Q2 2021 Cowen Inc Earnings Call
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This is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
Okay.
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Good morning, Thank you for joining us to discuss cowens results for the second quarter of 'twenty 'twenty..1 by now you should have received a copy of the earnings release, which can be accessed at investor Doc Cowen Dotcom.
After the Speakers' presentation, there'll be a question and answer session.
As a reminder, today's call is being recorded.
I would now like to hand, the call over to Mr. J T Farley Cowen as head of Investor Relations.
Thank you operator before we begin I would like to remind you that some.
Comments made on today's call on some of the responses to your questions may contain forward looking statements. These statements are subject to the risks and uncertainties described in our earnings release and other filings with the SEC Cowen has no obligation to update the information presented on today's call.
Also on today's call, we will be referencing certain non-GAAP financial measures, which we.
Some of the provide useful information for investors reconciliation of those measures to GAAP is consistent with the company's reconciliation as presented in today's earnings release.
As a reminder, we make available of quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release.
Joining us on today's call are.
I believe from the chair and Chief Executive Officer, Mr. Jeffrey Solomon and our Chief Financial Officer, Mr. Stephen Lasota.
Now I would like to turn the call over to Jeff.
Thank you J P. Good morning, everyone and thank you for joining us on Cowens second quarter 2021 earnings call.
Today I'm happy to.
<unk> sales on our strong performance. This quarter, then Steve will review the financial results of the quarter after that we'd be happy to answer your questions.
The second quarter of 2021 was a clear demonstration of Cowen core earnings power and the growing breadth and depth of our capabilities across the platform.
It was the third best quarter ever.
The shared your investment banking and markets and the forest the best quarter overall in terms of both revenues and profitability.
Didn't deliver the standout performance despite the slowdown in capital markets issuances and the impact of negative mark to market changes in some of our funds, which impacted our incentive income.
This quarter builds upon our record results over the past year.
Ever from it also demonstrates the consistent earnings power, we have established over the past several years through strategic investments in our capabilities and our team.
Over the past 4 quarters, we have generated nearly $1.9 billion in revenues and generated over $10 per share and economic operating income.
While Cowen stock is among the.
Are the farmers in the financial sector. This year, we believe that our valuation is still compelling and there's opportunity for additional upside.
Operationally, we are returning to the office in greater numbers across the firm and we will continue to do so in the coming months mindful of as always that safety and health of our team remains a priority.
Our team continues to operate.
The best for a very high level to deliver results for our clients regardless of where we are located.
While we clearly see the benefits of the beginning to gather again in the office. We know our feature will be felt more workplace flexibility of Cowen we're proud to be in a position, where we can rethink what the future of work will look like in order to address the needs of our clients colleagues and communities.
Here's some of the operating highlights from the quarter.
In investment banking it was an impressive quarter, even with the slowdown in health care capital markets activity and stack Ipos.
Revenues were up 13% year over year and it was the second strongest quarter on record for M&A revenues.
It was also the first quarter ever in which.
Advisory, which combines our M&A and capital markets Advisory revenues comprised the majority of total banking revenues at nearly 60 per cent.
This quarter was also a clear demonstration of our progress on sector diversification.
Outside of healthcare generated 55 per cent of banking revenues with strong contributions from consumer.
Technology enabled services.
Our health care business is also increasingly diversified with 40 per cent of our health care revenues coming from areas, such as tools and diagnostics Med Tech and health care I T.
And the M&A revenues were $85 million nearly triple on the level of a year ago.
And the spec IPO activity fell sharply compared to the first quarter total second quarter spec related revenue was just 10% of total banking revenues, including underwriting pipes in merchant fees.
Demand for advisory and capital markets issuance remained strong looking out to the remainder of the year.
Our pipeline ended the quarter at.
On a new record level and is up over 80% versus the level of year ago.
It is worth noting that stack mandates make up just over 1 third of our current deal backlog.
We've added a number of hires at all levels of our banking team in recent months and Cowen has emerged as an employer of choice for professionals, who wanted to accelerate their careers.
In markets, we had another strong quarter with the 2.82 million in average daily revenues that's of 5% year over year increase outperforming of 15% decline in U S equity trading volumes.
It is also an exceptional result, given how much trading activity in recent months was driven by retail investors who.
Apart of our client base.
Highlights for the quarter included of 48 per cent income increase.
The increase in Prime services revenues.
Cash trading was up 22 per cent and non U S execution was up 32 per cent.
Securities Finance and special situations, both rebounded strongly compared to last year.
With revenues in both groups up well over 200% versus the second quarter of 2020.
We have clearly gained share in our markets business and are seeing promising early growth in newer opportunities such as ADR trading and international Prime brokerage.
We are attracting new talent, adding fixed income expertise to our outsourced.
We're not trading offering bolstering our capital of introduction team.
And building out of leading adventure been trading desk in Europe.
We're also making progress on our digital assets initiative following on the $25 million of investment in poly sign, which we announced in May.
While there is still a lot of work to be done we're developing capability.
Capabilities to meet emerging client demand for trading and custody of a range of digital assets.
Looking at the current quarter, although equity volumes have slowed modestly in July compared to the second quarter, we were off to a good start with average daily revenues in excess of $2.4 million.
We're seeing both higher highs.
Outsourced from lower lows and our markets business, sorry, let me repeat that we.
