutional convertible securities and equity options. And in the next week or so a team of four high frequency options traders will join Cowen. This is a dialogue we have been having for the better part of six or seven months.

These new initiatives will allow us to leverage our well established sales and trading platform and cash equities into revenue areas where we have very little penetration, but significant opportunities. These initiatives required us to find the right teams and individuals to drive profits fairly quickly, but they do require some time to develop systems, get regulatory approvals and develop executable marketing plans.

But you will be hearing more from us about these initiatives in the future. I think our basic strategy here is all about being able to take the fixed cost structure, which we have done a good job at reducing, and bring in revenues which are much more variable in nature -- with a variable cost structure in nature, so that we can lay off our fixed overhead in new businesses where we don't currently have a presence.

Finally I would like to turn to our balance sheet. We stated in the past the stability of our balance sheet is a real differentiator for us, especially relative to our mid size peers. We've managed the investments of our firm capital since 1999 and we have managed to consistently generate attractive annualized returns.

Despite the fairly volatile broad market activity during the second quarter, our balance sheet performance was once again good. We earned $22.7 million in investment incomefrom various investment strategies. The increase was largely driven by a Luxembourg reinsurance captive transaction that we press released earlier in the quarter, but we also achieved positive performance across various investment strategies that we manage, including real estate, credit and global macro.

We believe our balance sheet is conservatively invested and well diversified. On a blended basis our trading strategy investments are only levered about 2.5 times and our merchant banking strategy investments, our private investments remain unlevered.

With the close of the LaBranche transaction on June 28, our liquidity position in the quarter was strong. Since quarter end we have worked to invest the LaBranche liquid assets, primarily across our trading strategy portfolios and will continue to judiciously invest portions of our longer term merchant banking strategies when we see opportunities to do so. With that I will turn the call over to Steve who will provide a more detailed overview of the financial results for the second quarter.

Thank you, Jeff. During the second quarter we reported GAAP net income of $20 million or $0.26 per diluted share which included the impact of a $22.2 million bargain purchase gain associated with our acquisition of LaBranche at the end of June. This compare to a GAAP loss of $21.2 million or $0.29 per share in the prior year period .

In the second quarter the Company recorded a bargain purchase gain upon consummation of the acquisition of LaBranche because the fair value of LaBranche's identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration paid. Based on the purchase price allocation, the fair value of the net identifiable assets acquired and liabilities assumed amounted to $178.3 million exceeding the fair value of the purchase price of $156.1 million which was paid in Cowen Class A common shares. This gain does not impact our income results which aim to provide investors and analyst with a view of common core financial results.

For the six month period we reported GAAP net income of $20.1 million or $0.26 per diluted share compared to a loss of $34.2 million or $0.47 per share in the first half of 2010.

In addition to our GAAP results as I just mentioned, management utilizes non-GAAP measures, what we term as economic income to analyze our core operating segments performance. We believe economic income provides a more accurate view of the business, by excluding such items as the impact of one time gain losses, such as the bargain purchase gain on the acquisition of LaBranche and expenses associated with one time equity awards in connection with the November 2009 Ramius common transaction, acquisition related expenses associated with the acquisition of LaBranche and other reorganization charges within the alternative investment management business. Economic income also excludes the impact of what we do as somewhat arcane accounting rules that require us to consolidate certain of our funds.

For the three months ended June 30, 2011 the Company reported economic income of $560,000 or $0.01 per diluted share compared to an economic loss of $18 million or $0.25 per share in the prior year period. This improvement was largely driven by increased revenues from most of our business units, partially offset by increased variable expenses associated with the Luxembourg transactions that I will discuss later as well as indications and marketing expenses associated with a fund within our alternative investment management business.

For the 2011 six month period we reported economic income of $7.5 million compared to an economic loss of $29.1 million in the first six months of 2010.

Adjusting economic income to exclude noncash items including depreciation and amortization, share based and other noncash deferred compensation expense and our real estate incentive based gain or loss, economic income for the second quarter of 2011 was $2.8 million compared to an adjusted economic loss of $12.8 million in the second quarter of 2010.

Second quarter economic income revenues increased 70% to $82.4 million from the prior year period driven by increases in investment income, incentive income, investment banking fees and management fees partially offset by a decline in brokerage revenues. We will spend a little time discussing each of the economic income revenue line items.

