Cowen Inc (COWN) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for joining the Cowen Group Incorporated's conference call to discuss the financial results for the 2016 first quarter. By now you should have received a copy of the Company's earnings release, which can be accessed at Cowen Group Incorporated's website at www.cowen.com.

Before we begin, the Company has asked me to remind you that some of the comments made on today's call, and some of the responses to your questions, may contain forward-looking statements. These statements are subject to risk and uncertainties ascribed in the Company's earnings release and other filings with the SEC. Cowen Group Incorporated has no obligation to update the information presented on the call. A more complete description of these and other risk 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's website at www.sec.gov.

Also on the call today, our speakers will reference certain non-GAAP financial measures which the Company believes will provide useful information for investors. Reconciliation of these measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release.

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

Thank you, Operator. Good afternoon, everybody. Welcome to Cowen's first quarter earnings call. With me as usual are Jeff Solomon, President of the Firm, Steve Lasota, our CFO.

As you know, it was a challenging and volatile environment during the quarter, notwithstanding we were able to grow our equity business, play a key role in a number of banking transactions that were equity issuances among the very few executed in the quarter, raised new assets in our asset management business, bringing AUM to a new level, and importantly, announced another important transaction, making a move into credit research and trading, emerging markets, and special situations, with our announcement last month to acquire those specific businesses from CRT Capital. Just to be clear, we're not buying the entire company. We're just buying certain businesses.

While the continued concerns regarding the macro environment are not new, investor sentiment is in a very different place from a year ago, when Cowen reported our strongest first quarter in terms of revenue and economic income since the formation of Cowen at the end of 2009. For the quarter ending March 31, 2016, we reported economic income loss of $4.9 million, or a loss of $0.05 per diluted share compared to economic income last year of $23.6 million, or $0.20 per diluted share in the quarter.

Economic income revenue was $106 million, which compares with $162 million in last year's first quarter. In this difficult environment, we delivered record brokerage revenue, and the alternative asset investment management business attracted new assets. This, however, was offset by lower levels of investment banking revenue, incentive fees from the investment management business, and lower investment income from the balance sheet.

In the quarter, the hedge fund industry's assets fell below $3 trillion worldwide for the first time since 2014. Decline in assets was a result of a very challenged performance environment, which made asset-raising extremely difficult. However, the majority of our alternative asset management products and capabilities generated a positive performance during the quarter, and continued to grow.

In addition, we raised $443 million in gross assets, or $110 million net, ending the quarter with $13.7 billion in AUM. Of the $373 million net increase in AUM since January 1, we saw $443 million in subscriptions, $333 million in redemptions, and $263 million in positive performance.

Management fees for the alternative investment management segment averaged $5.4 million a month in the first quarter, a decline of approximately $160,000 a month from the prior period. The decline of the overall monthly management fee run rate is attributable to an agreement which was executed to sell a portion of our ownership interest in the activist business back to the principals of Starboard at the end of last year.

And because we were kind of back-ended in the quarter in terms of the new assets coming in, we didn't get the full benefit of fee run rates for the whole quarter. The average management fee was 48 basis points in the quarter compared to 53 basis points in the prior year period.

In addition to funds raised for existing products, we also announced in early April that we finalized and executed a partnership agreement with a very unique individual, Samantha Greenberg, who will manage an equity long-short strategy initially focused on the communications, technology, media, and consumer sectors. The equity long-short fund is the second minority and women-owned business to join the Ramius platform, and is our 10th capability.

Also in this difficult environment, we launched the Ramius Archview Credit and Distressed Fund, a registered investment company, or RIC, as we call it, intended to meet the underserved needs of the affluent investors who are qualified clients. That is being distributed through one of the big retail distribution platforms, as well as directly. We are working towards the launch of a UCIT in Europe and the launch of a number of other funds from our affiliates later this year.

Our investment portfolio was modestly affected by short-term market volatility. For the quarter, the balance sheet produced $1.9 million in investment income compared to $28.9 million in the year-ago period. Merger arb was our most productive strategy. Gains in merger arb in our private portfolio helped to offset mark-to-market losses in other areas. We bought back $3.6 million worth of stock under the existing repurchase plan, and the total available for repurchase today continues to be $25 million on an ongoing basis.

