Q1 2022 Cowen Inc Earnings Call
Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good morning, and thank you for joining us to discuss cowens results for the first quarter 2022 by now you should have received a copy of the earnings release, which can be accessed at investor Dot Cowen Dotcom.
The speaker's presentation, there will 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. T J Farley.
Kevin's head of Investor Relations. Please go ahead.
Yeah.
Thank you Michelle before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements.
These statements are subject to the risks and uncertainties described in 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 believe provide useful information for investors reconciliations of those measures to GAAP are presented in today's earnings release.
As a reminder, we make available our 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 Cowens 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 T.
Good morning, and thank you for all for joining Cowens earnings call for the first quarter of 2022 today.
Today I will provide highlights on our operating performance and then Steve will review the financial results in more detail after which we will be happy to answer your questions.
The first quarter was a clear demonstration of the broad sustainable business. We built at Cowen. It was the most challenging capital markets environment in over a decade with U S. ECM activity down 80% year over year and down almost 90% on a dollar volume basis amid the heightened market volatility valuations in growth sectors were hit, especially hard with ESB I.
Biotech index down nearly 20%. Despite these headwinds we had a solid quarter generating nearly $100 million in investment banking revenues, which is above our pre pandemic averages in 2018 in 2019, and we put up the second best quarter on record for our markets revenues.
We maintained expense discipline, keeping our compensation ratio within our annual guidance range and we returned additional capital to shareholders repurchasing shares equivalent to over half of our economic operating income during the quarter.
We took additional steps to optimize our balance sheet, resulting in 18 million unrealized gain in the first quarter on an interest rate swap that we'd use to offset higher interest rates and Steve will share the details on that more shortly.
Now, let's take a look at the first quarter operating highlights and.
In banking, our acquisitions of Gordon M. H T and most recently portico have helped grow our M&A and capital markets Advisory practice, bolstering our relationships with financial sponsors and reducing our dependence on equity capital markets activity.
That strategy of diversifying our capabilities across products and sectors, which we began in earnest in 2018 was clearly evidenced this quarter as advisory assignments helped mitigate the impact of the sharp slowdown in ipos and follow on offerings.
Despite the overall market slowdown, we completed 23 capital markets transactions in the first quarter and an over 90% of them. We served as a book runner agent or advisor demonstrating the strength of our client relationships.
Our advisory revenues, which combines our M&A and capital markets Advisory revenues represented a record 76% of total banking up from an average of 59% in 2021.
Healthcare comprises only 36% of overall banking revenue as we had strong contributions from the industrials technology and vertical software data and analytics sectors.
Within health care, non biotech areas, including tools diagnostics Med Tech health care services and health care it.
It made up 40% of our total health care banking revenues, which is reflective of our continued effort to diversify our coverage even within that sector.
Despite the capital market slowdown our pipeline remained strong at about the same level as the start of the year, although the current market volatility and uncertainty of the timing of both deals and underwriting activity.
Turning now to markets. It was an exceptional performance, averaging $3 $2 million per day in revenue up 18% over the 2021 average and beating every quarter, except the record first quarter of 2021.
Highlights for the first quarter include.
Record cash trading revenues as well as strong gains in derivatives ADR trading and non U S execution, we continue to have strong momentum in prime services and swaps on.
On the digital front last month, we held our official launch for Cowen digital and we've started spot trading crypto currencies with several clients with more in the Onboarding pipeline in the coming quarters, we plan to explain expand our client base.
And product offerings to include Prime services derivatives and algorithmic trading.
Our partnership with digital infrastructure for Poly Sion is also producing results through its standard custody subsidiary polystyrene offers an attractive and differentiated digital custody solution for our clients Palestine, just completed a series C financing round with key new investors as part of its acquisition of the leading Crypto Fund Admin administration platform called Mg.
Stover.
While the terms of the financing were not disclosed this event did increase the value of Cowen is $25 million strategic investment made in Palestine in may of 2021.
Looking at the current quarter U S equity trading volumes in April have pulled back a bit from the strong activity, but our markets business remains active generating almost three.
A little more than 3 million a day and average trading volumes well ahead of the 2021 full year average.
In research our team continued at an intense pace of client engagement by hosting nearly 100 topical conference calls as well as holding several high impact client events, including our genetic medicine summit, our mobile disruption conference as well as our 42nd annual Health Care Conference and 43rd annual Aerospace and defense and Industrials Conference.
We further expanded our ESG offerings building out an ESG specialty sales team and publishing our annual ESG best ideas compilation, which quickly became one of our most read reports of the past year.
We also continued to build out our thematic research capabilities, we launched a very successful thematic research podcast series created a multi sector conference call for clients focus on various implications of the war in Ukraine and expanded our quality, our quarterly macro call for portfolio managers, which aggregates proprietary data points across multiple sectors.
We also held our first digital mining conference in early April which had very strong client participation.
In investment management total assets under management grew 11% year over year, and we generated the second highest management fees since 2008.
The market volatility was a headwind for incentive fees, resulting in negative mark to market adjustments in the health care and sustainability strategies looking at our five investment strategies, our sustainability strategy had almost $1 4 billion in AUM at the quarter end.
Long term performance is strong despite the recent drop in the value of the <unk> investment.
Our health care investment strategy, completing four new fundings in the quarter and ended with almost $1 1 billion in AUM.
Long term performance remains strong despite the weakness in public biotech markets.
The activist strategy ended the quarter with $8 4 billion in assets under management and it outperformed the Russell 3000 benchmark for the for the quarter.
The merger arbitrage strategy had 300 million little over $300 million in AUM the strategy outperformed the H F. Rx merger Arb index during the quarter.
The healthcare royalty strategy ended the quarter with $3 6 billion in total AUM.
As a reminder, our balance sheet does not reflect the value of our five investment strategies in any meaningful way.
In the coming quarters, we will be exploring ways to provide greater insight into the investment management business in order to provide you all with a clear understanding of its substantial work.
Turning to our balance sheet, we had investment income gains of $23 6 million in the quarter as the gain in the value of our strategic investment in poly sign as well as positive performance for our macro hedging strategy were partially offset by negative negative quarterly marks and values of investments in our health care strategy, our activist strategy and our merchant banking portfolio.
