Cowen Inc (COWN) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group Incorporated's conference call to discuss the financial results for the 2014 fourth quarter and full year. 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 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.

Thanks, operator. Good morning, everyone and welcome to Cowen's Fourth Quarter and Full Year Earnings Call. With me are Jeff Solomon, President of Cowen Group and Steve Lasota, our CFO, and other people who are involved the day to day running of the firm. The last five years have been pretty challenging for us - five years since we completed the Ramius/Cowen merger - and as we have talked about, we had a lot of work to do to get everything right-sized and going in the right direction.

And we made a significant investment in that business as well as the Ramius' business, which we completely re-crafted also. But that's now behind us and I think that the fourth quarter results and full-year results reflect that in spite of a challenging macro environment, we've been able to cut a path of sustainable growth with profitability.

This morning, Cowen reported record revenue and economic income for 2014. It also marks the second straight year of consecutive positive economic income. Our revenue - economic revenue - for the year was $498 million, 45% increase from last year's number. And that was all organic growth. Both of our business segments, Ramius and Cowen, showed positive year-over-year top line growth and year-over-year bottom-line growth, continuing the momentum that's been building in recent years.

Our economic income was $44 million or $0.37 per diluted share. Also as we had referenced in the past, our deferred tax valuation was released in the fourth quarter of 2014, which resulted in a deferred tax benefit of $128.1 million. This puts our book value at $6,07 per share as of December 31, 2014. Steve will walk you through the financials in more detail later.

Our results were achieved by focusing our resources and delivering revenue opportunities derived from our core mission at Cowen: helping clients to outperform. At Ramius, this means providing clients with access to differentiate alpha generating alternative investment strategies, products and services. And over the past few years, our efforts to broaden our asset management platform included adding a few new investment capabilities and expanding our suite of products around our existing capabilities, resulting in substantial growth in assets under management.

At Cowen and Company, we focus on providing active portfolio managers with impactful equity research, non-conflicted trading capabilities and high quality capital markets transactions. And delivering to our investment banking clients what we believe is differentiated financing advice, execution advisory services. To that end, we have enhanced our platform in banking research and sales and trading by adding depth in scale across all of the segments of our business, which resulted in the record revenue and market share gains that are evidenced by our 2014 results.

As we transformed the organization and added capacity, we made sure that we did so while being very efficient in managing costs and improving the operating disciplines within each of our businesses. This enabled us to make better decisions about the businesses we are in and identify opportunities for growth.

Again, Steve will talk about the non-comp expenses and comp expenses in a few minutes and you'll see sort of the discipline play out in the numbers. Even as we are experiencing positive operating results from these efforts, we remain well positioned to capture increased market share in all of our businesses while maintaining the operating leverage that we have in our cost structure today.

We have $678 million in equity capital, which is the strongest equity position we've been in yet. If you add all long-term debt, we have close to $900 million of capital resources available to invest in and grow the business, which I think it makes us probably, on a per capita basis, one of the best, if not the best capitalized firms in the business. That gives us tremendous flexibility to take advantage of opportunities.

We've been running hard all year. But I want to take this opportunity to acknowledge and thank all the people of Cowen who really contributed to these super results. They really did a tremendous job. We have great culture, a great team of people. It's a real pleasure for me, and I know for a lot of other people, to come to work every day because it's exciting every single day.

And finally I'm very proud to announce John Holmes, who many of you don't know, but has been with us for nine years, was promoted to Chief Operating Officer from Chief Administrative Officer. It's that expense control and leveraging of our IT capabilities that John's been able to apply, which has helped to provide the operating leverage that we've got.

And I'll turn the call now over to Jeff to talk about the individual businesses and then we back to answer questions.

Thanks Peter. Let me begin with our review of Ramius, which had a very successful 2014. Assets under management at the December 31 stood at $12.5 billion, up $3.1 billion in the year which includes $2.4 million of net inflows across almost all of our strategies. We experienced strong interest in our products as our core business expanded assets under management. We also launched or enhanced five new products and one new capability. Assets under management growth was driven by our diverse range of investment capabilities, including our activist, healthcare royalties, alternative solutions, real estate, event driven managed futures and global macro products.

