Peter Cohen - Chairman and Chief Executive Officer
Greg Malcolm - Chief Executive Officer of Cowan and Company
Jeffrey Solomon - Chief Strategy Officer
Christopher White - Chief Operating Officer
Devin Ryan – Sandler O'Neill
Justin Evans – Sonoma Capital
Ryan Kealy – KBW
Cowen Group Inc. (COWN) Q4 2009 Earnings Call March 2, 2010 9:00 AM ET
(Operator Instructions) Thank you for joining the Cowen Group Inc. Conference Call to discuss the financial results for the fourth quarter and twelve months ended December 31, 2009.
By now, you should have received the copy of the company's earnings release, which can be accessed at the Cowen Group Inc. website at www.cowen.com. If you do not have Internet access and would like a copy of the press release, please call Cowen Group Inc. Investor Relations at 646-562-1880.
Before we begin, the company has asked me 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 the company's earnings release and other filings with the SEC. Cowen Group Inc. has no obligation to update the information presented on the call. A more complete description of these and other risks, uncertainties and assumptions is included in the company's filings with the SEC, which are available on the company's website and on the SEC website, at www.sec.gov.
Also on today's call our speakers will reference certain non-GAAP financial measures, which the company believes will provide useful information for investors. Reconciliation of those measures to GAAP is consistent with the company's reconciliation as presented in today's earnings release.
Now, I would like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer, who is joined today by Mr. Greg Malcolm, Chief Executive Officer of Cowan and Company and Mr. Jeffrey Solomon, Chief Strategy Officer and Mr. Christopher White, Chief Operating Officer.
This is the first call since the completion of the merger between Ramius and Cowen. We thought we’d spend a little time reviewing the background of the Cowen/Ramius merger as well as the market opportunities we see for the new Cowen.
Greg Malcolm, the CEO of Cowen Company will discuss the activities of the broker dealer including recent developments on that side of the business. Jeff Solomon, Chief Strategy Officer will discuss our alternative investment management business including some of the recent developments in that business and on proprietary investing. Finally, Chris White, Chief Operating Officer will go into further detail on our 2009 full year and fourth quarter financials. At the end of our prepared remarks we will turn the call over to the audience and answer any questions that you may have.
Though 2009 was clearly a year of change within Cowen, which means Cowen and Ramius, most obvious of course was the merger to form a diversified financial services firm offering very high quality alternative asset management services, the main knowledge driven investment banking, sales and trading and research services and in each case primarily to institutions and corporate clients.
The events of the last 24 months have created and will continue to create, we believe, substantial opportunities for financial service firms and we’re able to adopt the new changing environment. Consolidation among the few remaining large firms has created an opportunity, we believe, for smaller focused firms to gain investment banking market share and growth oriented clients.
The thing that we absolutely know for sure is that people want relationships, they’re more important today than they’ve ever been. I think that we all know and recognize the company’s need to re-advertise and there’s been a birth of equity financing over the last three years in this country. As evidenced by activity this week, the last few weeks, M&A activity will continue to increase as company specific organic growth opportunities are harder and harder to come by and will be a significant growth opportunity where we are well positioned to be a participant.
The alternative investment management industry we can say without a doubt the growth in hedge fund investment has resumed. For asset managers who can provide customized solutions, institutional quality infrastructure and use the capital to invest alongside clients. Institutional investors and advisory platforms definitely are seeking in their manager’s scale, stability, institutional quality infrastructure, increased transparency with emphasis on transparency, given the events of 2008 and breadth of products.
The combined firm creates more diversified financial services platform, a complementary business. There are three main revenue drivers to the business which makes us look similar to the successful firms that existed as I grew up in the industry, many successful firms today. They are banking research, sales and trading, asset management, and then investing other firm’s capital.
Third revenue driver which allows us to make plenty of investing firm’s capital is the fourth differentiator for many of our peers. In that regard we raised $82 million net of additional equity capital last year through an offering and as of December 31, Cowen’s balance sheet had over $470 million in total equity which had $25 million of debt. Jeff Solomon will discuss later in the call a significant portion of our shareholders equity is available for investment purposes.
