Q2 2020 Cowen Inc Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, please stand by your Cowen Conference call will begin momentarily. Thank you for your patience and please could you do the whole.
[music].
Thank you for joining us to discuss cabins results for the second quarter of 2020 by now you should have received a copy of the earnings release, which can be accessed at Investor day Cowen Dot Com before we begin the company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain.
Forward looking statements. These statements are subject to risks and uncertainties described in the Companys earnings release in other filings with the FCC calendar has no obligation to update the information presented on today's call also on today's call. Our speakers will reference certain non-GAAP financial measures, which the company believes will provide.
Useful information for investors reconciliation of these measures to GAAP is consistent with the company's reconciliation as presented in today's earnings release now we'd like to turn the call over to Mr., Jeffrey Salomon Kalou, Kaelin's Chair and Chief Executive Officer.
Oh, Thank you operator, good morning, and welcome to Cowen second quarter 2020 earnings call. This is Jeff Solomon and joining me today on our call is our CFO.
Steve Lasota as a reminder, we make available quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release.
This morning, I would like to take stock of where we stand up to the tableau to the past few months in how we at Cowen have adapted to the evolving cobot 19 pandemic.
Then Steve will review the financial results for the second quarter and after that we would be happy to answer your question.
Overall the outlook is a little clear then when we spoke to you three months ago, but there's still a great deal of uncertainty.
We've seen progress on both treatments in vaccines for coated.
We have better data every day on how to treat patients who produce mortality.
Vaccine development in particular has progressed at an unprecedented pace, which gives us cause for optimism that we will finish out 2021.
A lot better place than we are in 2020.
That said the economic challenges due to the pandemic are far from over and the resurgence of cases in areas with less stringent public health measures or cause for concern.
Well, we certainly expect you to rising infections estates reopened we are concerned about the lack of a coordinated national response, as we head into the fall and winter.
I Cowen we remain cautious about returning to the office as we continue to prioritize the safety well being of our teams and their families.
And it is clear for quarterly results. So we are operating quite officially.
As such the majority of our time teams continue to work remotely.
Some SAP return of the office with appropriate safety measures in place if they choose to do so.
Whether in the office or remote we stand ready to help our clients to navigate the challenges that lie ahead, our focus on drug discovery tools and diagnostics as well as digital health care puts us at the forefront of science in capital formation.
Companies that do.
No its racing to find new therapies in vaccines rely on Cowen to access the capital necessary to find solutions in a compressed timeframe.
As a pandemic unfolds social issues issues raised of equity and economics are also.
National conversation and so they are cowen to.
Not only are we actively listening to the conversations with intent, we're trying to creating more inclusive environment for all of our team members.
Our view is that inclusion and diversity or not only moral imperative that their business imperatives as well.
Fostering inclusion in allowing for more diverse views will enable us to achieve better outcomes for our clients and for ourselves.
That requires establishing processes with deliberate intent to achieve those outcomes in holding one another accountable for delivering on them.
Earlier this month, we hired repo Rashid that's count first head of inclusion in diversity the culmination of a six months search process.
People has a strong leader with real experience and expertise in our industry in just a few weeks sheets.
Herself with someone who can and will partner with all the stakeholders at Cowen If we continue our inclusion journey.
Even though our path toward increased inclusion and diversity began in earnest prior to recent events. The past few months of highlighted to us how far we all have to go in order to achieve racial equity in the workplace.
Challenges ahead of us Worksite back together as we build the more diverse community.
So with a pandemic the protests and the approach are the most polarized presidential election in recent memory. There remains significant uncertainty for the remainder of 2020.
But even in the face it down uncertainty, we're doing pretty well at Cowen. Indeed, we are humbled by the success, we're having in our mission to serve our clients.
We must maintain lenny and be aware of our place in the world even as we continue working to help our clients outperform.
Well the month of March was the most challenging period for Cowen in more than a decade in the second quarter. We had outstanding results setting new records for revenue and profitability, even before factoring in the substantial gain from our invested in vector why Q in nickel a corporation.
For perspective, our operating income for the second quarter of 2020 was greater in the full years of 2018 and 29 team combined.
Even excluding Nicola our economic operating income in the quarter was greater than a total of the previous seven quarters combined.
What's behind these results well a surge in capital markets activity in life Sciences in health care tools and diagnostics high value M&A assignments continued market share gains in brokerage and a rebound in investment performance across all of our strategies in count investment management.
And above all else countless hours of hard work and determination by our team here at Cowen.
Let's take a closer look at how our operating divisions performed.
First off are sticking Nicola.
Which was a small investment we made in back to in the back to like you stack, which acquired the electric truck maker Nickel a corporation last month.
Our unrealized investment gains for the quarter were just under 130 million and our total banking fees related to that deal were over 20 million.
Well, we intend to monetize the Nicolas stake when were able to do so we're highlighting the impact of this win in our results because it's a demonstration of our strong and growing spec franchise as well as our domain knowledge and sustainability.
We also don't want to nickel against overshadow the incredibly strong results of the operating businesses, which were records in their own right.
As for those results in investment banking, we saw strong performance across the board.
Capital markets activity surged, well, we managed 53 transactions, including 10 IPO goes into debt transactions during the quarter.
