Cowen Inc. (COWN) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning, and thank you for joining us to discuss Cowen's Results for the First Quarter 2022. By now, you should have received a copy of the earnings release, which can be accessed at investor.cowen.com. After the speakers’ 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. Please go ahead.
J.T. Farley: 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 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 Lasota. Now I would like to turn the call over to Jeff.
Jeffrey Solomon: Thank you, J.T. Good morning, and thank you all for joining Cowen's earnings call for the first quarter of 2022. 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've 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 the XBI 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 and 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 had used 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. In banking, our acquisitions of Quarton, MHT 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 in 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 comprised only 36% of overall banking revenue as we had strong contributions from the industrials, technology and verticalized software data and analytics sectors. Within healthcare, non-biotech areas, including tools and diagnostics, med tech, healthcare services and healthcare IT, made up 40% of our total healthcare banking revenues, which is reflective of our continued effort to diversify our coverage even within that sector. Despite the capital market slowdown, our pipeline remains strong at about the same level as the start of the year, although the current market volatility adds uncertainty to 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 the digital front, last month, we held our official launch for Cowen Digital, and we've started spot trading of cryptocurrencies 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 from PolySign is also producing results. Through its standard custody subsidiary, PolySign offers an attractive and differentiated digital custody solution for our clients. PolySign just completed a Series C financing round with key new investors as part of its acquisition of the leading crypto fund administration platform called MG Stover. While terms of the financing were not disclosed, this event did increase the value of Cowen's $25 million strategic investment made in PolySign 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 a little more than 3 million a day in average trading volumes well ahead of the 2021 full year average. In research, our team continued 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 Healthcare 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 for the past year. We also continue to build out our thematic research capabilities. We launched a very successful thematic research podcast series, created a multi-sector conference call for clients focused 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 fee since 2008. The market volatility was a headwind for incentive fees, resulting in negative mark-to-market adjustments in the healthcare and sustainability strategies. Looking at our 5 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 Proterra Investment. Our healthcare investment strategy completed 4 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 2000 benchmark for the quarter. The merger arbitrage strategy had $300 million, a little over $300 million in AUM. The strategy outperformed the HFRX 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 5 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 PolySign as well as positive performance from our macro hedging strategy were partially offset by negative quarterly marks and values of investments in our healthcare strategy, our activist strategy and our merchant banking portfolio. And with that, I will now turn the call over to Steve Lasota for a brief review of our quarterly financial results. Steve?
Stephen Lasota: 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 income attributable to common stockholders for diluted earnings per share was $33.4 million or $1.05 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 and depreciation and amortization, were $108.2 million for the fourth -- for the first quarter. D&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, 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, and 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 in 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 in public positions in the sustainability and healthcare 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 proceeds. For the full year 2022, absent a continued and prolonged decline in capital market activity, we are targeting an annual compensation ratio between 56% and 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 were due 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 were $7.2 million compared to $4.4 million in the first quarter of 2021, due primarily to higher expenses on the Portico acquisition. Economic income tax expense in 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 25% to 28%. As Jeff noted earlier, our interest rate swap resulted in an unrealized gain of $18 million or $0.43 per common share in the first quarter of 2022, which was presented in economic interest expense or income and in 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-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 Op Co 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. In Asset Co, we had invested capital totaling $119.6 million at the end of March, down from $121.2 million at year-end. Turning to our equity. Common equity was $1.04 billion, up slightly from $1.02 billion at the end of December 2021. Common book value per share, which is the 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 generating 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 $0.12 per common share. During the first quarter, we repurchased $24.1 million in stock, a total of 798,000 shares, including purchases executed pursuant to our existing 10b5-1 plans. This is equivalent to 56% 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 a weighted average of 31.8 million shares, up 400,000 shares from the first quarter 2021 and down 1.8 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'll also prioritize additional capital returns when we were able to monetize assets on the balance sheet. And with that, I'll turn the call back over to Jeff.
