Cowen Inc (COWN) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for joining Cowen Group, Inc.'s conference call to discuss the financial results for the 2015 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, Inc.'s website at www.cowen.com.

Before we begin, the Company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group, Inc. has no obligation to update 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. A reconciliation of those measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release.

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

Thank you, operator. Good afternoon, everyone. Thanks for calling in. I assume everyone has had a chance to read our press release by now, so let me get right into it. This is about our fourth-quarter and full-year earnings. I am joined, as usual, by Jeff Solomon, President of Cowen; and Steve Lasota, our CFO.

As most of you are too well aware, many of the financial markets -- if not all the financial markets -- have been going through a fairly dramatic transition in the last, oh, call it, seven months -- or maybe even six months, going back -- or eight months going back to August. The fundamental macro underpinnings of the past several years is no longer reliable -- among those being the effect of Central Bank intervention in the markets, stability of oil prices, and the consistency of China's growth.

And as a result, investors are reassessing risks and have a decidedly more defensive posture than a year ago, as we've seen in the volatility in the markets and in the declines in the markets. The markets in transition can be extraordinarily volatile, and seemingly disconnected asset classes can become far more correlated. We saw it in 2008, and I think we're seeing it again in 2015/2016. Particularly the continuing slide in energy prices, having first affected credit products, now seems to have found its way to correlate directly to the equity markets -- and for very logical reasons.

But perhaps the greatest factor affecting volatility in the equity markets, and in the credit markets, is a lack of dealer participation in those markets, due to the dearth of capital because of the Dodd-Frank regulatory framework. And I think that this is having a profound effect on liquidity, and it's going to continue to do so, which means more volatility.

Now I mentioned this because, fortunately, for us at Cowen, many of the factors affecting our larger competitors, and some competitors not larger, are not affecting us in the same way. And I say that because of the way we're structured as a business. Against this difficult environment, our core operating businesses at Cowen performed well in the fourth-quarter and full-year 2015. For the full-year 2015, economic income was $34.5 million, or $0.30 per diluted share compared to $44.2 million, or $0.37 per diluted share in 2014.

Total revenue was $529.7 million, actually up 6% year-over-year. For the fourth quarter of 2015, economic income was $15.2 million, or $0.14 per diluted share compared to $18.9 million, or $0.16 per diluted share in the fourth quarter last year. Total revenue for the quarter was $160.7 million compared to $165.8 million in the same quarter last year.

We remain squarely focused on the things we are confident will deliver positive returns to our shareholders over the long-term. In 2015, we added meaningfully to our book value per share, which was $6.52 at year-end versus $6.07 at the end of 2014. Tangible book value was $5.73 at December 31, 2015 versus $5.68 at the end of last year. We also bought back $49 million of stock in 2015 and an additional $7 million of stock outside the repurchase program as a result of net settlement -- share settlement relating to the vesting of employee equity awards.

Since 2011, we've repurchased $110 million worth of stock and $26 million outside of the repurchase program as a result of net share settlement related to the vesting of employee equity awards. And at the same time, we've never had more liquidity on our balance sheet than we do today.

We announced in our earnings release that the Board of Directors approved an increase to our share repurchase program. The total amount available for repurchase under the program is $25 million. The Board likes or is very comfortable with these $25 million increments, and will be more than pleased to re-up that if we spend that during the third quarter -- the second quarter, which is not likely to happen, because we have a very short window. But be very clear, our Board is very pro-buying back stock at these prices.

Despite many of the challenges facing a number of our competitors, we feel well-positioned to take advantage of opportunities that markets like this present, to drive future revenue growth and margin expansion. We remain a very, very well-capitalized company that uses very little financial leverage to generate returns. We have continued to generate strong operating cash flows. Our operating businesses have the ability to scale across the Board, and we have a long history of finding ways to make positive investment returns that have little overall correlation to the broader markets.

Before turning the call over to Jeff to discuss the performance of Cowen and Company, I'd like to discuss the results of Ramius and performance on our invested capital. The alternative investment industry suffered significant outflows in 2015, as popular strategies struggled during the second half of the year. Prominent fund closures caused market dislocations, as investors rushed out of crowded equity trades and debt trades. Industry data suggests that assets declined in the industry about $58.2 billion in the fourth quarter of 2015, with $35.6 billion coming from redemptions, the rest from market deterioration.

In aggregate, hedge funds suffered a 2% drawdown in 2015, the worst showing since the end of the financial crisis. Ramius affiliated funds fared far better. With the exception of the activist strategy, many of the Ramius strategies generated positive performance in this environment and outperformed their peers.

During 2015, Ramius increased assets under management by $836 million net through asset raises that were partially offset by negative performance. In the fourth quarter, in particular, AUM declined by $421 million of which $164 million were redemptions and $257 million were performance-related. Management fees for the Alternative Asset Management segment tracked higher, growing 6.5% in 2015. Management fees for the Alternative Investment Management segment averaged $6 million per month in the fourth quarter.