Before I turn the call over to Jeff, I'd like to thank all of our colleagues at Cowen for their consistent efforts to advance the organization's goals through these really difficult times. [Jeff Solomon].

Thanks, Peter. In the first quarter, performance improved in our equity brokerage business as we benefited from the elevated customer activity in cash and electronic trading, as well as solid contributions from Prime Services, the acquisition that we completed last year. However, our investment banking business was adversely affected by market volatility, which contributed to a general slowdown in equity financing.

For the industry overall, it was a difficult quarter for equity financings. In our focus sectors, total proceeds raised declined almost 40% year-over-year to $43 billion. Eight companies debuted across all of our focus sectors, the fewest number of IPOs since the financial crisis. The number of follow-ons in our focus sectors declined by 48%, and in the healthcare sector specifically, total proceeds raised in IPOs and follow-ons declined by 60% year-over-year.

Despite the decline in activity, healthcare was the most active sector. It was the only sector to see IPOs. It was the second-most active sector in follow-ons.

Our results in equity capital markets largely mirrored these trends. ECM revenue was $22.7 million, representing a 63% decline year-over-year. We closed on 12 transactions during the quarter compared to 47 in the first quarter. We were a book runner on six of those transactions versus 27 in the prior year period.

Our average underwriting fee rose, however, 45% to $1.9 million from $1.3 million. While volatility has subsided since mid-February, the overall environment for capital markets remains challenged. Conversations with corporate clients are increasing, and we should have a strong backlog to execute upon when the window for capital-raising reopens. We do expect more companies to consider M&A as an alternative to going public, and we've already had a few transactions signed in the second quarter as we are working to be engaged in dialogues with a number of our existing clients.

In addition, we expect to see increased number of companies consider convertible financing as an alternative to straight equity, and we're in dialogues there, as well. For example, during the quarter, we completed a convertible debt transaction for a healthcare client, a transaction that enabled that company to raise greater proceeds than straight equity despite the correction in the biotech market.

The pending acquisition of the credit team from CRT will complement our efforts in debt capital markets, special situations, and balance sheet advisory, as well as in convert. We expect that transaction to close in early May.

Turning to our institutional brokerage business, which includes the equities and Prime Services businesses, while US equity price indices ended the quarter with modest gains, there was a lot of movement in stock prices during the quarter. Trading volumes were elevated through January and part of February, a period in which we posted our best commission day since the merger in 2009.

Revenue rose 49% year-over-year to $53 million, which is the highest level since the formation of Cowen. We experienced year-over-year gain in cash equities in electronic trading. And while our brokerage results benefited from the heightened market volumes, we were able to garner our fair share of commissions as a result of our improved connectivity with clients, which is something that we worked very hard to achieve.

Our efforts are reflected in our improving standings in the vote with a number of institutional accounts versus just a few years ago, and reflects the fact that we are better mapped to meeting our clients' needs on a consistent basis. Though trading volumes abated in March, a trend that has continued into the second quarter, we take comfort in knowing that what we do, which is providing clients with relevant and insightful research that helps them outperform in this difficult environment, is now in greater need than ever before.

To that end, Prime Services also posted higher revenues from the fourth quarter of 2015, which was our first full quarter of that business being under our umbrella. We're continuing to see positive momentum as it relates to new clients, and are seeing increases in custody assets as well. Clients who've been abandoned by the larger banks choose to prime with us because they see our commitment to the space and the attractiveness of our value proposition. And we're obviously using our existing infrastructure to scale the business pretty meaningfully.

For example, Prime Services is already leveraging our London infrastructure to expand our outsourced trading services to hedge fund clients in London and in Europe, and we're continuing to explore ways to expand our footprint there, as well.

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

Thank you, Jeff. In the first quarter of 2016, we reported a GAAP net loss attributable to common shareholders of $5.4 million, or a loss of $0.05 per diluted common share compared to GAAP net income attributable to common shareholders of $16.7 million, or $0.14 per diluted common share in the prior year period. The first quarter of 2016's GAAP net income attributable to common shareholders is net of preferred stock dividends of $1.7 million, which is associated with the preferred stock issued in May of 2015.