Jeffrey Solomon : 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, 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 it over to the operator -- I'll turn it over to all of you for questions. Operator?
Operator: . Our first question comes from the line of Steven Chubak with Wolfe Research.
Steven Chubak: So I wanted to start off just given your comments around the backlog, 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, there's 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 of what was a subdued first quarter?
Jeffrey Solomon: 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, they just -- they into backlog ever. So most of that reflects IPO activity and 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. And while we continue to win mandates and win book-run deals, we're being very conservative in how we're thinking about the execution of those deals. We'd 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'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 very 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. And I expected that we would see maybe a dip in that activity in the first quarter in part because so much activity gets done in the 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 in M&A. So the mix of the business and backlog is a little bit skewed more to M&A than it is to equity offerings at this point.
Steven Chubak : Understood. And maybe just a follow-up unrelated topic on the capital management and buybacks. If I take a step back, if I look over the last 3, 4, 5 years, every quarter we got on the call, there's talks of like pretty aggressive buyback that you guys are doing. The numbers are substantial. But despite that, you really fail to make a real dent in the share count. And it might be helpful if you could just provide a little bit more transparency here about how much excess capital you believe you're running with today? And with the stock trading at 80% of tangible, a mid-single-digit PE, why not look to just get much more aggressive in reducing that share count? I just want 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 shrink just really hasn't manifested?
Jeffrey Solomon : 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. And so I think you've got to adjust for that. When you look at the fact that we took out the convert last year and then we actually converted the premium into shares and then bought those shares back, I mean I think there's an adjustment that has to happen there. The people's calculations of what earnings per share outstanding were did not include the converts, which were deep in the money, and they should have. And so I think that's a big part of the reason why you're not seeing the share count reduction. I also think we've done -- obviously, we'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 benefit from the upside as well as their 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 they're equity related. And then the last one, I just think is RSUs. We continue to be believers that as we act as a partnership here. It's important for us to be making sure that 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'll continue to do what we can to reduce the share count. But I think those are the big headwinds and the reasons why maybe you haven't seen it. I would say we had about a 1.8 million share reduction in the first quarter. When you think about that, that's pretty meaningful when you're talking about a base of call 33 million fully diluted shares outstanding. So I wouldn't necessarily agree with the assessment at least as it relates to this quarter, I think we were pretty aggressive.
Steven Chubak : 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 could expect, just given the amount of excess capital as well as the monetization events that are likely on the
Jeffrey Solomon : Yes. I mean I think what we said is we're not changing our guidance on share buybacks. We'll continue to do that in the range we talked about. I'd like to be at the higher end of that range and where we can, if we have opportunities to buy it 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, we'll be much more aggressive. That's -- it's just being consistent. And so not changing the guidance, but obviously, we recognize where the stock is trading, and we'll continue to be aggressive buyers of our stock because we think it's super cheap.
Steven Chubak : That's great color. And then just lastly, one clarifying question, Jeff. You were talking about the potential monetization of various assets, and you would give additional color in the coming quarters. Are we expected to get an update on this in May or more fulsome update on how to think about potentially valuing these assets, especially those that aren't reflected in tangible common equity today?
Jeffrey Solomon : So I mean, I think we'll give you more color on the Investor Day for sure. Things continue to move, I think, in our constructive direction as it relates to Linkem. I don't have more to say on that front, but I continue to think that the desire on the part of our partners there as well as ourselves is to figure out how we're monetizing that position. And I don't have more to update because it's not in the public domain, but we'll see how that goes, given the current environment. We're definitely going to be focusing a lot more on helping people to understand the value of our GP stakes in the asset management business. And I think that's an important part of it, right? You quoted 80% tangible book value, but you're assuming 0 value on that tangible book value for our stakes, which gives me because they don't have any book value associated with them. And yet we know from the profitability of that business, performance fees notwithstanding that, that's 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 it's just going to take some time. So we won't do it on an earnings call, but happy to do it at Investor Day.
Operator: And our next question comes from the line of Chris Allen with Compass Point.
