Cowen Inc (COWN) 2012 Q1 法說會逐字稿

(Operator Instructions). Good morning, ladies and gentlemen. Operator: And thank you for joining the Cowen Group, Inc. conference call to discuss the financial results for the 2012 first 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 the uncertainties described in the Company's Earning 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 those 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 wwwsec.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. And good morning, everyone. Welcome to Cowen's first quarter 2012 earnings call.

With me here are Jeff Solomon, our CEO of Cowen & Co., our Investment Bank Broker Dealer arm, Steve Lasota, our CFO, Tom Strauss, Chairman of our Asset Management Business. In the first quarter, we generated approximately $4 million in GAAP income or $0.03 a share.

On an economic income basis we reported $6 million of income and an economic income cash gain of well in excess of $12 million. While we still have plenty of work to do to further increase profitability, our first quarter results reflect the improvements we are making across the firm. As you know, we have been working pretty hard towards creating a sustainable platform, sustainable for this environment for all of our businesses lower cost, figuring out new ways to add revenues and we are seeing some of these efforts starting to take shape.

Taking a look at the performance of our operating businesses, we made some progress during the period. At Ramius, which I will discuss in greater detail, or Tom will shortly, even though our total assets under Management were slightly decreased we had solid inflows in certain hedge fund products as well as growth with several existing customer solution mandates during the quarter.

We also generated over $20 million of investment income from the management of our proprietary capitol, and I will talk about some of our legacy assets which we are committed to return during the quarter. At Cowen & Co. we grew segment revenue of 19% from the fourth quarter, including an uptick in the brokerage arms activity. We recorded a strong underwriting quarter, thanks in part to the favorable equity environment and the ongoing success in rebuilding our healthcare banking franchise.

In fact, the first quarter we completed our most public underwriting transactions since the middle of 2007. Jeff will discuss other developments within the broker/dealer later in the call. In terms of cost, we reduced our run rate expenses by 30% the first quarter for approximately $12 million in the fourth quarter of last year.

Our compensation expense also tracked lower from late last year following reductions in head count and elimination of non core businesses and we expect to realize additional expense savings over the year and are on track to achieve a $40 million run rate expense saving target in 2012. Let me turn it over to Tom Strauss to talk about the Asset Management Business and I will come back and we will go to Jeff.

Thank you, Peter. In the first quarter, our total asset base remained relatively flat, total AUM decreased by 1% from the start of the year, approximately $100 million to $10.2 billion. The decrease was primarily driven by redemption's in our lower fee paying products including Cash Management which has more fluid movement on AUM and a custom hedging mandate within our Solutions business where we had a redemption of approximately $540 million and also a very low fee paying assignment.

These decreases were partially offset by an increase in assets of approximately $230 million within our single strategy hedge fund products, and increases in other parts of our Solutions business. That generated $14 million in management fees compared to the prior year and down 27% from the recent fourth quarter.

The decline relative to a fourth quarter was primarily due to the result of fees that we received in the fourth quarter from our healthcare royalty investment platform and based on a very successful closing of their second fund vehicle. Average management fees for the quarter was 55 basis points, compared to 61 basis points for the first quarter of 2011, a decrease in average fee was primarily due to the fees we earned in 2011, first quarter, from an increase in committed capital in our healthcare royalty fund.

Excluding cash management activities which we think is the appropriate way to look at this metric, our average fee was 68 basis points compared to 75 basis points in the prior year period.

In our Solutions business we continue to see strong demand across various areas especially our customized hybrid portfolios where we blend a core set of alpha generating managers with several liquid replication strategies for clients who currently invest in portfolio hedge funds or directly into a fund of funds, our hybrid portfolio solutions offer improved liquidity, transparency, enhanced ability to manage risk and clearly lower fees.

On the real estate lending side, the first quarter presented our real estate funds with several first mortgage opportunities, whose returns on a risk adjusted basis were extremely attractive. We were able to successfully close on a number of these loans in the quarter and have others in the pipeline which we hope to close early in the second quarter. We also continue to actively market this strategy.

At Ramius, we have been actively reaching out to a broader array of clients, including mass affluent clients that can invest in our two liquid alternative mutual funds, the Ramius trading strategy futures fund and the Ramius dynamic replication fund. It's important that we raise awareness of the Ramius brand as an institution caliber provider of liquid alternatives since we are not as well known in this channel as we are in the institutional channel. Let me turn this back to Peter to touch on the investment portfolio and our capital.

