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spk02: Good morning, and thank you for joining us to discuss Cowen's results for the third quarter of 2021. By now, you should have received a copy of the earnings release, which can be accessed at investor.cowen.com. After 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. J.T. Farley, Cowen's Head of Investor Relations.
spk03: Thank you, Carmen. 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. 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 a 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 Cowen's Chair and Chief Executive Officer, Mr. Jeffrey Solomon, and our Chief Financial Officer, Mr. Stephen Lasoda. Now, I would like to turn the call over to Jeff. Thank you, JT.
spk06: Good morning, everyone, and thank you for joining us for Cowen's third quarter 2021 earnings call. Today, I'm happy to provide highlights on our strong operating performance this quarter. I will also place this performance into the broader context of how the long-term strategy we laid out just three years ago has delivered these strong results. In that spirit, I will share some details about the durability of the business we've built, as well as the steps we've taken and continue to take to generate strong profitability consistently in a variety of market conditions. Then Steve will review the financial results of the quarter, and after that, we will be happy to answer your questions. Over the past four quarters, we have generated more than $1.9 billion in revenues, including over $1 billion in investment banking revenues. And we have generated over $10 per share in after-tax economic operating income. That is a 36% return on common equity. This quarter, we posted $359 million in total revenues and $43 million in after-tax economic operating income for a return on common equity of 17.5%. This is the 14th out of the last 15 quarters of meaningful profitability, with the exception being the first quarter of 2020. While Cowen stock has risen considerably over the past year, we believe that our valuation remains attractive. That is part of the reason we have been more aggressive in returning capital to shareholders by repurchasing shares at a record pace. But that's not the only reason. We've also long said, that we would be more aggressive with capital return as we demonstrated lasting improvement in our financial and operating performance. We've remained true to our word, and we believe in our ability to continue returning capital to shareholders commensurate with our continued performance. Now let me turn to our operating highlights. The third quarter of 2021 was the second best quarter on record for investment banking revenues, surpassed only by the first quarter of this year. Banking revenues were up 43% year over year, And importantly, M&A revenues set a new record above $100 million for the quarter, more than three times the level in the third quarter of 2020. It was a record quarter for both our M&A and capital markets advisory practices. It was the second quarter in a row that advisory, which combines M&A and capital markets advisory revenues, comprised the majority of banking revenues at 67%. Our results in these areas are a function of the – of the intentional approach we've taken to diversifying our business by product and sector over the past few years. We were able to achieve this despite headwinds in the equity capital markets this quarter, particularly in biotech. The industry breadth of our banking franchise was clearly evident this quarter. Sectors outside of healthcare comprise 54% of total banking revenues, strong results from industrials, technology, and the consumer sectors. Within healthcare, we continue to grow our footprint. Non-biotech areas, which include tools and diagnostics, medtech, healthcare services, and healthcare IT, accounted for the majority of our banking healthcare revenues in the quarter at 56%. The growth in the number of publicly listed disruptive healthcare companies, coupled with a pace of private healthcare company formation, will continue to be a tailwind for Cowen for the foreseeable future. Today, there are about 660 publicly traded companies in biotech, tools, and diagnostic sectors in the United States. That's more than 10% of all publicly traded operating companies listed on the New York Stock Exchange and NASDAQ and is up from only 200 companies a decade ago. Cowen has a leading market share of clients in this space. There will always be fluctuations in capital markets activity in this sector. However, given our market position, we remain confident that we will be able to capture a significant proportion of the IPOs, follow-ons, and increasingly debt offerings when companies decide the time is right to tap the markets or when their financing needs compel them to do so. We also saw a rebound in SPAC deals during the quarter, particularly in advisory assignments. SPAC-related revenues accounted for 44% of banking revenues in the third quarter and about one-third of banking revenues in the first nine months of 2021. As a reminder, Most of our SPAC revenues are on the back end. In other words, pipe financings, capital markets advisory, and M&A advisory during the D-SPAC process. We are not heavily dependent on the continued growth in the listings of SPACs in order for them to be a meaningful contributor to our future revenues. With approximately 500 SPACs looking to complete transactions over the next few years, we believe that a large percentage of them will ultimately find transactions. and the calendar will benefit even with a small percentage of the market share. That is why we are selective in partnering with SPAC management teams, choosing the ones we believe have clear vision and strong chances of success as public companies. This selectivity is evident in outcomes. Looking at SPACs which have gone public since the start of 2020, nearly two-thirds of IPOs which were book-run by Callen, already have deals pending or closed, which is almost double the average for all SPACs in that period. It is also worth noting that SPAC mandates make up under 30% of our current deal backlog. Demand for advisory and capital markets issuance remains strong into 2022, away from the SPAC market. While our pipeline ended the quarter slightly below the second quarter of 2021's record levels, it is still up 15% from the start of this year, and up 20% since the third quarter of 2020. We remain quite confident that our current backlog will result in meaningful revenues for Cowen over the next several quarters. Over the past several years, we have broadened our banking franchise through the acquisitions such as Quarton and MHT, after previously adding teams from Morgan Joseph and Dolman Rose in prior years. In addition, we've become an employer of choice with lateral hiring from across the street in every one of our sectors. it's a good time to be a Cowan. Our diversified revenue stream in banking is a direct result of these efforts. We are always looking for great bankers that can help us to continue our momentum, to deliver world-class outcomes for our clients, and we've been adding resources from the analyst to the vice president levels so that we have the capacity needed