We're seeing both higher highs and higher lows and our markets business and believe that our competitive position has never been stronger.
In research, we added to our already formidable bench strength.
With plans to bring on additional analyst analysts in the back.
Half of this year.
During the second quarter, we on boarded new senior analyst and life science tools and diagnostics.
Managed care and facilities.
In food and healthy living we also launched coverage on the cyber security sector.
Our focus on ESG sustainability and energy transition.
<unk> also continues to flourish.
1 of the largest coverage footprints on the street in these areas.
We published the 14 of our flagship ahead of the curve series reports in the quarter.
And launched the new thematic library.
<unk> continued to value, our thoughtful and differentiate of research and during the quarter our teams.
People gain in brokerage boats from our institutional clients.
In investment management, we had a negative mark to market charge, an economic incentive fees totaling $31 million nearly all from positions in the Cowen health care investment strategy.
While we are still up for the year.
So first half 2021 economic.
On many type of fees were almost $78 million.
Just for perspective that number is over 90 per cent of total economic incentive fee income from the entire year of 2020.
Economic management fees were up 26% year over year.
Due largely to higher AUM and the sustainability of the activist strategies total.
AUM was $14.4 billion, which is out of 25 per cent year over year.
Looking at our 5 investing strategies, our sustainability strategy had just over $1.5 billion of AUM at quarter end the.
The strategy completed a follow on investment in Eco ATM and also saw the completion of pro terrorist merger with the Arclight.
And on making our health care investment strategy completed 1 new investment and 2 follow on financings and ended the quarter with the $833 million in AUM.
Long term performance remains strong despite the declines in value of several public positions during the second quarter.
The activist strategy had positive performance of the second quarter grew assets to $7.2 billion.
Back of the merger arbitrage strategy had $311 million of assets under management at quarter end. The strategy had positive performance for the quarter, beating the H F. Our ex merger Arb index.
The healthcare royalty strategy ended the quarter with $3.7 billion in total AUM, which was up $200 million year over year.
Worth noting.
Health care of royalty has filed for an initial public offering and we intend to provide more details on our ownership stake and what it means for Cowen financially.
And economically when we're able to do so.
Turning to ethical which as a reminder includes non core investments that we intend to monetize the value of our investment.
Hi on wireless Internet Company, Lincoln was $8.3 million $7.7 million higher than in the second quarter of 2020.
The year over year gain was due to a favorable foreign exchange adjustment and improved business metrics.
The net asset value of our LP interest investments in the formation 8 and eclipsing rose $2.7 million to 40.
The $1.6 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 GAAP.
GAAP results for the second quarter of 2021 were as follows revenue was $458.8 million down 29% year over year from.
And the of tendered and $46.2 million net income attributable to common stockholders was $43.6 million or a dollar of 29 per diluted share down from net income of $112.1 million or $3.83 per share per diluted share in the prior year period compensation and benefits expenses.
So kind of $219.2 million a decrease of $86.1 million from the prior year period.
Expenses, excluding compensation and depreciation and amortization of $109.3 million from the second quarter G&A expense was $4.6 million.
Income tax expense was $10.2 million.
We're of peer to $44.9 million in the prior year period. Please note that we utilized all of available net operating losses. During 2020. Therefore, we have been a cash taxpayer since last quarter now turning to our non-GAAP financial measures, which we refer to as pre tax economic income economic income and economic operating.
From income.
Please consult the earnings release on our quarterly filings for the definition of these terms as well as an explanation about how the company uses these non-GAAP measures on how investors find them useful.
Op co had total economic income proceeds of $389.4 million Opco pretax economic.
The income was $71.9 million economic income was $51.1 million on economic operating income was $54.5 million in the second quarter.
The asset co had economic income proceeds of 696000 pretax economic net income loss of $4.7 million and an economic income.
On an economic operating income loss of $3.7 million.
On an overall basis, we reported pre tax economic income of $67.2 million down from $163 million in the prior year period.
Economic income is presented net of dividends as well as associated taxes. The company has utilized.
All of available federal net operating losses, not subject to limitation during 2020 economic income tax expense for the second quarter of 2021 was $18 million.
Economic income was $47.5 million for the second quarter of 2021 down from $161.3 million in the prior year period.
The prior year period included an unrealized gain and Nicola.
Second quarter economic operating income was $50.8 million compared to $166.9 million in the prior year period.
Total economic proceeds declined 30% year over year to $390.1 million.
<unk>.
At the moment of investment banking proceeds were up 13% year over year of to $214.4 million.
The economic brokerage proceeds were also very strong up 5% year over year to $175.8 million economic management fees for the quarter were up 26% year over year.
To $18.1 million economic incentive income was the loss of $31.1 million in the second quarter versus income of $46.4 million in the second quarter of 2020, most of the losses were due to negative mark to market adjustments on public positions in our healthcare strategy.
As a reminder, incentive income may.
The weighted from quarter to quarter based on the value of positions held on our various investment strategies.
Economic investment income was $5.5 million versus $140.5 million in the prior year period on the second quarter of 2020 results included almost $130 million on investment income from the unrealized gain on the Niccolo.
Fluctuations.
Turning now to our expenses compensation and benefit expense of the quarter was $224 million compared to $305.1 million from the prior year period due to decreased revenues are comped of proceeds ratio increased year over year from 54, 6% to 56.5.