That I will now turn the call over to Steve Lasota for a brief review of our quarterly financial results Steve.
Thanks, Jeff GAAP results for the first quarter of 2022 were as follows total revenues were $410 6 million down 45% year over year from 747 5 million net.
Net income attributable to common stockholders for diluted earnings per share was $33 4 million or a dollar five per diluted share down from net income of $145 8 million or $4 34 per diluted share in the prior year period.
Compensation and benefit expenses were $187 2 million a decrease of $201 million from the prior year period expenses, excluding compensation depreciation and amortization were $108 2 million for the fourth quarter for the first quarter G&A expense was $7 2 million.
Income tax expense was $11 9 million down from $54 4 million in the prior year period.
Now turning to our non-GAAP financial measures, we had total economic income proceeds of $331 6 million down 52% from the record results of the first quarter of 2021 for the quarter and investment banking proceeds were down 66% year over year to $98 7 million.
Brokerage proceeds were down 11% year over year to $197 8 million.
Management fees for the quarter were down 24% year over year to $20 7 million, but as a reminder, first quarter of 2021 fees included a payment of $8 8 million due to an increase of assets and the sustainability strategy.
Incentive income was a loss of $13 million in the first quarter of 2022 versus income of $108 7 million in the first quarter of 2021 recall that prior year period included large mark to market adjustments for unrealized gains and public positions and the sustainability in health care strategies investment income was 23.
$6 million versus income of $35 million in the prior year period, turning now to our expenses compensation and benefit expense for the quarter was $187 4 million compared to $388 4 million in the prior year period, our comp to proceeds ratio was unchanged at 56, 5% of economic income pros.
Seeds for the full year of 2022 absent of continued and prolonged decline in capital market activity, we are targeting an annual compensation ratio of between 56% 57%.
Fixed non comp expenses totaled $40 9 million in the first quarter up from $35 6 million in the prior year period variable non comp expenses in the first quarter of 2022 were $52 9 million versus $53 7 million in the prior year period. The increase in total non comp expenses would do.
Primarily to higher travel and entertainment expenses and business development expenses as well as service fees associated with the increase in head count, partially offset by lower trading costs from reduced trading activity.
Depreciation and amortization expenses was $7 2 million compared to $4 4 million in the first quarter of 2021, due primarily to higher expenses from the port portico acquisition.
Economic income tax expense for the first quarter of 2022 was $13 million.
We generated economic income of $37 4 million in the first quarter of 2022 economic operating income was $42 8 million or $1 35 per common share, which includes the impact of taxes at an effective rate of 25% at the lower end of our guidance range of 20, 25% to 28%.
As Jeff noted earlier, our interest rate swap resulted in an unrealized gain of $18 million off or <unk> 43 per common share in the first quarter of 2022, which was presented and economic income and economic interest interest expense or income and securities principal transactions net for GAAP.
We also entered into a new swap in the second quarter of 2022 to protect our floating rate debt from future interest rate increases.
Going forward outside of any quarterly marks marks to market on the new interest rate swap, we expect our second quarter 2022 interest expense to be approximately $5 million to $6 million before increasing to approximately $9 million per quarter in the third quarter of 2022 and in subsequent quarters, turning to the balance sheet at quarter end.
The company had invested capital in Opco totaling $723 2 million down from $734 8 million at year end. The drop was due in part to reduced allocations to our event driven and healthcare investment strategies and asset go we had invested capital totaling $119 6 million at the end of March.
Gone from $121 2 million at year end, turning to our equity common equity was one point O 4 billion up slightly from one point or $2 billion at the end of December of 2021.
Book value per share, which is common equity divided by total shares outstanding rose to $37 49 as of March 31, 2022 up from $36 57 at year end return on common equity was 16, 6% for the first quarter of 2022 in line with our target of Gen.
And at least mid teens after tax return on common equity on an annual basis regarding capital returns to shareholders. We maintained our quarterly cash dividend of <unk> 12 per common share during the first quarter, we repurchased $24 1 million in stock a total of 798000 shares including purchases execute.
Pursuant to our existing <unk>. One plans. This is equivalent to 56% of our economic operating income well above our minimum annual guidance range of 25% to 35% fully diluted share count in the first quarter was a weighted average of 31 8 million shares up 400000 shares from the first quarter.
2021, and down one 8 million shares from the first quarter of 2021. Looking ahead, we will continue to be opportunistic in share buybacks, depending on market conditions and available cash flow. We will also prioritize additional capital returns when we were able to monetize the assets on the balance sheet and with that I'll turn the call back over to Jeff.
Thanks, Steve so to sum up our steady performance in this challenging environment is the direct result of strategic decisions and focused investments that we've made over the past several years, even more importantly, it is a testament to the dedication and adaptability of the team at Cowen and our embodiment of the core values of vision empathy sustainability, and tenacious teamwork and with that I will turn.
I will turn it over to the operator I'll turn over to all of you for questions operator.
Thank you I have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish Jim move yourself from the queue. Please press the pound key.
And our first question comes from the line of Steven <unk> with Wolfe Research. Your line is open. Please go ahead.
Yeah.
Hey, good morning, guys good morning, Steve.
Hi, Steve.
So wanted to start off just given your comments around the backlogs, noting that the pipelines are largely unchanged at this juncture I know it was a relatively light quarter in terms of completion activity for the industry out there is a lot of talk about just deals getting pushed out.
How should we think about the cadence for investment banking activity and is your expectation that we can see an inflection off what was admittedly a subdued first quarter.
Yes, so I think when we look at backlog just to be clear we're not.
Just to be clear, we don't have for example follow on activity in backlog and that's always been a big part of our revenue. So I always like to remind people that when you look at follow on equity offerings.
Get into backlog ever.
Ever so most of that reflects.
Activity M&A activity for some of our IPO activity, it's going to get pushed out I think a good portion of that is biotech.
While we continue to win mandates in wind book run deals, we're being very conservative in how we're thinking about the execution of those deals.
Like to see some stability in that market. We know that these companies have to come because they all need to raise money.
But I think we're just being thoughtful on how we are.
We're adding them to the backlog from a numeric standpoint, the number of deals. We have is actually up pretty significantly we're just being cautious.
Given the market environment and backdrop.