Our unique alpha capabilities are resonating with clients. It is difficult to find capabilities that are differentiated and institutional quality with long-term track records.

So when our products are open to receiving increased capital, we continue to see strong interest. For example our Alternative Solutions business ended the year with $3.8 billion in AUM up almost $850 million from the start of the year. As an advisory driven business, we experienced particular success in winning large mandates.

AUM across our hedge fund strategies was $4.2 billion, up $1 billion during the year. The largest of our hedge funds strategies, our activist product, not only had strong performance in 2014 but has had consistently strong performance for over a decade.

Healthcare royalties' assets under management stood at $2.6 million at the end of the year and raised $1.1 million during the year. Healthcare royalties enjoys scarcity value as it is a unique asset class with a limited number of players.

And finally, our real estate strategy had $1.7 billion in AUM at December 31. Management fees continues to grow both in the quarter and the year. Management fee run rate or the progression of our average monthly management fees grew 31% to $6.1 million in the fourth quarter of 2014 from $ 4.6 million per month in the fourth quarter of 2013.

While we don't manage the business to this metric, our average management fee in the fourth quarter was 59 basis points unchanged over the prior year quarter. For the year, it was 55 basis points. Importantly, the average management fee calculation includes the growth in committed but uninvested capital in some of our newly raised funds.

Incentive fees more than doubled in the year, which primarily reflects the performance of our activist funds in the fourth quarter and for the year.

In 2015, we intend to opportunistically onboard emerging teams as we did with Quadratic Capital in the fourth quarter. We're also seeking partnerships with mature alternative businesses who can work with us to develop new products and capabilities. The impact of these new ventures will be de minimis as they scale but will serve as an important driver of growth in the years to come.

Now turning to Cowen and Company, we produced our strongest year since the Cowen\Ramius business combination in 2009, driven by both our investment banking and brokerage divisions.

It was a record year for IPOs in the United States with 263 companies making their debut, surpassing the previous year's record. But in growth sectors we cover in banking and capital markets, there were 194 IPOs and 397 follow-on offerings. As one of the top underwriters in the growth sectors like healthcare, Cowen was, and continues to be, favorably positioned to actively participate in the strong new issue calendar. 2014 was the strongest year for our ECM business and the fourth quarter of 2014 was one of the best revenue quarters of the year.

Our life sciences underwriting was particularly robust but we also saw a growing contribution from our technology, media and telecommunications vertical. We closed on a total of 129 equity underwriting transactions in the year, up from 78 in 2013. Our average fee per transaction increased 15% year-over-year.

In debt capital markets, we closed on 16 transactions in 2014. Our strategic advisory business also strengthened modestly during the year, closing 12 transactions in 2014, reflecting our ongoing efforts to strengthen our capabilities in this area as well.

Our equities business had a strong year despite a shrinking wallet for US commission dollars. We continue to see customers consolidating their business to their top brokers and we've emerged as one of them in our designated areas of expertise. We've made a deep commitment to high quality research. With an expanded research platform, we are providing customers with not just more content, but with content that actually adds value.

Today we cover over 800 stocks up from 400 two years ago, making us one of the largest providers of equity research in the United States outside of the bulge bracket firms. We have also added a variety of product enhancements and have several initiatives underway to ensure that we are in a better position to monetize our capabilities across the entire platform.

According to the latest market research data, we rank among our focus 150 accounts, we rank extremely high and have improved several spots in just one year.

I will now turn the call over to Steve Lasota who will review our financials, Steve?

Thank you, Jeff. In the fourth quarter of 2014, we reported GAAP net income of $142.5 million or $1.21 per diluted common share, compared to GAAP net income of $2.5 million or $0.02 per diluted common share in the prior year period.

