Cowen Inc. (COWN) on Q4 2021 Results - Earnings Call Transcript
Operator: Good morning. Thank you for joining us to discuss Cowen's Results for the Fourth Quarter and Full Year 2021. By now, you should have received a copy of the earnings release, which can be accessed that http://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.
J.T. Farley: Thank you, Operator, 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 in today's call, we will be referencing certain non-GAAP financial measures which we believe provide useful information for investors. Reconciliations of those measures to GAAP are presented in today's earnings release. As a reminder, we make available our quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release. Joining us on today's call, are 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 us on Cowen's earnings call for the fourth quarter and full-year 2021. Today, I will provide some highlights on our extremely strong operating performance during the fourth quarter, as well as our record full-year earnings. Then, Steve will review the financial results in more detail. And after that, I will share some thoughts on the outlook for 2022, and beyond. And why we remain confident in our ability to continue delivering strong results to our shareholders, then we'll be happy to answer your questions. 2021 was a record year for Cowen, in terms of both revenues and profitability. We are in $10 per share in after-tax economic operating income, which is nearly 35% after-tax return on common equity, well above our guidance of targeting at least mid-teens after-tax return on common equity on an annual basis. We generated record revenues in our broker-dealer powered by investment banking and markets revenues, while the management fees in Cowen Investment Management hit their highest levels since 2008. Given our strong operating performance, we returned nearly $160 million to shareholders through a record amount of stock buybacks over the full year 2021. We are keenly focused on optimizing our capital structure. And we'll continue to do so out of our cash flows, utilizing a combination of share buybacks and dividends. As we announced this morning, Cowen's Board increased the quarterly cash dividend by 20% to $0.12 per common share, reflecting our view of the positive outlook on long term for our operations. We're returning this capital to shareholders even as we continue to invest in the business organically and through acquisitions, that we believe will drive long-term revenue growth and diversification. This includes the recent purchase of Portico Capital Advisors, which closed in mid-December. It has long been a stated objective of ours to grow our advisory business in banking, to augment our world-class capital markets financing and advisory activities. We were able to do that in a meaningful way in 2021, as advisory revenues were the highest percentage of our banking revenues since 2008. The Portico transaction accelerates this strategy as we head into 2022, and beyond. We also delivered on our expense guidance, coming in modestly below our comp to revenue ratio for a second consecutive year, even as we increase our headcount by 12%. Cowen has become an employer of choice in our industry. It is the place where talented people want to come to do what they do best. This can be evidenced by looking at both the strategic hires we've made in key revenue areas, as well as the acquisitions we've made and successfully integrated over the past decade. We are after all a people business, which means that culture, talent, acquisition, and retention, have been, and will continue to be, instrumental to our success. Now, let's look at the fourth quarter operating highlights more specifically. In banking, we had a very strong quarter despite headwinds from reduced capital markets activity, as well as the drop-off in SPAC activity. Banking revenues were up slightly compared to the very active fourth quarter of 2020 and it was our second best quarter on record for M&A revenues. It was the third quarter in a row that advisory, which combines our M&A and capital markets advisory revenues, represented the majority of banking revenues at 65%. The industry growth of our banking franchise was on display this quarter. Sectors outside of healthcare comprised 58% of total banking revenues, including particularly strong results for the TMT consumer and tech-enabled services sectors. Within healthcare, non-biotech areas, including tools and diagnostics, medtech, and healthcare services, as well as healthcare IT, made up 47% of our total healthcare banking revenues. Our sustainability effort also continues to gain traction. Sustainability related banking efforts more than doubled in 2020 -- sorry, 2021, making up 10% of total banking revenues in the fourth quarter. And over 15% in the full year of 2021. SPAC related revenues accounted for 29% of banking revenues in the fourth quarter, and 32% of banking revenues for the full-year of 2021. As a reminder, our SPAC revenues are weighted towards business combination or back-end in other words, pipe financing, capital market, advisory and M&A advisory. Whilst IPO activity has slowed considerably, there is still nearly 600 specs continuing and currently seeking acquisitions. And we expect to continue to capitalize on the associated people from that product in 2022. As I mentioned earlier, toward the end of the fourth quarter, we completed the acquisition of Portico capital, the Cowen Portico team as they're now known, provides deep industry knowledge and strong client relationships in the high-growth verticalized software data and analytics sector, an area that has seen tremendous interest from both financial sponsors and strategic buyers. This transaction adds to the momentum of our investment banking platform, and empowers account Portico team to provide clients with the full breadth of our capital markets, advisory, and research capabilities. Thus far, we are very encouraged by the strength of their core business and the multitude of new client’s situations emanating from joint marketing between our new partners and our existing bankers. Looking ahead, with global economic activity continuing to be strong and disruptive technologies creating new opportunities in every sector, we remain very constructive and positive about the underlying fundamentals for both M&A activity in capital raising, over the intermediate and long-term, even as 2022 is off to a more challenging start. We entered this year with war mandated transactions at the start of 2021, which is a great testimony to both the overall deal activity and the growth of our client franchise, given the record levels of activity we experienced last year. The diversification of backlog also continues to increase, with a healthy mix of public and private M&A mandates, as well as capital markets transactions. SPAC related mandates now make up less than 3% of the backlog. Note that our backlog now includes mandates from Cowen Portico. While the number of mandated deals is higher, the timing of conversions is being impacted by market conditions, namely increased market volatility, inflationary pressures, geopolitical uncertainty, and rising interest rates, as global central banks shift away from their decade's long accommodative stance. These factors have led to increased equity market volatility which hasn't turned slowed capital markets activity for the first six weeks of 2022, but as the market digest the macro news flow, we anticipate the volatility will subside and when it does, we are confident in our ability to convert the math -- the vast majority of our mandated backlog. It is also worth noting that there have been two six-week periods in each of the last two years in which market volatility significantly interrupted capital markets activity. Both of these periods were followed by a rush of transactions from companies that needed capital, particularly in industries where Cowen as well positioned. It is also worth noting that Cowen thinking franchise is in a very different place than it was just a few short years ago. We've made meaningful strides in our strategy to become a provider of holistic financing advice, by offering companies