<unk> of economic income proceeds for the full year of 2021, we are targeting an annual compensation ratio of between 56%, 57%, although it may vary from quarter to quarter fix.
Fixed non comp expenses totaled $41.9 million in the first quarter up from $34.9 million in the prior year period.
The increase was due to return to office activity, new hires and technology initiatives variable non comp expenses in the second quarter of 2021 were $46 million versus $48 million year over year. The increase was due to higher brokerage and trade execution costs from increased volumes as well.
Well as higher travel entertainment and business development expenses for the remainder of 2021, we would expect TNT and business development expenses to rise modestly from current levels.
In person meetings are scheduled.
Second quarter, depreciation and amortization expenses were $4.6 million compared to $5.7 million.
The second quarter of 2020.
We generated economic operating income of $58 million or $1.50 per common share, which includes the impact of taxes at an effective rate of 26, 8%.
In future quarters, we expect our effective tax rate to be in the range of 26% to 31% depending.
And geographic sources of our income.
Turning to the balance sheet at quarter end of the company had invested capital in Opco totaling $831.6 million up from $722.8 million at the end of 2020.
In Africa, we had invested capital totaling $126.2 million at the end of June.
Down modestly from $131 million at the end of 2020.
Turning to our equity common equity, which is stockholders' equity less preferred equity was 1 billion compared to $868.2 million as of the end of 2020.
Common book value per share, which is common equity divided by total shares outstanding rose to 30.
$4.35.
As of June 30 of 2021 compared to $32.34 as of December 31, 2022.
Tangible book value per share was $28.35 at quarter end up from $25.95 at the end of 2020.
Return on common equity was 21.7.
7% for the for the quarter of 2021, well above our target of generating mid teens return on common equity on a consistent basis. As a reminder of this our oce target is now calculated on an after tax basis.
As we announced this morning, our board of directors maintained our quarterly cash dividend of <unk> 10 per common share.
During the second quarter, we repurchased a record $49.9 million in stock of total of 1 point to 7.5 million shares including purchases executed according to our existing <unk> 1 plans.
Fully diluted share count in the first quarter was the weighted average of $33.9 million shares in.
The increase of of more than 300000 shares over the previous quarter's weighted average.
This increase was due to the timing of the conversion of Cowen convertible notes in late June as well as the vesting of restricted stock units and long term incentive program shares.
During the quarter, we purchased shares equivalent to nearly 100% of.
On an operating income for the first half of 2021, we purchase shares at a value equivalent to 36% over economic of operating income just above our target range of 25% to 35%.
We may be more opportunistic on buybacks, depending on market conditions and available cash flow and we will prioritize.
The conditional capital returns when we're able to monetize the assets such as length of them.
With that I will turn the call back over to Jeff.
Thanks, Steve.
By all accounts this was the strong quarter and a clear demonstration of the consistency of our earnings power.
Without any extraordinary tailwind and indeed in the face of tougher capital markets environment.
Healthcare, we generated over $50 million and economic operating income after taxes.
That impressive result is even after factoring in the $31 million in negative mark to market and giving back some of the tremendous incentive income we generated earlier in the year, we remain well positioned to achieve or beat our target after tax mid teens return.
On common equity on a consistent basis going forward, even as we are focused on building on the progress we've made across the Cowen platform. We are mindful of doing well enables us to do market and this means working to benefit the broader communities in which we live and work during the second quarter Cowen was proud to be among the sponsors of the pledge the progress study.
For asking a report on racial equity and inclusion across corporate America.
This report found that there is heightened awareness about discrimination in the workplace.
Willingness of the majority of workers to help tackle those problems.
This is not a simple matter, but we believe acknowledging the issues and working to create a more inclusive and diverse workplace is an important responsibility.
And we've.
We've made progress in this area.
More work needs to be done and we're committed to this effort across the firm.
And with that I will open it up for questions operator.
If you would like to basket of question you will need the press star 1 on your telephone to withdraw your question press the pound or husky.
Your first question comes the line of Steven <unk> with Wolfe Research.
Good morning, guys.
Brandon This is Brendan O'brien filling in for Steven.
Yes, Hi, Brandon first.
Oh.
First of all.
The bill.
The non comp expense and ratios of bit higher than we were expecting so obvious based on the that was likely in part to the negative mark on.
Onto the income line.
But even adjusting that out.
The non comp ratio of took a significant step up quarter on quarter, just wanted to get a sense of what.
What's driving that increase on maybe how you're thinking about margins and non comp ratios in the normalized earnings environment, given the significant market share gains in scale generated over the last year.
So brendan for the fixed non comps I would expect that the number for Q.
So maybe a bit high because.
Some of that has to do with new hires.
The return to office activity, we expect that to continue but we also have some technology initiatives that were in Q2.
Of driving that number up a bit on the on the variable side.
Obviously, a lot of it depends on floor brokerage and trading execution, which is.
It depends on how well, we do that quarter in the markets business.
But also as I said TNA and client entertainment is picking up a bit and we do expect that to continue.
Into Q3 and Q4.
But again the fixed non comps so this quarter, we're probably a bit high but variable will depend on.
The T&D side will pick up but the trading execution will will be dependent on how much revenue, we do on any particular quarter.
Great.
On the share count.
On a like a little bit as it is a bit of the atone ships I guess.
