Cowen Inc (COWN) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Incorporated conference call to discuss the financial results for the 2014 second quarter. By now you should have received a copy of the Company's earnings release, which can be accessed at Cowen Group, Incorporated'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, Incorporated, 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 these measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release.

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

Thank you, operator. Good morning, everyone and welcome to Cowen's second-quarter earnings call. With me today are Michael Singer, CEO of Ramius, our asset management subsidiary; and Jeff Solomon, the CEO of Cowen and Company; and Steve Lasota, CFO of the parent company, Cowen Group.

Let me start with an overview of the environment and performance for the quarter, and then Michael will follow and talk about the investment management business, and then Jeff will provide an update on the broker-dealer. And Steve will take you through some of the details of our financials for the second quarter.

Overall, conditions remain conducive to a number of our businesses in the second quarter and continue today in the third quarter. Equity market volatility continued to be subdued and the fixed income markets relatively range-bound. These kinds of conditions helped our investment performance in both our asset management business strategies as well as our own proprietary investments on our balance sheet. Moreover, they were also conducive to capital-raising activities, which are the core of our investment banking business at Cowen.

Despite decreasing equity trading volumes, we continue to see quarter-over-quarter increases in commissions. The results from the second quarter of 2014 concluded our best 6- and 12-month periods since we merged with Cowen back at the end of 2009, and we think continue to reflect the steps we have taken to rebuild the business over the past 5 years.

While we did the Ramius business combination in 2009 and took reflective steps during the year, our second-quarter performance nonetheless demonstrated the consistency and financial discipline we have employed across our entire business. The Ramius platform is expanding. In the quarter, we raised $1.1 billion of assets under management, bringing AUM to $11.6 million as of July 1, and we are continuing to raise assets into the third quarter. The asset-raising was across all of our existing platforms, our seven investment capabilities, and as we have talked in the past and hope to be able to announce in the next few months, will be adding on some new disciplines, new managers shortly to the firm's portfolio of activities. Obviously, if we do, then we've got more runway to grow assets.

At Cowen and Company, we continued to see strong results in our core banking sectors. Banking results were primarily driven from equity capital markets, with growing contributions from sectors outside of our core business of healthcare. Our equities division continues to take market share and growth, despite the low-volume environment. Finally, our investment performance on the balance sheet was particularly strong in the quarter, as we benefited from solid performance in many of our strategic as well as significant strategies, as well as significant gains in some of our recently completed merchant banking investments.

We generated $21.6 million in investment income in the quarter versus $3.6 million in the second quarter a year ago. As of June 30, we had $535 million in equity and $579 million in invested capital.

Here are some of the other financial and operating highlights from the second quarter. The firm reported economic income of $8.5 million versus $1.5 million in the prior-year period. We were able to scale the business without adding significant fixed costs. For the quarter, fixed non-comp expenses were up 5% year over year to $23.5 million.

Variable non-comp expenses, however, increased 11% year over year to $11.1 million in the second quarter. This was due primarily to increased marketing activity firm-wide, which resulted in higher P&E travel and business development expenses and the costs that we incurred in the second quarter from some of our conferences. The increase in fixed and variable non-comp expense is against a 38% year-over-year increase in revenue.

While the general improvement in the market has benefited our industry in many ways, we continue to look to optimize the way we invest in our businesses so the organization can be successful in all market environments. Given our strong capital position and the solid footing of our businesses, we are in a good position to channel the strengths of Ramius and Cowen in ways that can further advance our objectives.

While the last several years were about realigning the organization, we are now intensely focused on how we drive franchise value and the new businesses. A lot of promising things have happened at Cowen Group, and we're really just beginning of, we think, realizing our potential. We are incredibly proud of all of our colleagues at Cowen. Their continued dedication and hard work has helped us to advance the ball once again this quarter, as evidenced by the numbers I just cited, and the best 6- and 12-month periods, as I mentioned before.

Let me now turn it over to Michael to give you an update on Ramius.

Thanks, Peter. In the second quarter of 2014, we made solid progress on our objectives -- to grow assets under management, expand our investment capabilities, and bring high-quality products to the market. As Peter mentioned, we raised $1.1 billion in assets during the quarter, bringing total AUM as of 7/1 to $11.6 billion. Since January 1 of 2014, AUM is up $2.2 billion, exceeding the $1.4 billion we raised in the entire year of 2013.