Following an agreement to sell a portion of our ownership in the activist business back to the principals of Starboard at the end of the fourth quarter of 2015, we expect the overall monthly management fee run rate for Ramius-affiliated funds for the first quarter of 2016 to be approximately $5.3 million or a little bit lower than last year's average run rate. We expect to make that up, though, during the year.

Average management fees were 53 basis points in the quarter compared to 59 basis points in the prior-year period. As a reminder, we do not manage to this metric, given the differing fee structures within products and distribution channels.

For the year, we reversed prior accruals of $1.5 million in performance fees, primarily due to equity market volatility in much of 2015. However, this resulted in a negative $47 million swing in performance fees from the prior year. So when you look at our results for the year, just keep in mind that there was a $47 million negative swing in performance fees. This should be viewed in the context of a period that was the most difficult for the industry since 2008.

Having said that, we believe that each of our investment capabilities, alternative solutions, activism, royalties, credit, global macro, long/short equity, merger and event, managed futures, real estate, are highly relevant to today's environment and investment climate. And, as I mentioned earlier, most of our strategies outperformed their benchmarks this past year.

2015 was a productive year for new strategies launched at Ramius. We launched a women's-owned global macro fund, we onboarded a consumer long/short equity strategy. We signed a deal to create a registered investment company for a credit fund, which we launched in early 2016. Assets under management from newly-onboarded strategies - long/short equity, global macro - as well as merger arb for the year were nearly $1 billion.

We are continuing to pursue new avenues of growth such as RICs, UCITs, and other structures in the segments that expand our client reach across the liquidity spectrum and broaden our geographic reach, with products which we think are particularly relevant in the environment that we are in and we're likely to stay in for a very, very long time.

Turning to our invested capital, this is an area which has differentiated us, and will continue to differentiate us from our peers. We utilize a significant portion of our capital base almost as a merchant bank to facilitate growth of our operating businesses. Our investment professionals have a long history of investing the firm's capital to generate steady positive returns without significant leverage. And this was evident in 2015. And the earnings on that invested capital -- we continue to reinvest in the business to broaden our product array or to expand the investment banking platform at Cowen and Company.

The balance sheet produced $62.6 million in investment income for the year, which includes significant income associated with the acquisition of the Luxembourg reinsurance company in the fourth quarter of last year. This compared to investment income of $65.2 million in 2014. We delivered positive P&L for the year on our liquid strategies. Merger arb was our single most productive strategy. 2015 was the year with record global deal volume, and remains one of our most attractive allocations of capital. And we think, again, will continue to be so for quite a while.

And our private investment strategies also delivered positive P&L for the year. Before I turn the call over to Jeff, I'd like to thank all of our colleagues for their hard-work and contributions to the organization, as I always do.

2015 was a challenging year in the financial markets. We continue to perform well at Cowen. We look forward to continuing to perform well in the future. And I think it's a direct result of an incredible team of people that come in here every day to win, and they are doing that.

And with that, let me turn it over to Jeff.

Thanks, Peter. Cowen and Company 2015 was a record year for investment banking fees and brokerage commissions. In investment banking, our performance was driven by the strength in our capital markets business and notably an outstanding contribution from the healthcare vertical. Steady growth in our M&A business also contributed to the record results.

Our brokerage business experienced a robust customer activity in cash and electronic trading and solid contributions from the newly-formed prime services businesses. The equity capital markets business had its strongest year since the Cowen/Ramius business combination in 2009. 2015 was a favorable year for new issuance in the equity markets. We were a book runner on 74 transactions in 2015 versus 42 in 2014; a 76% increase despite closing an equal number of equity transactions.

This translated to a 45% increase in our average fee year-over-year to $1.5 million from $1 million. 2015's mix was more weighted towards follow-ons and IPOs, as many of those companies that debuted in recent years raised additional equity capital this past year.

Our M&A business grew $24 million for the year, a 56% increase year-over-year. We've shown steady organic growth in this area over recent years, as our bankers have become more seasoned on the platform, and corporate clients increasingly recognize our capabilities. It is the deliberate process to transition from being a financing partner to a trusted advisor. As we deepen our relationships with corporate clients, we expect further growth in this area.

In terms of our investments in new areas to enhance our banking and capital markets offerings, we've established a presence in several areas that we expect will benefit our business in future periods. In 2015, we formed a special situations / balance sheet advisory team, which focuses on restructuring advisory services, and a dedicated convertibles and equity-linked products origination team.

These capabilities are highly relevant in the current market environment, and complement our debt and equity capital markets businesses in an environment where clients are considering a variety of options for raising capital. During the year, we also extended our banking coverage to include information and technology services.

Turning to the institutional equity brokerage business, which includes equities and prime services, commissions were up 17% in the fourth quarter and 10% for the year. The fourth-quarter 2015 results included a full quarter of prime services and a full year includes the four months of prime services. As a reminder the comparative 2014 periods include the stock loan business, which we exited in the fourth quarter of 2014.

It is worth noting that the commission wallet for US cash equities has declined in recent years. However, our equities business has grown each year since 2012, when we brought in new leadership. Over this period, we made meaningfully -- meaningful improvements in our relationships with clients for whom Cowen can make a difference by providing them with the types of research and corporate access they need to make better investment decisions.

