Stephen Lasota - Chief Financial Officer and Principal Accounting Ofifcer
Peter Cohen - Chairman, Chief Executive Officer and President
Jeffrey Solomon - Co-Founder, Chief Operating Officer, Chief Strategy Officer, Head of Investment Banking of Cowen and Company and Chairman of Investment Committee
Errol Rudman - Rudman Capital Management, LLC
Devin Ryan - Sandler O'Neill + Partners, L.P.
Cowen Group (COWN) Q4 2010 Earnings Call March 4, 2011 9:00 AM ET
Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Incorporated conference call to discuss the financial results for the 2010 fourth quarter and full year. By now, you should have received a copy of the company’s earnings release, which can be accessed at the Cowen Group, Incorporated 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, Incorporated 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 their other filings with the SEC. Cowen Group, Incorporated has no obligation to update the information presented on the call.
A more complete description of these and other risks and 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.
Thank you, operator. Good morning, everyone. Thanks for tuning in to our earnings call. I'm joined here today by Jeff Solomon, our Chief Operating Officer and Head of our Investment Banking unit; and Steve Lasota, our Chief Financial Officer. Later in the call, Jeff will discuss our individual operating businesses in detail, followed by Steve, who will take you through the financials for the fourth quarter and the full year.
2010 was a year of positive change and a lot of progress for Cowen. Through the last three quarters, we have discussed a number of initiatives within the Asset Management business and the broker-dealer to build the foundation for diversified growth-oriented financial institution and drive us to profitability. We're pleased to announce that in the fourth quarter we recorded our first profitable quarter as a combined company with GAAP net income of approximately $4 million or an economic income basis, a gain of approximately $6 million.
But first, I would like to thank all of the people of our organization for helping achieve this important milestone. As a group, we have come together and focused on being productive partners, seizing opportunities, managing costs and contributing to the performance of this organization across the board. More than ever, we have become a solutions-driven and intensely-focused organization, really pointed towards delivering the products and services that our clients are demanding both in the Asset Management business, as well as in Investment Banking, Research, Sales and Trading.
To touch on some of the highlights, at Ramius, our Alternative Asset Management business, the fourth quarter was a continuation of the year-long combination of strong performance and a positive trajectory and asset growth across the platform. Fourth quarter assets under management rose $815 million to $9 billion, as of January 1, 2011. This is a significant increase over the $7.8 billion in assets under management from the prior year. Our ongoing backlog of mandates in negotiation remains very robust as well.
Of note, the industry, meaning the Alternative Asset Management business, as a whole saw 2010 inflows to hedge funds at the highest level since 2007, around $55 billion, with more than 80% of new assets allocated to firms with more than $5 billion of AUM. As the industry is positioned to surpass its previous asset peak in the second quarter of 2007, global investments are focused on the dynamics of inflation, protection against inflation, strategic specialization, enhanced liquidity, improved structures and transparency for accessing hedge fund performance.
Through the year, Ramius had been delivering against these invested priorities, and the results have been very positive. Our existing products have performed well, in some cases, very well last year generating management fees and incentive income, and we have successfully launched others such as Ramius Trading Strategies and the Ramius Dynamic Replication Fund. Our Alternative Solutions business continues to win mandates from sophisticated institutions across the globe and with their experience and expertise are providing leading customized investment solutions. Looking at 2011, I'm confident that Ramius will continue to be able to respond to investor demand, continue to deliver appropriate risk-adjusted returns and innovative new products to meet determined client needs.
In our Investment Banking business, we recorded our best quarter since mid 2008, primarily due to the growth in our Underwriting business. Underwriting performance was driven in part by the efforts we've made in Asia. During the fourth quarter, we completed six transactions out of China including two book run IPOs. For the full year, we completed a total of 12 transactions, emanating out of China, as compared to five in 2009. In 2011, we will continue to make China a priority, and I expect this area to be of vital importance in growth for us in years to come.
2010, we also invested in several new business initiatives to increase the product capabilities of our Capital Markets department in order to deepen client relationships and increase coordinated offerings between banking capital markets and sales and trading. We have already begun to see signs of progress in some of these areas, specifically, in our debt capital markets and convertible bond origination and PIPEs-registered direct origination activities.
We have also completed our investment to expand the sales and trading platform, specifically our electronic trading and fixed income distribution platforms and the development of an emerging company research product for our research group. All of these initiatives mesh together to expand our offerings and ability to execute for clients in sectors that we focus on. They are collaborative efforts, that we believe will distinguish our approach, and allow us to aggressively take market share while maintaining the premium brand.