In terms of being a bit more opportunistic.
The capital of time.
On the on the monetization timelines.
Again understand.
Your willingness to continue to repurchase shares at current share price and how should we be thinking about the share count from here.
And in addition, given the significant capital accretion over the last 12 months, what the appetite is to deploy that capital to grow on the firm potentially inorganically.
<unk> My question.
Sure. So first of all of it there's no change in the tail on on our commitment to buying back share.
But I think we gave the guidance that we would.
Be in the range of 25% to 35% of our after tax economic operating income that's stands so as we mentioned on the last call.
The first quarter is a period in which the shortened period in which we have to buy back stock. So we certainly made up for that in the second quarter and we now stand at well in excess of the high end of our target range and we're not changing that guidance. So as we continue to generate the kind of profitability. We expect on an after tax basis, you can expect us to continue.
Continue to buyback stock and shrink the share count.
No change at all in that in that.
We'll continue to look at.
The organic opportunities I think the bar is high.
But we see them.
And where there are opportunities for us to do things.
To grow our platform in the near term or in the longer term, we'll do them.
And the good case in point is the investment we made in Palestine, Yeah. That's the longer term play for us as we think of institutions haven't really even begun the trade digital assets of crypto yet just haven't done it is largely the retail game, we're seeing a tremendous amount of pent up demand, we think from our institutional clients to do that we feel like we've got a product offering.
On the organic the rollout here that will be world class and it enables our institutional clients can participate.
We took $25 million of capital.
In longer term investing because we think it is going to drive the top line.
Also continue to do things like hire people.
And it's certainly.
You know the deal when you have of numbers like this from a profitability standpoint, but you should expect that we will continue to opportunistically hire people on areas, where we see meaningful growth.
And that has to do with you know again identifying the things we've always identified which our industry is undergoing rapid transformation are places.
Certainly in both the.
The knowledge provider of.
The intellectual capital on.
Understanding where those changes are occurring and of course, we like to play in places where there's.
The transactional activity of the capital raising of M&A advisory so.
Again, we will continue to do those things you can see the benefits of some of the investments we've made.
Frankly, when we had a lot less cash flow.
So super proud of that and we'll continue down that path.
Great. Thanks for taking my questions.
Thanks Brendan.
Jim.
Your next question comes the line of Sumit Modi with Piper Sandler.
Thanks, Good morning, guys.
I heard the commentary around the pipeline being a third spec related I wanted to drill on a little bit more into the total banking pipeline today, maybe give us an idea of what you are expecting to achieve over the next couple of years.
Terms of spec and non spec related deals and I guess sort of similarly on the health care versus non health care.
Growth of the business, how does the environment set up your expectation for growth for total banking.
Thank you have the infrastructure and talent set up the scale in the areas you're focused on or maybe you could kind of talk about that.
So let me let me address back so.
I think we all knew that the FCC.
Care looking closely at stacks of dis back transactions in the second quarter and that certainly put a chill on the market force back exits on.
Therefore at point of sale on the market per stack Ipos.
Obviously the record issuance in the first quarter spec Ips no..1 thought was sustainable on I expected there would be of meaningful slowdown for the remainder of 2021.
We're still seeing deals.
Get done, but they are a little bit more pricing in terms of spec ipos in terms of.
In terms of a destock transactions, we've actually had a number of them closed in July.
And we expect to continue to see those closings. So as we said I think on the last call.
We're not expecting there to be a.
Anything that changes.
In terms of these deals being able to close it was simply a matter of timing as the SEC began to ask for more detail and more of disclosure and changed some of the county.
The requirements for the lease back transactions, but thats happening and so when we look at our backlog I think it will continue to chop through it.
And certainly.
Certainly if July is any indication.
We're we're very excited about being able to capitalize on that going forward.
There's going to be a ton of.
Stack activity.
Certainly the spec activity over the next few years as we've said.
We'll get our fair share currently.
We are.
Staffed well, obviously, we're in the luxurious position of being able to pick and choose where we're going on lean in on fact transactions are there.
Still.
Too many of them for us to do and so we're continuing to focus on the ones. We think of the highest quality of that line up really well.
The capabilities.
Currently in the.
The industries in which we operate.
As far as healthcare is concerned I think historically are our bread and butter has been in the biopharma space. So for those that don't really understand the nuances around.
Around the biotech space the drug discovery has been the primary engine.
So we have of economic act of economic activity.
Which is actually free fairly downstream right discovering drugs as is actually on.
The primary engine of lot of these companies that have obviously raised significant amounts of money and they have to spend that money to build the infrastructure, so you're seeing tools and diagnostics, which are the up the the.
In the infrastructure necessary to continue to have drug discovery tools and diagnostics companies had been developed and those are really sit at the nexus.
Of technology innovation and in life Sciences innovation so.
For example, our ability as an industry to map the corona virus in less than 2 weeks is a function of the fact that.
The amount of technology and science in terms of mapping.
Mapping of genomic and Proteomic makeup of diseases.
And that has been a huge area over the last 12 months of growth and it's it's you know for those that are in the industry no. It's actually very different in drug discovery those companies have very different dynamics.
Different skill sets different economics different valuation metrics and so the growth on even in that sector as is sort of some of the biopharma IPO activity and follow on activity has abated. The growth has come from the tools and diagnostics health care information technology and a bunch of other areas that we're also really got it and we've made.