For the full year 2014, we reported GAAP net income of $167.2 million or $1.40 per diluted common share, compared to GAAP net income of $4.6 million or $0.04 per diluted common share in the prior year period.

GAAP net income includes the release of the Company's deferred tax valuation allowance, which happened in the fourth quarter of 2014. I'll provide more information on this in the tax section.

In addition to our GAAP results, management utilizes non-GAAP financial measures, what we term as economic income, to analyze our core operating segment's performance.

We believe economic income provides a more accurate view of the operating businesses by excluding the impact of accounting rules that require us to consolidate certain of our funds, certain other acquisition-related expenses, reorganization expenses and taxes and goodwill and intangible impairment. The remainder of my comments will be based on these non-GAAP financial measures.

In the fourth quarter of 2014, the Company reported economic income of $18.9 million or $0.16 per diluted share. This compares to economic income of $2.7 million or $0.02 per diluted share in the prior year period.

Fourth 2014 economic income revenues were $165.8 million compared to $96.5 million in the prior year period. Fourth quarter fixed non-comps rose $5.9 million year-over-year to $26.6 million. Variable non-comp expenses were $12.5 million compared to 9.8 million in the prior year quarter.

Moving to our full year 2014 results... The Company reported economic income of $44.2 million or $0.37 per diluted share. This compares to economic income of $6.5 million or $0.05 per diluted share in 2013. Economic income revenue was $497.6 million compared to $343.8 million in the prior year period.

Investment banking revenue was $170.5 million, up 62% year-over-year compared to $105.3 million in the prior year. Brokerage revenue rose 21% year-over-year to $146.2 million. Management fees were $64.8 million versus $57 million in the prior year.

Incentive income was $45.7 million compared to $21.2 million in the prior year and we generated $65.2 million in investment income compared to $36.7 million in the prior-year. Comp and benefits expense for the year was 61% of economic income revenue compared to 60% in the prior year.

Non-comp expenses increased 13% year-over-year, mostly from increases in variable non-comp expenses, which were up 22% year-over-year to $45.7 million.

This increase in variable non comps is primarily related to syndication costs related to a capital raise by an alternative investment assets fund and an increase in firm wide marketing activity. Fixed non-comp expenses were up 9% year-over-year to $95.5 million. This increase was primarily due to higher professional fees related to debt issuances during the first and fourth quarter of 2014, and an increase in costs from equity method investments.

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, or NOLs, to use to carry forward into the future of $321 million. Due to recent positive operating results and with our fourth quarter of 2014 results, we are now in a 3-year cumulative incomes position. As a result of this and other positive factors we released $128.1 million of $137 million valuation allowance. We previously had a 100% valuation allowance of $137 million against our net DTA.

The release of the deferred tax valuation allowance was the primary reason for an increase in our income tax benefit and is reflected in our GAAP net income.

Accordingly, stockholders' equity increased by $170 million in the year to $678 million and book value per share is $6.07 at year-end. Tangible book value per share, which includes the deferred tax asset, was $5.68.

Invested capital stands at $665 million as of December 31. Finally, moving to our share repurchase program; in the fourth quarter, we repurchased approximately 2 million shares in the open market and 9,000 shares as a result of net share settlement related to the vesting of equity awards, at an average price of $4.38 per share and a total cost of $8.8 million.

For the year, we repurchased approximately 6.3 million shares in the open market and 1.4 million shares as a result of net share settlement related to the vesting of equity awards at an average price of $4.15 per share and a total cost of $31.7 million.

As of December 31, $10.3 million remained available under our share repurchase program. Since we announced our original repurchase program in July 2011, we have repurchased $17.6 million shares in the open market and an additional 5.4 million shares as a result of net share settlement.

The total cost of all buybacks through the fourth quarter of 2014 was $77.9 million, which represents an average price of $3.38 per share. On February 25, 2015 Cowen's Board of Directors approved an increase to the Company's share repurchase program that authorizes Cowen's purchase up to an additional $14.7 million of Cowen's Class A common shares. The $14.7 million increase is in addition to the Company's existing $70.3 million share purchase program. With this increase, the total amount available for repurchase under program is $25 million.