for our higher level of revenue and operations. Our markets business has also remained incredibly resilient, averaging just over $2.5 million in daily revenue despite lower market-wide volumes. Again, our decision to invest in areas such as prime brokerage, securities finance, and European trading are paying dividends as we continue to take meaningful share from much larger competitors. While revenues were down 4% year over year, most of the drop, about $4.7 million, was due to the wind-down of most of our clearing operations. which we decided to do to free up balance sheet capital for other opportunities, including stepping up the buyback. Highlights for the third quarter included year-over-year gains in cash and electronic trading, prime services revenues, non-U.S. execution, and ADR trading. Prime services in particular is gaining momentum, adding nearly 40 new clients during the third quarter. Securities finance growth has also been strong this year, including our new swaps capability, which now has over 50 clients onboarded. We continue to attract new talent, including the addition of a leading event-driven trading team in Europe during the quarter, and we're boosting our ETF trading capabilities as well. The value proposition offered by Cowen as an independent, non-conflicted partner with world-class execution and research capabilities is increasingly compelling to institutional investors. That has translated into increased share of wallet for us, according to many third-party industry surveys. While we're making progress on the build-out of Cowan Digital, our digital assets initiative, we're still in the early stages. We are working on building out the legal, regulatory, and technology framework to onboard clients, and the engagement level among clients on the topic is very high. More to come on this front as we head into 2022. Looking at the current quarter, we are off to a good start with average daily revenues slightly above our third quarter average. In research, the third quarter, we welcomed new senior analysts to our biotech and life sciences, as well as our tools and diagnostics coverage teams. During the quarter, we had sector launches in healthcare facilities and managed care, as well as sustainable food and healthy living. In total, We added coverage of nearly 90 new stocks in the quarter, and today we have almost 950 stocks under coverage, which is the highest it's ever been. In the third quarter, we published 13 of our flagship Ahead of the Curve series reports. Clients continue to value our differentiated research, and during the quarter, our team once again saw significant gain in brokerage votes from our institutional clients. In investment management, even with the volatile environment for growth strategies, we added more than $400 million in assets under management compared to the second quarter of 2021, with most of that increase occurring in our healthcare strategy. Total AUM was $14.8 billion, which is up 25% year-over-year and up 3% quarter-over-quarter. We had a negative mark-to-market change in economic incentive fees, totaling $58 million. And this is due to a drop in the value of Proterra, which is the largest investment in Cowan Sustainable Investments. And we had declines in positions in the Cowan Healthcare Investment Strategy. Despite these marks, however, incentive fee income is still positive for the first nine months of 2021 at almost $20 million. Economic management fees were up 3% over the year to $15 million, largely due to higher AUM in the healthcare strategies as well as sustainability and activists. Those fees are net of a $3.8 million fund placement fee that we expensed in full during the quarter. Excluding those fees, our management fees would have been up more than 25% year over year. Looking at our five strategies, the sustainability strategy had just over $1.3 billion AUM at quarter end, and overall performance remains strong even when factoring in the drop in the price of Proterra. During the quarter, the strategy made its third investment in a sustainable development dental products firm called Quip. Our healthcare investment strategy completed two new investments and four follow-on financings and ended the quarter with just over $1.2 billion in AUM. Long-term performance remains quite strong despite the declines in public positions during the quarter. The activist strategy grew to almost $7.5 billion, even though the strategy was slightly down in the third quarter, and the merger arbitrage strategy had $321 million in AUM The strategy did outperform the HFRX merger arm index during the quarter. Healthcare royalty strategies ended the quarter with over $3.6 billion in total AUM, which is up $100 million year over year. Turning to our balance sheet, we had investment income losses of $20 million for this quarter due primarily to the declines in the value in our sustainability and healthcare strategies, as well as declines in some of our merchant banking portfolios. As is the case with our incentive income, our investment income is still positive on a year-to-date basis at $20.5 million. To give you some perspective, Cowen has always had quarterly fluctuations in our incentive and investment income lines. And in every single year since the global financial crisis in 2008, we've had positive contributions on an annual basis from our combined incentive and investment income revenue line items. While noisy at times, incentive and investment income are additive to our bottom line when viewed over the longer term. These revenues benefit investors who are focused on the remarkable growth of our core business over the past few years as our investment banking and brokerage operations have increased in size and profitability and our management fee income has risen. As a result of this shift, incentive and investment income has become a much smaller part of our annual revenue mix. Less than 10% of total revenues in each year since 2018, and in year-to-date 2021, it amounts to just about 3% of our revenues. In the coming quarters, we will be providing details to give investors more insight into these revenue lines so they prove to be less of a distraction. Before I hand it over to Steve, I'd like to share a few reasons why I continue to believe that we are well-positioned to deliver consistent profitability in the years ahead. We have a proven track record of identifying opportunities in areas of the economy that are undergoing significant disruption, sectors that require capital and will have a lot of transaction activity. From our leading position in biotech to longstanding growth sectors such as electronics and semiconductors and emerging areas such as sustainability, robotics, energy transformation, and digital health, we have built deep experience in partnering with growth companies. Our research team is truly ahead of the curve in identifying these emerging trends and investment themes. We lead with research, and then we bring all of Calend's resources to bear to help companies in these ecosystems and investors in these ecosystems who are looking to understand and embrace these opportunities. Now, I will turn the call over to Steve Lasoda for a brief review of our quarterly financial results. Steve?