That has translated into an improvement in the vote and market share gains with focused accounts. And during the periods of increased market volatility, such as the third and fourth quarters of 2015 and into 2016, our experience -- our business experienced some of its highest customer trading days on record.

Our electronic business continues to grow as a percentage of brokerage revenue. Since we acquired the ATM business in 2012, the average number of daily executed shares and our average daily number of clients are both up more than 250%. As I mentioned earlier, the fourth-quarter results reflect a full quarter of the Concept and Conifer acquisitions, both of which were accretive to earnings in 2015.

We expect to realize additional synergies as we continue to integrate these businesses in 2016. Since the closing of Concept on September 1 and Conifer on October 1, we've brought on approximately $1 billion in new customer assets as of the end of January, and that includes clients that have transferred to us from other firms as well as clients that have launched with us.

So where are we today? In investment banking, given our focus on capital-intensive industries, our dialogues with clients are more about readjusting valuation expectations and alternative forms of financing. Some clients are choosing to wait for more stability in the market to do their offerings, while others have asked us to help them pursue strategic opportunities. We see a greater number of clients considering both buy side and sell side M&A, given the current valuation levels, and in our special situations / balance sheet advisory area, we already have a few mandates in-hand.

While we expect equity capital markets to remain challenged in the near-term, our franchise system has demonstrated its ability to execute under difficult conditions. In January, we booked a record $12 million in ECM revenues in a single day. On that day, there were 10 healthcare follow-ons, and we were on six of them, three of which we were a book runner. In February, four IPOs came to market in our sectors -- the first to do so since December. We were on two of the four. In short, when there's a deal to be done in our focus sectors, we are there.

So far in 2016, our equities business is experiencing some of the best weeks we've had since the Cowen/Ramius merger in 2009. Because we've shown clients we are not only relevant with our research products but with our non-conflicted trading model, and our ability to provide them with ideas and tools to help them outperform, clients both large and small are coming to us to help to reposition their portfolios.

Finally, as we witnessed some of our larger competitors aggressively cutting overhead and staffing, we are thankful to have been able to grow our business more methodically and patiently over the last 4 1/2 years. As a result of our patience, the compensation structure at Cowen and Company remains quite variable in nature. Despite our growth in banking revenue over the past several years, we did not staff up aggressively.

To be some more specific, in 2011, we had 104 colleagues in banking and capital markets. At the start of 2016, we had 117, a net add of 13 people during a period in which banking revenue grew from $51 million to $223 million.

In brokerage, excluding prime services equities -- excluding prime services, equities headcount is up five people during the 2011 to 2015 period, where revenue grew from $100 million to $161 million. Overall, our headcount, including acquisitions at Cowen and Company, was 779 at the end of 2015 versus 669 at the end of 2014. Our tactical approach to hiring means we have greater ability to flex comp expense in response to the firm's overall performance, should difficult markets persist.

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

Thank you, Jeff. In the fourth quarter of 2015, we reported GAAP net income attributable to common shareholders of $28.9 million, or $0.26 per diluted common share compared to GAAP net income attributable to common shareholders of $142.5 million, or $1.21 per diluted common share in the prior-year period.

For the full-year of 2015, we reported GAAP net income attributable to common shareholders of $39.7 million, or $0.34 per diluted common share compared to GAAP net income attributable to common shareholders of $167.2 million, or $1.40 per diluted common share in the prior-year period. Fourth-quarter 2015 GAAP pretax loss was $17.8 million compared to a GAAP pretax income of $19.4 million in the prior-year period.

For the full-year 2015, we recorded a GAAP pretax income of $11.5 million compared to GAAP pretax income of $57.8 million in 2014. GAAP pretax figures for the quarter and year exclude the benefit associated with the acquisition of a Luxembourg reinsurance company in 2015. This income is recognized as a deferred tax income benefit according to GAAP, but is reflected in investment income in our non-GAAP financial measures.

Income tax benefit decreased by $72.5 million and $77.4 million in the fourth-quarter and full-year ended 12/31/15, respectively. This is primarily attributable to the release in 2014 of the Company's valuation allowance that was previously recorded against the Company's US federal and state deferred tax assets, partially offset by the deferred tax benefit recognized by the Company's Luxembourg subsidiary in 2015.

Given the size of our deferred tax asset, we do not expect to be a cash taxpayer for several years. 2015's GAAP net income attributable to common shareholders is net of the preferred stock dividend of $1.7 million, which is associated with the preferred stock issued in May.

In addition to our GAAP results, management utilizes non-GAAP financial measures, which we refer to as economic income. Management uses economic income to measure our performance and to make certain operating decisions. In general, economic income is a pretax -- pre-income tax measure and 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 fourth quarter of 2015, the Company reported economic income of $15.2 million, or $0.14 per diluted share. This compares to economic income of $18.9 million, or $0.16 per diluted share in the prior-year period. Fourth-quarter 2015 economic income revenues were $160.7 million compared to $165.8 million in the prior-year period.

