Cowen Inc (COWN) 2015 Q3 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 2015 third 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 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 [instructions] 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 the 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 begin.

Thank you, operator. Good morning, everyone. Welcome to Cowen's third-quarter earnings call. With me today, among others, is Jeff Solomon, President of Cowen Group, and Steve Lasota, our CFO.

In the third quarter our core operating businesses performed very well, while investment income and incentive income adversely affected revenue and profitability in the quarter. As you can see on the waterfall charts attached to the press release and -- in the earnings release and I will address this further in the call.

Before turning the call over to Jeff to discuss the performance of Cowen and Company, I'll discuss the results of Ramius and briefly comment on the performance we experienced on our investment portfolio.

Ramius continues to attract and retain assets under management even in an environment where many investors have retrenched. We feel our investment capabilities, alternative solutions, activism, royalties, credit, global macro, long/short equity, merger and event, managed futures, and real estate are highly relevant in today's investment climate. Our ability to continue winning investment mandates over the years regardless of the market reflects that.

Despite the challenging quarter, investment performance has been strong year-to-date on both an absolute basis and compared to relevant HFRI indices of many of the funds we are currently marketing. In third quarter, the hedge fund industry's assets, based on industry data that's been published, shrank by about $95 billion, which was the largest loss of assets in the industry since 2008.

In contrast, assets under management at Ramius expanded by more than $500 million with AUM reaching $13.7 billion as of October 1. Of the total AUM increase in the quarter, $1.2 billion was net subscriptions minus $684 million in performance. Our strategies were successful in raising assets during the quarter.

Management fees grew 10% in the quarter as the business continued to scale. The average management fee was 53 basis points in the quarter compared to 55 basis points in the prior year period. As a reminder, we do not manage to this metric given the fee structures within products and channels.

A more appropriate measure to track the progress of the business is the management fee run rate. Based on third-quarter 2015 management fees of $18 million, management fees averaged $6 million per month. Equity market volatility in the quarter had a negative impact on performance fees overall and resulted in a giveback of accrued incentive fees. This should be viewed in the context of a challenging quarter.

The strategies have had strong track records and we believe have the capability to drive future performance. We have seen much less volatility so far in the fourth quarter. We continue to attract talented teams to the platform and we entered into a partnership with Caerus Investors, our first long/short equity strategy with a consumer focus in the quarter. Long/short is the space that commands significant allocations that up until now we did not have a presence and we are expanding it.

We had set very high bars to find a high-quality differentiated team, which we have. Caerus' team has an impressive track record, brings AUM and most importantly we believe that we can provide the sales and operational support to help accelerate their business.

Ramius continues to enhance and diversify its platform with differentiated products and solutions across the liquidity spectrum. In 2013 we had five in-house affiliates, three continuous opening vehicles and limited hedge fund capacity available. Today we have nine in-house and affiliated teams, eight continuous opening vehicles, and six hedge funds with billions of dollars in capacity.

Our newer teams - Ramius Merger Fund and Quadratic - raised $400 million net year-to-date. While revenue contributions from the newer teams have been more modest near-term as their respective businesses scale, their success will play a key role in our future growth.

We are pursuing new avenues of asset growth which may include RICs and UCITS in Europe and other structures aimed at client segments from institutional to retail. We hope to discuss more about this with you in future calls.

Now the quarterly loss in investment income was primarily attributable to mark to market declines and spread widening within liquid strategies on our balance sheet and in our investments in our own products. In particular, widening credit spreads, widening merger arb spreads and equity exposure in some of our investments comprise most of the negative performance.

We took meaningful steps to reduce our market exposure during the quarter and believe we are positioned -- well-positioned to capture future returns given the mean reverting nature of our largest allocations. I think everybody should keep track of the volatility that took place in August, where we had kind of a 10 standard deviation move in 20 minutes one morning.

Our long-term investment strategy is to produce attractive risk-adjusted returns on our proprietary capital without using financial leverage remains our primary goal. As we have discussed in previous calls, merger arb and short-duration high-yield investments have been our largest investment allocation and the risk return profile of both strategies remains attractive as we have seen them in years. In fact the merger arb is probably as attractive as it has ever been.

