Cowen Inc (COWN) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Inc. conference call to discuss the financial results for the 2013 fourth-quarter and full-year results. By now you should have received a copy of the Company's earnings release, which can be accessed at the Cowen Group, Inc.'s 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 risks and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group, Inc. has no obligation to update the information presented on the call. A more complete description of these and other risks and uncertainties and assumptions is included in the Company's filings with the SEC, which are available on the Company's website and on the SEC website at www.SEC.gov.

Also on today's call, our speakers will reference certain non-GAAP financial measures, which the Company believes will provide useful information for investors. Reconciliation of those measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release.

Now I would like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Cowen's fourth-quarter and full-year 2013 earnings call. With me today are Michael Singer, CEO of Ramius, our asset management business; Jeff Solomon, CEO of Cohen & Company; and Steve Lasota, CFO of Cowen Group.

I will start with an overview of our performance for the quarter, followed by Michael, who will discuss the investment management business. And Jeff will provide an update on the broker-dealer, and Steve will take you through some of the details of our fourth-quarter and full-year results.

Cowen was profitable in the fourth quarter and full-year 2013. This is the first full year of positive economic income since the Cowen/Ramius business combination in 2009 -- finally. During this time of transition, we have worked methodically to remake our operating businesses into one that can thrive in the new economic reality. We have made significant challenges that required meaningful investments and management efforts. However, we believe you can see from our recent results our efforts are now beginning to pay off.

Ramius had a successful year. Assets grew by $1.4 billion in new assets, which is net of over $400 million of redemptions from legacy funds. And we ended the year with $9.4 billion of AUN. It was also an active year for new product launches with six new products and one new investment capability addressing several different distribution channels.

Cowen, the broker-dealer, also had a rewarding year. In banking, we are leader in equity underwritings and a leader in middle-market debt financings in our core sectors. In what is arguably one of the most difficult environments for equity trading volumes that many of us have ever seen, our Equities division is gaining market share, which Jeff will talk about.

Here are some of the financial and operating highlights from the full-year 2013. The Firm reported economic income of $6.5 million for the year versus an economic loss of $17.6 million in 2012, for a swing of almost $24 million -- over $24 million. Full-year 2013 revenue was $345 million, a $56 million increase over 2012.

We remain committed to keeping our expenses in check without impacting our future revenue opportunities. In fact, we continue to identify additional areas of potential savings for this year 2014. For last year, total non-comp expenses were up 4.5%, due largely to the increased variable expenses that came along with the 19% improvement in topline revenue. Notably, fixed non-comp expenses were flat for the year, which indicated our ability to successfully leverage our fixed cost structure with recent acquisitions.

Turning to our balance sheet, we ended the year with $508 million in equity and $428 million in invested capital. In 2013, we generated $37 million of investment income, which compares with $50 million in 2012. Investment income was down for the year, primarily a result of the underperformance in certain of our liquid strategies relative to the market and relative to what those strategies were able to throw up last year.

Over the years, we have consistently maintained a strong capital base, and it has served us well. It has given us the flexibility to continually evaluate a variety of opportunities that we come across and intelligently invest in our future. The reality is, it is a very different market environment to thrive in, as demonstrated by many, many smaller, less well-capitalized firms. However, with momentum on our side, we view this as an opportunity to continue to invest in our future in order to put more distance between ourselves and competitors.

Our 2013 performance gives you a view of the progress at Cowen. However, we still have a lot more ground to cover to ensure that we are well-positioned to succeed in all market environments. We are in a competitive business, so we must continue to forge ahead and execute on our strategy. I am extremely proud of my associates and colleagues for all their hard work and resolve to make 2013 our best year in a long time. Even with improved results, we have been working with the same amount of intensity and focus as on day one. For that, I want to express my gratitude and appreciation to all.

I will now turn the call over to Michael, who will give you an update on Ramius.

Thank you, Peter. Ramius had a very productive 2013. At the start of the year, we established four objectives that will be critical in moving our business forward. First, increasing AUM and revenues within our existing investment capabilities; second, realigning our expense base; third, reorganizing our sales and distribution efforts; and, fourth, creating bolt-on products for existing capabilities, and recruiting new investment capabilities to our platform.

I am pleased to say that we achieved each of these objectives. First, AUM and revenues -- AUM increased from $8 billion at the start of the year to $9.4 billion by the end, an increase of $1.4 billion in net new assets. Asset growth in the year came from our value activist, alternative solutions, and real estate capabilities. Management incentive fees collectively were up 10% year-to-date to $78.9 million versus $71.5 million in the prior period.

Second, we focused on realigning our expense base. In terms of that, we have successfully reduced our core expense base in 2013 by approximately $2 million, and have identified additional areas for savings in 2014. However, the real driver to our P&L will be our ability to deliver innovative products and solutions to our clients, meaning to AUM and revenue growth, which brings us to objective number three.

We reorganized sales and distribution. We significantly repositioned the team to better meet the challenges in raising assets from institutions and private clients. We enhanced the sales force to add additional resources in our direct institutional selling efforts, while maintaining our existing strength in platform distribution. With seven different capabilities in a variety of product constructs and distribution channels, our shift to a generalist/specialist model yielded success, $1.4 billion net new AUM raised.