alternatives to funding in the public markets. And we've grown our advisory business significantly. In fact, in recent weeks, we've seen an uptake in our clients seeking less dilutive alternatives, given the current equity market conditions. Hence, our confidence that we remain well-positioned to benefit, as our clients consider how best to match their aspirations with the challenging market realities. Turning now to our markets business. It was a strong quarter averaging $2.7 million per day in revenues, up 7% from the previous quarter. While average daily revenues were down 8% year-over-year, much of that drop, about $4.7 million, was due to the wind down of our most of our clearing operations in 2021. As a reminder, the clearing business required significant amounts of equity and regulatory capital in order to support it, and we made the decision that the returns on equity were not attractive enough in that business to retain it. Highlights for the fourth quarter included year-over-year gains in cash trading, prime services, non-U.S. execution, and ADR trading. For the full-year 2021, we also had solid gains in securities finance, and electronic trading. We have plenty of strong momentum in prime services in our swaps business, given the decision by a number of competitors to scale back or exit these areas. With these shifts and competitive dynamics, we are being opportunistic in adding new talent to our team. Overall, we continue to see higher highs, and higher lows in our markets business. Third-party industry surveys demonstrate our momentum as we have increased our share of the institutional commission pool consistently over the last few years. This is borne out by our revenue growth. Since the start of 2018, our markets revenues have generated a compound annual growth rate of 13%, which is double the average of comparable revenues in our peer group. We are also making progress on the build out of Cowen Digital, our digital assets initiative, and despite the recent volatility in crypto currencies, the engagement level among clients remains extremely high, and there is clear demand for institutional quality, capabilities, and infrastructure in that sector. We will have additional updates on Cowen Digital throughout 2022. Looking at the current quarter, we are off to a very strong start with average daily revenues running above our fourth quarter and full-year 2021, averages. In research, our fourth quarter, we initiated coverage on 53 stocks. Today, we are actually close to covering almost 1,000 stocks, and we're firmly in the top 10 in terms of U.S. stocks under coverage. In the fourth quarter, we also published 12 of our flagship Ahead of the Curve Series reports, including a primer on cell and gene therapy tools, and a deep dive on edge computing. Clients continue to value our differentiated research. As part of our focus on thematic research, in the fourth quarter we released a new version of our well regarded themes outlook, highlighting 14 investment themes to watch this year. We are also taking a leadership role on ESG and sustainability research. And are proud of had recently named best ESG research by a leading third-party publication. Our researching continues to produce excellent results, and during the fourth quarter, we saw another meaningful gain in brokerage gross from our institutional clients. In investment management, our fourth-quarter results were strong and we increased the size of our business even in the face of a challenging investment environment for growth strategies. Total assets under management grew 15 grew to $15.8 billion up 7% quarter-over-quarter, and an impressive 26% year-over-year. Incentive income for the quarter was at $13.5 million, and $33.4 million for the full year. The biggest full-year contributors were from sustainability and the activist strategy. Management fees were up 20% year-over-year to $20.1 million for the quarter, and full-year management fees rose to 36% to $80.5 million. This is highest level since 2008, due largely to higher AUM in the healthcare, sustainability, and activist strategies. The growth and consistency of our management fees, is a valuable, and I would argue underappreciated, part of Cowen's core earnings power. Looking at our 5 strategies, our sustainability strategy had almost $1.4 billion in AUM at the quarter end. Performance remain strong, even when factoring in the volatility of Proterra Investment. Our healthcare investment strategy completed 2 new investments and ended the quarter with just under $1.2 billion in assets under management. Long-term performance remains strong, despite the declines in the value of public positions during 2021.The activist strategy grew assets to almost $8.5 billion, and the strategy outperformance benchmark for the full year 2021. And finally, the merger arbitrage strategy had $319 million AUM. And that strategy outperformed the HFRX Merger Arm Index during the quarter and the full-year of 2021. The healthcare royalty strategy also ended the quarter with over $3.6 billion in total AUM. As a reminder, our balance sheet does not reflect the value of our investment strategies in any meaningful way. In the coming quarters will be working on ways to better highlight the value of the investment management business in order to present you with a clear understanding of its substantial work. Turning to our balance sheet, we had investment income losses of 5.9 million this quarter due primarily to negative quarterly marks in the value of investments in our healthcare strategy and in our merchant banking portfolio, our investment income was positive for the full-year of 2021 at $14.6 million. And as a reminder, Cowen has always had quarterly fluctuations on our incentive and investment income lines and but in every year since the global financial crisis in 2008, we've had positive contributions on an annual basis from our combined incentive and investment income. Looking at other items on our balance sheet, we had some developments during the quarter in Linkem, the largest investment in our Asset Co segment. And late December, the retail unit of Linkem announced plans to merge with an Italian fixed line operator, named Tiscali, in exchange for majority stake in the company. And this standing agreement would effectively separate the retail operation of Linkem from the network operations and the wireless spectrum. We are hopeful that this will help move us closer to monetization of this non-core asset. 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 fourth quarter of 2021 were as follows. Total revenues were $494.3 million down 16% year-over-year from $591.7 million. Net income attributable to common stockholders was $63.3 million or $2.02 per diluted share, down from net income of $90.5 million or $2.98 per diluted share in the prior year period. Compensation benefit expenses were $237 million, a decrease of $40.1 million from the prior year period. Expenses excluding compensation and depreciation and amortization were $130.7 million for the fourth quarter and D&A expense was $5.3 million. Income tax expense was $25.2 million down from $37.8 million in the prior year period. As a reminder, we utilized all available net operating losses during 2020. However, we have been a cash taxpayer since the beginning of 2021, and we do still have a small deferred tax asset. Now turning to our non-GAAP financial measures, we had total economic income proceeds of $454 million down 11% year-over-year for the quarter economic investment banking proceeds were up 0.3% year-over-year to $255.2 million. Economic growth brokerage proceeds were down 8% year-over-year to $170.3 million. Economic management fees for the quarter were up 20% year-over-year to $20.1 million. And economic incentive income was $13.5 million in the fourth quarter of '21 versus income of $44.4 million in the fourth quarter of 2020. Economic investment income was a loss of $5.9 million versus income of $10.3 million in the prior year period. I'm turning now to our expenses. Compensation and benefit expense for the quarter was $238.9 million compared to $279.9 million in the prior year period. Our comp to proceeds ratio decreased year-over-year from 54.6 to 52.6 of economic income