I will be very brief, but wanted to point out at the end of the quarter we generated $21.1 million in investment income. An increase to last year's first quarter $17.2 million in investment income. The increase was largely driven by our investment and co investment and value and opportunity fund, which put in very strong performance in the first quarter.

And we also recorded a very strong quarter across our liquid trading strategies employed in the firm's capital particularly in credit and event driven. As of March 31, we had $442 million of our capital or 85% of our capital being invested, which is the highest amount of capital, liquid capital that we have ever had invested during the quarter. Let me turn it over to Jeff Solomon who will talk a little bit about Cowen & Company.

We made some meaningful progress at Cowen & Company in the first quarter To give you a few highlights, our equity capital markets platform reported a strong quarter completing 17 public and private equity transactions and generating $13 million in revenue. Our healthcare banking franchise and the rest of our healthcare franchise continues to excel.

We completed more transactions in our Life Science coverage area than any other investment bank. It's important to note that our efforts to rebuild our banking franchise are a year old. We are quite pleased with our ability to reestablish our presence in this critical area for the firm.

Our brokerage business saw uptick in market activity with revenue increasing 14% from the fourth quarter, and we streamlined our cost structure at the broker/dealer segment by approximately $5 million. From the fourth quarter of 2011. However, we still have work to accomplish and to meet our objective of creating and sustaining a growth platform that is consistently profitable.

We continue to adjust our model to opportunistically and strategically improve our businesses in the efforts that's being put forth by everyone in our organization to accomplish this goal is truly remarkable. As I mentioned in our last call, one of our strategic objectives is to increase the platform's electronic footprint with institutional clients, given that institutional now pays a majority of commission dollars to electronic execution, Cowen must be able to compete in this area.

In early April we closed our previously announced acquisition of Algorithm Trading Management, or ATM, a provider of global multi asset class algorithmic exectuion trading models. ATM is actually a financial technology company that offers broker neutral services, institutional buy side and sell side firms. It's unique product offering has been adopted by a number of sell side firms and we at Cowen have been the client for the better part of the last year.

We expect to record modest revenues related to this business in the second quarter and are also analyzing and realizing the expenses, trading cost deficiencies related to the combination. In the latter half of 2012, we expect to drive incremental revenues as we further integrate the platform and execute new business opportunities with our existing institutional clientele at Cowen.

Kudos to everyone in our Equity Division who has already embraced our culture of cross selling when it comes to the electronic product. It's the cornerstone of how we are going to be successful. At Cowen, our core strength continues to be our fundamental research platform. We continue to look for ways to improve our overall client penetration.

To that end, we will be announcing the addition of a new Director of Equity Research and a new Head of Equity Sales to augment our Senior Leadership Team at Cowen. With or Senior Management Team finally in place over the next few months we would be able to intelligently expand our footprint by increasing both our efficiency our on existing products, as well as increase the amount of relevant content that we are providing the clients around our core competency.

Turning to the specifics of our business performance in the first quarter, we completed 20 investment banking transactions across all products, generating $15.6 million in revenue compared to 16 transactions for $14.7 million in the prior year period. The increase in revenues was primarily driven by our public and private equity underwriting product which benefited from a strong financing environment. We completed 1 advisory assignment and two debt market transactions.

While it's still early in the second quarter, our net capital markets group has been showing signs of real progress. The group has built their backlog to an all time high and we are well positioned to execute these mandates over the coming months and quarters. Our sales and trading business, brokers declined by 13% compared to the prior year period but increased 14% from the fourth quarter, even as volumes were down 7% quarter over quarter.

It is still too early to call this a trend but it indicates the importance of our product within our core client base and our ability to gain market share. Our management changes and our strategic moves in electronic trading will enable us to improve our relative market position over the remainder of the year. As you will recall, last year, we made a number of investments to bring the right professional to certain key areas of importance, especially in banking sales and trading.

We now have a deep lucky skilled and knowledgeable leadership team in place and we are growing our brand in critical sectors like Life Sciences and Healthcare and we believe we are well positioned to gain a share in several high growth products. I believe the foundation has been set in our first quarter performance is a reflection of the traction we are gaining. I will temper that by saying we have still have considerable work to accomplish.