We believe this is one of the most attractive allocations of capital. We have repositioned the portfolio to be 98% in deals with definitive merger agreements which have a lower volatility than other event-driven and directional strategies. We continue and we currently expect many of these transactions to close over the next six months.

I will just add that part of our commitment to our merger arbitrage portfolio is having -- the wanted results of attracting outside assets from new investors because our performance on an absolute relative basis there has been excellent. Partially offsetting losses on the balance sheet were gains from our hedging activity that benefited from the decline in the healthcare indices.

We heard concerns for some shareholders about the exposure we had in our healthcare merchant banking portfolio during the quarter and our merchant banking strategy we dedicate to healthcare investing experienced significant drawdowns. That was not the case. In fact we had positive contributions to investment income from that activity in the quarter.

As of September 30, we had $737 million of our capital invested on an equity basis. We continue to manage the balance sheet conservatively from a leverage standpoint. Before I turn the call over to Jeff, I would like to thank our colleagues for the hard work and contributions to the organization. Jeff?

Thanks, Peter. We had a very good operating performance at Cowen and Company this past quarter. In investment banking, demand for new issuance was positive at the beginning of the quarter, but we experienced a slowdown with the August and September market volatility as the number of IPOs and follow-ups coming to market declined considerably.

Having said that, our investment banking division reported one of its strongest quarters in recent years. It was surpassed only by the first and second quarter of this year.

In equity capital markets, we closed on 27 transactions which included six IPOs compared to 19 transactions and nine IPOs in the prior period. Our average fee across all our equity deals increased 84% year-over-year, reflecting our improved market position over the past few years.

Given the concerns we have heard from a number of investors I would like to take a few minutes to discuss our thoughts in the current environment and the trends within the biotech sector.

In a more volatile environment such as we are in today, there are four things to consider. One, the capital needs of life sciences companies of the next few years; two, the way in which these companies will raise that money; three, the number of publicly traded biotech companies that has increased; and four, Cowen's transformation over the years.

On the first point, life sciences companies are regular consumers of capital and the current market environment does not change the amount of capital required to fund their businesses. However, it may change the amount of capital these companies raise at any given point in time and the form in which they raise it.

The drug discovery process still remains quite capital-intensive. It takes hundreds of millions of dollars and many years to move from the preclinical and clinical trials to FDA approval and commercialization. Biotech companies as a result need to raise capital fairly often.

To illustrate this point, since 2011 we have had 68 repeat life science clients. These clients closed on 210 transactions with us. This equals about three deals per repeat client with each client coming back to the market on average every 1.5 years. We expect our clients to continue to seek access to the capital markets.

On the second point, if the current environment persists, companies may choose to fund their businesses through follow-on equity, convertible debt or straight debt. It is extremely important to offer clients viable solutions that address a variety of market conditions. This is why we expanded our capital markets capabilities over the last several years to include equity, converts and debt. In fact many of our recent conversations with life science clients have been to discuss alternatives to raising money in the equity markets.

We've made great strides over the past few years to position ourselves as product agnostic when it comes to advising our banking clients so that we can provide them with capital-raising capabilities that line up well with their needs given prevailing market conditions.

Volatility in the equity market makes it difficult for life science initial public offerings to come to market. So at this point we've had a more modest expectation in that area even as we expect to see a pickup in financing transactions utilizing other forms.

Additionally, we do expect to see an increase in advisory revenue as people look at other methodologies for realizing value. More importantly, the Firm is well positioned to weather a slowdown in new issuances as we remained cautious in our hiring patterns over the past few years.

Third, there are many more publicly traded biotech companies today than in 2011. Today there are 470 public US biotech companies on the major exchanges and since 2011, 197 have gone public. That means there's almost 200 more today that require funding in their pipeline, which is significantly more total adjustable market for us to advise than we had simply four years ago.

Finally, our investment banking business as a whole is in a much different place today. In 2011 we banked 18 biotech companies and biotech ECM] was $20 million for the entire year. Since 2011 our organization has implemented many changes to diversify our banking industry groups, including investments in industrials, certain areas of technology, M&A, special situations advisory, and consumer.

In addition, we have experienced, we expanded our sales and trading platform as well as our research footprint. Collectively these efforts, which among other things -- which include, among other things, acquisitions, new products, and personnel changes, have strengthened us as a firm.