proceeds. For full year 2022, absent any major prolonged decline in capital market activity, we are targeting an annual compensation ratio between 56% and 57%, although it may vary from quarter-to-quarter and is dependent on revenue mix. Fixed non-comp expenses totaled $43.9 million in the fourth quarter, up from 38.9 million in the prior year period. And variable non-comp expenses in the fourth quarter of 2021, were $50.3 million, versus $45 million in the prior-year period. The increase in non-comp expenses were due primarily to higher travel and entertainment expenses, business development expenses, and professional service fees. The non-compensation ratio increased to $20.7 million of revenues, up from $16.4 in the fourth quarter of 2020. Depreciation and amortization expenses were $5.3 million, compared to $5.9 million in the fourth quarter of 2020. And economic income tax expense for the fourth quarter of 2021, was $24.6 million. We generated economic income of $82.6 million in the fourth quarter of 2021. Economic operating income was $86.7 million or $2.77 per common share, which includes the impact of taxes at an effective rate of 22.6%. In future quarters we expect our effective tax rate to be in the range of 25% to 28% depending on the nature and geographic sources of our income. This estimate is a lower range than our previous tax rate guidance of 25% to 29%. For full year 2021, we generated economic operating income of $326.4 million or $10 per common share. Turning to the balance sheet. At quarter-end, Cowen had invested capital in totaling $734.8 million up $677.7 million at the end of September 2021. And Asset Co, we had invested capital totaling a $121.2 million at the end of December, up from a $120.2 million at the end of September 2021. Turning to our equity, common equity, which prior to this quarter was stockholders equity less preferred equity was $1.02 billion up from $981.8 million at the end of September 2021. During the fourth quarter of 2021, we made an election to cash settle part of our convertible preferred stock upon any conversion or redemption. And therefore, the preferred stock was reclassified from stockholders equity to temporary equity. As a result, common equity at the end of December 2021 equals GAAP equity. Common book value per share, which is common equity divided by total shares outstanding, rose to $36.57 as of December 31st, 2021, up from $35.40 as of the end of September 2021. The annual book value per share was $26.56 at quarter-end, down from $29.17 at the end of September '21, due in part to the Portico acquisition. After tax return on common equity was 34.7% for the fourth quarter of 2021, well above our target of generating at least mid-teens after-tax return on common equity on an annual basis. In mid-December 2021, we closed on our acquisition of Portico Capital Advisors for an aggregate estimated purchase price of $112 million, of which Cowen paid $91.3 million in upfront consideration. The acquisition increased Cowen's goodwill by $86.9 million, and intangible assets of $19.9 million, with a weighted average useful life of between 1 and 4 years. For full year 2022 we expect $9.6 million in intangible amortization expenses related to this acquisition. Full details on the purchase price and the accounting treatment of future contingent consideration will be available in Cowen's 2021, 10-K filing. Regarding capital returns to shareholders, as Jeff noted, we increased our quarterly cash dividend to $0.12 per common share. During the fourth quarter, we repurchased $36.9 million in stock, a total of 1.04 million shares, including purchases executed according to our existing plans. That is equivalent to 43% of our economic operating income. For the full year of 2021, we purchased shares at a value equal to 49% of our economic operating income, well above our minimum annual guidance range of 25% to 35%. A fully diluted share count at year-end was 32.6 million shares. Note that due to the change in accounting rules regarding convertible instruments starting in the first quarter of 2022, we are required to use the debt converted method for our convertible preferred stock in our diluted share calculations. We expect this rule change to increase our first-quarter of 2022 diluted share count by approximately $1.5 million shares. Looking ahead, we will continue to be opportunistic, and share buyback depending on market conditions and available cash flow. We will also prioritize additional capital returns when we are able to monetize assets on the balance sheet. And with that I'll turn the call back over to Jeff.
Jeffrey Solomon: Thanks, Steve. The portfolio was drawn across the board and encamps a record year for Cowen. This success is a result of the hard work of our team, who outperform every day, to help our clients, reach their goals. We're grateful not only for your dedication, hard work, and adaptability, particularly over the last few years, but we are also proud of how we've done so while staying committed to a culture based on our core values of vision, empathy, sustainability, and tenacious teamwork. Before we take questions, I'd like to briefly outline some of the reasons why we remain confident about the sustainability of Cowen's quarter earnings power. We believe we built a firm which can generate at least mid-teens after-tax return on common equity on an annual basis. Although there will be quarterly fluctuations, depending on overall market conditions, the organization is built to earn those kinds of after-tax returns over the business cycle. In investment banking, multiple years of organic growth along with targeted acquisitions, have provided us with depth across public and private M&A as well as capital markets and strong relationships with middle-markets financial sponsors. As an employer of choice, we will continue to add people and teams opportunistically, especially during times of uncertainty when many of our competitors are doing the opposite. So much of our record revenues and banking last year emanated from our one Cowen approach to client service maybe for private placements M&A deals that turned into IPO or SPAC transactions. SPAC transactions morphed into private capital raises for follow-on offerings that became debt advisory assignments. This diversity of expertise has differentiated Cowen in the ecosystem, and clients we advised have, have benefited from our being a lot less dependent on any one product or industry. And we created that in -- with a degree of intentionality that enables us to be versatile as we provide advice to our clients. In markets, we built on our strength in U.S. cash equities expanding into non-U.S. execution, options, swaps, and less volume dependent areas such as prime services securities finance. Our special situations across asset teams help our clients capitalize on opportunities which are less well understood or where liquidity is challenging. Overall, our markets business has generated more than $2.5 million in average daily revenues for the past seven quarters, and we believe we can sustain it, at least that level and likely higher any huge market dislocations. Moreover, not only do we have the revenues net division which have proven to be consistent, with the opportunity for us to continue to take share, will provide us with attractive long-term growth opportunities, particularly in disruptive areas like digital assets, where our institutional clients have only begun -- barely begun to engage. In investment management, we have built an impressive roster of private equity style strategies, with steady management fee streams and our management fees are now on an annual run rate of approximately $80 million, with potential upside from additional increases in AUM. We also expect our incentive income 2022 to be up year-over-year. Overall, our capabilities have never been stronger. In addition, Cowen has a larger client set than ever before. In short, we're in a very different position as an organization we were just four years ago. That's why we remain confident that we are well-positioned to succeed in delivering for our clients and for our shareholders year-in and year-out. And with that, I will open it up for questions. Operator.