Christopher Allen : Wanted to dive in a little bit on the brokerage business. Obviously, this past quarter, we saw a solid backdrop on increased volumes and volatility. But maybe you can help us break down where you're seeing share gains versus what's been driven by kind of industry tailwinds, which -- I mean looking at the April number, it seems like that's kind of continued? And then where are the growth opportunities to gain more traction moving forward?
Jeffrey Solomon : So I think you're right. There has been market share gains for Cowen as well as 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 to be clear, we've made some real strong progress in places like prime brokerage and outsourced 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, as 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 like swaps and derivatives and a bunch of other stuff. And that's really just, again, we virtually no meaningful presence in Europe 3 or 4 years ago, and that's been a nice area of growth for us. When I look out over the longer term, I definitely think that we'll see pickups in areas that where there's a huge market opportunity. While the amount we're doing in digital asset trading is small right now, that's a brand-new initiative for us. It's relatively new area that we think is actually going to show a significant amount of institutional involvement over the next 2 to 3 years, and we're in the pole position there and 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 were concerned that Cowen's volumes would go back to pre-pandemic levels, and that's just not -- that's not happening. And I think that's a function of the fact that we've taken share in our core businesses and expanded. And I also should point out that some of the businesses that we're in have higher margin business. And that's -- so when you're looking at trading a non-dollar in places like that, like there's just more margin in that business for us. So that's actually helped our bottom line pretty significantly.
Christopher Allen : Got it. And then maybe -- just touching on -- there are some SEC SPAC pulls out. I mean how do you guys think about that? I mean, you've talked about in the past SPACs as a percentage of backlog. How are you thinking about that kind of component of the investment banking backlog right now? And just maybe some color on that would be helpful.
Jeffrey Solomon : Yes. So at the SEC, none of this is surprising. And I said, publicly, we've advocated for better regulation in the SPAC market. We think there was definitely some people in the SPAC market doing things that we were concerned would cause there to be a negative team. 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's a really constructive place. For us, again, most of our business in SPACs is on the back end. And these rules won't go into play into effect for a while. There'll be common periods and back and forth. And so I think it's actually really geared much more towards the future new SPAC issuance. And so our view is that it will continue to be something we do. The SPAC 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 constructed our capital markets product business, our product partners are incredibly versatile. And so everyone should know it, we don't have teams of people sitting around doing nothing because all they did with SPACs. That's not the way this organization is constructed. We're actually constructed by industry. And the product partners are versatile and that they have to be -- we have to be advising clients on multiple paths forward. So a number of the SPAC 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 SPACs, but we're not losing them as clients. We're moving them to other areas of execution. And some of those take a little bit longer to play out. Some of them are just -- you don't get the same kind of velocity that we saw certainly in the first quarter of last year. And so I want to be clear, SPACs 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 and the product capabilities we have is not going back to where it was pre the SPAC sort of the SPAC boom because we have a whole slew of new clients now that are looking for advice even if they're not doing SPACs. And that's been actually something that has helped us significantly to build out our advisory business.
Christopher Allen : And then just last one for me just in terms of the opportunities around digital crypto. Obviously, you started spot trading early days there. As you kind of think about building out that business, or you be building it internally as you kind of just said you have leveraging capabilities within the platform and what's the appetite there from your client base just in terms of looking at that opportunity moving forward?