On the M&A front.
I think I was there.
Happy to see that.
The amount of deals that got done in the first quarter, particularly in the middle market M&A, which as you know has been a strategy for us.
To diversify and the replacement capability actually than I expected.
We would see maybe a dip in that activity in the first quarter in part because so much activity gets done.
In the fourth quarter and it was great to see that we had so much actual.
So much get completed in the first quarter and then.
Really the filling up of that pipeline again, which bodes well for continued growth and M&A.
So the mix of the business in backlog is a little bit skewed more to M&A than it is to equity offerings at this point.
Understood and maybe just follow up.
Unrelated topic on the capital management and buybacks, if I take a step back if I look over the last 345 years.
Every quarter, we got on the call there's parts of like pretty aggressive buyback that you guys are doing the numbers are substantial but despite.
Despite that you really start to make a real dent in the share count.
It might be helpful. If you could just provide a little bit more transparency here about how much excess capital you believe you are writing with today.
And with the stock trading at 80% of tangible a mid single digit P.
Why not look to just get much more aggressive in reducing that share count I just wanted to get a better understanding of how I should think about the buyback capacity.
And the benefit that you should see in terms of the earnings growth algorithm, because the share count shrank just really hasnt manifested.
Well I think there's a couple of things first of all the convert that we I don't think people were calculating in ours.
You've got to adjust for that when you look at the fact that we took out the convert last year and then we we actually converted the premium into shares and then bought those shares back as an adjustment that has to happen there.
Diebold.
Calculations of what earnings per share outstanding work did not include the converts which or deepen the money and they should have and so I think that's a big part of the reason why youre not seeing.
Share count.
A reduction.
Also I think we've done obviously, you've done some acquisitions and I think those acquisitions.
We want people when they come into the organization to have equity.
Exposure and we want them to be in a position where they where.
Where they benefit from the upside as.
As well as.
They are partners and so I think at the end of the day, it's very important part of how we compensate folks here is to make sure that their equity related and then the last one is I just think as Ara Hughes and we continue to be believers that as.
We act as a partnership here, it's important for us to be.
Making sure that our.
Our employees are active owners of Cowen equity, which benefits all of US we continue to buy back shares I think again, we've given guidance and pretty much beat the guidance every quarter.
And we will continue to do what we can to reduce the share count.
But I think those are the those are the big headwinds and the reasons why maybe you haven't seen it.
I'd say we had about.
One 8 million share reduction in the first quarter.
When you think about that that's that's pretty meaningful when you're talking about.
Base of call it 33 million fully diluted shares outstanding so.
I wouldn't necessarily agree with.
Assessment at least as it relates to this quarter I think we were pretty aggressive.
Well I guess I'm trying to think about the go forward in terms of the earnings algorithm like what's the expectation in terms of how much share count shrink. We can expect just given the amount of excess capital as well as the monetization events are likely on the call.
Yes, I mean, I think what we said is we're not changing our guidance on share buybacks will continue to do that.
And the range, we talked about I would like to be at the higher end of that range.
And where we can if we have opportunities to buy back cheaper I think we've just demonstrated that we will.
I also think that.
Again, when we get a bolus of exits and we think that there's an opportunity here to do that will be much more aggressive that's just which is being being <unk>.
Consistent and so.
Not changing the guidance, but obviously, we recognize where the stock is trading and we will continue to be aggressive buyers of our stock because we think it's super cheap.
That's great color and then just lastly, one clarifying question Jeff.
You were talking about the potential monetization various asset you would give additional color in the coming quarters or we expect it to get an update on this in may where a more fulsome update on how to think about potentially valuing these assets, especially those that arent reflected intangible common equity today.
So I mean, I think we'll give you more color on the Investor day for sure if things continue to move I think in a constructive direction as it relates to Lincoln.
I don't have more to say on that front, but I continue to think that there.
The desire on the part of our partners there.
As well as ourselves is to figure out how we're monetizing that position.
I don't have more more to update.
Because it's not in the public domain, but we'll see how that goes.
In the current environment, we're definitely going to be focusing a lot more on helping people to understand the value of our GP Stakes.
Asset management business and I think that's an important part of it right.
You've quoted 80% tangible book value, but you are assuming zero value when that tangible book value for our.
For our stakes, which because they don't they don't have any book value associated with them and yet we know from the profitability of that business.
Performance fees, notwithstanding that Thats, one of the most steady pieces of and we know how those stakes are valued in the public domain and obviously, we know how they're valued in the private domain. So I think our ability to show investors a little more detail around our ownership structure, there and the economics that flow off of that ownership structure, particularly.
Top line economics that flow off of that are really going to be critical.
And I think you're just going to take some time, so we won't do it on an earnings call, but happy to do it in Investor day.
That's right and looking forward to the unveil thanks for taking my questions.
Thank you and our next question comes from the line of Chris Allen with Compass Point. Your line is open. Please go ahead.
Good morning, guys.
Thanks for taking the question one of the.
Diving, a little bit on the brokerage business. Obviously this past quarter, we saw a solid backdrop with increased volumes of volatility.
But maybe you can help us break down where you're seeing share gains versus what's been driven by kind of industry tailwind.
I mean looking at the April numbers seems like that's kind of continues.
Then where the where the growth opportunities to gain more traction moving forward.
So I think.
Youre right. It has been market share gains for talent as well as.
The increased volumes I think I continue to be.
Very excited about how we're doing that and I think we outlined and detailed some of that in the script.
But but to be clear we've made some real strong progress in places like prime brokerage and outsource trading we continue to do really well in our ADR business.
And our non U S business and non U S business has actually been a nice.
Way for us to actually expand.
And land actually so land and expand strategy, particularly in Europe .
We have brought on a bunch of folks.
A couple of years ago, we started with cash equities and algorithmic trading and now we're expanding that capability to include things.
<unk> swaps and derivatives and a bunch of other stuff and Thats really just again, we had no virtually no meaningful presence in Europe , three or four years ago, and that's been a nice area of growth for us.
When I look out over the longer term I definitely think they will see pickups in areas that where there is a huge market opportunity and while the amount we're doing in digital asset trading is small right now.
That's a brand new initiative for us.
Relatively.