Operator: Thank you. As a reminder . Our first question comes from Sumeet Mody with Piper Sandler, you may proceed with your question.
Sumeet Mody: Thanks. Good morning guys. Just wanted to start with the banking side of things. Appreciate the commentary kind of on the uncertainty and optimism around that but we're seeing industry CM volumes trend down about 70% below last year's start to the year, and public data shows you guys are doing some activity in biotech and maybe some on semiconductors as well. Can you update us on some of the trends you're seeing across those focus sectors? I know there's some current concerns around potential regulation for drug pricing, weighing on biotech. What are the catalysts you are looking for today in that sector, and then maybe when do you think those could come through?
Jeffrey Solomon: Great question, Sumeet. And thank you. A couple of things. First of all, I would say, when you look at the calendar for underwritings, historically January, outside of biotech and SPAC, has actually been a relatively slow time. The fact that biotech has slowed down in the first quarter of this year is really more a function of the fact, I think, that, honestly, the valuations have come in so significantly that it takes time for management teams to take time for them to make the commitment to actually go out and raise the capital. We've also seen a significant amount of activity and less diluted financing. So many of these our clients that they would've otherwise tap the equity market at higher evaluations, they're looking at royalty deals and debt deals. And in fact, in the month of January, we actually added meaningfully to the backlog and those opportunities, those don't show up in places like Dealogic are mandated M&A backlog, but when you talk about the versatility of the business we built, that's why we remain confident. Drug pricing, I think for as long as I've been in this business has always been a specter that's over -- been an overhang in the industry, sometimes it appears to be more serious than others. The industry has done a really good job though it's getting out in front of it and our belief is that, any drug pricing regulation will not be geared towards impeding the growth partner -- growth and innovation. And that's really critical. What we expect to see is some degree of drug pricing from congress this year. But, I think, it will be much more targeted towards the larger pharmaceutical companies who really make their living off of increased drug prices year-in and year-out, not from the companies that we bank, which are doing really innovative things. So my conversations would suggests that that's how that's going to play out. I will also say, there's one thing I know about this industry. Everyone wants to wait to see a better day on stock prices to do offerings. And they want to do it off the back of good positive clinical results. Already in February, we've seen more activity than we saw January, which obviously for a number of companies that want their numbers go sale to actually announce their earnings and then they'll be free to raise money. They continue to do so in other ways too, that business has grown significantly for us. Again, as I said in my script earlier, we've seen these periods of time, 4 to 6 weeks of disruption in the capital markets, and what we've seen in each of the last few years in particular is once that subsides and markets find their levels, everybody who needs to finance, finances. That's what happens. And so whether that happens in the first quarter, the second quarter, I am not smart enough to know, but I do know it's coming because everyone on them needs to raise money and Cowen is the best at that, so we expect that when you look at it over a full-year. That's why we remain as confident as we do.
Sumeet Mody: Great. Thanks for that, Jeff. That's helpful. And one quick follow-up here. A two - partner on capital allocation. First on the dividend. Appreciate the increases over the last year, maintained that 1% yield roughly. How are you thinking about that rate going forward as the firm continues to earn that new, much higher level compared to just a couple of years ago. And then, secondly, we appreciate that the monetization should drive a lot of the future demand for buybacks. But is there room for, in the near term, to increase that pace ahead of these monetizations? Considering you guys are trading at a wider gap to earnings today than you did 4 years ago when you took over?
Jeffrey Solomon: I think will be -- we talked about capital optimization all-time and you and I have talked about this as well. I think is our stated objective to balance both return of capital to shareholders using both dividend payments as well as stock buybacks. And we also have some stated objectives and we want to continue to grow a diversification of the business and I would argue that some of the decisions we made in the middle part of the last decade to invest in certain businesses have really driven on our performance significantly and where we've made meaningful revenue. We're seeing meaningful revenue growth in 2019, 2020, and then 2021. I think, we'll continue to return capital, particularly as we trade at discounts to book value. That is an easy way for us to create value to shareholders and we will continue to do that. We'll also continue to raise the dividend incrementally as we see our business continue to scale. And I would say, a lot of people asked the question, where things normalize out. I look at the growth we've had over the past few years, and I recognize that has been exceptional. I also recognize the firm is structurally in a very, very different place than it was even in 2018, and 2019, given the number of MDs we've hired in banking, the acquisitions we've done, the sustained growth in our markets business. And the growth in our AUM. And so as investors look at where we will Cowen be, at oftentimes they look at where we were in 2016, '17, and '18, and it is a materially different firm. And I think certainly, you and some of your compatriots do a good job of articulating that, but the rest of the world will ultimately catch up to that.
Sumeet Mody: Great. That's the end of my questions.
Jeffrey Solomon: Okay.
Operator: Thank you. Your next question comes from Steven Chubak with Wolfe Research. You may proceed with your question.
Steven Chubak: Hi, good morning, Jeff. Good morning, Steve.
Jeffrey Solomon: Hi, Steve.
Steven Chubak: So maybe just to start off, I know you are planning to host an Investor Day a little bit later this year. I was hoping you could just speak to what prompted the decision to host the event, and can you speak to what you're planning to unveil, as part of the upcoming Investor Day?