Investment banking revenues were $14.3 million during the quarter, an increase of 44% compared to $9.9 million in the prior year period. In our sales and trading business revenue decreased by $5.2 million or 17% to $24.6 million compared to $29.8 million in the second quarter of 2010. This decrease was driven by an industry wide decrease in cash equities trading volumes. Over the same period NYSE and NASDAQ combined trading volumes declined more than 25%.

On the alternative investment management side of our business we recorded management fees of $15.5 million in the second quarter of 2011, an increase of $3.4 million or 28% compared to $12.1 million in the prior year period.

The growth and management fees was primarily due to an increase in our assets under management which have grown by $2.8 million over the past 12 months largely driven by our cash management and alternative solutions platforms. However, we are gaining traction and starting to see growth in our traditional hedge funds, specifically in the US Deep-Value Fund and Global Credit Fund.

Reported incentive fees of $5.7 million in the second quarter as compared to an incentive fee loss of $450,000 in the prior year period. The increase was driven by strong performance across our credit, in particular our real estate strategies. As Jeff mentioned, our real estate funds experienced several positive valuation adjustments during the quarter, including the Worldwide Plaza holding. One of the major benefits of the mark up in the fair value of the assets was the reversal of certain expense accruals related to a subordination agreement with a general partner of the RCG Longview Equity Fund.

While these accruals have been slowly reversing in the past few quarters, given the improving values of the real estate portfolios, in the second quarter we reversed $2.8 million of the accrualsrepresenting the remainder of the balance. I do want to mention that while we have reversed out the remainder of the accrued liability this fund has not risen above its high watermark and is not currently eligible for traditional incentive fees

Now on to our balance sheet performance. We recorded investment income of $22.7 million during the second quarter as compared to an investment loss of $2.9 million in the second quarter of 2010. Increase in investment income during the quarter was primarily driven by the closing of the Luxembourg captive reinsurance program which contributed approximately $18 million in gross revenue. In connection with this traction we also incurred $4.3 million in expenses during the period recorded in variable expenses.

As discussed in previous periods these captive reinsurance transactions are sporadic in timing and size, but are well worth the effort as this result reflects. Also as a reminder the gain that we reported for economic income is shown as a tax benefit for GAAP purposes.

Investment income is also driven by improved performance across certain investment strategies within our investment portfolio, particularly the real estate credit and global macro strategies. As you all the know, the second quarter was a bumpy ride in the market as much of the gains from a strong April were given up in a rocky May and early June.

Turning to our expenses and starting with compensation, we reported an aggregate compensation to revenue ratio of 51% for the quarter compared to 74% in the second quarter of 2010. For the six month period we reported compensation to revenue ratio of 53% compared to 70% in the prior year period. The decline in the cost to revenue ratio was driven by increased revenues, which as I mentioned, are up 70% for the quarter versus last year. Partially offsetting this trend was our share based compensation expense which increased by approximately $3 million in the quarter as compared to prior year period.

When adjusting compensation expense to exclude reimbursed compensation expense of $1 million, severance expense of $1.2 million, and comp expense related to a 2008 [deposition of latitude] of $170,000, the comp to revenue ratio declined to 49%.

Total noncompensation expenses in the second quarter increased by 20% to $38.8 million compared to $32.2 million in the second quarter of 2010. The increase in expenses was largely a result of an increase to our variable expenses which were impacted by the $4.3 million expenses related to the Luxembourg captive reinsurance transaction and $1.6 million related to syndication and marketing expenses related to one of our alternative investment funds. Also I wanted to note that when comparing our variable expenses to the first quarter of 2011 the increase was driven by those same two factors.

Although economic income is a pre-tax measure, I also want to briefly discuss our tax position. After the recent acquisition of LaBranche, Cowen has approximately $240 million of net operating losses, or NOL, to carry forward in to the future. The NOL along with other timing differences caused a large deferred tax asset. There is 100% valuation allowance against that asset, but it has significant value to the firm. IRS rules associated with the acquisitions of Cowen and Company in 2009 and LaBranche last quarter, limits the amount of the NOL that the Company will be able to utilize annually, but significant amounts of future earnings will be shielded from taxes by this asset.