I'd also like to speak out about our balance sheet, which stood at approximately $450 million in equity at the end of the year. Indeed, our tangible book value is $5.42 per share. One of the key factors underlying our rationale for the 2009 Cowen Ramius business combination was the ability to utilize in-house expertise and knowledge in investing our capital. This rationale was certainly apparent in the fourth quarter, as we were able to generate over $36 million in investment income, thanks in part to recent market condition improvements, our acquisition of two Luxembourg reinsurance captives and our investment professionals who've been able to generate returns similar to those produced by Ramius prior to 2008.
2010, we generated a total of nearly $60 million of investment income for return of approximately 15% on year-end tangible equity. As of February 28, approximately 85% of our equity is deployed in investments. I'm also pleased with the progress we made in reducing non-comp expenses. 2010 total non-comp expenses declined by 3% from the prior year, including 11% reduction in our fixed non-comp expenses. Our efforts to reduce expenses were even more noticeable in the second half of the year, which when prorated reflect the 6% annual decline in the overall non-comp charges despite an increase in variable expenses during the year, those variable expenses being included in the non-comps.
We made significant progress in 2010 and our fourth quarter is clearly encouraging. However, to ensure that this momentum carries into this year and beyond, we must continue to deliver best-in-class services and products to our clients. I am confident that we now have the appropriate platform and professionals to execute this goal.
Before I turn the call over to Jeff, I’d also like to touch on the announced merger with LaBranche & Co. We expect to file a proxy material shortly, and at that time we and LaBranche will reach out to both sets of shareholders to discuss the transaction rationale in more detail. I do want to emphasize though that we believe the combination will create value for both Cowen shareholders and LaBranche shareholders. We believe that in coming onto the Cowen platform LaBranche businesses, the people and the capital will have a better opportunity generating value than what's currently available to them.
Together, we see an ability to accelerate time to market in a number of high-growth areas in sales and trading, and we particularly like the ability to expand Capital Market's activities by leveraging LaBranche's licenses including its Hong Kong exchange membership. Given the initiatives we started in 2010, we believe there is real momentum that can be achieved through the addition of LaBranche, and we look forward to providing you with more information regarding the merger.
With that, I will turn the call over to Jeff Solomon, who'll talk about our businesses in greater detail.
Thank you, Peter. Before I get started, obviously, I'd like to echo Peter's sentiments about the efforts that our team put forth across the board. It's really been an incredible year, and we've done a lot, in a lot of different ways, to build out a very solid platform in which to deliver consistent performance. And we feel very proud of everybody here who's really stepped up to the plate.
I'll begin by discussing various developments that took place at Ramius during the fourth quarter and the year, followed by a brief discussion of Cowen & Co., our broker-dealer, and then I'll talk a little bit more in detail about our balance sheet activities. As Peter mentioned, Ramius had a strong year with consistent quarter-over-quarter growth in assets under management. We launched a number of new products and one mandate from prominent institutions while facing some incredibly strong competition.
To their credit, our team stayed close to clients, shifted their approach to meet new demands and priorities, took advantage of market opportunities and delivered solid performance across the board. In detail, our total assets under management for the fourth consecutive quarter increased, rising to just over $9 billion as of January 1, 2011, as compared with $8.2 billion at the beginning of October. The increase resulted from net subscriptions of $780 million during the quarter and performance-related appreciation in assets of $40 million. The subscription-related increase was also primarily driven by our cash management and by certain of our private investment products.
Our assets under management and our ongoing hedge fund products increased by $91 million in the fourth quarter, excluding $152 million in assets returned to investors in conjunction with the closing of our multi-strategy funds. $23 million of that $152 million was transferred to other hedge fund products. Moreover, the increase in the assets is net of $54 million in fund-to-fund distributions made in the fourth quarter pursuant to the July modification agreement with UniCredit.
For the full year, we returned approximately $824 million in assets to investors in connection with the closing of the Ramius Multi-Strategy and Ramius Enterprise funds and the return of assets to UniCredit pursuant to the terms of the modification agreement. So the numbers that I gave you earlier are inclusive of those returns.
Despite those returns, AUM increased by $1.2 billion or 15% during 2010. This increase was driven by all areas of our business, when we take into account the assets returned from the multi-strategy funds aside from real estate, which remained flat for the year. During the fourth quarter, we reported incentive income of $6.3 million, which is up $1.8 million -- up from $1.8 million during the previous quarter. This increase in incentive income was a result of our strong performance and the fact that our ongoing hedge fund performance seed products were through their high watermarks for all investors, other than those who transferred assets over from our multi-strategy funds.
