Cowen Inc (COWN) 2019 Q4 法說會逐字稿

Good morning. Thank you for joining Cowen's conference call to discuss the results for the fourth quarter and full year 2019. By now, you should have received a copy of the company's earnings release, which can be accessed 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 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.

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

Now I would like to turn the call over to Mr. Jeffrey Solomon, Chairman and Chief Executive Officer.

Thank you, Joel. Good morning, and welcome to Cowen's Fourth Quarter and Full Year 2019 Earnings Call. This is Jeff Solomon, and joining me today on the call is our CFO, Steve Lasota.

As a reminder, we make quarterly financials -- we make a quarterly financial supplement available in the Investor Relations section of our website, and we encourage you to review it in conjunction with our earnings release.

Before we review our results, I'd like to talk about the work we've done over the past 2 years since I became CEO. Our team has taken some great steps to simplify our business, diversify our revenue streams and to ensure that we can be consistently profitable over the long run. Early on, we adopted the mantra of simpler, fewer, deeper, and we've worked to put that into practice.

In Cowen Investment Management, we have exited 5 strategies that were not scalable and have focused on private equity style strategies, which leverage our industry expertise or what we call Cowen DNA. Those are strategies such as Cowen Healthcare Investments, and Cowen sustainable Investments. We've also taken steps to significantly reduce the volatility in our investment portfolio by refocusing our capital in dealer businesses like SPACs and securities lending where we can earn spreads in excess of our cost of financing.

We've worked to provide more transparency into the earnings power of our operating business by reporting 2 discrete segments: Operating Company or Op Co and our noncore Asset Company or Asset Co. This format highlights the earnings power of our core business as well as the monetization of potential legacy investments on our balance sheet. And while we've been consistently profitable for the past 8 quarters, we also made investments funded out of operations that are designed to strengthen our firm and help fuel our future growth. We've hired new teams in consumer and technology banking, European trading and outsourced trading, expanded offerings in areas such as debt capital markets, global prime brokerage, securities finance and swaps execution.

In addition, we completed the Quarton acquisition, which expanded our investment banking footprint and middle market advisory in the United States and in Europe. And while there's still plenty of work to do, we've made clear progress. I'm confident about our prospects looking ahead into the remainder of 2020 and beyond.

Turning now to our results. We had record economic revenues for both the fourth quarter and the full year of 2019. Fourth quarter profitability was up on both a consecutive year basis and the year-over-year.

Looking at our 4 core divisions in our Op Co segment. In investment banking, we had a strong finish to the year with full record-year revenues driven by higher equity capital markets activity, and an increased contribution from debt capital markets as well as advisory revenues from the Quarton acquisition.

Healthcare continues to be our strongest sector and is a core engine of profitability. Many of you probably have heard me say this but it bears repeating, of the 4,500-or-so publicly traded companies in the United States today, about 400 of those are healthcare companies that have gone public since 2012, and 300 of those are publicly traded biotech companies. That is a tremendous market focus for us and one which we expect will generate significant capital markets activity this year and in the years to come as our clients are consistently raising capital to fund their growth.

There's a bit of a misperception in the market that our revenues are driven by IPO activity. And while a robust IPO environment generally portends healthy equity markets, our revenues are primarily driven by our follow-on offering activity. In fact, in 2019, approximately 30% of our banking revenue was from follow-on activity in biopharma. That is why the number of publicly traded life sciences, tools and diagnostics and digital health companies is such an important indication of the persistence of our revenues in that area.

That said, our industry diversification beyond healthcare is also continuing. Non-healthcare investment banking revenue represented about 46% of total investment banking revenue in 2019, which is up from 38% in 2018, and it was well diversified across M&A, debt advisory, private placements and equity capital markets.

It was a record year for equity capital markets as we had 126 transactions in 2019, which was an 11% increase year-over-year, and we were a book runner on 83% of those deals. Underscoring the importance of follow-ons, only 34 of those 126 transactions were IPOs.

Full year M&A revenues were up 3% to $84 million, which includes a $35 million contribution from Quarton. The U.S. side of Quarton performed within the expected range, while Quarton Europe was weaker given the macro and Brexit-related concerns and the market slowdown in the German economy.

The M&A pipeline remains strong, and while macro uncertainty could certainly impact the timing of the closing of deals, we're seeing a number of the larger mandates in our backlogs moving nicely towards closing.