AUM growth is primarily driven by our alternative solutions, healthcare royalty, and value activist capabilities. Importantly, interest has come from institutional as well as high-net-worth and mass affluent investors. We won mandates from blue-chip pension funds that had never before invested in Ramius. Our sales and marketing team is deeply invested in the future of each investment capability, and our ability to raise assets across an expanding variety of alternative investment styles and strategies is a key strength of our franchise. Management fees were $16.1 million versus $14.6 million for the prior period. Incentive fees increased by $4.4 million year over year to $8.2 million.

We've spent a lot of time recruiting new teams to join the platform. We will meet with hundreds of investment teams to find the team and the right strategy, with the right pedigree, for us to build a successful set of products around their respective capabilities. You might ask why we're so selective. We expect these teams to be our partners for a very long time, so we need to make sure we get the fit right.

Our platform is comprised of three components -- diversity in emerging managers, liquid alternatives, and our general platform. The first, diversity in emerging manager platform. Despite mandates from public pensions to identify and invest in emerging alternative investment talent, there have been a limited number of institutional quality teams to allocate to. With the right team on our platform, we can accelerate their growth by providing them with an institutional infrastructure, the so-called institutional halo, proven sales and marketing capability, our forte, and know how to build and run a growing business.

After quarter end, we reached an agreement in principle with a manager that we are now in the process of documenting and then onboarding. We should be able to discuss this new capability in detail on next quarter's call.

Second, our liquid alternatives platform. Today we offer three alternative mutual funds, all developed in-house. In June, the Board of Directors for Ramius Trading Strategies Fund approved our plans to develop a strategic partnership with State Street Global Advisors, which manages more than $2 trillion worldwide. Investors are now considering our proxy proposal to rebrand the fund as State Street/Ramius Managed Futures Fund.

Since inception, the fund has been a best-in-class performer. State Street noticed that and sought out this partnership in order to further its own liquid alternatives business. We believe that if the proposal is approved, it will benefit our shareholders, Ramius, and State Street.

Under the proposed agreement, State Street will serve as a sub-advisor to the State Street/Ramius Managed Futures Fund. State Street brings 150 wholesalers who will help the fund succeed in the hand-to-hand combat that is retail alternative mutual fund sales. We believe that this partnership represents a smart way forward for the liquid alternative mutual fund industry, where alternative firms create compelling products and then partner with very large, premier asset managers in order to bring them to the retail investment public.

We are seeking similar strategic relationships with other premier investment firms. Additionally, we see an opportunity to offer other high-quality alternative-oriented products, such as RICs, BDCs, USITs, and separately managed accounts.

The third area we look to expand is our general platform. This is where most of our existing capabilities reside, and we will look to offer additional differentiated capabilities. Overall, I am very encouraged by the quality of teams we have met and the opportunities that lie ahead. We have identified several strong teams in each of these categories that could be a potential fit for us. I look forward to sharing more with you in the coming months.

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

Thank you, Michael. Cowen and Company embarked on a path several years ago to transform the organization into one that is recognized as a thought leader in our core sectors, anchored by our commitment to providing clients unparalleled domain knowledge, impactful advice, and practical insights. Our steadily improving results reflect the change we made at our organization over this time. Our platform continues to get stronger, even as we benefit from the hard work our team executed to implement those changes. And our goal is to build a lasting business that will succeed in a variety of market conditions.

We continued to make progress on that front in this quarter. Our second-quarter 2014 revenue was $70.4 million versus $83.7 million in the first quarter and $58.8 million in the year-ago period. Although we did not repeat first quarter's record revenue performance, the broker-dealer was profitable for the fourth consecutive quarter.

Strength came from our investment banking business, namely ECM, as well as our equities business, which again showed resilience despite a continued decline in overall US trading equity volumes. Banking revenue was $30.3 million compared to $25.6 million in the second quarter of 2013.

We closed 32 transactions in the quarter, all of which were equity related. In the second quarter of 2013, we closed a total of 25 transactions.

Market conditions for equity capital raises continue to favor growth companies, which enabled us to demonstrate our strength. We were a book runner on four of 11 IPOs in the quarter compared to four of seven in the second quarter of 2013, and we maintained a leadership position in healthcare financings while seeing increased contributions from other sectors.

