Cowen Inc (COWN) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining Cowen Group, Inc.'s conference call to discuss the financial results for the 2014 first quarter. By now, you should have received a copy of the Company's earnings release, which can be accessed at 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 the risks and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group, Inc., has no obligation to update the information presented on the call. A more complete description of these and other risks and uncertainties and assumptions is included in the Company's filings with the SEC, which are available at 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 for those measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release.

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

Thank you, Operator. Good morning and welcome, everyone, to Cowen Group's first-quarter 2014 earnings call. With me today are Michael Singer, CEO of Ramius, our asset management business, and Jeff Solomon, CEO of Cowen and Company, along with Steve Lasota, our CFO.

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

Cowen Group reported a new quarterly high for both revenue and economic income in the quarter since the Cowen/Ramius business combination in 2009. This performance improvement was the result of the considerable effort and costs that we incurred over the last few years to rebuild our business.

Today, Ramius is a $10.6 billion alternative investment manager, having grown by $1.1 billion in the first quarter of this year. We continue to attract new assets because of our differentiated offerings, long track records, and what we view as intellectual capital of our PMs.

Michael will discuss his plans to expand our current suite of seven investment capabilities, capabilities that are highly relevant in today's market environment, and the work we are doing in providing more products across the liquidity spectrum.

Cowen and Company, the broker-dealer, reported a record quarter since the business combination in the end of 2009. We saw a very good mix of business between banking and brokerage revenue, as both units showed solid year-over-year growth, which Jeff will talk about later.

Banking revenue was dominated by equity capital markets, with the favorable market environment for financing enabling us to show our real strength there.

Our equities division continued to make headway in growing commissions with key accounts and in gaining market share overall.

Here are some financial and operating highlights from the first quarter. The Firm reported economic income of $10 million versus an economic loss of $1.3 million in the prior-year period. We again demonstrated our ability to scale without adding significant fixed costs. For the quarter, total non-comp expenses were up 3.6%, or $1.1 million year over year. However, fixed non-comp expenses were up only $412,000 in the period, with a $35.9 million, or 48%, increase in revenue year over year. Obviously, our variable expenses reflecting our commission business resulted in most of the increase in non-comp expenses.

Turning to our balance sheet, as of March 31, we had $532 million in equity and $574 million in invested capital. We generated $8.2 million in investment income in the quarter versus $10.9 million a year ago, the reason being some of our investment strategies were less productive in the quarter than the prior period last year, particularly fixed income, where there has been such yield compression, harder for us to make money in the first quarter. And the market -- equity markets in late March took some of the wind out of our -- or pushed out merger arbitrage spends a little bit, costing us some P&L there.

In March, as you all know, we augmented our capital base with a relatively long-term fixed-rate financing. The private offering of $149.5 million aggregate principal amount of 3% cash convertible senior notes due 2019 gives us additional firepower to opportunistically invest in the future.

We're in a very strong capital position to take advantage of opportunities that advance our objectives and we are in a very strong operating position. To that end, we are spending a lot of time looking at ways to create shareholder value by optimizing the deployment of capital and leveraging all of our resources across the platform.

The first quarter, I think, is the first really good example of what our business can achieve when the market is open to capital formation and our businesses are aligned. However, we recognize that not all quarters will look like the first quarter. This is why we have been hard at work driving organic growth and operating improvements across the platform, while identifying opportunities that leverage the core strengths of both Ramius and the broker-dealer.

I would like to acknowledge all of our colleagues for whom their collective efforts made this quarter a reality. It's really what drives this business and is greatly appreciated by all of us. Their commitment reaffirms our belief that Cowen's success is predicated on a common culture of teamwork, loyalty, and the desire to meet the needs of our clients.

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

Thank you, Peter.