spk01: Thanks, Jeff. Gap results for the third quarter of 2021 were as follows. Total revenues were $412.2 million, up 28% year-over-year from $321.3 million. Net income attributable to common stockholders was $36.1 million, or $1.10 per diluted share, up from net income of $18.6 million, or $0.62 per diluted share in the prior year period. Compensation and benefit expenses were $201.7 million, an increase of $48.3 million from the prior year period. Expenses excluding compensation and depreciation and amortization were $121.9 million for the second quarter. DNA expense was $4.8 million. Income tax expense was $12.2 million, up from $8.8 million in the prior year period. Please note that we utilized all available net operating losses during 2020. Therefore, we have been a cash taxpayer since the beginning of 2021. Now turning to our non-GAAP financial measures, which we refer to as pre-tax economic income, economic income, and economic operating income. OPCO had total economic income proceeds of $358.8 million. OPCO pre-tax economic income was $60.1 million. Economic income was $43.5 million. And economic operating income was $47 million in the third quarter. ASICO had economic income proceeds of $238,000. pre-tax economic income loss of 4.8 million and an economic income and economic operating income loss of 3.8 million. On an overall basis, we reported pre-tax economic income of 55.3 million, up from 33.5 million in the prior year period. Economic income tax expense for the third quarter of 2021 was 13.9 million. Economic income, which is presented net of preferred dividends as well as associated taxes, was $39.7 million for the third quarter of 2021, up from $31.8 million in the prior year period. Third quarter economic operating income, which is economic income excluding DNA, was $43.3 million, up from $37.4 million in the prior year period. Total economic proceeds rose 31% year over year to $359.1 million. For the quarter, economic investment banking proceeds were up 42% year over year to $262.6 million. Economic brokerage proceeds were down 4% year over year to $160.5 million. Economic management fees for the quarter were up 3% year over year to $15 million. And economic incentive income was a loss of $57.7 million in the third quarter versus a loss of $1.3 million in the third quarter of 2020. Economic investment income was a loss of $20 million versus a loss of $90.5 million in the prior year period. Turning now to our expenses. Compensation benefit expense for the quarter was $202.9 million compared to $153.8 million in the prior year period due to increased revenues. Our comp to proceeds ratio increased year over year from 56.1% to 56.5% of economic income proceeds. For full year 2021, we are targeting an annual compensation ratio between 56% and 57%, although it may vary from quarter to quarter. Fixed non-comp expenses totaled $40.3 million in the first quarter, up from $33.1 million in the prior year period. Available non-comp expenses in the third quarter of 2021 were $48.1 million versus $39 million year over year. The increase in non-comp expenses would do primarily to higher travel and entertainment expenses, business development expenses, and professional service fees. Despite the increase, the non-compensation expense ratio declined to 24.7% of revenues down from 26.3% in the third quarter of 2020. Third quarter depreciation and amortization expenses were $4.8 million compared to $5.7 million in the third quarter of 2020. We generated economic operating income of $43.3 million, or $1.32 per common share, which includes the impact of taxes at an effective rate of 25.1%. In future quarters, we expect our effective tax rate to be in the range of 25% to 29%, depending on the nature and geographic sources of our income. Turning to the balance sheet, at quarter end, the company had invested capital in Octo, totaling $677.7 million. down from $831.6 million at the end of June 2021. The change is due in part to the increased share buyback and quarterly mark-to-market of our balance sheet investments. In addition, we have moved excess operating cash out of Opco to the holding company level. That operating cash was approximately $80 million as of June 30, 2021. In AssetCo, we had invested capital totaling $120.2 million at the end of September, down from $126.2 million at the end of June 2021. This change is due primarily to reduction in the value of our investment in the Formation 8 and Eclipse funds. Turning to our equity, common equity, which is stockholders' equity, less preferred equity, was $1 billion, nearly unchanged from the end of June 2021. Common book value per share, which is common equity divided by total shares outstanding, rose to $35.40 as of September 30, 2021, up slightly from $34.35 as of June 30, 2021. Tangible book value per share was $29.17 at quarter end, up from $28.35 at the end of June 2021. Return on common equity was 17.5% for the third quarter of 2021, well above our minimum target of generating mid-teens after-tax return on common equity on a consistent basis. Looking ahead to 2022, we are confident we can meet or exceed that target, absent any extraordinary changes in market conditions. As we announced this morning, our Board of Directors maintained our quarterly cash dividend at $0.10 per common share. During the third quarter, we repurchased a record $52.4 million in stock, a total of 1.46 million shares, including purchases executed according to our existing 10B51 plans. That is equivalent to over 120% of our economic operating income. For the nine months of 2021, we purchased shares at the value equivalent to 51% of our economic operating income, well above our minimum annual guidance range of 25 to 35%. Our fully diluted share count in the first quarter was weighted average of 32.7 million shares, a decrease of more than 1.1 million shares over the previous quarter's weighted average. Looking ahead, we'll continue to be opportunistic in buybacks depending on market conditions and available cash flow, although the amounts will vary from quarter to quarter. We'll also prioritize additional capital returns when we're able to monetize assets on the balance sheet. Starting with the fourth quarter of 2021, we plan to provide an estimate of our incentive and investment income quarterly marks shortly after... each quarter end in order to provide more transparency into the quarterly impacts our investment management operations and balance sheet investments have on our overall earnings results. And with that, I'll turn the call back over to Jeff.