We did not close any debt capital markets transactions in the second quarter, as transactions slipped to the third quarter, although so far in July, we've closed five debt capital market transactions, and we feel good about the DCM pipeline for the remainder of the year.

We are learning to manage through the chunkier fee streams like this as the overall business grows. And though revenue may not line up every quarter, the debt capital markets business provides an important counterbalance to the cyclicality of the equity capital markets business and remains a cornerstone of our ability to provide financing to our clients up and down the balance sheet.

Equities revenue was $35 million for the second quarter of 2014, which is up $1.8 million from the prior-year quarter and up $750,000 from the first quarter of this year. This is remarkable, considering that US trading volumes were down 8% year over year in the quarter and down 11% versus the first quarter of 2014.

This low-volume, low-volatility market environment challenges companies to define a strategy that enables them to maintain relevance with their clients. With more than 700 stocks under coverage and over 40 research analysts, our research breadth puts us on par with many of our larger peers. However, quality and thought leadership is what actually differentiates our research, and our clients are paying for access to that capability. As such, all of our efforts, from client mapping to corporate access to conferences, are centered around managing the allocation of Cowen's resources to those customers where our verticals align best and where we believe we have the ability to be true partners.

Our ability to actively track and analyze the utilization of our resources has been a critical factor in growing our share of the commission pie with customers who find value in what we do. And by approaching the resource allocation question with a more critical eye, we've seen our market share steadily improve over the last several quarters. According to the latest data, among our focus accounts, we have moved up another notch in the rankings.

Overall, we made solid progress in our business, but there are several areas of improvement, and plans are in motion to drive future organic growth. In addition, we're identifying new opportunities to drive operating margins while leveraging the unique strengths of Cowen and Ramius. I want to thank our colleagues for their contributions in the quarter. Your dedication and drive is what makes this happen every day.

And with that, I will turn the call over to Steve Lasota, who will give you an update on our financial performance.

Thanks, Jeff. In the second quarter of 2014, we reported GAAP net income of $8.4 million, or $0.07 per share, compared to GAAP net income of $1.1 million, or $0.01 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 segment 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, reorganization expenses, and taxes.

For the second quarter of 2014, the Company reported economic income of $8.5 million, or $0.07 per share, compared to economic income of $1.5 million, or $0.01 per share, in the prior-year period. Second-quarter 2014 economic income revenues were at $111.5 million, an increase of $30.5 million compared to $81.1 million in the prior-year period. We generated $21.6 million of investment income for the second quarter, this compared to $3.6 million in the prior-year period.

On the alternative investment side of our business, management fees were $16.2 million in the second quarter versus $14.6 million in the prior-year period. Incentive income was $8.2 million in the second quarter compared to $3.8 million in the prior-year period.

In our broker-dealer segment for the second quarter, investment banking revenue was $30.3 million compared to $25.6 million in the prior-year period. Brokerage revenue was $35 million, a 5% increase over the prior-year period.

For the quarter, compensation and benefits expense was $63.6 million compared to $47 million in the prior year. For the second quarter of 2014, we reported an aggregate comp-to-revenue ratio of 57% compared to 58% in the prior-year period. The decrease is primarily due to a change in the business mix from prior year.

Excluding expenses associated with activities for which the Company is reimbursed and severance expense, the comp and benefits expense was 55% of economic income revenue in the second quarter versus 56% of economic income revenue in the prior-year period.

Moving to our non-comp expenses for the quarter, fixed non-comp expenses rose 5% year over year to $23.5 million. This increase is primarily due to higher professional fees relate to the debt issuance during the first quarter of 2014, partially offset with various firm-wide efforts to reduce fixed expenses.

For the quarter, variable non-comp expenses were $11.1 million compared to $10 million in the comparable period a year ago. The increase was due to an increase in floor brokerage and trade execution expenses as a result of overall higher revenues, which generated increased trading costs. In addition, marketing and business development expenses increased due to increased marketing activity firm-wide. The second quarter 2014 interest expense was $2.7 million, which reflects a full quarter of interest related to the convertible debt issued in the first quarter.

While economic income is a pre-tax measure, I'd like to briefly touch on our tax situation. After the acquisition of LaBranche, Cowen had significant net operating losses in the US to carry forward into the future of $337 million. The associated gross deferred tax asset currently amounts to $134 million. There's a 100% valuation allowance against that asset, but it has 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 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 $535 million at June 30, and our book value per share was $4.65. Tangible book value per share, which is a non-GAAP measure, was $4.24 per share compared to $3.87 per share at June 30, 2013.