I joined Ramius 17 months ago and set to work with our team on growing AUM, expanding our investment capabilities, and extending the reach of the Ramius platform into new segments of the market. This year, our focus has been on our ability to help emerging asset managers institutionalize and grow their business and bring high-quality liquid AI alternative products to high net worths and retail investors. I am pleased to report that we made progress on all fronts.

The first quarter of the year has been productive. AUM grew by $1.1 billion during the quarter, bringing the total AUM as of April 1 to $10.6 billion. AUM growth came from our alternative solutions, healthcare royalty, and value activist capability. Management fees were unchanged and incentive income declined by $400,000 over the prior year, due to market conditions.

We expect the growth in AUM will result in increasing management fees over the course of the year and expanding potential for performance fee income. Additionally, revs will increase as committed capital is called and invested.

We will spend the remainder of 2014 pursuing strategic AUM growth and building on our emerging manager, liquid alternative, and general platform capabilities, while also making strides with our general platform of current seven investment capabilities. As always, we look to provide investment capabilities and solutions that address the markets' needs and to package these investment capabilities in a variety of ways that are relevant across the liquidity spectrum.

We are actively working to identify talented teams with investment capabilities that can be successful on our platform. We will need many, many teams in order to find the right partners. We are very patient.

To give you a sense of the level of activity here, on average we are meeting between a half a dozen and a dozen teams a week, and the number of inbound calls is growing. These teams understand that it takes more than just investment acumen to attract assets and to scale their business. We're optimistic about our ability to recruit teams to our platform.

Ramius offers a compelling value proposition. We essentially offer teams three things. We provide them an institutional infrastructure, the so-called institutional halo because you need to be institutional before you can be sold institutionally. Second, in sales and marketing, we have 14 talented and proven sales folks and marketing folks to support those efforts. And finally, know-how to run and grow a business so PMs can focus on job one, which is putting up great risk-adjusted returns. We accelerate their growth so they can focus on just doing that, producing superior risk-adjusted returns.

Last year, we added one new investment capability and six new funds. This year, we will pursue two forms of organic growth. One way is to attract new talent into the Ramius ecosystem and to nurture that talent once it's here. We're also looking to make greater use of our already considerable capabilities. You will hear more about this in the coming months.

In January, we announced two key hires that will be instrumental in launching new capabilities and furthering our relationships with investors, Jake Walthour, Vice Chairman of new business and product development, and Brad Sussman, head of liquid alternative products. I mentioned both of these individuals in our last call. They have now been with us for about three months, and as you can imagine, it's been a very active and productive period.

Jake is aggressively working on building out our diversity and emerging manager platform. This is an area that has traditionally been underallocated, due to a limited number of institutional-quality emerging diversity teams. With the right teams in place, we believe that we can see meaningful investments by public pensions, municipalities, and cities and other blue-chip investors.

On the liquid alternative front, we are continuing to develop strategic relationships in core products that are easily understood by financial advisors. Selling to the liquid alternative market is quite different from direct institutional selling and requires an advance understanding of how this marketplace operates, its product needs, and the ability to educate financial advisors about how our products can enhance their client portfolios.

Brad, who has been at the forefront of the movement to offer liquid alternative to retail mass affluent investors in his role at his previous firm, Merrill Lynch, has an intimate understanding of this market and how we can win.

In addition to open-end mutual funds and exchange-traded funds, we see liquid opportunities for public and private BDCs, public and private REITs, SMAs, [P Fix RICs], and other structures.

Our sales and marketing organization is showing more productivity, following the changes we made to the incentives and the general approach. I'm encouraged by the level of collaboration I have seen, and our success is reflected in our ability to grow assets and to attract blue-chip investors to our investment capabilities.

Expense control remains an ongoing priority. We see additional opportunities to save on costs without sacrificing the quality of our infrastructure. Having said that, our business is highly scalable. We do not need to add much in the way of fixed expense in order to grow revenue, and much of the additional expense from the additions of new investment teams will be variable in nature. But as you know, the real elasticity in the P&L will come as performance fees grow.

