Cowen Inc (COWN) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Incorporated conference call to discuss the financial results for 2011 third quarter. By now you should have received a copy of the Company's earnings release, which can be accessed at the Cowen Group, Incorporated website at www.Cowen.com. Before we begin, the Company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group, Incorporated has no obligation to update the information presented on the call.

A more complete description of these risks and other 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.

Thank you, operator. Good morning, everyone. Welcome to Cowen Group's 2011 third-quarter earnings call. With me today are Jeff Solomon, our Chief Executive of the Cowen and Company, subsidiary of Cowen Group; Steve Lasota our CFO; and some number of other people who are involved in running this firm on a day-to-day basis. I'll start with a general overview followed by a more detailed discussion on Ramius, and, later in the call, after I'm done, Jeff will take over and talk about Cowen and Company. Third quarter was a difficult period in the markets, as everyone knows, driven by what was going on, both in the United States and Europe with the debt ceiling crisis and the whole sovereign debt crisis over in Europe, resulting in very significant volatility in the capital and credit markets. As a result, we recorded an economic loss for the quarter of $46 million, or $0.40 per share. We are, obviously, very unhappy with these results for the quarter, and we just wanted to make note of a few things as we take you through it.

Performance was adversely impacted to a substantial extent by an unrealized mark-to-market and losses on our investment portfolio, which was mostly affected by spread widening in the global credit markets. In addition to that, a lot of the new initiatives that we have been putting in place did not yield the revenue that we would have expected in third quarter because of the dislocation in the markets. And, in addition, we had ongoing costs from those initiatives and the costs of LaBranche and the winding down of their operations, which closed on the end of the second quarter as you remember. During the quarter, we had investment losses of about $17 million as compared to a gain last year of $14 million -- $14 million, sorry, in the prior quarter. So, that is a swing of $31 million.

The $17 million essentially all came from marks in our fixed income portfolio, some of which we have earned back in the fourth quarter already. And, to give you some extent of the dislocation that happened in the portfolio, we had a negative return of about 4.5%, compared with a 14% decline in the S&P and a 6.3% decline in the Merrill High Yield Master Index. And I think that sort of gives you some sense of -- not that you needed to be reminded how about the quarter was. Notwithstanding, for the first 9 months of the year, our investment income is still more than $22 million. And, as I mentioned, we were able to recover some of the mark-to-market on our bond portfolio in the month of October.

I want to make it very clear that our losses or marks in the quarter were not the result of any sovereign debt exposure. We don't own the debt of any particular country -- any country, other than, perhaps, the United States. Unlike many firms in our industry, we run an investment portfolio with very little leverage. At September 30, the Company had $442 million in invested equity, with a long market value of $754 million, for a total invested assets equity ratio of 1.7%. And, needless to say, that investment portfolio is, by and large, highly liquid. In addition, our overall liquidity picture as a firm is not impacted by these losses. With over $430 million in cash and net marketable equity securities, our balance sheet remains as strong -- if not stronger than ever, given the LaBranche acquisition.

Despite the challenging market environment, the top-line results for both our core operating businesses improved during the quarter. At Ramius, the investor management arm, we experienced our seventh consecutive quarter of asset growth and reported our highest level of management fees for a single quarter in nearly 3 years. At Cowen and Company, we actually recorded an increase in banking revenues and experienced a slight increase in the company's core cash assets -- core cash equity business. Had it not been for the dislocation, I think, frankly, we would have done better in the core cash equity business and investment banking. Our investment banking has undergone significant change, and we are beginning to see focus in expanding revenue generation in both the investment bank and the sales and trading platforms. And, again, Jeff will cover that in just a few minutes.

Nonetheless, there is still a significant amount of work to be done to reposition the Company for profitability. And that's why, last month, I made Jeff Solomon the CEO of Cowen and Company to really accelerate all the development work we're doing and the integration of sales trading research and the investment banking arm of the Company. We will continue to reshape the brokerage platform as we go through this to meet the needs of our clients and, basically, the reality of the marketplace. And, while we did experience headwinds in the third quarter, we really think we did make progress, and we'll try and take you through that in a few minutes. Non-comp expenses increased by 30%, to $39 million from $29.6 million in the quarter. Steve can take you through why those expenses were up -- mostly from extraneous, like the LaBranche acquisition and things like that, and not from the core business. But he'll take you through those.

Our fixed non-comp expenses increased due to a couple of factors. There, too, we had increased expenses from LaBranche, which were not included in last year's numbers. And we also recorded increases in recruitment fees as we added a number of professionals to our broker-dealer in the quarter. We experienced increase in variable expenses in the quarter related to placement fees on the asset management side and an increase in professional fees incurred in connection with the potential future acquisitions of Luxembourg reinsurance companies. It is important that we remain vigilant about our operating efficiencies in this environment, and, therefore, we have taken steps to further streamline costs to a considerable extent by consolidating operations and reducing headcount following the LaBranche acquisition. These initiatives, too, will be discussed by Jeff later in the call.