And finally, our share repurchase program. In the second quarter, we repurchased approximately 1,976,000 shares on the open market and 850,000 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 $2.8 million, or $4.01 per share.

Since we announced our original repurchase program in July of 2011, we have repurchased 14.2 million shares in the open market and an additional 5.3 million shares as a result of net share settlement related to the vesting of equity awards. The total cost of all buybacks through the second quarter was $62.9 million, which represents an average price of $3.23 per share.

On August 6, Cowen's Board of Directors approved an increase to the Company's share repurchase program that authorizes Cowen to purchase up to an additional $11.3 million of Cowen's Class A common shares. The $11.3 million increase is in addition to the Company's existing $60 million share purchase program. With this increase, the total amount available for repurchase under the program is $25 million.

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

Thanks, Michael, Jeff, Steve. Ladies and gentlemen, that sums up the second quarter. We think it was pretty good. We think it was very good, and we're satisfied with the progress we're making and think that, as I said much earlier, we're at the early days of what this firm can do.

So why don't I just turn it over to you for questions and see if we can add any clarity that you may require.

Thank you. (Operator Instructions.) Joel Jeffrey, KBW.

Steve, just a quick question for you, maybe. You guys have clearly been profitable for a few quarters in a row now. I'm just wondering about when you guys think you might see the valuation allowance come back onto your balance sheet.

Well, we need to--in discussions with the accountants, you need to have cumulative income that would be able to allow you to reduce that valuation allowance. So we are looking at things that we can do to do that, but we're still a few quarters away from that unless we do some type of transaction, Joel.

Okay. And then thinking about the non-comp expenses and the increase in the variable levels there, should we just continue to think about that, to grow that out in a similar manner to how we're forecasting revenue growth?

Second quarter partially, so floor brokerage and trade execution will increase as we do more equity business. But second quarter tends to be high for variable because of our conferences and the T&E associated with those conferences.

So we expect it to just come down a little bit, but not necessarily track in line with the revenue growth?

Correct. And as Peter's saying, the interest expense on the convert, which isn't in fixed or variable non-comps, we break that out separately. But if you're looking at non-comp increase, a big piece of that is because of the interest and amortization of premium and convert.

So we actually hope that floor brokerage and clearing costs go up a lot, because that means we're just doing a lot more business.

Okay. And then just lastly for me, just thinking a little bit about the investment income line, how much of the contribution was from gains on merchant banking funds? Just trying to get a sense for how sustainable maybe these levels of returns are, or if we should think about it tracking a lower level?

It was really not meaningful at all in the quarter.

So then in terms of thinking about that net revenue line over the next few quarters, was there anything meaningful that caused the substantial lift in this, and can this be sustainable for the back half of the year?

Joel, the timing on the realization of these things is kind of unpredictable in the short run. We know we're going to realize gains over the course of the year. We don't know if it comes in the first, second, or third quarter. So it's going to be sporadic. Second quarter happened to be a particularly strong quarter for the event space for us in the merger arm, and --

It was pretty much across the board.

Yes, it was pretty much across the board. I think the only place that was kind of soft was credit during the quarter. So it's very hard to predict where it's going to come from. And we've been pretty good in terms of looking at where we think we will end up at the end of each year, when we start looking at the years ahead. But just timing is erratic, so the quarters are going to fluctuate.

Great. Thanks for taking my questions.

Steven Chubak, Nomura.

So clearly, we've seen really strong progress on the equity side, and you've very effectively bucked the trend that we've seen across the broader industry. And given that historically there's a very high correlation between the strength in the primary calendar helping drive increased secondary activity, I was hoping you can give us some insight into how much of the strength or resilience in your brokerage revenue is a function of, really, just better and more research content and more coverage of companies versus increased capital-raising that you've been seeing in the market, which presumably is a little bit more volatile?

Well, that's, I think the epic question for anybody who runs a business like this. And if anybody tells you that they've got an exact answer for that, then they're probably misleading you. I think we know that the combination of high-quality content on the research side and a decent calendar leads to increased volumes. And the combination of the two has really been significant, I think, for us.