Health care wasn't stand out sector accounting for 72% a banking revenues in the second quarter.
M&A fees were 16% of total banking revenues, including our highest ever single feed from back to why Q for Nicola for the nickel acquisition.
Capital markets Advisory, which includes private placements pipes in private debt financings was 13% banking revenue.
Combined our advisory businesses represented approximately 29% of investment banking revenues in the quarter.
In markets, we had another record quarter for revenues building on the market gains we made during the volatile first quarter. Our daily revenues were almost $2.7 million portraying day breaking the record set in the prior quarter of 2.14 million per day.
Highlights for the quarter included growth in options electronic trading non U.S. execution.
In prime brokerage as well as continued momentum in cash treating.
Securities Finance and special situations, including our stock trading book all rebounded after a difficult first quarter.
We've also added to our capabilities with senior hires in prime brokerage swaps portfolio trading cross asset trading cash and European treating it remains in excellent environment to higher high quality talent.
In research with less travel, we see we seize the opportunity to put out even more of our trademark collaborative and thematic pieces.
The number of research reports, we publish grew 17% versus last year end client engagement also group, what total reports red increasing 16% and an average readership of Cowen research remains at Street high levels.
In terms of client engagement, we held sever seven major virtual conferences hosting hundreds of companies in thousands of clients instead of a significant number of non deal road shows as well.
We also said 175 conference calls for clients, yielding neither yielding needle nearly 19000 participants.
This incredible productivity yield and market share gains in a double digit percentage increase in institutional client votes.
And our investment management Division, we had a record incentive income accruals.
Well management fees remain at the highest annual run rate in over 40 years.
Our health care strategy ended the quarter with 800, a 19 million and assets under management.
That's strategy benefited from a surge and investor interest in a biotech sector and from five IPO as the portfolio companies during the quarter.
Our sustainability strategy had 207 million and assets under management at quarter end.
The first portfolio investment the mobile phone recycling from eco ATM has proven to be resilient. Despite the economic shock of the past several months.
The merger arbitrage strategy had 471 million and AIU M at quarter end after a strong rebound from the fall the first quarter. The fund outperformed the benchmark HF Rx merger Arb index.
Our health care royalties strategy ended the quarter with three and a half billion in total AIU EM and HCR fun three is fully committed and fund for is 28% committed.
And finally, our activist strategy closed the quarter with 5.8 billion in assets up from 5.4 billion in the prior quarter strategy performed well in the second quarter and year to date is strongly outperforming the benchmark Russell 2000 index.
Turning to our asset company as a reminder, this segment includes an encore investments, which we intend to monetize.
The value of our stake in the Italian wireless company Lincoln, which is assessed each quarter by third party valuation firm was marked up by $3.4 million to 73.6 million as the company experience increased demand for it services.
Wrote down the remaining $4 million and the Surfside real estate investment, we do not expect renewed interest in their property in the current environment. Although we continue to work with a lender to potentially restructure giving us more time to recover some of that investment.
The net asset value of our LP investments information eight any clips declined by half a million dollars to 38.9 million.
And now I will turn the call over to Steve Lasota for a brief review of our financial results for the quarter Steve.
Thanks, Jeff for the second quarter. They 2020, GAAP revenue was up 43% year over year record 418.8 million from 292.2 million, we reported GAAP net income attributable to common stockholders of 112.1 million for $3.83 per share versus.
GAAP net income for 4.1 million or 13 cents per share.
Period.
Second quarter, 2020, GAAP compensation and benefits expenses were 305.3 million an increase of 168.9 million from the prior year period.
GAAP expenses, excluding compensation in DNA were 100 million for the second quarter DNA expense was 6.2 million.
Second quarter operating general administrative and other expenses were 92 million about hundred million, an increase of 3 million from the prior year period.
Second quarter income tax expense was 44.9 million compared to 5.1 million in the prior year period.
Now turning to our non-GAAP financial measures, which we refer to as economic income and economic operating income in general economic income as a pretax measure that includes management Reclassifications, which the company believes provides additional transparency of the performance of the company's core businesses and divisions, which may be otherwise different.
Well to pinpoint.
Eliminates the impact of consolidation for consolidated funds and excludes goodwill and intangible impairment certain other transaction related adjustments in or reorganization expenses and certain costs associated with debt economic operating income is a similar measure, but before depreciation and amortization expenses the earnings release and accordingly.
Filings have additional information about how the company uses these non-GAAP measures and how investors find these measures useful.
We are now providing a reconciliation quarterly earnings release, showing the three categories of adjustments made to go up to arrive at economic income.
Just two categories management Reclassifications in fun consolidation Reclassifications do not have any effect to an economic income third category income statement adjustments does impact economic income with most of the current impact coming from the exclusion of taxes full explanation to these adjustments are available in the earnings.
Ladies and our 10-Q.
The remainder of my remarks will be based on these non-GAAP financial measures. We reported economic operating income of 166.9 million horrified always and 69 cents per share for the quarter.
Looking at our business segments as Jeff noted, we had a record quarter overall and in the operating company segment Opco had total revenues of 559 point Fourmillion economic income was 164.3 million an economic operating income of 170 million in the second quarter of 2020 Asacol.