Now turning to our markets division. Markets revenue, which includes brokerage, securities financing and other revenues, was down 2% year-over-year, outperforming a 4% decline in market-wide U.S. volumes. Highlights during the quarter included the strength in securities finance, derivatives and cross-asset trading, including special situations. We also continue to expand our footprint in Europe where we see an opportunity to grow our share, building on the hiring of a European trading team last fall with the addition of a small prime brokerage team from global prime partners. We have also recently joined the London Stock Exchange as a member firm and have rolled out a suite of trading algos tailored for European market structure.

Even as the buy side commission wallet has contracted, we've gained share, and we believe we are well positioned to firm up our role as a trusted execution partner to some of the strongest institutional investors in the marketplace.

In research, we now cover about 800 stocks and continue to grow our coverage across nearly every industry vertical. The research team published 174 of our flagship ahead-of-the-curve series reports in 2019, and overall readership of Cowen Research reports was up notably year-over-year. We're also capturing more mind share as a result of our differentiated approach that centers on collaboration between teams and proprietary data analytics, and we continue to leverage the depth of our industry knowledge to inform our internal strategies by identifying emerging areas of growth that can be meaningful drivers to our business in just a few years.

Moving to investment management. We had a strong investment performance across the board, and our strategy is generating solid investment and incentive income, while new assets raised in 2019 were the highest in several years. The impact of our asset raising and our focus on private equity-styled products is evident in our management fee run rate, which was at the highest level in more than 2 years in the fourth quarter of 2019.

Looking at our 5 main investment strategies: our sustainable investing strategy, which launched in the third quarter of 2019, had approximately $210 million in assets as of the end of the year. It just made its first investment along with the co-investor, taking a $200 million stake in a mobile phone reseller and recycler called EcoATM. The strategy will continue to look for opportunities in the areas of renewables and storage, clean transportation, sustainable food production and industrial efficiency.

Our health care investment strategy had approximately $680 million in assets at the end of the year and is currently making new investments in portfolio companies. The health care royalty strategy held a final close on its fourth fund during the quarter, representing $1.8 billion of capital and commitments for that fund and affiliated entities and has now ended the year with about $3.3 billion in assets under management.

The third fund is now fully committed across 25 investments in both royalties and debt-like structures of commercial or near-commercial stage health care products and companies. Our merger arbitrage strategy had approximately $590 million in assets at the end of the year, and it had solid investment returns in 2019, outperforming the HFRX merger arb index.

The activist strategy had almost $6 billion in assets at the year-end, and it generated positive returns for the fourth quarter and for the full year of 2019.

I'm turning to Asset Co. As a reminder, we are committed to monetizing these legacy investments when we can. We'll consider both price and timing as factors when looking to divest these holdings, which amounted to approximately $137 million in the fourth quarter of 2019. The biggest holdings remain our stake in the Italian wireless broadband provider Lincoln at $72.4 million and the stake in private venture funds, Formation8 and Eclipse at $40 million. Regarding Lincoln, we continue to work closely with our partners at Jefferies to explore pads for the company to grow, while providing existing shareholders a path to liquidity. While there is clear value in those asset company investments that utilize valuable balance sheet capital and have been a strong drag on our overall performance, generating negative returns on equity over each of the past 2 years.

In contrast, our operating company is performing quite well, generating return on average common equity of 13.6% in the fourth quarter of 2019 and 11.6% for the full year, approaching our long-term target of mid-teens pretax returns on average equity. That is a far cry from our full year 2017 ROE of just 3.1%.

Part of the effort to deliver higher returns on equity is optimizing our capital returns to shareholders. As we announced today, our Board has initiated a quarterly cash dividend of $0.04 per share, which is approximately a 1% yield. During the fourth quarter, we also bought back 793,000 shares of our common stock for $12 million or an average price of $15.21 per share.

In 2019, we purchased 2.2 million shares of stock for $34 million at an average price of $15.44. This buyback kept our share count almost flat year-over-year, even with the investment made in the Quarton acquisition as well as the restricted stock issued as a part of our compensation program.

As we've noted previously, we intend to repurchase stock opportunistically out of cash flow, at least sufficient to keep our share count flat on an annual basis, and we intend to return additional capital as and when we're able to monetize investments in Asset Co.