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

In the first quarter of 2016, the Company reported an economic income loss of $4.9 million, or a loss of $0.05 per diluted share. This compares to economic income of $23.6 million, or $0.20 per diluted share in the prior year period. First quarter of 2016 economic income revenue was $105.6 million compared to $161.7 million in the prior year period.

Investment banking revenue was $26.1 million compared to $65.2 million in the first quarter of 2015. Brokerage revenue rose 49% year-over-year to $52.9 million. Management fees were $16.9 million, a 2% increase over the prior year period. Incentive income was $6.9 million compared to $15.4 million in the prior year. And investment income was $1.9 million compared to $28.9 million in the prior year.

Other revenue was $1 million compared to $0.1 million in the prior year, and the comp and benefit expense for the quarter was 59% of economic income revenue compared to 59% in the prior year.

Variable non-comp expenses in the first quarter were $15.2 million compared to $13.2 million in the prior year period. This increase is primarily related to higher floor brokerage and trade execution costs due to higher brokerage revenue, increased marketing and business development expenses, some of which is related to the two acquisitions during late 2015.

Fixed non-comp expenses totaled $27.2 million in the first quarter compared to $25 million in the first quarter of 2015. This increase was primarily due to higher legal and other professional fees, increased occupancy costs, and increased depreciation and amortization, all of which are primarily related to the two acquisitions during late 2015.

Stockholders' equity increased by $93 million to $783 million at March 31, 2016 from March 31, 2015. The increase was primarily related to the preferred stock issued in the second quarter of 2015. Common equity, which is stockholders equity less the preferred stock, was $681.6 million compared to $690.1 million at March 31, 2015.

Book value per share, which is common equity divided by shares outstanding, was $6.43 per share compared to $6.21 at March 31, 2015. Tangible book value per share, which is common equity less goodwill and intangible assets, was $5.64 per share compared to $5.82 per share at March 31, 2015. Investment capital stood at $666 million as of 3-31-16 versus $614 million a year ago.

In moving to our share repurchase program, in the first quarter we repurchased approximately one million shares in the open market and acquired 1.1 million shares as a result of net share settlement related to the vesting of equity awards at an average price of $3.57 per share and a total cost of $7.6 million. As of March 31, $21.4 million remained available, and yesterday Cowen's Board approved $3.6 million increase to the share repurchase program, bringing the total available for repurchase to $25 million.

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

Thanks, Steve. In a period with political and economic uncertainty, our services are needed more than ever. Everything we do is geared towards helping our clients outperform. Institutional clients need access to differentiated alternative investment products and solutions, and corporate clients need solid financing and strategic advice.

Portfolio managers, buy-side analysts, and traders need to access insightful research, non-conflicted trading and execution services, and comprehensive brokered solutions. In short, we cannot predict the timing of a recovery in the capital markets, but the fundamentals underlying our clients' long-term financing needs still remain intact.

Our brokerage business is showing a higher level of consistency, which helps to smooth out some of the lumpiness inherent in our other revenue lines, and should we continue to successfully grow assets under management, that should translate into steady growth in management fees, as well. With $1 billion in total capitalization, we are well capitalized and maintain a significant amount of liquidity.

In terms of capital management, we're continually evaluating the various avenues available to us to drive long-term shareholder value. And the easiest way continues to be to buy back stock so long as our stock is trading at a discount to tangible book value. Since our buyback program was instituted in 2011, we've demonstrated our commitment to do so while ensuring the long-term growth of our business. Our responsibility is to balance these tools in order to achieve our objectives of driving long-term shareholder value.

While we face similar headwinds as others in the industry, environments like this present tremendous opportunities for firms with staying power to establish leadership positions. We are fortunate to have the flexibility to facilitate the growth of our core competencies by responding to the evolving nature of the industry and by taking advantage of opportunities that continue to present themselves when dislocations in our business take place. You can see from last month's announcement of the agreement to acquire CRT's credit products business, credit research business, special situations and emerging markets unit, and we have an opportunity to partner and grow with Samantha Greenberg as she scales her business.