Finally, turning to our balance sheet. Our stockholder's equity amounted to $638 million at June 30 and our book value per share was $5.49 per share. Annual book value per share, which is a non-GAAP measure, was $5.11 per share. Book value measures decreased from the first quarter of this year by factors driven by the increased number of shares outstanding.

We acquired LaBranche in a 100% soft transaction, and as such, over 40 million shares of Class A common shares were issued to LaBranche shareholders in exchange for 100% of LaBranche shares outstanding on June 28. We also paid down the revolver, so we have no debt. I will now turn the call back over to Peter for closing

At this point, ladies and gentlemen, I don't have any closing remarks. I would just like to open it up for questions that you may have.

I will have just one comment which is if you look at the change in the results of the firm over the last year since the acquisition they are quite dramatic. We said this was going to be a long-term project and I think that we are very pleased with the progress we have made, but we have along way to go in terms of getting this to the place where we want it to be and we are very well along that track.

In spite of the environment we are actually quite excited about what our prospects are, especially given that we've got this very strong balance sheet and we are seeing just tremendous amount of talented people who are attracted to our platform. So we are upbeatthough we are all environment bound and we have seen this movie before. And we will see it again, but out of it comes progress.

Why don't we see if we have some questions out there to we can take.

(Operator Instructions). Your first question comes from the line of Devin Ryan from Sandler O'Neill. Please proceed.

Good morning, guys. You guys, obviously, had very strong asset flows in the quarter. I was wondering, and I know the timing of funding might be tough to predict given the market volatility, but can you guys give any more detail about the pipeline and mandates and just the level of conversations that you have had? Are those mandates pretty granular, or are there some other lumpy ones out there? Maybe like the ones -- we saw a couple lumpy ones in the second quarter. Just more detail there would be nice.

That's a good question. All of our mandates are going to be lumpy because our target client base is institutional worldwide. It's a big institutional. When it comes in, it comes in chunks. As we sit here today we believe we have between $400 million to $500 million of approved mandated fundings coming up pending the paperwork, and given that many of these are government institutions, in one form or another whether it's a state pension fund or it's a superannuation fund from Australia or something, they take their time in getting the paperwork done, but it gets done. So there is somewhere between $400 to $500 million that we feel highly confident is on its way.

Our shadow backlog, those people who we are engaged with, in a dialogue with all the time, is a number around $2.9 billion right now. Historically the conversion rate on that is somewhere between 30% to 40%. I guess depending on the environment that could change. One thing that we feel really good about is that the suite of products that we've got, the very specific strategies we've got are really responsive to people's needs, whether it is credit, it's the activist portfolio. We have got some exciting stuff going on, and our trading advisory business that may be we will have more to talk about later in the summer.

We are embarking on raising our new -- it will be our fifth real estate lending fund, and I think given our record there which is excellent as will be our equity record, that we will be very successful in raising that money. That will take time.

And our performance and credit has been outstanding, we don't have quite a three year track record there yet which is an important thing. We are actually coming up on a two year track record. You need at least two years to start getting people to pay attention to the fact that you really know what you are doing. After three years maybe they really believe it.

But we are starting to get a lot of attraction there, so it is going to be bumpy, but it is because the nature of the size of these tickets are large. We are not appealing to the $5 million or $10 million investors.

I will tell you that getting on the distribution platforms like Morgan Stanley Smith Barney or eventually Deutsche Bank, BofA or UBS. We are on Morgan Stanley with the activists. We are building a pipeline there. The number of investment management boxes have gone out to people are very substantial. Those will be smaller tickets, but those will just sort of filter in over time.

Peter, there is just one thing that is really important for everybody to understand, and that is that once these things are funded, they really aren't subject to the market volatility swings. These are investors that take their sweet time in making their decisions and then there sweet time in actually funding the mandate forms they have been awarded. But once they are awarded, they stay a around for a long time.

It may be chunky, but this is stuff that doesn't roll-off very quickly. I think when we look at that as opposed to the platform distribution business which we are just ramping we like the fact that the asset flows are a little more diversified. Our goal over time is to have a healthy balance between the two. As we talked about in our last call, we just recently got on our first platform and it is going to take time to ramp that business up.