Jeffrey Solomon: I think a part of it is Steve is what I just mentioned in the last answer, I think -- I don't think that shareholders fully or potential shareholders fully recognized the transformation that's gone on here. So many people ascribe our success over the past few years to market conditions. And we've definitely benefited from those to be fair. But I think Cowen would not have benefited for them nearly as much as we did if we hadn't made the strategic moves we've made. And so our goal is to be able to articulate with I think a greater degree of clarity the things that drive our business, and it's easier for us to do that in an Investor Day than it is for us to do that on a quarterly call. Quarterly calls are meant to get people periodic updates, we'll lay out strategy and try to give you some sense as to why we remain highly confident in our ability to deliver on the business, which we do, but if you really want to dig in and understand the core drivers of the business, it takes some time. And we've got things that we're working on. We've mentioned certainly things like Cowen Digital as that progressive ways for folks to think about our asset management business and how to model that up with a great degree of transparency. Those are all the things that we're going to cover. From our standpoint, knowing what we know about Cowen it isn't that hard to make a case for why Cowen is too significantly undervalued and why we think the core drivers remain in place. We see that every day from the inside and then I just think it takes some time for us to really level set with everybody who doesn't know the story and help them to understand why we think there's a lot of value creation still here on the table. So that's the primary impetus for that Steve.
Steven Chubak: Thanks for that perspective, Jeff. And as following up on what is merely a little bit of a softball question but figure it now as the opportune time just to unpack some of the commentary around expense, and this quarter you certainly -- and even for the full-year, you demonstrated good expense, discipline, and as we look ahead, given the inflationary environment, just the challenging, revenue backdrop to start the year at least, how should we be thinking about the complexibility, if we do see a material and sustained slowdown in activity? And also in terms of the non-comps, how should we be handicapping the non-comp inflation given continued normalization in T&E in particular?
Jeffrey Solomon: I'll handle the first one. I'll turn over the second part of the question to Steve. Listen, absolutely, if revenues slowdown, we'll be at the higher end of the comp range we've articulated. I also think that a lot depends on revenue mix and as you know, the more we skew to advisory, in terms of our revenue mix, the higher the comp to revenue ratio is. And I think you covered the industry so you can see what the comp to revenue ratios are for advisory firms. And so the more we do in advisory, the more complicated. But of course, the less non-comps I think will probably incur as a percentage of those revenues. So I think we've given a good range and I'm confident that we should be able to hit that range. Obviously if there is a meaningful slowdown, it could be at the higher end, but we're not planning on that because again, we look at the backlog that we have and the shadow backlog that we have of companies that we know need to finance, and that's why we remain confident in the guidance that we've given. Our non-comps, I'll turn it over to Steve who’s done all the work on that.
Stephen Lasota: Steven the non-comps is a similar story, right? It's dependent on revenue, but if a lot of that revenue comes from M&A, then you have less non-comps. Although with that being said, T&E, and client development, and conferences, are picking up. I don't think they're going to return to 2019 levels, but they're picking up because people want to get back out and see clients. And it's going to be good for our business.
Jeffrey Solomon: Specifically, our Healthcare Conferences is always a fairly significant expenses, virtual again, this year. That's a first quarter expense, which has driven some of the -- if you look at 2020, even we had higher non-comps in the first quarter because of that. And we'll continue to look at the flexibility around virtual conferences. I think, that's -- something we've all learned, is that, some of the conferences that we used to do in-person, are actually, better done virtually. And we'll continue to do that. I think, looking at the difference in between – in travel, as well as entertainment. I think those are -- we tend to lump them together, but they are really two different drivers. I would say travel probably doesn't increase anywhere close to the level that it was in prior years, because so much of we've learned, we can do so much in the business without actually having to get on a plane and go. We will get on a plane and go see clients but the amount of times that we had to do that in any given year probably doesn't return to prior levels. For entertainment though, I do think people will be out. And that's a good thing because that really drives connectivity in the business. And I've been post-Omicron as the things have slowed down. We've been out pretty meaningfully, just reconnecting with people and that is a part of what drives the revenue in the business. So again, it'll be higher than it was probably in 2021, but I don't think it approaches to levels that it was in 2018 or 19 in an absolute sense.
Steven Chubak: Thanks, Jeff. And one final question on the advisory business. You talked about the strength in the shadow backlog. Certainly encouraging to hear given some of the weakness that we've seen, at least in some of the public data, which doesn't seem representative of what you're seeing internally. Last quarter, you talked about the advisory business running at $100 million per quarter. Sustainably with the addition of Portico. I know there's going to be some volatility quarter-to-quarter, but wanted to gauge your confidence level around that $100 million plus level being sustainable over the medium to long term?
Jeffrey Solomon: Yes, I think when we look at that number, obviously quarter-to-quarter, it will vary just like all the advisory businesses do, but I think when we look at that number, that's a good number for us to think about on an annual basis, and our rolling 12-month basis. And the reason is that, when you look at the Dealogic numbers, so much of what we do just doesn't even show up there. So if a company -- if we're engaged on a buy-side or on sell-side transaction, and the company decides not to sell stuff and decides to do a cash out refill, and that shows that those fees show up as a debt capital markets advisory transaction. And honestly, we're in the business to serve the needs of our clients. What falls out in Dealogic is just the way people account for at all and how they categorize it all. And so much of our revenues, including our SPAC advisory revenues, don't show up that way, like a pipe that will further engage on a pipe to help a back-end SPAC transaction happening. Those are not things that show up in your logic. This is why we remain very confident in our advisory business and maybe the -- it's harder to see relative to some of our peers. And that versatility is a difference-maker account, this is why our clients have continued to choose us because we're not just pushing one product. And I think the challenge that a lot of our competitors have is the only thing they do is M&A. And if you are facing an environment where that's not your best alternative, you got to go to a place like Cowen that has that versatility. And that's really what helps to drive that business for us. And that's why we remain as confident as we do about our ability to hit the numbers that you talked about on a rolling 12-month basis.
Steven Chubak: Helpful color, Jeff. Thanks so much for taking my questions.
Jeffrey Solomon: Thanks, Steve.
Operator: Your next question comes from Chris Allen with Compass Point. You may proceed with your question.