While we have benefited from a strong biotech market in recent periods, we are by no means completely dependent on this continued pace in order to be successful as an organization. I hope this gives you a better understanding of the unique characteristics of the biotech industry and why we remain positive, even if biotech ECM activity remains tempered in the near term.

Let me talk a little bit about our equities business, which had a record quarter. Our efforts in recent years to optimize our research with clients have paid off as clients have turned to us to help them reposition their portfolios during the market sell-off.

While equities in general has not seen a lot of growth in recent years, our business has. We believe the gains we have made, if we continue to stay focused, are sustainable over the long term. Third-quarter brokerage was up 12% year over year, excluding one month of revenue related to the Concept Capital acquisition, which closed on September 1.

While it would be easy to say that the market volatility is what drove our brokerage results, the truth is that just a few short years ago we were not in a position to capture these volumes even if they had come. As a result of many of the changes we've made over recent years in the organization, our clients are beginning to realize who the go-to firm is in times of equity market stress. For example, in the month of August, with NASDAQ composite down 7%, our daily averages were up over 40% versus the prior year.

Our electronic business also continues to grow nicely. Since we acquired ATM in 2012, the average number of daily executed shares and our average daily number of clients are up both more than 250%. We differentiated our electronic offering from others in the market because we are a non-conflicted product, and this message is resonating with clients in the current regulatory environment.

As I mentioned, we closed on the Concept Capital acquisition on September 1 and we closed on the Conifer acquisition October 1, so the fourth quarter will reflect a full quarter for both acquisitions. We expect them to be accretive to earnings in 2015.

While still early days, the integration is going according to plan and synergies are aligning as expected. More importantly, the feedback we have received from the market has been positive.

Both Concept and Conifer were already benefiting from the fact that some of the larger players in the prime brokerage business had moved up-market or have exited the business all together. As smaller accounts search for new platforms to help them with their prime service needs, our new prime services division is already well positioned to be the go-to place, having recently won the Hedgeweek USA Award in 2015 for the Best North American Prime Broker.

Marrying the introducing prime services to the existing Cowen equities research franchise really enables us to leverage our content-generating capability in research and corporate access beyond the current client base. To date, the primary focus of our equities business has been delivering high-quality content to the largest accounts in US equities, and we've made great progress there the last three years.

With the acquisitions of Concept and Conifer, along with the launch of our new emerging managers effort, we've expanded our audience for the content we are already producing at Cowen. In the next few years we believe we can achieve a $200 million run rate in the equities business. By way of reference, our 2014 brokerage revenue was $146 million.

With the prime services initiative and the other initiatives we have in place within our core equities business, we believe we have the pieces in place to reach this goal. Much of that growth is expected to be accretive to operating margins, which will help defray the fixed cost nature of our business.

I want to echo Peter's comment to our team at Cowen Group. If the true character of the firm is defined by the way in which it performs in difficult market conditions, then it's clear that we are building something special and sustainable here at Cowen. Thank you for your efforts on behalf of all of our clients and shareholders.

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

Thank you, Jeff. In the third quarter of 2015, we reported a GAAP net loss attributable to common shareholders of $11.9 million, or $0.11 per diluted common share, compared to GAAP net income attributable to common shareholders of $6.5 million, or $0.05 per diluted common share, in the prior-year period. Diluted per-share data is based upon 109 million weighted average shares outstanding. Third-quarter GAAP net income attributable to common shareholders includes an income tax benefit of $5.1 million.

As a reminder, with the release of our deferred tax valuation allowance in the fourth quarter of 2014, our nine-month GAAP results reflect an income tax expense. The tax benefit booked in the quarter is primarily attributable to a decrease in the Company's operating profit. However, given the size of our deferred tax assets, we do not expect to be a cash taxpayer for several years.

Third-quarter GAAP net income attributable to common shareholders also includes preferred stock dividends of $1.6 million, which is associated with the preferred stock issued in May. In addition to our GAAP results, management utilizes non-GAAP financial measures, what we term as economic income, to analyze the core operating segment's performance. We believe economic income provides a more accurate view of the operating businesses.