Jeffrey Solomon : 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 up better and clearance got better, that was a big solve that enabled there to be a meaningful allocation from asset allocators and equities and institutional formats. The growth in hedge funds as a result of that. When we look at crypto, it's early days and still largely a retail business. Now this adoption rate for institutions is going to come 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's likely to trade them in our conversations, these are people who are very fast in the equity market or in the macro market, clients who are already talking to and they're looking for ways to express their investment thesis using cryptocurrencies or investing in things where they think there's extensibility, the same way they might make equity investments. And so what we've chosen to do at Cowen is focused primarily on the infrastructure. This is why we made the investment in PolySign because custody is a big solve. When you see people like Brevan Howard and Soros partnering with us on those things, as we buy a fund -- the largest fund administrator that should give you an indication that custody and fund admin are precursors to institutions getting involved. They have to account and custody for their assets. So the growth in that and our ability to participate in that from an investment standpoint and 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 do what exchanges do, firms like Cowen who are equity execution and prime brokerage and things like that will do what they do and custody will be its own thing. And right now, that industry is all in one, like you have all-in-one solutions, and that doesn't work for institutions. And so where Cowen is focused and why we're so excited about it is we're focused on occupying the space that is best for Cowen, where our existing client -- clients of Cowen already know us and respect us. So as they move into crypto, we are going to be the logical place for them to go because they'll get the same experience trading crypto and digital assets from Cowen that they get trading equities. And that's the strategy that's unfolding. And again, when you see people like Soros and Brevan Howard and a bunch of other people who are partnered with us at PolySign, that gives you an indication that, that is happening.
Operator: And our next question comes from the line of Sumeet Mody with Piper Sandler.
Sumeet Mody : So I just wanted to start with biotech in the underwriting space. I know, Jeff, your previous comments revolved around kind of clarity of H.R.1 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?
Jeffrey Solomon : Yes. So I think -- there's no question that as we get into BBB, which should be the better, I would say, regulation to look at -- better legislation to look at, but 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 previous version of BBB in part because it protected innovation. And I think that's a big component of this. I fundamentally believe that at least the legislators I speak to and the groups that I'm a part of in those discussions have made strong impact in terms of protecting innovation, which is where biotech lives. 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 innovation is what we're looking for, and I think that's where 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 deck for the next decade and takes a big risk factor off the table. So I'm looking at it. What we're seeing is for companies that are having positive clinical results that need to raise capital, if the results are really positive, we're getting deals done. I mean we got a bunch done towards the end of the quarter or during the quarter, and we've had a few in the month of April. It's just people are waiting for events in the -- those events happen in clusters. And when they have positive performance after that, you oftentimes will see our clients are doing financings. I also will say that the increase in private investments, so pipes and big capital raises relative to market caps, we've seen much more uptake in that from our clients. And I expect that you'll -- those just take more time to get done than what I would say are like the drive by follow-on offerings, right? And so even though the velocity has slowed down, 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 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 we look at the mandates that we have, there's going to be back-ended in this year as we -- as people get closer and closer to having to do their capital raises. And the last thing I would say on this, Sumeet, is, whenever there's a market in transition like the one that we're in, it just takes some time for the human brain to reset on valuation, right? I used to be worth this and now I'm worth that. And so for people that are looking to raise money, there's a moment in time in which they're like, "Well, I just need to get it done." And that's what we're seeing. We're seeing management teams and Board and say, well, I know we used to be worth that, now we're 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. And Cowen is a place that can get that done for us. And that's all you can ask for. We can't change the environment we're in. We just -- these are the times when you make more meaningful and deeper relationships because you're getting stuff done. And I guess the other thing I would say is there's more versatility to that as we look at companies that are doing more debt deals. We've been very active in the debt in the royalty space. Those are like M&A trades, frankly, where we're sole managed and the fees look like M&A fees. Those 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.
Sumeet Mody : Great. And then just one follow-up for me here. I just wanted to level set kind of expectations around the M&A strategy today. And 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 and banking more generally and then 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 you want to scale that maybe you don't have a core competency in today?