Let me talk a little bit now about the asset management business. We recorded a solid third quarter, especially given the challenges that the asset management industry faced during the quarter. Assets grew by 5%, or $500 million, to $11.2 billion. I am happy to note that we have now increased assets in the management in each consecutive quarter going all the back to the end of 2009. Quarterly asset growth was driven by net subscription into Ramius products of $878 million during the quarter, partially offset by a performance-related reduction in assets of $350 million. Subscription-related increase in assets was primarily driven by our cash management and health care royalties businesses.

Third-quarter management fees increased by 60%, compared to last year, primarily due to an increase in management fees associated with the closing in our healthcare royalty funds. As a result of these fee increases, our average annual management fee increased to 67 basis points, its highest level in nearly a year. This marks an increase from 61 basis points in the prior quarter and 57 basis points in the 2010 third quarter. Excluding cash management, which is a very low fee-paying business, our average management fee was 89 basis points in the third quarter as compared to 62 basis points in the prior-year period on the same basis.

We are proud of our investment professionals and their ability to develop and successfully market new funds to meet the evolving needs of our global investor base. They've really acted with great foresight and conviction to launch some of these high-quality products and continue to respond accordingly in the third quarter with the formation of the Ramius Trading Strategies Managed Futures Fund. This fund commenced operation in September and already has over $200 million in assets under management. During the quarter, we reported an incentive fee loss of $600,000 as compared to an incentive fee gain of $1.8 million in the prior year. This reversal was primarily associated with our Global Credit Fund which, like the firm's balance sheet, also sustained substantial reversal of profitability.

Turning to fund performance -- our funds faced a very volatile and challenging market environment, and, not surprisingly, we experienced a difficult quarter. To highlight a couple of the more notable fund performances in third quarter and for the year, our Global Credit Fund increased by 10.4% in the quarter and is down 3% -- I'm sorry, our Global Credit Fund decreased by 10.4% in the quarter and is down by 3% for the 9 months after having been up substantially for the first half of the year. The Starboard Fund, our activist fund, declined by 4.3% but out-performed the Russell 2000, which dropped nearly 22%. And, for the year, Starboard is still up 2.4%. To give you a benchmark, the HFRI fund-weighted composite index was down 6.2%, and, as I said before, the Merrill High Yield Master Index was down 6.3%. We remain focused on marketing our existing investment strategies and have built a strong pipeline. During the quarter we continued to execute on this pipeline and brought in gross new funds of $1.6 billion into our platform.

On the real estate side of our investment business, with the dislocation in the CMBS markets, we are seeing a surge in lending opportunities as borrowers are now faced with increased spreads and lower volumes from the conduit level lenders. While portfolio lenders have stepped in, they are unwilling to reach high into the capital stacks, allowing our debt fund to fill the void by providing financing solutions for borrowers where our experience and expertise gives us comfort to do so.

Next, I will touch on a few corporate matters. We recently filed a registration statement with the SEC to register distribution -- the distribution and resale of shares of Cowen stock issued to the former RCG Holdings (technical difficulty) since November of '09. The registration covers the distribution of shares of Cowen stock, currently held by RCG Holdings to RCG members, the former owners of Ramius, in accordance with the terms of our operating agreement. A portion of the shares covered by the registration statement relate to membership interests awarded to certain of the key employees of Ramius at the time of the combination. These awards relate to shares of Cowen stock received by RCG in 2009. And they vested over a 3-period with 50% of the awards having just vested November 2 and the remaining 50% next November.

We expect to file Form 4s on behalf of certain of our executive officers later today, to report shares surrendered to Cowen in conjunction with the satisfaction of the tax liabilities associated with this vesting. So, these Form 4s don't relate to any outright sale, but a surrender of stock by people. And I am one of those people, so I'll tell you that right now, to pay taxes on this vesting. The prospectus also covers potential sale of Cowen shares attributable to certain executive officers and directors, though many of these individuals are still subject to lockup agreements that prevent the sale of these shares. That is a lot of words, but, in essence, the former RCG partnership holders have the right to get stock over time. We had an obligation to register that stock, and, to the best of our knowledge, being in touch with all these people on a regular basis, nobody is selling their stock.

During the quarter, we repurchased 2.5 million shares of our common stock at an average price of $3.35, under our previously announced share repurchase program. We acquired an additional 450,000 shares of our common stock at an average price of $3.46 as a result of net share settlement relating to the vesting of equity awards. And we have approximately $11.5 million of availability remaining under the existing approved share repurchase agreement to continue to buy stock back, which we intend to do. I will now turn the call over to Jeff, who will give you an update on the activities of Cowen and Company broker-dealer.

Thank you, Peter. First, let me say, the past 2 years the financial performance of Cowen and Company has been unacceptable. The fact is that the broker-dealer has not had a profitable quarter since we acquired it in 2009. I'd like to tell you that is going to change in the fourth quarter. But, with the current market volatility in the capital markets, that's unlikely, as the implementation of our plans to change the future of Cowen and Company will take some time.