In general, economic income is a pretax measure that excludes the impact of accounting rules that require us to consolidate certain of our funds; certain other acquisition-related expenses, reorganization expenses, and taxes; goodwill and intangible impairment; and preferred stock dividends. The remainder of my comments will be based on these non-GAAP financial measures.

In the third quarter of 2015, the Company reported an economic income loss of $14.5 million, or $0.13 per diluted share, which compares to an economic income gain of $6.7 million, or $0.06 per diluted share, in the prior-year period. Third-quarter 2015 economic income revenues were $82.8 million compared to $110 million in the prior-year period. Investment banking revenue was $53 million, up 16% year over year from $45.8 million. The increase in revenue was primarily due to an increase in equity underwriting activity.

Brokerage revenue rose 18% year over year to $41.9 million. The increase was attributable to higher customer volumes in our cash equities and electronic trading business and the initiation of our prime brokerage business in the quarter. Management fees were $18 million, a 10% increase over the prior-year period.

Incentive income was a giveback of $8.6 million compared to income of $4.5 million in the prior-year period. Investment income was a loss of $22 million compared to income of $7.5 million in the prior-year period.

Compensation and benefits expense was 67% of economic income revenue compared to 59% in the prior-year period. Variable non-comp expenses declined 4% compared to the prior-year period to $11.7 million. The decrease is primarily related to a decrease in syndication costs offset partially by increased floor brokerage and trade execution costs.

Fixed non-comp expenses totaled $26.2 million in the quarter compared to $23.5 million in the third quarter of 2014. This increase was primarily due to higher legal and other professional fees and increased occupancy costs related to additional office space in our recent acquisition of Concept Capital.

Stockholders' equity increased by $224 million from September 30, 2014, to $763 million at September 30, 2015, which was primarily related to a release of the valuation allowance against deferred tax assets in the fourth quarter of 2014 and the issuance of preferred stock in May of 2015. Common equity, which is stockholders' equity less the preferred stock, was $661.5 million.

Book value per share, which is common equity divided by shares outstanding, was $6.18 per share. Tangible book value per share, which is common equity less goodwill and intangibles, was $5.62 per share. Goodwill and intangibles include the effect of Concept Capital acquisition, which close during the quarter. Invested capital grew to $737 million as of September 30, 2015, versus $594 million a year ago.

Finally, moving to our share repurchase program. In the third quarter we repurchased approximately 3.6 million shares in the open market and 7,000 shares as a result of net share settlement related to the vesting of equity awards at an average price of $5.38 per share and a total cost of $19.2 million. Since we announced our original repurchase program in July of 2011 we have repurchased 25.3 million shares in the open market and an additional 7 million shares as a result of net share settlement related to divesting of equity awards. The total cost of all buybacks through the third quarter of 2015 was $128 million, which represents an average price of $3.97 per share.

As of September 30, $5.9 million remained available under our share repurchase program. On September 30, Cowen announced that the Board of Directors approved an increase to the Company's share repurchase program, it authorizes Cowen to purchase up to an additional $19.1 million of Cowen's Class A common shares from time to time, bringing the total available for repurchase to $25 million.

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

Thanks, Steve. Our job at Cowen is to build a business that is well positioned for success around all market segments. Our core businesses reflected in our three revenue lines of investment banking, brokerage and management fees performed well in the quarter.

As we continue to grow our business, we will be in a position to mitigate the effects of quarter-to-quarter variability associated with performance fees and investment income as it starts with driving our -- as it starts with driving our core business and creating platform synergies focused on revenue growth, expense management, and capital management.

2011 was the year in which we did a lot of restructuring and 2012 was the year in which we began to establish a framework for our business today. As we look to the future, we see many opportunities to drive revenue and margins organically and through acquisition.

Building a winning organization starts with putting the right team in place when the market opportunity is less than obvious. It's followed by creating a culture where when someone wins we all win. Again, thank you to our colleagues for all their hard work over the years and making a difference in Cowen, to our clients, and our shareholders.

Now let's open it up for questions. Operator?

(Operator Instructions) Devin Ryan, JMP.

Thanks. Good morning, everyone. So on the balance sheet, just want to make sure I understand the comments.

The risk was reduced during the quarter, so to the extent the markets had been recovering thus far in the fourth quarter does that mean that the recovery and results will be more muted? Or how should we think about the higher position today given that the markets have been a little better in the fourth quarter?