I will now turn it over to Jeff for closing remarks.

Thanks, Steve. Our 2014 results reflect the long-term investment we made in people and process between 2010 and 2013. By staying true to our mission of helping clients outperform, whether that client is an active portfolio manager, an investment banking client or an asset management client, we are always evolving our businesses with this question in mind: are we doing the things we need to be doing to generate alpha for our clients. We believe our singular focus on the ability to help clients outperforms sets us apart from our peers and clients recognize this.

As we look forward to the rest of 2015, the US economy continues to show signs of strength despite some fall-off from the decline in oil prices and the current market dynamics benefits both our capital markets businesses as well as our asset management business. Our funds at Ramius have continued to perform well into 2015 and our demand for our investment banking services has been strong year-to-date.

We continue to believe that the outlook for the economies around the world remains quite challenged and could be diverging from the United States. As such, we expect to see pockets of equity volatility during the year, but our business is focused squarely on the United States.

Nonetheless, we continue to think the long-term growth prospects for our business remain firmly intact as we continue to focus on sectors that benefit from the stability and strength of the United States economy.

To that end, we are continually looking at ways to optimize our business and invest in t areas to ensure that we are in the best position possible to win regardless of market conditions. As Peter mentioned earlier, we have a significant amount of capital for firm our size, which provides an anchor and stability we need.

Before we take questions, I'd like once again to commend all of our colleagues for all they achieved in the past year; their passion for winning has helped to drive the firm and the entire organization to new levels.

I'd now like to open up to questions, operator?

Thank you very much, Jeff. (Operator Instructions) Devin Ryan from JMP Securities.

Thank you, good morning and congratulations on the strong year and all the other announcements with earnings, so great to see. I guess, first question on capitalization obviously highlighted the strength, and maybe excess capital position. And now that you're not moving forward on the commercial finance company, at least for now, can you maybe speak in little more detail at some of the areas you'll be looking to deploy that capital and then any thoughts as we're modeling that, how to think about how long that capital could take to become productive.

Well, I think, first of all, we are always looking at how we can be driving ROE and certainly looking at the time to build out the finance business and where we currently think the credit markets are today, we think there are much better opportunities. So that was the statement we made. Certainly building out our asset management capability, we have a number of potential opportunities to scale that business where we can both deploy our capital and attractive return characteristics, as well as scale businesses, those take a couple of years to do, but what we feel very good about the queue of opportunities we have in that space.

Secondly, I think we -- we also recognize that as long as we continue to trade at a discount to our tangible book value, there is an opportunity to do accretive things and you can see the Board has authorized us to continue the stock buyback program. Our goals going forward are to continue to look for ways to optimize our capitalization and I know that a lot of shareholders and a lot of folks have asked us, why we think it's so important to have all that capital. We've done a very good job at navigating through pretty treacherous waters and one thing that we found that really keeps our organization on a very solid ground is the fact that we have more than enough capital to be in a very safe place and we don't leverage that capital aggressively. Again, this has been part of our philosophy going back to at Ramius for 20 years; it served us incredibly well and we'll continue to look for ways to find the right optimization between capitalization and driving ROE.

We are - just because we're not going forward with the finance company as we've described, it doesn't mean that we don't have some alternatives in the general sphere of direct lending that we are not exploring. We are. In fact, we might find more attractive than how we perceived the direct lending business before.

And, the capital is not idle, it's invested. We happen to have an enormous amount liquidity and it would be better served in a ramped-up operating business than just invested on the balance sheet. But we'll get there. There are a number of endeavors underway that will get that capital put to work.

Got it. Yes, I just appreciate that perspective, just wanted a little more detail. That's helpful. And with the cash equities business in the quarter, and I think results were pretty impressive against the backdrop, and you highlighted in the release, the options and electronic trading in addition to just the traditional cash equities, I'm just trying to get some perspective, were those items kind of unusually strong and that was more kind of lumpy quarter or the momentum that you had kind of ending the year is something that maybe is carrying into 2015.