Investment banking revenue was $36 million compared to $44.9 million in the fourth quarter of 2014. The decrease in revenue was primarily due to reduced equity underwriting activity, which was partially offset by a 35% year-over-year increase in our average underwriting fee for equity transactions. Brokerage revenue rose 17% year-over-year to $48.1 million. The increase is attributable to higher customer volumes and our cash equities in electronic trading business, as well as a fourth-quarter contribution from our prime brokerage business.

Management fees were $18.8 million, a 4% increase over the prior-year period. Incentive income was a give-back of $0.5 million compared to income of $28.8 million in the prior-year period. The decrease was primarily related to reversal of previously accrued performance fees. Investment income was $43.5 million compared to $28 million in the prior-year period. The increase primarily relates to the tax benefit associated with the acquisition of the Luxembourg reinsurance company. Other revenue was $14.7 million compared to $4.7 million in the prior-year period.

Moving to our full-year results, the Company reported economic income of $34.5 million, or $0.30 per diluted share. This compares to economic income of $44.2 million, or $0.37 per diluted share in the prior-year period. 2015 economic income revenues were $529.7 million compared to $497.6 million in the prior-year period. Investment banking revenues were $222.8 million, a $52.3 million increase from 2014. This is primarily due to an increase in equity underwriting activity and a 45% year-over-year increase in our average equity underwriting fee per transaction.

Brokerage revenue rose 10% year-over-year to $160.4 million. The increase is attributable to higher customer volumes in our cash equities and electronic trading business, and the initiation of our prime brokerage business in late 2015. Management fees were $70 million, an 8% increase over the prior-year period. Incentive income was a loss of $1.5 million compared to income of $45.7 million in the prior-year period.

Investment income was $62.6 million compared to $65.2 million. Other revenue was $15.4 million compared to $5.2 million. Compensation and benefits expense for the year was 60% of economic income revenue compared to 61% in the prior-year period. Variables comp expenses for 2015 were $56.2 million compared to $45.7 million for 2014. The increase is primarily related to an increase in client service and business development, increased for brokerage and trade execution costs, and expenses related to Luxembourg reinsurance company.

Fixed non-comp expenses totaled $103.7 million compared to $95.5 million. This increase is primarily due to higher legal and other professional fees, and increased occupancy costs related to additional office space and costs in running the new prime service businesses.

Stockholders' equity increased by $112 million to $790 million at December 31, 2015 from 2014. This increase is primarily related to preferred stock issued in the second quarter of 2015. Common equity, which is stockholders equity less the preferred stock, was $688.7 million compared to $677.7 million at the end of 2014.

Book value per share, which is common equity divided by shares outstanding, was $6.52 per share compared to $6.07 at December 31, 2014. Tangible book value per share, which is common equity less goodwill and intangible assets, was $5.73 per share compared to $5.68 at 12/31/14. Invested capital grew to $731 million as of December 31, 2015 versus $665 million a year ago.

Finally, moving to our share repurchase program. In the fourth quarter, we repurchased approximately 1.7 million shares in the open market and acquired 79,000 shares as a result of net share settlement at an average price of $4.22 per share and a total cost of $7.3 million. During the 12 months ended December 31, 2015, we repurchased 9.4 million shares for $48.7 million under the Company's existing share repurchase program, and acquired approximately 1.7 million shares outside of the program as a result of the net share settlement relating to the vesting of equity awards at an average price of $5.23 and a total cost of $57.6 million.

Since we announced our original repurchase program in July of 2011, we have repurchased 27 million shares in the open market and an additional 7 million shares as a result of net share settlement. The total cost of all repurchases and purchases through the fourth quarter of 2015 was $136 million, which represents an average price of $3.98 per share.

As of December 31, $18 million remained available under our share repurchase program. And on February 25, the Board approved an additional 7 million to bring the total available for repurchase to $25 million.

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

Thanks, Steve. Over the last several years, we've been establishing an operating framework where our organization can perform well over the marketing cycle. In this more difficult environment, we continue to look to officially manage costs, align expenses with revenue expectations, and improve our operating discipline.

As I mentioned earlier, we did not overstaff in recent years, even as we were growing. And as a result, we are well-positioned to flex our cost structure as appropriate. With approximately $1 billion in total long-term capital and a conservatively-managed balance sheet, we believe we are well-positioned to take advantage of strategic opportunities during times of market turmoil like this. We have a long history of managing capital and generating a steady stream of positive returns with modest leverage.

Except for 2008 we have posted positive risk-adjusted returns in a grind-it-out manner with very little leverage since 1999. We are constantly evaluating the most appropriate ways to create shareholder value by optimizing the deployment of capital and will continue to do so.

Our strong capital position provides us with the flexibility to consider a variety of opportunities to drive shareholder value, including organic growth through our existing platform at both Ramius, and Cowen and Company. We're looking to acquire businesses that will scale our platform by leveraging our fixed cost structure, and eliminating duplicate cost at advantageous prices, and we will continue to buy back stock.

Our responsibility is to ensure that we are in the best position possible to generate long-term returns for shareholders using the combination of all of these tools. It's about consistency over the long haul by having enough flexibility to stay the course or take advantage of opportunities where others falter. It starts with driving our core businesses and extends to creating platform synergies over some revenue growth, expense management, and, of course, intelligent capital optimization.