Great that is very helpful that color.

And all of that kind of business is going to also serve the purpose of raising the average fee substantially. Though the offset to that is sort of an anomaly, but our cash management business results have been so good that is attracting more money. We have been advised of another $0.75 billion that will be coming into cash management. And that is a very low yielding business, so it masks what is going on in the higher yielding stuff because the numbers are big.

The numbers that you throw out there in terms of what the $400 million to $500 million that is not cash management?

No that doesn't include cash management.

Great. Then with LaBranche closed, thinking about the capital -- the large amounts of capital you are getting from that, how much has already been invested in kind of permanently in terms of your already putting it into strategies that you want it to be in versus -- and then how much is going to go I guess into the investment portfolio versus deploying it into seeding and growing new funds or building out the investment bank? Do you have targets for how you would like to allocate that, or is it more just a function of being opportunistic?

Cash and investments are all fungible. Until we have another, better way to use the cash than investing it, it is going to get invested. We are sitting on a lot of cash. We are still pulling stuff through the accounting pipeline from LaBranche. You look at our June 30 balance sheet it will show about $110 million of cash on the balance sheet.

We are probably half deployed on LaBranche capital at this point in time. We will get it all deployed as we see the opportunity. We will keep a certain amount of cash just laying around as working capital. The commitments we will make to fund the new businesses when they come, we will pull the money back out of the portfolio for those businesses as the need arises.

For instance, you take the real estate lending business. We will make a substantial GP commitment with our GP partner, [the file group] to that fund maybe as much as $50 million between the two of us to raise $500 million to $700 million, but that money is on call. We are not really stripping anything out of the portfolio to fund that until we actually have transactions that need funding.

So we are halfway to it where we want to be in terms of the LaBranche portfolio. We are going through a little bit of a reassessment process, or litmus test check, next week about where we want to have capital in this environment. We may get some kind of nice rally today based on the jobs numbers, but if you look at what happened in Washington, that whole circus, really nothing was accomplished at all. They bought some time.

The president thinks he bought enough time to get this ceiling debate pushed out beyond the next election. I don't think he is going to make because all the numbers are predicated on GDP growth which is highly unlikely to occur, and that's where the tax revenues attenuated. The taxes for that growth aren't going to be there.

We are very suspicious about where things are. One of the good things that's happened here is the (inaudible) [spreads] have widened out the opportunity to put some money -- not in treasuries obviously, but in corporate. The chance to deploy more money in our short-dated corporate activities are very good and with what's happened in the market merger off spreads have pushed way out.

We have taken some short-term pain there, but we have got a wonderful portfolio and plenty of buying power to put to work there. It seems to be a real dearth of capital available in that space today. So it seems a little choppy, but I think we are going to be really well positioned in terms of taking advantage of the whole restructuring of the markets going on.

Just in terms of investing in the investment bank. Obviously you brought head count down and you guys made some cuts there and I think you clearly didn't lose much on the revenue side from doing that. As you build back up, how do you do it in a way that is very cognizant of maybe some of the problems that were there in the past and not getting ahead of you skis where you are investing and it is a drag on earnings, but the revenues ultimately don't cover or come to the degree that may be --

I am going to let Mr. Solomon answer that question. Maybe in more detail. I will just say that the people we are hiring, we are hiring people with proven records. We do a tremendous amount of deep diving on these people and their relationships and how real they are in the ability to generate revenue before we bring them in. We are not throwing darts at a board. This is very targeted in terms who we want and where we want them from. Jeff, why don't you just amplify.

Yes, I think that is spot on. If I take a look at our senior revenue producers across banking and capital markets over the past 12 months 50% of that team is new.

So you talk about the hiring, we are going after very specific areas around our core competency. We are really going after areas where we have significant research footprint that was currently under banked on this platform. It takes time for those bankers to ramp up.

This is not like a one quarter bet or a two quarter bet. This is a fundamental bet that our organization can be well positioned to take advantage of other people vacating their seats. I think there is a lot of instability and we hear this. There is a lot of instability to other places.

Cowen really suffered from that instability a couple of years ago, and in investment banking when clients are making choices they are making choices to go with stable platforms. Cowen had that problem a couple of years ago. Now we don't hear that too much about Cowen anymore. The buzz in the market place that we've heard is people want to come and work here.