I think it's definitely a bunch of the fact that we had momentum in those businesses. So what used to happen to us before we had an electronics business and before we had an option and event business, if you look at our fourth numbers, you see a trail off in our cash equity execution as discretionary wallet from the long-onlys were spent.

So Cowen really use to eat out of the discretionary bucket at most of its long-only accounts because we didn't have an electronic product was competitive. But over the past three years since we did the ATM acquisition, we've been able to take market share from other electronic players. So we're less dependent on just the discretionary commission bucket to get paid. And so as those in the fourth quarter, the momentum that we had is more, I think, emblematic of the balance we have in the business between cash and electronics. I would also say that having an options and event capability, especially when the event calendar has been as robust as it has been, is helpful. So when you have events that occurred like, some of the events that occurred in the fourth quarter, especially around some of the unexpected events in the event space, people are repositioning of all the time, and as a result of that, we're pretty much -- we're in a position where we can benefit from that significantly. So I think there was some uniqueness around maybe the event space for the fourth quarter, but I would say overall, pretty much it's been a very strong balance of just the way the business has evolved.

Got it, helpful. And then just lastly, I'm sure you probably don't want to talk too much about the first quarter, but just looking at some of the investment banking trends, it looks like it's been just a phenomenal start to the year for you guys. I know there's been a lot of activity in the healthcare space, but is there anything else that maybe changed that you see driving that or is it just a function of -- there's been a lot of deal flow and you guys are getting at least your fair share and then along the same lines, you mentioned the expectation is to kind of continue to expand the advisory platform. Just any update there in terms of what you're doing and are you still looking to hire selectively, some advisory-centered or -centric investment bankers.

So, to answer your first question, yes, the calendar has been strong. Yes, we're in the middle of a wonderful time in the markets for healthcare. I still think the healthcare dynamic, at least the supply demand dynamic in healthcare are for the areas we cover, is still pretty good. So a lot of folks have asked if, if, we think if we've raised so much money... I want to give a couple of statistics for people so you can get your head around it. Last year in total in biotech, the market raised $17.6 billion, that's all. If you take a look at the M&A that got taken out of the biotech space, even in the most conservative numbers I've seen have been $80 billion to $100 billion taken out. If you want to include some of the mega cap deals you can get up to a hundred -- a couple hundred billion dollars that's been taken out in terms of market cap. And so, I think what's happening here is there is money flowing into that space. There's been a real class of new companies that have developed with some emerging technology that's really interesting and breakthrough. And the amount of capital that's been raised is actually relatively small compared to the amount of capital that was taken out of the business. So do I think it's sustainable? I do. Do I think we're going to have quarters like the fourth quarter and the first quarter all the time? No but I think what we noticed about what the great thing of being in that business is, these are companies that are always in need of capital. And we are in a position where we have well over 100 new clients that we've done a great job for the last couple of years to make sure that in multiple market environments, they'll be using our services, provided that we continue to perform for them. So I think it's been great. And it will continue, the dynamic suggest that this won't end abruptly. That's where we are on the capital formation side. We've also done some other things in our other businesses. Healthcare has been so good, it outshined, where the progress we've made in our other businesses. And I think the thing we've done here is those businesses in our other sectors are right sized. So, when we look at the metrics, we actually look at the number of bankers producing an amount of revenue, that's actually the metric I care most about. You can have a lot of bankers and still not do enough revenue. We actually have surprisingly few number of professionals relative to the production and so we're looking for people who we think can come into this organization and be productive in both capital markets and advisory business. And so as we made some hires, and I think we made some announcements, we're continuing to tactically look at where we can monetize our research footprint by adding bankers in those spaces where we already have the fixed cost associated and the domain knowledge associated. So selectively, we've done that. We've seen already this year in several mandates, to be added to the backlog in M&A. And I think that's a function of the fact that our platform is more mature and so if you go back to where were in 2010, we really did rebuild almost everything from banking. There are some people that were here then, but this is relatively new banking platform and it just takes time for the platform to mature, for the bankers to have consisting calling efforts, you know, wearing the Cowen pinstripe. So we're seeing now the function of that maturity on the platform.