Jeffrey Solomon : So it's a good question. I think you can continue to see us to focus on end markets, we think there's continued growth that are both accessible and -- addressable and accessible, right, for Cowen. And that's been the strategy, Sumeet. So there's plenty of places that have huge market, the potential the Cowen, it would be very difficult for us to do this. Why we don't have a balance sheet, so we don't do lending. So any industries that have huge lending capabilities, it's 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 and more disruptive, right? That's the reason we're here. But if you look at the middle market sponsor business and you look at our footprint there, those are less balance sheet intention for Cowen because so much of the financing for those transactions happens with direct lenders. And we've been very active in the direct lending business as 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 that's nonbank direct lending, there's an opportunity for Cowen to compete and we compete and win all the time there. The acquisition of Quarton was a platform acquisition for us. MHT was a tack on to that. Portico adds both sponsor and vertical capability in an area we think has tremendous growth, which is verticalized software. They're the best in that space. And we're seeing it, right? The wins that we continue to see from the verticalized software players, they have acknowledged that Portico is the best player there, and we're all over that now. And that has given us tremendous qualifications to expand in each of our industry groups. So if you're doing something, for example, in auto tech, suddenly, your conversations around mobility more broadly are really relevant. And so the great thing about that acquisition is 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 too catered to the needs of sponsors. And I think that's because we can compete there. And we see that there's a -- that's a marketplace where there's still a tremendous amount of capital even with people focused on it in the middle market, there's so many middle market sponsors to get under covered. And there's a real opportunity for us to with a 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. Don't see us doing much in the way of acquisitions in asset management. 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 revenues are more valued by the market. And so our continued to move in that area is pretty logical.
Operator: And our next question comes from the line of Michael Brown with KBW.
Michael Brown : So if we actually just build on maybe that last question a little bit there. Jeff, when you -- you talked about kind of the Portico acquisition. This is, I guess, 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 I take a step back at an announcement you guided to the acquisition adding about 20% growth for the advisory business in 2022 relative to expectation at that time. The landscape has, of course, shifted quite significantly since. So is there any -- as you think about that now, is there any thoughts on updating that number in terms of either the level of growth or the implied revenue that, that implied for Portico as you think about 2022?
Jeffrey Solomon : 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 part of the core Cowen product offering, and it is. And what I'll say is the speed with which it's integrating is much faster than the Quarton acquisition. And you'd expect that, right? Because the first acquisition, when you're entering a new marketplace, there's just a lot to learn. And then, of course, we went through the pandemic and everything stopped in middle markets for a good 9 months. What I'd like to see what's happening in Portico is that we're winning both M&A advisory assignments and we're winning Capital Markets Advisory assignments. So when Portico joined as when Quarton joined, they didn't really have a debt financing capability. So they could be great at selling companies out of the sponsor portfolios or maybe selling a founder entrepreneurial businesses into sponsors. That was -- as a big part of the Quarton business. But then the second trade, the third trade or the same asset, they would 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 Portico and what's happening every day at Quarton is that the pitches include both M&A advisory and Capital Markets Advisory so that if sponsors are looking to do stable financings or they're looking to 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 in 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 won on its own and vice versa. I think we're winning M&A -- we're winning capital markets mandates in places where maybe 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 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 we're 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 volatility doesn't matter much. These are businesses that are not pegging their valuations off of the same kinds of valuations that we're seeing 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'll continue to plug away and continue to accelerate that business even if the capital markets turn around or stabilize at some point. We're not expecting to see any slowdown at all. In fact, if anything, we'll see uptick and increased participation there.
Michael Brown : Okay. Great. It sounds like you're certainly still positive about the outlook there.
Jeffrey Solomon : Definitely.
Michael Brown : Yes. I wanted to -- I know you have like a private capital solutions business, and I know the pipe business is a key strength for you guys there. And you've talked a number of times on this call and other calls about your focus on growing with the sponsor market an area there that's certainly seeing secular growth is in the GP continuation funds and the LP secondaries business. So forgive my ignorance here, but I'm not really sure how your capabilities in that space stack up. Do you have an offering there to take advantage of that or to participate in the growth of those markets? And if not, is there an opportunity for Cowen to grow there? Could that be a larger piece of the story for you as you look down the road years from now?
Jeffrey Solomon : So 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 of what's happening in the middle market sponsor business. It's a lot less visible, I think, in many respects than what I would call Dealogic, I mean, which has been historically how people have looked at Cowen's revenues. That is on the strategic 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 felt 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 the foundational building blocks in place. So when you think about how to build a strategy, it's all about sequencing what comes first and then what comes 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. And as we look at our next strategic opportunities, that is 100% an area of focus for us.