Finally, we have been working on building the Ramius brand. To that end, we have a number of initiatives underway, including white papers, conferences, and educational events that will highlight our thought leadership and platform capabilities in a manner that the market can appreciate.

I will now turn the call over to Jeff, who will provide an update on our broker-dealer Cowen and Company.

Thanks, Michael. It has really been a fantastic quarter for us and it's been our strongest quarter since the Cowen/Ramius business combination in 2009.

Since that time, we have all experienced that the US equity volumes have been in a secular decline and the environment for capital markets has been mixed, and we took the time during that challenging operating environment to strategically invest and rebuild the broker-dealer.

In 2012, our results began to show signs of consistency, and in 2013, after harvesting some of the benefits of the changes, the broker-dealer demonstrated more substantial improvement. The progress has continued into the first quarter of 2014, and our first-quarter results are a testament to Cowen's potential as we further strengthen the platform.

As Peter mentioned earlier, we're building an organization that can succeed in various market environments. Despite some macro events in the quarter, the new issue market remained largely resilient, with the number of IPOs nearly doubling from a year ago and the follow-on market for equity financings also continuing to be favorable. We are well positioned to benefit from this trend.

Total first-quarter 2014 revenue was $83.9 million, compared to $45.2 million in the prior-year period. Banking revenue was $49.6 million, compared to $17.2 million in the first quarter of 2013.

We closed on 47 deals in the quarter, compared to [16] in the prior-year period. 41 of those were equity related. Three came from our debt capital markets business and three were advisory assignments. We served as a bookrunner on five out of nine IPOs in the quarter versus last year. In the first quarter of 2013, we were not involved in any IPOs.

Though the debt capital markets revenue was modest in the quarter when compared to our 2013 run rate, our 2014 pipeline is robust. Our DCM average fee per deal has traditionally been greater than ECM, making the revenue in that product somewhat lumpier.

Our healthcare vertical continues to be a core banking strength. We are actively working to increase revenues from other verticals as we improve our revenue diversity from both a product and industry perspective. Indeed, a number of our verticals outside of healthcare also saw meaningful revenue increases.

Our equities business, revenue was up -- was $34.3 million, up 23% over the prior-year period. This is in an environment where US trading volumes were up only 9% year over year in the first quarter. What is encouraging, though, is it is the first time we have seen volume in the overall market trending higher, and that is certainly encouraging.

March 2014 marked the one-year anniversary of the Dahlman Rose acquisition. A lot of changes have occurred in our organization since then. Beyond simple growth in headcount, we now cover more than 700 companies from a research perspective, up from 400-plus before the acquisition. We deliver more research content to more accounts, and more importantly, we are covering those accounts more effectively. Since we embarked upon a comprehensive mapping effort over a year and a half ago, we have installed new management disciplines and our client votes have improved dramatically.

According to a recent survey from Greenwich Associates, our equity research product market share doubled year over year, and based on a separate industry survey, we moved up a spot in the research vote. These are incredibly solid achievements in a very competitive marketplace. It is a true testament to our commitment to providing alpha-generating idea flow from our research capabilities.

In light of the heightened conversation around market structure, I wanted to briefly mention Cowen's electronic product capabilities in more depth. It's important to note that the trends outlined in Michael Lewis's book are not new. We recognize the need to bring a product suite into our organization that would enable our clients to transact more effectively in a non-conflicted way.

Our algorithmic product, which we acquired with ATM a couple of years ago, is a liquidity venue neutral product, and our solution enables our clients to seek their liquidity based on a number of parameters that best suit their needs. In other words, routing decisions that they are making are driven by execution quality factors and not by economics.

We provide real-time transparency of venue on every execution and full transparency and customizability of routing configuration. In short, our electronic product is 100% aligned with the interests of our institutional customers, and we're the only research-focused brokerage organization to be able to offer this kind of high-quality execution to our clients. It is a real differentiator and that is why our clients have begun to use our product suite.

