Cowen Inc (COWN) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining Cowen's conference call to discuss the financial results for fourth quarter and full year 2018. By now, you should have received a copy of the company's earnings release, which can be accessed at Cowen's website at www.cowen.com.

Before we begin, the company 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 has no obligation to update the information presented on the call.

A more complete description of these and other risks and uncertainties and assumptions is included in the company's filings with the SEC, which are available on the company's website and on the SEC's website, www.sec.gov.

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

Now I'd like to turn the call over to Mr. Jeffrey M. Solomon, Chief Executive Officer.

Thank you, operator. Good morning, everyone, and welcome to Cowen's Fourth Quarter and Full Year 2018 Earnings Call. This is Jeffrey Solomon, and joining me today on the call is our CFO Steve Lasota.

2018 was a milestone year for Cowen on many fronts. We made great progress towards accomplishing the objectives we set out a year ago when I became the CEO. As a reminder, these objectives are outlined on Page 9 of our investor presentation. And at their core, they are all about making the company more profitable and more sustainable for the long term, by driving return on common equity, or ROCE, on an economic operating income basis.

Following the mantra of simpler, fewer, deeper, which is a framework philosophy underlying these objectives, we also set out to provide more transparency to investors. To that end, we now have available a new financial supplement which provides additional operating and financial information as well as a reconciliation of GAAP to economic income. In an effort to better illustrate how our businesses are progressing, we will be providing this financial supplement on a quarterly basis going forward. It is available for download on the Investor Relations section of our website and should be read in conjunction with our earnings release.

In addition, given that GAAP net income to common stockholders is a financial measure that is after preferred stock dividends, I want to highlight that we've started including an additional economic income financial measure, beginning with this quarter's earnings release, which is economic income attributable to common stockholders. This financial measure is also after preferred dividends, so as to better facilitate the comparisons between GAAP and economic income for our stockholders and potential investors.

There is no mistaking the positive results of 2018, where we produced an ROCE on an economic operating income basis of 12.1% in 2018 versus 3.1% in 2017. Those outcomes are the product of great collaboration and great effort by our team at Cowen. Please keep in mind that as I review some of the key operating highlights that have defined the company's success over the past year, that it's really a team sport and that it reflects the work of a lot of people here at Cowen.

You've heard us mention before that we are actively working to make improvements in our capital allocation process by harmonizing our balance sheet with our operating activities. We not only made some decisions to exit certain non-core businesses that we felt were not in service of our long-term ROCE goals, but we reallocated capital into dealer and spread businesses, such as securities, finance and SPAC trading, where the returns on that capital are less volatile. We also continue to scale our higher-margin businesses, especially in our strategic merger advisory business, which nearly doubled in organic revenue in 2018.

But it wasn't just our organic efforts where we made great strides. Most of you know in November of 2018, we entered into an agreement to acquire leading middle market financial advisory firm, Quarton, which provides us with significant scale, revenue diversification and cross-border expertise. The acquisition was completed at the beginning of January, so the 2018 results do not include any revenue or expenses from Quarton.

In addition, we continue to diversify our revenue streams, maintain and grow contribution from our recurring revenue businesses, simplify our balance sheet and focus on opportunities where we have strong domain expertise. All things we said we would accomplish at the start of 2018.

We also worked to position the investment management platform towards strategies that are salable and scalable, and leverage Cowen's domain expertise or what we call Cowen DNA, with the operating businesses.

Now it's easy to look at this and say our results were entirely driven by the work we accomplished in the past year. But the truth is that our strong operating performance in 2018 was the result of the decisions made in prior years to put the fundamental building blocks in place to enable us to successfully grow the organization and drive higher profitability. Now I will spend some time going over the financial highlights for the fourth quarter as well as the entire year.

In the fourth quarter, economic income attributable to Cowen Inc. was $7.7 million compared to a loss of $9.4 million in the fourth quarter of 2017. Economic income to common stockholders, which is after preferred stock dividends increased to $6 million from a loss of $11.1 million in the fourth quarter of '17. And economic operating income, which represents economic income to common stockholders and adds back depreciation and amortization, totaled $8.7 million for the quarter versus a loss of $7.9 million in the fourth quarter of 2017.