Recently, we announced two important additions to Ramius that will be instrumental in launching new firm capabilities and expanding the Firm's relationship with investors. First, Jake Walthour joined us a few weeks ago as Vice Chairman of New Business and Product Development. He will be responsible for expanding the Firm's relationships within the global financial community, attracting talented emerging investment teams, and also serving as a leader and senior salesperson across the Ramius platform. Jake is an experienced and accomplished industry professional and joins us from Cliffwater, a premier hedge firm consultant, where he served as a trusted advisor to a number of the country's largest public pensions, endowments and foundations.

Second, Brad Sussman joined us as Head of Liquid AI, Liquid Alternative Products. Brad has been in the forefront of the movement to offer liquid alternative strategies to retail and mass affluent investors in his former role at Merrill Lynch. He will be responsible for our current suite of four alternative mutual funds, and has a mandate to expand our offerings with both existing and new investment teams that have strategies well-suited to the Liquid AI space.

Fourth, additional products and capabilities -- Ramius was successful in launching six new funds and one new capability during the year. This helps to diversify our product suite and expands our capacity to raise additional AUM. We expect to further broaden our breadth of capabilities in 2014 by adding account investment teams in the emerging and liquid alternative areas, and by expanding the range of products within the general platform. We also continue to develop strategic distribution relationships within our Liquid AI platform. Overall, we achieved our four goals, but there's a lot more to do.

This significant strategy was possible thanks to our two greatest assets -- our clients and colleagues. We have an incredibly talented group of passionate and motivated investment teams which benefit from our top-quality institutional infrastructure, sales and marketing professionals, and industry know-how, so that they can do what they do best -- deliver strong risk-adjusted returns and effective solutions for our clients. The entire team at Ramius is dedicated to the success of each of our client's investment goals. And we are grateful for the strong relationships we have with clients across the spectrum in terms of size and geography, and greatly value their long-standing support.

We have evolved significantly over the last decade to become a stronger firm all around. And, to be clear as to who we are, we are not a fund of funds. We are not a multi-strategy hedge fund. Ramius is a $9.4 billion alternative investment platform that offers innovative products and solutions across the liquidity spectrum to institutional and private clients. We have seven different capabilities. We attract talented teams to our platform and provide them three things -- institutional infrastructure, sales and marketing, sophisticated reporting, and know-how, and allowed them to be successful. We also invest a significant portion of our capital loans to our clients because they're committed to the strategies that we run.

I look forward to discussing Ramius's progress with you during our next quarterly call. I will now turn the call over to Jeff, who will provide an update on our broker-dealer, Cowen and Company.

Thank you, Michael. As Peter mentioned earlier, our journey to rebuild Cowen and Company over the last three years has been one aimed at transforming the Firm to one that is recognized by our clients as the thought leader in our core sectors, by consistently providing unparalleled domain expertise, quality independent research coverage, trusted advice, and superior execution.

We've come a long way. In 2013, we realized new levels of success in both banking and brokerage. We recorded record revenue highs since the Cowen/Ramius business combination in 2009, gained market share, and completed a franchise-enhancing acquisition. To give some perspective on the magnitude of the change that occurred in the three years, in 2010, revenue at Cowen and Company was $151 million. In 2013, it was $226 million. That's a 50% increase. In the course of this past year, our research bench has gone from 27 publishing analysts covering less than 400 companies to 42 publishing analysts covering approximately 700 companies. More importantly, we have enhanced the research product offering while establishing greater relevance to clients, with a research breadth that now places us on a more level playing field against our larger peers. With more content than ever before, we have more insight to share with accounts, more conversations to be had, and in general, there's just more of everything that is high-quality.

To give you a snapshot, our corporate access events were up 33% year-over-year. Our non-deal roadshows were up 16%, and our conference one-on-ones grew 32% year-over-year. With the help of an expanded product management team, we can now ensure that our research is being heard by those clients that care.

Our success can be measured in part by the growth we are seeing in our brokerage division. After bottoming in 2012 at $94 million, brokerage revenue in 2013 rose to $121 million and exceeded the 2010 revenue of $112 million. In banking and capital markets, in 2013, we exceeded the $105 million mark in revenue versus $39 million in 2010. Today, we are also book running more deals than ever before. In 2013, we acted as a book runner in 40% of our deals versus 2010, where it was closer to 10%.

In March 2013, we completed the acquisition of Dahlman Rose, which expanded our overall platform to include the natural resource supply chain. The acquisition was a natural fit, and we experienced early benefits across the platform, as there was a lot of cultural commonality between the two organizations. As you can see, we are starting to reap the benefits of this -- of the efforts we've made over the past years to elevate our franchise to the next level. To be sure, the favorable capital raising environment has helped to advance our business, but it was made -- but our success was made possible because of this strong position that we are in today.

Let me give you some additional detail on the performance. In banking and capital markets for the quarter, we closed 33 deals across all product lines compared to 22 a year ago. We completed 29 equity transactions, three debt capital markets transactions, and one advisory assignment. For the year, we closed on 102 transactions compared to 74 in 2012, and we completed 78 equity transactions, 17 debt capital markets transactions, and seven advisory assignments. In 2013, we served as a book runner on nine of the 23 IPOs in which we were involved, compared to three out of 13 in 2012. As a testament to our healthcare franchise, we are the number one issuer for lead managed life sciences offerings in the United States.