Today, we have 102 active clients, compared to 84 a year ago and 58 two years ago. Our goal at Cowen is to be a thought leader in our core sectors by providing clients with unparalleled domain expertise, advice, and execution services through our deep commitment to high-quality research and investment banking services.

Companies hire us because the corporate finance advice we give is well informed, thoughtful, and our execution is superior. Accounts pay us because we are one of the few firms to provide agenda-setting research on relevant topics and they care what we have to say. Ultimately, our brand we build is based on trust, integrity, and our ability to provide corporate and institutional clients with the tools and insight to be better investors, business operators, and decision makers.

In summary, it's really gratifying to see what our organization can achieve when all the businesses are working together as a unit. It is truly a reflection of the dedication and tenacity of our employees, and I want to thank them for their efforts in helping us to achieve another record quarter at Cowen and Company.

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

Thank you, Jeff.

As Peter mentioned, on March 10, 2014, we issued $149.5 million of 3% cash convertible senior notes. The convertible notes are due March 2019, unless earlier repurchased by the Company or converted by the holder into cash, in accordance with their terms prior to such date. The convertible notes are unsecured obligations that hold an initial conversion price of $5.33 per share.

We used $20.5 million of the net proceeds from the sale of the notes to purchase a cash convertible note hedge and warrant transaction, which increased the effective conversion price to $7.18. The remainder of the net proceeds will be used for general corporate purposes.

For the first quarter of 2014, we reported GAAP net income of $9.8 million, or $0.09 per share, compared to a GAAP net loss of $2.6 million, or $0.02 per share, in the prior-year period.

In addition to our GAAP results, management utilizes non-GAAP measures, what we term as economic income, to analyze our core operating segments performance. We believe economic income provides a more accurate view of the operating businesses by excluding the impact of accounting rules that require us to consolidate certain of our funds and certain other acquisition-related expenses and other reorganization expenses.

For the three months ended March 31, 2014, the Company reported economic income of $10 million, or $0.09 per share, compared to an economic loss of $1.3 million, or $0.01 per share, in the first quarter of 2013.

First quarter of 2014 economic income revenues were $110.8 million, an increase of $35.9 million compared to $74.9 million in the first quarter of last year. We generated $8.2 million in investment income for the first quarter. This compared to $10.9 million in the prior-year period.

On the alternative investment side of our business, management fees were unchanged at $14.1 million in the first quarter versus the prior-year period. Incentive income was $4.7 million in the first quarter, compared to $5.1 million in the first quarter of last year.

In our broker-dealer segment, for the first quarter investment banking revenue was $49.6 million, compared to $17.2 million in the prior-year period. Brokerage revenue was $34.3 million, a $6.3 million increase over the prior-year period.

For the quarter, compensation and benefits expense was $67 million, a 51% increase year over year. The increase was primarily due to higher revenue during the first quarter of 2014, as compared to the 2013 period, which resulted in higher compensation and benefits accrual to remain consistent with the Company's compensation to revenue ratio.

For the first quarter of 2014, we reported an aggregate comp to rev ratio of 60%, compared to 59% in the prior-year period. The increase was primarily due to a change in business mix from the prior-year period.

Excluding expenses associated with the activities for which the Company is reimbursed and severance expense, the comp and benefits expense was 59% of economic income revenue in the first quarter of 2014 versus 55% of economic income revenue in the prior-year period.

Moving to our non-comp expenses. For the quarter, fixed non-comp expenses increased by 2% year over year to $22.8 million. This was primarily due to an increase in occupancy expense related to space acquired during the Dahlman Rose acquisition, completed in the first quarter of 2013. This expense was partially offset with savings related to various Firmwide efforts to reduce fixed expenses.