For the full year, economic income attributable to Cowen Inc. was $76.1 million, up nearly 5x compared to the $15.8 million for the full year of 2017. Economic income to common stockholders improved to $69.3 million from $9 million in 2017, and economic operating income almost quadrupled to $80.9 million from $20.6 million in 2017.

Now as I highlight the successes in our specific operating businesses, I encourage you to follow along with the financial supplement book, beginning on page 3 which is entitled Revenue Metrics. There, you will find a lot of information to which we will be referring throughout this call and on calls going forward.

Turning to banking and capital markets. We continue to take advantage of this strong capital raising environment. Investment banking revenue grew 47% in 2018 to $329 million, and you can see that investment banking performance also held up well during the market volatility in the fourth quarter.

For the full year 2018, health care continued to drive strong equity raising activity, but we also gained additional momentum in our non-health care verticals. In 2018, non-health care investment banking revenue represented 38% of total investment banking revenue, up from 28% in 2017. Pro forma for Quarton, non-health care revenue would have been 44% of total investment banking revenue in 2018.

And just to add a quick note on our alliance with Intrepid Partners because it does play into our diversification strategy. As a reminder, we partnered with Intrepid in November 2018 to jointly provide comprehensive capital markets advisory and execution services to North American oil and gas companies and investors.

We've already had a few wins on the board, but there's lots more we can be doing here, especially now with the recent addition of our debt team, which has a lot of relevance to the Intrepid clients.

More to come on that later, but it's nice to say that getting early validation not only of a partnership but that our growth in banking doesn't all have to be built organically or through acquisition, it can be through strategic partnerships as well, and Intrepid has been a great example of that so far.

In addition to industry diversification, we are working to gain traction in scaling products that will drive margin such as our merger advisory business. This business almost doubled organically to $81.7 million in revenue in 2018 from $41.8 million in 2017.

As a percentage of the total investment banking revenue, our advisory business grew from 19% in 2017 to 25% in 2018. And taking a closer look, we had meaningful contributions from a variety of industries, including industrials, technology, consumer, information services as well as health care.

And pro forma for Quarton, our advisory business would have been 35% of total investment banking revenue in 2018. It is worth noting that Quarton's average transaction fees have historically been lower than Cowen's, and so, therefore, going forward, we expect to see overall implied average fees and median fees for transactions to actually decline with the inclusion of Quarton.

As I mentioned earlier, the acquisition of Quarton is expected to add significant scale to our advisory business and diversify our overall banking revenue as well as expand our international presence. Although, it's early days, the integration has been going according to plan and Quarton finished 2018 on a high note and their mandate of pipeline continues to look very strong. We look forward to providing more updates on the integration as the year progresses.

Now turning to our markets businesses. For the full year, brokerage revenue was up 45% compared to 2017. And this includes the fourth quarter, which was one of our strongest quarters due to the heightened market volatility. You can see this in our brokerage revenue per trading day figures. For the full year 2018, we averaged $1.8 million per trading day versus $1.2 million in 2017. During the fourth quarter, brokerage revenue averaged $2 million per trading day. And as a reminder, we broadly describe the individual units within the brokerage business as institutional brokerage and institutional services, which are defined further in the financial supplement.

Starting with the first component, institutional brokerage. Revenue increased 36% in 2018. As a reminder, 2017 includes 7 months of Convergex. But if we normalize and by that I mean, assuming Convergex was included in our numbers for 12 months in 2017, this increase was actually 15%. As far as institutional services business, revenue grew 74% in 2018. Again, if you normalize for Convergex, this increase was 20%.

Our European cash and electronic revenue, which largely represent U.S. -- European accounts trading in U.S. equities, was up for the full year in 2018 despite the onset of MiFID II regulations. Research is a critical differentiator for Cowen and an anchor for our business. These results demonstrate that research matters. And they demonstrate that Cowen is increasingly a key provider of choice for the buy side with our non-conflicted independent execution model as well as our collaborative value-added research products.

One area that we haven't talked much about but should is our initiative to maintain and grow contribution from our recurring revenue or spread businesses. Markets revenue, which includes brokerage, financing and other revenue, increased $476.7 million in 2018 from $323.9 million in 2017. Normalizing 2017 for the acquisition of Convergex, markets revenue increased $82 million or 21% year-over-year.

Moving to the -- with the increased scale and clearing execution, we reduced overall brokerage expense in 2018. Some of these savings were 1x in nature, which means we expect slightly higher comp -- noncomp brokerage expenses in 2019. Steve will talk more about that later in the call.