Devin, this is Peter. We started reducing our exposure in August. We kept it kind of muted in September and maybe even early October, but when the market started to stabilize, we started to sort of lift some of those protection mechanisms we put in.

October's performance has been excellent on the balance sheet and we don't really think we've given up anything by the actions we took during third quarter.

I think it's also worth noting, Devin, that a lot of the strategies that we have are spread strategies and those spreads can get wider and narrower. Obviously in times of volatility we see spreads get wider and then when the markets gets a little less volatile, those spreads come back in. There is just a natural ebb and flow to those mean reverting strategies, so when we see less market volatility, those strategies start to generate income.

I think that in the quarter with the volatility that we all experienced, we saw, was exacerbated by the lack of liquidity that there is in the marketplace in general. And as we have all seen, some of the best investors of our generation who have suffered terribly during the third quarter and coming from continuing even into October. What happens is they tend to go to where they have liquidity to basically rebalance their portfolio.

A lot of what we do are in those more liquid names. Like merger arb, spreads today are like 2008 spreads and this is not a 2008 environment. Unless you're on top of that with a political environment where a question about drug pricing by one particular candidate or a question about some of the big healthcare company mergers by one particular candidate put fear into the market and driven spreads out wider in transactions that are definitive contracts, subject to some regulatory review. But, by and large, they are going to happen.

So we feel very comfortable. It's not a really exact analogy, but if you go back to the summer of 2011, August 2011, we had the sovereign debt crisis volatility in the markets. As I recall, we had mark-to-market losses about $17 million or something in the quarter, third quarter, all of which was made back plus in the fourth quarter.

We have over a 20-year history of investing our capital at a compounded rate of return of north of 15%. We're not doing anything different today than we've been doing for the last 20 years and expect to continue to do it. And as we continue to invest -- [and understand] we're not just speculating in any way shape or form on our balance sheet.

What we're doing is investing with strategies that we are trying to scale with client assets. As we put a performance, like merger arb, our performance year-to-date is not good -- it's excellent, notwithstanding the quarter. It is why we are engaged in a number of dialogues that -- can grow that strategy substantially.

That's where our money goes, to build strategies and prove that we know how to invest the money. That has been our history since the day we opened the shop and it's going to continue to be what we are all about. And maintaining liquidity so that when opportunities like Conifer or Concept come along, we've got the liquidity to go and make those acquisitions and scale the Cowen and Company part of the business. It's a little bit of an orchestra that has to be managed.

Got it, thanks for all the detail there. On the equity underwriting backlog, it sounds like the actual backlog is very strong and laid out a compelling case around I think the biotech industry in terms of long-term capital raising. Clearly, I think near term it's been more challenged. Fourth quarter has started on a slow note here.

So with respect to just thinking about maybe some of the near-term dynamics, are issuers ready but the market is skittish; buyers don't want to participate? Or is it more a function of just issuers don't like the new prices after valuations have taken some hits? Just trying to understand the dynamic there a little bit around the back up in the backlog.

I would say it's a combination of both. I think we've got more than enough companies we think are great companies that are likely to access the market at some point over the next three to six months. Many of them may be waiting for the all-clear signal so they can get better execution. A lot of them are funded; a lot of them we did private round. Of course they don't have to do something today if the market doesn't participate.

But then there are other things companies that really feel that having a public currency is a real strategic advantage and so we have taken a couple of companies public this quarter. We've gotten them public. They've gotten -- I think they have come cheaper than maybe wherever we expected them to come, but they are public and they can execute on their business plan.

There will be value inflection points that occur in the next three to six months. If they deliver on what the key milestones are that they've identified, we expect them to perform accordingly.

And so I just think any time you have a situation where there's an uncertainty in the marketplace, particularly around drug pricing, it just throws a big rock in the pond and everybody has to see where the waves settle out. And when that happens, people just wait.

I do think, though, as I mentioned in the call, there's just a natural need for these companies to continue to access the market. And when we look at our backlog, if it doesn't happen in the fourth quarter, it will happen in the first quarter. If it doesn't happen in the first quarter, it will happen in the second quarter.

There's just so many really excellent companies that we are involved with where we have already been mandated and we will make the right choices for those clients based on market conditions.