And now before we answer questions, I'll turn the call over to Steve Lasota for a brief review of our financials. Steve?

Thank you, Jeff. For the fourth quarter of 2019, we reported GAAP net income attributable to common shareholders of $3.5 million, an increase of $145,000 from the prior year period. For the full year 2019, GAAP net income was $17.8 million versus $36 million in 2018. For the quarter, GAAP revenue was up 8% year-over-year to $281.1 million from $259.9 million, and full year GAAP revenue was up 9% year-over-year to just over $1 billion. In the fourth quarter of 2019, GAAP comp and benefit expenses were $147.2 million, and for the full year 2019, they were $535.8 million.

Noncomp expenses, which exclude comp and DNA, were $106.2 million for the fourth quarter, and DNA was $5.5 million. Full year 2019 noncomp expenses were $388.5 million and DNA was $20.5 million. Additionally, there was a goodwill impairment charge of $4.1 million related to the change in segments and restructuring of reporting units in the second quarter of 2019.

Our income from gains on investments was $55.8 million in the fourth quarter, income tax expense was $5.2 million and noncontrolling interest expense was $24.1 million. For the full year 2019, other income was $138.8 million, income tax expense was $14.9 million and noncontrolling interest expense was $31.2 million.

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 reorg expenses and certain costs associated with debt.

Economic income revenues also include incentive income during the period when incentive fees are not yet crystallized with GAAP reporting, investment banking retainer fees collectible during the period that would otherwise be deferred for GAAP. Economic income also records costs associated with starting a fund over the expected life of the fund. The remainder of my remarks will be based on these non-GAAP financial measures.

We reported economic income of $12.3 million for the fourth quarter of 2019 compared to $6 million in the prior year period. Fourth quarter economic operating income, which is economic income before DNA expenses was $17.8 million compared to 8.7% in the prior year period.

For full year 2019, economic income was $48.6 million and economic operating income was $69.1 million. Fourth quarter economic income revenue increased 20% year-over-year to a record $249.8 million, while full year economic income revenue was up 4% to a record $944.8 million.

For the quarter, investment banking revenue was up 22% year-over-year to $95 million. Full year investment banking revenue was $352.2 million. Q4 brokered revenue was $108.7 million, and full year 2019 brokered revenue was $440.4 million. Management fees for the quarter were $13.9 million compared to $11.2 million in the prior year period, and full year management fees were $45.7 million.

Incentive income was $10.8 million in the fourth quarter, up from $2.3 million in the fourth quarter of 2018 due in part to higher performance fees from our healthcare investment strategy, and full year incentive income was $46.2 million.

Investment income for the quarter was $20.9 million, up from a loss of $5.6 million in the prior year period due in part to stronger performance in the healthcare and activist strategies and in merchant banking.

Full year 2019 investment income was $54.5 million. And finally, other revenue was $0.5 million in the fourth quarter, up from a loss of $1.4 million in the year ago period. Other revenues for the full year were -- of 2019 were $5.8 million.

Turning now to our expenses. Beginning in Q3 2019, compensation now includes profit-sharing arrangements to certain employees which were previously shown as NCI. The impact of the Quarton acquisition as well as the effect of some new hires in banking in markets in the second half of 2019.

Comp and benefit expense for the quarter was $146.6 million compared to $114.2 million in the prior year period. Our comp-to-revenue ratio rose year-over-year from 55.1% to 58.7% of economic income revenue. Full year 2019 comp-to-rev ratio was 56.9% versus 56% in 2018. Going forward, we'd expect our comp-to-rev ratio to be in the target range of 56% to 57% on an annual basis, although it could fluctuate from quarter to quarter.

Fixed noncomp expenses totaled $36.3 million in the fourth quarter, down from $37.2 million in the prior year period. Full year 2019 fixed noncomps were $146.7 million, an increase of $6.2 million primarily due to the Quarton acquisition as well as an increased spend on technology and business applications.

The variable noncomp expenses in the fourth quarter of 2019 were $38 million compared to $37.7 million in the fourth quarter of 2018. Variable noncomp expense for the full year of 2019 was $151.9 million. An increase of $8.2 million was primarily related to increased business development, including conferences and travel as well as costs associated with new hires.

Fourth quarter depreciation and amortization expenses were $5.5 million compared to $2.7 million in the fourth quarter of 2018 due to intangibles acquired as a result of the Quarton acquisition. Full year D and A was $20.4 million.