New Cowen has financial stability, diversified revenue streams, the ability to grow existing businesses, and if appropriate, expand into new businesses. Prior to the merger neither Cowen nor Ramius had the ability to take full advantage of the changing landscape but together we have the resources to opportunistically build and invest for the future with a lot of flexibility.
In that regard, over the last six months of the year and into 2010 we have taken advantage of opportunities that we likely would not have pursued as different companies such as the banking side of the business added both a REIT and a FIG practice in our broker/dealer, we added new distribution expertise to our alternative investment platform which has the potential for very significant asset raising over time, we added Cowen individuals within both sides of the business which Greg and Jeff will talk about later, we have utilized our balance sheet to make certain small opportunistic investments that we believe offer attractive return profile that may be more importantly also offer potential to enhance our ability to gather assets and pursue investment banking business in the relevant sectors that relate to the investments.
We’ve also been able to eliminate over $10 million of comp and non-comp expenses from the combined businesses some of which is being reinvested in revenue generating personnel. These are just some of the examples of the ways in which we’ve begun to execute on many of the opportunities presented through the merger.
While we are proud of the progress we have made to date, we realize there is much much more that can be done. Rest assured we will keep pursuing the opportunities to reduce expenses, grow our core businesses, and expand into new areas. If we can do so profitably as we move forward.
I would like now to turn the microphone over to Greg Malcolm, who will talk about our broker/dealer business.
I’d like to briefly highlight just some of the recent developments in the broker/dealer. On a personnel issue, last week we announced that Don Meltzer has decided to step down as co-head of our investment banking business in order to pursue his academic interests. I’m pleased to say that in that regard, Don will remain in an advisory capacity with us as a senior advisor. Scott Ryles will now assume sole responsibility as head of investment banking.
As Peter mentioned at the beginning of the call, we recently announced the expansion of our platform to cover new verticals including financial institutions and REITs, the FIG group we have built out that team in investment banking led by four senior bankers and we’re very close to making some decisions and announcements on the research side of the house for FIG. In REITs its just the opposite, we’ve hired a talented research team, have already rolled out on a number of names with more to come in the second quarter, and we’re currently looking to fill out the investment banking side of our REIT real estate team.
We also expanded our investment banking capabilities with the addition of the senior professional focused on structured and other debt financing, primarily in the healthcare sector, a senior technology M&A banker and a senior banker focused on healthcare services. These new additions have already begun to produce mandates and we’re increasing level of activity and dialogue with these clients. We’re confident they’ll be meaningful contributors as we move forward.
Over the course of 2009 we’ve also strengthened our product offerings in electronic trading, and have added capabilities in trading each EPS, we’re confident that these new sources of revenue will contribute in 2010.
Our backlog in both capital raising transactions and M&A continued to build throughout the quarter and that positive momentum is carried into the first quarter of this year. Our current backlog consists of 16 underwriting transactions which is more than double our backlog in June including eight filed transactions and we’re lead manager on approximately 20% of these deals all of which are IPO’s. On the advisory side of our business we currently have 20 transactions in backlog as compared to 17 in June ’09.
Market conditions have not been favorable for the new issue business thus far in 2010 but I must say when I look at the companies that are in our backlog compared to many of the companies that have come to market or tried to come to market I believe that quality executions will pick up later this month and into the second quarter.
In sales and trading, volumes were down significantly last year for everyone in our business. NASDAQ and New York Stock Exchange volumes were off approximately 14% for the year and on an aggregate basis, that only tells part of the story, funds flow information is also telling us the same as equity funds had net outflows of over $30 billion in 2009, that’s excluding ETS. All that said, and importantly, we increased our market share in the cash equity business through the first three quarters of the year and more than held our own in this quite difficult market.
Now I’ll turn this call over to Jeff Solomon, who will talk to you about our alternative investment business and our balance sheet investment activities.