We are focused as ever on creating a platform that can perform well over the market cycle, and we thank our colleagues for their commitment to the organization. You all are certainly a tenacious bunch, and I cannot think of a better group of individuals to lead our customers and clients through these challenging markets.

With that, I will open it up to questions. Operator?

(Operator instructions.) Devin Ryan, JMP Securities.

Hey, thanks. Good afternoon, guys. Maybe just starting where you just left off there, Jeff, clearly a lot of pressure in the brokerage industry right now. We're seeing a number of firms cutting back, and maybe even more deeply in recent months. So, it seems like, on one hand, these are attractive times to pick up talent. You can upgrade some seats. On the other hand, business still very tough, so spending money into this backdrop could be even more dilutive I guess maybe near-term.

And so, I'm just trying to get a sense of how you guys are thinking about this period right now to invest in the business now, and then how are you thinking about doing that just so you don't take on too much risk, given that it is an uncertain time right now?

And then, I guess with that as a backdrop, where are really the biggest focuses right now? Is it bringing in more research folks, upgrading sales, banking? Where is the best bang for the buck in this type of really pressured backdrop?

Okay, great questions. So, first, let me say that we have been extremely judicious in terms of bringing on the number of people in areas where we have uncertainty about our ability to scale. Just to give you orders of magnitude, in investment banking and capital markets, we have roughly the same number of people in investment banking and in capital markets today in 2015 -- at the end of 2015 and into 2016 that Cowen had in 2010.

So, if you look at the change in the revenue profile of our organization, it's not been about scaling up in that business. It's really been about bringing in talented individuals and aligning the resources of the organization to do more with the same amount.

So, unlike other organizations, we're not looking at areas where we've got to shrink meaningfully in banking and capital markets. We're already started to scale up in research, and so it's unlikely, unless we see something really opportunistic with an individual here or there, that we'll scale up in research. We've done a great job at scaling up. Certainly the Dahlman Rose acquisition was meaningful, but we've also upgraded talent meaningfully over the past few years. So, our research footprint is actually pretty well sized relative to the market opportunity, and not looking like we need to do anything meaningful there.

In the equities business, certainly acquiring the Prime Services business is a great example. The dislocation that has gone on from the big banks really kicking out a lot of the smaller managers is a function of the fact that the new capital rules make it less than ideal for them to service small accounts. In fact, in many of the instances, we've seen some of the larger banks really pushing their smaller accounts to us so they can square off with us on a more omnibus basis. Essentially we're acting as the role of aggregator and middle office, and providing those services in exchange for commissions, which is a business we know exceedingly well.

So, we'll continue to look for businesses like the Prime Services business that leverage our fixed cost structure, and I think we'll also continue to look at ways to upgrade potentially our capabilities once we integrate the CRT platform. That is totally opportunistic. As I think we discussed on the last call, we had -- particularly related to that. I mean, this is a discussion we've been having with CRT for four or five years. We just couldn't get to an agreement on terms, and we couldn't really get to an agreement until now on the businesses that we actually wanted to take on. And certainly that happened in the last quarter. And so, we're much more well-positioned to take advantage of those things where we can take on large teams that are going to be immediately accretive.

In terms of adding talent, I certainly think on the M&A advisory front, we could be adding some people there. But, it's not like a wholesale mass investment. It's really bringing individuals onto already existing successful teams where we can leverage the client connectivity that we already have to offer more products and services. And so, I just think that we're going to be in the market for really talented individuals who seem to be coming our way with great regularity as they're unhappy on their existing platforms, or as other banks are really just forced to make some pretty drastic moves. Does that answer your question?

It does, yes. Thanks for all that detail, really appreciate it. Maybe just another one here on the market backdrop. Financial conditions seem like maybe they've eased a bit here over the past several months. We still haven't really seen much of a pickup in issuance, particularly in the life sciences space, where you guys are clearly a leader.