Moving to the investment management business. As of January 1, we had $10.4 billion in assets under management, which was a $481 million decrease from October 1, 2018. And before I provide a strategy update on the investment management business, I'd like to spend a moment going over the performance of each of our strategies.

Starting first with our private health care strategy which as a reminder is the first Cowen DNA investment platform. This strategy performed exceptionally well in 2018, and we're looking forward at launching follow-on products later this year. The health care royalty strategy is now 78% committed in its third commingled fund and building on the strong performance achieved throughout 2018 with $403 million deployed across all active vehicles.

Merger arbitrage meaningfully outperformed the HFRX merger arbitrage index in both the quarter and the year. Each of our real estate vehicles are actually closed and are -- as our -- and are now in their investment periods. And the long/short equity business, which focuses mostly on TMT and consumer sectors, outperformed the HFRX equity index and the S&P 500 for the year.

We've discussed in recent quarters that we will be selective in how we grow the investment management business going forward. In 2018, our focus was on investment capabilities that are salable and scalable, as we draw more closely upon the expertise and DNA of Cowen.

As a result, we monetized and transitioned certain strategies to reduce costs and reduce risk during the year. As we grow our Cowen DNA strategies, they will be private equity-type structures which should provide more consistency in our results over time.

Since Elizabeth Rosman's appointment as the Head of Investment Management in August, we've sharpened our focus in this business. And our end goal is for investment management to be more profitable, more consistent and more closely aligned with our overall strategy at Cowen. We will have more to say about this as the year unfolds.

Ultimately, we believe these steps will help us to drive investor returns, not just within the investment management business, but for Cowen as a whole. And with that, I'd like to discuss some more macro pieces of our strategy, starting with improving our capital allocation process, which helps us to drive higher ROCE in 2018.

We're also -- sorry, we're also continuing to buy back our shares as well as invest in areas of our business we believe have significant expertise and growth opportunities. During the quarter, we repurchased $15 million of our common stock, leaving about $10 million available to repurchase under our current program. As we've talked before, we continue to use our capital strategically and sustainably to ensure that we have enough in capital in all market conditions while still being able to repurchase shares opportunistically. One of the other areas we've discussed before is monetizing some of our non-core investments, which are valued at $126.9 million as of December 31.

This process does require time. And as I've said before, we don't have unilateral decision rights in most of these investments. We're continuing to make progress on realizations, although it's still too early to provide specifics. And as a reminder, these legacy investments are not a key driver to the operating performance of the business. Yet they do periodically contribute to investment income when there is a change to our mark and they will provide addition -- additional sources of capital to grow our business once they are monetized.

Investment income in 2018 did include an outsized, unrealized gain in Tilray, which we invested in Tilray, as many of you know, in a private round prior to its IPO in July. This is a great example of harmonizing our balance sheet with our operating activities and the stock had quite a run in 2018, which created some volatility to the investment income line in both the third and fourth quarters. It is worth noting that after the underwriters' lockup expired earlier in the year, we did sell our position completely and earned quite a significant return on that investment.

When we took a look at what the company has accomplished this past year, we believe it's clear that we're moving in the right direction. From a more diversified revenue mix, focus on higher-margin businesses to a cleaner, simpler balance sheet and an investment management business that's more integrated with rest of Cowen, our results are starting to follow the execution.

Before I offer some closing remarks and thoughts about where we go next, I will turn the call over to Steve Lasota for a brief review of our financials. Steve?

Thank you, Jeff. For the fourth quarter of 2018, we reported GAAP net income attributable to common stockholders of $3.4 million or $0.11 per diluted common share compared to a net loss of $77.7 million or $2.51 -- or a loss of $2.51 per diluted common share in the prior year period.

As a reminder, our GAAP results for the fourth quarter of 2017 were negatively impacted by certain one-time charges, including the reduction in value of our net deferred tax asset of $40.6 million, as a result of the Tax Cuts and Jobs Act of 2017.