Made investments in those areas to broaden our health care.
As we look forward.
You know I think we could see continued to see of tough tape and drug discovery.
You know certainly it's been a difficult run here of the last 6 months.
It's probably the different most difficult the most difficult period of time.
Per months really if you look at sort of March April May June and July.
It's been a very difficult time, probably the most difficult time in that sector since.
The end of 2015 at the beginning of 2016.
And I think so.
So a lot of people say well what happened the Cowen when.
The last.
Total sector rolls over and we've said for over and over again that the diversification of our banking business the <unk>.
The vision of our pipeline that the the diversification of into M&A and capital markets Advisory of all of which are non biotech firm not most of which are non biotech book.
Really be helpful to us and I think this quarter is.
Is proof positive that even when there's a slowdown in economic activity or financing activity in that space Cowen can do really well because we've got many other things going and so they look at our pipeline going forward I feel very confident it's the highest it's the highest it's been well even with all of that activity and.
And the makeup of it is more diverse than it ever has been so I hope that gives you. Some maybe a lot of color, but all of that's helpful to use of the.
Yeah no for sure. Thank you I appreciate that.
The second 1 I wanted to kind of touch on hiring a bit wondering the.
The work from home dynamic its.
On employee retention, we're seeing the play across the economy I saw the journal article this morning, highlighting it in the tech sector, but it seems like it's increasing competition for employees, maybe more on the junior side, but have you seen any impact on the talent base and in recent months.
Or due to the ability of your peers, the higher remotely or have you been kind of a net gainer.
The effect of front, maybe you can talk about that all of that.
So I think maybe on a net gainer on that front.
Had we been.
Really good at on boarding during this period of time I've been through a bunch of back to work back to office returned the office.
And then some of the course of the past month of met a bunch of of our colleagues who seem like they've been.
Her on that a long time and many of the more on board of during the during the period of time of remote work Theres certainly when we're bringing people back together again, a palpable excitement.
On a around being together again and I'm I'm I'm encouraged by that too so whatever the future holds for us.
I think there's a real does the strong desire on the part of our team to.
Here for other.
That really speaks well of our culture.
And the Cowen has been of net gainer in the.
In terms of talent certainly we're on a lot better position on where a decade ago, where it was very different story, but even over the past few years, leading up to the 2.2 of the pandemic.
We were already exhibiting the kind of recruiting capability that we had always been desirous of and so if anything thats accelerated during the pandemic and we've been able to demonstrate that we can bring people on in a remote environment and still have them have the same kind of empathetic engagements.
Debt are so common in our organization is so foundational.
B the gift so I feel pretty good about the fact that Cowen is a is the place where people want to come work I never take that for granted at all.
The old Super special the that's the way it is and I, certainly think debt, whether working remotely or together or or.
Flexibly, whatever that looks like on the connectivity that we.
Organization is 1 of our core strength and I think we're benefiting from our ability to extend that to new people as well.
Alright, great. Thanks, So on 1 more if I could sneak in for Steve I'm, sorry, if I missed this but what was the driver of the $7.3 million dollar other revenue line in the quarter. It was just a little bit higher than.
The kind of normal run rate there.
Yeah, it's mostly our operations.
From insurance and things like that in overseas.
Okay. Thank you.
Yes.
Again, if you'd like to ask a question price.
Star 1.
Your next question comes the line of Devin Ryan with J P M Securities.
Thanks, guys JMP Securities.
I guess first question here on the.
On the brokerage business just continued momentum there.
Jeff you've been talking about some of the the growth initiatives in that business, whether it's edr's of international Prime brokerage.
Sure there is any way to give frameworks around how you would maybe size of those or think about kind of some of these incremental.
All areas youre extending into and how big it could become and then also just with the digital assets initiative kind of when we should expect that that could start to at least become revenue producing are productive I. Appreciate the work out of in the early days here, but any other color for that as well.
So I'll.
I'll just say.
We have definitely been more acquisitive on talent than any of our peers I think in the brokerage business I mean, we're being selective but but we have a bunch of folks if youre on that if youre in the equities business.
U S and increasingly in Europe, and you've got a franchise is the gray.
Good place to come work.
It really is I mean, because it's it's got tremendous forward momentum.
Plugging it if youre plugging and playing and so you know as I think we mentioned.
You know we agree with the hire of this the the team in Europe than team. It's the I think we think it's the best of MTV in Europe that bolt on to our already.
Growing European business that we started.
To address it.
Towards the end of 2018.
These are the.
The great opportunities for us to attract talent and it's just when you if you're on that business, which I know you are if you look around and you make a shortlist of places where you want to go work with the top of the Atlas because of the forward momentum and honestly your ability to make an impact on.
The form I think that's a big thing a lot of folks who who work in that industry at much larger firms getting sometimes struggle with are they really making an impact and what's the commitment to the equities business versus the other businesses at Cowen.
It's a core competency for us the markets business.
And you can see how the investments we made.
I'm really.
Played out and I think certainly if you look at and what we're doing we've seen the best market share gains are really anyone on the space, except maybe a Goldman Sachs. I mean, it's the top 10 platform.
And so which is kind of the highest market share we've ever achieved and so we'll continue to press our advantage there because that is the game.
Sure.
Of this planning and when the when share is coming your way and you want to do things to make sure you continue to address the needs of those clients.