You spoke to hoping to have a nice backlog as conditions improve. So, I'm just trying to get a sense of is that a function of timing and we're just hoping for a few more weeks of stability, and that should do it in the markets, or are there other considerations that you guys are seeing that are just weighing on the appetite there, maybe regulatory or something else?

And then, along the same lines, can you put any additional perspective, or maybe quantify the level of pent-up demand from an issuer perspective, meaning it really doesn't feel like we've hit desperation yet for the industry, but just trying to get some sense of if you can help size how big that pent-up backlog could be?

I mean, it's hard to give it a number. What I would say is that it's just inevitable. Most of the clients in that space are going to have to raise money eventually. A lot of them raised money last year, so we expected it in the first market downturn with increased volatility that people would just take a break because they weren't desperate. Most of the clients aren't desperate to raise money.

Those that need to raise money are raising money anyway, and I think the higher quality clients who are already well financed in the private market, and we've done a number of those deals, are just waiting for better market conditions. I would say, though, this is not a biotech-specific problem. I think we're having overall in the entire market -- I think we had one tech IPO all year. I think there's a broader issue going on in that most of the capital that flows into the market today are really for passive product and are not huge buyers of new issue. So, there really hasn't been any meaningful pickup in new issue across any industries.

I feel fortunate, or we feel fortunate, because we know that in the industries that we bank particularly where we're focused from a capital raising standpoint, they're capital-intensive, and they require capital eventually. So, I can't tell you if it's going to be a week or two weeks. I mean, the conversations are there. The connectivity is there. People are simply waiting for the right time to reengage.

And I would say a lot of that is really driven by the buyers. Frankly, a lot of the long-only and hedge fund -- healthcare-focused funds have been facing redemptions, and I think that seems to have slowed. We do spend a lot of time talking. So, now that it seems to have slowed and people are less worried about having to raise liquidity, we can begin to have substantive conversations with them.

What I will say, though, is for high quality companies, many of whom we're banking, if we bring them, investors seem to find capital to do the deals. So, again, I just think this is classic. We've seen it as a pullback. We haven't seen quite the rallying prices in biotech that we've seen in other sectors. And when we do, or the longer it goes along, eventually that turns around, and we stand poised and ready to hit the go button as soon as the markets allow us to do that.

Okay, that's helpful. And maybe just the last from me, the balance sheet, clearly tough quarter, tough backdrop. Any perspective on how that's been trending quarter-to-date? Just curious if it's recovered at all with the little bit better market backdrop.

And then, separately, should we be expecting any Luxembourg deals over the next several quarters?

So, two answers. The first one is I would say our book is not terribly market-directional. I think we have seen a rally in some of our healthcare positions in the merchant banking fund. But, spreads in the merger arb space continue to be wide, so I think that operates in a different sphere because it's not exactly correlated, if you will, to overall market direction.

As far as Lux deals, listen, we work on them all the time. Hard to predict when they come down the pike. I don't see one imminent, like within the next quarter or so, but we're in discussions all the time to acquire those. And if they're there to be done, we're certainly one of the handful of firms that'll do them, or that are capable of doing them. So, we're in discussions. It's too early to make any predictions, though.

Understood, great. Thanks for all the color, appreciate it.

Okay.

Mike Adams, Sandler O'Neill.

Good evening, guys. How are you doing?

Good, how are you?

Doing well. So, another one, just kind of following up on some of the last line of questioning here about the challenging environment. Kind of looking at the other side of it, if revenues stay depressed, how aggressive do you want to be on the cost side of the business? I know you're investing. You don't want to lose talent. But, is there anything you can do on the non-comp side, and are there any initiatives underway to reduce non-comp expenses?

Well, Mike, we're always working on the non-comp side, and I think we can always do better on the non-comp side, because no matter how hard you try, expenses creep in. It's definitely getting a lot of focus right now because we want to look at protecting the down side, and the upside takes care of itself. I couldn't quantify it. But, as we've grown, we can always find ways of being more efficient and using technology as a way of supplementing a lot of labor and displacing cost.

So, we've done a bunch on the Prime Services side in a bunch of businesses we've acquired, where we've been streamlining processes. We certainly have actually taken costs out of our equities business over the years and have upgraded recently our CRM, and we're doing a lot around what we call optimization, which is really taking a look at the content production mechanism and making sure that it gets to the right client at the lowest possible cost delivery.