New area that we think is actually going to show significant amount of institutional involvement over the next two to three years and we're in the pole position there to take advantage of that.
So again I'm not projecting that those numbers to be highly visible.
In 2021 relative to the size of our markets business, but when you think about the trajectory and the growth in that business, it's been pretty significant so.
That's really what I would say it's been much more a function of I think cowen taking share than anything else.
I think a lot of people for.
Certainly post 2020, we're concerned that cowens volumes would go back to pre pandemic levels and Thats, just not thats not happening.
That's a function of the fact that we've taken share in our core businesses and expanded.
Yes.
No.
And I also should point out that some of the businesses that we're in have higher margin business and that's that's.
So when youre looking at trading in Nondollar and places like that like there's just there's just more margin in that business for us. So.
That's actually helped our bottom line pretty significantly.
Got it and then.
Maybe.
Just touching on there.
<unk> spec proposals out I mean, how do you guys think about that I mean, you've talked about in the past specs as a percentage of the backlog.
How are you thinking about the kind of the component of the investment banking backlog right now.
Just maybe some color on that would be helpful.
Yes. So yes, we see this is none of this is surprising and I've said publicly we've advocated for better regulation and the spec market is we think there was definitely some people in the stock market doing things that.
We were concerned with.
Would cause there to be a negative <unk>.
So I'm actually glad to see that the SEC is trying to put some rails around the kind of activity that should be permissible we continue to work.
With the regulatory agencies to get this into a place that is a really constructive place.
For US you know again, most of our business and faxes on the backend.
And these rules wont go into play into effect for a while.
The commentary is back and forth and so.
I think it's actually really geared much more towards the future new spak issuance.
So our view is it will it will continue to be something we we do.
The the snack business I want to be clear it was super Hot in the first quarter of last year, and so everybody focused on it.
But for US it's just another product area that was viable or could be viable for a certain type of company.
And the way that we've constructed our capital markets product business, our product partners are incredibly versatile and so everyone should know we don't have.
Teams of people sitting around doing nothing because all it did was back that's not the way. This organization is constructed.
Actually constructed by industry and the product partners are versatile and that they have to be we have to be advising clients on multiple pads forward. So a number of the stack mandates have pivoted to private capital raises or other M&A activity or debt financings as many of these companies have decided they don't want to do.
But we're not losing them as clients were moving them to other areas of execution and some of those take a little bit longer to play out some of them are.
Or just.
Get the same kind of velocity that.
We saw certainly in the first quarter of last year.
To be clear stacks for us has actually been.
A reason for different and new clients to talk to Cowen and that is part of the reason why we continue to see growth in our advisory business more broadly.
And so again.
I don't think our advisory business given the acquisitions, we've made in our product capabilities. We have is not going back to where it was pre.
Pre this fact.
Ah.
The stack boom.
Because we have a whole slew of new clients now that are looking for advice, even if theyre not doing stacks and thats been actually something that has helped us significantly to build out our advisory business.
And then just last one for me just in terms of the.
The opportunities around digital crypto.
Obviously, you started to spot trading early days there as you kind of think about building out the business. So you would be building in internally.
As you would kind of just said you have leveraging capabilities.
Within the platform.
What's the appetite there from from your client base just in terms of looking at that opportunity moving forward.
So I mean, we have clients that are ending from crypto curious to executing already and but everybody is talking about it right because there's a tremendous amount of alpha and so little participation and the infrastructure associated with trading.
Crypto or trading digital assets is just in its early days and so the reason so if you think about the analog to the adoption of equities.
50 years ago equities were largely owned by individuals and then we went through this institutionalization of that marketplace as systems got better and processing got better in clearance got better.
That was a big solve that enabled there to be a meaningful allocation from asset allocators in equities and institutional.
Formats.
Growth in hedge funds as a result of that we look at crypto.
Early days and it's still largely a retail business now this adoption rate for institutions isn't much faster than it did in equities, but we think it's going to follow a similar trend and as a result.
When you look at who's trading them, and who is likely to trade them in our conversations. These are people who are very facile in the equity market or in the macro market clients that we're already talking to and they are looking for ways to express their investment thesis using crypto currencies or investing in things, where they think there's extensibility of the same way they might make.
Equity investments and so what we've chosen to do account is focused primarily on the infrastructure.
This is why we made the investment in poly Sion because custody is a big solve.
When you see people like a brevan Howard and Sorrows are partnering with us on those things.
We buy a fund that the largest fund administrator that should give you an indication that that.
Custody and fund admin are precursors to.
Institutions getting involved they have to account in custody for their assets. So the growth in that and our ability to participate in that from an investment standpoint.
The ability to integrate that product offering into our execution capabilities is so critical and when we think about the regulatory environment here. If you read what people have been talking about we think there's going it's going to follow a similar path to the regulatory environment that we've seen for equities, which is that exchanges can I do with exchanges do.
Firms like Cowen equity execution in prime brokerage and things like that will do what they do in custody will be its own thing and right now that industry is all in one <unk> all in one solutions and that doesn't work for institutions and so we're Cowen is focus and why we're so excited about it is we're focused on.
Occupying the space that is best for Cowen.
There are existing clients.
Clients of Cowen.
<unk> already know us and respect us so as they move in to crypto, we are going to be the larger the logical place for them to go because they will get the same experience trading crypto and digital assets from Cowen.
Get trading equities and that's the strategy, that's unfolding and again when you see people like <unk>.
Soros and Brevan, Howard and a bunch of other people who are partnering with us at Palestine that gives you an indication that that is happening.
Thanks, guys.
Thanks, Chris and thanks, Chris.
And our next question comes from the line of Matt <unk> with Piper Sandler. Your line is open. Please go ahead.
Yeah.
Thank you. Good morning, guys. So just wanted to start with biotech and the underwriting space I know, Jeff your previous comments revolved around kind of clarity of HR one.
Seems to be a bit of a resurgence in Washington around drug pricing legislation in the last few weeks, maybe you can update us on your expectation for those activity levels in that sector. Today, what do you expect to see from a return in biotech ECM maybe this year.
Yeah.
I think.
There is no question that.
As we get into BBB.
Could be the better I would say regulation to look at better legislation to look at that there's going to be something in there about drug pricing I was actually pretty.