spk06: Thanks, Steve. This quarter's performance and our record performance year-to-date are the result of years of strategic planning and investment. They're also representative of what our core operating business can do, even when historically strong markets for Callen are challenging. While we have grown revenues faster than most of our peers – At a 25% annual pace over the past five years, the mix of our revenues is just as important to maintaining the consistent profitability in our core business. Within investment banking, we've built out a substantial capital markets advisory business, which includes M&A advisory. And we also added debt capital markets capabilities, so we're able to provide a broader range of financing solutions for our clients. As I noted earlier, capital markets advisory is additive to Cowen's traditional strength in equity markets underwriting, and it enables us to drive profitability even at times when issuance slows down, as we've seen over the last two quarters. In markets, our revenues have more than tripled over the past three years, as we've expanded from our core strength in U.S. cash equities into non-U.S. execution, options, swaps, and less volume-dependent areas such as prime services and securities finance. We are confident that this business mix can generate at least $2 million a day and revenues on a consistent basis, and likely higher absent any huge market dislocations. In investment management, despite the quarterly volatility and incentive in investment income, we focus on private equity-style strategies with steady management fee streams, and we would expect our management fees to be in excess of $70 million on an annualized basis going forward, with potential upside from additional increases in AUM. Overall, the revenue mix at Cowen is more balanced and more durable, and it's built to perform in all manner of market conditions. But the most important reason we're outperforming here at Cowen is because of our team and because of the amazing clients we serve. Over the last three years, we've grown our team by a third to 1,500 people, seeking out the best candidates who are eager to collaborate to help drive favorable outcomes for clients. During that period, our revenue per employee has more than doubled to 1.3 million per employee over the last 12 months, well above most of the peers in our industry. As the saying goes, culture eats strategy for breakfast, and we are intently focused on building an inclusive, durable culture centered on our core values of vision, empathy, sustainability, and tenacious teamwork. We are fortunate to be in a position where we are helping clients to achieve their financial and operating objectives every day. Our entire organization was purpose-built to help others to do what they do better. and our success is the result of our ability to partner with our clients in their successes. We are extremely grateful to those who continue to place their trust and faith in us. I'm personally grateful for all the hard work that goes into these impressive results. We really do have the best team on the street, and I'm proud to be part of it every day. With that, I will turn the call over to the operator, and we'll open it up for questions.
spk02: Thank you. And to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. One moment while we compile the Q&A roster. Our first question is from Michael Brown with KBW. Your line is open.
spk09: Great. Thank you, operator. Hi, Jeff. Hi, Steve. How are you guys?
spk06: Good. How are you doing, Mike?
spk09: Good, good. Yeah, so I wanted to ask about advisory, obviously a record result this quarter. And so I'm hoping you could maybe break that down a little bit further for us and share some of the key strengths this quarter. And as you're answering that, what is the proportion of your business that's touching financial sponsors? I know that was a key strength of Quarton, so I'd love to just get a little bit of context there.
spk06: So I'll answer, first of all, I think when we've seen the advisory business obviously kick back on this year significantly, it was obviously post the financial crisis, I think everyone had a challenging time with their M&A advisory businesses. And so we're seeing some of that actually pick up a pace, although I will also say the backlog continues to be strong. So I'm very confident in our ability to continue to have M&A revenues in the same area. You know, a big chunk of that is sponsored business. We're continuing to build out our sponsor platform. I don't think we break out the specific amount of advisory business as sponsors because that's actually not how we think about it. I think we think about it more from an industrial coverage model, which includes sponsors. But I have, and I think you're right to point out, I have said that a big part of the transaction volume that goes on in M&A is sponsor-driven. And our growth in that area is a function of the fact that we are much more relevant to sponsors than we used to be. And so I would anticipate that we'll continue to make those kinds of inroads. And a big chunk of our revenues this quarter also had to do with the SPAC backends, which, by the way, oftentimes cross over into the sponsor area. So when I look at our SPAC revenues, oftentimes we're dual pathing. We're talking to private companies about private sales or public sales. Sometimes they break more to private sales to sponsors. Sometimes they break more to public sales or the opportunity to tap the markets using a SPAC backend. You know, I can't understate the importance of having that capability because it drives our ability to do other parts of the business. And so we think about it more holistically, you know, when we think about our M&A advisory business as opposed to just, you know, are we just focused on sponsors? Are we just focused on corporates? We have to have that full mix in order to continue to drive our business forward.
spk09: That's helpful to get that insight into your thinking there. Just a quick clarification there. In your comment, I think you had mentioned that you expect advisory to stay around this level. Did I hear that correctly? So you produced about $100 million of revenues this quarter. Is that where you see the business operating over the coming quarters?
spk06: Yeah, I actually think it, I mean, I think it could move higher from here. You know, when we look at the growth trajectory and our ability to win assignments, I actually think it could move higher. I think I was more reflecting the fact that, you know, we've reached a pretty significant milestone this quarter in terms of the size of our advisory business. So I'm more acknowledging that. Like, I believe that, you know, our ability to continue to produce, and when I look at the way the backlog is continuing to queue up, I'm very confident that, you know, that will continue to grow. I'm just more I think the comment was more you know we've reached a new level and I think I've said over and over again our goal on many instances is to do higher highs and higher lows and I feel pretty good about where we are in the advisory and the growth advisory business and also say you know it's taken us a while to get here and I think there were a lot of people who felt like it was going to be really hard for us to build a meaningful advisory business and I know a lot of Our competitors actually have much more meaningful advisory businesses, and they started faster. I would just say when you take a look at the compound annual growth of our advisory business, I don't think there's a firm that's growing faster on the street, which suggests to me that we can continue to take share in a meaningful way. And so I would focus investors more on the growth rate of our advisory business because I think that's actually indicative of the share that we can take.
spk09: It's certainly impressive to see when you were at, I think, $84 million in 2019. So that's great to hear.