Our debt capital markets business continued to grow nicely. It accounted for 26% of our banking revenue for the year. In just three years, we've established ourselves as a top license agent or book runner for high-yield middle-market offerings. Our momentum has continued into the first quarter of 2014, as the public offerings in our sectors continue to be favorable. In fact, the first two months of the year have been some of the busiest we have seen since the Cowen/Ramius merger.

In the brokerage business, our US trading -- while US trading volumes were down 4.5% in 2013, our equities revenue was up 21%. Part of our success can be attributed to our electronics business we acquired and integrated in 2012, which is growing nicely. If you look at our quarterly numbers, you will notice that our momentum began to pick up in earnest in mid-2012, once our new leadership began implementing programs to establish relevancy with commission-paying clients, and we began a new mapping and matching effort to serve our clients more appropriately.

In 2014, thus far, we also starting to see signs of increased commissions flows in equity, as we have seen mutual fund flows increase significantly in the equities space, as investors have migrated a little bit away from fixed income. We continue to make improvements on that front, and expect our improvements in the broker vote to manifest themselves through increased commissions in the quarters to come.

It has been a very gratifying year. As Michael said, there are still many areas for us to improve as well. And we have a lot of ground to cover to be where we want to be. The coming year is about driving organic growth for us, and identifying opportunities to integrate businesses that will either drive higher operating margins or leverage the unique characteristics of having Ramius and Cowen under the same organization.

Finally, to all of our employees, thank you for your hard work this year. You have done an amazing job over the past couple of years by showing tremendous vision, tenacity and, of course, empathy. I'm excited for what 2014 holds for us.

With that, I will now pass the call to Steve Lasota, who will give you an update on our financial performance.

Thank you, Jeff. For the full-year 2013, we reported GAAP net income of $4.6 million or $0.04 per share compared to a GAAP net loss of $23.9 million or $0.21 per share for 2012. For the fourth quarter of 2013, we reported GAAP net income of $2.5 million or $0.02 per share compared to a GAAP net loss of $9.3 million or $0.08 per share in the prior-year period.

In addition to our GAAP results, management utilizes non-GAAP measures that we term as economic income to analyze our core operating segments' performance. We believe economic income provides a more accurate view of the operating businesses by excluding the impact of acquisition-related expenses and other reorganization charges. Economic income also excludes the impact of accounting rules that require us to consolidate certain of our funds. Economic income was $6.5 million for the full-year 2013 or $0.06 per share versus an economic loss of $17.6 million or $0.15 per share. For the three months ended December 31, 2013, the Company reported economic income of $2.7 million or $0.02 per share compared to an economic loss of $8.5 million or $0.07 per share in the fourth quarter of 2012.

For the full-year 2013, economic income revenue was $344.5 million, which is up $55.9 million or 19% from 2012. Fourth-quarter 2013 economic income revenues were $96.4 million, an increase of $19.2 million compared to $77.2 million in the fourth quarter of 2012. We generated $36.7 million and $9.9 million investment income for the full-year and fourth-quarter 2013, respectively. This compares to $50.1 million and $11.8 million in the full-year 2012 and fourth-quarter 2012, respectively.

On the alternative investments side of our business, management fees of $57 million were unchanged versus 2012. For the fourth quarter, management fees were $13.9 million. Incentive income increased by $6.7 million to $21.9 million for the year. For the fourth quarter 2013, incentive income rose by 7% to $7.4 million.

In the Broker-Dealer segment, investment banking revenues were $105.3 million for the full year 2013 versus $71.8 million in 2012, a 47% increase year-over-year. For the fourth quarter, revenue was $34.9 million compared to $21.2 million in the prior-year period. Brokerage revenue rose by 29% to $121.1 million in 2013 from $93.9 million in 2012. For the most recent quarter, revenue was $27.7 million, a $5.3 million increase over the prior-year period. For the year, we reported compensation benefit expense of $204.8 million, a 9% increase over the prior year. For the quarter, it was $58.8 million, an 8% increase over the prior-year period. The increase was due to higher revenues during 2013 as compared to 2012. The increase was also related to an increase in headcount due to the acquisition of Dahlman Rose in the first quarter of 2013.

In 2013, we reported an aggregate compensation-to-revenue ratio of 59% compared to 65% in 2012. Excluding expenses for activities in which the Company gets reimbursed in severance, the comp-to-rev ratio was 57% for the year versus 62% in 2012. For the fourth quarter 2013, we reported an aggregate comp-to-rev ratio of 61% compared to 70% in the prior-year period. Excluding expenses for activities in which we get reimbursed in severance, the comp-to-rev ratio was 59% for the year versus 68% for 2012.