Which which dovetails I think into some of what we've done in the prime business and why you're seeing some of our prime balances increase youre seeing us.
Take on more small counterparties and grow out of.
Our our swaps business.
Share grants.
And I think the the longer term.
The Cowen digital fits and I don't expect it to be a revenue generator in the near term because we've got a lot of work to do.
2.2 home that product offering and frankly get regulatory approval, which is which is challenging regulatory approval on a bunch of the different jurisdictions, where we want to trade assets.
Yes.
We know that that demand is there and that's what's interesting so in our conversations we're having so much in depth conversations for so many in depth conversations with our institutional clients they would like to figure out how to get exposure.
It's just it's hard for them in part because of the custody challenges.
And that's what we're solving.
Business, you think about the growth in some of the more.
Did the growth outward from cash equities, which is where cowen was 2 of algorithmic trading to prime brokerage to then 2 options.
And all of those businesses that sit around the traditional cash equities in research sales thing the Cowen.
So it was really good out of a decade ago.
When you build out from those cores.
You find that you can just take a greater share of wallet from an existing client base and so for US. This is identifying the clients, we already have and figuring out how we can help them.
To continue to consolidate their wallets.
<unk> was.
As of Corp, as the core provider.
And that's been the strategy.
And we will continue to be the strategy for us and certainly it seems like it's working I mean relative to just about every other firm on the street and relative to market volumes, we continue to to excel.
Okay.
Okay terrific. Thanks, Jeff.
A follow up here just on the investment banking backlog and outlook, but zeroing in on the M&A advisory business clearly a lot of them on from there very strong.
The second quarter results, but.
I believe you have some large transactions in the backlog there. So if you can maybe.
Just give a little more flavor for.
How are you guys of sizing that market and where you want cowen to be whether it's you know.
The next revenue target of 3 or $400 million of revenues for the business or any other frameworks and it also seems like you guys are moving upstream in terms of size.
Sales you know some of the fees you've had more recently are larger than the historical advisory fees. So just maybe give a little more color. If you kind of Jeff around how you guys are thinking about kind of the next.
Target of revenues for M&A Advisory and then some of the other aspects of the momentum.
Yes.
I think as we look at.
Our backlog and I think the guidance, we gave in terms of the cash.
Much of that backlog is pretty significantly weighted to M&A and capital markets advisory in the I don't want to reiterate in the M&A and capital markets Advisory is pretty much everything.
But equity underwritings so.
When you think about the metrics that we gave in.
Earlier on the call.
Anytime we have significant amount of M&A and capital markets Advisory the economics associated with those looks very similar so on debt capital markets transaction or restructuring or anything like that looks and blocks from tox economically to us like.
An M&A transaction.
Certainly what we're seeing in terms of the.
The activities in snacks, and certainly the <unk> transactions has as well.
I hope to our average deal size metrics significantly those those are large transactions.
<unk>.
When they close oftentimes where.
We're both a capital markets advisor, we've raised some financing on the backend or we're representing either of the target or the fact theres just so many ways for us to win in that space and we're good at it. So we're winning not just because we took <unk> public, but if you're a private company and youre looking to access.
Access the market and you want to have the best for them on the street to be of sponsor for you and advise you and raise capital for you and support you of the aftermarket Cowen is the logical choice.
Because of how we're set up and how we can be integrated between M&A advisory and financing and I continue to say like that that is.
A difficult thing.
Wall Street is not set up actually in many instances certainly firms of our size are not set up necessarily to provide M&A advice and financing advice on an integrated basis. That's something we do and we were we've been set up to do that for a long time.
So as we continue to expand we're looking at how we take.
Those M&A prints and parlay that into other opportunities that you can see it happening.
As you can see the some of our middle market activity has picked up dramatically and and when you look at the numbers and how they have increased.
In the middle market.
That's been a function of the fact that we're just we're more active we have more prints were doing.
Doing more with middle market sponsors many of middle market sponsors are reaching out to us to ask us for financing advice or spec advice oftentimes that translates into getting mandates that are traditional in nature.
And we've seen that in some of the acquisitions, we've made that the average ticket size for the people that used to work with those.
That has increased significantly.
It's a function of the fact that the the strategy that we laid out of being able to plug the financing into M&A advisory is a critical component.
And especially as we focus on places.
Net debt or less balance sheet intensive. So again, we have a great. So I would call synthetic capability to.
To get access to financing through the direct lending market, which is every bit as competitive as the bank market and it's much more important I would argue in the middle market than it is in the big cap sponsored game and so from our standpoint that that robust financing activity goes hand in hand, with the providing private companies with great.
Advice to get good exits or cash out refi and if you can't discuss those things in combination when you're talking to a client and then youre stuck selling of single product.
And I think many of our competitors, who lack the financing prowess are basically selling single product. They can only do 1 thing and increasingly what we're seeing as we compete win against firms.
Sizer oftentimes the firm's bigger than us is that we of the ability to offer a full suite of services.
<unk> enables our the private companies to feel very comfortable of hiring us and that's just this is as things mature on our platform. This is what we're seeing so I expect to continue to see growth.
On an M&A, our M&A business is going really well I continue to see us continue to grow out of the sponsor space, where we didn't have much of a footprint in and we're growing in that space are meaningfully.
And those businesses have some very very different dynamics of what people I think traditionally associated.