Operator: And our next question comes from the line of Devin Ryan with JMP Securities.
Devin Ryan : Most questions have 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, the 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 if we maybe look out 5 years, like how big can ESG? And I know it's kind of an overlay to a lot of things, but how big of a kind of revenue opportunity or how you guys would frame that for the firm? Like if you can stack rank it in terms of like whether it's sector or just kind of revenue opportunity, that would -- just more perspective there would be helpful?
Jeffrey Solomon : So great question. And I think it's just a part of what we do really well, like we see these mega multiyear trends, and then we go after them, right? And thematically, like biotech was really obvious to us a decade plus ago. It just was obvious given what was happening given what we knew in research. And because we were so good at it, 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. Sustainability 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 in horizontals, right, things that are transcending across industry, like software, for example, right, a software and verticalized software. Each industry has dominant players. And so every industry benefits from having -- we benefit from having a verticalized software platform that can go across every industry and win business. Sustainability is the same thing, and ESG is the same thing. Every industry is undergoing its own revolution in how it is going to tackle climate change. And well, that may be imposed upon them by the SEC and it may be governmentally imposed and so on and so forth. The truth of the matter is it started about half a decade ago with everybody and corporate 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 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 opportunities, it's huge. In the industries, we started with electric vehicles because it was the industry that was furthest along and because Tesla is such a powerful investment idea for people, people began to look at other ways to apply battery technology to mobility. But if I look at ag tech or clean energy more broadly or workplace automation, all of these are ways for people to play sustainability. And they are across the industrial complex, they are across the healthcare complex. Every vertical that we're in is having its own version of the ESG revolution. And management teams need advisors 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 with partners who can work with every other partner. And that's a critical element of this. So sustainability maybe its own vertical, but I like to think about it as, if you're 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 space. I was in Israel earlier this week. And we had Jeff Osborne over there, who is our lead analyst, who's been doing this for a decade plus. And the attendance that we got from every industry in 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. It's 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 culture like the one that we have where everybody understands there's a fee pie there, and we should go after it on a collective basis. And that's what's happening at Cowen. So I'm 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.
Devin Ryan : Okay. That's really good color, Jeff. I appreciate it. I'm going to kind of close out here with -- it's a little bit of a statement, but I guess there's a question in here as well. I think that anyone that probably listened to this call is going to hear a lot of optimism. And coming back to maybe the conversation with Stephen on the stock, I mean, I think there's a lot of focus in the market when talking to a lot of investors, potential investors around closing the valuation gap, right? And we just went through probably the toughest or one of the toughest quarters I can remember in 20 years for a number of the businesses you're in. And if we annualize the earnings you guys have put up and even back out the interest rate swap, it's a mid-single-digit PE multiple. And if I look at even peers in this backdrop, many are trading at 2x kind of that multiple or much, much more. So I guess, the point is it will be great to have like a more detailed discussion broadly -- asset management business would be great, but just a more detailed discussion at the Investor Day around kind of the valuation more holistically in ways we can all kind of think about the valuation gap. And then I'd just love if there's any other context around how you guys think internally around like is the right multiple 10x? Is it double digits on PE because, again, mid-single digits on an annualized incredibly challenged backdrop doesn't feel appropriate? So just trying to think about how you guys think about what is actually appropriate relative to, again, all the optimism and kind of evolution of the business mix that you just talked about on the call here.