These investors carried over their high watermarks when they elected to transfer assets into our single strategy products. We had strong performance across nearly all of our funds during the quarter. To highlight a couple of the more important funds, our deep value and opportunity fund increased by 11.6% in the fourth quarter and was up 31.7% for the full year. Our global credit trading platform increased by 2.9% in the quarter and was up 17.7% on the year. Our Activist fund-to-funds portfolio with the hedging overlay product increased 2.9% in the fourth quarter and was up 6.9% on the year. Our RTS Global 3X Fund increased 7.1% in the quarter and was up 18.5% since the fund launched in the beginning of March. To give you a benchmark, the S&P Index was up 10.8% during the quarter and was up 15.1% for the full year.
During the quarter, we remained focused on marketing our liquid investment strategies particularly value and opportunity and the long/short credit trading strategies. Our global credit fund crossed two important milestones: First, by completing its first full year of operation on October 1; and then by surpassing the $200 million mark in assets under management for the fund vehicle on January 1, with almost $40 million of client inflows received during the quarter.
Our deep value fund neared the $200 million mark as it finished with nearly $20 million in client inflows over the quarter, which is the strongest quarterly inflow over the past few years. As you may have seen in a separate announcement this morning, we recently made a decision to spin off our Shareholder Activist business into a standalone and independent business that will be managed by Starboard Value LP.
On completion of this spin-off, Ramius will maintain a significant minority economic interest in Starboard but the majority will continue to be led -- and the fund will continue to be led by Jeff Smith, Mark Mitchell and Peter Feld. Due to the nature of this strategy, we feel that this action will put value and opportunity business in a better position to attract capital from institutional investors, seeking an experienced and professional shareholder activist group dedicated solely to deep value investing. With a strong long-term track record and outstanding performance in 2010, we have confidence in the team, and we continue to look forward to supporting the growth of the business going forward.
Of note, Ramius will maintain a significant minority interest in the new management entity, and we will retain a proprietary investment in the funds on our balance sheet. We will also continue to market the funds, and we will continue to provide certain ongoing services in terms of the operations of the business. As I alluded earlier, the Alternative Solutions business continues to win mandates from sophisticated global institutions due to the team's expertise and experience in developing customized investment solutions. Some of the most notable mandates include the following, all of which are expected to be funded by April 1: A $200 million customized replication mandate from a U.S. university endowment, a $20 million custom replication mandate from a global family office; and a $375 million mandate from an Australian asset management firm for a customized hybrid portfolio combining a range of access mechanisms into one solution.
These are all in the backlog, not in the AUM. We're also actively developing new products that we believe will help to drive asset growth in 2011. For example, we were awarded an important mandate from a global investment bank to construct and manage a new product for global distribution, which is expected to launch in the second quarter of 2011.
Under that agreement, we will manage a portfolio comprised of strategies developed by the bank, as well as a custom replication index developed by Ramius. We are also close to launching an insurance dedicated fund-to-funds product with anchor investors already lined up. In terms of our managed real estate funds, we as well as our investors have started to see the value of our holdings increase, which has been a welcome sight considering the challenges faced over the past few years.
In addition, the inflow on the debt fund platform has picked up considerably over the last few months after a long period of sluggish flow. The return of the collateralized mortgage-backed security or the commercial mortgage-backed security market has brought in new capital, and banks have begun to resolve smaller balance loans. And while we still have a meaningful amount of capital to commit in our debt fund, we hope to take advantage of these market improvements by seeking to raise capital for our Real Estate Fund business later this year.
Cash management strategy also had a strong quarter, with $936 million in new inflows; and while the management fees are relatively low for this product, we're starting to reach AUM levels in that business that make this a nicely profitable business for us in the firm. Future opportunities for the alternative Asset Management business continue to expand as institutions and private investors continue to look for smart custom products and solutions to better balance their broader investment portfolios. We are looking forward to next year and the value this group can create for clients and the firm.
Now I'll turn over to Cowen & Co., our broker-dealer. We recorded our strongest investment banking quarter in terms of revenues since the second quarter of 2008. It was also our best quarter of the year in terms of total transactions completed.