Moving to our non-comp expenses, fixed non-comp expenses were unchanged for the full-year 2013 at $95.5 million, even though we acquired Dahlman Rose in the first quarter of 2013. For the quarter, fixed non-comp expenses declined by 12% to $22.6 million. Variable non-comp expenses were $30.6 million for the full-year 2013 compared to $25.3 million in 2012. The increase for the full-year 2013 is a result of an increase in core brokerage and trade execution expense related to the increase in brokerage revenue. Marketing and business development expenses have increased due to firm-wide increase in marketing activity. For the quarter, variable non-comp expense was $7.9 million compared to $5.5 million in the fourth quarter of 2012.

While economic income is a pretax measure, I would like to briefly touch on our tax situation. Cohen has significant net operating losses and NOLs in the US to carry forward into the future of $323 million. The associated gross deferred tax asset currently amounts to $128 million. There is 100% valuation allowance against that asset, but [adds] significant value to the Firm. IRS rules associated with the acquisition of Cowen and Company in 2009 and LaBranche in 2011 partially limit the amount of NOLs that the Company will be able to utilize annually, but significant amounts of future earnings will be shielded from taxes by this asset.

Turning to our balance sheet, our stockholders' equity amounted to $508 million at December 31. And our book selling per share was $4.41 per share. Tangible book value per share, which is a non-GAAP measure, was $3.99 per share compared to $4.03 at the end of 2012.

Finally, moving to our share repurchase program. In the fourth quarter, we repurchased approximately 2.7 million shares in the open market and 64,000 shares as a result of net share settlement related to the vesting of equity awards. The total cost of the program in the quarter was $10.6 million or $3.85 per share.

Since we announced our original repurchase program in July of 2011, we have repurchased 11.4 million shares in the open market and an additional 4 million shares as a result of next year's settlement relating to the vesting of equity awards. The total cost to the program through the first quarter of -- fourth quarter of 2013 was $46.3 million, which represents an average price of $3 per share. As of December 31, we had $15 million remaining under the current program. The Board approved an additional $10 million to bring us up to $25 million. So this $10 million increase is in addition to the Company's existing $50 million share purchase program.

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

Well, thanks to everybody. I would like to open it up to questions at this point, operator.

(Operator Instructions) Joel Jeffrey, KBW.

Peter, I just wanted to follow-up on a comment you made on the call about having a lot more ground to cover before Cohen can succeed in all market environments. Can you talk a little bit about sort of what initiatives you are looking at that would specifically get you there and sort of timing of those, potentially?

Well, I was speaking sort of very, very broadly long-term about things we want to accomplish. I mean, we have tremendous momentum on the Cowen and Company side of the business. And it is continuing to drive home our position of research and monetize that. Every point we pick up in votes is meaningful commission dollars. Our debt capital markets, which was almost nonexistent two years ago, racked up a fantastic year. And we're going to grow that business.

And what is really driving all those businesses in the Cowen and Company side, and seeing if there are any niches that we need to sort of add -- you know, we're not trying to be all things to all people, but trying to alpha generators in very specific segments or verticals where we think we can bring real value-added.

On the asset management side of the business, we went from what we used to be, a multi-strategy shop to these individual verticals. And we now think the platform, while it will continue to grow in its existing verticals, has that ability now to add more verticals. So, the Firm is just completely repositioning itself over the last three years. Now and it is just building on that foundation. I'm kind of looking way down the road. It's not sort of like what we have to do in the next three months; it's what we have to do in the next three years, five years.

(multiple speakers) You can tack on and add to the asset management business that we can attend to the investment bank that we'll leverage our fixed cost infrastructure by only adding variable costs, comp and maybe some transaction costs. We have got the capital to do it. We are very well-positioned in that respect. It's now taking advantage of what continues to be, I think, a lot of sort of -- I'll call it disequilibrium or dis-economic scale in the industry among smaller firms and niche-y firms.

For instance -- I mean, Jeff can talk to it, but filling out -- getting more robust in sort of the advisory business would leverage our fixed costs in the investment bank a lot. And we are getting more traction there. So it's a little bit of this, a little bit of that.

Good, great. And then in terms of what is going on at Ramius, I appreciate all the color you guys gave on the objectives that you laid out, but just sort of thinking about the difference between the strength in the inflows and the performances that we've seen this year, is that really just being driven by the current market conditions? And is there anything that could potentially improve the performance of the funds meaningfully in the near-term?

I'll let Michael answer that.

Sure. I mean, I look at that in two parts and say you influence these performance fees. Alternative products in buoyant markets don't capture all the upside. They are not built for that; they are built for steady returns, high sharp performance. So in a year like last year, we did fine. And we got our share, but it's not as if we caught a ton of it. From the asset raising standpoint, we certainly didn't raise assets because the market was up. We've raised them in products that have long track records, loyal clients, where we have been developing institutional relationships for several years. And those assets came in. We are not performance chasers. People tend to get that through ETF and indexed products.

So coming into this year, we continue to have good momentum. We had a number of product offerings in the market, where we expect to raise significant AUM.

Okay. And then switching over to the brokerage side of the business, Jeff, the capital market business was very strong in the fourth quarter, and it sounds like the first quarter is off to a really strong start as well. And you mentioned that you guys are -- that led, I guess, 40% of the deals you were book runner on. I mean, is that as high -- how high do you think that number can get? And do you think you can continue to see the strength in ECM throughout 2014? Or is this just sort of a quarter-by-quarter number that we need to check back on (multiple speakers)?