Okay, great. With respect to the prime brokerage platforms, just want make sure all the I guess dilution to tangible book value, that's already occurred because those deals closed in last quarter. I just want to confirm that.

And then now that deals have closed, I don't know if you guys can give us some better quantification around what you are anticipating in terms of contribution as we look out over the next year there. That would be helpful.

Devin, on the first point, only Concept closed in the third quarter. Conifer was the first day of the fourth quarter, so that's not then reflected in goodwill and intangibles. And Jeff can answer the second part.

I think we are pretty definitive in the comments we made earlier that we think we can achieve a $200 million run rate in equities revenue and you can ascribe a large chunk of that to the acquisition of those two businesses. I will say that we have our targeted numbers that we would like to be able to hit on an average daily basis. We have them already established.

I'm not going to disclose them today, but I will tell you this. The numbers we have laid out for our average daily revenues in 2016, we have already hit those multiple times in October of 2015. So for one, we see no falloff in revenue since the acquisition and we've seen that the combination of those and the ability to cross-sell, even within those platforms, is beginning to take hold. And we're just getting started at permissioning those accounts for our content.

So early days are encouraging as we connect here on that. So feel very confident in our ability to hit the $200 million number.

Got it, okay, helpful. Then just last from me, any captive reinsurance deals expected this quarter or over the next several quarters?

We are working on something, Dev, but it's still too early to tell whether it's going to close in the fourth quarter. We hope to, but not really sure yet.

Okay, that's great. Just going -- Conifer, the dilution intangible, is that something less than $0.10? Just want to get some framework on that.

We are still working through the numbers but it should be around that, maybe a little bit less than that.

All right, great. Thanks for taking my questions.

(Operator Instructions) Steven Chubak, Nomura.

Good morning. So just a quick follow-up question, Jeff, relating to the $200 million revenue target in equities that you alluded to.

I appreciate some of the detail that you had provided, but just wanted to get a better sense as to, in thinking about that walk from call it $140 million to $150 million to $200 million, how much of that is from some of the new initiatives on the prime side versus your expectation for organic growth and continued market share gains?

So I think a large chunk of that is from the acquisitions and from some of the new initiatives to -- on our emerging managers platform. I think if you look at what we have been able to do in terms of our focus accounts, what we call the focus 170 accounts, we continue to make progress there, because that's going to -- as we've taken market share that's going to sort of ebb and flow a little bit more with what the commission wallet on the Street looks like.

What we see is a tremendous opportunity to permission clients, let's say, 200 and below and really work through those clients to figure out who of those accounts are the best accounts for Cowen. And when we find those accounts we've got a number of initiatives on board to really work those hard. Then you go deep with those accounts and you figure out who the winners are and you grow with them.

We know that there's an element to the smaller accounts where there's turnover and that's just the nature of that business, so we should be extremely careful with how we permission and how we optimize those resources. But the reality is they are so underserved by the larger firms, especially if you get down to hedge funds that are below 500, of the 500 largest, they're so underserved.

And I like to say the paradox is we can give them a little bit of what we do and it means an awful lot to them. We believe that not only can we capitalize on acquiring the revenues without any attrition, but we think we should be able to drive revenues on average with the best accounts as we progress over the next few years.

Thanks for that detail, Jeff. Maybe just switching gears for a moment, just looking at the alternative side of the business. One of the things that we've been hearing, at least some of your investors highlight, is the fact that there are windfalls or sources of future incremental earnings upside that aren't currently contemplated either in consensus numbers, just given the chunkiness of some of those gains.

The Healthcare Royalty Partners; I know some of the stakes that you have in your funds and strategies are marked at cost. I was hoping you could give us an update as to what some of those future sources of potential windfall are and how we should be thinking about that going forward.

Steve, we don't usually give too much future guidance on this, but we do know with Healthcare Royalty Partners that what we've been telling people is, unlike other hedge fund products where we are booking incentive fees on a hedge fund basis, the method one versus method two.

In Healthcare Royalty Partners you don't book any incentive fees until all the money is returned to the investors plus a preferred return, which with fund one is -- we're getting pretty close. So we should see incentive fees start to come through for Healthcare Royalty Partners. And as you know, we are on fund three, which is really fund four because there's fund one, an overflow fund, fund two and fund three. So as those start to come on, they should continue year after year.