For the full year for 2018, we reported GAAP net income attributable to common shareholders of $36 million or $1.17 per diluted common share compared to a loss of $67.7 million or $2.29 per diluted common share in the prior year period. Note that our GAAP stockholders' equity increased by $46.4 million to $794.4 million at December 31, 2018, from $748 million at December 31, 2017. Our GAAP revenue was up 27% year-over-year to $259.9 million compared to $204.5 million in the prior year period. For the full year, GAAP revenue was up 47% to $966.9 million compared to $658.8 million in 2017. The increase for both the quarter and the year was due to the continued strong performance across our businesses, namely banking and brokerage.

Also, we adopted the new revenue recognition standard effective January 1, 2018, which requires underwriting expenses to be shown gross rather than net of associated investment banking revenues and expenses reimbursed from clients to be shown gross in investment banking revenues rather than net in their respective expense category.

In the fourth quarter of 2018, comp and benefits expenses were $115 million. Noncomp expenses for the fourth quarter of 2018 were $109.4 million and depreciation and amortization $2.9 million.

In addition, other income from gains on investments was $0.8 million, income tax benefit of $280,000 and noncontrolling interest expense was a benefit of $655,000 for the quarter.

The new revenue recognition standard has impacted several components of our GAAP income statement. To begin with, underwriting expenses and expenses reimbursed by clients are now shown on a gross basis. Meaning underwriting expenses, which were previously shown net of investment banking revenues, are now included with our expenses. And expenses reimbursed by clients were previously shown net of their respective expense line item are now included in investment banking revenues. This change, however, has no impact on our GAAP net income.

Within our investment management business, the majority of fees from certain funds that we previously presented as incentive fees are still being recognized, but are now being presented as equity investments in the funds with associated gains or losses in the income statement. Only a portion of our previously recognized incentive fees are now being deferred for GAAP to a future period at the point that they are crystallized.

Now turning to our non-GAAP financial measures, which we refer to as economic income. As a reminder, we use economic income to measure our performance and to make certain operating decisions. In general, economic income is a pretax measure that eliminates the impact of consolidation for consolidated funds and excludes goodwill and intangible impairment, certain other transaction-related adjustments or reorganization expenses, certain costs associated with debt and preferred stock dividends. Economic income revenues also include incentive income during the period when incentive fees are not yet crystallized with GAAP reporting. The remainder of my remarks will be based on these non-GAAP financial measures.

We reported economic income of $7.7 million for the fourth quarter of 2018 versus a loss of $9.4 million in the prior year quarter. For the full year 2018, economic income increased to $76.1 million from $15.8 million in 2017. Going forward, economic income attributable to common stockholders, which is economic income less preferred dividends, is a new financial metric that we will be including with our quarterly results. Economic income attributable to common stockholders was $6 million or $0.19 per common share in the fourth quarter of 2018 compared to a loss of $11.1 million or a loss of $0.36 per common share in the prior year quarter.

For the year, economic income attributable to common stockholders was $69.3 million or $2.26 per common share, an improvement from $9 million and $0.31 per common share for 2017. For the fourth quarter of 2018, economic income revenue increased 13% year-over-year to $207.4 million compared to $183 million in the prior year quarter. For the full year 2018, economic income revenue increased 37% to $909.5 million from $606.2 million in 2017. The increase in economic income revenue for both the quarter and year was due to strong performance in equity financings and brokerage activity growing contribution from advisory and nonhealth care sectors. As a reminder, Convergex was included in 7 months of 2017 and a full year of 2018.

For the quarter, investment banking revenue was up 18% to $77.6 million from $65.5 million in the fourth quarter of 2017. For the full year, investment banking revenue was up 47% to $329.1 million from $223.6 million in 2017. Brokerage revenue for the quarter was up 19% year-over-year to $123.4 million. For the full year, brokerage revenue was up 45% to $452.3 million from $312.8 million in 2017.

Management fees for the quarter were $11.2 million compared to $13.3 million from the prior year period. For 2018, management fees were $49.2 million compared to $55.4 million in 2017. Incentive income was $2.3 million in the fourth quarter compared to $7.4 million in Q4 of 2017. And for the full year, incentive income was $23.7 million compared to $26 million in 2017.

Investment income for the quarter was a loss of $5.6 million compared to a loss of $6.6 million in the prior year. The decrease was mostly due to the mark-to-market adjustment of Tilray, as Jeff mentioned, and we sold out of our position in Q1 of 2019. For the full year, investment income was $56.3 million compared to $45.1 million in 2017. And finally, other revenue was a loss of $1.4 million in the fourth quarter compared to a loss of $83,000 in the prior year period. And for the full year, other revenue was a loss of $1.2 million compared to $3.2 million in 2017.