Well, I mean, I think the pipeline backlog, assuming the markets stay reasonably stable, is as strong as I've seen it. So the replenishment rate has been pretty high. We are not burning off backlog and running out of steam. I think there's always a flurry of activity that happens in the first six weeks of the year before numbers go stale. So we have seen a number of companies get done before February 15th. But as you can see from the public filings, we have also done a handful of deals in this intermediate area, which should show you, I think, the strength of the marketplace in general. So I don't expect to see -- again, barring any major macro upheaval, I don't expect to see any change in that.

I also would say that there has been a pretty significant change in the complexion of a lot of these deals. So we did have, as an industry, a very solid IPO pipeline last year. And those companies in many respects, especially in our areas like life sciences, are going to be repeat issuers. So there's a consistency around our ability to finance these companies. If we are in on the IPO, that's not a spot that we are going to let go of so easily. We really shine after these companies get public with the efforts that we put forth in corporate access and non-deal roadshows.

So I would say a couple years ago, we had to scratch and claw to move our way onto the covers and then move our way up the covers. But once we're there, we're not losing any of that tenacity. We're really making sure that we are the go-to bank for companies that we bring. So even if the IPO market cools off a little bit, the follow-on market for our sector should be -- should continue to be strong, and we will take advantage of that.

Okay. And do you think there's further upside in the percentage of deals you can book on? Or is it sort of the 40% range kind of the maximum?

You know, it's a number -- that, to me, is a number that's an output. Obviously, we are trying to move up on the covers. But if we're -- we don't -- we have some hard and fast rules, but we have a lot of exceptions around what assignments we will take. For us, it's a matter of making sure that we are getting paid adequately for the services that we provide. So I would like to tell you -- obviously, it's our goal to move that number higher, but I'm not going to move that number higher at the expense of missing out on some really good pieces of business where we are not book run. So if it turns out that we -- that number dips a while, we made a conscious decision to take on maybe larger clients where we think we can move up market cap. I mean, there's so much that goes into that.

So I kind of view that as an output. I would like it not to go down, but if it does go down, it would be a function of the fact that we are making some investments into the larger companies where we think we can do book run deals subsequently.

Okay, great. And then just on the brokerage side of the business, I mean, it sounds like from your comments that 1Q was off to a pretty decent start. But the revenue number came down quarter-on-quarter into the fourth quarter. And kind of just wondering, given that equity market volumes overall were up a bit, just kind of what drove that decline in the fourth quarter?

I think -- first of all, I think for us, fourth quarter is always -- if you look historically, fourth quarter has always been a slightly -- it's been a quarter that's come down every year. First of all, everybody in the business loses the last week or two of volumes. And I think we've shown some remarkable traction in the second and the third quarter. So I'm not really looking at the quarter-over-quarter comparable number as much as I am looking at year-over-year. And I'm looking at whether or not we are capturing significant mind share from clients and votes.

To me, the move up in research votes, capturing that market share, tells me all I need to know about future revenue sources. We have been looking very carefully at votes that have come in over the course of the past six months, and we have moved up significantly in some cases. We moved up a little bit in other cases. I can only think of two situations where we haven't, where we have actually moved down. And it has been more of a conscious effort around focusing our research efforts in places where we can move the needle.

So, to me, on -- a quarter-over-quarter analysis isn't one that I look at much. I am looking more at whether or not we can take significant market share. What I will say is the McLaughlin report came out -- our McLaughlin report came out, and I think we were the single biggest mover in terms of market percentage for the non-bulge in terms of market share. And that tells me, again, all I need to know about whether or not we are making traction.

All right, great. And then just lastly from me, a bit of a housekeeping question. Looking at the diluted share count, that was up quarter-on-quarter, but the period-end share count was down quarter-on-quarter. Just I'm wondering if Steve could just talk a little bit about why -- how to think about the share count going forward and why the difference between the two?

Well, in the fourth quarter, we bought back 2.7 million shares. So that decreased the share count. And as I said, the Board approved another $10 million to repurchase shares in the open market. When the window is open, we'll continue to do so if the price is right.

I was just thinking about the fully diluted share count. We would expect that to come down in the coming quarters?

It depends on what the stock does, Joel. I mean, we're not going to be buying stock at certain premiums to probably the tangible book value. I mean, it's diluted to our overall equity. So, we are going to be sort of opportunistic about when we can buy stock and at what price.

Great. Thanks for taking all my questions.

Thank you.

Mike Adams, Sandler O'Neill.

Congrats on a full-year return to being in the black here. So a question for Jeff on the brokerage business. Clearly, you guys performed really well during the year, but it remains a challenging business. So, you saw some of the comments from SEC Chair Mary Jo last week about prioritizing a tick-sized cloud. And then, Jeff, you have been kind of spot on with your view of whether or not this would get pushed through, because it looks like it's going to happen.

So, if you wouldn't mind, what are your expectation for how it will impact the business, really both in terms of like the revenue opportunity and maybe like any additional investments or hiring that you are going to have to make?