So that's what we see and that's what we have been talking about on that side. For fund one, we do have some indication, but it's still too early to tell what the number will be and when it will actually come in. But that is clearly an income, a piece of income that we do expect.

Then just one final one for me. Just thinking about the capital management priorities, given areas you see for future investment at the same time your stock is trading at a pretty healthy discount to tangible book. If you guys could just speak to that prioritization as it stands today that would be really helpful.

Could you clarify a little bit exactly (multiple speakers)?

In terms of your capital management priorities, whether it's share repurchase versus using some of that excess to fund future growth initiatives.

You know, I don't think we take it down to a defined list of priorities. We're looking at the environment. Every day that we are in, we're looking at the opportunities on the investment side, looking at the opportunities to build investment products. We are looking at the opportunities to add other businesses, so it's a fluid thing.

We will always maintain an enormous amount of liquidity. As you can see, our Board re-upped our repurchase authority yesterday. We were very active in the third quarter buying stock. We bought 3.6 million or 3.7 million shares of stock and we will continue to buy back stock as long as we maintain liquidity and have what we need to to grow the businesses and grow the assets under management.

To the math we are doing, just to give you some idea, is as we are engaging either new strategies or acquisitions, we are looking at the long-term impact in terms of being able to drive earnings versus the short-term benefit of buying back stock. So we know that when we buy back stock it's accretive today, but it inhibits your ability down the road to maybe grow businesses you think long term are sustainable.

There is a very healthy mechanism that goes through so when we do these new initiatives, we are looking at them through the lens of how we're driving long-term shareholder value. And that is math that we go through on every one of these. Whether we are doing -- launching a new strategy at Ramius or we doing an acquisition at Cowen and Company, we're always looking at it through the prism of where does that fit in terms of long-term earnings growth versus the short-term gain associated with accreting to book value?

And I think, certainly as Peter mentioned, over the last quarter we have the capital flexibility to do both and we will be looking at how we deploy capital through that prism.

And without naming names, there are some firms in our business who spend an enormous amount of their liquidity and capital in buying back stock and now find themselves in a position where their ability to sort of invest forward is hampered. Maybe they've made that decision. They don't want to invest; they just want to liquidate their capital back to their shareholders.

But we have a young organization and the industry is going through a lot of change. We are right in the middle of that change and we are going to be a huge beneficiary of wherever it's going, both on the asset management side and on the securities side. I've always said since day one, we are in this for the long term. This is -- we are not short-term oriented in what we do here and it's going to remain that way.

Understood. Very helpful color. Thanks for taking my questions.

Joel Jeffery, KBW.

Good morning, guys. I know you are talking a little bit about the performance so far in the fourth quarter, but just wondering how that specifically could relate to any kind of rebound we see in the incentive fees or the investment income line? How quickly could that occur if things pick up quickly?

Well, all I can do, Joel, is point to last year as an example, and I'm not saying it's what we expect to happen. It just is what happened last year. But half our investment income and incentive fees last year were earned in the fourth quarter.

When we look at these investments, they play out over a period of time. We look at the returns of -- I don't think it's possible to manage to a daily performance number in the strategies that we are in, or even maybe a quarterly number, but we do take great pride in the fact that the strategies we have over the long haul perform. Sometimes that performance comes in a very compressed timeframe and sometimes it plays out over time.

And so Peter is right; we had an unbelievable rally into the year-end last year. Not saying that we will have that again this year, but if we do, it's a very direct correlation to performance. And so it's not like there's a lag there.

Great, thanks for taking the question.

Thank you, I'm not showing any further questions. I will now turn the call back over to management for closing remarks.

Thanks, everybody. I appreciate your taking the time. Sorry -- I know some of you have trouble dialing in. I apologize on behalf of Thomson Reuters to all of you who had trouble dialing into the call.

We will certainly be available to answer questions and we will be in touch with a number of you over the course of the next few days and weeks. Thanks again for listening in.

Let me just further add that we want to thank everyone here at Cowen for their continuing efforts to help build this business. We've come a long way since the merger five years ago, six years ago, and we couldn't be more pleased with the progress we've made, notwithstanding the volatility in the quarter. So to all of my colleagues here, thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.