I can tell you that the inbound calls that we are getting from people who are at other platforms, who either heard what we are doing, they know who we have hired or see us putting prints up; we've actually had to create a process internally to handle the inbound calls. Now that means we can afford to be selective.

As we hire individuals, we are doing our best to try and line up their compensation with what we think their market opportunity is. We've identified what we think works best in terms of the kind of person that we want, the skill set that we are looking for.

This is clearly a team environment. We are looking very specifically at how we score our bankers, not just on production, but on the quality of the calls that they are making and their willingness and ability to reach across the platform to win business. We all know how difficult it is to win business.

We are not looking for lone wolves who think they can do it all by themselves. This is a chance for us to actually bring people into an organization who are willing to pull me into a pitch, willing to take Peter, Tom Strauss, Morgan Stark, their partners in other areas, bringing in equity capital markets guys to win business. And where we have done that, we can tell very specifically that we have gained significant attraction with clients by wins.

So these are the kinds of people that we are looking to bring on to the organization. While the number of people that want to come is significant, we are really doing a very good job, as Peter said, of screening the type of individual because really this is a collaborative effort.

Lastly for me, I may have missed this, but what is the current deferred tax asset valuation allowance? And now that you have been profitable for three consecutive quarters, can you just maybe talk about the timing of when this DTA could come back on balance sheet and how we should think about that going forward?

Well, Devin, we have approximately $240 million of NOLs. There are other timing differences that cause those DTA with full valuation allowance, but that is the argument with the accounting firms, right? When you need to show progression that you will be able to use those NOLs before they are going to let you take down that valuation allowance. We will be working on that over the next few quarters. It's going to be some point in the future. It won't be in the next quarter or two.

Okay. Great. Thank you.

They are what they are. I mean instead of a (expletive) asset once it gets -- it inflates your net worth and it looks very nice, but you have got to earn it to make it worth its value on the balance sheet. It is a nice cosmetic to have, but frankly I don't really care to much about -- and it also has to pull through the income statement, so we will have some bizarre -- if things continue to improve -- some bizarre quarter where we book this enormous allowance through the income statement, but it is not cash. It will happen when it will happen

Your next question comes from the line of Miss Lauren Smith from KBW.

Good morning. I guess a couple of questions drilling down the numbers a little bit. When we look at this comp ratio in the quarter, is this like a pretty good run rate, or was it -- I mean I am glad it is going in the right direction, but something about the mix of business this quarter that allowed you to bring that down, or is this 51% range, good going forward?

I think, Lauren, the mix definitely has an impact on it because the better we do the more income we produce from capital, the lower the pad is on that. If you go back and you look at sort of Goldman's kind of blowout great quarters, 2009 they had so much trading profit that comp to revenue was down to like 40% or something like that. That is not real.

Frankly, I would rather see that comp to revenue ratio be a little bit higher just because we are producing so much business in banking and certain other areas of the firm while we still deploy our capital. So I wouldn't hang my hat on that number, but I don't think it goes up terribly too much from where it is. And if we do really well with our capital it could go down lower, but no one should believe that is where we want it to be.

Sure.

Lauren, if you look at where we were six months 2010 to six months 2011, we have $7.9 million more of compensation booked in the 6 months ending 2011. So a lot of it is driven by the increase in revenue. We have $51.8 million more revenue this six months compared to last year, but based on our head count that we currently have, there is $7.9 million more booked of comp this year than last year.

Even as that ratio has come down.

Yes. That's the point.

Got it. What was your head count at quarter end? How many people ultimately are there from the LaBranche franchise?

So it's 573, not including LaBranche; 604, including LaBranche.

The important point of this is there is only two days of LaBranche included in these six month numbers.

Right. Got it. Then just to give the expenses on the noncomp or the variable non comps, so $4.3 million right was from the Luxembourg transaction, so that was pretty much nonrecurring, right?

Right.