The Washington revenues and point 7 million in an economic operating loss of 3.1 million in the second quarter on an overall basis, we reported economic income for 161.3 million for the second quarter Twentytwenty compared to economic income of 15.5 million in the prior year period revenues increased 120.
10% year over year to 558.7.
For the quarter investment banking revenue was up 83% year over year to 190.4 million the best quarter on record.
As a record quarter for brokerage revenues as well, 35% year over year to 167.1 million.
Management fees for the quarter were 14.4 million compared to 10.5 million in the prior year period.
Instead of income was a record 46.4 million in the second quarter versus income of 4.2 million in the second quarter of 2019.
That's been income for the quarter was 140.5 million versus a loss of 2.9 million in the prior year period second quarter investment income includes an unrealized gain of 129.8 million related to our nickel investor.
Consistent with the first quarter financial supplement we now provide additional transparency into our investment banking revenues by breaking out our capital markets revenues into underwriting revenues and capital markets Advisory revenues, turning onto our expenses compensation and benefit expense for the quarter was 305.1 million compared to.
Hundred 36.4 million in the prior year period.
Our comp to revenue ratio declined year over year from 55.82, 54.6% of economic income revenue.
Our comp to rub ratio is 56% year to date.
We're targeting annual pumped a rough ratio of 56% to 57%, although it could fluctuate from quarter to quarter during the remainder of the here.
And the second quarter 2020, we accrued compensation expense in relation to the unrealized gains on the nickel or investment at a rate of 50%.
Fixed non comp expenses totaled 34.9 million in the second quarter down from 38.4 million in the prior year period. The decrease was due in part to decrease the occupancy and equipment and other expenses variable non comp expenses in the second quarter 2020 were 40.8 million compared to 39.5 million in this.
Second quarter 2019, due to higher brokerage and trade and execution costs from increased volumes, partially offset by lower travel entertainment and business development expenses.
Can core depreciation and amortization expenses were 5.7 million compared to 5 million in the second quarter of 2019.
Turning to the balance sheet at quarter end the company had invested capital in Opco totaling 711.8 million that includes 387.3 million and broker dealer regulatory capital, we had invested capital in asset company totaling 124.4 million.
Turning to our equity common equity would you stockholders' equity less preferred equity was 800.4 million compared to 708.5 million as of December 31st 2019.
Plumbing book value per share, which is common equity divided by total shares outstanding rose almost 17% to $28. A 96 cents as of June Thirtyth 2020, compared to $24.77 as of December 31st 2019.
Tangible book value per share was $22 at 94 cents at quarter end up from 18 goals and 72 cents at the end of 2019.
Deferred tax asset went from 79.2 million to 36 million in the first half of this year.
Return on common equity was 90% in the second quarter 2020 up from 11.4% in the second quarter of 19, excluding the impact of nickel a return on comedy common equity was 55% in the second quarter 2020, well above our long term target mid teens and you'll see.
As we noted in the release this morning, our board of directors maintained our quarterly cash dividend of four cents for sure first common share during the second quarter, we repurchased 447000.
There's four 6.6 million for the remainder of 2020, we may opt to purchase additional shares in the open market on an RV Tunis Dick basis, when the impact of buybacks on available cash flow as well as prevailing marketing business conditions with that I'll turn the call back over to Jeff.
Thanks, Steve before we take your questions I'd like to give you a sense of how the rest of 2020 keeping up for Cowen.
As I noted earlier, there are a lot of questions around the progression of the call the pandemic.
And the efforts to develop effective treatments and vaccines. There's also a great deal of uncertainties surrounding the U.S. election in November.
Overall, we have a solid competitive position in a robust pipeline of new business as we head into year end, but we do expect the pace of capital markets activity to slow how did the election.
We would also not be surprised to see a seasonal slowdown in business levels and in trading volumes in August as it's been the case in many previous years.
That said, we have started out for third quarter on a very strong note.
Average daily market revenues in July or on par with the second quarter.
Investment banking revenues for July are running well ahead of the monthly average for the second quarter.
As Steve noted, we are required to mark or Nicola position in this could weigh are down our investment income in the third quarter is nickel was down by about half since the close on June Thirtyth.
So to sum it up the second quarter 2020 financial results were the strongest Cowen is ever had.
And this was the culmination of years of planning positioning and hard work by our team.
And it's important that we recognize our successes but.
But also equally important there, where we remain humble and aware of our environment and that we commit ourselves everyday to working hard to team to help our clients and our communities.
With that I will open it up for questions operator.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one and you've touched on telephone. If your question has been answered and you'd like to remove yourself from the Q. Please press the pound keep our first question comes from the line of Steve into the from Wolfe Research. Your question. Please.
Hi, good morning.
I think.
Hey, so Jeff appreciate some of the commentary regarding it really strong brokerage activity to start off July obvious, hoping you could speak to what do you believe is sustainable run rate, especially given some of the factors that appear to have driven strength in the quarter or it's the non U.S. business some improvements that trading.
Derivatives activity. It feels like these are still businesses are in relatively nascent stages of growth on the Cowen platform and could potentially drive some sustained pick up in brokerage activity relative to what we saw a maybe a last year and some of the recent momentum continue right.