spk06: I got to give credit, Mike. I got to give credit to the team here. That doesn't happen by accident. And I think we talked about a few years ago, and you probably remember this, how we were investing through the cycle, in particular in 18 and 19. We made significant investments and our compensation ratios reflected those investments and And, you know, I think there were a lot of doubters out there that we could actually make meaningful progress. But you can see in a quarter like this quarter where you have a real significant slowdown in IPO activity and following activity, particularly in the biotech sector, this is a real indication that the investments that we've made, you know, in 18 and 19 and the acquisitions that we've made, particularly Quarton and MHT, have really gained significant traction. And that gives us great confidence in our ability to operate in multiple market environments.
spk09: Appreciate that, Jeff. And maybe just a quick one on the capital returns. You ran through some of the thoughts there, and I appreciate that. I guess if we could maybe put a little finer point on that. You did a record amount this quarter. You did about $50 million last quarter. Is that the right way to think about the pace here near term and Maybe just give us a broad update on the capital allocation philosophy broadly.
spk06: Yeah, so I think, you know, we're not changing our guidance in terms of the minimum amounts we're going to buy back. But as I said in the beginning of the year, we will be very active when we see opportunities to do this. And I think third quarter was a good example of, you know, we had some opportunities to buy stock cheap. And I'm all for that, right? I go back to my days on the buy side. I know how to buy things when I think they're mispriced. So I'm happy that we were able to do it. We certainly have the financial wherewithal to do it. And we'll continue to be active. I think we also recognize that we took care of the convert, which I think when you look at, you know, fully diluted shares outstanding, that was a big objective of ours. And so we said we would continue to buy back aggressively, and we have. And I think we'll continue to do so as our operating business continues to thrive.
spk09: All right. Thanks, Jeff. I appreciate the call on that.
spk06: All right. Thanks, Mike.
spk02: Thank you. Our next question comes from Sumit Modi with Piper Sandler. Your line is open.
spk05: Thanks. Good morning, guys. You know, just sticking on the M&A front, you know, we've Hearing the commentary around the strength of your sort of D-SPAC pipeline today, but kind of looking forward, kind of given the uncertain nature of the economy at this point, some maybe yellow flashing lights, how are you guys thinking about the effects that could have not just on the D-SPACs but kind of M&A more generally and some of the core verticals like healthcare, consumer, industrials over the next year? Do you think you can grow through any dislocations in industry trends given your smaller but sort of growing base that you're working off of?
spk06: So, great questions to me, and that's obviously something we think about. I think I aspire to be big enough one day in M&A to actually have general market conditions impact our flows. That would be great. I think we have a lot of room to go before we get there. I think from our standpoint, we're taking share. I can't stress this enough. We didn't used to compete with a bunch of firms in this space at all, and now we're competing and winning in part because of the breadth of the product offering that we have. So I actually am not terribly concerned about economic headwinds and how that might impact our business specifically. I mean, obviously, if there's a huge economic downdraft, it could impact everybody's business. But I look at our business and I'm like, we just had a very significant dislocation not that long ago in the first and second quarter of last year. And now we're seeing a pickup in M&A activity across the board and that M&A activity and also access to capital. So when you think about the number of SPACs that are public and the amount of business that has to get done because of the time constraints around SPACs over the next 12 to 18 months, it's hard to make the argument that the general economic conditions will impact our ability to continue to grow advisory business. I just think there's a lot of stuff right in front of us with a very significant install base that gives me a higher degree of confidence in what I can see into the future than maybe at any other time. And so Listen, I'm not smart enough to predict quarter over quarter. I think you could always have those kinds of fluctuations. When I look out over the next year or two at the work that we have to do and the sectors that we have to do, there's a lot to get done. And so I remain very upbeat about it.
spk05: Great. Thanks. That was really helpful. And then turning to brokerage, appreciate the color around the progress of that brokerage growth and diversification. Just wondering if you could step back a little bit and kind of frame the shift in that business over the last few years. Maybe talk about how the product offerings have changed in the business, how they've impacted your positioning moving forward to capture more of those revenues on both a kind of brokerage and services perspective.
spk06: Yeah, so I think there's actually not a lot of folks that understand the intricacies and dynamics of equity market structure and equity market trading in particular. I think what we recognize is the world really falls into two categories. There's the big players who use central risk books and their dark pools to really drive volumes. That's not our game, right? We don't have dark pools here, and we are not using risk capital to drive outcomes. We're much more agency-focused, and I think there you've got to be at the top of your game both algorithmically as well as in research. So you have to excel at both of those. And I think the gains, the share gains that we've shown and the continued share gains that put us well inside the top 10 in terms of our market share, that's bigger than at least half of the bulge in terms of our market position. That's because they've stumbled, and I think it's hard to regain that momentum. It's not like you can all of a sudden wake up tomorrow and rebuild a world-class equity research franchise. That's a hard thing to do. We have that. I don't think you can wake up tomorrow and rebuild your algorithms and get them reinstalled on people's desks so people use them. That's a hard thing to do. So the very thing that we've done, positioned ourselves to have not just meaningful share gains, but meaningful, like, consistent share gains. So our gains over the course of the past year to year and a half are not eroding in terms of market share, and that's phenomenal. And so, you know, those are the strategies we pursued. We'll continue to do that. And when you think about adding on in places like, you know, what I would call non-execution-driven businesses like securities, finance, and swaps, That is an area that we have a lot of ground to take. We can really penetrate the wallets from existing clients in a way that others can't. And then when you look at what we've done in Europe, I mean, again, we're much bigger than we used to be in Europe. We still don't actually move the needle when you look at market And so there's a real opportunity for us to continue to take share there. So I continue to remain, you know, bulled up on our ability to grow our business. I know some people think it will be harder to do in the future. I'm less concerned about that.