Looking ahead, I think there are some encouraging signs for our business in general. As you know, The President recently signed The Jobs Act into Law and this important piece of Legislation should make it easier for small companies to access investment capital required to grow their businesses, especially public market. We expect to benefit from the this change in regulation in the quarters and in the years to come.

Our Organization realized long ago realized capital raising imposed on public companies and publically traded growth companies and we have been quite active in these legislative reforms. Over the past six months, our leadership here as met with senior legislator on this topic and thought to spread through various media venues.

On capital markets regulation, I am acutely aware of the impact these should have on emerging companies. We are now actively working with our clients to update them on these recently changes that actually stand to gain the most and will make sure that we are there to help them do that. With that, I will let Steve Lasota, a give you an update on our financial performance.

Thank you, Jeff. During the first quarter of 2012 we reported GAAP net income of it $4 million or $0.03 per share, compared to a gain of $82,000 with $0.00per share in the prior year period. In addition to our GAAP results, management uses non GAAP measures that we term as economic income to analyze our core operating segment performance.

We believe economic income provides a more accurate view of the operating businesses by excluding the impact of the expenses associated with one time equity awards made in connection with the November, 2009 Ramius transaction in acquisition related expenses and other organization charges. Economic income also excludes the impact of accounting rules that require us to consolidate certain of our funds. The three months ended March 31, 2012, the company reported economic income of $5.9 million or $0.05 cents per share compared to economic income of $7 million or $0.09 cents per share in the prior year period.

The slight year over year decrease in economic income was principally driven by a $3.2 million or 7% increase in compensation expense attributable to and increase in head count and deferred stock comp experience partially offset by a reduction in our non compensation expenses. First quarter revenues were largely unchanged at $79.2 million compared to $79.7 million in the first quarter of 2011. We generated $21.1 million in investment income during the first quarter and ended the period with $442 million of invested capital.

During the 2011 first quarter we earned $17.2 million in investment income. The increase was largely attributable to performance in the value and opportunity fund. We also recorded a strong quarter across our liquid trading strategies which represented 56% percent of our total equity amount at March 31st.

On the alternative investment side of our business, we recorded management fees of $14 million during the first quarter of 2011, flat compared to the prior year period. Although the change is flat, the mix is come provides of an increase in management fees going on a single strategy hedge fund products and Ramius strategy group which launched it's mutual fund product last September later offset by a decrease in fees from our discontinued multi strategy hedge Healthcare royalty fund.

The decrease in Healthcare royalty management fees for the current year is due to an increase in committed capital in the prior year quarter that resulted in recognizing cumulative retrospective management fees. Reported incentive of $4 million for the first quarter as $5.2 million in the prior year period. The decrease was primary related today a decline and incentive real estate from our fund, and single strategy hedge fund products.

And our broker/dealer segment, investment banking revenues were $15.6 million, an increase of 6% compared to $14.7 million in the prior year period. We completed a total of 20 transactions across all products and the most recent quarter compared to 16 transactions in the first quarter of 2011. Brokerage revenue was $24 million the first quarter of 2012, a decrease of 13% compared to $26 million in the first quarter of between due to increases in the correspondence's company cash business.

Aggregate ratio of 58% for the quarter compared to 54% in the first quarter of 2011. The increase was primarily attributable to investments in new professionals and additional stock compensation expense, offset by a decrease in severance expense. In the current quarter, we incurred $1.3 million in compensation expense to activities in which the Company gets reimbursed and severance expense of $617,000.

Excluding these items, the revenue ratio was 56%. Moving to non comp expenses. Fixed non comp expenses increased by 2% to $21.2 million. As compared to $21.6 million in the comparable prior year quarter.

The decrease was due to decreased equipment expenses related to our expense reduction efforts in 2011 to reduce excess servicing space. I would like to point out that our non comp expenses in the prior year period included a $1 million diferencial of litigation reserve, excluding this reversal, our non comp expenses decreased by 6% in the prior year. Bearable non comp expenses were $6.9 million in the first quarter of 2012, down 23% compared to $8.9 million in the first quarter of 2011.