This $1.6 million that you identify for syndication and marketing expense, wouldn't that be deemed more recurring? You guys were out there and that is really the cost of doing business, as you continue to look to --

Lauren, it is a little erratic because we don't use outside (inaudible -- speaker prompting) consultants in all of our fund-raising activities so that is going to be --

lumpy --

it's lumpy, yes, but it's a good news number because the revenue that derives from that is all back ended. We are paying upfront, but the assets first coming in [is still earning] fees. That will be lumpy. Frankly, the bigger the number that gets over time, the better it is because it means the asset base is going to grow that much faster.

We hope so. Just switching gears, Peter, I know you spend a lot of time over in China and that is an important business for you guys. Give us an update on trends there. It seems like seems that things have taken a little pause there generally speaking. And then you guys lost someone a couple weeks ago from your China business who went to Lazard. How meaningful or not is that individual, and are you going to replace him?

Sure. Sol, you want to --

Yes, First of all let's just talk about the fact that China was the flavor of the month for the back half of 2010. Anything that had the word China in it or around it was selling like crazy. And then someone flipped a switch, and beginning in January, suddenly -- we know why, there were obviously a lot of concerns about the validity of the numbers coming out of China and that has snowballed. With the exception of maybe a few internet companies and some T&T companies, the new issue business has slowed, almost come to a halt.

We have turned our whole business orientation really to merger advisory transactions. There are some really interesting things that are happening there. A lot of cross border transactions. There is still a significant amount of capital that wants to be deployed in China by the ECPE firms, and then there is a lot of Chinese companies that are looking at outside of China to do acquisitions. And so we are engaged in a number of dialogues and have in fact closed a couple of cross border transactions with Chinese clients.

The fact that we had one individual who left -- there is no question that across our investment bank we are still subscale. I want to be really clear about that. It goes to Devon's question earlier. We are being careful with the rate at which we bring people on, but we still are a relatively small bank relative to what we can be as we ramp, so we are being very careful about this.

The loss of that individual -- anytime you lose a individual, you don't like to see that happen, but it happens all the time. We are in active dialogues with two or three people that we think can replace that individual.

He made his decision for reasons that are highly personal and maybe just didn't see that where he was going with his practice lined up well, with us. I have a pretty big philosophy about that and it's the following. If you don't think you can be successful here, you shouldn't be here, and I am okay with that.

Because we really only have a limited number of slots. We want people who genuinely think they can be successful here. And in doing so, the inbound calls we've had, even for this position, we had calls the next day, so I am not particularly concerned about it at all.

I would say our backlog in China is as good today as it has ever been. The mix is different. We are starting to get traction on the capital market side. I was there two weeks ago. We signed an engagement letter to do a debt financing with what we think is a very credit worthy company.

The China effort marches on and China will go through it's own difficulties. It is so for real that we are committed to make that work for us. And getting the LaBranche broker dealer, just coincidently we got our own license about a week before the LaBranche thing closed, that we applied for. But we have a core staff of people and now we are engaged with small groups of people to see who do we want to add to it.

In our conversations with the Chinese companies, having that ability to bring into the HM market is of great value to them because if I had to guess that will continue to be the market of choice for a long time to come for a lot of these Chinese companies. But also when I was over there, I spoke to the guy who is in charge with turning Shanghai into the next financial center of the world. I spent about two hours with him and I think we are getting ourselves well positioned, and nobody has got a lock on China yet. It is wide open.

It is different than here because you have got to continue to show up and build bridges to these people, you have got to build relationships. You can't be a one trip wonder over there and get business. And what I continue to hear is that they are looking for these smaller [edgier] firms to have relationships with where you actually and go walk around their factory and ask questions about how they make this or that, as opposed to I am selling something from so and so, and here's my lead table standing, you should give me the business. That doesn't weigh that heavily with the Chinese.

Thank you for that color. That is helpful. I guess that is it for me. Hope you guys --

We should mention actually we are having our first China conference in the fall in November. Cowen's never had one. What do we have now, about 50 companies signed up I believe it is?

A little more than that.

Thanks a lot.

That concludes the question-and-answer session I would now like to turn it to management for closing remarks.

I don't think there is anything that's been left unsaid. Appreciate everybody's tuning in and listening to us. We will continue to make progress as we have. Again the environment is going to affect us as everyone somewhat, but frankly we are feeling very good about where we are and the track we are on and we have just a lot of irons in the fire and we have a got a lot of interesting things to be talking about in the future. So stay tuned and everybody have a great weekend.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.