Looking at our business segments as of December 31, 2019, the company had invested capital in Operating Company totaling $580.6 million. Op Co had total revenues of $251.4 million and economic operating income of $23 million in the fourth quarter. For the full year 2019, Op Co had total revenues of $938.5 million and economic operating income of $78.6 million.

As of December 31, 2019, the company had invested capital in Asset Co totaling $137 million. Asset Co had negative revenues of $1.5 million and an economic operating loss of $5.3 million in the fourth quarter of 2019. For the full year, Asset Co had revenues of $6.3 million and an economic operating loss of $9.5 million.

Turning to our equity. Common equity, which is stockholders' equity less preferred equity, was $708.5 million compared to $693.1 million as of December 31, 2018. Common book value per share, which is common equity divided by total shares outstanding, increased slightly to $24.77 as of December 31, 2019, compared to $24.37 as of the prior year period.

Return on common equity was annualized 10% in the fourth quarter of 2019, up from 5% for fourth quarter of 2018. ROCE for the full year 2019 was 9.7% versus 11.8% in 2018.

In the financial supplement, we also provide a segment breakout of return on common equity. As Jeff noted, Op Co had ROCE of 13.6% for the fourth quarter and 11.6% for the full year. In contrast, Asset Co had ROCE of negative 56.6% for the fourth quarter and a negative 25.6% for the full year.

With that, I'll turn the call back over to Jeff.

Thanks, Steve. As I look back on the last 2 years and more than 10 years since the merger of Ramius and Cowen, I'm proud of what we built, a world-class investment bank and brokerage focused on key growth industries, such as life sciences, TMT, consumer and industrials. We're actively extending that domain expertise to our investment management business where we can drive meaningful margin.

As we think about the next decade, we've identified a number of new areas of growth and disruption, such as cannabis, robotics, disruptive consumer technologies, digital health and sustainability. We are already thought leaders in these areas that are increasingly using our insights to drive our operating strategy as we build higher-margin businesses like merger advisory and investment management.

Overall, 2019 was a solid year for Cowen. We had another full year of consistent profitability, increased our revenue diversity by product and industry, made targeted investments in people and capabilities and significantly revamped our investment management division. 2020 is off to a strong start with impressive capital markets and trading activity in January and a robust advisory pipeline looking ahead to the first half of the year.

Our theme this year is execution. We'll continue to focus on the investments we've made over the past 2 years to grow the business, take share and improve profitability. We will also selectively look for tuck-in opportunities and team lift-outs where we see opportunities to plug-and-play in relatively short order. I'm confident that we'll be able to execute on our plans as we help our clients strive to outperform.

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

(Operator Instructions) Our first question comes from Jim Mitchell with Buckingham Research.

Hey good morning there

Hi Jim

Maybe just a question since you brought it up on trading, obviously, a little more opaque. You said off to a strong start. How much of that is the environment versus sort of the European business? Maybe you can update us a little bit on how that's going. And just the overall environment for trading and what you're seeing?

It's been pretty strong across the board so far in 2020. Certainly, the European business, which we didn't really have last year for any meaningful amount of time, is certainly adding meaningfully as we continue to add clients. We continue to do really well in areas like derivatives or listed options. The trading business and event business has been doing quite well and continues to do well. So I'd say it's pretty much across the board. And I think it's simply a matter of overall market volumes, but the fact that we've already taken share from other players.

Right. Okay. And then on just the it looked like the invested capital in the Asset Co came down, and you had kind of a revenue loss there. Was there a small sale there that reduced capital in that business? And the loss was, obviously, a little doubled, I think, year-over-year. Is that -- how do we think about the loss content? And what's remaining as you sell down assets?

Well, on the -- for the quarter, on -- there was a small write-down on a property that we own in the real estate business. So -- but going forward, as we've talked about with Asset Co, we are looking towards -- Jeff commented, we're looking to liquidate as much as possible.

Yes. I mean we're still moving on the path that we had outlined on previous calls in terms of monetizing that. From time to time, we have to take marks just because we do quarterly valuations. Sometimes they get marked up a little, sometimes they get marked down a little based on a number of environment -- a number of the assumptions that go into pricing level 3 assets.

Right. Okay. And do you feel any better or worse in terms of what's out there. Given the market environment, do you feel better that you can get good valuations for what's left?