So, a month ago we set out to lay out those plans to rectify the situation. Before I start, I want to thank every one in research and sales and trading, who I have had a chance to spend a lot of time with over the course of the past month. Your candor and insight has helped me to understand why the Cowen brand remains incredibly strong with our clients, even in a difficult environment. My assessment of the challenges facing the business is two-fold. First, the current market environment is one of the most challenging we have seen. Second, the market structure and competitive landscape are undergoing significant change in our business.

We need to respond accordingly and align our platform with this new landscape in order to improve our position with clients. We are already making progress on both fronts. First let me address the market environment and our performance in the third quarter. Even with the current equity and current market volatility, I'm pleased to report that our equity brokerage revenue was up 2% to $26.5 million in the third quarter. The slight increase was achieved even without any growth from the new products and offerings in options and electronic market making that are launching in the fourth quarter. Frankly, we expected to see some progress in those areas in the third quarter, but, for a variety of reasons, their launches were delayed. I expect those businesses to be more impactful as we head into 2012.

We face similar macro challenges in our investment banking and capital markets activities, where revenues were up year over year, but down quarter over quarter. The global shutdown -- the shutdown of the global capital markets in August and September, and, now, into the fourth quarter, has made it difficult for us to continue on the trajectory that we were on during the first half of the year. Still, in investment banking we completed 12 transactions across all products, generating $10.8 million in revenues in the quarter, compared to 11 transactions for $7.2 million in the prior-year period. The increase in revenue was primarily driven by our strategic advisory products where we completed 3 transactions for $6.3 million. The improvement on a year-over-year basis reflects some of the changes that we made and speaks to our a successful reorganization efforts we made over the past year, though third quarter results fell short of the pace that we were setting in the beginning of the year, when we made $30 million.

Despite these conditions, there are a number of positive take-aways. First, we began to show signs of progress on our lead-managed business. During the quarter, 40% of our underwriting transactions were lead-managed compared to 13% in the entire year of 2010. This momentum is also evident in our backlog numbers as well. Additionally, our healthcare franchise continues to gain traction following the hires we have made, and we recorded a very strong underwriting quarter. Indeed, yesterday we printed one of the first significant follow-on equity financings in the healthcare space since the capital market shutdown in August and the first healthcare deal to be printed in the equity capital markets in over 6 weeks.

We have continued to selectively invest in the franchise through this quarter. So our compensation numbers, while down, were only down slightly due to our successful recruiting initiatives. Remember, over the last year, our objective was to retain and recruit talented investment banking and capital markets individuals that can leverage their individual brands into our franchise. While we have been quite successful in this initiative, we have recruited -- just to give you an idea -- 13 senior bankers in capital markets over the past five quarters, with 7 of those folks coming on board this year. The investments we've made on individuals and new products offerings in banking capital markets and sales and trading have resulted in compensation remaining higher than what it would have otherwise been given the challenges of the current market.

Finally, it is crucial that a firm of our size be vigilant about our expense structure, especially given what is going on. In the past 4 weeks, our team has identified and implemented steps to reduce our cost structures significantly in 2012 by consolidating operations and reducing headcount. We are targeting a 15%, or approximately $35 million expense reduction, at the broker-dealer, based on our current cost structure. I want to be clear here. We are being thoughtful and precise in our decisions to reduce expenses and headcounts while making sure that we remain in a position to serve clients profitably when the markets turn.

Next, I would like to discuss the changing market structure and what we are doing to meet evolving client needs. The traditional cash equities high-touch business continues to show little growth as our institutional clients moved away from the high-touch cash equity execution models. It is no secret that Cowen's brokerage revenues have been impacted by this transition over the past 5 years. The real question is, what are we doing about it? We have discussed on previous calls how we've taken steps to reposition the platform toward growth-oriented products. Our general focus is to invest in businesses that are variable cost in nature so that we can create operating leverage off of our fixed cost structure. More specifically, we are broadening our electronic capabilities to meet the demands of our clients and, in doing so, we are acknowledging an entirely new revenue area in which little market share -- in which a little market share can move the revenue needle for us significantly.

We've also taken steps to increase our presence in listed equity options, a market that has grown nearly five-fold over the past decade and continues to expand. We recently added 2 individuals to serve as co-heads of our institutional options group along with several other team members, which we have added to our existing efforts. This team also launched Cowen's first self-side event-driven strategies group, which includes both equity and options sales trading. Again, this is a product capability that not only serves the needs of our existing clients, but it opens up a whole new set of clientele who want access to our high-quality research product. The options and event strategy dovetails very nicely with our current cash equity and research sales effort as cross-selling is going to be key for us to be successful. These initiatives will allow us to leverage our well-established sales and trading platform in cash equity into revenue areas where we have had very little penetration historically, but where we have significant revenue opportunity over time.