Great. I'll appreciate all the detail and congratulations again guys.

Mike Adams, Sandler O'Neill

Good morning, guys. And also I throw in my congratulations there. Really impressive fourth quarter here. So, first question, a follow-up on the brokerage business, just I mean looking at almost 50% growth in the brokerage revenue year-over-year and, I mean, really impressive. Could you maybe give us some of the headcount trends in that business in terms of research analysts, sales and trading personnel? I was just trying to figure out; you know, what the right run rate is for that is, looking forward, the next couple of years here?

So, we haven't added materially to the headcount in either area, actually since the post-Dahlman Rose acquisition in 2013. We have -- where we've added to headcount is mostly in associate support for senior analyst, which I'm sure is something that resonates with you. And we think it's really important to scale the domain knowledge and one of the ways to do that and build sustainable franchise in research is to have really talented associates who can grow into senior positions. So part of what's happened here is we've had some senior associates take on responsibility and initiate on some areas that are really interesting and it's been organic thing. That's not something that was happening here a number of years ago.

So there hasn't been a material change in headcount since the Dahlman Rose acquisition in either research or in sales and trading. It's been a matter of really positioning our resources to have the maximum amount of impact. I know you know how this game works, this is about as much about vote getting and penetration, as anything else. And I think our sales and research worked extremely well together. We put new processes in place, and some new technology in place that allows us to peer into our client base and ensure that they're getting the content they need and they want and the more they can indicate to us what they want, the more of it will get to them, and we're not spending a lot of time with clients who don't want certain content. Again this is really about optimization and making sure that we're in a mode where the content that we produce has the maximum amount of impact.

And Mike just what Jeff was saying earlier, the fourth quarter, we used to have a fourth quarter slowdown, right, so we're up 21% year-over-year. For the fourth quarter we're up over 35% in equities business. And I think we didn't experience that fourth quarter slowdown because of our electronics and options and how we've moved up in the vote and things like that. So the fourth quarter has been sustainable, whereas in the past, we would experience a fourth quarter slowdown in the equities business.

Got it.

One of the things we tracked pretty aggressively as where we're moving in an area where we're trying to be predictive with our vote. So when we see the amount of resources we're applying a particular account, we have an expectation around where we should be. And we're trying to shorten the cycle time between how much we're provisioning and how long it will take for us to get realization. And the dialogue we're having with accounts has been productive around that. I say to people very clearly to our clients if we are not adding value to you and things we're giving you, you should tell us because we can take that content, that effort, and we can put it elsewhere where it is more appreciated, and that's an okay thing too. I also feel like if we are adding value, then our clients have a responsibility to make sure that we're getting a disproportionate amount of their share because that's how we ultimately end up in a position where we can continue to do what we do best.

Got it. Thanks guys. And then to stick with the broker dealer, earlier this week, we saw few departures, senior members of the DCM team, a business you spent 3 years or 4 years building and were really starting to see some tangible assets. Can you give us a strategic update there, and how are you going to go about rebuilding this time around.

Well, I think don't think it's a rebuild, I just -- we have actually lot of talented professionals in that area. Obviously we'll be looking to continue to recruit, as we have been, and one thing that doesn't go away is our ability to source opportunities, most of those opportunities came from the banking network, and the team that departed was doing mostly execution around that. There is an embedded knowledge base here in the organization that certainly did not leave and we continue to execute very well and win new mandates even without them.

Okay and then last one.

You guys, you're listening to the Urban Meyer of investment banking here, right. His third team is better than our people's first team.

Actually that's an Ohio State reference, by the way, from an Ohio State grad. I just want to say that I probably would not have chosen over Meyer, but okay.