Yeah, I mean, I think you've hit on a few of a of the things that have made a difference certainly you know our our our philosophy has always been we can cross sell and we can bring to bear for our clients any one of a number of products and services to help them do better and sometimes that's options trading sometimes that's research sales sometimes have to outsource.
Trading in our prime brokerage business.
We're obviously, our new European training capability.
That's all sort of wrapped around the fact that we have I think the preeminent electronic trading and low touch platform on the street, its independent and not affiliated with.
Any dark pools. So when you look at the at the I think collection of businesses that we have what's really specials are they work together to try and figure out what's your appropriate for which clients in a way we've set up our organization is really to make sure that we're introducing our product capabilities through our relationships.
Allowing clients to get the best of what they want from us and in that in of itself is a you know just a difference maker.
For a from certainly our size I, but also just say I think what's happening as a result of this.
And that make and a lot of the market volatility is a lot of the buy side is picking and choosing who there who their strategic relationships are and making sure that those relationships I take an increasing share of wallet and I I've been describing it to people is sort of a divide.
I and I are you guys. There can you hear me.
Yeah, I can hear him sorry, I think my phone cut out sorry about that ER. So I think increasingly we are certainly making a.
The difference in terms of being on the right side of that divide.
Got it and maybe just one question for me regarding the no some of the mark to market considerations and recognizing that nickel, obviously provided a large gained there's going to be significant volatility with those marks quarter to quarter. Although just wanted to get a sense as to like updated plans run.
Guarding the timing of potential monetization some of these large portfolio gains and just some of the.
Parameters that exists that might prevent you from monetizing those games.
As quickly as this year may get pushed out into next year.
Well I mean, certainly in the case of a of the Nicolas situation. We are subject to a lock up a as are most of the investors and sponsors shares and so.
We I think the earliest we can get out is within six months not that we would do it on day. One that's for sure I think we want to be very careful about how we exit that position and we're working closely with other sponsors and and and and ER and the company to make sure that were not being disruptive Oh, we have the opportunity certainly within a year if the stock.
And then used to trade at these levels to monetize that position.
You know if it if the stock doesn't trade. These levels I think it would be beyond a year, but but reasonably comfortable that that we should be in a position to monetize that we didnt, whether it's in the year beginning starting sometime in six months.
For the other investments I mean look that the the.
We're continuing along the same path for some of the private investments we have I think that the business.
At Lincoln has certainly gotten a lot better.
And that's been great. So it puts the company to position where it can access the capital markets and we're having those conversations but we'll see.
How that progresses, but I think we're on the similar timeline that we have given people a guidance towards a.
Certainly you know that would be a 2021 timeline.
And then it certainly if you look at the moved towards E. Commerce totally helps our position in the formation dates on which is largely made up of wish dot com and so you know the push towards Oh God towards E commerce across the board and I would say you know that platform is effectively a.
And online and on a.
<unk> dollar store if you will.
Certainly and an economic time people people will be looking at how to be more judicious with their spending and that probably twice very well for a company like wish Dot Com show you know we've seen some of those numbers to the extent they've shared it you know business is actually improved over the course, the past quarter. So they said I think publicly that they're looking tomorrow.
Ill take that comedy public at some point in 2021, So I think we're selling the same track there, though I would caution everybody.
As it relates to those two positions, where we don't control the timing of that I'm just relating to you you know things that we've either seen or that we've heard a you know as a as over the course the past very much.
Thanks, and just one final one for me, Jeff just regarding the philosophy around comps. So you had the 50% comp accrual on the nickel again with some of the gain it in Twoq you expected to reverse in the coming corridor.
Is it reasonable to expect some reversal of that comp accrual commensurate with that and I guess just bigger picture I was hoping you can speak to your philosophy around how you're going to comp against future portfolio gains given that this is typically viewed as maybe a higher margin or less compensable revenue source.
So the answer to your first question [laughter] excuse me is yes.
We will be reversing comp accruals a against the same way, we accrued comp against it. So the expectation is that we would reverse that 50% accrual to the extent that Nicola continues to trade at this level.
You know and I think the philosophy around this says you know we come to a total a contra revenue ratio target.
I certainly Oh, we do I think we're signaling here, we will accrue less for investment income, but but we are targeting still the overall, 56% a written in around 57% comp to revenue ratio and I think that reflect sort of how we see things progressing over the course of the of the rest of year and we will abhi.
Lastly, I look at each quarter, because each quarter stands on its own but but you know well, we'll take a look at how we're doing as we head into year end, we look the overall comp numbers.
That's great or Jeff Steve. Thanks, So much for taking my questions.
Thank you Steve.
Thank you. Our next question comes from the line of Michael Brown from KBW. Your question. Please.
Thank you operator.
Hi, Good morning, Justin Steve how are you guys when they get how are you.
Sure.
Want to stick with nicoletta starts so.
Longer term as you exit Nikolai and I guess also de other.
The other investments link on the net formation eight what what is kind of your plan or for that caching and capital as it gets freed up I think in the past you talked about.
Let me return you know increasing the buybacks.