In closing, despite the challenges we are facing in this market, we're making sure that we are well-positioned to take advantage of the markets when they return, by both cutting expenses and maintaining our critical footprint to execute. With that, I'll let Steve Lasota update you on the details of our financial performance.

Thank you, Jeff. During the third quarter of 2011, we reported a GAAP net loss of $48.2 million, or $0.42 per share, which included the impact of a $25 million net loss on securities, derivatives, and other instruments. This compares to a GAAP loss of $15.4 million, or $0.21 per share, in the prior-year period. For the 9-month-ended period, we reported a GAAP net loss of $28.1 million, or $0.32 per share, compared to a loss of $49.5 million, or $0.68 per share, in the first 9 months of 2010.

In addition to our GAAP results, Management utilizes non-GAAP measures -- what we term as economic income -- to analyze our core operating segment's performance. We believe economic income provides a more accurate view of the businesses by excluding such items as the impact of one-time gains or losses, such as the bargain purchase gain on the acquisition of LaBranche and expenses associated with one-time equity awards made in connection with the November 2009 Ramius-Cowen transaction, acquisition-related expenses associated with the acquisition of LaBranche, and other reorganization charges within the alternative investment management business. Economic income also excludes taxes and the impact of accounting rules that require us to consolidate certain of our funds. For the 3 months ended September 30, 2011, the Company reported an economic loss of $45.8 million, or $0.40 per share, compared to economic loss of $12.9 million, or $0.18 per share, in the prior-year period.

The year-over-year decrease in economic income was principally driven by our investment loss, which negatively impacts revenues on an economic income basis, and an increase in non-compensation expenses. For the 2011 9-month period, we reported an economic loss of $38.3 million, compared to an economic loss of $42 million in the 2010 9-month period. Third-quarter economic income revenues decreased by 38% to $37.9 million from the prior-year period, driven by an investment loss partially offset by higher management fees and investment banking revenues.

I'll spend some time discussing each of the economic income revenue line items. Starting with our balance sheet performance, we recorded an investment loss of $17.1 million during the third quarter, a $32 million decrease compared to our investment gain of $14 million in the prior-year period. It is important to note that the majority of this investment loss was due to unrealized losses associated with our global credit strategy, which were partially recovered in October.

On the alternative investment management side of our business, we recorded management fees of $18.5 million in the third quarter of 2011, an increase of nearly $7 million or 60% as compared to $11.5 million in the prior-year period. The increase was a result of higher management fees for our healthcare royalty funds of $6.9 million due to an increase in committed capital and fees earned and associated with a securitization. We also experienced an increase in management fees associated with our Global Credit Fund and funds in our Alternative Solutions business. We reported an incentive fee give back of $600,000 in the third quarter, as compared to incentive income of $1.8 million in the prior-year period. The decrease in incentive income was primarily related to losses associated with our Global Credit Fund, partially offset by incentive fees from our real estate funds.

Turning to the broker-dealer segment, investment banking revenues were $10.8 million during the quarter, an increase of 50% compared to $7.2 million in the prior-year period. The increase was driven by higher transaction volumes and larger assignments in our advisory business. Sales and trading revenues increased by 2% to $26.5 million compared to the third quarter of 2010. The slight increase was driven by the Company's core cash equities business.

We reported an aggregate compensation to revenue ratio of 118% for the quarter, compared to 75% for the third quarter of 2010. For the 9-month period, we reported compensation to revenue ratio of 65% compared to 72% in the prior-year period. The quarterly increase in the comp to rev ratio was driven by decreased revenues which, as I mentioned, declined by 38% for the quarter versus last year. During the quarter, compensation expense declined by 3% compared to the third quarter of 2010, due to lower variable compensation as our revenue increase did not meet expectations due to market conditions. This decline was partially offset by an increase in compensation due to additional headcount from our investments in new professionals in investment banking, capital markets, and sales and trading and the acquisition of LaBranche.

Total non-compensation expenses in the second quarter increased by 32% to $39.2 million compared to $29.6 million in the third quarter of 2010. Fixed expenses increased by $5.2 million or 22% to $29.1 million compared to the prior period. This increase was due to new incremental fixed expenses associated with LaBranche, which was acquired by the Company in June and, thus, were not included in our results last year. Additionally, the increase was driven by higher employment agency fee expenses and an increase in expenses related to our data center services as we transitioned to a new provider. This data center transition was completed in the third quarter, and we do not expect to incur duplicate expenses in this area going forward.

Variable expenses increased by $4.4 million or 76% to $10.1 million compared to the prior-year period. This increase was due to $2.1 million in expenses incurred in connection with potential future acquisitions of Luxembourg reinsurance companies, as well as $1.5 million in placement fees related to an alternative investment asset fund. There were no such expenses incurred in the third quarter of 2010.