spk05: Okay, great. Thanks for taking my questions. Thanks, Shamit. Thanks, Shamit.
spk02: Thank you. Our next question comes from Devin Ryan with JMP Securities. Your line is open.
spk04: Great. Good morning, guys. Morning, Devin. How are you doing, Devin? I'm doing terrific. Thank you. I guess first question here, just digging a little bit more on the outlook for the underwriting businesses. Clearly, coming off of a fantastic year and just a lot of things that are hitting. And I just want to unpack a little bit as you guys are thinking about maybe budgeting for 2022. And I appreciate probably some of this is hard to share because you have to predict the future. But do you think about just the business and where maybe a micro level where you're hitting on all cylinders or maybe even feels like it's above normal? versus kind of where there's still room for growth. How would you kind of break it down as we head into next year, looking at your backlogs, like where there could be upside in revenues and where maybe the bar is a bit high? And then just within that as well, I know you said two-thirds of the SPACs that you're working on have either closed the deal or have a pending deal. But I suspect of that two-thirds, there's still a number working through the process where there's somewhat predictable revenues and then the remaining one-third, you know, a lot of revenue still to come. So is that 4Q, or is there still kind of this embedded kind of nice momentum of SPAC revenue that's going to come in in 2022 just as, you know, those deals close and you get the majority of revenues on closing?
spk06: Okay, so a lot in there to unpack. So let me just make sure. I want to make sure that I actually address it. Are you talking about banking backlogs specifically? Yes.
spk04: Yeah, I mean, that's effectively what I'm getting at. Like if you're thinking about the backlog heading into 2022, just like where there's maybe some capacity and growth and then where the bar feels a little bit high just given how well you did and have done in 2021.
spk06: Yeah, so I actually feel like, you know, there's a lot of room to grow in advisory. That's for sure. But I also – and as I mentioned earlier, a lot of that has to do with the fact that I think a significant number of SPACs are going to get back-end deals done. They may not be done at the same valuation levels. There may be some fee compression. But we've just begun to think about the volume that has to get done as an industry. And it's going to be significant. I just have been around the SPAC space for a long time. I think that sponsors are highly motivated to get deals done. I can't think of any other space in M&A advisory where there is a group of individuals who have to get something done in a time frame. And we can debate how much of them are going to get deals done and how much of them. I will just say my experience is the vast majority of them will figure out ways to get deals done. because the economic pain of not getting a deal done is too great. So it's going to be a really busy 2022 for SPAC backends, and it's going to be a really busy deal in 2022 for Cowen. What I will also say is a bunch of companies are coming to us And they're exploring SPACs. And we are the best at back ends, hands down, bar none. So when you come to Cowen, you're coming to get advice maybe on whether or not that's a path for you. But while you're here, you're also hearing about the other opportunities for you to either monetize or capital raise if that's not the best path for you. And I think one of the things that's driving our advisory business is the inbound calls from people who want to understand the SPAC market better. That's both sponsors and companies. When they're here, we're walking them through their alternatives. In many cases, it's driving other outcomes in both capital markets advisory or what I would call the debt advisory business or private placements. Maybe it makes sense for them to do one more round of private financing. Those are calls we were not getting two years ago. because there just wasn't enough happening around that. So the knock-on effect of being the preeminent SPAC player has enabled us to continue to grow businesses in other places. That is part of the reason why I remain as bulled up as I am on our ability to drive advisory business going forward. Does that make sense?
spk04: It does, Jeff. And then, I mean, if you can also, on the underwriting side of the business, just love to think about – you know, maybe at a more granular level where, you know, the bar's high into 2022 and I appreciate you can continue to do better, but just where, you know, you just, it was kind of a special year versus like where there's capacity and things, things, things could be better. I mean, longer term, clearly in underwriting business, you're, you're expanding the footprint, you're increasing market share, but just trying to think about after what is a phenomenal year, we're getting questions, around, like, what does that imply for 2022? So I just like any more granularity around, you know, the individual, you know, sector, you know, maybe from a sector perspective, like where the bar is.
spk06: All right, so let me try to give you a little bit of color on this. So if you look at our underwriting revenue over the course of the past two quarters, it's been about $86 million, right, each quarter. And if you think about the mix, right, we know, if you just take a look at biotech, which has been the primary driver for Cowan's underwriting revenue historically, that has been – last quarter was the worst quarter in terms of volume. In terms of biotech performance, right, it's been the most horrendous six-month period in biotech stocks, you know, honestly, since I can remember. And so many of those companies have chosen not to actually finance themselves. We were mandated and are mandated on a number of situations that just didn't go because of market conditions. So yet, Callan's underwriting business has remained pretty consistent. Where did that come from? Well, we're much more relevant than we used to be in areas like AI, robotics, our consumer business. If you look at the number of book run transactions we've done in consumer alone in the last two quarters, That tells you something different is happening at Cowen. We're finally beginning to monetize the investments we made in banking and also our research footprint. So, again, you can't do IPOs and follow-ons unless you've got a really high-quality research footprint. We've made investments in that over the past few years, as we've discussed. And when the inevitable biotech slowdown occurred – We picked up the slack in other areas that wasn't happening. So I look out the next year, and I'm like, I know a bunch of these biotech companies that we're mandated on have to raise money. Like, it's not really an option for them. After a while, price just, you know, they can wait for a while to see if market conditions are better, but inevitably they have to raise money. And when they do, we'll be there. And so I look at this and I say all this business that I thought we were going to do in biotech, if there had been a halfway decent tape over the last two quarters, that just got deferred. And that makes me feel really good because actually I look out at, you know, the back half of this quarter maybe and into the beginning half of next year. I'm like, I already know there's going to be a bunch of those companies that are probably going to have to finance. I will also remind people that is not in our backlog. So biotech follow-ons, which has been a huge driver of Cowan's revenue, they're rarely, if ever, are in backlog because by the time you actually become qualified for mandated backlog, you're actually in the market and you're pricing them overnight or in two days. So, again, I'm looking at the shadow here and saying we know all these companies are going to have to finance. The last thing on that front is I think people are waiting to see what happens with drug pricing policy. It's been a big thing in biotech. Obviously, we'll see what happens with the bipartisan infrastructure plan. There's likely to be some clarity around where drug pricing is going to fall in that plan. And once there is clarity... it will be safe for people to invest in biotech again and pharma. And I will just say people have been on the sidelines for the last six months because of the uncertainty of where this is going to fall. I don't know that I'm smart enough to know where that is going to fall, but once it does, people will be able to readjust and they'll be back in the market. And I actually think there's a very significant probability that we'll catch a bid. Now, I don't do market timing. I just, you know, I'm a student of that business because it's an important part of our business at Callen. And that's what I think. We'll see how that plays out over the next few weeks.