Turning to our alternative investment management group I’d like to discuss for a few minutes how we’re positioning going forward. First, we recently announced some changes to the management of our alternative solutions and internal hedge funds businesses. Morgan Stark has been named the Chairman of Ramius Alternative Management and the Head of Macro Strategy, and Tom Strauss has been named President and CEO of the combined unit.
Unifying the senior management for these two businesses will allow us to streamline our operations and integrate and enhance our marketing efforts and coin service efforts through improved product coordination. This change sets us up very well for 2010 and beyond as we take a more focused approach to product and service delivery based on our client needs.
Looking back to 2009, I’m happy to say that in the fourth quarter we booked incentive fee income for the first time in over four quarters. This occurred as certain of the funded funds products eclipsed their high watermarks and the impact of the club act and subordination provisions relating to the real estate funds wound down.
We also made good progress last year on getting our value and opportunity funds back closer to its high watermark. Redemptions have slowed and for the first time in a year we’re seeing investors seriously consider making new allocations to alternative investments broadly and for us, in our fund to fund vary and our directly managed businesses specifically.
In that vein, our pipeline of potential new investment mandates is quite strong as the new assignments are being realized. For example, during the beginning of 2010 we’re happy to report that we closed on $100 million managed account for our new credit product. While we believe the primary growth drivers will be in our alternative solutions business that will be our fund to fund products offerings especially on the customized completion side of the business.
We also are seeing our single strategy credit funds and our value opportunity products show continued incremental traction. We’re hopeful that we will begin to receive commitments from a number of our prospective clients in the pipeline. These offerings play to our core competencies in the credit arena and in the event driven arena respectively.
As for our Cowen healthcare royalty partners business, the healthcare royalty financing market remains strong, with companies continuing to evaluate attractive source of capital to finance their commercialization and development efforts. Cowen Royalty remains at the forefront of this niche market having committed over $300 million in non-investment opportunities over the past two years.
In August, 2009, we closed on a $300 million Co-investment fund which capitalized on the growing pipeline of investment opportunities. While the Cowen Group is not an investor in this fund the capital gives the team added flexibility to do larger deals which we as an investor in the main fund will benefit from significantly. Cowen Royalty’s main fund has performed above our expectations returning consistent distribution since the end of 2008 and were bullish on the growth prospects for this business in 2010 and beyond.
As for the distribution side of the asset management business, we’re continuing to work on building out our platform distribution business. We’re making progress on our 1099 fund to fund products which is our first product to be distributed to the platforms. It is a multi-strategy fund to fund product with a 1099 tax reporting which avoids complex K-1 tax disclosures and we think it differentiated in the marketplace for high net worth individuals.
We anticipate marketing this primarily through two important channels which are new channels for us. One is a network of independent financial advisors and the other are the large platforms at commercial and investment banks and this dovetails with the investment we’ve made in building out the platform business.
Finally, I’d like to take a few minutes and talk about our balance sheet investment activity. Investment income was again a positive contributor in the fourth quarter, notwithstanding markdowns we took from private investment in the fourth quarter. As we’ve said previously, we believe that having capital on the balance sheet is a strategic advantage and we’re able to invest in products to generate both returns on invested capital and additional earnings streams as we see new products and businesses. We’ve continued to explore ways to deploy our capital to meet these objectives.
As was discussed before, our balance sheet has over $470 million in total equity which is $25 million in debt at the beginning of the year. Of this total equity, the balance sheet was invested across a broad range of strategies at the end of December. The majority was invested in liquid trading strategies which themselves carried a blended leverage ratio of about 2.3 times that’s long market value over equity, the remainder was invested in private investment strategies which we do not leverage.
Our largest investment allocations include credit trading and event driven, reflecting our core competencies in those areas and our belief that the returns look attractive in those spaces. On the private side, our traditional, we have our investments in traditional privates, real estate which actually represents less than 5% of our total equity, Cowen Healthcare Royalty Partners and private investments in public equities which is the business that we’ve been in for a long time.