Finally, turning to our balance sheet, our stockholder's equity amounted to $585 million at September 30 and our book value per share was $5.09 per share. And, as Peter mentioned, we have over $430 million in cash and net marketable securities. Tangible book value per share, which is a non-GAAP measure, was $4.72 per share. I will now turn the call back over to Peter for closing remarks.

Thanks, Steve. Well, I think you all heard it. It was a lousy quarter. One that we are very, very unhappy with. You know, no excuses for what happened, though I think we probably feel better about it than you all do, because of what was going on here in terms of transitioning this firm and expenses that were running through the income statement without the corresponding revenue in the costs of LaBranche, et cetera. And, you know, we have to do better. We will do better. And why don't I just open it up to questions at this time.

Thank you. (Operator Instructions) Your first question comes from the line of Devin Ryan, representing Sandler O'Neill.

In terms of on the expense initiatives that you spoke about -- it sounds like they have already been launched. That was my take away. So I just wanted to get a sense of time frame of that $35 million flowing through, were there reductions there? Then, how we should think about the breakdown between how much would come out of compensation and how much would come out of non-compensation expenses?

I'm going to let Jeffrey respond to that.

Is about 50/50 between comp and non-comp. Those are expenses we expect to be fully implemented. We are ready actually implementing them. It is an ongoing process. I don't expect to you to be able to see that in the fourth-quarter, particularly around compensation, because we're so late in the year. But those are targeted to be in place full year 2012.

Okay.

Let me just add, that is the Cowen and Company side of life in the Cowen group so far. Jeffrey developed a plan with his people over a very short period of time, did an amazing job in identifying a way to reduce expenses where we don't think revenue is going to be impacted. There's more work to do on the Cowen and Company side and there's work to do in the rest of the firm, too We are not going to be sort of Pollyannaish about the environment. It is as difficult an environment as I have ever lived through in 40-something years now of doing this. So, we are really taking the attitude that we have to size this expense structure of the firm for a very different environment. And you know, let us be surprised that it is better than we think is going to be.

Yes, but I think what is really important here is -- what happened at Cowen & Company, near as I can tell in the last downturn is there were significant cost reductions that really put the Company out of position to benefit from the rally that occurred in '09 and a '10. I think that what we are doing here is isolating businesses and individuals that we don't think our long-term -- either going to be contributing or will drive revenues when the market does turn. And we are making, what I would say, pretty hard calculus decisions around expected ROI on businesses and on individuals and their ability to deliver well on the platform. So, this is not a wholesale decision. This is a tactical decision where we are literally going through individual by individual. Those kinds of changes have actually already been implemented. So, what we are talking about now is just getting at the non-comp structure.

And, Devin, also, you should -- I mean you look at what you want to look at, but one of the things that I look at very importantly is economic income after we have added back the non-cash expenses that mostly relate to depreciation. But more so, the legacy equity awards that were made as part of compensation which are vast, as you know, years after you put them in, then you have to take the expenses as they vest. So, I tend to look at economic income with adding back all of the non-cash items and then of course in this quarter, I look at the swing in the investment portfolio and the actual cash loss to the firm is much smaller in than the headline loss. And so the 9 months, it is much smaller. It's almost insignificant. And that's the thing that we focus on as we go through this transition is to make sure that we preserve cash to the extent possible.

The vesting of these prior equity awards tends to accumulate. So this year we've got two years worth of vesting; we've got '09 and '10 running through the income statement. Then whatever we do in terms of deferred compensation, be it in equity awards or some other form of deferred, next year we will have 3 years and then it will flatten out. Because we will be dropping '09 in ' 13, and we will be picking up '11 in '12 and dropping -- yes, we drop a year -- we pick up year. So, tends to flatten out. That has been a growing non-cash expense that there is nothing we can do about that.

Got it. I guess ultimately, besides this quarter, you guys have been profitable for a few quarters in row. So, when you think about the firm today, how do you feel like you are positioned for profitability relative to where you were couple quarters ago or a year ago? Are you still in terms of the current structure and expense structure, in a better position today than you were 6 or 9 months or a year ago?

I think that we are in a far better position today than we were a year ago. Let alone 2 years ago. There has been a total transition in investment banking and in terms of people out who could not be productive to really a fantastic group of people today. I mean it is a real partnership of talented people up there and as, Jeff -- he talked about this underwriting that we led the other night, it was kind of indicative of new people and the confidence that issuers have in them.

Actually, if I could spend two seconds on that, because I think it is really instructive give people a sense of what it means to rebuild.

Let me just finish, and then you can be instructive. On the asset management side, we have gone through this transition of returning assets, winding down the multi-strategy funds. We still have expenses related to that but they're getting smaller and smaller as we liquidate those funds and return assets to our clients. But all the new initiatives have real legs and are growing. Our Starboard Fund has got mandates out there that are being basically papered today. You know we have, we think, $1 billion capacity in that fund. Where we are not nearly at $1 billion, we think we are going to be there in a much shorter period of time than we would have thought 6 months ago or 9 months ago. Credit was growing. Of course, the setback probably sets them back a few quarters, but you know, the RTS Mutual Fund, which I talked about, which we can build out our solutions group, which is winning very substantial mandates. So, it is a completely different asset management business.