For the quarter, variable non-comp expense was $9.4 million, compared to $8.7 million in the first quarter of 2013. The increase was due to an increase in floor brokerage and trade execution expenses related to the Dahlman Rose acquisition and overall higher expenses which generated increased trading costs. In addition, marketing and business development expenses were increased due to increased marketing activity Firmwide.

For the quarter, we also had interest expense of $643,000, primarily due to the convertible that.

While economic income is a pretax measure, I would like to briefly touch on our tax position. Cowen has significant net operating losses, or NOLs, in the US that carry forward into the future of $340 million. The associated gross deferred tax asset currently amounts to $135 million. There is a 100% valuation allowance against that asset, but it adds significant value to the Firm.

IRS rules associated with the acquisitions of Cowen and Company in 2009 and LaBranche in 2011 partially limit the amount of NOL 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 $532 million at March 31 and our book value per share was $4.61 per share. Tangible book value per share, which is a non-GAAP measure, was $4.19 per share, compared to $3.99 per share at the end of 2013.

Finally, moving to our share repurchase program and other treasury stock transactions. In the first quarter, we repurchased approximately 810,000 shares in the open market and 453,000 shares as a result of net share settlement related to the vesting of equity awards. The total cost in the quarter was $5.3 million, or $4.22 per share.

Since we announced the original repurchase program in July of 2011, we have repurchased 12.2 million shares in the open market. We also purchased an additional 4.5 million shares as a result of net share settlement related to the vesting of equity awards.

Total cost of the program through the first quarter of 2014 was $38.7 million, which represents an average price of $3.15 per share. As of March 31, we had $21.4 million remaining under the current program.

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

Thanks, Steve.

Here you have it, everybody. Good first quarter. We're really pleased, starting to really see the leverage we have created out of all the work that has taken place over the last few years. Obviously, we're all in this business somewhat market dependent, but we think we will continue to make progress and feeling really good about where we are. And with that, let me just open it up to any questions.

(Operator Instructions). Joel Jeffrey, KBW.

Just a quick question. You clearly had a very good revenue quarter on the brokerage side. Can you talk a little bit about the profitability of that business and the type of leverage you are seeing driven by the higher revenues?

Just to be -- clarify, brokerage, like the commission business?

Yes, well, the broker-dealer business, inclusive of the investment banking and the brokerage.

Look, obviously, it's a high fixed-cost business, and we have done a lot to bring our costs in line, so what we are seeing is above certain revenue levels a significant portion of that drops into profitability. So the marginal revenue above -- really above $60 million is impactful to us -- $60 million a quarter is impactful to us.

So, I like what we're doing here because it demonstrates that when we have the right kind of environment and as we continue to scale the business, revenue actually -- the incremental revenue is meaningful to us from an accretion standpoint.

Okay, and then on the ECM side, I know you had said you continue to see real strength in the healthcare business and you have mentioned a couple of other verticals. Can you specifically talk about some of the verticals you are starting to see improved strength in that business?

Our DCM businesses -- it is interesting. Our ECM business caters largely to healthcare and tech in terms of our ability to do lead managed business. We have seen some growth in clean tech in particular over the last -- really the last six to nine months, which is impressive, because actually we are starting to see a resurgence in that business and we like to see that. Those guys actually use a lot of capital to build out projects and do development, so we do have a pretty good position in that space.

I would also say the DCM business caters largely to middle-market sponsors in industrials and consumer, aerospace and defense, and what's nice about the balance in our business is that when we walk into a room and we're pitching our capabilities, we can pitch our capabilities to finance companies up and down the capital structure.

Where we have been benefiting significantly over the course of the past year is in the fact that there is significant growth in what I would call the shadow banking or the alternative lending space as banks have exited parts of the marketplace, and our DCM capabilities cater to finding alternative forms of financing for companies in consumer, in aerospace and defense, energy. Those are the areas where you can find a more diversified lender base.

And so, that's where we are seeing the gains. We are using our ability to come with creative financing solutions to leverage ourselves into a trusted advisor status.