Comfortable with where drug pricing landed in terms of its of the.
The previous version of BBB.
In part because.
It protected innovation and I think that's a big big component of this I fundamentally believe that.
That at least the legislators I speak too.
And the groups that I'm, a part of those discussions.
<unk> made strong impact in terms of protecting innovation, which is where biotech live.
I think drug pricing, there's elements of drug pricing that should be actually controlled better and those are not in the biotech space. So doing that without squelching innovation is what we're looking for and I think that's what we're going to land if we land anywhere on BBB.
And I would argue that if we get something done that is good for innovation it kind of clears the decks for the next decade and it takes a big risk factor off the table.
So I'm looking at it.
We are seeing is for companies that are having positive clinical results that need to raise capital. If the results are really positive.
Getting deals done I mean, we've got a bunch done towards the end of the quarter.
Or during this during the quarter and we've had a few in the month of April .
People are waiting for events in the.
Those events happened in clusters and when they are positive performance. After that you oftentimes, we'll seek our clients are doing financings I also will say that the increase in private investment so pipes.
And a big big capital raises relative to market caps, we've seen much more uptake in that from our clients and I expect that youll. Those just take more time to get done and then what.
Then what I would say are like the drive by follow on offerings right and so.
Even though the velocity has slowed down and I'm pleased to see that the mandates for some of these private investments have actually picked up meaningfully and we'll just continue to bang those out the.
The desire or the need for biotech companies to raise capital is not going away.
Irrespective of the current market environment, and the regulatory or legislative environment.
And so we're just.
I would say that when we look at the mandates that we have.
There's going to be back ended.
And this year.
As people get closer and closer to.
Having to do their capital raises and the last thing I would say on this to me.
Whenever there is a market in transition like the one that we're in.
It takes some time for the human brain to reset on valuation right I used to be worth this now I'm worth that.
And so for people that are looking to raise money.
In a moment in time in which they were like well I just need to get it done.
And that's what we're seeing we're seeing our management teams and board and say well I know, we used to be worth that now or not.
We're figuring out how to actually pair our pipelines and figure out how to raise the money we need to raise in order to advance our lead.
Compounds in the clinic.
In Cowen as places they can get that done for us and that's that's that's all you can ask for.
Changing environment we're in.
These are the times, when you make more meaningful and deeper relationships because youre getting stuff done.
I guess other thing I would say is theres more versatility to that as we look at companies that are doing more debt deals.
Been very active in the debt and the royalty space those are like M&A trades, frankly, where we're sole managed and the fees look like M&A fees.
It will be in our capital markets Advisory business, and we're seeing a tremendous amount of activity that we hope will be visible to all of you.
In the months quarters to come.
Great. Thanks, and then just one follow up for me here just wanted to level set kind of expectations around the M&A strategy today I know you've got some competing interest on the capital allocation front, but and you've been pretty active on the banking side over the last couple of years, but can you just talk about the appetite today for inorganic growth in banking more generally and then.
In may versus sort of brokerage or asset management, and then also what sectors within.
The banking business that are kind of more interesting to you today that that you want to scale that maybe you don't have a core competency in today.
So it's a good question I think you can continue to see us focus on end market. So we think there is continued growth in that are both accessible and addressable and accessible right for Cowen and Thats been the strategy.
So there's plenty of places that have huge market.
The potential Cowen it would be very difficult for us to do that's why we don't have a balance sheet. So we don't do lending. So any industries that have huge lending capability is just going to be harder for us to be able to compete. This is why we focus on areas that are less balance sheet dependent more disruptive right.
The reason we're here, but if you look at the middle market sponsor business and.
And you look at our footprint there those are less balance sheet intensive or county, because so much of the financing for those transactions happens with direct lenders and we've been very active in the direct lending business is our our capital markets Advisory business reflects the fact that a significant percentage of that caters to the middle market sponsor space.
And there with the amount of direct lending Thats nonbank direct lending there is an opportunity for Cowen and compete and we compete and win all the time there the acquisition of Accordant was.
As a platform acquisition for us and <unk> was a tack onto that portico adds both sponsor and vertical.
Okay capability in an area. We think has tremendous growth which is vertical is software.
They are the best in that space and we're seeing it right.
The wins that we continue to see.
From the vertical is software players.
Big have acknowledged the portico is the best player there and we're all over that now and that has given us tremendous.
Efficacious to expand.
In each of our industry groups. So if youre doing something for example in auto Tech suddenly your conversations around mobility more broadly.
Our really relevant so the great thing about that acquisition. If it's made each of our industry groups a lot more relevant and it's early days for that.
If we were to do anything more it would be to cater to the needs of the sponsors and I think that's because we can compete there and we see that there is a that's a marketplace where there is still a tremendous amount of capital.
Even with people focused on it in the middle market. There is there is so many middle market sponsors to get under covered.
And there's a real opportunity for us.
Relatively small percentage of market penetration to have a big impact on our bottom line and so that's most likely where we would focus.
I don't see us doing much in the way of acquisitions in asset management, you don't see us doing much in the way of acquisitions in the markets business I think it's a real obvious one for us to continue to grab that momentum that we have in M&A advisory.
And ultimately get rewarded as you know M&A advisory.
<unk> revenues are more valued by the market.
And so our continue to to move in that area is pretty logical.
Yeah.
That's really helpful. Thanks for taking my questions Jeff.
Thanks, Jamie.
Thank you and our next question comes from the line of Michael Brown with <unk>. Your line is open. Please go ahead.
Hi, Steve Good morning.
Hi, Mike.
So if you can actually just build on maybe that last question a little bit there.
Jeff when you.
You talked about kind of the political acquisition.
The first full quarter with portico included in the Cowen platform.
Can you just touch on what the revenue contribution was from portico in the first quarter.
And if it take a step back at announcement you guided to you the acquisition, adding about 20% growth for the advisory business in 2022 relative to expectation at that time the.
The landscape is of course shifted quite significantly sense. So is there any.
As you think about that now is there any any thoughts on updating that number in terms of either the level of growth or the implied revenue that that implied four for portico as you think about 2022.
Well so.
I'm not going to break out portico, specifically, just because it's integrating and so I think if I start to break it out then it makes it seem like it's not.