It's been very steady for us. But if you look at the business, a lot of the transactions where we're actually lead managing are in healthcare, but if you look at the growth in the equities business beyond healthcare, it's pretty significant. And so I actually think that it's a combination of both. I think we made some really great strides at how we have identified clients in the marketplace who are willing to pay for our capabilities, and we press on those clients to get them as much as they want to move the needle for them.

And so the exercise for us is more about identifying places with clients where we line up, and then provisioning those clients as much as we possibly can to drive a bigger share of their individual wallets. It's a very bottom-up approach, and so I think the gains we've seen have been largely a function of that as well as a decent calendar, which certainly helps.

Okay. And then just following up on a question relating to healthcare specifically, I know you've seen some contributions from some of the other sectors, but healthcare has clearly gotten a lot of attention following some comments regarding the frothy and, I guess, one mentioned even bubble-like conditions in the sector. And I know that there's been some debate around that. But it has been a concern that's flagged, that we could see a slowdown in UCM activity in that space specifically, and was hoping you can share some insights into what you're seeing in the broader market today.

Well, I think it's been a fantastic market, and I don't think we're going to see, like for example, the second quarter, we didn't see the same kind of volume that we saw in the first quarter. In terms of frothiness, listen, there are always things. These markets always can extend themselves a little bit further. What's been interesting is that we've had a couple of pullbacks in the broader market indices, and it hasn't been smooth sailing for every company that's gone public.

And so I feel like -- the metric I'm using to judge our capability and our ability to continue to extend that is how well have the stocks that we've brought in public done after they've gone public? That's actually a metric we look very carefully at. And in looking at it, there isn't anybody who's -- any bank that has done better at aftermarket performance in the companies that we brought public in that sector than us.

And so that means that I can't speak for what everybody else is doing. Our focus continues to be high-quality companies that we think have a lot of room to move after they go public. As long as we continue to do that, whatever deals there will be in the marketplace, we will get a very significant share. And the reason is because I think companies and VCs recognize our connectivity with the long-only. And our ability to continue to produce positive outcomes for them makes us a very logical place for them to bank.

And so even if the broader market slows down for healthcare, which we've seen a couple of times this year, we continue to win significant mandates because our ability to select high-quality companies is what drives the business. So am I worried about it? I can't control it.

But what I can say is we've seen a number of what I would consider to be sub-par companies from other banks try to come public and not get there in the last 3 months. And we've been able to steer clear of that by making sure that we're focusing on the creme de la creme. And that's where we spend our time. So I think we have a little bit of protection in the broader market slowdown for healthcare because the better-quality companies are selecting Cowen.

Thanks, that's really helpful. And I swear this one is the last one for me, on the share buyback. Liquidity has increased your capacity, and we saw a net reduction. I'm just trying to think about, given the, let's call it bullish hedge transaction structure that you guys had recently employed, it would suggest that you clearly view your stock as attractively valued. And just want to get a sense as to the levels we should be thinking about where you'd arguably be more than offsetting any incremental dilution based on your overall buyback or repurchase strategy.

Is there more?

Oh, no, no, that's it. That's it.

Well, we've said consistently that if we can make purchases below tangible book value, we will continue to do that, subject to how we view our liquidity and our cash requirements on a going-forward basis. We tend to roll forward our forecast. We do it every month. We're looking out the next 3 years. And as we're now to the point where we feel comfortable that the businesses are in the right place, and now we're in a position where we can start some substantial new initiatives, we will be very careful in terms of how we use cash to buy back stock versus growing new businesses.

Now, I didn't really say very much there. I walked the middle of the road. So just to be more succinct, stock below tangible book value, we're buyers of the stock. Over time, we would like to see our stock selling above tangible book value; that would be great. But if not, we'll take advantage of it, and we will try and absorb all divesting that comes along from stock-based comp, which itself is something that, as the stock price goes higher, will become less impactful, because we'll be issuing fewer shares. And Jeff wants to say something.

Yes, I think it's really important. So we obviously feel a lot better about the business and our ability to continue to manage growth now than we did several years ago. And I think, when you look at the -- we understand valuations as well as everybody else does. There's an ability for us to scale the business beyond book value. We're going to continue to look at that. And we'll make sure that the employment of capital has appropriate ROE targets beyond just buying back stock.