Do you also look to deploy some of that into some acquisitions and if so where are you kind of looking to bolster your franchise than most and.
You know any color there would be appreciated thanks.
So it's a great question, Mike and I think you know, we don't count our chickens before they had so you know as we are actually monetize that we'll be making decisions based on on on the state of play in the economy and the world as we see it obviously if the stock continues to trade at a discount to book value, we understand how accretive it is for us to return capital to shareholders that cheaper than.
Okay got you you know said another way if we love what we own and we love what we do why wouldn't we just by more of that and I think we've shown overtime that we will do that and a and if it turns out that when these are monetize it that's still an opportunity for us to do that we will can't really speak to the specifics of the size of that or the amount because it will depend on where the world is how.
Did I think we're all are still a very thankful that we are well capitalized certainly during the month of March it proved that that capitalization.
And then extra layer resiliency for us I think when a lot of our smaller competitors. There were some real questions in the marketplace as to whether or not they would be around that there was never a question about that for Cowen and that's a function of the fact that we have a significant equity base and we are well capitalized with with long term debt and no near term maturities. So are we.
We'll be judicious as we think about how to return capital just because we want to make sure that we're not doing anything that that puts us in harm's way of things turned against us in a rapid fashion.
As it relates acquisitions I mean, we'll be opportunistic we get shown stuff all the time and you know I would say at this point it would be really interesting for us to maybe look at some tuck ins.
And that we would keep it to a reasonable amount just where we think we can do a buy versus build on something that we think in a impact our profitability our margins reasonably quickly I don't.
We're not currently looking at new platform acquisitions or new businesses. They were just looking at things that we can can help us to accelerate in markets, where we already play a in with products that we already play where we can scale that distribution or that capability and those would include you know small advisory firm acquisitions or things like that where again, we can talk to them.
What is already a you know a pretty well oiled machine and and when we can diversify our revenue streams from an industry standpoint.
Great and just on the comp ratio. So last year came in at 56.5 right in the middle of your on here.
Target of 56% to 57%.
You know this year, obviously, the first quarter started off challenging start excellent second quarter.
You know a little bit a certain that headwind from the Nicolas sneakers relate to the third quarter and Mark continues to play out but.
To me it seems like you should be able to run kind of below that level. As you think about the full year, obviously got a crystal ball. So you don't know out second half of ultimately shape up but basically saying it does sound like it's a.
Pretty good environment. So is it possible that it's things I don't know ticket turn for the worse that you could actually becoming a little bit lower because it seems like a nickel a snake even if it does have to get mark down could could certainly help because the comp ratio this year.
You know that's something that is a possibility I think so much of what we end up doing with compensation you know where it's at the low end to the hired arrange depends on revenue mix in a you know I think if we see a rebound in M&A activity, though payouts on that activity tend to be higher though the noncomp said to be lower.
Do you continue to see real strong performance from our our markets business. Certainly you know it's it's the flip of that so you know I I think you know the big driver or certainly this quarter on the comp to revenue ratio coming down what was the Nicola investment.
And and there could be more of those I think that's there's some you know we own and a number of a small investments in spec sponsors shares in so yeah, I think depending on how that plays out over the course, a year that could certainly be an impact as well.
But I think as we think about it you know we're comfortable with the target range that we've outlined.
And and I would suspect it will be you know if anywhere you know the lower end of that range, if things continue to be but but not much lower than that are just because I think we think it's in years like this year. A this is this is when people get paid and went to make sure that for all the hard work Interbody account is doing it the that people get paid adequately and then.
That's a sort of a top of our agenda for all of us including shareholders.
Great I could just sneak in one more on a stacks obviously, we've seen just to look for growth and stack activity and you guys had certainly guy by more than your fair share. There. So just wanted to hear you kind of risk a little bit about the trends. There do you see this trend is having a lot of.
Systems to continue and do you feel as though you need to invest anymore at all and your franchise, whether it's on banking side or on the on the trading side at all.
You know, it's a it's been great I mean, it's actually been around for 30 years.
I I I was an investor and some of the first ones in the 19 nineties all the southern stack is seems to be the flavor them on for everybody.
And we've known for a long time, that's backs present, great alternatives to private companies to think about going public that's not a new story I think it's just other people have woken up to the idea that you can access the capital markets. You know utilizing this fact structure and there's many more efficiencies about doing so.
This back acquisition, then certain simply taking the company public through an IPO I think specs and provide a and augmentation to the capital markets and augmentation to capital formation process is not every company well make a good spec acquisition and some companies required the IPO process for a whole host of reasons, but I think.
It's not going away you know I think the for me I would expect to spec market continued to continue to grow its probably grown in terms of its aggregate size, it's probably a grown three acts over the past you know three to four years.
The stock market, we estimate today is around $45 billion. So it's still relatively small.
Compared to the rest of the market and so I would expect that you'll see increased activity. We know we've got a number of mandates to take companies public or takes back teams public and go out to search for acquisitions.
And so I I think it's going to be a mainstay of capital formation do I think it were placed the IPO I don't.
I think it's more likely to replace things like you know direct listings and things like that where I think a lot of private companies will look to access the market using spec or acquisitions, because there's some real benefits to doing that and we're fortunate to be in a position, where we have a market leading practice and not just on taking the public.