As the drivers.
On the islands of investment banking business, and so I look not only at the size of our backlog Devin, but I look at the diversification of the strength of that backlog. It gives me a lot of confidence as we head into the back half of the year and into 2022, that's a very very different firm than it used to be.
And it's much more resilient, even if some of the traditional ways, we made money might add.
We're not like I feel like they could or they may not right and I think we're in a great position.
When I think about the portfolio of businesses and industries and products we have in banking.
Okay.
Okay terrific on 1 last 1 here if I can squeeze interest.
On the healthcare royalty.
We've received some investor questions, just around that and the potential impact.
Obviously that'll.
That'll create.
Permanent capital vehicle and overtime management fees move higher I think Theres also.
Some incentive income crystallization is there anything you guys can share around.
On the process or potential implications on.
Cowen.
So I can't give any details now though I appreciate the question.
Can't give any details now because the debt.
The company is in registration so I've got of just tell you that we're going to be giving you a lot more information when we can.
Well I will say that.
And I think Devin we've talked about this in the past the economic.
The ownership of healthcare royalty partners and the management and the incentive fees to the extent there are any are not anywhere on our balance sheet.
So.
As we get more information on how that goes.
Yeah.
If I were an investor I would be looking at it.
And we will be back to you and to investors. When we can talk about it in more detail so that people.
Can you get a better sense from what it means for us economically we just we can't say it right now.
Because they are in registration.
It's a great question, though yes, yes understood.
Okay terrific well, thank you I'll leave it there.
Great. Thanks, Kevin.
Your next question comes the line of Michael Brown with K B W.
Great. Thanks for thanks for taking my questions.
So I think let me just follow up on the on the M&A Advisory comments that you made there.
Understood very comprehensive.
You talked about financial sponsors as you know an area that you have been investing in activity there has been.
A really robust the real kind of leader of the M&A activity for the industry.
Can you just provide us with 1 of a bit more color. There what have you been doing to kind of grow out your coverage for.
Our sponsors what's what's kind of neat and what's what do you need to address near term or what's kind of the top focus there and then what is what is your outlook for that segment specifically.
Yes, it's a great question and I appreciate that Mike because I think it was a lot less obvious.
Listen as I understand.
To stay on the dynamics of this business better.
There's so much that goes on in terms of the construction of a proper M&A practice, which Cowen did not have the Cowen had a at.
The extent of Cowen did M&A.
Emitted way historically, it was really a public company and I would say corporate to corporate M&A right, we had great industry.
The bankers, who have great industry knowledge, but you are basically trying to get corporations to sell divisions of corporations, because we just didn't have a sponsor footprint.
On a lot of our competitors made that shift to sponsor coverage in the early 2 thousands and Cowen was busy doing other things at the time and honestly, we didn't want of a me too sponsor coverage business I think.
So for a lot of the big firms sponsor coverage oftentimes starts with hey, we lend to you and so when you look at the sponsor models of the big firms if they're lenders. They they expect to get business from the sponsors and Theres a lot of the rinse repeat to sponsor coverage certainly big cap sponsors.
Where if you as long as Youre of consistent lender on your name comes up on on.
Rotation and as long as you've got a heartbeat youre going to get on a fee.
Not the game that we're in it's never been the game that we're in we don't have of balance sheet to lend.
Nor are we going to have a balance sheet. The lens. So we have to compete on intellectual capital and that means going into markets, where you have dominance.
Because you've done all of the transaction.
In the space are you been able to uncover.
Opportunities.
For consolidation that are just a lot less obvious so when we acquired Courtney is our first foray into that space. It was the platform acquisition and you know in retrospect I should've articulated more as the platform acquisition, we needed to have a meaningful amount of.
Of engagement.
With sponsors because the way. It works is if you don't have enough exclusive sales and not enough sell sides.
Then the sponsors don't call you back.
And in order to get those sell side you have to have great connectivity of sponsors. So it's a chicken and egg question, if youre trying to do it organically, which we tried to do for a number of years. So the court.
Cash and gave us this footprint that expanded on our corporate capability. So if you think about the the cascade of big corporate transactions and what's happening at the top of the house in terms of the big corporations, there's of Cascade down into on in the industries in which we cover 2 smaller companies that are building themselves up in consulting.
The acquisition themselves. So ultimately I would take out either on the public markets, which we're really good at or it's a big corporate Takeouts, which we have the relationships. So for US. This is about building a building out that pipeline. So the we could be a seller of businesses multiple times over a number of years from 1 sponsor to another to another as of consolidated.
The <unk> and ultimately to 2 of corporate if theres, a corporate takeout and I'd say, we're in the middle innings, there, but you can see with the even.
Even with the interruption that happened as a result of the pandemic the the.
The way that that business has come back our middle market sponsor activity is up probably 40% year over year of.
Which is.
And it's stronger with bigger tickets, which means that we're cross selling debt.
Net financing capabilities were also actually in some instances advising on the equity raises of growth capital that wasn't something that you know.
On our platform acquisitions, we're doing and then moving bolted on the MH T acquisition.
<unk>. This is getting a really high quality group of bankers and segments, we know well going deep on that exhibit the same kind of characteristics that we talk about industry is undergoing massive disruption they need the require significant capital or will have a lot of transaction activity. It's actually fairly straightforward model. This is why we focus this is when we think about.