Well, while Urban is definitely sitting on top right now in the final rankings that is. So a last question from me, on the comp ratio a little bit of a true up in the fourth quarter I know that you guys been talking about moving to more cash composition in terms of the comp mix. How do we think about that ratio moving forward? I mean, seems like less deferred comp, it should come down over time but overall, like what's a good number for 2015.

I think...

I mean we are going to -- Mike, we're going to monitor what's going on in the marketplace right. I mean, we've talked about it on earlier calls because we saw -- we do this, we participate in the studies. We want to see what everybody else is doing because we don't want to lose our good people if we're not paying them enough cash and we give them too much deferred, it's a balancing act. You want people though -- you want people to have skin in the game and work hard every day and want to be committed to the firm but we also need to pay enough cash to be competitive, that we're not going to lose people.

So we've -- we started, we really want to get below a 60% comp-to-rev ratio, but if the market tells us we can't, and then we may not be able to. But I would -- we usually, we project around a 60% comp-to-rev ratio, we may be a bit below or a bit higher depending on the revenue mix as well, but --

We also -- we want to work down the deferred. So that it kind of just flattened out because that's a future charge to earnings. So to the extent that we can afford to pay out more cash, (a) it makes everyone a lot happier who works here, they deserve it, they've earned it, lot of guys made a big investment in this place the last 5 years, and it was time, subject being able to afford to do it, to recognize that by paying more cash and in the process, we just enhanced future earnings by reducing future deferred amortization. And, as Steve said, we will continue to monitor it, but that's kind of the path we're on, which is all towards building future value into the earnings stream of the Company.

Peter makes a good point. So, when people came here 4 years ago, especially in investment banking, there was definitely career risks associated with that in their minds. And I think, it was, what we talked about what we were going to build was largely aspirational. We had a pretty good vision of what we wanted to do, but there is no proof. And a lot of those folks took pretty significant deferred portions of their compensation in deferred. And I think this is the first year where that has really, where we've been able to sow the seed, reap the benefits of the seed we sowed earlier. And so I think we did a really good job from a balance standpoint this year of being competitive, and as a result, I think we've got some pretty good feedback.

Got it, understood, guys, thanks for the color and congrats again really on the strong fourth quarter and full year.

(Operator Instruction) Joel Jeffrey, KBW.

Good morning, guys. Just going back to the commercial finance, I mean you guys kind of announced your plans to get into this back in September. So you're kind of 4, 5 months down the road for you decided to sort of pull the plug on it. And you'd mentioned that you have mentioned that $125 million of capital that you could put towards it. I'm just kind of wondering how far long did you get in the process of building this business out one before you decided wasn't really something that could go forward?

Well, I mean, first of all, it's not a business that was going to be a very intense business from a headcount standpoint, in part because most of what our value-added proposition is in the origination side of the business where we already had everybody. So the incremental headcount that we had was 3 people in that business. And so it wasn't particularly far along in terms of cost. It had -- it cost us probably a couple million dollars last year in total and we carefully monitored, we continue to carefully monitor where we are in the credit cycle. And this is a business that you can't just get in and get out. So as we look to where, at how the credit cycle was evolving and some of the things that are getting done in the marketplace where we were going to have to bid competitively with our balance sheet in that particular sector of corporate credit, we just felt it's getting a little longer in the tooth, that now might not be the right time to move forward on that. It doesn't mean that we're not going to be competitive in terms of our agency business. We still are very competitive and we're still winning lots of mandates and interestingly enough, what we reason have viewed the finance businesses as a product extension of what we were doing on the agency side, as we crawled into it a little bit more with our client base and our bankers, it didn't actually seem as if the clients we were banking were necessarily desirous of our actually having a lending capability. I mean some were, some weren't. As we move forward, it wasn't a slam dunk to say, hey, we want to see Cowen in our lending syndicate.