Like Peter, I would like to acknowledge everyone at Cowen for doing all the things that you do to make our organization and our culture so great. Helping clients to figure out ways to outperform, especially in these difficult times, define who we are as a firm.

Thank you for your continued commitment to delivering on that ideal every day. I'd now like to open it up for questions. Operator?

(Operator Instructions) Joel Jeffrey, KBW.

Can you give us a sense for the economic net income impact that you got from the Luxembourg reinsurance acquisition during the quarter?

Sure. We booked -- the revenue was roughly $37 million, Joel, and we have associated expenses with -- we had various expenses for both identifying the opportunity as well as internal costs for putting the whole deal together. So, net, we also pay comp out on it, so net, it's probably like $10 million to $12 million we net off the bottom.

Okay. And then sort of just going forward -- I mean the comp ratio certainly came in a lot lower than what we had modeled. How should we think about that going into 2016?

I'll handle that. So, a lot of it has to do with revenue mix, Joel. I mean, I think you can see when we do a higher-margin business like M&A advisory and investment banking, like the year we had, obviously the comp to revenue ratio of the broker-dealer comes down. Certainly performance fees impact that as well. The better we do with performance fees, you can see the comps and revenue ratio comes down.

Of course, the fact that we did well with our balance sheet this year is probably the single greatest way to drive down our comp to revenue ratio, because the comp dollars associated with proprietary investing activities is a lot lower. So I think we've been consistent in giving targets. I wouldn't be budgeting much different than what we've done historically. And it's just really going to depend on where the revenues come from, but I'd say we've been fairly consistent and in the range of the past few years and don't see that changing materially.

Okay. And then if you guys can just give us a little bit of color on why you sold a portion of the Starboard funds?

So on the Starboard, we have a relationship with them -- the deal struck a number of years ago where they have the ability to buy us down at various points in time, which they've elected to do. It's about getting us, as the business scales, getting more ownership in their hands that will enable them to be able to scale the business.

For us, this is part of the deal that we're in, which is to seed and scale businesses and then grow them. And then as they grow, the management teams end up owning a bigger percentage of those businesses. But our business model here is to own large pieces of businesses like this in perpetuity and this is a great example for us to do that.

Okay. Great. And then just a quick follow-up on the Luxembourg business. How should we think about that going forward? Will there be any expense and/or revenue impact in the quarters rolling forward on this?

We're going to get into the reinsurance business, but we're going to do this slowly and methodically. So for 2016, it won't have a material impact either way.

This is Peter -- it's really more a primary insurance business plan, than a reinsurance -- there will be some reinsurance, but the way we're structured now, we are going to be writing some primary insurance with three different insurance companies that are primary writers that we're going to participate with.

And we're going to walk very slowly -- reinsurance industry right now is not a great one. It's got tremendous overcapacity in large measure because of people from the hedge fund industry have decided to set up reinsurance companies and get capital offshore, and hopefully take the fee income and convert it to long-term capital gain.

I expect that you are going to see pricing tighten up a little bit because the investment side of those reinsurance companies didn't do particularly well in 2015. That's not our thing to do that. Ours is like really building kind of bespoke insurance companies that may have a slight reinsurance component to it. And to the extent it does, it's probably going to be very dissimilar to these other companies.

Because one of the things we are very capable of doing is evaluating financial reinsurance and that's going to be part of our platform. But, as Steve said, don't look for much of the contribution in 2016 as we sort of walk our way into building this business. But this is an attempt or, a serious endeavor, to start diversifying our platform in businesses that we understand that involve financial assets. And this was a major step in that direction.

Great. Thank you for taking my questions.

Devin Ryan, JMP Securities.

This is Brian McKenna for Devon. First, if market volatility persists and it feels like the capital raising window is closing for more of an extended period, are there any levers on the expense side outside of comp that we could think about as an offset to the revenue pressure?

Well, I mean, I think some of our variable expenses will come down if people aren't traveling as much. I think we will have less transaction expenses -- those will happen. I don't know that it's going to be -- we're not going to be bringing down our fixed cost structure materially -- we're pretty tight on that as it is.

Okay. Helpful. Thanks. And then within brokerage is there any way we can get some perspective around how much the prime brokerage businesses are contributing today? And how that is progressing for relative to the original expectation?

So let me say it's progressing as we expected. So the good news is that we saw no fall-off in revenues from the time of the acquisitions were closed, and actually revenues grew pretty nicely on a combined basis. Today I would say our -- that business is about, call it, somewhere between 22% and 25% of the total equity commission business on a run rate basis.

Okay. Appreciate that. And then lastly with respect to Ramius, can you provide any update on where you are on any conversations with adding new managers to the platform, and whether we should anticipate any announcements on this front over the next several quarters?

This is Peter -- sure. We are in discussions always with potential new managers. I would say right now we're probably very close on one in particular -- we would expect to add at least one, if not two, during the year. But at the same time, we expect that some of our existing strategies are going to start to grow some tentacles and we'll be raising money in some new distribution systems that will help us accelerate the growth of some of our existing.