As it relates to real estate, while our market position was down significantly in 2009 we’ve had little permanent impairment to gain as our positions are mainly financed longer term. Where we’ve taken back properties in our lending business, we’re actively managing those properties to provide us with strong current cash flows. However, should the difficult conditions persist in the commercial real estate market; some of the impairments that we’ve taken to value are likely to become realized over time.
We established a robust investments process centered around the investment committee that we mentioned in our previous discussions, that includes members that have come throughout the firm. We consider both the allocation of capital for investment purposes as well as strategic business initiatives in those estimates. Our belief is that we need to look specifically both at the investment side of the firm as well as acquisitions and joint ventures as we intend to use our capital to be very ROE driven.
I will now turn the call over to Chris White, who will provide an overview of the results for 2009 and the fourth quarter and the full year.
I’d like to spend a moment going through or results of 2009, but first I’d direct people also to this morning’s press release as most of the numbers covered today are included in the release.
The new Cowen Group, as the result of the merger of Ramius and Cowen, which closed at the beginning of November. The GAAP accounting associated with the merger resulted in Ramius being deemed to be the purchaser and therefore all pre-November GAAP figures represent only legacy Ramius information. As a result, our 2009 GAAP financials reflect 12 months of Ramius operations and two months of Cowen operations. Likewise, the fourth quarter GAAP numbers reflect three months of Ramius and two months of Cowen operations. All 2008 GAAP information is Ramius stand alone.
For the 12 months ended December 31, 2009, we reported a GAAP loss of $55.3 million of $1.35 a share, compared to a loss of $141.8 million in 2008 or $3.78 a share. For the fourth quarter of 2009 we reported a GAAP loss of $23.4 million or $0.46 a share compared to a loss of $76.3 million in the fourth quarter 2008 which represented $2.03 a share.
As expressed previously, we believe that economic income, which in a straightforward and understandable way shows how we make money and how we spend money, is the best way to view our results of operations. More specifically, economic income excludes the impact of consolidating any of our funds, it excludes in 2009, $19.2 million of transaction related expenses, $10.5 million of which were incurred in the fourth quarter. It excludes expenses associated with the one time equity awards made in connection with the transaction, which totaled $3.4 million for the year all of which was incurred in the fourth quarter. And it excludes in 2008 the impact of writing off $60 million of goodwill.
In an effort to provide more detailed disclosure, we’ve made pro-forma adjustments to economic income such that you see in our release and we will discuss today, fully combined results, meaning 12 months and three months of both Cowen and Ramius operations for the full year and fourth quarter of 2009 and 2008.
For the 12 months ended December 31, 2009, the company reported a pro-forma economic loss of $67.9 million of $1.66 per share compared to a loss of $146.9 million or $3.91 a share in 2008. In the fourth quarter we reported a pro-forma economic loss of $21.1 million or $0.41 a share compared to a loss of $76.9 million or $2.05 a share in the prior year period.
The numbers in 2009 are somewhat confusing due to a handful of non-cash and non-recurring items that had a significant impact on our results. These items include the following; legacy non-cash deferred compensation expense of $26.9 million and $3.8 million in the full year and fourth quarter respectively. Most of these expenses have been eliminated although a portion will be replaced in future years with expense associated with equity awarded as part of annual compensation.
We also had non-recurring expenses of $7.2 million in 2009, the vast majority of which were incurred in the first three quarters of the year. These expenses related primarily to the closing of certain businesses and an arbitration case that was concluded in the company’s favor in 2009.
The 2009 figures also include $8.9 million of non-cash negative incentive fees due to the reversal of previously booked incentive income for our real estate fund and the impact of the subordination agreement with an investor in one of those funds, $700,000 of this amount was incurred in the fourth quarter. Moving forward, there’ll be no further reductions associated with the previously booked incentive fees and we expect the impact, if any, of the subordination provision to be minimal.