Our fee realization is going up. We feel kind of really good about that. I think some of the new initiatives on the sales and trading site, while they were delayed in terms of generating revenue, you know they are starting to bite in the fourth quarter. We are starting to see revenue come from those. We have incurred the expense, built the systems, and now we think that can have a real meaningful impact. There are other things on the horizon that we can do on the sales and trading side. But we still have some wood to chop across the entire firm to get where want to get too. And if it is in a better environment, it would have been easier to get there. But it has been at tough environment. Now I'll let Jeff talk about what he wanted to talk about. Thank you.

Thanks. I just -- when you talk about being able to increase and improve your brand to take some time. The deal we did yesterday was for a company called [DynaVox]. The year ago we were a co-manager, took a $250,000 on a deal that they did in November last year. We did it with the idea on the expectation of the trade ourselves into a lead managed position over the course of the year by doing what we do best which is non-yield road shows and incredible sponsorship inside of the sales and organization and obviously canvassing the company significantly, paying attention to their needs as the client from the banking side. And, in doing that, we're paying attention to them at a time when they obviously didn't need to pay a fee, but we expected at some point they would, and when they did, we want to be in that pole position. This is banking and capital markets and sales and trading 101, but it takes a year.

Yesterday we printed this deal. We were the sole book manager, the sole book runner. And we took 70% of the economics -- or 67% of the economics. That is one example of a number of the ones that I see in our backlog where we transition from a co-manager position and getting very poor economics into ones in which we are in a joint book run position or book run position where we are getting much more significant economics. If the market -- when the markets open back up again, I think you will see us print those. But if you are looking at what our backlog looks like today including our shadow backlog, about 50% of the deals that we have in backlog or shadow backlog are joint book run positions versus I think it was 15% a year ago at this time. So, that -- when Peter talks about the transformation, I will tell you I can see it. I wish that we had a market that will allow us to show everybody what it is, and we will some day. And we will make significant money as a result of that.

Okay that's very helpful. I appreciate both of your comments there. I guess just maybe on that backlog, completely understand that is going to be market sensitive. But in terms of just the size of that backlog, haw do you guys feel about where it is today versus where was a year ago?

I actually feel great about it. I mean, we all have our comfort zones. So when the market's not printing, what do I look at? I look at how well are we doing -- are we out on the road? Are we talking to clients? Are we winning mandates? Are we improving our position? That's what I look at. Because in the absence of being able to see numbers go up on the scoreboard, I want to see the players playing and playing hard. I will tell you that we have not missed an opportunity to get in front of clients.

What is most interesting to me about this, and I don't want to guild the lily here, the fact of the capital markets are closed means that the clients are more willing to spend time & talk with us. It give us a chance to actually to catch up to our competition, because we can spend time with these folks at a time when they really are looking for good quality advice on what to do in the capital markets. And so not surprised, given the caliber of people that we've got into the organization and the team that we have built, and our distribution reach, that we are moving up significantly in terms of our positioning.

Okay great. And then just maybe on the Ramius side for Peter. Just in terms of the flows that you guys had were obviously very good. And I think relative to what we saw for many peers in the industry, just even that much better. When we think about the conversations you're having right now and maybe mandated expectations, can you give us a little bit of help of how we should think about things that next couple of quarters? How optimistic are you about the --?

I'm going to let my of partner Mr. Strauss who runs that business answer the question.

The flows into the business despite a turbulent market, actually are about in line with our timeframe and our expectations. Things get delayed perhaps a month or 2, but the institutional interests remains quite strong. Bernanke's constant comments about keeping interest rates at zero for some period of time are clearly encouraging institutions and private clients to look at the alternative space quite constructively? So, barring something even worse than what we have seen, we fully expect the flows to continue in the months ahead.

Okay. Great. Thank you. And just finally here, on the buyback. Can you -- Do you guys mind running through those numbers again? I just didn't get them all done in terms of what you guys repurchased and how much is remaining on the authorization. And then just some thoughts about the return on that investment here. Obviously, stock has been beaten up quite a bit and you guys are very liquid. So how much sense does it make to maybe get even more aggressive on the buyback?

Yes well we bought back 2.5 million shares on the open market. We brought back just shy of $500,000 shares through net settlement where people, instead of selling stock in the market to pay the taxes, they sold it back to the firm, and the firm basically paid the taxes on their behalf. So, that is roughly $3 million shares of stock. All of that was about $11 million against an authorization last summer of $20 million. So, we have $9 million left to spend under the past authorization. I think will do is we will spend that money and our board will then revisit that subject, as to whether we should increase it. I mean we're limited as to how much we can buy. So you know, we have to follow the buyback formula which is I think a max 25% of the trailing 4-week average volume.

Right I understand that. Great. Okay thank you.

Steve you want to add anything to that?