Turning now to our expenses. Comp and benefit expense for the quarter was $114.1 million or 55% of economic income revenue compared to $111.1 million or 60.7% in the prior year period. For the full year, comp and benefit expenses was $506.3 million or 55.7% of economic income revenue compared to $388 million or 58.2% in 2017.

Fixed noncomp expenses totaled $37.2 million for the fourth quarter compared to $35.5 million in the prior year period. And for the full year, fixed noncomp expenses were increased $19.7 million to $141.8 million compared to $122.1 million in 2017.

Variable noncomp expenses in the fourth quarter of 2018 were $37.7 million compared to $35.5 million in the prior year period. And for the full year, variable noncomp expenses were $143.6 million compared to $105.8 million in 2017, and this is based on a revenue increase of approximately $244 million.

In 2018, we achieved significant cost savings following the Convergex acquisition and activities such as execution and clearing, driving significant efficiencies in margin improvement. We also realized approximately $5 million in one-time cost savings, which benefited our variable trading cost margins in 2018.

Depreciation and amortization expenses were $2.7 million compared to $3.2 million in the fourth quarter of 2017. And for the full year, D&A expenses remained flat at $11.6 million compared to 2017.

Economic operating income attributable to common stockholders, which is economic income before depreciation and amortization and less the preferred dividend, was $8.7 million for the fourth quarter compared to a loss of $7.9 million in the prior year quarter. And for the full year, economic operating income attributable to common stockholders was $80.9 million compared to $20.6 million in 2017. GAAP stockholders' equity increased by $46.4 million. Common equity, which is stockholders equity less preferred equity, was $693.3 million compared to $646.7 million at the end of 2017.

Book value per share, which is common equity divided by total shares outstanding, increased to $24.37 as of 12/31/2018, compared to $21.82 as of December 31, 2017. And lastly, invested capital was $786.7 million as of December 31, 2018, compared to $695.3 million as of the end of 12/31/2017.

This completes my financial summary. And on a final note, we are continually monitoring and reviewing our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segment.

As a result of the recent change in chief operating decision-maker at Cowen, Jeff, we're experiencing a significant strategic shift to refocus our investment management businesses on a set of differentiated products, which are aligned to content and insight within our domain of expertise. We are currently evaluating the impact of these changes on the presentation of economic information that were used to assess the performance of our operating results and make decisions about resource allocations, which may impact the company's determination of operating segments in the future. Please note that our earnings release directs you to our website, which contains our financial supplement.

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

Thanks, Steve, and it's clear that we've accomplished a lot this past year, and we still have a lot more work to do. We'll continue to focus on how we drive higher and more sustainable ROCE, but it's clear that the Cowen today looks quite different from a year ago and certainly quite different from a few years ago.

We are encouraged by the progress thus far in becoming more transparent, consistent and profitable. Transparent in a sense of providing relevant information to model our businesses and a framework to think about how we're achieving progress on our objectives. Consistent in a sense of working hard to have more predictability in our results without depending on any single outlier business to carry us in any quarter. And profitable in a sense that our operating businesses and balance sheet activities working concert with one another towards driving more sustainable ROCE over the long term.

I started the call by outlining some of the operational objectives we're working towards and have achieved already, and it bears repeating that we'll -- some of these objectives which will continue to inform our strategy over the next couple of years.

As a reminder, the objectives are continuing to diversify our revenue stream so that we're sustainable on all market environments, both in strong years like 2018 and in less favorable environments. Health care is and always will be a key strength of Cowen, but we're also capturing additional market share in other areas where we have domain expertise.

Scaling the businesses that will drive margin. We've talked about what we're doing on the advisory side from the strong organic growth in 2018 to the recent acquisition of Quarton, but it doesn't stop there. Other businesses like securities, financing and SPAC trading also generate higher margins. And we will be gradually scaling those business in ways that will generate attractive returns on our capital.

We'll also continue to focus on Cowen DNA opportunities, in part by simplifying our balance sheet by exiting non-core investments and strategies. And in 2018, we took a big step in that regard. But as I mentioned, there's still plenty of work to be done, and we expect to share updates on those initiatives in 2019.