I think what Peter mentioned is also true. We are always looking at different ways to deploy capital and there some other things we're working on, other things we're looking that may exhibit better rates of return at lower risk. And we remember, at our hearts, we are investors, and we look at businesses through an investment and a risk-reward lens all the time. And so when we are sitting down towards the end of the year and looking at the capital commitment and the return on equity and the risk in the business versus other things we're seeing, we made a tactical decision that now is not the right time to press forward. And it's not that we won't do it going forward or that we won't find an opportunity to do it, but our view is that there is more likely to be a stress in the stress cycle coming then there is to be a regular way lending business and so we want to be judicious. That's our job.

Yeah, I mean, let's also, mention that the fellow who we brought into to run the business and lead the business, Craig Schiffer, had an untimely death over the Christmas holidays, was buried in an avalanche in France. And so given our reservations about what was going on in the credit cycle and we were deeply into those discussions, and then all of a sudden, our lead horse is no longer with us, it was, like, big stop sign for us and re-evaluate.

Okay. I appreciate the color on that. Then on the incentive income line, I mean that was clearly very strong this quarter. Just wondering with the strength in the activist funds, how challenging is that to surpass these high waters marks going in 2015.

Well, there's no high water mark going into 2015 in that business or any of our other businesses, actually.

So in terms of thinking about incentive fees going forward on these funds we shouldn't necessarily be concerned that the performance was extremely strong this quarter and any kind of slowdown could negatively impact those?

Well, I mean we may not have as strong a quarter as we did in the fourth quarter and have the same in incentive fees. But if they -- if the returns across the funds are as strong as prior year, and then we will have the same incentive fees.

Okay and then just lastly for me, I apologize if I missed this earlier, what was the net inflows on the AUM side this quarter for the, net of the fund sale?

About $2.8 billion.

Well, that's for the year. But just in the fourth quarter?

Yes.

A little over 300 million.

Steven Chubak - Nomura Securities

Hi, good morning. Steve, maybe just one point of clarification, just given the strength in the incentive income line. I know there's some interesting dynamics in terms of how the incentive income is accrued for the Healthcare Royalty Partners strategy specifically. I didn't know if any of the benefits there were accrued in the fourth quarter or whether that's expected to be more of a 2015 event?

There is none -- there are no incentive fees for 2014 from Healthcare Royalty Partners and for 2015, we aren't -- we're not expecting any in 2015, but we do expect them starting in 2016.

Ok, and can you remind us how we think about the accrual of those incentive fees?

The way it works is for Fund One, the money has to be returned in a preferred and then we got to book the incentive fee. So you don't put the incentive fee until it's actually earned. So we're working -- they're working, the guys are working through Fund One now. But it's not complete and when the money's returned plus the pref, then we'll have our incentive fee.

So, you said regarding expectations. That was my question.

But we expect to start seeing incentive fees from fund one in 2016.

And clearly a stronger investment banking results, particularly within ECM and M&A lines, so just looking on a year-on-year basis, DCM it was down, and just given some of the cautious commentary regarding the outlook for our credit markets given where we are in the cycle. I'm just wondering how that informs you thinking regarding the business at least as we entered in 2015.

From DCM?

I don't think it gets impacted at all.

Okay. Look, that's it for me. Congrats on the quarter and thanks for taking my questions.

Thanks Steve.

Thank you very much Steven. Ladies and gentlemen that's all the time we have for questions, I would like to now turn the call back over to management for closing remarks.

Well thanks everyone for dialing in. I also like to thank, which we don't do often enough, those shareholders of ours who were believers in what we were doing early on and bought our stock and have been with us during this whole reincarnation of the Cowen Group franchise. And we appreciate your support, loyalty and patience. This place has a lot of momentum, it has taken a long time to get, to get to where we are, but it is what it is, we are where we are. And we are very excited about where we have to go in the future. Given our capital base, the talent of our organization, and the just -- kind of the depth and breadth of the activities of the firm. We just -- we feel really good about the future and just appreciate all of your interest.

Thank you very much. Ladies and gentlemen that concludes your participation in today's conference call. You may now disconnect. Thank you for joining and have a very good day.