The decrease was primarily due sinned indication costs related to a capital raised by an alternative asset fund in the first quarter of 2011 and decreased conference related expenses. Economic income as a pre tax measure I would like to briefly touch on our tax situation. After the acquisition of La Branch, significant net operating losses to carry into the future of $312 million.

The associated gross deferred tax asset currently amounts to $124 million. There is 100% valuation allowance against that asset but has significant value to the firm. IRS rules associated with the acquisition of Cowen & Co. and La Branch transactions primarily limit 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.

Our balance sheet, our stockholders equity amounted to $517 million March 31st, and our book value per share was $4.54 per share. Tangible book value, a non GAAP measure was $4.32 compared to $4.23 per share at the end of 2011. I will turn the call back over to Peter for closing remarks.

Thanks, Steve. I will open up to questions in a second but let me just say that this is a really difficult environment that we are living through. Everybody here is very intensely focused on taking all of the steps we can to make sure that we come through this environment in the strongest possible shape.

We've got a lot of new initiative going on, making real transaction in the broker/dealer in those new initiatives in the Asset Management business, I think, is poised for, you know, a lot of good growth in the future.

Our internal investment processes are as good as they have ever been, and you may not hear the enthusiasm because it's Friday and we are tired and, you know, we have a lot of work to do to get ready for reporting earnings, but this is a very enthusiastic group of people here, and we see light at the end of the tunnel both in the industry an especially for us because we think we are really well positioned to take advantage of it. With that, let me open this up to questions.

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

Good morning, everyone. How are you.

Good.

Hi.

Hi. So within the Asset Management Business, are you guys strong a little bit on the fund performance but let me get some color on how you guys feel like your products perform relative to the bench marks and then just kind of give some comments about mandates, would you expect net positive flows in future quarters or are you still expecting a drag from the cash management business that contributed to the redemption's in the quarter?

Good question, Devin. This is Tom Strauss. I say performance in the first quarter was very solid in both our credit and our value and opportunity funds. And I think we are pleased in that score. Our mutual funds to continue to perform well versus their competition, and to address your second question, I think we are optimistic based on assignments that have been mandated but not funded, and we think the second quarter is likely to be a solid one in terms of positive growth.

Uh huh. Are you guys seeing any change in timing of when, you know, once mandates are given as to when they are funded,I know it was, we kind of were where that period had really lengthened. Are you seeing any change in that. Or is it starting to lengthen out again. Is volatility maybe picking up here.

Well, I am not sure what the difference is between long and longer. But clearly, institutional mandates are taking a longer period of time than would have been the case a year or two, documentation is more thorough, due diligence is more thorough, the process is just more, if you will, institutional, which I think in the long run plays to our strength because of the deep infrastructure that our firm has. Definitely from initial inquiry to funding, the time duration has increased significantly.

Uh huh.

No worse, Devin than it's been. This is a shift in the length of time it takes to fund mandates and it continues, you know. So we have strong backlog, very strong backlog, as Tom said, you know, expect positive flows from the second quarter. We feel pretty good what's going on there.

Okay. I appreciate the color. A question for Jeff on the broker/dealer. You know, you guys talked a lot about the new initiatives on the brokerage business specifically. But I would love to get any sense or any additional color around, you know, how meaningful you think the revenue potential is from just a number of these new initiatives you guys have announced over the past year, plus year, you know, I guess growth expectations for revenues, just any color around that, just given that, you know, obviously the traditional cash equities business has been in quite a soft patch here more recently.

So I think once we have grown internally, they take longer. As to the ones we announced last years, those have been organic. We have made investments in the technology and, you know, customer ramp, it's a 3 step process with electronic. First you have to get the meeting, second the customer to install and third, you have to get them to use it.

On the ones we announced last year, things are going a little slower than we would have liked but I think we are finally, starting to see those ramp a little bit in the first quarter. As it relates to ATM, it's different. That's an operating business that's been around for a number of years. With the revenue base, I think with the last call, we announced that acquisition that it would be accretive.

It is. It was a profitable company before we purchased it. And we actually think this is a much more of a situation where we with bring to bear our distribution capability, you know, because we talked to all of these institutional accounts that ATM would never have had difficult on the buy side talking to those guys. And so for us, this is sort of taking existing profitable business and being able to penetrate our client's much more aggressively with a new product offering.