We also look to maintain and grow contribution from our recurring revenue or spread businesses, such as securities, finance. And this is just another reflection of us moving deeper into the areas where we're already exhibiting strong growth. We are still in the early stages of this effort, but we look forward to continuing to improve our capital allocation process, even as we were able to significantly increase our ROCE for the year. Our goal remains to achieve sustainable mid-teens ROCE over the long term.

Let me finish by saying these objectives inform each and every one of our business decisions. We understand that our progress cannot be distilled into a single number, that plugs nicely into a model and that's why we're taking steps to improve transparency in order to make it easier for investors to value us and ultimately to understand what we're seeing here internally, which is a company with significant growth and profitability potential.

So I want to thank each and every one of our employees and partners, not only for helping us to get to this important juncture but also for helping to position the company to scale even further and drive more attractive returns. Also, I want to thank our shareholders who continue to believe in the Cowen story and what we're doing and who know that our strong operating performance and progress we're making are only a preview of what we can generate in the future.

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

(Operator Instructions) Our first question comes from Devin Ryan of JMP Securities.

Congratulations on the record year.

Thanks, Devin.

First question here is just on the brokerage business, clearly a great result in the quarter. I know that was partially a function of volatility, but it did create a nice hedge to some other areas. And so I think the strategic rationale of the addition of Convergex has really been playing out in the market. But from here, how are you guys thinking about the ability to grow that business? Can you still do more with prime brokerage or connect more services into what's now a broadened client base? Or just trying to think about whether we should be thinking about this business as more of a ballast in these types of markets versus a growth driver from here?

So it's a great question. Obviously, we still think we have room to grow. It's certainly taking market share from others because I don't think we're building -- and we said this over and over again, we're not predicating our business strategy on growth in the U.S. commission market. We know that it's relatively stagnant. And we know there are pressures on -- from our clients to pay less for more services. And so are predicated to be able to surround them with more product and get in front of them with ways to be more effective and take a larger share of their overall wallet. You've certainly seen that as we've moved in the prime brokerage business, moving into the clearing business and allowing us to grow our securities lending business has been a fantastic boon for us, both on the sense that we can begin to offer some of our clients on a selective basis products and services that they can't otherwise get from some of the larger organizations. This is really about bifurcating the kind of clients that we're talking to in many instances. You just don't get the right kind of attention from some of the larger institutions, and so we're building our business to make sure that they're getting the right kind of attention from organizations like ours, that would be securities lending and things like that. We are -- we've actually launched a swap product. It's early days. So I wouldn't build into a model or anything like that, but it gives you an idea where we're going. Effectively, it allows us to offer synthetic prime services to people on a selective basis. And that's just a great way for us to 360 clients who are really impactful to us, really help them to figure out ways to pay us, even if their commission wallets are likely to decrease over time. So look, we see adjacencies all over the place in that business. Our international algo product we launched this year. I think it's just getting started. That was something that we acquired is really part of the Convergex acquisition and the development work that's gone on in improving that product over the course of past 1.5 years has been tremendous. And we're already seeing uptake from clients. So again, do I think there is likely to be growth? Yes, I do. And I don't think it's predicated on the notion that we will be having to see growth in the overall market. I'd also say the last piece is we don't really talk much about it because it's been a few years, but we're seeing actually really great progress in what's happening at the firm formally known as CRT. The cross asset capabilities that we are presenting to clients for them to be able to trade in securities and look at securities up and down the capital structure is pretty unique. And it's taken us a few years to get it right, frankly. We got great leadership in that area. And so what we're seeing is significant progress we've made there. And finally, I just think -- we see great growth in the options -- sorry, the options trading business, given the volatility in the markets and we've got a bunch of new clients. So I don't know that we'll have the same kind of growth that we had year-over-year, but still remain optimistic.

Okay, great. Thanks Jeff. Appreciate all the color. On the advisory business, so you guys also had a strong year. I think, Quarton is expect -- or was expected to generate about $45 million in revenue on their own, so that would put you, kind of, pro forma at about $125 million in advisory fees, which is really kind of a new level of scale. And so when you guys think about the addressable market in the business that you're building, because I know advisory has been a focus, do you have any aspirational goals for how large you would like to see that business become maybe over the next 5 years or so, I know some of your kind of middle-market focus peers are a few hundred million or higher in terms of revenue, so that would still kind of leave a lot of room for you guys to grow that. So just how are you thinking about that business scaling and kind of where you would like that to be over the next handful of years?