Not part of the core Cowen product offering and it is.
And what I'll say is.
The speed with which its integrating as much faster than Accordant acquisition, and you would expect that rate.
The first acquisition when you're entering a new marketplace Theres, just a lot to learn.
And then of course, we went through.
We went through the pandemic and everything stopped and middle markets for a good nine months.
What I'd like to see what was happening in portico is that we're winning both M&A advisory assignments and we're winning in capital markets advisory assignments. So when portico joined has been.
Important joined they didn't really have a debt financing capability. So they could they could be great at selling companies out of the sponsor portfolios or maybe selling.
Our founder.
Entrepreneur businesses into sponsors that was a big part of of the important business, but then.
Second trade a third trade at the same asset.
Lose those because.
They just didn't have the full suite of products to offer what we built at Cowen is an opportunity for us to add value to the acquisitions, we make and what I like about what's happening at porticoed and what's happening.
Every day at Gordon is that the pitches include both M&A advisory and capital markets Advisory.
Sponsors are looking to do staple financings or they're looking to do.
Do a dual track, where maybe they're going to try to sell the business or look at doing a cash out refi, we have the ability to execute on both of those and so we're winning mandates in part.
In both buckets, because we have that full suite of products and that's really been a manifestation of the strategy and I think you can see it with the uptake from portico. Some of the wins, we've had and portico are a function of the fact that we have that full suite and maybe where the backlog is filling up with things that portico may not have one.
On its own and vice versa, I think were winning M&A, we're winning capital markets mandates in places where maybe we we certainly wouldn't have had the opportunity to pitch that business because we maybe didn't know those clients. So it's happening at a great and actually in a great way.
And I think we'll continue to see that we are not seeing a slowdown in activity as a result of.
Market volatility and when you think about our build out.
Everybody knows that we're tied more to the <unk>.
Equity capital markets calendar, because we focus on things like disruptive growth and raising equity, which is what Cowen has been historically really good at I don't think we want to give that up because we just think sometimes it's cyclical and we know those clients, particularly in the areas. We want where were excellent those clients are going to raise money. Eventually so we're not giving up on that.
What we've done, though and I think what this quarter demonstrates is how we can create balance in that business in our investment banking business and what we're seeing from the sponsor side and what we're seeing in terms of the mandates. We're winning is the market volatilities doesn't matter much.
These are businesses that are not pegging their valuations off of the same kinds of valuations that we're seeing.
<unk>.
In the what I would call speculative growth or disruptive growth sectors, where there's been the most amount of volatility. So it's a nice balance for us because again, we will continue to plug away and continue to accelerate that business.
Even if the capital markets.
Turnaround or stabilize at some point, we're not we're not expecting to see.
See any slowdown at all in fact, if anything we'll see uptick and increased participation there.
Okay, great. So it sounds like you're certainly still positive about the outlook there.
Definitely I wanted to I.
I know you have like a <unk>.
Capital solutions business and I don't know I know the pipe business is a key strength for you guys there.
And you talked to.
A number of times on this call and other calls about your focus on growing with the sponsor market.
An area there that that's certainly seeing secular growth is any GP continuation funds LP secondaries business.
So forgive my ignorance here, but.
Not really sure how your capabilities in that space stack up do you have an offering there to take advantage of that.
Supporting the growth of those markets and if not is there an opportunity for calendar two to grow there because that would be a larger piece of the story for you as you look.
Down the road years from now.
Mike That's a great question and kudos to you for asking it.
I'm not sure that a lot of people understand the nuances and what's happening in the middle market sponsor business is it's a lot less visible I think in many respects than what I would call a dealogic, which has been historically how people have looked at cowens revenues.
That is on the strategic.
Our agenda for Cowen.
And.
We have looked at a bunch of acquisitions in that area and have not pulled the trigger in part because we thought it was much more important to build out the core capabilities in M&A and debt advisory.
Now that we're in that space, it's much more interesting for us and I think we can be in a position, where we add value, we know that GP continuation funds and the ability to help sponsors to.
Do secondary trades is a key part of the strategic value add.
And we've advised in some instances around that but certainly having a capability and access to capital in and around that space as we build out our strategic capital group is critical.
And I would say.
A year ago.
We still have wood to chop on putting some of them.
Additional building blocks in place.
So when you think about how to build a strategy is all about sequencing. What comes first and then we'll come second and then how do you actually create product capability that fits the needs of those clients. Once you get to learn who they are and you've identified a great potential growth area for us.
As we as we look at our next strategic opportunities that is 100% and area of focus for us.
Okay, great looking forward to hearing more thanks.
Thanks, Jeff.
Thank you and our next question comes from the line of Devin Ryan with JMP Securities. Your line is open. Please go ahead.
Good morning, Jeff Good morning, Steve how are you guys.
Devin how are you.
Doing great.
Most questions really been asked here, but I do want to dig in a little bit around the ESG opportunity. You guys are clearly I think ahead of most in terms of thinking about where the puck is going there and how big the opportunity could be in the U S. Obviously U S is a little behind.
Some other geographies, but if you can help us maybe just think about what the capital markets opportunity looks like today and then how you see that evolving.
Maybe look out five years like how big.
USG and I know, it's kind of an overlay to a lot of things, but how big of a revenue opportunity or how you guys would frame that.
For the firm like if you could stack rank it in terms of like whether it's sector or just kind of revenue opportunity that just more perspective, there would be helpful.
So great Great question and I think it is a part of what we do really well like we see these mega a multiyear trends.
And then we go after them right and thematic late like biotech was really obvious to us a decade plus ago. It just was obvious given what was happening again, given what we knew in research.
And because we were so good at we had to lean into that no matter, what because we saw this explosion happening and I think we see.
Similar things as it relates to sustainability, but there are some differences and you've highlighted it in the way you've asked the question.
Staying ability is transcendent so when we look at opportunities the street, obviously organizes itself by vertical.
And we know that a lot of money gets made and horizontals right things that are transcendent across industry like software for example software at vertical is software.
Each industry has dominant players and so every industry.
Benefits from having we benefit from having a vertical wise software platform that can go across every industry and wind business sustainability is the same thing in ESG is the same thing every industry.
Every industry is undergoing its own.
A revolution in how it is going to tackle climate change and.