So I say early days that we are less than a month into or about a month into this acquisition. On that 3 step process, we haven't had any clients tell us, no. We don't want to see you. So that's good.

We have had a few say they want to see us and where they have seen us, you know, they are taking it to the next level and putting it through its paces. I think for us, we are not trying to compete with the guys who do huge amounts of algorithmic trading for us. This is really going in and trying to address client needs at a much more specific way. And so I believe the sales cycle might take a little longer on the buy side. But I think what you will see out of the gate with ATM is positive impact Day One, even as the buy side business starts to ramp.

Thanks for that color. I guess just from the revenue perspective, I mean, do you look at this, the brokerage business, you know, as a whole, as kind of a good growth business for the firm, or is it, you know, it will you know, is it 5% to 10% growth rate. A 10% to 20% percent growth rate. Or more than that?I am trying to get some perspective around that. I know it's kind of a tough question to answer.

Yeah. I actually don't I look at it much more in where is there low hanging fruit for Cowen to really penetrate clients in a way we are not penetrating?So we are still in a position where given our research footprint, you know, there is more that we can be doing in the core business even as the overall macro environment is challenging.

There are some places where we can be doing better at penetrating our clients with our fundamental research product. And I think you will see, we are making two key senior hires in the core business of equities which is, you know, our Director of Research, our new head of sales. That's really to ma I can sure we are maximizing the impact of our clients. So, you know, I don't know that I think about it in terms of where I see that business growing in the context of a difficult market environment.

I think that there is just some stuff on the table for us to be capturing that we are currently not capturing and with a little bit better organization and with a broader product array where we can basically make sure the clients don't have an excuse not to pay us, we can make we can make inroads in terms of increasing our market footprint even in a difficult environment. So I know that doesn't answer your question specifically about percentages, all I can say is we are making, putting ourselves in a position to increase our footprint even as market conditions stay the same.

Okay. Thank you. And then, just on the investment banking backlog, just any color there as well, you know, how is that feeling?Is it building?Are clients feeling a little bit more comfortable after, you know, the first quarter had kind of a nice market move?And any insight into, you know, how things are trending, maybe advisory versus underwriting?

So we still are very much tilted toward the underwriting business, you know. We have a ways to go on building our advisory business so the backlog in advisory moves up nicely in the first quarter in terms of mandated M & A backlog. That's one of those things honestly, remember our team is still relatively new on the investment banking side. That takes time. They have to be on the platform for a while in order to really make significant inroads in advisory.

I am pleased that, you know, as I mentioned the debt capital markets business, we have been invested there for almost two years and really in the first quarter and coming into the second quarter, we have seen significant uptick from clients across all four of our industry specialties, clients who really are availing themselves of what we can offer in terms of providing debt capital markets activities. And so I am encouraged by that. What I would say to you is, just like anything else, when you have a history of winning and you can put up numbers on the board and you have got a momentum, clients recognize that, and we are beyond the stage of proving that we can do it.

And I think one of the challenges we are having is, frankly, as we take on all of these executions, making sure that we continue to deliver the high quality service and, in particular, in the healthcare space where we are, you know, from an execution standpoint in terms of the amount of stuff we are trying to get done. I feel like I am optimistic about it. It's still very much tilted toward equity capital markets, as you might imagine but we continue to build a solid pipeline away from that which I think gives us more breadth and a better foundation for the future.

Great. And then just on the expense front you guys did a really nice job on the expense reductions and initiatives that you have put in place but it sounds like from the comments that it may still be some additional reductions to come in future quarters. I am not sure that I interpreted that correctly. Just, you know, how we should be thinking about the non comp run rate, I guess moving forward relative to this quarter's level.

Devin, you could see last year that our non comp's, you know, ramped up quite a bit and in the latter half of the year. You know, we did have an acquisition and things like that. But, you know, all the work we did at the end of last year, you know, we see more non Corp reductions coming down the line, things that, you know, technology type things that, you know, will come through in second and third and fourth quarter. So we feel, you know, we feel real good about what's going on in the non comp situation and we are at it every day, every minute.

Okay. Great. Just lastly, I didn't see anything in the release on share repurchases. I would just love to get your thoughts on the buy back here?