Yes. I mean I think each individual investment kind of stands on its own. So we talk about them collectively because they're in 1 division, but they're not correlated at all. And so we look at them on an individual basis. Certainly for the large ones, there's been some pretty good operating progress that's been made. I think Linkem made an announcement at the end of the year that they'd signed up a wholesale agreement, which is one of the first of its kind, to basically remarket our fixed wireless capability to a number of customers who are currently using DSL. That's a huge feather in the cap for the technology and for the company. We've been talking for years about getting wholesale agreements, and so I thought that was a big step forward in terms of their ability to execute. And I think everybody probably read about the article. Management made some comments in the press about seeking liquidity and financing the company through an IPO. I don't -- I can't speak to that because I'm actually a shareholder, not really on the Board, and it's probably not appropriate for me to do that, but that's in the public domain.

So all in all, I think we're moving in the direction that we want to move in.

Okay, great, thank you very much.

Thank you. Our next question comes from Devin Ryan with JMP Securities.

Great. Good morning Jeff and Steve, how are you?

Good, how are you, Devin?

Doing well. So maybe just to follow up on the last point, just to dig in a little bit more about Asset Co. And appreciating kind of the drag that it's been, and I also appreciate that there's some lumpy investments in there, but I think that some of them maybe had some restrictions around ability to sell or timing. And so I'm just curious, are any of those investments in a position where you technically couldn't sell them today? And I appreciate what you just mentioned about Linkem and potentially moving towards a process. But even outside of that route, can you think about selling that or some of these other investments in the meantime? And how are you balancing the trade-off of potentially maybe not maximizing the fair value of the investment today, but you would, obviously, be able to bring back a lot of capital that you could do something more productive with that would kind of reduce that drag, and obviously, clean up the optics as well? So just trying to think about it more holistically, but also specifically whether there's any restrictions to being able to be opportunistic.

There aren't restrictions like legally, but I think there's just some impediments to getting to where we want to get to as we work with our partners. We don't have, in many instances, the unilateral ability to, for example, force Linkem to do an IPO. Like, we don't have that unilateral right. We have the ability to go seek liquidity for our position. But we're pursuing, I think, strategies that balance that where we can get good outcomes for our shareholders and also help the company to continue to grow. I mean our -- we're working collaboratively with our partners at Jefferies to figure out how to make that happen. That's probably the best that I can say there.

In other instances, we're moving along the process of monetization. I can't give you specifics because there's intricacies in each of them, but we're further along in that process than we were. Some of them just -- it's taken a while for legal entanglements and partnership that we have with certain other members to get to a spot where we can seek liquidity, we're closer in some of those. And then, of course -- than in others, and I would say as it relates to some of our limited partnership investments there, we're waiting for the return of capital. We can certainly go out and seek liquidity in the secondary market, but there hasn't been any for the assets that we own or at prices that we think are attractive relative to what the earnings -- relative to where we have them -- the value.

Got it. Jeff, appreciate the color there. Maybe a follow-up either for you or Steve around expenses. And I heard the comment about kind of the comp ratio range and some of the new moving parts there. But I guess, what are you thinking about non-compensation levels, either the absolute level or ratios? And the ability to kind of leverage some of your non-compensation costs moving forward? And just more broadly, as you look out over the next several years, how you're thinking about operating leverage, the ability to maybe drive the comp ratio lower than the current range if there is, or even leveraging fixed costs? So just kind of a broader view on the operating leverage in the model and expectations there.

So I think -- those are good questions, and I think we've given some guidance on where we think where the near-term compensation is likely to fall based on what we think the revenue mix is likely to be. I would say, as we grow the advisory business, your compensation to revenue ratios will go up, but you're, obviously, not adding meaningful noncomps as a result of those revenues. You'll also see when we have investment income or incentive income that we don't really add -- there's no incremental noncomp costs associated with those either. So the better we do in those areas, the lower our noncomp-to-revenue ratio is going to be and, frankly, the better our comp-to-revenue ratio is going to be as it relates to investment income and incentive income.