So, let me just say this is a -- keeping our theme that we benefit as an organization from increased capital formation activity for emerging growth companies. So, if you look at -- I don't think it's an accident that we've seen ECM activity pick up after the JOBS Act. And that has benefited us, but it has also benefited the US economy and it's benefited private sector job growth. And there's a lot going on in that area that is meaningful.

For us, the tick-sized pilot is two-fold. One, it's widening increments for small-cap stocks and it's also limiting trading increments, so that our institutional clients, who have routinely said to us that they stay away from small-cap stocks, can reengage. And that's an important part for us not so much from an economic standpoint, but we want to see increased liquidity for small-cap stocks.

So, it's going to be a fairly lengthy process. Once a pilot is actually designed, we are going to have to do -- internally here, we will be looking at ways that we can help to drive liquidity in the stocks we think are going to be relevant to our institutional clients. So I am cautious about making an overstatement about a return to the way it used to be in terms of wider spreads.

That's not what this is about. This is really about, in my mind, driving liquidity to small-cap stocks, which would eventually come around to increasing capital formation and creating private sector job growth. At Cowen, I think our view is, anything we can do to drive commission flow to small caps is beneficial. But I want to caution you that if we're not -- if there is a tick-sized pilot that occurs in the near future, you are not going to all of a sudden see a massive spike in volumes. It's going to take some time for that to work itself through.

Got it. Understood. And -- so I know we don't have all the rules at this point or however they are going to turn out. But is your impression that this will also include like a trade-at rule? The tick-sized pilot, that is?

So I think it's really clear to just -- let's define the terms. The trade-at generally means that lit markets will get preference over dark markets. I actually don't think that will happen. And in fact, the task force that we chair, the Equity Capital Formation Task Force that we chair does not recommend preferential venues. It simply says we are in favor of limiting the increments at which small stocks can trade. So, to the bid price, the offer price, or one spot in the middle. And we do that because we actually want to cluster liquidity to create market depth in small-cap stocks.

So our view is that one of the major impediments to liquidity in small caps is that you can't see a lot of flow because there's no aggregation of -- there's no clustering of order flow at the increments. And so we want to be able to drive that clustering effects to create market depth. And then we want to limit sub-penny trading because, at the end of the day, that is what a lot of our institutional clients, and a lot of institutional investors in the country feel, dissuades them from engaging in investing in small-cap stocks.

Understood. Thanks, Jeff. Changing gears, a question on expenses. So, we saw the fixed non-comp expenses tick down again in the fourth quarter. And I believe Michael talked about some additional savings coming in 2014 from the Ramius side of the business. So how should we think about those non-comp expenses in the coming quarters? Like how much more can come out there?

This is Peter speaking. We think that -- I wouldn't count singly on Ramius, per se, as being sort of the big contributor. I think on the corporate side, we are finding ways to bring expenses down more. I mean, we're burning off a lot of real estate over the next few years from going to the Cowen merger to the LaBranche acquisition to Dahlman Rose -- we are losing space; leases are expiring. We have sublet space. Commercial real estate in New York is particularly strong.

And we are really kind of -- this is surgical now. We're digging in and seeing where we can save $10,000 here, $50,000 there. So we expect that we'll still continue to have pressure to bring -- and there will be pressure on expenses coming down. And it could come from any part of the Firm.

Okay.

It's not going to be massive, but there's room, we think, to continue to sort of press expenses down.

Mike, we have identified some fixed non-comp expenses that we can reduce in 2014. It won't be as significant as it has been in prior years. On the variable side, that actually may tick up as we have more revenues in brokerage trade and execution expenses.

Sure, sure. Typically a good thing when those variable expenses are going up. So, Steve, another question for you, maybe. Can you explain what happened with the minority interest line this quarter? Because -- well, was this some sort of year-end true-up? Because when we look at the asset management fees in the fourth quarter, they were up modestly sequentially, but the minority interest really jumped.

Well, for the whole year, I mean, if you compare it to prior-year, there was only one group that was minority interest. And we entered into agreements with two other groups for 2013 that is now a minority interest. And part of that normally in the fourth quarter was the fact that there was kind of like a double counting. So what would be accrued in the past we had some -- you book some incentive fees that are unrealized. In the past, you wouldn't pay out on that; but now, because it's a profit share, you have to book that through NCI. That's really what happened in the fourth quarter.

It sort of is a true-up. I mean, it's like a catch-up in this transition year from fully consolidated to non-consolidated.

Like going from employees to a partnership arrangement.

Right. And which funds have this partnership relationship? Is it the healthcare fund? And I think there's one or two others in there. Can you remind me?

Yes. Healthcare was -- has been since existence. But Orchard Square, which is our credit group, and what we call Raswall, our alternative solutions groups. Those are the two new ones for 2013.

Great. Thank you. And last one for me, and I will get back in the queue. But your initial comment on the return to profitability this year -- clearly, it's going to -- sort of bring into focus the valuation allowance against that DTA. So can you talk about maybe the criteria your auditors are looking at in order to reverse that allowance? I mean, like, for example, are they looking at overall group profitability? Do they look at the broker-dealer specifically? And then what sort of time-frame are they looking at, where these discussions all will take place?