But on on the de spec process I don't think there's an organization.
That has more experience a de stocking companies than we do.
And then the backend went to trading we have the leading spec training capability. So this is something we've known for awhile and it's great to see the market wake up to this is a as a real process.
But it makes sense for us in many ways to to continue to do things that we're doing a because at the end of the day, we have a.
A leading practice in this area and so.
We feel very good about it and.
We think this is you know we're nowhere close to the end of that trade.
Great. Thank you for taking my questions.
Thank you. Our next question comes in the line of Sumit loading from Piper Sandler Your question. Please.
Thanks, Good morning, guys I appreciate the color Jeff on kind of the outlook for for this year just wanted to drill down a little more kind of get your perspective on the sustainability of the biotech activity and get some color around the relationship between you know the pandemic any activity you're seeing if we don't see maybe a vaccine till early next year do you think we could see some elevated.
Activity levels for the remainder of the or even with the uncertainty if the election other macro factor.
You know I think we're in a you know I I think anyone who says they have a crystal ball or says they know doesn't know me not I just that that's a that's why we've said well things are a little bit more clear or they are exactly as clear as maybe you would have thought I I wouldn't have.
On the first quarter call, we started to see activity picking up when when we did our first quarter call I'm not sure I could have told you the amount of activity that would occur between you know April in July and so I think all of us our pleasantly surprised we positioned ourselves incredibly well for for this you know and I think.
As we've talked before she meat financing has become a very strategic conversation in calendar is one of the best financing banks in the world and so for the industries that we serve.
And so I think you know if there's on search and uncertainty.
In the market and continuing uncertainty the market, particularly around a vaccine or the election I think you know the only thing for companies to do is to look at making sure that they're well capitalized enough to get to the other side of wherever that volatility does.
And in this is a bicycle given to our clients and it's the right kind of advice and certainly I think those are that are taking advantage are gonna be in a much better position to withstand whatever that volatility looks like so you know there are our base case is that there will be a vaccine I'm not gonna be I don't think I'm smart enough to.
No one that will be all I know I said theres never been more energy and more shots on goal a you know to solve a singular medical problem in the history of mankind, a and we know a lot about this industry and this industry is amazing when it puts its mine to it.
And certainly the access to capital private capital in this industry is is it a is it the back it's really it's either at the center the foundation of of drug discovery and vaccine discovery and we're happy to be playing a role. So our view is that it will happen I'm not going to tell you that you know what's the timeframe is because I just don't think.
Smart enough to know that but then there will be a vaccine and things will return to some new degree of normal as people begin to recreate that that's going to happen and I think for for clients, who need to be finance you just need to make sure that they're gonna be here when that happens and so I'm getting yourself in a position where you can be well capitalized to good idea.
Okay Fair enough. Thank you and I, just kind of one follow up on Nicola just around the timing of monetization you know the window does open kinda early December and the stock that you mentioned kind of trading below that second quarter, Mark is the priority liquidation or what's kind of maybe proof fundamentals you guys have room to wait for a more attract.
If I could exit point, assuming the stuff there's an approved by then.
You know I think.
It's oh.
Our our job as a as capital Allocators is to not look at you know quarterly swings and profitability or our job is to makes smart investments with the capital and take a those gains when they present themselves and then ultimately at the end of the day recycle that capital and redeployed.
That capital return that capital to shareholders, you know well, obviously, there's a number of factors it would weigh into that really depends on where the stock is trading in our view on the stock, but but also on where we're trading and how we think we you know what are the other uses for that capital and I think you know given my background as a as a portfolio manager I'm always.
Looking at capital allocation, and making determinations as to where the best places to deploy that capital and so there's a number of factors that go into that what I will say is a you know we're we're not you know just looking to get long securities for the second get long Securities and I think one of things we've talked about as its velocity of capital is really critical to us and.
Making sure that we can redeploy a return that capital in order to continue to drive our own. Our OE is it is a central tenet right balance sheets are meant to be seen not heard a and show you know I think you can expect us to be judicious and and thoughtful about how we liquidate but you know you can also expect us.
To do things, we said, we would do as we've done historically with some of the other investments two years ago till Ray.
Last year long ago.
You know we were in the business of making sure that when we win a that we don't give it all back.
Got it alright, thanks for taking my questions.
Okay.
Thank you. Our next question comes from the line of Devin Ryan from JMP Securities. Your question. Please.
Great. Good morning, Jeff Steve how are you guys.
Dan how are you.
Doing great. Most have been asked but just wanted to dig in a little bit more on some of the themes here, we've been going through so what a difference a few months makes fear and greed capital raising quarter I'm clearly and we can see the third quarter starting at a strong as you noted also appreciate there's lot of uncertainty in the backdrop so the crystal.
All questions are tough, but when you look at your business and think about kind of the economics per transaction or you a percentage of lead managed or book run role can you give us any more flavor for kind of the momentum there because I think that's maybe more important because it was obviously a rising tide this quarter work.
Most firms in copper isn't did very well, but it seems like count is getting a higher percentage of larger roles and just wanted to get a little perspective around kind of what you guys are doing internally around that and also just any data that kinda give us more evidence I guess for validates that view six cents right.