Like Peter, I'd like to recognize the incredible hard work of our partners. Mergers are never an easy thing, and in our first full year working together with the Cowen team, we've taken significant steps forward in realizing our goal of returning the firm to profitability. There are really exceptionally talented individuals across our investment banking sales and trading and research groups who work more closely together to achieve that end. And I truly look forward to demonstrating what we can achieve by building on our current momentum.
In investment banking during the quarter, we closed 17 transactions, generating $15.8 million in revenues, as compared to revenues of $7.2 million from the 12 transactions in the third quarter. Fourth quarter represented our strongest capital-raising quarter since 2007, both in terms of underwriting revenues and transactions completed.
During the period, we closed 11 transactions, generating $9.9 million of revenues, as compared to the prior year period when we closed nine transactions for $7 million and the third quarter of 2010, when we closed nine transactions for $3.5 million. We were a book runner on approximately 25% of our fourth quarter transactions including two transactions that originated out of China, as we continue to focus on expanding our banking footprint in Asia.
On a side note, upon closing the LaBranche transaction, as Peter mentioned, we feel our ability to accelerate our capital markets and activities in China will be substantial. Certainly, it's something we could do on our own but the time and effort will be significantly reduced by leveraging their license and allowing the combined organization to maximize its impact in the region, potentially building out a similar focus sector strategy in delivering debt equity product for emerging companies established in that region.
Our equity capital raising backlog today stands at 22 transactions, of which 12 transactions are filed. We are a lead manager on about 25% of our aggregate underwriting backlog, which is mostly comprised of IPOs. On the advisory side of our business, we have 18 transactions in backlog, as we executed on four transactions in the fourth quarter. We also continue to make headway in our recently established credit fixed income group, which has six transactions in backlog and has already closed one transaction thus far in the first quarter. In our PIPEs and Registered Direct group we completed three transactions in the fourth quarter, and we have almost double-digit number of transactions in the mandated pipeline.
As I discussed on past calls, we made important changes to our banking platform for 2010. And these changes were undertaken in order to increase our product capabilities, to properly size the platform and re-orient our coverage model in those areas where we can deliver the most value to our clients. In July, we added a fixed income credit group for two reasons: To support our existing banking clientele by providing the capability to address the needs across their entire capital structure; and to expand our reach by increasing our client base.
While we are less than nine months in this group's formation, there's already strong evidence to suggest that our strategy is paying off. In January, Cowen acted as the sole agent for a long-time equity client of the firm in the exchange of its convertible notes into high-yield bonds. This credit assignment allowed us to deepen our relationship with an important client and represents business we can not have executed at this time of the year.
It also represents the fact that we are working very closely with sales and trading and capital markets to make sure that we are delivering an integrated product solution for clients. The credit group has not only given a foothold to clients that we are previously unable to cover as holistically. But it's opened up a new dialogue with clients who can avail themselves of these kinds of product offerings.
We can now advise companies in more advanced stages of their life cycles, operating in a wider range of sectors and subsectors in the economy. In fact, our mandated credit backlog now includes assignments from clients in sector such as materials and merit time. In addition to our credit group's formation, we've also reshaped other areas of the Capital Markets department.
As I've discussed on previous calls, the big initiative for us was to increase and refocus our presence in the PIPE and Registered Direct market, which has historically been a core revenue generator for our banking franchise and an important capital raising tool for our clients. We are now beginning to see the progress of our efforts.
In the fourth quarter we closed three transactions, which was the most of any quarter in 2010. We've also worked to rebuild our presence in the convertibles origination market. And to this end, I'm pleased to announce that we completed our first convertible notes offering in early January for an important equity client of the firm.
To unify these efforts, we created the Global Capital Markets group which includes debt capital markets, equity capital markets and the private equity group. And while I've announced this development in past calls, it's important to reiterate the significance of this change. Not only are we winning in some of the new initiatives but our ability to cover clients across the entirety of the capital structure is helping the core business of equity underwritings as well. And that is a very important thing as we look forward.
In 2011, we're going to continue to be aggressive in taking market share in our focus sectors and ensuring that the momentum created by these new initiatives continues. We will also be opportunistic in hiring skilled professionals and entering and strengthening our presence in verticals where we believe we can add value to our clients and the firm.
Turning to sales and trading. In 2010, we continued to maintain our market position despite an aggregate 15% decline in New York Stock Exchange NASDAQ trading volumes as compared to 2009. Cash equities volumes remained depressed in the fourth quarter, and decreased customer activity resulted in a 14% year-over-year decline in brokerage revenues. However, despite this trend, we were able to increase revenues in the quarter by 2%, as compared to the third quarter largely based on our success in maintaining our market share, particularly with the top 100 institutional accounts, which we view as a core client base.