We bought back, you know, we did buy back some shares, although, you know, the window was not open very long in the first quarter because by the time we file our K and, you know, when we start with the Q, it's not a long window but we will be buying back as soon as the window opens early next week, and we will continue, you know. I think we are $12 million into the $20 million that we committed to. And what we will be buying back again next week.

Okay. Great. Thanks for taking all of my questions, guys.

Okay. Thank you, Devin.

And your next question comes from the line of Joel Jeffrey with JBW. Operator: Please proceed.

Good morning, guys.

Go morning, Joel.

Just to build on one of the questions that Devin asked. Is it sounds like clearly electronic trading can contribute more in the latter half of this year. Can you talk about any of the contribution it made during the first quarter?

Well, ATM is the big initiative there. So it wasn't in the first quarter at all because we didn't close until April 2nd. Actually, I think I want to draw a distinction here, we have an electronic product offering and a lot of people get confused on what that means. What we do with the program business for a while, but the algorithmic front end is really at the decision making point, at the trading desk for the buy side.

So when you are talking about ultimately how, you know, you get paid. You go ahead paid for fundamental research. It's critical to make sure you have high quality content going in at the portfolio manager and at the investment level so you do well until your votes. On a daily basis, decisions are being made on where to allocate daily trading volume, and we've got a very aggressive and pretty high end sales trading capability in the cash market, and what we are giving those guys is a tool to basically engage with the sales traders on both cash and electronic trading.

So cash and algorithmic. That's, you know, that's a relatively new product offering for Cowen but really, what it says is, if $1.00 are being paid by client, $0.60 of those cents are being paid electronically we didn't have a way to address that $0.60.

And so what we are seeing is we now have a way to address that $0.60 and we actually think that the ATM platform given it's actually a broker neutral, is a differentiated product even in amongst the high caliber algorithmic trading capability that our competitors provide and as our sales traders are talking to the guys that are ringing the register every day, we are getting that entry into where the revenue gets produced on a daily basis in a more broad sense. So I think it's a very tactical move for us and it will play out over time. But it's definitely going to take, you know, some time for us to make sure that we get through where the utilization of the install base actually kicks in.

Okay. Great and then sort of thinking about investment income, appreciate the color you gave us on where the strength came from for this quarter but sort of looking out for the remainder of the year, is this going to be driven by market levels and how the equities markets perform and how should we be thinking about modeling that going forward?

Well, it's a combination of all of the activities we engage in, in our investment management business. Certainly, you know, equities have, you know, a bearing on it but the big contributors in the quarter were our merger Arbitrage activities, the business continues to roll on, it will make its contribution or credit activities, we are a very big contributor, and I mean the kind of pure, you know, beta contribution to the results from the market, I would say, were not the dominant feature of where the results came from.

But, you know, recognizing, and, you know, difficult equity markets, it's going to be harder to make money in merger arb and some of the other equity related activities but not stealing credit. Our real estate portfolio continues to do well, makes contribution, our equity and lending. Our healthcare royalties business makes a contribution. Our activist group, which is a fair amount of exposure there, V &O, our value and opportunity fund.

I won't say they are, you know, equity diagnostic, certainly good equity markets help their business but over time that's proven not to be an obstacle to making money if you were to look at the record over the last ten or eleven years. So yeah, I mean look. It will be, it definitely can be choppy, but, you know, we think we have our arm wrapped around risks pretty well and, you know, we have budgeted amounts of the year and we are optimistic we will make it.

Okay. Great. And then just lastly, I think with the La Branch deal you picked up, I think there was an Asia component to that as well. Was there any contribution to that business in the quarter and hour are you thinking about the outlook for that business.

What we picked up was Hong Kong membership and mostly what they were doing over there was trading EPS and that's a business we closed last year. So we got some licensure, and we got licensure on our own. Actually, it's interesting the ATM acquisition actually we are going to drop that into the old La Branch shell and in ATM, we have the ability to do multi classic and algorithms and we are focused primarily on the U.S. because I don't want to build any expectations here, we do have some capability to execute algorithmically outside the U.S. The La Branch acquisition gives us the ability if we choose to trade on the Hong Kong stock exchange at some point.