You know, unless we do a 10b5 plan which is -- we will have to discuss with the board.

Got it. The I think the feedback was about --

How we look at it? I mean we look at it that we are buying -- it's a very high return investment, because believing, as we do, that we are going to get this firm back to breakeven and then profitability, that we are buying book value at very big discount. And you know, it has an implied return of 30% or 40%. I mean unfortunately, you don't book that through the income statement, but that is the reality of it. It will increase tangible book value and book value.

Yes, absolutely. And then just lastly on the Luxembourg comments, I guess should I take the expenses this quarter to mean that there are some more opportunities out in the near-term horizon? I know you guys have had some pretty big gains related to some of the acquisitions you have done on the Luxembourg captives.

Yes, Devon we are looking at a couple and we hope to close a small one in the fourth quarter. And we are working on some other opportunities in the future as well.

Okay. Great. I will hop back into queue. Thanks for taking a my questions guys.

Joel Jeffrey, KBW.

Just a couple of quick question. You know the investment banking number actually came in a little bit better than what we are thinking about and it looked like it was probably M&A driven. Just wondering were there any deals that may have closed earlier than anticipated? I know you said the pipeline looked strong, but just trying to get a sense for how to think about the quarters going forward.

There were deals actually, we did one that we didn't disclose. One significant one in the third quarter that was not disclosed. So, I can't really talk about it. The other was we had some activity in China. And it's interesting, this is an environment where it is certainly a target rich environment for us in M&A. One of the biggest challenges we have is the folks that we have on our platform -- almost half of the senior bankers weren't here last year.

M&A is the business as you know Joel, you've to be good, you've got to be trusted, and you've got to be in your seat for a while in order for people to select you as an adviser. I wouldn't read anything into the mix last quarter. We just had a couple of transactions that occurred that were meaningful and we are certainly happy about that. We do have some that could close between now and the end of the year. It's hard to say.

Okay great. And then thinking about your comments about your opportunities in the electronic brokerage space. Is there any way to sort of quantify the revenue opportunity there? I know you said a small bit could be meaningful. And then just thinking about -- does that in any way cannibalize you more high touch business?

You know that is a great question. I think it is actually very insightful. When you think about what we do, that is exactly the things that we're looking at. Let me give you couple of stats. The size of the electronic trading market in 2012 was -- sorry, the size of the overall US commission market, both high touch and low touch was about $12 billion. I would just like to say to you, that number is actually up over the last 6 years. So if you look at 2005, that number is about $11 billion. The low was in 2007 -- it was about $10 billion. But last year was $12 billion. So, that is cash equities both electronic and high touch. Right? So, when people say that the cash equities business is over, I beg to differ. I just think the mix has changed significantly. When I say the mix has changed obviously the percentage of that flow that has gone on in the marketplace has changed significantly from high touch the cash -- to electronics.

If I look at the numbers that we look at from Grant Associates and from Tab Group, it is about half and half. I mean, give or take a few percentage points. So you can say at about $6 billion is high touch, and $6 billion is electronic of some sort. And electronic, I consider that to be DMA, algo, dark pools and programming. Right? So, when I look at that and see that we really have very little impact there, I say there is a great revenue opportunity for us. And if you look at the folks that made that decision to get into that business while they were maintaining their high touch business, their revenues actually haven't gone down. So what it says to me is the clients are paying a number for your research, sales and trading. And that they want to be free to make that mix as they see fit. But the numbers that they're going to pay probably don't change significantly. My concern is that if we don't have an electronic footprint that is meaningful, we know where the cash equity pie is going. It's going in one direction.

And so, when I look at what piece of the pie, just to begin to bracket this for you -- of that sort of $6 billion in high touch, about $1.3 billion is allocated to firms that what we would consider to be of our size so mid- tier, growth banks and regional banks. That is a $1.3 billion budget. We did a $100 million last year in the business. So I look at that and say, holy cow, we own 10% of that marketplace. That is the marketplace that we compete for. That is huge and it speaks volumes for our footprint and our sales efforts, but I don't expect that to be 20%. I don't even expect that to be 15% next year, because there are so many mouths to feed. And while I do think there is going to be shakeout here and there will be fewer mouths to feed, we will get some of that, but usually when there's one less mouth to feed, everybody benefits and it's probably not perceptible.

So, our goal has to be to expand that $1.3 billion revenue pie for our cash equities business. When I talk about investments that we're making in ways for us to increase our presence, we are talking about two very specifically, We need to have an electronic footprint. We need to be able to take some interesting technology that we can acquire or develop. We are ready know that our clients -- I've talk to them for the past month, that will take our call and if our algos are even remotely competitive, they want to pay us, because we are very relevant to them. They don't really have a way to pay us right now. And our cost structure, when we do take the DMA algo business, because we white label other people's products. It is very cost prohibitive for us. We are a literally paying away all the vig when we get an electronic order to the generic algo providers on the street. And so that is a real revenue-- a chance for us not only to make revenue increase our pie but a way for us to reduce our variable expenses.