And well that may be imposed upon them by the SEC and it may be governmental imposed and so on and so forth.
The matter is it started about a half a decade ago with everybody.
America figuring out how they were going to get around it because investors want to know and when somebody like Blackrock says, it's going to make this its top priority suddenly every other investor says well, we better have an answer to that too.
And so when we look at the size of the market opportunity is huge in the industries. We started with electric vehicles because it was the industry. There was furthest along and because Tesla was such a powerful investment idea for people people began to look at other ways to apply up.
Battery technology to mobility.
But if I look at AG check or clean energy more broadly.
We're a workplace automation.
All of these are ways for people to play sustainability and they are across the industrial complex they're across the.
Health care complex every vertical that we're in is having its own version of the ESG Revolution and management teams need advisers like us to help them navigate now you may know, we put out an ESG score on every company and the amount of company engagement, we get now where people are saying, okay help us to understand your.
ESG, scoring methodology what are the things that we need to keep doing in order to improve that is giving us yet another touch point and we're building out our banking capability.
Two with partners, who can work with every other partner and that's a critical element of the sustainability, maybe its own vertical but I like to think about it as if youre working in sustainability at Cowen you've got to work in partnership with every vertical to win business and that's what's happening in the banking and the banking space I was in.
Israel earlier, this week and we had Jeff Osborne over there who is our lead analysts who has been.
Doing this for a decade, plus and and the attendance that we got from every industry and Israel sustainability AI mobility.
All of those companies are addressing unmet needs in sustainability in some capacity or another that should give you an idea that people are going to build their models to address this and they all need to raise capital. So I can't quantify for you how big it's going to be because it's indeterminate.
<unk> is a huge area, where a lot of banks just don't play and I think you need to have the right kind of culture for it right. There has to be collaboration and working across the platform requires a cultural like the one that we have where everybody understands there's a fee pie there and we should go after on a collective basis.
And that's what's happening at Cowen.
Super bold up on it because I think it's one of those places where we can compete and win and it's going to be really hard for other people to do it.
Okay.
That's really good color, Jeff I appreciate it.
Kind of close out here with a little bit of a statement, but I guess, there's a question in here as well I.
I think that anyone that.
Listen to this call is going to hear a lot of optimism.
Coming back to maybe the conversation with Stephen on the stock I mean, I think there's a lot of focus in the market talking to a lot.
Investors potential investors around closing the valuation gap right and we just went through probably the talk us or one of the toughest quarters I can remember 20 years for a number of the businesses you're in and if we annualize. The earnings you guys just put up and even back out the interest rate swap.
Mid single digit P/e multiple.
If I look at even peers in this backdrop, many are trading at <unk> kind of that multiple or much much more so I guess the.
The point is it will be great to have like a more detailed discussion broadly asset management business will be great, but just the more detailed discussion at the investor day around kind of the evaluation more holistically and ways. We can all kind of think about the valuation gap and then I'd just love if theres any other context around how you guys think internally around but.
Is the right multiple 10 times as the double digits on P/e, because again mid single digits on an annualized.
Incredibly challenged backdrop doesn't feel appropriate so trying to think about how you guys think about what is actually.
Appropriate relative to again, all the optimism and kind of.
And of the business mix that you just talked about on the call here.
Yeah. So what we will definitely go into more detail on that at Investor day, but let me respond to that so first of all.
When you look at where our businesses are settling out in difficult environments. So it's just settling out at higher lows and we've said this for a while everyone. When we're knocking the cover off the ball and everyone's like Oh, you just benefiting from the.
The market environment, Yes, we are benefiting from the market environment, because we're in the right spot at the right time, because we saw that coming.
And there'll be a moment in time in which those tailwind swing around and because they invariably do and the question will then be how do we navigate intact in that environment and the first quarter is a great example of how Cowen is able to tack in an environment with headwinds period, that's the validation points.
A lot of people have been waiting for.
I hope they've been waiting for it because here it is and so when you look at the fact that Theres still some people who are tethered to tangible book value as a metric it's just wrong sided.
It is because the acquisitions that we've made the revenue growth that we've shown in the earnings growth that we've shown.
Should suggest to people.
Valuing Cowen off of tangible book value is just wrong and this quarter demonstrates that having said that if that's where you think you live and you can't get away from it then you have to give cowen credit for the things that are not on cowens balance sheet like you can't have it both ways right we have a.
<unk> assets, particularly in our asset management business that has zero value when it comes to tangible book and yet contribute to earnings.
This is why we've stayed with ROA and return on an equity as a primary metric we know that we can manage to a mid teens on the low end Roe.
With the capital base that we have and I think it's remarkable the capital base I know some people want to see us buy back stock more aggressively I get it right. We are trading cheap relative to book value I got it.
But if you look at the earnings power of Cowen from the acquisitions that we made in the organic growth we've had in higher margin businesses and lower margin businesses. This is a business that on a capital base that has doubled.
In the last three years is also increased its ROE meaningfully and what I would say to anybody who's looking at valuation here.
You have to normalize that we're not we're generating so much more earnings in aggregate and we're making we're meeting these benchmarks and targets. We laid out we started this journey when I became CEO in 2018, and we said you said pretax actually back then our ROE and now we're saying repeatedly after tax Roe.
In the mid to high teens that is what we can accomplish and we did it in this quarter, which is the worst quarter for many of our businesses that we've seen in over a decade and so when you think about my optimism I'm like okay.
That's a pretty strong headwind, we did a really good job people need to get off the whole tangible book and because it's not relevant anymore.
You need to start looking at this on an earnings basis for all the reasons that you articulated.
Joe.
Okay, Great. We'll look forward to more wholesome discussion next month, but thanks for the update.
Thanks, Stephanie.
Thank you and our next question comes from the line of game genre with Goldman Sachs. Your line is open. Please go ahead.
Good morning, maybe when you think about the potential handoff between equities and ECM, presumably would see higher equity capital markets in a period with lower market volatility. So how do you think about.
If we did see lower volatility.
In ECM did pick up how does that affect the equities trading business or are the trading results. You saw this quarter quote unquote fully normalized <unk> should grow from here.
Yeah. So.
It's a good question I think you could see market volumes.