But we are not doing that, but what it did give us was the ability to extend our trading footprint there when and if the time is right. So no revenues from that business in the first quarter. I don't anticipate there being business in the second quarter or third quarter because we have so much opportunity in front of you was in the U.S. market but as we look at how we address our clients' needs globally, which is a really big macro theme in equity trading, given the fact that US equity funds continue to experience outflows and we see growth and equity funds more globally, we will be utilizing that at some point in the future as we develop our electronic capability in the Asia markets.

Okay. Just as a quick follow up to that, were there any expenses tried today that during the first quarter?

Any expenses tied to ATM.

To the Asian business at all.

No.

Great. Thanks for taking my questions.

Thank you.

Your next question comes from the line of Donald Distino with Harvest Capital. Please proceed.

Hey, guys. I apologize. I came in and out of this call. So please forgive me if I start to address, just quickly on the management fees, was there an explanation of why they were down as a percentage of AUM when it sounded like the next was moved away from the level market cash to the higher products?

Yeah. That's a good question there are different parts of the world and different groups of clients that have very strong biases toward structuring fee arrangements. So to take two extremes, there are a group of clients that say, look we want to know what the management fee is. We are not going to pay incentive fees.

Price the mandate accordingly. There are another important group of clients that say, look, we want to drive our fixed costs, our fixed fees as low as possible, and we are going to pay you more than generous incentive fees. So some of that reduction that you are seeing has come from assets flowing into the second category.

Last year, for example, there were no, you know, incentive fees were very limited because of the performance of the overall hedge fund business but I think in our normal environment, you will see incentive fees kick in for some of these lower managements fee mandates.

And quarter over quarter, comparing first quarter of 12 to first quarter of '11, it's roughly flat, but in the first quarter of '11, we did have a closing at healthcare royalty partners, which has ret proactive management fees, an increase in management fees and that's why that had a lot to do with the that percentage.

So when you get the when you give the percentages on management fee, on the press release, you know, you have a paragraph about management fees and a paragraph about incentives but the percentages that you give are 55 basis points versus 70 basis points, whatever it was, those include incentive fees?

No. Just management fees over total AUM with and without cash management. Because cash management is, you know, a low management fee business.

Okay. I'm sorry. I am still confused. So I thought the answer to why first quarter was down from fourth quarter was because of incentive fees.

Fourth quarter, yeah. Fourth quarter was down.

Incentive fees. First quarter was down from fourth quarter because of incentive fees. Is that what you are saying?No. No.

That percentage is just management fee over total AUM. It has nothing to do with incentive fees. The reason why it's down is in the fourth quarter, we had a closing for Cherp as well, our healthcare royalty partners.

What's, should I think of the first quarter, all else being equal, as kind of a run rate without any without any closings that it kind of.

We expect that to increase because some of the new some of the new mandates dates are in our hire management fee paying products. So that's difficult to answer, you know. Some of our products, some of those, the recent AUM, isn't a product that has higher management fee. And then we also have some mandates that could be coming from lower fee paying, you know, lower management fee paying. That's why Tom went into the explanation of, you know, we may get a lower management fee but a higher performance fee type arrangement.

Got it. And then quickly, again, on the commentary on the backlog in healthcare. In the first quarter, how much how did healthcare do and do you have any stance on what your kind of market share was?Healthcare was pretty good and a lot of investment banks?

So healthcare was pretty significant piece of the backlog. A pretty significant piece of the execution of the first quarter, which was to be expected because we were kind of, we made our investment there early and it was a very robust quarter. So, you know, it was good to see us hitting on an area that was pretty important for us.

We kind of look at the world between banks and non banks and you include Jeffries in there, we had the second most amount of fees and that's how I look at it. I look at fee income. Second most amount of fees, if you look at everybody including all of the Balch banks and healthcare, we were third behind J.P. Morgan and Jefferies. So I think what it says is when the window is open for healthcare, especially for growth companies like we have seen, we are right there.

Thank you very much.

Okay.

(Operator Instructions). And your next question comes from (inaudible). Please proceed. Hi. How are you guys?

Hi.

I just wanted to get an idea of the goals going forward. If I were to understand it, excluding the invested capital of the firm, the Company, you know, the core investment banking business and just the fee business from the asset management lost $15 million dollars in the quarter. Is the goal to get to break even excluding the invested capital, or is, do you think that's something that will be accomplished given the positive results this quarter?