Jeffrey Solomon : Yes. So we'll definitely go into more detail on that at the 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, there's just settling out at higher lows. And we've said this for a while. Everyone when we were not going to cover off the ball and everyone's like, oh, you're just benefiting from the market environment like yes, we're 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 tailwinds swing around and -- because they invariably do. And the question will then be how do we navigate and tack in that environment? And the first quarter is a great example of how Cowen is able to tack in an environment with headwinds. That's the validation point that I think 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 there's 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 and the earnings growth that we've shown have -- should suggest to people that 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 Cowen's balance sheet. Like you can't have it both ways, right? We have a bunch of assets, particularly in our asset management business, that have 0 value when it comes to tangible book and yet contribute to earnings. So when I -- this is why we've stayed with ROE and return on 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're 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 and the organic growth we've had in higher-margin businesses and lower-margin businesses, this is a business on a capital base that has doubled in the last 3 years has 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 meeting these benchmarks and targets we laid out when we started this journey when I became CEO in 2018. And we said pretax actually back then 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 thing because it's not relevant anymore. It's -- you need to start looking at this on an earnings basis for all the reasons that you articulated.
Operator: And your next question comes from the line of James Yaro with Goldman Sachs.
James Yaro : Maybe when you think about the potential handoff between equities and ECM, presumably you 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 and ECM did pick up, how does that affect the equities trading business or are the trading results you saw this quarter "fully normalized" and thus should grow from here?
Jeffrey Solomon : Yes. So it's a good question. I think you could see market volumes taper in 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 diminution in volume because we continue to grow organically with a number of clients in the geographies that we have and the business lines we have. So the growth in our swaps business, the growth in our prime brokerage business, the growth in outsourced trading, all those are happening regardless of the volume 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, right, institutional services versus institutional brokerage. So when you look at the growth in institutional brokerage, that is much more a function of Cowen's 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 gains in the markets business, even when equity and ECM picked back up again.
James Yaro : Okay. So maybe I just turn to 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 PolySign? And then more broadly, how do you expect investment income and incentive income to perform in a period where markets are down a little bit? Is that coming that should be lower? Or is this sort of a sustainable run rate?
Jeffrey Solomon : Yes. I think -- so we can't 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. Like -- so what we've done at Cowen and maybe predict your involvement in the name, but 5 years ago Cowen would have been really levered in terms of its investment income to the movement of the equity markets and volatility, right? It was super invested in equities and in event-driven names where you would have seen a tremendous amount of diminution in value as a result of the spike in volatility. And we made a decision in 2018 -- we said balance sheets are meant to be seen, not heard. And so sucking the volatility out of the balance sheet wherever we can is a critical element of what we do. So we reduced our gross exposures 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 so -- 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 earnings. Like we did that in November and 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 or it's healthcare investments, or even our sustainability portfolio. Incentive fee is a little harder to hedge out. So you'll see volatility there, and we can't control those kinds of things. But those are just -- when you look at Cowen, I think you just you need to discount them. You need to discount them when they're up and you need to discount when they're down because they're not representative of core earnings capability. We obviously do accrue compensation against them and we reverse compensation against them. So there's some -- they're 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 PolySign 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.
James Yaro : Okay. And then just one last one. When you think about the monetizations of some of your merchant banking-type assets, has the market volatility slowed the pace of monetizations there? And then when you do monetize all of them, perhaps you could just update us on how -- what your plans are around the proceeds in terms of buybacks, dividends, new strategic investments and/or acquisitions? And then I think sort of the other end of the question that Steve asked in 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?
Jeffrey Solomon : Yes. 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 into 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 because I've seen how that can end for companies. And so the one thing we don't worry about at Cowen even in an environment like the one that we're in, nobody is worried about 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 a very levered company. And so I don't -- I think the proper metric is how do we make sure the equity bed is strong enough and resilient enough if we go through a prolonged downturn or we don't have to lay awake at night worrying about whether or not Cowen is going to be here. And that's just -- that's part of my own philosophy around how you manage a safe business and how you get yourself in a position to take advantage of the next upswing, which invariably happens. So that's part of that. I think I want to 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 Linkem, which is probably the largest chunk of that, that everyone focuses on, I mean, no question that a war in Europe is not great to be time to be selling a European asset. Having said that, there's 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 that asset has a very unique position. And so we'll continue to do things we need to do in order to monetize that. I think I've been on the record of saying I would have 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 c