So buying back stock is a relatively straightforward way to look at closing the gap between the discount to tangible book value and tangible book value; that's a no-brainer. As the stock gets closer and closer to that, the deployment of capital has to be very carefully considered as we look at businesses that will ultimately drive ROE so that we trade at a premium to book value.

And so that's the math that we are doing. There are a number of businesses here that we think can drive -- that we're looking at, especially in the asset management sector -- that can drive premium to book value, because they trade more along the lines of EBITDA with higher margins. And as those businesses begin to percolate, we expect to be trading north of tangible book value, and we'll look at stock buybacks versus the growth in those businesses through an ROE measure.

Yes, one of the great, I think, mistakes that a number of the securities firms and banks made in the pre-2008 period -- I was always sort of astounded by it -- was how much stock they were buying back at big premiums to their book value. So they were diluting their safety net on a very consistent basis. And when the bell rang, it was a problem in terms of liquidity for some of them, which has forced them to go to the capital markets at very inappropriate prices.

We've always said, for 4 or 5 years now, that's not us. We're capital hounds. We're very prudent about the use of our capital, because at the end of the day, that gives us a huge advantage over many other firms. And we'll continue to husband it very carefully.

We are generating, from operations, forgetting about the liquidation of investments from the past, a lot of cash. But at the same time, we recognize the pressures on all of our colleagues here for cash compensation, and we hope to improve on that in the future, starting with this year.

So it's a balance. It's something we're looking at every single month, constantly.

That's an interesting point, because you mentioned that tangible book provides a threshold, and obviously, there are different considerations you need to make. But the interesting component is the DTA, and as that valuation allowance, granted, it's not going to happen in the very near term, begins to reverse, that your tangible book value is going to be meaningfully higher; you'll have that additional capital available for deployment. And I suppose I'm wondering, do you focus more on tangible book as reported, or do you contemplate the adjusted tangible book as well when making those buybacks versus other forms or avenues of capital deployment considerations?

We look at it without the DTA. We don't factor that in, because even when we get to reverse it, it doesn't represent cash or a hard asset. It's a future asset. We have to earn our way through it. So we look at tangible book in terms of what's hard cash, liquefiable, we can get our hands on right now in terms of how we run the business.

All right, great. That's it for me, and thanks for taking my questions.

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

Good morning, gentlemen. Congrats on a strong quarter. So first question, Jeff. I'd like to touch on the equities business again, just given how strong the results were there. And I know we touched on this last quarter, but I'm just curious if you saw any pickup in your ATM product in the wake of the New York AG filing a lawsuit against Barclays and their dark pool. It seems like it gives your broker-neutral, venue-neutral offering, a little bit of an edge. Have you seen any pickup in, I guess it would be late in the second quarter or maybe even into July?

Well, we've seen steady pickup. We've been seeing steady pickup since we did the ATM acquisition a couple of years ago, and I think that's a function of the fact that we're simply under-penetrated in terms of electronic trading as a percentage of our overall business. If you look at the mix of the amount of business that's done electronically, even with the growth in our electronic product, we're still weighted more towards cash than electronics. So we continue to see ramp there. And the interesting thing about it is it's ramp there that is not cannibalizing our core cash business. That's what we expected, and that's what's happened.

I think Michael Lewis's book shined a bright light on something that we already knew. And I think most people that had some trading at our clients are sophisticated enough to understand that the product offering that we have, it is an answer, a market solution to a very difficult problem, which is the fragmentation of market structure. And we were already seeing that. I think we continue to see that flow through in terms of clients. We've seen some new clients come onboard. But those were already in the pipeline and converting before Flash Voice hit the press.

I do think it's interesting, though. We did host, at the beginning of July, our very first market structure conference that we -- a very small group of well-heeled clients, where we brought to bear a lot of domain knowledge around the utilization of algorithms and broker neutrality. And we did get very significant attendance from the long-only buy side and hedge fund buy side firms.

And I still think there's a lot of domain knowledge that has to permeate the buy side to understand how to navigate these markets. And so we continue to build product and develop product that will drive that. We offer a very unique solution in that regard, because we don't have dark pools and we're not funneling everything to our own internal order flow, and we're not going to. And people are finally starting to recognize that that's a really important part of their getting the best execution, and they're coming to us more and more.

So all in all, I'm feeling very good about the acquisition we did a couple of years ago, because it gives us not only a seat at the table, but a very relevant seat as we gain market share from some of our larger competitors.