The final reduction is for depreciation and amortization expense of $8.3 million in 2009, $600,000 of which is related to amortization of intangibles from the transaction. Depreciation and amortization in the fourth quarter was $2 million. We expect to have approximately $4 million of amortization related to intangibles in 2010.
When adjusted for these non-cash and non-recurring items, pro-forma economic loss for the year was $16.6 million compared to $120.3 million in 2008. I would also note that we took $12.5 million of net unrealized markdowns related to our private investments, including real estate, during 2009.
I realize that we just walked through a long list of numbers but we thought it was important to share them with you to help you gain a better understanding how the business performed in 2009.
We’d now like to run through the different components of pro-forma economic income, starting with revenues. In 2009 revenues were $260.8 million up 32% or $63.2 million as compared to 2008. During the fourth quarter we recorded revenues of $69 million an increase of $72.6 million compared to the fourth quarter 2008 when we reported negative revenue of $3.6 million.
Turning to specific revenue line items, investment banking revenues for the year were $44.6 million down just over $6 million or 12% from the prior year. The decline was driven primarily by lower M&A revenue offset partially by higher revenues from capital raising activities. M&A revenue was down approximately 40% which was in line with gross sector M&A market generally.
We did observe a rebound in investment banking in the fourth quarter with revenues of $15.7 million up $10.5 million from the fourth quarter 2008. This rebound was largely driven by an increase in our underwriting and other capital raising businesses, as growth financing picked up dramatically. Underwriting revenue in the quarter was the best it has been since the fourth quarter 2007.
Moving to our sales and trading business, revenue decreased by approximately $22 million or 14% to $133.7 million compared to $155.9 million in 2008. Sales and trading revenue in the fourth quarter was $31 million compared to $35.3 million in the fourth quarter 2008. We, like others, suffered as volumes decreased over the course of the year. Notwithstanding the reduced volumes, we continue to increase market share which should help us when trading volumes return to more normalized levels.
On the alternative asset management side of our business we reported management fees of $61.4 million in 2009 a decrease of approximately $36 million or 37% as compared to 2008. Management fees in the fourth quarter were $14 million compared to $21.4 million in the corresponding period in 2008. The decrease in fees was the result of a net decline in assets under management over the course of the year.
As Jeff discussed, we’re pleased with the interest we are seeing in some of our existing hedge fund products as these tend to be among the higher management fee products we offer. On a blended basis, over the course of the year, our average management fee was 0.65% including lower fee paying products such as cash management and our mortgage advisory business where we are not currently collecting management fees.
During both 2009 and 2008 we reported non-cash negative incentive income due to the reversal of previously booked incentive fees from our real estate funds and the impact of a subordination agreement with an investor in one of these funds. However, as was mentioned earlier, we booked incentive fee income in the fourth quarter for the first time in over four quarters, as one of our larger fund to funds products went through its high watermark in December and the impact of the real estate club act and subordination provisions wound down.
Good progress was also made last year on getting our value and opportunity fund back to its high watermark. As of December 31, we were 8% below that high watermark. We also made steady progress against the multi-strategy high watermark where, as of year end, we needed to increase net asset value by 25.8% down from 34.7% at the beginning of the year.
Investment income improved dramatically in 2009 as we reported revenue of $24.5 million for the full year and $5.2 million in the fourth quarter, compared to negative investment income in both periods in 2008. Investment income was largely driven by our interest in the enterprise fund during 2009. As previously noted, performance in this area was negatively impacted by net unrealized mark downs of approximately $12.5 million for the year and our private investment portfolio.
We’re very comfortable with our current marks on the private investments and feel fortunate that we have no reason to dispose of these assets at what we believe are depressed values.
Other revenue decreased slightly on a year over year basis as we exited the fund placement agent business during 2009. Other revenue in the fourth quarter increased by approximately $850,000 due primarily to the favorable resolution of previously mentioned arbitration proceeding.