So these are -- our goal is to scale businesses and to create the lower noncomp and comp-to-revenue ratios by scaling the businesses. So we've put some businesses on -- we made some investments in businesses that we think will add meaningful margin, and out of that will follow the appropriate comp and noncomp ratios. Again, if it's advisory business, it'll be probably higher comp-to-revenue, but lower noncomp-to-revenue. And as we scale on some of the trading businesses and the prime brokerage business. It'll be probably lower comp-to-revenue ratio and higher noncomp-to-revenue ratio because they're more transaction-oriented businesses. And so that's really the way we think about it. The goal, obviously, overall, is if we continue to grow revenues at the pace that we've been growing them over the course of the past few years, your fixed cost just goes down because we're not really adding meaningful fixed costs anywhere to be in these businesses.

Got it. Okay, thanks Jeff. And then maybe just a final one for me on just the investment banking outlook. It seems that you guys have had some really good momentum to start the year just based on what we can see out there in terms of revenues and deals. I guess, you talked about a little bit on the prepared remarks, but where are you seeing the strength at the moment? And is some of the, I guess, early year success here a function of kind of realizing backlog that may be delayed into the first quarter? Or are things kind of replacing what you're essentially realizing? Just trying to get a sense for the tone of business because you've clearly, from at least what we can see, started the year on a really good note.

Yes. It's been a good first 5 weeks to the year. I'm not -- you can see it as much as anybody. But what you can't see is, obviously, how -- what's happening in the M&A backlog because either we haven't announced those deals yet, or when we do, they may not close in the first quarter. We are definitely seeing some things that we expected would close last year that are closing in this year, and that happens. It's -- those revenues are lumpy. If we had had, had 1 or 2 meaningful transactions closed in the year last year, we'd be having a very different discussion around M&A. The bottom line is just some of them closed earlier in this year and some of them are just about to close.

What I will say is, I continue to be impressed with our ability to win. And so in the aggregate, when you look at the scrubbed backlog and the nature of that backlog, there's more transactions with higher fee potential than in any other time since we've been doing this.

And other than the Quarton acquisition, we've grown our M&A advisory business organically. And it takes a couple of years for people to get up and moving on the platform. But I would say, already, we're seeing wins in areas where we've made investments, and those are just -- those are great. And so I'm fairly optimistic as we look at our ability to convert this backlog.

Okay. Great. Maybe I'll squeeze in one more, just while I'm here. So the dividend that you initiated, how are you thinking about that now as they're more outlets to return capital to the extent you do monetize Asset Co? Is that an outlet or a strategy that you would think about is kind of going up significantly? Or how are you thinking about kind of now that you've initiated that using the dividend as kind of an outlet for capital return from here?

Well, I think we'll -- it opens up another path for us to return capital to shareholders. And I think there are some shareholders who appreciate the fact that there's a yield on the stock or -- and there's some new shareholders that probably would have a better look at us because there is a yield on the stock. There's definitely people who just won't look at companies that don't have dividends. And so for us, it's -- we are probably an outlier in our comparable group where it's the only investment bank that doesn't have some dividend yield. And so we felt -- we certainly have our operating businesses that are in the best position they've been in a decade. And so there's no reason for us to not begin returning shareholders capital in a variety of ways. And so this one adds to it. And obviously, the better we do in our operating business, all options are on our table to increase buybacks or increase the dividend, but I think we're making a strong statement today that the operating businesses, after 2 full years of solid performance in what we look -- what we see in the future horizon, we can certainly support this dividend. We're glad to be able to do it for shareholders that have been asking.

Okay terrific. Thanks Jeff. Thanks Steve.

Our next question comes from Sumeet Mody with Piper Sandler.

Thanks, good morning guys. Just wanted to piggyback on Devin's investment banking question. Just wanted to maybe get an update on the fee rate trends within banking, maybe talk about the progress getting lead roles on deals over time against your expectations. And then maybe, secondly, I heard the comments on DCM. Just wanted to get a feel for the trajectory of that? How did the year end in that segment? And should we expect to see something maybe more material this year?

Yes. It's interesting. We have seen meaningful increase in the debt capital markets. I'll take that question first. And in part because, as your business is growing in advisory, they're kind of hand in glove. And so when we're pitching business, we're pitching both capital solutions as well as, say, outright sales. So if sponsors or clients are looking to recapture businesses or they're looking to acquire something that they need a financing attached to it, those are great discussions to be having. And we've got a team here that works really hand in glove with our industry bankers. It, frankly, works hand in glove with our restructuring practice. There's a lot of different avenues that we have for us to scale that business. I'll also say the acquisition of Quarton, particularly in the United States, has opened us up to middle market and lower middle market sponsors. That's an area that we didn't really have extensive connectivity with. And many of those portfolios need to be -- the companies in those portfolios are getting refinanced. And so the combination of what Quarton was already doing on debt advisory along with the Cowen debt capital markets team has increased our win rate.