And we kind of look at costs in conjunction to whether or not they're attached to revenue dollars, and obviously we're not spending money in places where we don't think we can see revenue drive. And so, we've always been doing that, and I think the key for us is to continue to try to look for opportunities to scale the business by adding revenues without adding a lot of fixed costs.

I would also say this. I mean, we've seen growth in non-comp costs primarily because of the execution, increases in our volume on execution, and the migration of the business that we've seen from the cash equities business to the electronic execution business.

One of the thing that we were able to do with the Prime Services business is really migrate over a significant portion of that business to our own algorithmic trading capability. And again, we're talking about scaling the business without adding fixed costs. And I would say heretofore without some of the technology investments that we made, you would have just seen us adding bodies to process the volume of business, and we just haven't had to do that.

So, Peter's right. We continue to look at it. We look at it as an operating committee that drills down. We've got a lot of tools to help us make better decisions to make sure we keep costs under control. But, we never really had the big spend in growth in costs, so we'll continue to tighten it down and make sure that we have staying power.

Got it. Understood. And then, on comp, I think you guys actually did a really nice job managing that comp ratio in the quarter. A little bit surprising, given that you didn't have a big contribution from the balance sheet performance. So, I guess how are you able to achieve it, and how sustainable is it below 59%?

Well, we have a comp metric that we sort of manage the business to. And it's across each segment of the firm. It's not one comp metric for the entire firm, but there are a series for each operating division of the firm.

And that's really how we accrue compensation, based on what we expect to pay as a percent of revenue. We're not going to subsidize compensation from very profitable parts of the firm for unprofitable parts of the firm. If the year doesn't change, this'll be a difficult year for comp. I think it's no secret that what's going on around the industry, that comp is under tremendous pressure, and certainly at the big banks. Now you've got the regulators looking at regulating compensation. I don't think there is a major firm that we haven't heard of that hasn't been quietly letting people go.

This is one of those periods, but the reality is there are fewer and fewer places where people can practice the trade on the Street, and we'll do our best to pay people fairly, but we have to be mindful of our stockholders.

So, something we talk about a lot is the concept of sustainability. And look, in our business, there are great markets and there are not-so-great markets. And I think we, as clients for years of Wall Street firms, watched in amazement as they staff up in the great times, and then shrink in times -- it seems like that's not well thought out.

From our standpoint, if we're looking at bringing -- and if you look at the longevity of people, partners on this platform, this isn't our first rodeo in a downturn. Most of our bankers, and most of our research analysts and salespeople have seen slowdowns before. And so, at the end of the day, it's not going to be this way forever.

And if the quality of life and the capabilities we have at Cowen line up really well over a business cycle, compensation takes care of itself. We can't manage to any one year. You can't squeeze blood from a turnip. And I think everybody understands that.

Don't forget also that most of our employees here are equity owners, and get it. And so, for us, this is about making sure that we can drive long-term sustainability, and we're not going to do anything that causes us to take significant operating losses at the expense of really making sure that we have the ability to be in a position to scale the business when markets are more accommodating. So, I think it's (inaudible) the philosophy, and that's how we're executing on it.

Got it. So, I mean, it sounds like you guys are entirely committed to this sort of discipline, and that we should expect this to be sustainable in coming quarters?

Yes. I mean, listen, I'd love for the markets to be better in the areas, but again, there are things that are in our control. Costs and expenses are clearly in our control, and then you put yourself in a position so that, when markets do turn around in the spaces where you can be most obvious, and then it works most obviously to be successful, you do that.

And I think -- again, I don't want us to gild the lily. It's tough. But, I feel like, in this downturn, we are well positioned to take advantage of dislocation that might be happening to other people. In a way, we've been -- our patience in waiting for this has enabled us to not be having to scramble, like a lot of other firms, to figure out what to do. We've missed and not done certain things, and not overpaid for certain assets in better times because we were concerned that in the next downturn, which is inevitable, that you're left with a cost structure that's not sustainable.