Okay, and maybe just as a follow-up on that one. I know you had said earlier that the DCM can be a bit more lumpy, but it was definitely a little bit lower than what we were looking for this quarter. Was it just a function of things not closing or are you seeing anything different in the pipelines there?

Actually, it's just a function of things not closing. Sometimes, these things take a little bit longer. They are highly negotiated, sometimes a private placement, so they push into the next quarter.

It's interesting. The companies we are financing aren't necessarily needing to get things done by the end of the quarter. In some cases, you see that in the equity market where people want to put more equity on their balance sheet before they report here. These are just growth businesses. They are really -- they close in due course, and so it just got pushed into the next quarter.

All right, great. Thanks for taking my questions.

(Operator Instructions). Mike Adams, Sandler O'Neill.

Good morning, guys. Congrats on the record quarter. (multiple speakers). So another question for Jeff here on the brokerage business. So, really strong results in the first quarter and I know that there is clearly a seasonal factor there where we're looking at industry volume that's up 15% or so. I'm just wondering if you can give us a little bit more precision in terms of what's driving the quarter-over-quarter revenue growth? What's seasonality in these higher volumes versus some of the market-share gains that you are picking up?

Yes, I think the number one differentiator for us is account penetration. When we did the Dahlman Rose acquisition, we recognized that we had excellent research and excellent penetration in our areas of expertise.

The problem was we just weren't providing enough product to actually garner meaningful enough votes across our biggest accounts. And so, adding the Dahlman capability in these sectors where we have exceptional research footprint, it's really been fantastic.

The cultural fit has been exceptional because there has been -- there is a high focus on -- there is a focus on high-quality research, and all of a sudden, we have taken and we now have more sectors inside these organizations that are relevant to the vote givers, and when you aggregate those up over the course of the past year since we did this, the votes have been coming in pretty strong, and that takes time for it to translate.

So, I always like to say, first, you got to get published. Then you got to get people to actually pay attention, and when they vote, then you can begin to have a dialogue with the trading desks about where we have moved in the research vote. And we are, I think, at the front end of being able to realize that. Maybe in the first quarter is the first quarter that we have seen where people are recognizing that there is actually a gap in where we are, research-wise, versus where they have been paying us historically, and so we think we should be getting a bigger share of the wallet from our clients than we have in the past.

And I think it's bearing out. When you look at the Greenwich -- when you look at that survey, it really does talk about not just the practical aspects of where we are in the vote, the specifics of where we are in the vote, but also a number of softer items like, how impactful is the research? When you think of high-quality research, who do you think of? There is a lot of softer brand-oriented positioning things that go into factoring where you are in that survey.

And the fact that we have doubled our market position, I just don't think there is any other brokerage firm that's doubled its market position in the past year. And so, it tells you that we are -- in addition to taking advantage of an increase in the overall market, we're actually outperforming because there are some things that we're doing here internally.

Got it, and then just following up on the doubling of the market share. It sounds like, based on some of your comments, that you still think there might be a gap between the value that you are providing your customers and the commission dollars you are receiving. So, how much further penetration do you think you can get with these accounts? How much more can you move up in the broker votes, I guess? Like what inning are we in?

Look, we --

There's one.

We always have room to move north, I think.

Some of our product is top 10 product. It just goes to show you that when you have a clearly differentiated product on the shelf and you have been able to add value, the people don't necessarily have to trade with all the big guys. The big guys dominate because of their ability to really provide significant liquidity through their dark pools and their electronic and algorithmic capability. And every client that we talk to has to deal with the bigger banks.

When they choose to deal with people that aren't the bigger banks, they are doing it because there is a value proposition, and I think we're in the early innings of being able to recognize that.

Now we haven't yet fully realized from a revenue standpoint where we are in terms of the actual vote. We have got much further to go. I'd like for us to be inside the top 15, which is a fairly meaningful revenue bump from even where we are.