So obviously, we think it has tremendous growth potential. I mean, I do look and I admire a lot of what some of our competitors were able to do in the early part of this decade that put themselves in a position where they can capture huge market share. I mean, I've said over and over again, I wish we could have got to it earlier. I think we did the right thing, frankly, at Cowen. I don't regret anything that we did in the past 6 years in terms of focusing on the businesses that were really critical to making sure that Cowen could have a strong foundation. But when you look at that market, especially the middle market, there is tremendous growth opportunity and there's just a dearth of high-quality players that can play at scale. And our strategy is -- I mean, I'm happy to talk about it because I think it's hard to replicate, is to be able to go in and provide our clients, the middle market and the lower middle market with solutions. And those solutions might be financing solutions, they might be acquisition opportunities, they might be sale opportunities. But when you sit with a client who's just not used to being covered with a firm that has a full suite of products with individuals who actually understand the -- what it means to run small businesses. It's an amazing thing. And I look at sort of the early wins we've had post this acquisition and I look at the wins that we had last year, and the common theme among them is that we're able to really engage with clients for the full suite of products, where they know that we can execute for them. If they choose path A, whether that's equity finance; or path B, if that's debt finance; or path C, strategic acquisitions; or path D, looking at strategic alternatives to monetize. And I just -- there are just a dearth of players in that -- in the middle market who can play at scale and still execute like a small firm with a lot of engagement. And that's why, I think, we have tremendous upside. So I'm not going to give you like a number of what I think it could be, but you know what some of our competitors do, and I just don't see why that can't be us.

Okay, great. Another question here, just on banking more the ECM side, just any sense of impact of the government shutdown either on backlog kind of deals, just kind of falling apart all together because of kind of the timing or how that affects first quarter timing versus second quarter timing? Just trying to think about kind of any near term or kind of intermediate term effects of the shutdown? Or just more broadly too, if you can just expand a little bit on the backlog and ECM?

Yes. So I would say, there's no question that this -- that the lack of SEC opens in January will definitely impact first quarter revenues. I don't think -- we don't think it impacts year long revenues. So the backlog will get cleared and ultimately things that might have happened in the first quarter will happen in the second quarter assuming that market conditions continue to be favorable. So we're not changing our full year outlook at all. But there's no question that we had a backlog of things that we think should have got done in the first few weeks of the year that don't. And of course, in equity finance, when people's numbers go stale in the middle of February, you have a period of time until they report, where you can't do anything. And so certainly, we will have missed that. The companies that actually did have the well-known seasoned issuers that had shelfs in place. Many of them took advantage of the market, and so we participated there. And certainly, our M&A, franchise and some of the debt deals we're working on are continuing to help deal with the fact that it was a slower equity finance market in January.

Okay, great. And last one here I'll sneak in. So you guys made a lot of progress during 2018 on kind of reducing the non-core capital. And I think that was one of the contributors to the strong return on equity that you had, and you alluded to this. But when you look at 2019, can you maybe remind us of some of the high-level areas that you could still take capital out of or even events that we should be thinking about to have on the radar where capital could come out. I know Linkem is one thing we've spoken about, potentially something happening there, but anything else. And as you talked about refining your capital allocation process because it's all interconnected here, how do you stock repurchases -- or how are you thinking about that? Is there any shift with stock repurchases as you're thinking about capital allocation? I know you had a relatively active buyback in the quarter. And will you be neutralizing the Quarton share issuance? So I know there's a lot there but would appreciate it.