On the expense side, we wanted to take a few minutes walking through compensation. Compensation and benefits expense for the full year 2009 was $206.7 million a 5% decrease as compared to $218.7 million in 2008. Compensation and benefits expense in the fourth quarter was $57.5 million compared to $44.1 million in the fourth quarter 2008.
On an absolute basis our compensation to revenue ratio was 79%. This ratio excludes one time equity award expense of $3.4 million from grants made in connection with the merger. The ratio includes $27.5 million of legacy non-cash deferred compensation expense booked in 2009. Most of that expense has been eliminated as a result of the merger and that which remains relates to the one time awards made in connection with the transaction.
Going forward, we will also incur expense related to equity awards made in connection with annual compensation. If the $27.6 million is backed out of the compensation, the ratio drops to 68.9%. As mentioned earlier, 2009 full year revenues include $8.9 million of non-cash negative incentive. Excluding the impact of this non-cash item the ratio drops to 66.6%.
I would also note that compensation and benefit expense includes $7.6 million of severance in 2009. Excluding the severance, in addition to the other items discussed, the ratio drops to 63.4%. The significant severance expense was caused by a reduction in headcount over the course of the year. We currently have 569 full time employees which represented a 14% reduction from December 31, 2008, and a 24% reduction from September 30, 2008.
Looking at non-comp expenses, non-comps in 2009 were $130.7 million an 11% decrease from $147.3 million in 2008. Non-comp expenses in the fourth quarter were $35.2 million a 1% decrease from the fourth quarter 2008. These measures exclude transaction related expenses associated with the merger of $19.2 million in 2009 and $10.5 million in the fourth quarter. The decline in 2009 non-compensation expense was driven primarily by lower professional fees and communication expenses. We continue to focus on non-compensation expenses and expect to bring this number down again in 2010.
Taking a look at taxes, which although they are not economic income as a pre-tax measure, we at least wanted to briefly address this matter. In 2009 we recorded a $2.2 million tax benefit which equates to approximately a 3% effective tax rate. Based on existing tax assets we do not expect to incur meaningful taxes in 2010. On a go forward basis, we believe that an effective tax rate of approximately 30% is reasonable.
Finally, turning to the balance sheet, book value per share was $6.33 at year end and tangible book value per share was $5.75 a share.
With that, I’ll turn it back over to Peter for closing remarks.
You’ve heard an awful lot of information being thrown at you and we appreciate it takes some time to parse through this. In summary, we’re pleased with the progress we’ve made following the close of the merger in November 2009. We’re going to continue to be very opportunistic with our business and build on the cost savings and revenue enhancing opportunities presented by this combination. I think we’re very positive on the future and look forward to delivering value to all of our shareholders. I think you all know, employees of the company own a third of the company.
With that, I’d like to thank you and turn it over to all of you for Q&A.
(Operator Instructions) Your first question comes from Devin Ryan – Sandler O'Neill
Devin Ryan – Sandler O'Neill
You guys spoke a bit about the redemptions and the funds but can you give a bit more color on exactly where they came from. It sounds like the tide is turning on that front. Would it be realistic to think about positive net flows as early as this quarter, I want to get some color there.
The bulk of the redemptions came early in the year last year and we staggered redemptions out and negotiations with our investors primarily in our multi-strategy funds and some of our fund to fund products. We’re not really giving forward guidance, what we can give is pipeline that we have in terms of actively engaged mandates that we’re seeking from clients has grown significantly. Those are always tricky to predict when those kinds of commitments fall. Our distribution network is primarily one where we’ve gone direct to the consultant fee network. They tend to come in size so you’ll get mandates that get awarded at less than regular time.
What I can say is the pipeline has certainly increased, the amount of actively engaged dialogues we’re having with clients on the property that we already have is increased significantly. Then we’d expect to close on those if history is any guide.
I think a year ago we were seeing a lot of people show interest but we weren’t seeing people actually make decisions. As the year has progressed people are actually coming to fruition now and making decisions.