But we're very, very particular about what we want to be in. We have a very strong view about where the world is and where it's going, and what products make sense for investors. And we are sticking with that view. I mean, the view is that we are going to have low interest rates for a very long-term. We are going to have slow growth, no growth in the world economy. We are going to have pressures -- all over. China is a real problem. Notwithstanding what anyone says, oil is a real problem. It's going to have its ripple effect across the credit markets and equity markets worldwide.

Certainly the destabilized sort of political framework of the world is not kind of a great thing. And therefore, I mean, we are very focused on what we hope are non-correlated, we think are non-correlated, strategies that deliver yield to investors. Because we are going to be in a basically zero interest rate environment, where people are going to make returns -- whether you are a pension fund or an endowment or a family office -- how are you going to make returns on your capital to pay the bills? So we are very yield-focused and we will add accordingly.

I also think just to highlight, across the firm, I mean we believe that environments like this actually present tremendous buying opportunities. It may not be evident on a quarter-over-quarter basis. But this is exactly the kind of environment that we've been in -- we've been doing this for 20-plus years -- this is exactly the kind of environments when --

You've been doing this for 20-plus years.

Well, at Ramius and Cowen for 20-plus years, managing capital and managing teams. I mean this is the kind of environment where you can really generate positive alpha incrementally. And so the kind of volatility that we're seeing -- for some, if you're on the wrong side of that trade, it can be very painful.

But for those of us that are well-capitalized, and have patient capital and the ability to put capital to work opportunistically, it presents great investment opportunities. And so the teams we are looking at and things we're looking at doing with our capital, this actually presents a very interesting period of time for us, because we are not gated by some of the regulatory constraints as some of our larger brethren.

I'd like to answer with what Jeff said -- I mean on the investment management side, it's near impossible to, unless you are extraordinarily talented and you spin out of a shop where you are well-known to raise -- to start and raise a new investment activity and meet all of the fiduciary requirements of FINRA and the SEC today, which keep getting more and more difficult.

We have that. We are -- inundated would be an exaggeration, but not much. People who would love to figure out how to get on our platform. And if they've got the right strategy, we are willing to sit down and talk to them. Those dialogues go on constantly. And maybe one out of 10 might make sense for us.

On the Cowen and Company side, there's never been a better environment for Jeff to grow the business to tack on pieces that fit. If you are not public and have a lot of capital and a lot of liquidity, you are in a tough spot today. And the worse it gets, the worse it's going to get for you. And this is like the 1970's -- I've been saying this for a number of years now that this time was coming, and it's taken longer than I thought, but it's here.

Because we see enormous opportunities to tack on things that leverage our business without any overhead. So I've never been sort of more enthusiastic about being in the business than I am right now. It's a very exciting time.

Okay. Great. That's it for me. Thanks for taking my question, guys.

Mike Adams, Sandler O'Neill.

Just one question to start here following up on one of the prior lines on Starboard, but what percentage of the fund do you own now? And how much did you actually sell back to them?

Mike, we don't disclose that. We own a substantial part of the business, and we will always own a substantial part of the business going forward. We are really thrilled with what those guys have done. When we made the decision to basically spin them into a majority position and us into a minority position, it was because we couldn't see our way to handle the potential conflicts between an investment bank and an activist activity.

And the simple math for me was, we get to $1 billion over time, with a fair amount of difficulty or we could be multi-multi-billion-dollars really quick if these guys were independent. It turns out that that was the right decision. Notwithstanding that, no one peak person at that firm owned that much of it. So our objective is to get these guys in a position where they own enough of it individually, the principals there.

So it really behooves them to grow this into -- to double the size again of the business. And if it does, our economics, whatever they are -- and they will be substantial -- will make us more money than we've made in the past. We wish them only the best of luck and hope that they grow an enormous business. And we will be very happy with the smaller percentage.

Got it. And then one quick follow-up on that, in terms of the monthly management fee guidance that you gave us after this sale-back to Starboard. Is that on a stable asset base? Or what are you guys assuming in terms of AUM?

Yes, that's on a stable current basis.

Got it. So there's $13.3 billion as of year-end?

Yes.

And that's not factoring in any assets we might have raised during the first quarter. We're just kind of giving you the --

January run rate.

Yes, January run rate. Coming into January.

Yes. And I made the comment earlier that we expected that we would close that gap.

Got it. And do you mind giving us an update on where AUM is? I know sometimes you do give us those 8-K filings.

I think we said $13.3 billion at year-end.

At January 1, it was $13.3 billion.

March 1 it's going to be higher.

Okay. Fair enough. And then would you mind updating us on the underwriting backlog? You guys talked about obviously a very tough start to the year, but a couple of the biotech deals that you did earlier in February performed well. And I'm just kind of curious if there's any sense of optimism or hope based on those two deals? And maybe could you just update us on the near-term dynamics on where issuers stand?

We are always optimistic.