Christopher Allen: Hey, good morning, guys. Thanks for taking my questions. Starting off, you mentioned, look opportunistically at people, teams. Wondering how the current environment is impacting the willingness there. And then, is there any change in terms of buy versus build opportunities as you look to build the franchise further?
Jeffrey Solomon: So, great question, and I will just say, Cowen is definitely a place where people want to come work. There are more people that want to come than we can possibly higher. I'm flattered by that, and it's good that you asked this question because, I often say, if you really wanted to test the health and the sustainability of a franchise, all you need to do is figure out whether or not people want to work there or not, in our business. And people want to work at Cowen across-the-board. And that makes me feel -- give me a great deal of confidence in our ability to attract and retain the right kind of talent. We will continue to look for opportunities where the product capability that we have fits really well with the people that want to come on board. And I say that because everybody who comes to Cowen on revenue producing area has a franchise of some sort. The question is whether or not that franchise, whatever they do for their clients, can we augment or add to that franchise again, whether that's an organic higher urban individual, a lift out of a team, or an acquisition of our firm that does something really well that can be bolstered by the product capability and the engagement that we have in counting. And so we're continuing to do opportunities like this. I think what you've seen, for example, in the growth in our ability to do more banking in whatever digital assets. Again, that . So there are a handful of folks in that industry who are making great strides like covering clients, whether it's the miners, or it's the payment processing folks who are using digital assets and crypto as a way to navigate their business models. There are very few places on the street where they can go for full-service investment banking capability. And so when we see teams that want to join, or individuals that want to join our platform, just in that particular area, it's emblematic of what we're seeing. There are very few firms around the street that get around what I would call growth. The way that we do and can provide the products and capabilities that bankers and frankly, sales traders they need in order to execute for their clients. And so I would say it will be both organic acquisitions, organic hires, as well as targeted acquisitions, but no shortage of opportunities on that front.
Christopher Allen: Understood. And then, maybe some color on the markets business noted, this has started the first quarter up relative to fourth-quarter in full-year 2021. Is this broad-based you're seeing strengthening specific areas and any color just in terms of the impact, some of the teams you've added. I am thinking the European team and I think just on the securities finance side, whether there has been an impact that you're seeing yet?
Jeffrey Solomon: Yeah. The short answer to that is, yes. First of all, Europe for us has been a real growth area, again, we really had no meaningful presence in Europe prior to a few years ago, but obviously, some of the larger firms had decided to exit that business or scale it back significantly and we're the happy beneficiary of these amazing teams who again can come in and plug into our core capability, whether it's algorithmic trading or cash equities or frankly prime brokerage and outsourced trading and all these things that all worked collectively in tandem. So we're seeing that. I think we're continuing to see the build-out of the security finance business. That is something that I don't think people really fully appreciate the consistency of that business. And in terms of its ability to generate revenues for us seven days a week, 365 days a year, because it's an interest spread business, but also enables us to do things like swaps and provide hard to borrow for our clients and prime brokerage. These are key drivers for us as we look at -- and if you look at the growth in that business, as we break it out in our financial supplement, I don't see why that would abate actually, because there are fewer providers of those, as some of the bigger firms have scaled back meaningfully, and so If anything, we're gated maybe by the size of our capital base. And that is part of the tension that we have in terms of returning capital to shareholders, as well as retaining capital to be able to provide attractive client service capability on that front. So, no shortage of opportunity for us to get bigger in that business.
Christopher Allen: Thanks, guys.
Operator: Okay. Your next question comes from Devin Ryan with JMP Securities. You may proceed with your question.
Devin Ryan: Great. Good morning, Jeff and Steve. How are you?
Jeffrey Solomon: Good. How are you Devin?
Devin Ryan: Doing well. So I think most questions have been asked, but I'm going to try to take a little bit different angle on the investment banking outlook question. So your healthcare revenues were down 3% in 2021, you still grew investment banking revenues by 40%. So I think that's clearly highlighting the increased scale and diversification of the business. So it would be helpful just to if you can give us the number of investment banking Managing Director's today versus one year ago to kind of give some more flavor for that, a kind of growth of the franchise. And then as we think about some of the puts and takes over the intermediate term in the outlook. So you have your SPAC contribution that might come off a bit, but there's still a lot of revenues to realize healthcare, the bar's necessarily high given what we just talked about. And it sounds like there's still a lot of deals that are eventually going to come there. You are still very early days are ramping sustainability, the M&A backdrop is still reasonable, and you added 20 bankers from Portico at the end of last year. So it feels like everyone's expecting that there should be a pretty healthy drop-off from 2021 in the outlook, just given how strong 2021 was but on the other hand, you've added a lot of capacity into the business just over the past year. So I'm just trying to think about what are some of the biggest areas of revenue off of the 2021 base? And maybe what areas we're thinking about, kind of over contributed last year, if at all?
Jeffrey Solomon: Great questions. And let me -- and I appreciate that because I don't think we actually talked about this much, but it's a great opportunity to do so. So you've given me an idea, we look at -- I'm having the MD growth. Hypothetically, that's really more emblematic. Managing Director Growth is probably more emblematic of revenue drive. In 2018, we have 42 bankers -- 42 MDs, and this year we'll close with 89. So it's obviously -- when you look at MD growth, it's over 110% growth in the number of managing directors on the platform account. And that's both organic hires as well as acquisitions, so meaningful, yes, this is part of the reason why we said we're structurally in a very different place than where we were prior to the pandemic, and really frankly, prior to 2018, that If you look at total banker growth over that same period, it's around the same. So building in those teams to actually execute, it's roughly the same amount. And so when you look at year-over-year growth for us, we exited the last year with 73 MDs. In banking and 2020 and as I said, 89 for this year. So still meaningful and that's a combination of both organic hires as well as acquisitions.