Well I certainly think that we're doing more lead left business and we are you know books to on more deals then we have been in one time in health care and I think that just reflects the status of and the stature of our franchise I certainly you know we demonstrated in many instances that that we can be as good if.
Not better than most banks, regardless of size when were lead left so we do recognize that some of our clients want to have other banks and parents. So our job is to the end of the day delivery for our clients, regardless, where we are in the syndicate, but there's no question that are were being more choosy.
And we're putting ourselves in a position where what's a bandwidth that we have a we're focusing on opportunities, where we can maximize our economics and and maximize our partnership with our clients. Our goal in knees and I think we said this over Devon is to be a persistent player for companies as they raise capital. So it's really about being able to deliver at the.
I'll separate them deliver consistently in between deals so that you're always on the cover any what you're seeing in certainly in a quarter. Like this is a cowens persistence in our our client coverage model. The fact that we're servicing our clients 360 and doing things for them in between deals makes us the go to organization I'm in enables us.
To get rewarded adequately for delivering on that and and that's been a central part of what's made US successful I also think you're seeing for the first time or or or and what we're extending that franchise into much more strategic conversations we've done a few debt deals for some of our health care clients, we've done more M&A for health care clients.
In the past quarter, and that's a function of the consistency of.
Developing their relationships that we haven't so it's not just about a equities at all Cowen I think it while we're happy to do as many follow ons and Ipos as we can because it builds a great pipeline of future relationships, it's really about the quality of those relationships in our ability to extend.
Our knowledge based on how to financing provide strategic advice to those relationships. So that I actually think about their business models going forward, we can help them along that journey.
And so in many instances you know what were overseeing now is a little bit less dependence. If you will on being lead left an IPO and a little bit more diversification.
Well good if you look on page four of our supplement.
Given some of the details piece.
Behind how many transactions in the.
Each transaction value and you can see this significant increase there in Q2.
Yep.
Sixtyv and and it's got pivots nicely to kind of your M&A franchising and kinda the momentum in strategic advice and you've been on some some nice deals recently, whether gilliat or fisker and so clearly some momentum and some larger types of transactions and maybe historical and so I'm wondering maybe get stalled a.
Active around what you're seeing across your M&A franchise, because you have.
Part of business, it's very important focus on maybe some smaller transactions, so where is there a differential amongst the different areas of the M&A business and just any other flavor for what you're seeing or what you're expecting you on the near term.
So I mean, there is I mean I you certainly see that our median has a increase if you look at <unk> in our supplemental information you'll see the median M&A. If he has increased even with the nickel transaction, it's been moving up.
Higher over the course of past four quarters, and that's a function of the fact that we've been taking on larger M&A assignments for our corporate clients as well is continuing to grow the business a you know from.
And from the Korten standpoint, actually Corden had a better first half a this year than it did last year and I think that's you know.
I think something that people didn't expect to see so what we've seen it is across the board, whether it's and it's something that lower middle market transactions were <unk> folks is or some of the the larger transactions, where the historical Cowen franchise has played well. We've we've been successful I also would say like we're benefiting from the fact that the DCE back process is a unique.
Process in M&A that that really blend as a blend of both financing a and positioning companies to be public ready and so part of the drive that you're seeing in our M&A business is our ability to do back and it's not just backs that we've taken public that we're working on we're working on a number of situations, where we've been called in.
By others back sponsors that we didnt take public to assist on the backend we've been called and by corporations, who are looking to actually merged with backs because they recognize that the end of the day, others actually limited knowledge on how to do this effectively and show a we've been told and by a number of companies that are considering stock back ends.
And getting retained by them now in order to drive those outcomes and you know I I think it ended the de those are really powerful trends that we're seeing that give us a.
A little bit more comfort.
Well that our backlog, which continues to be at the highest level I think it's we didn't really we wouldn't really delve into this but our banking backlog is even after this quarter is higher.
Then it was ER and to be at the end of last quarter. So when you look at the replenishment and the ability to win mandates that that is I think central to know went to two looking into the future in saying that even if the market kind of stays as is.
And doesn't deteriorate any meaningful way that we should be in a position or capitalizing on that as we head into the back half a year.
Great color. Thanks, Jeff just last one here on the brokerage business and thanks for some of the detailed earlier in the call, but you're trying to think about a range of this business. It's been obviously, you're tracking higher the last couple of quarters and it's been a very active backdrop and the same time you guys are taking share so I'm trying to just kinda.
Parse through that a bit you know 2.65 million per day.
In revenues this quarter.
Last year for was doing under two some kind of thing is to the extent things slow we have a kind of a normal summer slowdown. If you will it does it still feel like a sub 2 million today. It is like the right way to think about a slower environment or is the the bar higher because some of the newer capabilities or I'm, just trying to kind of think about.
That range morally how you guys were thinking about it. So you know which has been you assumed some pretty large swings here over the past me. If you go back even over the past three quarters.
They're big difference.
So I would say couple of things or maybe just talk about the difference in first quarter second quarter. So the revenue mix in that was a little bit different in the first quarter. We had obviously we had some challenges on inventory in the first quarter that impacted that number.