We certainly narrowed our focus. One of the things that we tried to do with the reorganization of our asset management business was, we understand the dialogues we’re having with clients are far more about figuring out solutions for them and how we can help them with their investment portfolios. When our sales force is dialoguing with clients we’re really trying to ascertain if we’ve got solutions for them and engaging them in a way that we can be more value added and strategic longer term.
The downside to that is it may take longer for us to get the assignment but once we’re embedded with the client we then can follow up with other products and services so our view is we’re spending time on bigger opportunities that’s where the revenue stream can be a lot longer and lot more strategic in nature.
Devin Ryan – Sandler O'Neill
Thinking about the capital levels and the opportunities there, you’ve obviously recently seated some investments and done some hiring and it sounds like all that will continue. Can you talk about what other opportunities you’re looking at deploy capital potentially like in acquisitions or anything else like that?
We’re certainly going to be opportunistic. I think if you look at our balance sheet we can be very nimble in the things that we choose to do. Certainly if we had opportunities in the alternative space to acquire assets under management and good talented teams we would continue to look at those and there are some of those in the marketplace. Generally speaking, you’ve got to work out in the culture more than anything else. There are lots of opportunities but you’ve got to make sure you have the right kind of cultural fit.
On the broker/dealer side there’s some things where if we had opportunities and we can fit it in, again culturally with our organization we would certainly look to do that. This has got to be really laid up against the ROE we think we can generate on the balance sheet with the investment portfolio. One of the reasons we set up the investment committee the way we have is to be able to look at both investment opportunities and strategic opportunities so that when we are analyzing this we can really compare them against one another and make the best, we think optimal decision from an ROE standpoint.
Devin Ryan – Sandler O'Neill
In terms of hiring, if you can answer it this way, thinking about where headcount is going is what I’m getting to. Are there any thoughts of where you’d like to see it by say the end of 2010?
We don’t have any targets on headcount per se. We have reductions that we saw in effect across the organization. At the same time, we are seeing an awful lot of very talented people who could fill important roles for the combined organization. We have a very active interviewing process going on. Might we be sort of flat to up a little bit, yes I think that could happen. I don’t see us growing headcount very substantially. By the same token, I don’t see it declining very substantially because we are bringing people in and what we’re trying to do is take advantage of the infrastructure savings and invest those savings back into revenue producing people. We are seeing some really attractive people.
Devin Ryan – Sandler O'Neill
On the cost initiatives, I think you guys were tracking for somewhere around $10 million. Can you give me an update on how that’s progressing and where you guys are on that front?
We’ve already realized in excess of $10 million of cost savings between comp and non-comp. As we move through the course of the year we will be able to realize even more. I think we’re ahead of the game in terms of what we indicated to people that we could do. I think the culture of both firms is one in which we try to reduce non-comps and we try to reduce expense wherever we can.
I think over the last three years we’ve brought down non-comps by over 20% on a combined basis and there’s more that we can do because there are redundancies within, certainly on the infrastructure side, not people I’m talking now about systems and things that take a little longer to actually extract them from the system. I think we’ll do that over the course of 2010.
Your next question comes from Justin Evans – Sonoma Capital
Justin Evans – Sonoma Capital
Would you guys ever be a buyer of a plain vanilla asset management business? Is that something you’d ever think about?
I don’t think we would rule out anything. The answer is sure but it’s going to be a function of whether or not we think that we can apply the marketing capability to grow that business and whether or not that business brings some unique capability to us that we presently don’t have. In this environment we don’t rule out anything. We’re going to look at everything and very carefully figure out how we can leverage the organization and the firm’s capital.
Justin Evans – Sonoma Capital
I wanted to ask about the prop book a little bit, is that still mostly invested in the enterprise fund or should we think about that as being deployed more broadly across the firm?
The bulk of that is invested directly in the enterprise fund now. Within that fund we obviously have our private investments and our public investments. When I talked about it I was really talking about how we look at managing risk on a look through basis. The bulk of that that are still invested through the enterprise fund.
There’s more capital in the broker/dealer today.