There's plenty of companies that need to be financed. It's not a matter of if, it's a matter of when. And I think -- people who are in a position where they can take advantage of the markets are going to do so. And those that feel like they are not trading at the right levels to pursue a financing, they wait for better pricing.

What we're seeing, though, is the better companies, especially on the IPO front, are coming out. The deals are well-covered. The investors are actually extremely well-heeled. It's a fairly -- it's not an easy thing to do. When you see these companies coming, they perform well -- you are seeing the better companies continue to have access to the market.

So we'll see a few more deals, I think. Even in this current market, I think we'll see a few more deals. And if things stabilize, I think we will see a lot of companies looking to raise capital. For me this has been more about -- when I think about this, this has been more about fund flows than anything else. I think certainly we've seen some of those generalist funds pull back from healthcare, and that's certainly cost some adverse price swings.

And I think there is the overhang of the drug pricing policy debate, which I don't see that subsiding any time before the election. But as investors get their heads around what it means, and if there's ever likely to be any impact on that, the good companies who are doing groundbreaking work are still going to have access to the capital markets. And that's really what we've seen in January and February so far, is it's not a shortage of backlog as much as it is people just can afford to be patient and are waiting for, I think, a more quiet time in the market.

As I've said before, we feel very fortunate to have the franchise we do in healthcare to those are -- that is a capital-intensive business. And when you look at the landscape -- industries across the entire US economy -- it's hard to see growth in equity capital markets growth in a lot of those industries. But I'm reasonably sure if I take a one-year, two-year, three-year, five-year view that the Company that we are backing in that space will raise money -- all of them -- or sell themselves or do something. So there's a lot of activity in that space, which is why we think we can continue to be successful over the long haul.

Great. Thanks, Jeff.

As an addendum to what Jeff said, our research footprint has never been stronger, and we are seeing the fruits of that daily in our equity business. And there's just a lot of good things going on at a lot of places we are at. That's why we are so upbeat in what seemingly has been a challenging quarter. It's done nothing but present opportunity to us.

Great. And maybe sticking to another upbeat topic -- Linkem, you gave us an update on that a couple of quarters ago. You guys sound pretty excited about that investment. So how has the business growth been trending? And have any monetization plans come into focus?

So Linkem is tracking exactly on its budget, which is to say it grows about 10,000 customers a month. We've got 331,000 active customers today. We announced at the World Mobile Congress in Barcelona just two days ago with ZTE, the Chinese equipment manufacturer, working together, we are going to -- something we hadn't planned two years ago, but a year ago got the idea that we were going to accelerate our entry into the central cities.

So we announced that we are going to be lighting up Rome, the most popular city in the country, end of the second quarter, beginning in the third quarter. The same thing with Florence, with Naples, with Serino. The government there has sort of caught on to what we're doing and is very excited about it, and we're excited about it.

The earliest we can see monetization of the event right now is 2017. We're well-funded into 2017 in Cowen and Company, and I've love to say that I can make it grow faster than it's growing, but it's just great. It's doing just great.

Got it. Great. Thank you, guys. That's all for me.

Steven Chubak, Nomura.

Most of my modeling questions have been asked and answered. Peter, I just had maybe a bigger picture question for you relating to the discussion around liquidity. I certainly appreciated some of your earlier comments about the environmental headwinds which have clearly weighed on some of the larger peers, whether it be the lack of capital or elevated market volatility, certainly your brokerage business is much better positioned for that environment.

I'm wondering is in the context of your alternatives business just -- we've been hearing more concerns about the potential for higher losses in what you would classify as more liquid strategies, such as credit funds, just given the weakening market liquidity? I just wanted to get a sense as to what your thoughts are in terms of the long-term outlook how that forms your investment approach? In managing your own capital and from a balance sheet perspective, how you can protect yourself against that threat?

Well, there is a lot in that question.

One comment and a question.

So, yes. We did have a credit silo, which we sold. We started to get concerned about the headwinds in that business.

Well we sold a year ago.

We sold a year ago. Yes, sold a year ago. So our exposure to credit is really de minimis at this point in time, though we think that this is probably a good time to be setting up a credit capability to take advantage of the dislocation that is occurring. I think there was too much money chasing yields, and there was way too much loosey-goosey investing that went on.

So certainly credit is something we are going to be looking at. Our balance sheet -- we have north of $400 million of basically liquid assets today, cash equivalents. It's monitored across all the strategies where we have the money on a real-time basis by six people. Every place where we have money has got a very, very tight risk-managed set of metrics around it and is independently overseen by a Risk Management Department, and Steve, our CFO, and Controller, Ed Zilnicki, myself and a few other people.

And what we are very active at is running these macro hedges over the entire balance sheet to protect us against kind of these black swan events. Because we view our capital as kind of our lifeblood that gives us the opportunity, when things are really bad, to do things to grow the business.

So I mean, we are going to stay sort of down the path we are in, being very nimble, being very liquid, and use our capital to seed new managers that we can leverage by growing AUM against them. We brought in this macro strategy just a year ago with Nancy Davis. She has over $300 million in assets under management in really one year. We expect a good chance that she will double over the year.