It's overall group profitability. And the way it -- really, you need significant earnings to reverse that valuation allowance. We have looked at a couple of -- we have looked at a few transactions that may help us with that, but we haven't pulled the trigger on anything like that yet. But we do need to show significant earnings before the auditors will let us reverse that valuation allowance.

Okay, great. Well, you are making progress on that front. So congratulations, guys.

Thank you.

Devin Ryan, JMP Securities.

I just want to circle back on Ramius and some of the comments in the prior questions. But you guys have said in the past that Ramius has the infrastructure to be a $15 billion to $20 billion investment manager without really much changing. So just love to get an update on how do you characterize that today if we're just trying to think about the operating leverage from each additional dollar of AUM that you add from here? Essentially, how much capacity is there really where fixed costs really aren't going to change that much?

The asset management business, if done right, is the highly scaled business. And we have the benefit of a deep infrastructure. And what I mean by that is legal and compliance, technology, a technology platform, operations, client and salesperson support. And the Firm has an investment in that which distinguishes us from many other asset management firms that are really more products and businesses.

So the short answer is we have an awful lot of scale. We can certainly get over [$15 million] without adding much in additional expense. This is a business with incremental revenues because the profit margin in incremental revenues gets significant. The way to create AUM, as Peter referenced before -- we are an alternative investment platform with affiliated and proprietary teams. And we provide this infrastructure to resell the products, provide marketing support and general know-how in the business.

We have seven capabilities today. I would expect by the end of the year, and you will learn about this quarter by quarter, that number is going to increase as we add additional capabilities. And based on the liquidity fees that we need and the distribution channels we want to sell those products into, we will wrap those capabilities without adding much in terms of fixed costs. The additional costs, of course, will be the variable costs, which should be paid to those capabilities based on their success.

I would add to what Michael said, and this goes back to Joel Jeffrey's question to Michael earlier, the first question about performance. We are not trying to manufacture product that we think we are good at and then try and sell it. What we are trying to do and have been doing is figuring out what does the market need, what does it want? And then build the product to that demand in the marketplace because it's not one-size-fits-all any more.

And we have been very successful -- a little, I would say, sort of oblique to everybody. But since the end of 2008, we have returned $6.6 billion of assets to investors from all strategies, the old multi-strategy. And even people who cycle that as some of what we do now. But we returned $6.6 billion and we have reached kind of a recovery high here of $9.5 billion. So we are building product that, whether it is tailored to the specific buyer who likes healthcare royalty because it's very unique, or our solutions group is providing certain hedging techniques through technology to institutional investors, to our Starboard Group, which is a very kind of in-demand type strategy today.

So not everything we do is going to be sort of big incentive fee-generating, but we can amass a lot of assets. And our overhead is going to stay relatively fixed to do that. So the bulk of this whole transition is really behind us at this point. It's not even the bulk, it is behind us. So now it's adding on very specific things that we think the market is telling us it wants, and then sort of raising the assets from those segments of the marketplace and growing AUM.

Okay, great. Thanks for the update there. And then just following up on your comment that some strategies have been moved to profit-sharing in 2014, how is that going to impact the overall profitability of those strategies to Cohen, if at all? And what was the driver behind that? Are there any other benefits that maybe we can see where you may be able to scale the AUM faster with them having that type of arrangement?

Yes. I mean, the idea was it shouldn't affect the profitability at all, because what we did is we took what was sort of compensation expense and we transferred it to a partnership sharing. What we did is we wanted to make all of our PMs partners in their business where they had -- they weren't employees but partners that had a vested interest in growing their business, using all the resources of the Firm to leverage their business.

And in return for that, we got certain considerations that we believe append people to us under normal circumstances for a very long period of time. I mean, we are almost like a fund of funds but not really, because what we are doing is we are directly managing the strategies to our portfolio groups.

Okay, got it. And then just with respect to your thinking about the use of your balance sheet to generate investment income, it seems like you guys have been on more the conservative end with how you've been positioned. And maybe that's a market view, but obviously a great long-term track record there, some great expertise. So just thinking about the returns on the balance sheet in recent years, which have still been good, do you still feel like you guys have the right amount of capital allocated to that strategy? Are there maybe some other opportunities to move capital elsewhere that might the more compelling as the environment changes today? Or just an update there in terms of how you guys feel like you have capital allocated to the balance sheet.

Sure. Look, I mean, the balance sheet has in the last few years benefited greatly from performance in -- through the Starboard Group's activities. And we also benefited substantially from the credit spread compression that went on since the end of 2008. Credit was less robust last year than it had been in years before. And Starboard's performance, while good, was not as outstanding as it had been years before.

One of the things we have been doing is we have been bringing down the nonliquid side of the balance sheet substantially. And we have more to do. And we will get to a level where we will just start to recycle money and opportunities. One of the great sort of things that has been happening in the last year is now integrating the investment side with unique asset flow from the investment banking side, where we are taking advantage of relationships that all bankers have to invest in private transactions that we think have just tremendous upside potential.

So we'll probably, for the time being, continue to run the balance sheet with the allocations as it is. We have got the new strategies that we want to see. We will put money into those strategies. They will be yielding from day one. And we will start to sort of migrate the balance sheet a little bit away from some of the places we've had it, but not terribly different.