Okay. So I mean, I think you've highlighted the big elements, I mean, $126 million is something we're going to continue to work down. The biggest of that is clearly Linkem, clearly our investment in them. Those are just things. We just don't have the ability to unilaterally make them happen at prices that, I think, you would like or we would like. So there's always an opportunity to monetize stuff at significant discounts, but we're not going to go that route because we don't have to. So we're working, I think, very hard. In this year, we're certainly working on things that would lead me to feel better about the fact that we're closer to monetization in some of those assets. I can't get into too many details around that. But last year this time, we weren't working on those things and now we are. And so we'll continue to work hard on that. We'll continue to buy back stock out of cash flow like we've been saying. Certainly, we saw strong cash flow last year. And we certainly wanted to be aggressive in buying back stock ahead of the issuance for Quarton, and I think that was an opportunity for us to do that. We know that there is a pretty lengthy period of time during the first quarter, in which we can't be in the market. Obviously, that ends soon, but we'll basically have been out of the market for almost 2 months and then we have a short window to be in the market before the first quarter is over. So we're smart about how we access the market. And clearly with the market volatility and where the stock was trading, it's attractive to buy back shares at those prices, and so we'll continue to be aggressive and tactical with that. And then as we start to monetize some of these bigger pieces, we'll do capital allocation. That's why it's really important to focus on ROCE. ROCE is a measure that incentivizes us to do the right thing with capital. And there's a balance between the short-term gain of having stock buybacks and driving your equity calculation lower and making, I'd say, difficult decisions sometimes to make investments in business that continue to drive you forward. And so we're constantly debating that, but we have this very consistent framework of how we are making those determinations. And it all revolves around this idea that we should be doing things that put us in a position where we can be consistently achieving mid-teens pretax ROEs over the business cycle. And so this year, we made great progress in that. And we're putting ourselves in a position where we start just about every year with the opportunities to do that, and the markets don't have to be exceptional for us to accomplish that. So I hope that's helpful, but obviously stock buybacks are a part of that equation but they're not the only factor that goes into it.

(Operator Instructions) Our next question comes from Sumeet Mody of Sandler O'Neill.

One follow-up on the ECM side of the business. From the outside, it looks like overall industry activities have been trending down the last couple of quarters and health care volumes haven't been too inflated from that down take. How are you feeling about that environment in biotech today? And are we still in the early stages there? Can I just get an update on the color?

I think we're still in the early phases of drug discovery. I think we said on previous calls the amount of investigatory, new drug applications in front of the FDA is at a record level and those companies need to be financed. It doesn't mean that we won't have ups and downs in that financing cycle. And certainly, it was a really bad fourth quarter for a lot of investors, which obviously makes them a little bit more cautious with new issue. But when you look at the broader trend and what's going to play out over the next 5 years, there's not a better industry to be in especially if you do equity finance. All of these companies will need to finance. And increasingly, they're going to be doing it with debt financing. And so we're engaged in a lot of conversations around helping our health care companies to think through debt financings and royalty financings because that's a real alternative for them. And so it's not just equity finance. And we're having lots of conversations about hybrid equity finance, as we certainly think that there will be a lot of folks who are doing convertible issuance. And so one of the things we did -- we don't talk much about, is we have a combined and consolidated global capital markets effort that rolls into this 1 group, 1 team, where we can sit in front of a client and talk about a multitude of products that might fit their needs and objectives. Now ultimately, they can and we can advise them on what the best one is for them. But to be able to sit in a room and say, here's path A, here's path B, here's path C and be able to balance that against what's happening in the market in each of those areas is a huge advantage. And so -- I don't know -- and I think we're just beginning to scratch the surface on that. So we'll see how it progresses. There's certainly -- it's not going to be linear, but I mean I couldn't be happier that we have an expertise in that area because one thing I do know is the sun is going to come up tomorrow and the other thing I know is biotech companies will need to finance themselves at some point.

Great. That's great color. And then one quick one on modeling. Just for the comp ratio, it kind of came in a little bit lower than we were expecting for the year, pretty solid step down year-over-year. Just wondering if that's a good run rate for us to use for '19? Or any consideration we should be aware of for the year?

Sumeet, as we've said in the past, we're definitely working on getting that comp to rev ratio down, but -- because we had an exceptional year, I think, that's why the comp to rev ratio was where it is at. I mean, we do -- we're pushing to get it lower, but depending on how -- where the revenues come out this year, we're projecting in a similar area.

There are no further questions. I'd like to turn the call back over to Jeffrey Solomon for any closing remarks.

So thanks again for joining us for the call today. Sorry that I have a cold and keep coughing. I want to wish everybody a happy Valentine's Day. I want to make sure we do that, and, of course, it's also a very special day here at Cowen because it's Steve Lasota's birthday. So we are certainly want -- don't want the call to end without saying happy birthday to you, Steve. You do an amazing job, and we wish you all of the prosperity and success for your next year.

Thank you.

All right. And with that...

Getting older.

Getting older is better than not getting older, buddy, okay? So anyway with that, we thank you all for your continued support. Look forward to speaking with you on the next call. Talk soon.

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