Got it. Great, Jeff. And then to touch on the capital-raising business and competition in that space, just given the deal that we saw earlier this year, where a competitor is bulking up and going after a piece of that ECM pie. So I guess first, it's encouraging that clearly, they have a pretty strong outlook on that business. But I know that ISI generally have -- well, they had a presence in healthcare and consumer, where Evercore traditionally wasn't a bigger player. How does this change the competitive dynamic for you guys, at all, in your mind?

I don't think it does. I think that ISI is a formidable competitor and that they offer high-quality research. I think if anything, it validates the business model that we have at Cowen. If you focus on high-quality, alpha-driving research that's bottom-up, there's franchise value associated with that. I think that the acquisition of ISI by Evercore demonstrates that, and I continue to believe that we've solved the more difficult problem here, which is how do you run a capital market-centric business that's dominated by fundamental research profitably? That is a difficult problem to solve.

It is not the highest-margin business on the street, but to be able to do that without the benefit of a gigantic balance sheet and massive lending relationships with a lot of these companies demonstrates that if you focus on high-quality talent and the ability to drive alpha, that there's a lot of room in there. And I think, so when I look at our franchise and I look at ISI's franchise, our banking platform is additive. And if they're able to do what they were able to do without a banking platform, I think it makes some sense.

So again, I feel like -- I look at those guys, I admire what they've done because they are considered to be a high-end, Tiffany's research product -- as is ours -- and I think it's wonderful that somebody else recognizes there's significant franchise value in building that out, because we've been talking about that for 3 years.

I want to just add to what Jeff said. I think that we, among ourselves, have always said you couldn't reproduce what we have here, what we inherited and rebuilt and built on for -- I don't know, pick a number -- $0.25 billion, $300 million or $400 million, the investment you would have to make. And I guess I've just been around so long that my perspective is that we will get rewarded for that eventually.

I look at Evercore, which has got a great franchise, and ISI, which is a great franchise, and this deal, and I go, well, there it is. They're going to spend $200 million to $400 million to try and put in place what we already have. And I think it's great. I wish them tons of luck. And I think it's good for us and for the industry. And there will be fewer and fewer people who garner a bigger and bigger share of wallet.

The commission business isn't going away; the equities business isn't going away. And kind of like I lived in the 1970s, if you have a long-term view, and you're right -- which I believe we are -- we're going to get very well rewarded for it.

Understood. Thanks. And a question for Steve. So, Steve, on the comp expense this quarter, given the revenue mix, I guess I was expecting a little bit more positive operating leverage, like investment income tripling versus the first quarter. So can you dig into that a little bit and what drove the comp ratio this quarter? And how should we think about that in the back half of the year?

We've talked about it a little bit, Mike, and Peter mentioned it earlier. We are expecting to have to pay out more cash this year based upon what's going on in the industry. You hear others. We saw what happened at the end of last year, with some banks paying all cash. So we're just expecting that. That affects our comp-to-rev ratio and economic income, because we'll be deferring less and paying out currently, and we're just preparing for that.

Okay. And then, Steve, one other point of clarification. I know that in your prepared remarks, you talked about professional services being a bit elevated around the capital raise. So as we look into the back half of this year, should we expect a small step-down around that, like $1 million or so?

I'm not sure if it's going to be that much, but we will have some decrease, yes.

On top of what Steve said, everybody has kind of suffered the last years, I guess post-2008, in their economic comp numbers because they wanted to keep their organizations intact, pay people reasonably well, and they paid with a lot of deferred. That deferred is running through everyone's income statements. That's a revolving door that we want to slow down. So to the extent that we keep our comp-to-revenue a little bit higher in the current period means that we'll be in a healthier position on economic comp going forward, because we'll, hopefully, burn off, at some point, more deferred than we're creating. And that's really our goal.

So, again, we run our business with a multiyear view, and we're not going to monkey around quarter to quarter. This is all about what this place will look like 3, 4, and 5 years down the road from now.

Okay, that's it for me, guys. Thanks again, and congrats.

Thank you. I would now like to turn the call over to Peter Cohen for closing remarks.

Well, operator, thank you, and all of those who joined and asked questions. Appreciate it very much. Enjoy the rest of the summer, the little that's left, and we'll be back here, I guess, in late October or early November to report on the third quarter. And wish you all the best. Thank you.

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