spk01: Okay.
spk04: Terrific. Thanks, Jeff, for all that color. That's very helpful. And just a follow-up question here. You know, you talked about expanding the footprint. I think sometimes, you know, not appreciated fully when people look at Cowan. I mean, headcount's up 16% over the last two years since the end of 2019. It's up 10% just even from the end of 2020. So you guys are growing the footprint pretty substantially. So what I want to connect this to is it feels like you're getting operating leverage off of that because you have infrastructure in place that's leverageable. And so over time, it doesn't happen necessarily overnight, but over time that should drive operating margins higher as you grow the footprint. I guess two things. One, how are you thinking about growth into 2022? Can you keep up kind of this type of pace where you're growing faster upper single digits, low double digits, you know, the footprint annually. And then in terms of like the need to add more infrastructure underneath it, like where do you feel like you need to kind of add versus where can you really get, you know, some additional positive operating leverage? Because it does, as I said, feel like as you're adding more people, you're seeing, you know, positive operating leverage off of that as we've seen over the last couple of years.
spk06: Yeah, so two things on that front. First, I think it's really important. This is the first time we've actually articulated to people our revenue per head. And we've done it on a rolling 12-month basis, so you can actually see how that operating leverage actually works at the top line. Naturally, our expenses are going to go up. nominally like in, in, in terms of aggregate dollars because we have more people and we're bringing them back to, to, to, um, office spaces. Uh, and we've got to make sure that we've invested in that infrastructure to bring them back and things like hoteling software. We actually need more space in some instances because we've done some acquisitions in areas geographically, uh, particularly in San Francisco where, um, you know, and, and, and in New York we brought on so many teams, um, They need places to go. We've increased the footprint primarily around revenue producers, and that's been a great thing for us. So part of what you're seeing is the infrastructure and market data services and telecommunications infrastructure. We're also not asking people to bring their – desktop home operating systems back to the office. So we've had to make some investments in fixed infrastructure to make sure that people have desks both at office and equipment at home. And we've regionalized. This is a big thing for us. We've made a decision to, in particular in New York, we've regionalized our office footprint. So we've got new offices in Red Bank, Summit. We've built a much bigger space in Stanford where we had extra space, and we built that space out. It will be open hopefully in the next few weeks. Long Island, this is enabling our best talent to be able to work near where they live. So as we return to office, we're not necessarily returning to commuting. because the efficiency gains we've seen from people not having to commute has been amazing. So what you're seeing part of our uptick in fixed costs is a function of the fact that we're more people and we're redesigning the workplace of the future. Having said that, I expect we'll continue to drive those margins pretty hard because, you know, we're seeing we're just exiting this period of time at a much higher revenue run rate. And that's really what we expect to see going forward.
spk04: Okay, great. Thanks very much. I'll leave it there. Great. Thanks, Devin.
spk02: Thank you. Our next question is from Steven Schubach with Wolf Research. Your line is open.
spk08: Hi, good morning, Jeff. Good morning, Steve. Hi, Steve. Good morning. Good morning. So I wanted to just ask a question on the brokerage business. Now that we've entered a period of more normalized trading activity, I was hoping you could speak, Jeff, to the sustainability of this 2.5 million per day run rate. I was also hoping you can just unpack some of the factors that maybe drove some of the pressure in the services revenue line. These fees have historically just been much less volatile, and you cited some strong KPIs in terms of new client ads. So just trying to unpack some of the different puts and takes there.