Outside of the investment portfolio we are actively managing our broker/dealer capital which is something that Cowen historically did not do. There obviously we have regulatory capital needs and we maintain a significant excess net regulatory capital in the broker/dealer and we’re actually able to generate positive carry on that as well.
Justin Evans – Sonoma Capital
In your release I noticed there wasn’t any guidance and I think you mentioned it, can you guys give any kind of color on what you think this business can earn, maybe backing out the prop book. Obviously the prop book is going to add a lot of variability to your earnings each quarter depending on what the market is doing and how you guys are doing there. Generally speaking for the rest of the business how can that do without that prop book?
We can look at history and see it by business in our prior filings. We do have a lawyer sitting with us in the room here.
The only thing I would say on that is how the business does ex the prop book is to a certain extent is going to be a function of the environment that we’re in. I don’t think it comes as any surprise to anyone how much volume has contracted and how new issuance and the follow on business has been affected by the lack of volume in the environment. We had this flurry in the fourth quarter of new issuance then it slowed down again.
A number of deals, not ours per se, deals that were filed by other banks got pulled in the last six or eight weeks. Suffice it to say this merger wouldn’t make any sense if we couldn’t make money ex our prop capital in a more normalized environment. The one thing that I think will happen and I hope we will participate is the M&A environment is going to continue to be and maybe growingly be robust. We’ve got the ability to participate in that in our space or spaces, in our sectors. I hope that attempts to answer the question with out getting myself in a pickle.
Justin Evans – Sonoma Capital
I’m trying to figure out how different your model going forward will be from the historical investment bank model. Do you envision using some leverage at some point for his model?
The key here is matching duration to asset type. I think we can and have used leverage. We’re more likely to use leverage against things where we have significant liquidity. Of course we’d like to be in a position where we have a lot of liquidity on the asset side and maybe term debt at some point in the future if we were to put some debt into the portfolio. It’s the balance sheet.
Could we scale? Sure we could scale but I think we’re far more focused on managing the liquidity on the balance sheet and generating the rates of return on a un-levered basis, a partner view if we could do that well then adding a more leverage will enhance the returns but we will not be a slave to having to leverage the balance sheet in order to generate returns.
Justin Evans – Sonoma Capital
With the lack of guidance, I’m just a little bit nervous about the burn rate. Can you address that at all? Is there any likelihood that you’re going to have to raise additional equity at some point?
We don’t anticipate having to come back to the market to generate additional equity unless we see an opportunistic reason to do so.
We have seen conjunction with some kind of proactive event which required more capital perhaps then we had available but that would have a real benefit.
Your next question comes from Ryan Kealy – KBW
Ryan Kealy – KBW
On the high watermarks that you touched on, are there any funds in the largest ones that you break out with at least $200 million in AUN that are not capable of recapturing high watermarks because of when they were created or started investing?
Every fund that we have is capable of being able to recoup its high watermarks. It’s a little misleading because high watermarks are specific to the investors themselves. To the extent that new assets come in to any of those existing funds those are not subject to high watermarks. The numbers that we put in there, if you are a generic investor and you were an investor as of January 1, 2008, where would your returns have to go in order to recoup the high watermark.
Ryan Kealy – KBW
In terms of future potential redemptions, are there any notable lock ups coming off, I think you guys have touched on it before maybe within the enterprise fund, or are those pretty much expired at year end?
There are several, the enterprise fund was a two year rolling lock up fund, the answer to your rolling lock up funds, so there are several through March and June are the last two significant redemption dates. To date we have relatively small redemptions that we’re seeing from that. People haven’t redeemed they would be rolling for another two years.
Ryan Kealy – KBW
Of any of the people that have not redeemed to this point are any large contributors or you don’t really disclose that?
We haven’t really disclosed that.
At this moment I’m showing there are no questions in the queue.
I’d like to thank everybody for their patience and thank you for your help and look forward to speaking with to you with brighter stories in the future. Thank you all very much.
Thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect. Have a great day.
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