So, I'm not saying that every day is like lollipops and gumdrops over here. But, we're not in the same mode, I think, as a lot of our competitors, or at least based on what we're hearing, because we're open and candid and honest about what we can and can't get done in this environment. And we're well-capitalized and managing the business through the challenging time.

Got it. Okay. And last one from me, Jeff, you mentioned CRT. It sounds like it's expected to close in coming weeks here. So, at this point, are you a little bit more comfortable maybe giving a better picture of the financial contribution you expect once you've on-boarded the teams you're purchasing?

So, it's good of you to ask. I'm going to give the same answer I gave you the last time, which is we'll talk about it on the first quarter after the business closes. The only reason I won't give you more guidance than we gave on the last call is only to say that I just know that, when businesses are in transition, it takes time to ramp up. So, I just don't know the speed at which the business is going to ramp.

And CRT is a business that has been through two transformations in the last 24 months, or that will have gone through two transformations in the last 24 months. And we're very confident. In fact, what I will say is, that the onboarding of clients has been significant. Like, we're not having problems opening up clients on the Cowen platform. Remember, we're not buying the CRT platform. We're actually just lifting the team. So, we're going through the process of engaging with clients on the Cowen platform directly.

So, we have a pretty good idea of the big volume clients are all getting open with us before we close. That's pretty good indication that the franchise is intact. If we were getting significant pushback from clients about why they should be adding Cowen as a counterparty, then I might be a little bit concerned.

So, I'll allow that what we've learned since the call we had about a month ago is that the base -- our direct engagement with clients suggests that they see the same thing that we see, which is an opportunity to scale the business. Now, we'll see how that translates in the first quarter after we close. I'll be able to give you a lot more information because we'll see it under our own roof.

It's closing a week from tomorrow.

Yes. Our target -- we're still subject to regulatory closing, but our target closing on this is May 6.

Okay, thanks, guys. That's actually good color, Jeff. I appreciate it. That's it for me.

Great.

Steven Chubak, Nomura.

Hi, good evening, this is actually Sharon Leung filling in for Steven.

Hi, Sharon.

Hi. So, one more about CRT. I guess we've seen a set trend where fixed income was weak across the Street in the first quarter. Can you give us any sense of how CRT fared at all in the recent quarter? And moving forward, should we think about the business as being tethered more to balance sheet and risk-taking activities, like the bulge brackets, or more correlated to volume trends like the agency-oriented brokers?

So, three great questions, or two great questions with sub-parts. So, first, let me say I think the business did okay in the first quarter, although, again, I'm not -- it was sort of in line with our expectations. But, I think, long-term, we have very different expectations about what we think we can do with the business on our platform.

And what we've noticed in the acquisitions that we've made is that the things that we do here, the connectivity that we have as an organization, tend to promote more engagement from the companies that we have purchased. And that's just to say -- all that's to say is whatever they're doing over there with whatever they have is just what they have, and there's no effect of -- the research footprint that we have, the sales effort that we have, the ability to cross-sell, the engagement that's going to go on once it's here. So, I think the business has been fine, but it doesn't necessarily reflect what we think the business will do once we've had a chance to integrate it.

Second, let me make it really clear. This is an agency execution business. It does not require us to do capital commitment or take capital risk to facilitate trading in this business, right? So, we're not in the business of committing capital, just in the same way that we're not in the business of committing capital in our equity execution business. It's an agency business.

So, what I will say is that I think, interestingly enough, I don't look specifically at volume trends as something that are a way for us to predict how the CRT business will do. And then, the reason I look at that is because it's sub-scale, and it's focused in really what I would call the stressed and distressed market, so storied bonds.

I think the primary driver here is whether or not we think there's going to be more product that requires deep research on the balance sheet. And I believe that this is going that way, right? The business is going that way. So, if I look at overall trends and how much trades in high yield, or how much trades in investment grade, like, that's not indicative of what we think we can do with the market penetration. It's really more is the total addressable market increasing because the amount of stressed and distressed bonds is increasing. And there I can say to you for sure that's happening, and we should be a beneficiary of that continued stress, particularly because we know what's happening in some of the sectors that we already cover from an equity standpoint.