spk06: Yeah, so let me take the services line really quickly. We sold off a part of our clearing business and we reduced our clearing footprint there. So, again, everyone looks at top line numbers. We're actually looking at capital utilization, which is another thing that I think people need to focus on, right? There's this that we have too much capital tied up in certain businesses. And we definitely had capital tied up in the clearing business last year and made a conscious choice to exit that business and move that off. That's part of what's enabled us to do more share buybacks. So, but obviously the revenue drop there is a function of the fact that clearing is was in the service line, and that was a conscious choice. So that's really the drive there. When you strip that out, we're continuing to see growth in our swaps business and our prime brokerage business. Outsource trading is a big part of that. These are the things that are driving our performance there, and I don't see that abating anytime soon. Again, when investors – and I think you probably see this a little bit in your business – They have a finite amount of wallet. They want to aggregate that wallet with people who are able to provide them services. And so what we've done is now that we're onboarded so many clients and we're so relevant to them in cash equities and algorithmic execution, we're opening up other pockets for them to pay us because, you know, they may choose. We want to make it easy for them to pay us in a broad variety of ways so that they can continue to consume what they consume on the research front and or in the NDRs or whatever it happens to be. So our view is, you know, we'll see quarter over quarter moves between, you know, cast execution, algorithmic execution and services. But over time, our expectation is that services business will be a much more stable part because once you open up prime brokerage accounts and swap accounts, Like people don't move them around as much, at least not from where we are. If you're running a really big prime brokerage business like some of our larger competitors, you know, people move balances between those folks all the time. When people are moving their balances to Cowen, they're doing it with intentionality to get Cowen paid. And so they're not likely to move it away. And that's what we've seen is the stickiness of our prime business and our securities finance business and our swaps business. is actually really helping us to maintain that $2.5 million a day.
spk08: That's great call, Jeff. And just a follow-up, just switching gears a bit, I want to talk about Royalty Partners. And I know there are some limitations in terms of what you can share, but I was hoping you can provide some sort of update on when that IPO is expected to relaunch And if you can give any sort of context around what your ownership is today, how much of it's reflected on the balance sheet, and how would you deploy such proceeds once there is some sort of monetization event?
spk06: So, obviously, yeah, we're disappointed with market conditions. That was probably emblematic of, you know, they launched the deal and it was, you know, probably the worst time that we've seen in sort of the biotech or healthcare business to try to get a deal done. So, They pulled that deal. We'll refigure that out. I expect it. What we saw is actually interesting is meaningful demand. I just don't think it was the valuation level that we had hoped. And so it makes sense for us to refigure. um, rethink about that when market conditions are better, uh, the value is still there. So I want to be clear, but we don't show it. I think you, you, you put out a research report that rightly points out that we don't carry any of our stakes, um, on, uh, at any value on the balance sheet. Uh, and they're meaningful. I mean, obviously they, they're, those are, if we were to mark them to market, um, They're meaningful pickups in book value. And so, you know, what I would say is on health care royalties, we'll continue to monitor market conditions. And I don't think it will happen in the fourth quarter. But as we head into next year, what's been validated for us is the ability to do a permanent capital vehicle in that space is hugely valuable. And we'll continue to pursue that. You know, the market won't always be this way.
spk08: And just one final question for me, Jeff. You had noted that you would provide some additional context or some incremental disclosures on some of your investments. I think you had touched on that a little bit in your prepared remarks. So I was hoping you could provide some additional color on what incremental disclosures you plan on providing since that business and your investment portfolio just generally remains rather opaque.
spk01: Steven, you know, What we've seen others do is disclose at the end of the quarter some realized events around our incentive fees so that people will have an earlier view into what's going on in that line. So we plan on doing that in the future.
spk06: we're just trying to take away the guessing game there. Um, you know, I, we, uh, obviously we had an incredible, uh, incentive income in the first quarter of this year. And I think when you look at those numbers, nobody here and nobody on the phone probably thought that was sustainable. And, and so when you, when you look at the mean reversion, people are just always trying to guess, uh, coming into the quarter. And I think we should just probably tell you what it is earlier. Um, so that people can drop it in their models.
spk08: Uh, it's music in my ears. Uh, So we certainly welcome that disclosure, and thanks so much for taking my questions. Thanks, Steve. Thank you.
spk02: Thank you. Our next question comes from James Yarrow with Goldman Sachs. Your line is open.
spk07: Good morning. I just wanted to ask about your ability to generate comp leverage from here. Go ahead. Specifically? Sorry about that. So you've had tremendous success in growing the top line over the past few years. So I just wanted to touch on your ability to generate top leverage from here as you continue to grow the franchises.
spk06: Listen, I think we've actually generated a significant amount of comp leverage so far. When you look at a lot of our competitors, they skew much higher in terms of comp-to-revenue ratio than we do. We've got businesses here that are lower comp-to-revenue ratio, and I think when you look at our business, I think we – I wouldn't expect it to move too much off of this. I would say longer term as we grow our advisory business, that will be higher margin business, lower actually fixed costs. So actually you can make the argument that if we see you higher in advisory business, the comp level might actually, comp percentages might go up, but margins will also go up. And I think that's really what we focus on, James, is margin. And comp levels really fall out of business mix and things like that.
spk07: Okay, that's really helpful. Thank you.
spk02: All right. And I'm not showing any further questions in the queue. I will turn the call back to Jeffrey Solomon for final remarks.
spk06: Well, thanks, Operator, and thanks, everybody, for listening in this morning. As I often do, I think it's important to highlight just the amazing team that we have here. I mentioned it earlier. I also should just say it feels amazing that when great people from all across the street want to come work at Cowan, Part of what we're seeing here in the explosive growth that we've been able to experience, particularly during the pandemic, is that There are some really talented people working in other places that want to come work at Cowan. And, you know, no one really ever asks me this question, but the single greatest metric that I use as a measure for how we're doing is whether or not the people who are at other firms want to come here and do what they do and whether or not they're able to do it better here than anywhere else. And whether or not the people that are already here are staying here and and are living on the promise that – and whether or not we're able to deliver on the promise that we give them. That's happening at Cowan. And we have a bunch of use cases and things that validate our strategy around recruiting and retention, and it makes me really feel good about where we are. So more to come, and I look forward to catching up with you on the next quarterly call. Have a great day, everyone.
spk02: And with that, we conclude today's conference call. Thank you for participating, and you may now disconnect.
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