Great, I appreciate that. And then just lastly, for Jeff, just on the brokerage business and a lot of progress there -- I'd just love to get some perspective around where Dahlman Rose is with respect to getting back on the voting list. You talked a little bit about that, but maybe where you think you are in terms of having that business, to what would be a budgeted or kind of a reasonable run rate? Are you already there? Is there still some wood to chop with respect to just kind of getting everything onto the combined platform? Just appreciate some perspective there.

So, let me just say there, it's a fully integrated platform, and it was within the first quarter. So, we don't think about Dahlman Rose as a separate entity. We don't think about our energy business any differently than we think about any business we have here. So it has been fully integrated within first quarter. And I think that we have already started to see some of the gains from having that integrated, in two ways.

One, the way we have realigned our sales effort here has allowed us to maintain a degree of depth of knowledge in the sales force as we talk to PMs and analysts, that -- where we didn't give up the knowledge base. And that's really important because, to us, having intelligence at the sales level and the training level is really critical to being able to drive customer business. And we see that as a very different methodology than maybe the rest of The Street engages.

So, the integration has been extremely successful in maintaining the specialness and the domain knowledge that exists on the sales force. Where we have seen incremental benefits -- and it's hard to say whether or not it belongs specifically to any one sector -- is that we just -- we have more heft inside each of these organizations. Our clients are very large. We were hitting on a fairly narrow number of industries. Broadening that depth to include more industries has allowed us simply to, by the volume of research, and the volume of connectivity and touch points we have had inside these organizations, to move northward.

Rarely do you see, in our estimation, one plus one equal two in this business, because it's so much overlap, but we didn't have a lot of overlap. The PMs and analysts we were talking to at Cowen prior to the Dahlman merger, we weren't talking to the same people. So, at -- it has been largely additive. And we have seen that show through in a lot of our votes. So, don't think about it as separate. Definitely see it as fully integrated; seeing benefits both from domain knowledge as well as simply having more heft.

Great. Thank you and congrats again on the profitable year.

Thanks, Dev.

Harold Henick, Scurlydog Capital.

I hate to be the fly in the ointment here, but -- and I missed the beginning of the call, so if this was addressed, I apologize. But at some point, you guys really have to start making money and getting back to even is not really good enough. So what is your targeted return on equity, longer-term? And how long will it be, do you think, before you can reach that? And now actually that will solve the other problem of the -- of getting the deferred tax back. But the first question is you've got to make money, and how long is it going to be before that happens at a reasonable ROE rate? Thank you.

Well, I think given where the risk/rerate is right now, that we should be, and sort of think in terms of a 10% to 12% ROE. I would have -- five years ago, I probably would have said 15% ROE, but let's be realistic about what capital can do. So if we got to a 10% ROE in this environment, I think we'd be doing just fine. And unless we get sort of major market disruption, that's sort of the direction that we would hope to be in sooner than later.

I mean, is that years or quarters or what --?

Well, it depends on how you view sooner than later.

How do you view -- well, how do you view sooner than later?

Well, so let me (multiple speakers) --

At my age, I view sooner than later sooner.

Sooner is better than later. How's that? I think that we have done a very good job here at not sacrificing the long-term buildout of sustained profitability at the expense of driving current quarters. So the investments that we are making, and the investments we made over the last three years, have really helped to drive and propel revenue back to a level where we can cover our fixed costs significantly. And as Peter pointed out, the revenue drives that we are looking from this point forward is simply to add revenue that will drive margin, and will be largely variable in expense, in nature.

So, the key for us in terms of margin expansion is driving revenue that -- where we can continue to maintain the same fixed cost structure. And so, whether that's acquisition opportunities or organic growth, I mean, it's hard to pinpoint specifically. Our drive forward has to be supremely focused on making sure that we are leveraging the fixed cost structure of the organization. So first step was getting it back to business, to profitability and make sure that we were building it in such a way that we could have sustained profitability and enough of a platform to really -- to drive revenue growth in the longer-term.

Yes, but at some point, you have to earn your cost of capital. And I just would love to know when do you expect to do that? Obviously, no one is really answering that. But I think that's an important question that, at some point, you are going to have to address with investors.

I think we agree with you. And what we are looking at -- again, first things first. We had to get ourselves back to a spot where we could be profitable. And happy to talk more with you off-line on that topic.

Okay. Thank you.

Mike Adams of Sandler O'Neill.

Actually, my follow-up was answered, so I'm all set. Thanks, guys.

Okay, Mike.

Since there's no more questions, I'd now like to hand back to Peter Cohen for closing remarks.

Well, really, I think nothing further to say, that the questions helped us sort of round out our view of the business. I think that what we are trying to convey here is, and perhaps maybe not doing a good enough job, how much of a transition and rebuild this Firm has gone through in both businesses, the Cowen side and the Ramius side, and our belief that that is really behind us. And if that is the truth and we are right about that, then we will start earning the returns on equity that we think are appropriate.

And given that employees own about 28% of this Company, that's more than a passing question that exists within the organization, especially among those of us who own a lot of stock. So I thank you for attending the call, your questions, and of course, we're always available to speak one-on-one. Thanks, operator.

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