And so, I just think that's probably more indicative, and so the metrics that I look at are more along the lines of the increase in potential default rates and stress bonds. That's probably a better indication.

Let me add to what Jeff said. The groups that are joining us are not just traditional fixed income, agency flow-oriented. There is a very unique emerging market flow capability, again on an agency basis, that comes as part of the acquisition. There is -- as we're kind of a unique, special situations group that we like a lot, that comes up with very unique ideas that they sell to their customers, again, on an agency basis.

So, it's not just purely a kind of traditional fixed income, a la the bulge, that is going to be coming part of the firm.

Yes, and you know what we love about this, and I think it's -- when we did the Cowen-Ramius merger, this is two groups of people who'd been working together for long periods of time. I mean, you look at the longevity of people inside the Cowen organization, and the longevity of people inside the Ramius organization, these are people who have been working together for long periods of time over multiple market cycles.

The same dynamic exists at CRT. So, this core team that we're bringing on is really a team that's really working together under multiple market environments for the better part of a decade and a half. And that suggests to me that there's just a fantastic rhythm. That's why we like the idea of putting this together. And it lines up very well with where we are culturally.

We have done some things, by the way, where we can episodically to make sure that we're getting our teams of people together to talk about business strategy broadly, about how we might be able to talk about markets we might be able to go after. But obviously, we're precluded from really having any substantive dialogues until we get FINRA approval. But, early indications and dialogues we might be having about the things that we could be doing once we're together suggests that we should be doing more collectively than either of us are doing on our own.

Okay, great. That was super-helpful. And now, kind of piggybacking off of Mike's question earlier, when we think about the path to achieving your 10% ROTE target, given the current fixed expense base, how much more scaling or investment do you think is needed to get to a point where you can generate significant revenues to support reaching those targets?

Well, tell me what the market's going to do, and I'll tell you. (Inaudible) exactly.

Yes. Here's an interesting way to look at this. I think as we look at the model of sustainability, growing the lower margin businesses that have bigger volume, for example like Prime Services, enable us, even though they're lower in profitability than investment banking is, on the surface of it, they're more sustainable. They just don't ebb and flow the same way that investment banking does.

And so, when I look at -- part of the sustainability push is bringing on these businesses that can smooth out the earnings so that, when you get the upturn in the businesses that add margin, you can make a lot more money. And when you have the inevitable downturn in those businesses, you have sustainability.

So, I look at it as it's more like fixed costs over repeatable business. I would say the same thing in Ramius. So, continue to focus on scaling businesses where we can have meaningful AUM and drive management fees. Obviously those are things that really go to continuing to add revenue without adding management fees. What's the number? We have revenue targets in our minds, but a lot of that just depends on what I would call the variable parts of our business, which is performance fees and investment banking.

Okay, and then one last one. Some of the companies have reported that, following a difficult start in the first quarter, trends have kind of stabilized towards the end of the quarter and into March. Have you seen something similar on the brokerage side, I guess?

What I would say is that I've been actually quite impressed with our ability to do volumes when volumes are there. For me, when we look at the business, I actually compare our business to what happened in the last downturn, and whether or not our daily revenue numbers are meaningfully higher than they were the last time we saw a challenging market like this.

And I just think, when look to the proof in the pudding in the investments we made in the business over the last three years, the proof in the pudding is the fact that we can have a quarter like we had, where even with equity volumes up in the first few months, and we're vastly exceeding that. We're increasing at a -- have increased our market share greater than the market increased, right?

And so, again, I think that this is what gives us the confidence to know that we have sustainability in the business even through the downturn, and that's the key thing, because this isn't going to last forever. Companies are going to start to finance, and M&A deals will start to pick up again. And when they do, we'll be there to do them.

Okay, great. That's it for me. Thanks.

Okay, thank you.

And I'm not showing any further questions at this time.

All right, then. Thank you all for dialing in.

And we'll talk to you next quarter.

We'll talk to you next quarter, and let's look for a better environment to develop.

Thanks, everybody.

Thanks, everyone.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.