Yes. It's very hard to reach that conclusion, the conclusion you just did. Our goal is to be profitable in every segment of the business. We are, you know, in the process of rebuilding the investment banking platform.

You know, and move well into it and you think the biggest dollars through have been spent and, you know, there are all ongoing costs but all of the extraordinary expenses of doing that are ongoing and I think that, you know, we are making a lot of progress. Of course that whole platform from the sales trading side to the banking side, and you know we are not going to depend over the long term on our investment income as we reach profitability.

The asset management is profitable, and as we grow the asset base, you know, we expect it to be very profitable, which it once was when we ran a multi strategy shop. We have gone to a different model. I think that we are very happy that we did, given that we know what's going on among multi strategy managers in the universe who are all or I won't say all because I don't know all but certainly the ones we are familiar with are experiencing redemption on a continuous basis.

It's very hard for them to make money and our single strategy approach allows us to grow businesses that, you know, may not all be hitting all of their cylinders at the same time but enough of them are hitting all cylinders that we are going to grow that business. So I mean we are in transition we feel pretty good about where we are going. It's a fortunate part of how we view ourselves.

We have had this ability to make money out of our capital account over a long period of time and we believe that will continue and that will help us through this transition.

Yeah. Okay. That's very, very helpful. Thank you.

In terms of its very hard to extrapolate, you know, from one business to another because a lot depends on, you know, how expenses get allocated based on revenue during the quarter. So you know, it's fairly complicated. But clearly, I think we know exactly where we are in each of the businesses. We know exactly what we have to do and we are focused on achieving that.

You know, having a better environment would certainly help a lot. I think that's, you know, that's going to take awhile. You know, if you want to sort of talk big picture, it's going to be hard, I think, to get great clarity until we get through this election. And depending upon the om come out, I think, of the election, you know, the world might feel better.

Look. What's going on Europe, what's going on Asia, raise weighs very heavily on this Country. Anyone who think what happens in Europe is not tuned in, how much is being generated out of Europe which is going through, you know, a major contraction and will continue to because there is no secret sauce to figure out how to get them out of their problems. We suffer from our continued, you know, high structural unemployment in this Country.

It's hard to see how that's going to change any time soon. So demand in this Country isn't going to be very robust. Put those factors together and then you have got to sort of look at China and say, well, how robust is China going to be?Because they haven't been able to internalize demand for the extents they need to soften the blows from their export business.

It's a very integrated world, and a lot of issues that have to get resolved, you know, I think before people feel, you know, really good about that equity. Frankly, I think the pension fund, you know, as you read continuously about the shift from equities to individuals with fixed income are doing it exactly at the wrong time. They should be buying equities now because if we do have inflation, which we probably have to have to inflate our way out of here and devalue all of the debt that's been issued.

Equities are probably going to do very well in that environment because people are going to look to hide, you know, intangible things, operating companies that pricing power, et cetera. So, you know, I don't know. At some point, we are going to have an explosion in equities. When it happens, most people won't be there, explosion on the upside.

And one follow up question. In terms of just over the last year, in the asset management business, in the high C asset management business, if you excluded investment gains, what was the growth in AUM?

Pretty modest across the hedge fund platform in 2011 the hedge fund business industry wide lost money. We have positive performance but it would have been low single did I know its when you think about compounding the overall portfolio. So most of the gains came from new assets. Does that make sense?

Yes. Yes. Based on the return in the first quarter, when the equity markets rallied about 12%. Which is often a good sign to me. Do you think that's a more conservative investment strategy or across the portfolios.

You can't look at the equity market and our returns and draw because our capital is.

Okay.

Carry income and we have income off of our real estate investments, carry off of our investments in our lending portfolio, to the Healthcare royalties business so equities is not a good benchmark .

Thank you.

Very diversified. We have equity exposure because we do merger arbitrage portfolio but that's actually less (inaudible) to the volatility in the equity markets than let's say a pure equity portfolio, you know, or pipe support portfolio is somewhat, you know, operates somewhat independently with the pure equity markets. Not entirely all the time. So you really just can't draw a parallel from the equity markets, what happens top our investment portfolio.

Thank you.

Thank you very much.

With no further questions in queue, I would like to turn the call over to Management for closing remarks.

Thank you, we will keep plugging away and will speak to you in about three months. Everyone has a nice weekend.