Great, and then, Jeff, last question, following up. Appreciate the commentary you gave on the market structure debate that clearly -- I mean, it is always ongoing, but at elevated levels right now. Some of the media reports that we have gotten recently, subpoenas to certain market participants, is this something you view potentially as an opportunity? If people are dialing back or if there is maybe a greater light shone on some of the dark pool activity, is that something you think that could benefit Cowen?

I think it does benefit Cowen because of the way we are positioned with our product.

So the ATM product is, as I said, broker neutral and it is also venue neutral. So, if there is liquidity to be had, the goal is to arm our institutional clients with the ability to actually give them the tools to deal with predatory behavior, and if there is predatory behavior in certain pools, we want to be able to recognize that and enable them to capture liquidity without fear of being picked off.

And you can do that when you are an organization like ours that doesn't have conflicts. So we don't have our own dark pool. We are not reading people's flow and trying to match it off in an internal matching engine prior to taking it to the market. We are going to all 50-plus different venues and giving them a window into where there is liquidity in the stocks they care most about. And we can either do that for them, we can advise them, or they can do it on their own by taking our software capabilities and actually manipulating it themselves.

So we're agnostic in terms of how our clients want to use the product, but the good news for us is our [best] product, which is the name of it, is really making a difference in the places where we have been able to get it installed, and I think we're at the front end of that, as well. We are getting some really good client feedback, and when people start to realize that we offer a tool that is differentiated in the marketplace, I can't imagine why somebody wouldn't want to have it.

Understood. And Michael, appreciate the commentary that you gave us on why management fees as a percentage of AUM ticked down some of the undrawn commitments. Can you give us an actual dollar amount of non-fee-generating AUM that -- I feel like if we had that number, it might smooth out that management fee yield that we are all calculating.

Yes, it comes from more than one place, so I can't give you a number with precision. From one place, order of magnitude, $600 million. In the other place, it is a little bit more complicated because it is how two funds interact with one another, and when the fees turn on in one and turn off on another, so that's not -- it can't be put in that context.

But a lot of it is about this $600 million, and a little bit is also because of our solutions business, which is growing in AUM, and as certain client accounts get bigger, there are breakpoints in the fee schedule, so the management fee does tick down on incremental assets. Of course, we are making more money all the way through it and they have performance fees.

Got it. Last question for me, probably a question for Steve, the fixed non-comp expenses, were there any unusual items in there? I know you hosted a couple conferences in the first quarter, so is that a line that maybe could drop in the second quarter as that rolls off?

Yes, we tend to have higher expenses in the first quarter because of our conferences, and as we didn't have Dahlman in the first quarter, the full year of rent in the first quarter, compared to 2013, and we have -- I think we talked about it on the last call a little bit. We have done some stuff with our Boston office, so we do expect fixed non-comps to come down a bit, but we're working hard at it, but nothing really meaningful at this point.

But the healthcare conference is in March and that's the single biggest conference expense.

We have three or four conferences in the first quarter. (multiple speakers).

Got it. Okay, thank you for taking all my questions.

Devin Ryan, GMP Securities.

Just a few for me here. So, I guess starting off with respect to the recently raised capital. It would just be great to get some color around some of the opportunities that you may be looking at to actually deploy that capital. Is that going to be more towards the investment management business? And then, do you have any sense around timeline of being able to put that capital to work?

The principal objective of that capital was to enhance our ability to bring in teams. We are not in the ceding business. That's not what we do. We're in the business of expanding our platform.

So, we have in the pipeline two or three kind of active discussions with PM groups that will bring new product that we think are scalable, and we would expect to deploy capital in each of those as a way of showing our commitment as we go to raise money.

In the meantime, that capital was deployed on our balance sheet in basically credit and merger arbitrage and in our real estate lending business. So it went to work during a yield to cover the cost plus, and when we find the right opportunity to take some portion of that capital, because we've got a portfolio group joining us that we think is scalable, and we think it's a good place to put capital, we will redeploy it. It's really earmarked towards building the asset management business.