Again, who we bring on organically or Inorganically, it's got to be in industries that exhibit those characteristics because thats what gets cowen paid and so we don't spend time of industries that don't meet both of those right. There are industries undergoing great dynamics are great change. If we don't have anything to say or any of the offering that we just don't spend time on them right and then Conversely, the industries that may need to raise the.
A lot of capital, but maybe that capital is balance sheet capital, we don't spend a lot of time on those either so we have to look for individuals and businesses that are transacting in those spaces that exhibit those 2 characteristics, where they overlap and the success of what we're seeing in the middle market.
It's a function of the fact, they've got great domain expertise married up with.
That connectivity the sponsors which is what they want and what they need and so I would argue it's much more.
A much more.
Much more of a moat around that it's very difficult to build the intellectual capital of knowledge base.
<unk> point, and then I'll get off of it we're probably the dominant player in the in HVAC.
Transactions.
We've done more HVAC transactions in this country in the last year than any other bank right isn't of business that people thought about but we saw it as the business. It was undergoing significant consolidation got around it and we've got a great team. That's doing just about every transaction in that space.
And that's the function of the fact.
Now the right access to the middle market certainly through the court and the acquisition, but also of that integration into industrial the industrial complex that we have that is historical strong suit of.
Of talents industrials and aerospace and defense.
You know those are the things I think that really we're starting to see that flourish in a meaningful way.
Hey.
Just as these.
The integration of those acquisition season on our platform and that's why I give a lot of confidence.
When I look at our backlog.
I hope that's helpful to you.
Yeah that was great I appreciate all the color there.
Yeah.
We are clearly working on the 1 of the way that you just kind of touched on there.
Did mention though of that.
Some of your peers of an advantage with their larger balance sheets of the ability to land and maybe sink their auction in a different way than the the Cowen.
1 of your peers announced the strategic alliance with the Japanese Bank.
On the models.
And then maybe kind of 1 of the elements there.
On 1 oversimplify the.
The merits of of the transaction, but love to hear your thoughts on something similar to that you know announcing a strategic alliance with an ownership stake if that's.
Something that debt Colin would eventually be interested.
Debt at some point and if you see any value in us.
The structure like that.
Well, so I mean.
I always like to say I admire you know I might have that firm and I admire what they do there there are different than we are.
And they've had a very active honestly relationship and partnership.
Inc. On the lending side for a lot of years.
So I think it says the transaction that makes a lot of sense for them, particularly as you think about how they monetize that region.
Maybe better and I think that's sort of that's important is it.
On the observed that the same way you are I don't know that I have any deeper insight there, but I look at it.
Chip on if we're going to make a big if we were ever to think about making a big move into that region, yeah, we'd want to of a partner.
Think we're affirm that looks from partnership all over the place.
Because we think we're good on what we do and we think we bring we add we add a lot of value in the in the domains, where we have we also recognize that by definition that means we can't.
And I say, so all of people and so as we think about how we expand.
If we were to expand into other geographies or other businesses.
We were always seeking a partnership and I can give you multiple examples of how we would do that if that partnership where do involve an investment in the firm I'm open to that.
The all day.
But it would have to be.
Very very meaningful in terms of changing the dynamic here and so we're good in non active and in those dialogues.
I think if there was an opportunity for us to do something and drive meaningful value for us by partnering with somebody.
Yeah.
Do that the because.
We're going to what we do and we recognize the.
Net debt in order for us to continue to grow there there might be an opportunity for something like that but right now.
No and I don't think by the way I don't think we need to have the lending partner to answer your question more specifically I don't think our business isn't.
Yeah, we currently constructed.
Necessarily benefits from having.
On a big lender there that's not under our control and I think we tried that a few times, having synthetic create to try to create synthetic lending relationships and honestly, it's very difficult to do that when you're bouncing fees from an investment.
You can credit decisions and I think it's hard to to do what I would call synthetic lending partnership relationships unless everybody's got the same economics.
So we were not looking to do anything in that area, yet, but I'm open to suggestions and if you know folks on talking about it with us I'd be interested in hearing maybe.
The banks there is an opportunity on just I'm not aware of it yet.
Yeah, great. Thanks for thanks for all of that just thought that was an interesting overview and I agree its not that on a sort of implying you need a balance sheet lending partner just to kind of got my my mind.
Thinking about that a little bit so I appreciate the thoughts there.
Thanks for the good question and it's a good question and I appreciate that Mike.
Yeah.
Alright, so if there's no further questions. There are no further questions I would now like to turn the call over to Mr. Jeffrey Sullivan.
Okay, well thanks operator.
You know I'd like to express my heartfelt thanks to the team at Cowen.
You all have demonstrated their commitment to our core values, you know them well.
Vision empathy sustainability intimation of teamwork and I couldn't be more proud of the work that you do here every day, it's a real privilege for.
The the chair and CEO of this company I feel of Whats amazing people that do amazing things for other people and.
I say that with all humility, because I realize how lucky I am to be in that position.
And so I just didn't want the end this call without acknowledging all of the hard work.
And everything that you do to overcome the challenges.
The ball face to deliver on a day in and day out basis of thank you to all of our colleagues.
At.
At Cowen.
Thank all of you for joining us we really do look forward to speaking to you on our next earnings call of an October and.
Until then.
Stay safe and stay healthy.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
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