What's appealing about her strategy, because macro can be pretty wild as we all know, is that everything we do, and she does, is expressed through options with well-defined downside risk. We know exactly how much we can lose and we know roughly how much we can make. And we approach everything we do that way. We don't want to make the first dollar and we don't want to make the last dollar; we want to make everything in between.

So I think it also starts with -- so when you've been doing this as long as we have, you have a pretty profound understanding of the fact that many strategies in the world are short volatility. And I think we understand, fundamentally, that short volatility strategies work most of the time. And then the few times, when you have outsized moves, that they don't work as well.

Starting with the fact that we just don't highly lever strategies. Most of the strategies -- most of the way our risk is allocated is in mean reverting strategies, where win spreads get wider, you can buy them when they are wide. And then when they get narrower, you can sell them. And so we like that. That's the secret behind owning non-correlated asset classes. This is not a place that prides itself on getting directional at all.

And so when we think about our investments -- even when we're making loans in our real estate book, or looking at drug royalties, we are buying assets at prices that factor in some likelihood that there could be distressed, even when it's not obvious. And so you are essentially creating the underlying asset at a cheaper price, which gives us a lot of downside protection.

So in the liquid side, it's really a lot of mean reverting strategies. And as Peter said, we are running macro hedges over the top to eliminate unnecessary directionality. And in the less liquid asset classes, it's really a lot more about being able to create the assets at prices we think factor in some probability that there could be distress at some point. If it turns out there is, then we created the asset cheap; and if it turns out there isn't, then we've just got a yield along the way.

Thanks. And this is a quick follow-up -- presumably in this environment, it's gotten a little bit more expensive to overlay those macro hedges. I didn't know where that would get reflected in the income statement?

So it's all net in the investment income line. I mean, we are not huge -- we are not big fans of paying up for volatility. So some of these you have to have in place when volatility isn't so high, and so we've done some of that. And then some of it is simply looking at the way that the underlying investment teams are presenting risks. And you can see that there's some sort of directionality.

You can eliminate that directionality using liquid -- very liquid instruments to make sure that, as the entire portfolio presents itself, you don't have unwanted directionality in the portfolio.

Yes, but let me -- it can be expensive macro hedges, especially if you have a very short-term orientation and you are very static. We are neither. We have a long-term orientation even in our hedging activities and we're not static. So when we get sort of a massive move down and all of a sudden we create a lot of P&L, we will capture that P&L, and we will reset our hedges.

On the other side when we have big rallies, what we'll do is we will turn around, we'll take a little P&L aggravation and we will reset those hedges up higher again. So we are very proactive. Does it cost us money? Sure it costs us money. But on balance, it does what it's supposed to do.

And this is not a new activity. This is an activity that we've been doing it since 1999. We have internal return on our capital since 1999 of 16.2%, inclusive of 2008, which wasn't pretty. And the guy who helps us drive the macro hedging, and works very closely with me, has been with us probably 15 years. You know? So, but I mean, everything we knew do is not so visible from the outside, but we have a really incredible team of people who all communicate across the entire platform.

Our macro guys are talking to our macro manager, Nancy Davis, who talks to our consumer long/short guys, who talk to research, who talk to our merger R guys about -- I mean, this whole thing is tied together and we bring them together. We had -- we just had a group together about three or four weeks ago with our senior leadership. And we make sure that these silos are not walled off from each other, and that they work as closely as they can under the regulations without breaching any of the FINRA -- with the Spitzer settlement stuff, which expired, by the way.

All right. Very comprehensive answer, guys. I really appreciate you taking the question.

Nick Brown.

I just have two questions for you. On the investment banking revenues in the quarter -- and obviously we can appreciate why those were down year-over-year, but with the continued volatility in the market as the run rate going forward, at least for the current quarter, likely to be below fourth-quarter levels?

Hard to say. I mean, it could be or it could not be. I mean, sort of we already -- we've got pretty good visibility of what we booked already. Like I told you, if nothing happens between now and the end of the quarter, we would be below but I don't expect that to be the case. Either way -- it's hard for us to manage a quarter-over-quarter revenue in capital markets.

What I will say is when our clients are ready to print, we are there for them. And so we'll just -- we'll do it and it will probably catch itself up at some point during the year.

Okay. Thank you. That's helpful. And just the other question on the tax benefit in the quarter -- I know it was down quite significantly year-over-year, but it was still -- can you explain why it's still such a big tax benefit relative to your pretax loss?

Sure. So, in 2014, that -- the tax benefit was taking down our valuation allowance. And in 2015, the tax benefit is the Luxembourg reinsurance captive that we acquired in the fourth quarter, that runs -- for GAAP purposes, that runs through the tax line.

Okay. So was it a one-time related to the acquisition rather than something that's going to persist going forward?

Yes. Yes.

Okay. Thank you very much.

No problem.

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to management for any closing comments.

Operator, thank you. Ladies and gentlemen who are on the call, thank you for dialing in and listening to us. Those who asked questions, we appreciate that. To the Cowen people on the call or not, thank you again for an amazing performance last year, and what you're doing right now.

So we look forward to speaking to you at the end of the first quarter and continue the discussion. So, thank you all.

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