Oftentimes, if we're co-pitching and it turns into a sale, that shows up in the M&A mandate, but we're pitching multiple pads, dual-track processes and solutions, and so having that there is helping us to win in M&A. And we see that pretty meaningfully.

I think the interesting thing about what we're doing is that we're starting to see increased co-pitching with industry expertise and middle market expertise. So increasingly, the teams are integrating and making, I would say, really solid pitches. There are companies that Cowen would have historically looked at that might have been too small, and so our historical coverage bankers wouldn't necessarily be spending time on it. And so being able to bring in high-quality partners who can focus on middle market and the intricacies of lower middle market deals has been extremely helpful. And so we've been able to work by increasing, I would say, the backlog at Quarton, particularly in the United States. Europe is a little bit of a different story. The backlog actually has been pretty stable. It's just there hasn't -- the amount of transaction activity has fallen off. And so I think we haven't lost deals, but we -- the deals we have and the things we're working on, either buyers aren't ready to go ahead and buy or sellers aren't willing to sell at those prices. And so that market for us just seems to be a little bit locked, but it's not that there's anything fundamentally wrong with what we're doing. It's just a slower time. And that will turn back around again. And I think we'll certainly capture our fair share there. Is that helpful? And if there's any other questions, I'm happy to dig in a little bit more.

No. That's great. That's all I had for you guys, thanks.

Great, great Sumeet.

(Operator Instructions) Our next question comes from Chris Walsh with Wolfe Research.

Hey Jeff, hey Steve, good morning.

Hi Chris, how are you?

Doing well. I just had one clean-up question. I think I heard you touch on Quarton briefly in your prepared remarks, but I couldn't quite hear whether you called out the revenue impact this past year. Did I hear you say it was a $34 million contribution?

$35 million.

$35 million.

$35 million. Right. Okay. And then just looking back historically to even 2018, they were at a higher level of around $50 million a year. As we look ahead, do you think that, that piece of business could reapproach that $50 million a year run rate?

For sure. I mean, again, these businesses tend to be a little bit lumpy. That $50 million a year, if you look at it, it was probably the best year they ever had. We certainly didn't price the acquisition off of that number. So we priced it off of a more reasonable number. And certainly, we have earn-outs and a bunch of things in there that'll adjust if the numbers don't pick up. But our view is that -- again, we're continuing to show people what we did in the Quarton acquisition because we paid for it. But the way we pitch the business is in a much more integrated basis. And so if there's a deal that we're working on collectively and it's a traditional industry banker who is the lead on that and there's support from the Quarton team, that may not show up in the Quarton revenue numbers. And what you can't see is how much of the backlog actually is a function of the fact that we're working across the entirety of the platform as we integrate. I think our first goal for the first year with Quarton was, first and foremost, do no harm. The Quarton team is extremely talented, and they know their business really well, and we don't at Cowen. And I mean I think we know it a lot better now, but we didn't want to be in a position where we were changing the way that they were going to market with their product. Having said that, we have -- we bring a lot of tools to those clients and to those bankers that they didn't have before. And learning how to work with one another and integrate that, the wins we might be seeing in debt capital markets and things like that for Quarton clients, that's not showing up in that M&A number. And so I think we've done a really good job at actually converting, particularly in the U.S., and I think we can certainly see bumps in that number in the future. The backlog would suggest that, that's likely.

Great thanks, Jeff. That's all for me. Best of luck to you guys in 2020.

Thanks, Chris.

I'm not showing any further questions at this time. I would now like to turn the call back over to Jeffrey Solomon for any further remarks.

Well, thank you, operator. In closing, I just want to express my gratitude to the team here at Cowen for your passion and dedication. Every day, you guys remind me that our values of vision, empathy, sustainability and tenacious teamwork are a meaningful part of who we are as a firm. And certainly, our commitment to these values will continue to deliver results for our clients, for our shareholders and our other stakeholders over the long term. And we look forward to doing that. Thanks for joining us today, and we look forward to speaking you -- to you, again, on our next call in April.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.