Great. I appreciate the color.

(Operator Instructions) Louis Margolis, Select Advisors.

Good morning gentlemen. One of the big it competitive advantages you have organizationally as you can do proprietary trading. And I'm wondering if you are interested in expanding that? That's the first question.

The second is, you seem to be very successful at capital raising for proprietary products. I think both of these -- certainly the first has more variability, the second has very high margins, but very low variability. And the third big competitive advantage that we have all acknowledged is, you mentioned, that if you buy the stock, you make 30% or 40%. I don't quite understand the arithmetic there. But if you are buying stock at $2.70, ad it's got a $5.00 tangible book, that is a big number.

Yes.

It would seem to me that exploring how to do something very significant in the stock year under $3.00 seems very compelling economically.

And will of course the unknown is, if you show up to do something that's very compelling, how many shares you can actually buy at that level. You know, but that is not falling on deaf ears. It is obviously something that we think about all the time and are continuing to think about. That may be in the short run a very good thing to do. In the long run in terms of building the business, given that we have a long-term horizon, having the capital to build out a further prop trading capability and asset management capability, is equally important. So, you know that is kind of a balancing thing that we go through all the time. We are looking at ways of expanding the proprietary -- it is really not a trading platform, it is an investment platform.

We are not market makers against a flow of big customer activity in a big variety of products on which we can get in front of the flow and make money. Our capital is basically invested where we think we can make equity returns far in excess of what the market will provide over time and we have done that for a very long period of time, really since 1997. So, it is almost 15 years now. And we are looking at ways of expanding on the things that we're doing and some new things to build that out. And every time we do explore (technical difficulty), we are also looking at how can that be leveraged into proprietary products, for the fiduciary money that we can grow -- a new strategy. W are doing all those things and you know we would hope that -- maybe not the next call, the by sometime next year we will be able to talk about some of those new initiatives being in place and up and running.

Just parenthetically, I am not an enthusiast of electronic trading. I think a lot of this high frequency trading is quite predatory.

Yes well, we're --

But this is not a platform for me to articulate my views.

No, no. By the way, I don't disagree with you, but we are not talking about proprietary electronic trading. What we are talking about is electronic execution for customers.

Yes. There is a big difference between electronic trading and direct market access and then high-frequency. This is like, I want to put in a program trade or use an algorithm to execute a basket or a single stock. That is not -- we're not talking about high-frequency here.

Good. Thank you very much. You have got some really capable people there who I've known for long time.

Devin Ryan, Sandler O'Neill.

Yes, guys. I just had one quick follow-up here. Just on the management fee improvement -- just wanted to get a sense of what drove that jump from last quarter? Was it just the higher asset level, and what was the mix of the assets that you brought in at a higher free rate? It looks like obviously that the fee yield did go up. I just wanted make sure that is kind of a sustainable improvement; just want to see if there's anything else going on there.

While Devin, it was mainly driven by our healthcare royalty fund, which, had an additional close to the closing in the quarter and as part of the closing, the management fees have a catch up. And we also -- you know as you'll see, we closed on the RTS mutual fund, which generates some management fees as well.

It is a combination of both the growth as in higher fee paying assets and the mix of the business. I mean I suspect that cash management assets are going to kind of level off here. I am not expecting them to grow as dramatically as they have in the past. The asset growth in the future should be from higher fee paying strategies. We have to accrete the fee realization up and that is one of our definite goals on the asset management side. But, recognize that season general are coming down.

Investors have gotten much smarter. Like for instance, all of the other big institutional investors now, depending on the product, they want to say that they're willing to take performance fees but they want them indexed. So it's not even a function of a hurdle, it is a function of if the market is up 20% and you're up 20%, why should I pay you? An incentive fee? You just got the beta of the market, but I will pay with you for the alpha. So, investors have gotten much smarter and much more diligent about sort of fees. But we think we have a product suite that caters to the discerning view that they have about how we should get compensated.

Got it. And then when I think about the flows or the increase in assets quarter-to-quarter, was that primarily at the end of the quarter? So I'm just trying to think about how much of the that was the kind of new assets you were actually able to bill fees off of.

Well a lot of the new assets were cash management as well as late in the quarter. The mutual funds was launched late in the quarter. As Peter mentioned, there are a lot -- there is a lot in the pipeline that we expect to close fairly quickly.

Okay great. Okay thanks guys. Take care.

With no further questions at this time, I would now like to turn the call back to Management for closing remarks.

Thank you operator. Thank you all of you who attended and listened to the call. Again, just to reiterate, we are very disappointed in the results, but at the same time we have a very good understanding of why they were what they were. They were unacceptable, and we have to get back to work and complete the program, the path we set out to transform this place into something special. Numbers don't reflect how far along in my opinion we are in that process. So, if we get decent markets and I think you will see a different performance out of this company. And I think with that, we are done.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation.