Q4 2020 Cowen Inc Earnings Call
Ladies and gentlemen, please standby your conference call will begin in approximately two minutes. Once again. Please stand by your conference call will begin at approximately two minutes. Thank you for your patience and please continue to hold.
[music].
Good morning, and thank you for joining us to discuss cowens results for the fourth quarter and full year 2020 by now you Should've 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.
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 company's earnings release and other filings with the SEC Cowen has no obligation to update the information representatives on todays call also on todays 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 income can.
Just didn't with company's reconciliation as presented in today's earnings release now, we'd like to turn the call over to Mr. Jeffrey Sullivan.
The cat, one chair and Chief Executive Officer.
Thank you operator, good morning, everyone and welcome to Cowen is fourth quarter and full year 2020 earnings call. This is Jeff Solomon and joining me on today's call is our CFO Steve Lasota.
As a reminder, we make available a quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release.
Today I'm happy to share the details on the record results the Cowen delivered in 2020.
And why we believe our business momentum is sustainable.
I would also like to share some thoughts on our culture talent, which in addition to strong tailwind we are experiencing in many of our businesses is a driving force behind our success.
Then Steve will review the financial results and after that we'd be pleased to answer your questions.
First to give you some perspective in 2020, we set a new earnings record with GAAP net income of more than $7 per share and economic operating income on more than $11 per share.
And many of the same dynamics that led to this result have remained in place so far in 2021.
For this reason among others, we continue to believe that Cowen valuation remains compelling as we believe that the factors driving our performance are not fully recognized yet by the market.
Our record earnings were years in the making here.
They are the result of our careful strategic planning and targeted investment in our team and our capabilities and fostering a culture of collaboration.
Cowen culture is a key to the outcomes, we were able to deliver for our clients and the success, we've had achieved as a firm.
As we conduct our business, we do so through the lens of entity one of our core values by considering the impact we make on our colleagues clients and communities.
We engage with clients, we are driven by the goal of helping companies, who help others and are working to raise money for companies. So they can hire more people.
The health care and sustainability sectors are two areas of focus for us in these efforts for example in health care. We have helped 165 companies go public over the past eight years, resulting in the development of hundreds of new or improved drugs and therapies across a range of diseases, improving or <unk>.
And in the lives of countless people.
In 2020 alone Cowen work on 33 health care, Ipos 26 of them and biotechnology.
The fast track research efforts that led to the breakthroughs in developing COVID-19 vaccines has highlighted to most people around the world the importance of biotech innovation.
We see investor focus on biotech continuing in 2021, encompassing several exciting areas beyond vaccine development and antibody treatments.
Today, there are thousands of investing of investigational new drug applications now pending before the FDA and even factoring in the challenges which are part of drug discovery, we believe.
We are still on the early days of the Golden age of biotechnology.
We are also on the early innings of the growth of sustainability.
There is increasing investor demand for companies, which are playing a part in the global transition away from carbon intensive assets.
At Cowen we are an active participant in sustainability, using our capital raising expertise and our industry domain knowledge.
In 2020, we executed 20 sustainability focused transactions, including eight transactions in the electrical vehicle space.
One recent transaction worth noting is our advisory assignment for App harvests are cutting edge agricultural technology company, which is building some of the world's largest indoor farms in Appalachia.
And working on this transaction, which closed last month, we are not only helping app harvest to change the game as it relates to food sustainability, we are helping them to bring much needed investment dollars and jobs to a part of the country that is in need of positive economic development.
Apple Harvest is also working to eliminate so called fresh food deserts across the eastern seaboard by increasing the availability of fresh nutritious produce for millions of Americans.
Cowen is also supporting apps harvests efforts to give back to the community.
Donating funds to expand their hands on agricultural technology program to two additional high schools and the surrounding area in eastern Kentucky.
This is a big part of what we do at Cowen partnering with clients, who work to serve the greater good while generating positive outcomes for investors and shareholders and these are just a few examples on what makes our time this time in our history. So special.
Now turning to our results the fourth quarter was extremely strong across the board capping our best year ever.
In investment banking, it was a robust quarter with revenues up 160% year over year.
We had performance across our banking platform that was very strong with M&A and capital markets advisory contributing over 50% of our revenues.
As a reminder, we now break out capital markets advisory revenues as distinct from equity underwriting is they have revenue and profitability characteristics similar to M&A advisory revenues and most of our competitors present their businesses in this fashion.
Highlights of the quarter included continued strength in biotech tools and diagnostics and sustainability. Our banking revenue is growing more diversified and in the fourth quarter healthcare represented 56% of revenues down from 78% in the prior quarter.
We managed a total of 56 capital markets transactions during the quarter, including 17, Ipos and free debt.
Transactions, it was our strongest quarter and year for debt capital markets revenue since 2014.
Our M&A revenues were up 225% year over year in the fourth quarter and the momentum is continuing as our deal pipeline at the end of January was at a record high and the backlog is almost double the size it was a year ago.
M&A fees were 34% of total investment banking revenues in the quarter in capital markets Advisory fees, which includes private placements pipes and private debt financings made up 20% of total banking revenue.
It was an exceptionally strong full year in investment banking with revenues up 107% the surge in biotech equity capital markets and our excellence in that area has continued to benefit Cowen and we don't see that changing in the near future.
We are also making solid progress on broadening our other product and industry offerings beyond our traditional strength in biopharma.
Our health care banking revenues outside of biotech and areas like tools and diagnostics Med Tech and digital health nearly tripled over year over year in 2000 $20 million to $116 million or banking revenues outside of healthcare were about $225 million, that's more than our total investment banking revenues across all sectors just three.
Years ago.
Our holistic cross team cross product cross industry approach is gaining traction as clients realize that financing transactions are strategic decisions.
They seek to partner with us to find solutions, which are right for them.
This breadth of offerings and expertise is a key differentiator for Cowen.
As we look ahead to 2021, we are making targeted additions to our banking team building out our capabilities in areas that are largely adjacent to our existing footprint.
And markets, we had our strongest quarter on record with daily revenues of $2 $9 million per trading day, well above the $1 8 million per day level in the fourth quarter of 2019.
Full year 2020 markets revenues were up 42% driven by both increased market share and expanded capabilities.
We saw particularly strong performance by special situations, which include Speck trading electronic trading cross asset trading Securities Finance Prime brokerage.
And outsource trading.
Non U S execution, it's also outperformed and we see opportunities to gain additional market share in 2021.
By expanding our global offerings, including electronic trading.
While overall U S market volumes could pull back from historically strong levels of 2020. This year has also gotten off to a strong start with Cowen average daily market revenue, so far exceeding the fourth quarter of 2000 Twenty's average.
And research 2020 was a very productive and engaging year for the team. Despite the COVID-19 and work from home environment. Our total conference attendance actually rose, 25% year over year, even as it related expenses dropped significantly due to the shift to virtual events.
During the year Cowen held hundreds of virtual analyst marketing days, Inc.
On the conference calls, which drew tens of thousands of attendees. A research team was prolific in 'twenty 'twenty publishing 60% more of our flagship ahead of the curve series reports than in 2019. We also continued to enjoy street high readership levels and this intense productivity drove another annual increase.
<unk> and the weighted institutional client votes that helped drive an increase in buy side Commission wallet share.
In investment management management fees are at the highest annual run rate in over four years, while total assets under management are up $1 1 million.
Sorry, $1 1 billion year over year to $12 5 billion.
Quarterly incentive income was the second strongest on record behind only the second quarter of 2020 'twenty looking.
Looking at our five investment strategies, our health care strategy.
Ended the quarter with 896 assets under management, which is up over 30%.
This strategy had very strong performance for both the quarter and the full year due in part to several recent ipos in that strategy.
Our sustainability strategy had $477 million in AUM at quarter end more than double the amount at the start of 2020 during.
During the fourth quarter. This strategy added $93 million on commitments from our major public pension fund and we continued to see strong momentum coming into the first quarter.
The merger Arb strategy had $392 million in assets under management at quarter end down from 590 at the start of 2020.
Strategy outperformed the benchmark H F Rx merger Arb index for the quarter.
Healthcare royalty strategy ended the quarter with almost $3 6 billion in total assets under management, which is up about $300 million year over year.
The strategy committed over 1 billion in investments in 2020, which is a record amount.
H C ours.
Most recent main fund had a final closing in November of 2019 and is currently 55% committed.
And finally, the activist strategy had $6 4 billion on assets at quarter end up from $6 billion at the start of 2020.
The strategy was positive in the fourth quarter and for the full year, even slightly lag the Russell bench on the benchmark Russell 2000 index.
Turning to our asset company, which as a reminder includes non core investments that we intend to monetize the value of our investment in the Italian wireless company link them was $82 7 million, which is $5 3 million higher than the prior quarter as the company increased experienced increased demand for services.
On the net asset value of our LP investments information eat in the Eclipse funds Rose 100000 to 39 point too.
Million.
As a reminder, the largest investment information eight fund is steak and wished dot com, which had an initial public offering at the end of December.
And now I will turn the call over to Steve Lasota for a few brief.
A brief review of our financial results for the quarter Steve.
Thanks, Jeff for the fourth quarter of 2020, GAAP revenue was up 79% year over year to $502 9 million from $281 1 million, we reported GAAP net income attributable to common stockholders of $90 5 million or $2 98 per diluted share.
Up from GAAP net income of $3 5 million or 11 cents per diluted share on the prior year period.
In the fourth quarter of 2020, GAAP compensation and benefit expenses were $277 4 million, an increase of $130 2 million from the prior year period.
GAAP expenses, excluding compensation in DNA was $117 7 million for the fourth quarter G&A expense was $5 4 million.
Fourth quarter income tax expense was $37 8 million up from $5 $2 million on the prior year period now.
Now turning to our non-GAAP financial measures, which we refer to as economic income and economic operating income.
Please consult the earnings release on our quarterly filings for definition of these terms as well as an explanation about how the company uses these non-GAAP measures on how investors find them useful for the remainder of my remarks will be based on these non-GAAP financial measures as a reminder, our Cowen has two reportable business segments Opco in asset co.
The Opco segment consists of Cowen investment management investment banking markets and research the asset co segment consists of private investments on the other legacy investment strategies on.
Co had total economic income proceeds, which we have previously called economic income revenues of $505 6 million economic income was $128 6 million and economic operating income of $134 5 million in the fourth quarter of 2020.
Asset Covid economic income proceeds of $7 2 million and economic operating income of $4 2 million in the fourth quarter.
On an overall basis, we reported economic income of $132 8 million for the fourth quarter of 2020 up from $10 8 million in the prior year period.
Fourth quarter economic operating income was $138 7 million compared to income of $16 3 million in the prior year period.
It'll economic proceeds increased 106% year over year to $512 7 million for the quarter economic investment banking proceeds were up 163% year over year to $254 4 million.
Economic brokerage proceeds were also very strong up 64% year over year to $185 8 million.
Economic management fees for the quarter was $16 7 million compared to $10 5 million in the prior year period economic incentive income was $44 4 million for the fourth quarter up from 11 million in the fourth quarter of 2019, and economic investment income was $10 3 million versus Inc.
Some of $16 6 million in the prior year period, turning now to our expenses compensation and benefits expense for the quarter was $279 9 million compared to $146 6 million in the prior year period, our comp to proceeds ratio previously referred to as a comp to revenue ratio decrease.
<unk> declined significantly year over year from 59% to 54, 6% of economic income proceeds for full year 2020. It was 55, 6% down from 57, 7% for full year 2019.
For full year 'twenty 'twenty, one we're again targeting an annual compensation ratio of between 56 and 57%, although it could vary from quarter to quarter.
Fixed non comp expenses totaled $39 8 million in the fourth quarter up from $36 3 million in the prior year period. The increase was due in part to higher professional service fees, partially offset by lower occupancy and equipment costs renewable.
Variable non comp expenses in the fourth quarter of 2020 with $44 1 million compared to 38 million in the fourth quarter of 2019, the increase was due to higher brokerage and trade execution costs from increased volumes, partially offset by lower travel entertainment and business development expenses for the first quarter of 2020.
One we would expect TNT and business development expenses to be significantly lower year over year, given the virtual work in conference environment.
We see an increase in those expenses starting in the third and fourth quarters fourth quarter, depreciation and amortization expenses were $5 9 million compared to $5 5 million in the fourth quarter of 2019.
Taking a look at our full year 2020 results, we generated record economic operating income of $335 9 million or $11 38 per common share.
Turning to the balance sheet a corner on the company had invested capital in Opco totaling $722 8 million.
During the fourth quarter, we sold all of our common shares of Nikola Corporation, resulting in a negative quarterly mark of $6 3 million, but realizing a total gain over the duration of the investment of $27 8 million.
To hold a small portion of nickel of warrants in our merchant banking portfolio.
The merchant banking portfolio also contains approximately 600000 shares of App harvest, which went public earlier this month.
And asset go we had invested capital totaling 131 million at the end of December down from $136 9 billion at the start of 2020 is the increase in value of our Lincoln investment was offset by write downs on our legacy real estate holdings during the fourth quarter, we retired $47 million of our outstanding.
Convertible notes and in the coming months, we'll be looking at additional options for optimizing our capital structure and reducing our overall interest expense.
Turning to our equity common equity, which is stockholders' equity less preferred equity was $868 2 million compared to $708 5 million as of December 31, 2019.
Common book value per share, which is common equity divided by total shares outstanding rose, 23% year over year to $32.34 as of December 31, 2020.
Tangible book value per share was $25 and 95 <unk> at quarter end up 39% from the end of 2019.
Return on common equity was 43, 4% for 2020, well above our target of generating mid teens return on common equity.
As we noted on the release this morning, our board of directors maintained our quarterly cash dividend of eight cents per common share during the fourth quarter, we repurchased 165000 shares with 3.3 dollars $9 million, including purchases executed according to our existing <unk> one plans for full year 2020.
We repurchased three 1 million shares for $47 $3 million given Cowen strong performance. In 2020. We also expect we also expanded our stock compensation plan, providing all of our employees with the share grant in order to further encourage long term alignment of our team members and shareholders.
Looking ahead, we intend to buy back shares in an amount sufficient to keep the share count at least flat on an annual basis, we may make additional share repurchases purchases opportunistically weighing the impact of buybacks on the overall available cash flow as well as prevailing market and business conditions.
Also please note that as this debt.
Debt at the start of 'twenty 'twenty, one our net DTA was $9 million with virtually no Nols remaining as such we expect that we will start paying cash taxes in 2021 on consistent basis with an effective tax rate estimated in the range of 27% to 31% depending on the nature.
And geographic sources of our income our cash tax payments will also depend on the timing of the realization of our deferred tax asset and liabilities. Once we become a cash taxpayer our calculations of economic income and economic operating income will be made on an after tax basis with that I will turn the call back over to Jeff.
Thanks, Steve.
While 2020 was a record year for Cowen. We believe we are well positioned for continued momentum through 2021.
We have made the investments necessary to succeed in our multi year growth areas and our collaborative approach is resonating with our clients both existing ones and new ones.
As I mentioned earlier, our deal pipeline is at record highs and we expect that the record number of <unk> coming to market will provide meaningful opportunities for M&A mandates going forward.
As more companies consider the structure as an alternative.
Net is attractive to traditional ipos.
We believe the market has not yet fully caught up to the reality of our business momentum given the Cowen stock is still trading below book value and at very attractive earnings multiple.
We will continue to repurchase shares opportunistically in 2021 to take advantage of this valuation gap, which we expect to disappear.
Overtime.
While our fourth quarter and full year results are remarkable there even more so considering that over 90% of the Cowen team continues to operate via remote work, while maintaining high levels of productivity.
We expect COVID-19 vaccines to become widely available in the second half of 2021 and as chaotic as they rollout has been we shouldnt lose sight of the fact that it is nothing short of a scientific miracle that we have not we have not one but several effective vaccines being deployed just one year after the corona virus, which seek first sequence.
Once the vaccine availability improves and we approach herd immunity, we expect that we will have significantly more of our team back in our offices.
Oliver and making those determinations, we will continue to use the same guiding principle debt has served us so well over the past year.
The safety and health of our colleagues and their families come first.
Longer term, we will continue to assess our future real estate needs based on a combination of remote hybrid and fully on site employees.
And with that I will open it up for questions operator.
Certainly ladies and gentlemen, if you have any questions. At this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes on the line of Michael Brown from Cape VW. Your question. Please.
Hey, good morning, Jeff and Steve how are you guys.
Good how are you.
Okay.
Okay. Good.
So you know a lot on a lot of commentary in the prepared remarks I. Appreciate all the color on <unk> on the quarter and on the momentum you're already seeing in 2021 here.
Maybe if we could just start with.
On the brokerage business I guess that was kind of a surprising.
Let's see bad debt.
Revenues per day have actually exceeded the 2024th quarter levels.
Can you just help us parse through that is that really just you know.
How much of that is kind of what the market is giving you versus how much is really some of the.
Growth in say like on the non U S.
Revenues or outsource trading some of the other ancillary products that you've kind of grown and developed recently.
Trying to understand how those those dynamics are playing out here.
So it's a good question I mean, I think we're certainly seeing the benefit of what we call our institutional services business, which is a little bit less volume dependent obviously the growth in prime brokerage and outsource trading our securities lending businesses. These are businesses that really.
Where we're taking share by adding clients those clients have grown.
Our debit balances have grown we are starting to offer.
On a selected basis swap a swap capability that allows us to open up another avenue of revenue for clients to pay us.
So I think that's part of what you are seeing but I also just you know when you see.
The areas in which we have expertise continue to remain robust obviously stock trading has been pretty robust.
For the foreseeable future I think that that.
That makes a lot of sense. When you think about how we're doing but honestly every business is up and our cash equities business, our electronics business, our European business and I think that's you know.
<unk> of our market position.
And then we're super grateful for that.
Obviously, I think it's a reflection of a lot of hard work and a lot of.
Years of planning to be able to be there for clients when they need us and so what we're experiencing I think is a function as much of our market position.
And our expertise as anything.
Okay, Great maybe just a quick follow up on on your comment there.
Obviously the stack.
Back.
Dynamic has been it's been a very powerful on it and you guys are certainly well positioned to benefit from.
On the.
I've taken in activity there.
Great capabilities in the space.
How do you.
And when we think about your total revenue here from the.
The capital raising side, the advisory side and the trading piece of the business have you looked into kind of what proportion of your revenues are really coming from specs, we take all of those pieces together it just becomes such an important.
Important dynamic that it would be helpful to know how you how you think that that how much of that contribution is coming.
Through the revenue line.
Yes, I think that's a that's something that we.
We actually we haven't looked at it that way because I will say theres different attributes of the spec business. So.
On our stock trading businesses increase in part because there's just so many more spec. So we continue to be the leading trade or secondary in the secondary market of specs. So the fact that that there's so many more of them is.
Is driving that part of our business, whether we're underwriting them or not.
And so that's.
That's kind of a drive that aspect of the business.
And when I look at the banking revenue you know most of the banking revenue that we're getting is from destock transactions and backend transactions and capital raising associated with the <unk> transactions.
Lot of people tend to focus on stack Ipos, that's actually the.
From a banking standpoint, not really the big revenue generator and so when we look at how much <unk> as a percentage of our banking revenue last year.
It wasn't as much as I think everyone thinks it is.
In fact, I would argue that debt the spec revenue this year stands to be a lot greater as we see more exits.
Net are going to occur, where we're getting backend fees as well as advisory fees and financing fees associated with the <unk> process.
The two transactions that have already closed this year innovations merger with panacea.
On App harvests merger with Novus. These are pretty significant fee events for Cowen.
And and so I would expect that we'll see more of those because every time you see us back backend where cowen as an adviser.
You know in some capacity is meaningful.
Okay, Great and Steve I appreciate the commentary on the DTA.
And the fact that you'll be economic income will be on an after tax basis now going forward.
<unk>.
Apologies if I missed it but did you update the guidance now on the returns as you know I think previously you were targeting a mid teens on a TCE which was.
Essentially a pre tax basis since you weren't paying cash taxes.
Is it fair to assume that that you can actually still do a mid teens ROE TCE is that fair.
Target going forward or is that something you guys are still kind of working through it.
Any update on at a later date.
Yes.
Still.
We're still talking about.
Our Roe.
On a pre tax basis, but obviously with our tax rate being roughly 27, 28%.
We can we can run the math, but.
And then with 2020 being so good we're obviously well above that mid teens target but.
But the target is still you know on a pretax basis.
The mid June target in the mid teens target.
Pre tax so I think we're trying to be consistent right. When we said that our overall pre tax free.
Years in previous years would be given that sort of is our target. Although those are pretax numbers because we weren't a taxpayer on economic income is a pretax measure. So obviously when you look at the.
At the Delta between our our economic income numbers on our GAAP net income numbers the big Delta there is taxes.
And certainly in this year.
Obviously, we we blew through that number that we feel like our business has.
The much more sustainability on resilience going forward so.
Just based on the size of the scale of it. So I think we should be able to hit that those are those targets.
At least for the foreseeable future.
Okay, Great I'll leave it there and hop back in the queue. Thanks.
Thank you. Our next question comes on line of Steven <unk> from Wolfe Research. Your question. Please.
Hey, good morning, Thank you for having me on to ask some questions. So.
Wanted to start off on the ECM backlog I mean, you've cited the record M&A backlog commentary there was quite encouraging.
We're coming off an incredibly strong year for ECM, just wanted to get a sense as to how the backlog compares today versus pre COVID-19 levels and what's your expectation Jeff just in terms of the sustainability of some of the recent momentum just given you have such tough comps you have to deal with in 2020.
Yes.
I think when.
We look at our equity capital markets business. So I just want to remind everybody that you know.
The biggest part of that business is follow on offerings and I always say when we talk about our backlog numbers are particularly for biotechnology.
Those.
Those.
Revenue is rarely get into backlog because.
Our company has positive clinical results they decide to do a financing.
It gets into backlog or maybe like a day and then it gets out of backlog because we execute very quickly on them. So when we really talk about our backlog numbers, whether that's in ECM DCM or in.
On our advisory business, we're really talking about Ipos.
Debt advisory and debt financing businesses and our M&A backlog.
And so that just gives you an indication primarily of the level of revenues outside of biotech follow on offerings and I think.
It's really important.
To understand that dynamic.
We see the driver.
Biotechnology continuing to be in place more so maybe than ever before.
The capital flows suggest that.
There is red oak readily capital.
Sort of capital readily available to invest in new companies New company formation is happening at an increasing pace.
Some of the estimates I've seen or that there were 300 series a financing is done for biotechnology companies last year that those are all some portion of those companies will be accessing the public markets theyre doing so at an increasing pace.
And so you know when I look at.
The dynamics that sort of underpin our backlog continues to be pretty strong as it relates to follow on offerings.
The more successful the companies are with clinical resolves the more money they race and that's been really been the highlight of it. We were involved earlier. This month company called <unk> that did a $1 billion follow on.
And that $1 billion follow on is one of the largest equity financings.
In the history of biotechnology.
And in Cowen is the only investment bank debt has been on every cover as a book runner since the IPO.
And that really I think is critical to our success is really servicing the clients that we have.
Making sure that we're doing everything we can to continue to help them along their journey.
And then selecting new clients.
Who we think can be really amazing over the next decade, but the dynamics that we've seen remain in place and I'm not saying that then it will be this way every quarter.
But I do think that when you take a look at over the next few years I just it's hard to see the dynamic around this space changing meaningfully.
Thanks for all that color, Jeff and maybe just switching gears to capital management.
Business has been performing well you exited 2020 with a very strong liquidity and capital position.
The buyback in <unk> was maybe a little bit lighter than we expected, especially given some of your comments around the business momentum on how youre thinking about valuation was hoping you can give us an update just in terms of capital management prioritization and given some of the remarks alluding to capital structure optimization in particular on what sort of quantum of interest expense savings.
Should we be contemplating if you were to take action around.
Taking out some high cost debt and refinancing.
So let me let.
Let me start and then I'll turn it over to Steve.
So I think.
You have to look at what we did with the convertibles as well as our stock buyback for the fourth quarter, we bought back a bunch of convertibles, So rus debt.
Net reducing future dilution and we had an opportunity to do that and we took advantage of that opportunity. So when you aggregate loans.
Common stock buyback and the retirement of convertible debt.
It's pretty meaningful amount of money and it should give you an idea that we have multiple ways to take.
Think about optimizing our balance sheet, and obviously I'm not going to comment on on how things will look like by the end of the first quarter, but some of those opportunities remain available to us.
And we will continue to look at it.
The way too.
Return on capital to shareholders, I mean, whether we're buying back stock paying dividends or retiring debt that's expensive or retiring.
Convertible debt Thats dilutive and deepen the money all of those are really accretive to EPS and really accretive to our earnings going forward and they are.
Effective ways for us to continue to drive value for shareholders, Steve on them at the end of that you wanted to add to that no.
We spent over $47 million of taking out two birds.
$88 million left and you know.
We're looking at some of our debt is a bit expenses on we're looking at other opportunities too.
The decrease debt interest expense.
Great and just one final one for me on the corporate tax rates, you guided to 27% to 31% is that rates a bit higher than where most of your peers are running I was hoping to get some color as to what's driving some of the upward pressure on your tax rate recognizing there's always idiosyncratic factors to consider.
And whether there's any room to optimize.
The rate that you're paying now that youre going to be a cash taxpayer and maybe there is debt and increased area of scrutiny or focus internally.
Sure I mean.
We've been working towards this for a number of years, but from.
From a tax rate perspective, it's really state apportionment and you know even.
Country apportionment net effects that that rate.
And it's also win.
On assets and liabilities from a for me.
Tax perspective, you know when certain things like you know.
We don't have much for Nols left but it depends when some of these.
On deferred tax assets of deferred tax liabilities are going to turn on and we're also looking at opportunities to.
Decreased net effective tax rate one thing.
Research and development tax credits there are credits available that.
We will pursue to decrease that tax rate.
That's great color, Steve and Jeff. Thanks, So much for taking my questions.
Yeah.
Thank you. Our next question comes from the line of Sumit Moody from Piper Sandler Your question. Please.
Hey, Thanks, good morning, guys.
I wanted to get your opinion or if the canvas team has put out any opinions on the new administration and maybe the effect on that.
That could have on accelerating the pace of legalization federally and what your thoughts.
About what that could mean across the business lines.
So our current.
View is that that's not necessary a high priority for the administration. Although this administration is more likely to consider.
Cannabis legalization or at least relaxing some of their rules around.
Allowing banks to finance cannabis sort of the difference between the Safe Act and the States Act.
Some version of that.
Not something we think is a top priority obviously the administration's top priorities.
Outlined our.
First second and third Covid relief in vaccines.
I think they could get to it.
I think there's definitely a social justice aspect of it that needs to be addressed and I think.
Its unlikely in our opinion that you get cannabis legalization without meaningful mass incarceration reform.
And I would just say.
There has that has to be addressed and I happen to agree with that by the way I just don't see how we have legalization.
Canada sales in this country without meaningful change in the laws and relating to mass incarceration.
Of individuals', particularly individuals of color.
And so you know we should have we should be able to find a holistic solution here I do believe that cannabis.
Is a unifier in the sense that.
You know.
Red States Blue States people of all backgrounds do you see that the benevolent tower of cannabis.
Used appropriately and so there is a groundswell of support for <unk>.
Federal legalization, but just a number of things have to be addressed and so I don't think it's imminent, but I certainly think it's more probable under by the administration that it was under a Trump administration.
Okay, great. Thanks.
And then just shifting gears to the asset management business I know you guys recently closed CHF three just what.
And as we think about 2021 kind of fund raising.
Are there any new strategies you guys are thinking about you know anything for CSI or CHF four how should we think about that.
So I think we'll continue to focus on the areas, where we have expertise.
Said pretty consistently that we might have room for one strategy a year. If we can find one we continue to look at a bunch of them.
It would have to be something where the bar is pretty high and it will be more focused on private equity style investing than it would be on on hedge fund investing I think is fair to say, we continue to see really strong momentum for Cowen sustainable investments.
Certainly the end of the year last year.
On a closing and I think we've continued to see strong momentum into the beginning of this year.
That's pretty pretty remarkable that strategy was launched initially three years ago and.
Could it be a very meaningful part of our future provided that we can deploy the capital with positive returns, which I think we can.
And so you know.
We're in the luxurious position of.
Being selective.
We don't we're not really.
On sort of gated by this idea that we have to be the biggest.
I, just think we have to be profitable and smart and adding.
Really I would say highly distinguished indistinguishable.
Unique alpha product for investors and the good news is when you look at the caliber of the investors in our most recent funds.
They are and the amount of capital a day have an experience that they're having both.
In health care investments as well as in.
Cowen sustainable investments.
We're developing new product those stores will remain open to us.
Can't think of a time.
In our history.
Cowen investment management, even dating back to the Ramius days when the caliber of LP in our funds is ever been higher.
Just in terms of the access to those flow so.
The team has done a great job.
The board and we're working to do everything we can to reinforce that.
By focusing on quality instead of quantity.
Alright, great. Thanks for taking my questions.
Okay. Good to hear from you as you meet.
Thank you. Our next question comes from the line of Devin Ryan from JMP Securities. Your question. Please.
Great Good morning, Jeff and Steve how are you guys.
I mean, how are you.
Doing great. Most questions have been asked but maybe just to dive in here a little bit more on investment banking commentary clearly just a terrific year terrific quarter.
And we can see the data around this year starting on a very good note.
Yeah.
Think about Cowen is market share and how that's evolved over time hear me clearly you guys are gaining market share in the industries that you're in but then Youre also win areas strong in areas like health care that have been very active and so I guess I'm just trying to think about and maybe how you would frame.
How your market share has been evolving kind of where you feel like you've really picked up share.
Relative to maybe the competition and then also as you look forward kind of the areas that you feel like maybe just based on where you're making investments or where.
Youre seeing momentum, where where there's the most incremental market share opportunities ahead, and I'm really thinking most about kind of the investment banking businesses.
I think it's interesting we do look at share numbers.
But.
But it really started this outputs.
I think.
It's good to look at the scoreboard and see us winning and certainly taking a bigger share in areas like advisory fees.
Certainly looking at our market share in areas like healthcare, ECM and things like that but I wouldn't say I think the.
The secret behind our success is our ability to pick industries.
That are undergoing transformation and having a deep knowledge of those industries.
And and <unk> and <unk>.
Ability to build a product suite that addresses those industries.
And that's just not something you can't wake up Tomorrow, and decided you want to be in certain industries.
And then be able to develop product around those industries. So when you look at the success that we're having it's about it's about growing with the clients we have as much as it is about.
Taking on new clients.
Our clients as they get bigger and more mature they are looking for different product.
Some of our clients when we're going in and providing strategic advice to them is strategic advice blended with financing advice.
There aren't very many banks they can approach a client and say listen we can be holistic in a way we're addressing their needs and we can give you our best advice and figure out the best way to execute for you.
On once we decide on what that path is.
Aren't very many that do it at scale like we do and and so it's been about I'd say first and foremost selecting the right industries and then.
[noise] biotechnology like sustainability like the transformation, that's going on in the industrial complex in energy transition and all of these things that we think are going to play out over.
The next decade, and then finding the companies that we think are the leaders in those areas and building meaningful deep relationships with them. So that we can address their needs and build our competencies and are on a pro.
On our capability to address their needs as they evolve.
That's basic strategy.
We've been fortunate that we've been right.
That and we've been saying it for years debt.
If financial investors want to play growth.
That we have to build a mechanism for them to play growth and this is where we aim to be one of the very few.
Financial stocks were financials investors can find an opportunity.
Actually.
<unk> along with the economy.
And so that's why we don't do a lot of lending that's why we don't have a big net interest margin business those are or are not.
Those are not necessarily growth areas. That's why we don't really use a lot of balance sheet.
Really bad intellectual capital and we think there's a moat around that it's hard for somebody to wake up tomorrow and decided they want to be in that not that people won't over time, but we intend to be able to press our advantage in the areas, where we have domain expertise so that people can catch up.
Got it I appreciate the perspective, there, Jeff and then maybe a follow up here on.
Outlook for operating margins, maybe a little bit of embedded.
Revenue.
Prediction and here as well, but the firm had a terrific year, there 20, almost 25% on the operating margin and maybe kind of thinking on how you guys are managing the business.
Two a margin or.
Now that we've kind of hit a level kind of north of 20 percentage, but if you think about yes. It was.
20% a good bar.
Or higher to be yet.
Creating steve's commentary about expenses in the first half of the year remaining low and maybe creeping back up just how you guys are thinking about.
The operating margin going forward in managing the business.
So I'll start and then I'm happy to turn it over to Steve.
We're definitely benefiting from working from home right, we've had meaningful cost savings.
From a non comps for the lack of travel and an increasing.
Kind of.
The increase in margin because we were not doing conferences in person I think everybody has seen that and I think as Steve mentioned on the call earlier.
We're going to be in a position where.
We have a great comp in the first quarter, because first quarter of 2020 had a full suite of travel and also are mostly it's also on our most expensive conference quarter.
So we have at least one more quarter, where we're going to comp.
A reduction in non comp expenses relating to travel and entertainment and conferences.
Forward.
Good to see how we return to the same level in aggregate.
People are going on travel less.
And I think we're seeing tremendous connectivity in some of the virtual events, we're doing and so we're not going to stop doing them I think clients really appreciate them.
Efficient way for them to glean and garner information I still think we will do conferences in person, but I think there'll be.
We will have to reinvent how that happens.
And take a look at to see certainly.
Certainly the networking part of that is going to be a big part of it but it's not going to be probably to the same extent.
And so going forward are.
A non trading non comp expenses right, you've got to break out our variable expenses into two buckets, one is related to trading.
Which we expect to continue to increase as our numbers increase in revenues and the ones not I would say as we head into the back of the year, we'll see a pickup in some expenses.
And therefore, some margin shrinkage, but we're not going to go back to the same level of non comp expenses as a percentage of revenues and the reason is because we'll be traveling less and we'll.
<unk> be able to take advantage of the reduction in the overall spend but also our revenues are so much higher.
And then they used to be and so we're finally in that spot where we're hitting.
Non comp expenses that are in and around the same as our peer group.
And that feels pretty good and so I would say as we manage our margins going forward.
That's our biggest that has been our biggest differentiator between us and the other people who are.
Our comp group is that we just have a bigger non comp expenses.
So I would I would expect us to see.
We're not gonna be going back to the levels, we had prior to 2020.
Steve do you have anything out of that.
Just you know as we've talked about on the past a little bit in the short term.
Variable non comps because of TNT and client development as Jeff said, we will remain low the first half of the year, we will start to pick up a little bit, but we've obviously learned a lot from this but they're not going to go back to the levels of 2019 and the longer term the fixed non comps I think are real.
States footprint, especially on the expensive areas like New York, and Boston and San Francisco will decrease.
And while we may get space and some of the satellite areas, that's going to take a little bit longer for that to happen because of the leases and things that we have but.
For instance, we have a lease on.
Building, that's running off so we're not going to renew that.
So there's things like that that will take a little bit longer but I think there is definitely room on the fixed non comps to come down as well.
Yeah, Okay terrific I'll leave it there guys. Thanks, so much.
Kevin.
Thank you. Our next question is a follow up from the line of Steven <unk> from Wolfe Research. Your question. Please.
Alright, thanks for accommodating the follow up.
Jeff just wanted to dig into some of your earlier comments around how well positioned you are for the stack opportunity certainly there is that we've seen record fund raising there I would also note that that's probably one of the stats excited most often in terms of thinking about how published a current market is at the moment.
I'm, hoping you can give some perspective on how you're thinking about stack fundraising over the long term and more specifically do you see us at least hitting an inflection point here just given.
On the step up that we've seen recently and if you could just talk to the competitive landscape. How are the folks that don't have a strong hold on a real foothold in this area looking to take some of that market share as that price continues to grow.
Well I certainly can't speak to the strategy of our competitors I can speak to our strategy, which as you know we continue to focus on taking teams public debt, we think have access to unique deal flow.
I'm not going to speak to the volume of specs I just.
I think there's really not much to taking a spec public.
And in the sense that it.
There's not a lot of heavy lifting that has to go on to get us back public and I think you are probably seeing some people.
Get access to the market that maybe don't have unique deal flow.
I don't know who those people are but what we continue to do at Cowen is focus on the quality of the teams were backing.
So that we think we have a high probability of.
Being having successful outcomes on the backend.
I would just say this is really no different than when you screen for Ipos I think every time, there's a slew of ipos the media on the public gets concerned about volumes.
And invariably there are other banks, who.
Actually.
<unk>.
Take it take companies public prior to their ability to be public our job is to find high quality alpha generating.
The management teams that can access companies that deserve to be public.
And I would say.
There is still about 100.
It's like a 100 billion.
Entrust, which probably means there's 500 billion or.
Potential buying power for private companies, that's still pretty small when you take a look at the overall market capitalization of the.
The equity markets public and private.
It's still pretty small.
What I would say to everybody in the industry is just make sure you're taking companies public to deserve to be public.
The same screen.
And that's what we do.
So.
It's easy to get caught up in it because it's the flavor of the month.
And but I also happen to think it's.
When you look at the caliber of people certainly the ones that we're dealing with and the caliber of a number of folks who've taken the spacs public they are.
Incentivized to make sure they are doing deals with good companies.
Because that's really where their alpha is and so we'll continue to do that same thing because at the end of the day.
That's how we will be held accountable it will all be in the success of the outcomes at the back end not in Europe, you take companies public at the front end, that's not really a differentiator because that makes sense Steven.
That makes perfect sense, Jeff gets really interesting color I know you could provide some helpful context on the market. So I appreciate you taking the follow up.
No problem. Thanks for the question.
Thank you. Our next question is a follow up from the line of Michael Brown from <unk>. Your question. Please.
Thank you Yeah, I think thanks for taking my follow up as well.
And it somewhat build on your last point there Jeff.
<unk>.
You guys had some commentary on App harvest, obviously, it's a great story, which could transaction for you guys.
Just wanted to double check a couple of things related to that though so.
When you think about App harvest.
Is it similar to kind of Nicola and that you don't necessarily plan to see this as some sort of long term investment at some point.
If you do plan do you plan to exit that and what what are kind of of lockups associated with that that position.
And then two do you what is the cost base. There is it does it kind of like a dollar of shares at the right way to think about it and then I guess the last pieces will you comp the crew comp against the marks.
Markup for our partners. Thank you.
Yeah, so listen not specific App harvest I mean, I think we'll continue to follow the same strategy we've been following.
Obviously up harvest is a very special company, which is part of the reason why I highlighted it.
At the beginning we were involved.
NAV harvest prior to this back so we advise them prior to doing a stack merger, we advise them on a capital raise and.
So we have a reasonably low basis.
But because we participated in that financing with our balance sheet our goal here.
When I think about it is to.
A great example of a company that just would not have had access to the amount of capital.
To build out the kind of footprint that intends to build out without access to the public markets and I think when we when we look at.
On the growth of App harvest, they are really well set up and we intend to be a long term partner for them, which is why we made the decision to reinvest in the community and return some of the revenue as we've generated to the community by building out. This is a long term play for us I think.
It fits very nicely into the theme that we articulated that we think is really important which is theres a lot of capital that sits at the coast and we know that's the case.
And it's really hard for people in the middle of the country to access that capital and so when you find a really talented management team and a visionary like Jonathan web.
And he what we bring to the table is access to the public market capital into them.
Some of the biggest and brightest.
Public market investors, we want to be able to bring that skill set and the ability to articulate the app harvest.
Business model to the public markets and.
Obviously, our research team has to feel constructive about that I mean, because research independent at the end of the days only think that matters in our business. So.
If Jeff Osborn and the team couldn't really get comfortable with.
The business model than it would've been hard for us to be as proactive, but I think when you look at our interactions here, what we ultimately end up doing with our capital as it relates to this is not really relevant.
Two finding to App harvest through its lifecycle as it builds out a half a dozen to a dozen.
Facilities.
And to really look for other companies like Apple harvest that they have breakthrough technologies or the ability to build economic development zones, where we can bring to bear our capital on the capital from that we have access to to do economic development to the private sector. That's just.
Gotta be central.
Our theme.
And on App harvest is going to be the first and most visible example of that.
But I think there'll be more behind it.
Okay.
Okay, and just to clarify any any commentary on when you may look to exit that position and.
Got you.
On to create comprehensive.
We will do the same thing that we've been doing all along when whenever we've had.
Whether it's till ray or Nicola or any of the investments that we've had we'll follow the same path that we have.
Again, I just think there is a.
Again, this is not uncommon for us.
We have small investments and a lot of on a.
A lot of our clients certainly the biotech onto phase II when this happens pretty.
Pretty regularly for Cowen has sustained objective for us to invest alongside of our clients and on our own capital up in small increments to help companies. We have a high degree of conviction in and we'll follow the same path around liquidity, we've said over and over again that balance sheets are meant to be seen not hurt, but we think that our ability to invest in these businesses is <unk>.
Why people like talent.
It gives them an opportunity to participate.
And things that they wouldn't otherwise be able to participate in and it's really hard for public market investors, especially in the financial space to get access to these companies and we are really on access point for financials investors to get access to growth companies. We can do that provided that we're mindful of the fact that our goal is to return that.
Capital to shareholders over time, and so there's opportunities for us to monetize those assets in due course.
We'll follow that path and of course, we will.
Accrued compensation, along the way because.
That's what we do so it won't be any different than kind of what we did with nikola or til ray or.
Any of the dozens of biotech analogy companies that we've invested in over the last six or seven years.
Okay great.
I appreciate all the color guys. Thank you.
Okay.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Jeffrey Solomon for any further remarks.
Well. Thank you so much everyone.
Body for taking the time, it's a long call and I hope that.
Is indicative of sort of peoples.
Ah patients.
Good questions and appreciate all the attention.
I just I'd like to think.
I'd like to thank the team here at Cowen for demonstrating.
Our continued commitment to our core values on vision empathy sustainability and tenacious teamwork.
Oftentimes.
People give me credit for those words I will just say.
That is just a reflection on who we are if we've done anything at Cowen from a senior management level, it's just to identify.
The culture.
And be able to label it as such.
The folks at Cowen you know.
On the way and you're walking away every day.
So I just want to thank you for your dedication to helping our clients to continue to outperform.
I'm grateful for all that you do.
And I'm looking forward to seeing more of you in person later this year.
It's been an interesting year for sure.
And in one debt.
As for the record books, but.
But I do Miss you every day and I can't wait to be able to be back with you in person I. Thank you all for joining us and we look forward to speaking with you on our next call have a good day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
[music] zone.