Okay, got it. And I guess that gets to maybe the next point. I appreciate all the color around how many teams you guys are seeing and meeting with on a weekly basis, and it sounds like quite a bit of activity there.

So just curious what the maybe constraining factor is when you meet with somebody, why it doesn't work out. And again, I appreciate the color you just gave around the amount of groups that maybe are close to joining. But of these six to 12 teams that you're meeting with on a weekly basis, how often are they getting to that kind of next level of discussion where you're getting closer? And I am assuming that there may be some additional teams that are still moving along that pipeline. So, just some additional color there would be helpful.

Remember, what we're trying to do is find strategies that we think are relevant to the environment we're in. And what do I mean by that? So, we think interest rates are going to stay low a long time. There is this desperate need for yield. We are looking for things that leverage our distribution platform where we -- both internal and external distribution capabilities.

And I think where things break down is because we, at the end of the day, don't think that it's -- either the team is for us culturally or there is a product that we think we can leverage in terms of growing AUM. I think it's much more us that it is them, and we're going to be very deliberate about when we add a team because we expect it to be here forever.

One thing is for sure. If you are not of a certain scale today, it is going to -- it is really hard to get to scale with all of the compliance, legal requirements of being in the investment management business. To pass the due diligence of any of the consultants is getting -- has always been difficult. It's getting more difficult.

That's part of what we have to offer, which is all the infrastructure in place. We have been vetted by the toughest in the country, and our depth of distribution. So we have a lot to offer, and therefore we are being really picky about the people we are talking to.

Okay, great. I appreciate that color. And then with respect to the balance sheet, I'd just be curious to get a little bit more detail around how you are positioned today. Has there been any changes to how the balance sheet is positioned over the past couple quarters, and I guess I'm just getting at are you more risk on or risk off or just your view through the balance-sheet investments?

We are not really a risk-on/risk-off balance sheet. We are looking for absolute returns from where we deploy our capital.

The one thing that has happened is that we continue to make progress in liquefying some of our legacy investments and our liquids to our total capital keep coming down.

At the same time, we are having very good success in raising new real estate debt money. We're going to close debt fund five June 30. We have a hard close, and then we are going to start on debt fund six, so we'll deploy capital there, debt fund five, and again in debt fund six, but those are yielding assets.

What we are doing in credit is basically it's yield, and what we are doing in merger arbitrage is basically yield. So yes, we will take some volatility based on market fluctuations. We're not sitting here saying, we don't like the market, let's get out. And we do like the market, let's get in. Because we're not trading equities. We are basically in the arbitrage business or the yield-seeking business.

Sure, okay, appreciate the color. And then, just lastly, maybe one for Steve just around the Dahlman Rose occupancy. I know that led to a little bit higher kind of fixed expense. But do you guys plan on keeping that space or when will that expense roll off? I am just trying to think through some of the moving parts (multiple speakers)

Yes, there were 2-1/2 floors at 1301 that Dahlman had. We have already sublet one, just recently, and it will be a little impact in lowering rent because we took some more space here to accommodate the expansion of the whole activity in the broker-dealer. We have less than two years left on the Dahlman Rose -- two years or three years?

Two years.

Less than two years left on that 1.5 floors. We're using it because we're chock-a-block full here, and I guess our expectation is when that lease expires, we're out of there and we will look for less expensive space that is much closer to us on Lex for those people who are over there.

Got it, okay. Thanks, guys.

We -- our space issues are pretty well cleaned up, and relative to our revenues, our rent now is -- all of our rent and our non-comp expenses are -- compared to where we were three years ago, two years ago, we're getting in line, we're in line, and now we're going to drive harder to get them in even better position.

There are no other questions at this time.

All right, then. Thank you all for attending the call. Operator, thank you, and we will see you end of the second quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a wonderful day.