And those reverse in the second quarter, so part of the gain in the second quarter and the daily average performance is simply the swing in fact, if we didnt have a drag on for Mark Downs in inventory and actually most of those reverse. So if you were to normalize that you would see that were normalizing somewhere in between those two numbers.
But any very consistently above a you know in those numbers I eat it doesn't feel to me that we're going back to where we were last year and that's partly because of some of the new capabilities. We've added and the new talent that we that so European trading has a it's picked up significant.
Only.
The fact that we have a presence in Europe me at all is a new are really for all intents and purposes. I mean, we had one that was wasn't staff well and it wasn't position well and certainly when we hired the team last year, they've come onboard and Naved accelerated significantly so those revenues put us in the different position on a heads up basis when you're.
Comparing year over year second quarter that there really wasn't much of European presence last year now there is a I would certainly say elevated volatility helps our options and derivatives business. No question about it that when you. When you look at the health of that business. It just does better when Dick's is trading at a 20 thirtys and it doesn't Texas trading in the 15th.
And are 27 or low Twentys and show.
It to the extent that we continue to see volatility and and I think we will for a whole host of reasons that business is going to do better and then last or would you say, there's some businesses that we've continued to grow where you know we reached a tipping point and were recognized in the industry is having expertise obviously, our algos electronics business has continued to gain.
Momentum and the installed base continues to be higher and grow higher as we win more clients in that area and once you get in long as you know screw it up you're not getting you're not getting removed and and from our standpoint, we're doing everything we can that continue to find the latter there and I would say in or prime brokerage business. The growth an outsource trading is a real secular trend.
It's a real secular tailwind and we're seeing many smaller funds look at all sorts trading as a as a viable way to scale their businesses and we're taking share in that space, where a really good outsourced training capability a platform. We think there's talent coming our way we gave a number of people.
Who'd like to come and do outsourced trading account and so I view that as a as a pretty good secular tailwind as well. So you look at all those things it's hard to see a.
Barring you know it's hard to see on a heads up basis, you know assuming that we don't have a huge slowdown involved in volumes.
How we returned to the to the prior levels I. Just think you know will be more volume centric, but we'll probably have make higher lows in higher highs depending on how volumes go.
Yeah, Okay that was exactly I was looking for appreciate you guys take all my questions.
Alright death.
Thank you and our final question today as a follow up from the line of Stephen Chin from Wolfe Research. Your question. Please.
Hi, yes, thanks for accommodating the one quick follow up so it's sad relating to the discussion around capital management I. Appreciate the color on how you're thinking about just the prioritization of buyback versus inorganic growth opportunities I didn't know whether you were strongly considering opportunities to maybe better optimize your low.
Liabilities stack just given.
Some potential to refinance some high cost debt.
Given you do have some elevated interest expense burden that continues to weigh on returns whether you saw any opportunity to optimize that liabilities that care.
You know, we'll look at it a you know again were very are are we centric and if it makes sense for us too.
Refinance some of that debt at lower rates as people have a better sense for our if our credit spreads come in and we can.
We can access the market more cheaply you know we would love to do that I I think a it just depends on how the market conditions are I mean, what I love about our capital stack is that it's good long term capital.
Even if the rates it attach accretive to our targeted rates of return or so I think we'll just we'll we'll be in a position where.
If we have the cash should we expect to be generating this year. We're gonna look at a number of things that would be one of them.
If it makes sense to do that and then we'll do it just really depends on where the markets are and whats available to us when.
When we have the cash that's something that we again everything is on the table as it relates to thinking about how to drive our OE, but but our overarching goal is to be able to to provide consistent returns on equity to the extent that we Canada markets allow us to do that.
Again, I want to cochenour body, we look at that on an annual basis. So we're less about managing quarter over quarter or are we as much as we are looking at annualized or are we in our we over an extended period of time because at the end of the day, we are a financial services company and we need to we are tethered to the performance of financial instruments.
Having said that obviously, we're going to hit the mid teens pretax or are we in a zero interest rate environment that feels like a pretty good high return on People's equity I certainly for me as an investor it's something that I would want to do and if people can rely on cowen to be able to generate those kinds of returns and their portfolios then that'd be a great thing for us to do and if part of that as refinancing our capital sacked.
To ensure that we can hit that with great great irregularity, well look at that.
So Jeff Thanks, so much for accommodating the follow up.
Problem.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Jeffery settlement for any further remarks.
Well I appreciate everybody tickets in the time to a you know to sit with US today. It is been really a incredible quarter and a and then so many ways. We've been so much to to thank everybody for I, especially want to thank our team here at Cowen for the for your increased commitment.
Two or continued commitment to our core values of vision empathy sustainability and tenacious teamwork.
You know I think what we've been able to accomplish over the last three months has exhibited tremendous a adaptability and we've all had to create new ways to be effective for our clients in new ways to ensure that we can deliver at a high level and you all have demonstrated your dedication our values to our clients and to each other.
During this difficult time and I just want to say on behalf of everybody you INSPIRIS everyday and and I'm really proud to be part of this organization.
Thank you everybody for joining us we look forward to speaking to you on our next call talk too soon.
Thank you, ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good day.
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