Taper and a less volatile environment, but I think what we've shown when that happens at Cowen is our organic growth strategies in areas, where we're making meaningful inroads like in Europe .
We're in a better spot. So we won't see the same kind of diminishing in volume because we continue to grow organically with a number of clients in the geographies that we have in the business lines. We have so the growth in our swaps business the growth in our prime brokerage business the growth in outsource trading all of those are happening regardless of the vault.
I'm in the market and that's part of the reason James We go through in our supplement and we highlight how much of our business. We think is volume related versus how much of our business. We think is not volume related or less volume related rate institutional services versus institutional brokerage. So when you look at the growth in institutional brokerage that is much more a function of cowens organic growth.
In terms of the number of customers we have the clients, we have and the wallet that we're getting from those customers and so this is why even in a lower vol environment Cowen continues to make.
Strong headwind strong gains.
In in the markets business, even when equity in ECM pick back up again.
Okay. Thanks.
So maybe not in terms of investment income, which obviously came in a lot stronger than I think the market was expecting this quarter is there any chance you could just size the mark specifically on poly side, and then more broadly how do you expect investment income and incentive income to perform in.
A period where markets.
Markets are down a little bit is that.
Something that should be lower or is this sort of a sustainable run rate.
Yes, I think so we can actually quantify it because the valuation round wasn't made public so I can't it was meaningful but I also think what was meaningful was our ability to hedge away market risk. So what we've done at Cowen. It maybe predates your involvement in the name, but five years ago Cowen would have been really levered in terms of its investment.
Income too.
Two the movement of the equity markets and volatility rate it was super invested in.
In equities and in event driven names, where you would have seen a tremendous amount of.
Diminished in value as a result of the spike in volatility and we made a decision in 2018.
Balance sheets are meant to be seen not heard and so sucking the volatility out of the balance sheet wherever we can as a critical element of what we do so we reduced our gross exposure significantly.
And you can see that in terms of the performance of investment income in the first quarter of 2022, even versus 2020, right, where we had a little bit more headwind there, but we've also and we've increased and we do a much more dynamic job at hedging the risk associated with that.
So when we put for example, our interest rate swap hedge in place in December right that is an acknowledgment that we think that rates are more likely to go higher than not and as a result, we need to protect ourselves because a rapid rise in rates will absolutely impact our core operating areas like we did that in no.
Remember in December of last year way before the first quarter played itself out that's what you'd expect from Cowen and that is the same kind of philosophy, we have when we're dealing with the volatility we might see in some of the underlying strategies, we have whether it's starboard or its health care investments, where even our sustainability portfolio.
<unk> is a little harder to hedge out so youll see volatility there.
We can't control that those kinds of things, but those are just when I. When you look at Cowen I think you just you need to discount them you need to discount them. When they are up and you need to just kind of went down because they are not representative of core earnings capability.
We obviously do accrue compensation against them and we reverse compensation against them. So theres some.
They are less impactful to the bottom line because that's the way people are going to get paid.
But at the end of the day when you look at our performance on investment income this quarter.
It was a combination of a number of things and I don't want anyone to think that the poly Sion situation.
Overshadowed everything else that we did because it was really a wonderful.
Effort that was made by our team here to make sure that the investment income came in where it came in.
Okay. Thanks, and then just one last one.
When you think about the monetization of some of your merchant banking type assets has.
The market volatility slowed the pace of monetization there and then when you do monetize all of them, perhaps you could just update us on.
What your plans are around the proceeds in terms of buybacks dividends, new strategic investments and acquisitions.
And then.
I think sort of the other end of the question that Steve at the beginning which is is there any sort of minimum threshold in terms of your float that you look at below which you wouldn't buy back any more stock.
Yeah. So to take your second your last part of the question first no. We don't I mean I think this is all about.
Cowen is all about being able to come in tomorrow and the next day and the next day. So what we're not going to do is like borrow a ton of money and buy back a bunch of stock as I've seen how that can end.
For companies and so the one thing we don't worry about account even in an environment like the one that we're in nobody is worried about our.
Our ability to come in tomorrow, the next day or the next year and that equity bed provides us.
With a lot of that comfort, we're not very Levered company. So.
I think the proper metric is how do we make sure the equity that is strong enough and resilient enough. If we go through a prolonged downturn, where we don't have to lay awake at night worrying about whether or not count is going to be here and that's just that's part of my own philosophy around how you manage the safe business.
And how you get yourself in a position to take advantage of the next upswing, what's invariably happens so that's part of that.
Part of that I think.
Let me go back to your first.
The first part of your question, which is more about monetization of the assets I think actually so specifically as it relates to to Lincoln, which is the probably the largest chunk of that that everyone focuses on <unk>.
No question.
A war in Europe is not great to be the time to be selling a European asset.
Having said that there is a lot of strategic activity around that asset because it continues to be a unique asset right. They're not we're not they're not doing more licenses and not doing more mobile communication carriers in Italy, and and that asset has a very unique position.
So we'll continue to do the things we need to do in order to monetize that I think I've been on the record as saying I would've liked to have done that a long time ago.
But I'm glad that we have partners our friends at Jefferies, who also agree and we'll continue to do everything we can to monetize that asset as soon as we can.
And then once that happens we have said over and over again, we will buy back stock I know thats, what everyone wants to hear and that's what we intend to do because the cap. We're not we don't need that capital to drive our current business.
And we should be returning a big chunk of that to shareholders. If something comes along in the interim that we think is compelling we could take some of that but it would only be in service are driving our ROE higher and driving our multiples higher and I think James from your standpoint, you are one of those folks that are super tethered to tangible book value.
I, just think youre missing it as we migrate our business to more of an earnings model tangible book value just becomes less relevant.
Particularly buying back stock also has a negative effect on book value because you're shrinking. It. Our view is those are the kinds of things that we're doing that help us to drive the multiple expansion in Cowen and this quarter should be a good example of what we're capable of doing.
Thanks for taking my questions.
Thanks James.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Mr. Jeffrey Solomon for any further remarks.
Thank you operator, and thanks, everybody for joining us today I Hope you will join us either in person or for the webcast of our updating of our upcoming Investor day on may 19th.
Look forward to speaking you.
Then as well as on our next earnings call in July have a great day everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
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