Devin Ryan: Okay. Great. Thanks Jeff. And then a follow-up as well on the brokerage side of the business. So you highlighted in the presentation you guys published this morning that over the past three years you've expanded revenues there by 13% and so that's more than two times your peers, and when you think about the addressable market that you are going after today, and kind of how that's evolved and just based on all the comments you made, including new areas like digital assets and what you're doing in Europe as well. I think there is an expectation and just kind of a view in the market that brokerage has obviously lower growth and there are some challenges in parts of the market, but on the other hand, did you identify the number of areas for expansion for the firm and some of these areas are coming from a very small base. So, I guess it would be very helpful to just think about Jeff, if you can, how are you contemplating growth in the industry in the brokerage business and then, how do you think Cowen can perform relative to that, just given all these other initiatives that are ancillary to maybe how people think about the core brokerage business?
Jeffrey Solomon: I think we do a pretty good job of breaking out on our supplement, the growth in the core brokerage which we think is more volume driven and institutional services which we think is not as much driven by volume rate. And so if you look at the growth, it come from both areas, but obviously the faster growing part of that business has been the essential services part of business that's prime brokerage, that's outsourced trading, that is securities finance and our swaps business. So obviously, those were places where we are adding -- we're taking a bigger piece of wallet from existing clients, right? And I think you won't always think about the brokerage business as you've got a lot to get more clients, more clients, more clients and our view is once you get to scale in terms of the number of clients, not that we wouldn't be adding new clients, we are, but new fund formation is in the primary driver there. The question is, are you taking share from other people that are either exiting the business or don't do as well as you? And what we've done with our top clients is take a bigger share. And we think that trend continues in part because the buy-side is making decisions as they have been for the better part of the last decade was to do business with fewer counterparties. So this is what that paradox that we've talked about Devin, which is, we know that the overall pie maybe shrinking as people look to reduce their expense loads. But the distribution of that pie skews to the best performers. So the ones that are the weakest performers get disproportionately hurt, and their share goes to close to zero, and the ones at the top end of that, take meaningful share, from everybody else. And if you're in the middle, you're probably going to end up at one side of the other. You are either going to end up as a top revenue, or you're probably going to get eliminated over time. Our view is that we are as we've demonstrated, I think we've mentioned in this call early, we're a t top ten provider of services. Then we're well within that what I would call that circle of critical vendors for the buy side. That means that when they skew their votes towards the best performers, whether that's in execution, cash equities, electronic, European ADR s, options at events, right prime brokerage capability swaps, they're going to be looking for reasons to do business with Cowen, because they'd rather do business to ensure that they continue to be top of mind at Cowen. And that's taken years to build and it doesn't get unbuilt or doesn't dissipate quickly at all. In fact, the trend is moving much more towards us in this area. And that's why we continue to make the drive that we've made -- that's why we feel -- again, I think it's underappreciated. The stability of our business and we made a quantum leap pre -pandemic to post-pandemic, everyone keeps waiting for our daily average revenues to go back to what they were. Pre -pandemic -- Pre -pandemic, it's not going to happen, in fact because of the structural changes that we made the investments in people, the new products we've added and this over-arching trend where the buy side is allocating to the top performers of which we are one. And I think it's really interesting to start highlight. We do not run a central risk book at Cowen. So when you look at equity markets, in particular, it really -- it falls into those who are willing to use their balance sheet to position and take risks, i.e. the bulge and they do a good job at that, and they make up the bulk of the top 10. Right? And then, people like us, really very few, who don't have to use their balance sheet in order to get market share. Ours is agency, largely agency driven. And that is hugely capital efficient for us.
Devin Ryan: Jeff, just to put it all together, Jeff, so there's been a structural shift that's been happening in the market. Cowen has been on the right side of that and made good decisions and as a result, you outperformed the industry. How do you react to the perception that brokerage is low growth within Cowen, I mean, 13% revenue growth of the past few years is not low growth in my opinion. But how do you react to the view that brokerages low growth based on all of those things that you just said?
Jeffrey Solomon: I do think that's a perception in the market. Again, I told people for years to tell all your friends equities is a hard business. We'd like to see more people get eliminated because there's more share to be taken. And that remains true. Again, just look at our numbers and how they've grown meaningfully and then tells you all you need to know about whether or not the strategy we pursued, even going back a decade. In 2012, people told me or us that we were crazy for buying electronic algorithmic trading platform. We couldn't disagree more and you look at the growth of our electronic trading platform and how it spun into all of the different areas, including our cash equities business, which is up meaningfully from 2012, that is a huge testament to the trend that we identified 10 years ago. I will also tell you, and again, we're not prepared to go into more detail yet, but we believe that over the next three to five years, the growth in digital asset trading is going to be meaningful. I don't know when that tipping point will occur, but it's sooner now than it was a year ago when we set out to make an investment in poly sign, to do digital asset custody, to build out our own digital asset trading capability at COWIN Digital. That is not the value of that as it begins to take shape as revenues begin to come in not fully appreciated. So we look out over the next three to five years, the same way we looked out in 2012 over where the business was going, we have a really good insight into asset classes that we think the institutions are going to trade in, and we want to be there. And, there is not a world-class, institutional digital asset trading firm. There's a lot of retail, but not a lot of institutional quality digital asset trading firms. We intend to be one of them. And so, that is nowhere in our numbers today in terms of revenue but when you talk about lengths of growth, I just will tell you all of the people that are trading equities with Cowen are considering what their strategy is going to be for digital asset trading. I know that to be the case as I've talked too many of them. When they do it and how they do it and who they do it with still to be determined, which is put us in a position where we can take meaningful share when that happens. And that's really why I get so excited about is I know that's going to happen and I know we're going to be a winner there, and it's nowhere in our numbers today.
Devin Ryan: Thanks so much, Jeff. Appreciate it.
Jeffrey Solomon: Great.
Operator: Thank you. And Instructions]. Our next question comes from James Yaro with Goldman Sachs Senior. Proceed with your question.
James Yaro: Thanks. And good morning. to touch on the trajectory for capital markets advisory business. You were near the all-time record this quarter. If you can just speak to what drove the result to this quarter in particular. And then the sustainability of these results and the run rate to build off from here.
Jeffrey Solomon: So I think that a lot of the capital markets advisory business is driven off the fact that when equity markets -- so we've been in the bear market for what I would call speculative growth for nine months. Great. The rest of the broader market industries may have simply caught up in the month of January, but let's be really clear, it hasn't exactly been a great equity raising environment for a lot of the businesses since really, April 1st of 2021. What are we doing? We're talking to our clients about alternative ways for them to finance themselves, so debt transactions, private placements, companies that may have otherwise looked at the SPAC market and said, I don't really want to be in the SPAC market, but I need to do a financing, and so we've done a number of private placements, private opera tings that would've otherwise been SPAC deals. So as, some of the traditional business account has been in both in public equity underwriting and maybe the SPAC back ends, as that has flattened out of it, our clients are doing other things. And so you're seeing the growth come. Particular capital markets advisory from our ability to help our clients to pivot to other things. The need for financing doesn't change just because the markets aren't there. What changes is the way you finance yourselves. And what we've built at Cowen, which I continue to think is unique in terms of the street, is the ability to offer clients a multitude of ways to get the capital they need to execute on their business plans. And that's why you're seeing the growth and capital markets advisory as some of the other businesses appear softer.
James Yaro: Okay. And then I just want to ask about the overall leverage in the business. I know there have been changes in terms of swap margining rules, but if I compare your tangible assets versus tangible common equity has significantly increased the leverage on the balance sheet over the past few years to about 12 times versus less than six times in 2018. What's the level of leverage in your business that you feel comfortable operating at, and should that change from where you are as of this quarter?
Jeffrey Solomon: The primary driver and the biggest driver of that has been the growth of the securities finance business. So just to be clear, that's a matchbook business. So you've seen the balance sheet go up on both sides, which I think is really driving that. That is largely an overnight funding business that we did for years We're very comfortable with, it's not a huge risk business for us, as we have both sides of the trade and we're acting as an intermediary there. And so I think where we ended the year is a comfortable level for us. I think it could go over down modestly. Actually, if you look at where we ended the year, it was down from the third quarter. And so, I think you will continue to see us play in and around this area. Obviously, we have the ability to reallocate within that, but the leverage targets we have are in and around where we are, are not much more meaningful. But the primary driver has been -- the securities, finance, and obviously the growth in that business has been a meaningful contributor.
Operator: Thanks. Your next question comes from Sumeet Mody with Piper Sandler. You may proceed with your question.
Sumeet Mody: Hey, thanks. Just following up here, curious on the debt side of the banking business, with interest rates set to increase. Can you maybe just talk about the activity levels you're seeing there on that smaller portion of the banking business and update us on the view of that business opportunity going forward, more kind of medium to long term?
Jeffrey Solomon: Actually, we've seen increased activity like meaningfully increased activity. So a lot of the debt that we're doing might be floating rate in nature and a lot of it has to do with things that are a little further out maybe, in terms of, specular growth in or our middle market. What I will say is, the primary driver of that business is really the number of the amount of dollars in both credit funds, as well as the growth in what I would call middle-market and specular growth companies that are looking at debt as an alternative to equity finance. So supply and demand. And despite the increase in rates, there has been more money raised by the providers of that in alternative form. So the alternative lending business, right? The direct lenders, and so there's more money in that space than there ever has been and I think people tend to project forward Sumeet what they think will happen. We are still as of this discussion in a zero interest rate environment, even though the market might be pricing in six or seven rate hikes over the course of next year. If it's six or seven rate hikes, we will be any almost zero short end of the curve. And if you look at that activity and the growth of that activity, even in the last rate rising cycle, those funds got bigger because people are looking for yield, people will continue to look for yield for the foreseeable future and the providers of that capital will fall over themselves to get that money deployed. So still a very robust market and we're seeing it because the number of mandates and the increased pitch count, again, every time the equity market has a little bit of a hiccup, everybody looks at the debt market to get themselves finance. And so we've seen it in an increase in the number of mandates so far this year in 2022. In the pitch count for the inbound requests for us to come and pitch those capabilities has increased meaningfully.
Sumeet Mody: Great, thanks.
Jeffrey Solomon: Great.
Operator: Thank you, our next question comes from Steven Chubak with Wolfe Research, you may proceed with your question.
Steven Chubak: Hi, thanks for accommodating the follow-up. Jeff, you did -- I nearly didn't give much air Play to the modernization plans for non-core assets, was hoping you could just give an update on the planned IPO of healthcare royalty partners and then the other plant monetization’s, especially in light of some of the recent volatility that we've seen?
Jeffrey Solomon: Well, we mentioned, I think in Asset Co, we mentioned that there was a meaningful structural change in what we're doing, hopefully this year at Linkem, the announcements of the split of the retail operations away from the network. There's a good pre -stage to ultimately realizing value from that investment which I know for those of you that's been Cowen shareholders for a while, it's been a long time coming. I'll remind you like, we don't control the timing on that. I'm just looking at the fact that we're finally reaching a point here in which the 5G build-out as occurred. There's a real structural change in terms of the way the businesses is running and our partners at Jeffrey are more inclined to pursue the monetization path, I think than they have been -- again, by their own -- if you look at our own Investor Day deck, they say the same thing. So that makes you feel good about the probability of that happening at some point this year. As far as healthcare royalty partners is concerned, we're continuing to work through that. And if you look at the demand for what they're doing, again, it's the same thing we're seeing in the banking side of the business, they have been focusing on growing their asset base, when they couldn't get public in the middle of the year, they went back to simply putting more money to work and raising a bunch of capital inside pocket vehicles. Ultimately that where they can deploy that capital and that's actually part of the driver of our future performance. I think that they will at some point continue, it makes a lot of sense for this to be a permanent capital vehicle. It just does. And when that happens and how that happens again, I think its market dependent, but the value to Cowen doesn't change. It's still highly a very valuable franchise for us that is not remotely recognized. As you all know that the investments we have in our asset managers are not on the balance sheet. And so we will continue to work with them to figure out when the optimal time is to access the public markets, if that's the right thing to do, but in the meantime, we're just going to continue to grow the business because of demand, especially in an environment where equity financing is expensive, given the values of some of these companies. They'll continue to do business, so we remain really constructive on that. And my hope is at some point we'll be able to up public markets if that's the