We've also seen a pick-up in activities, thus far, into the first quarter of 2011. While cash equities remains the heart of our sales and trading effort, we've executed on a number of important growth initiatives in 2010 which are starting to pay off. In the summer, we announced the hiring of Tom O'Mara to increase our presence in options convertible and equity derivatives.
And Tom and his team's efforts have allowed us to expand our coverage universe by offering our traditional institutional clients with more product breadth. In addition, the convertible product is important for our new origination efforts in debt and equity capital markets, as I mentioned, enabling us to better serve issuers through increased distribution of equity linked securities. We have also focused on expanding our coverage in middle markets and opened a significant number new accounts in this area over the course of 2010. And this effort is really starting to be an important contributor to the Equities business.
Additionally, in November, we announced the hiring of Tim Slaughter as the Head of Fixed Income Distribution, and Tim is now responsible for expanding the firm's fixed income distribution capabilities as we continue to build out our fixed income and credit distribution platform. We recently hired two professionals to Tim's team, and the group is now generating revenue that is purely incremental to our historic Sales and Trading business.
Looking forward, we are seeking to expand on these efforts by building out additional sales and trading products, including our ETF business and our electronic market-making business. Here is also an area where the LaBranche merger makes sense. With the close of the transaction, our time to market in this area is shortened significantly. LaBranche's robust information technology platform, proprietary electronic trading systems and talented professionals can be paired with Cowen's fundamental research culture, customer-driven sales and trading capability in equities and equity derivatives. We think it's a match that has the potential to give our business, collectively, the leverage its needs to succeed.
Finally, I'd like to turn to our balance sheet. And even though it was conservatively invested we are pleased with the return of approximately 15% on year-end tangible equity. Going forward, we will continue to seek a solid rate of return on our proprietary capital, as it is a real differentiator for our organization and something that will fund our growth through the seeding of new products and strategies, hiring and promoting talented individuals and investment in infrastructure and technology.
Of note, $450 million in equity we had as book value by the end of the year last year, and it's invested across a diverse array of strategies. On a blended basis, our liquid investments were only levered 1.7x at the end of the quarter. And our illiquid investments remain unlevered.
In terms of balance sheet performance, we had a very strong quarter, as Peter mentioned. We reported $36.8 million in investment income, and that increase was due to positive performance across our various investment strategies, particularly in event-driven, credit, real estate, global macro and commodity trading strategies.
In addition, we generated $18.1 million of revenues and had a financing cost related to the two Luxembourg reinsurance companies that we acquired. I'll stop there and turn the call over to Steve, who can provide an overview of the results in detail for 2010's fourth quarter, as well as the full year.
Thank you, Jeff. Good morning, everyone. Beginning with GAAP numbers, please remember when reviewing the earnings release or the 10-K, which we expect to file next week, and as a result of the Cowen Ramius merger which closed in November of 2009, the 2009 GAAP fourth quarter results reflect three months of legacy Ramius results and two months of legacy Cowen results. Furthermore, GAAP results for the full year ended December 31, 2009, include 12 months of legacy Ramius results and two months of legacy Cowen results. All 2010 results reflect performance of the combined business.
For the three months ended December 31, 2010, we reported GAAP income of $4.1 million or $0.06 a share compared to a loss of $23.4 million in 2009 or $0.46 a share. For the 12-month period, we reported a GAAP loss of $45.4 million or $0.62 a share, compared to a loss of $55.3 million in 2009 or $1.35 a share.
Management utilizes economic income when analyzing our business performance, as we believe that economic income provides a more complete view of how we generate revenue and where we incur expenses.
More specifically, economic income excludes the impact of consolidating any of our fund's expenses associated with one-time equity awards made in connection with the Cowen Ramius transaction, which totaled $2.1 million for the fourth quarter of 2010, $9 million for 2010 full year and $3.4 million for the fourth quarter and full year of 2009 and in the 2009 periods, transaction-related expenses of $10.5 million for the three months and $19.2 million for the year.
In addition, economic income revenues include the investment income that represents the income the company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment-related expenses. For GAAP purposes these items are included in each of their respective line items. In an effort to provide more detailed disclosure, we have made pro forma adjustments to economic income for the 2009 periods, such that you see in our release, fully combined results for both the 2009 and 2010.
For the three months ended December 31, 2010, the company reported pro forma economic income of $6.4 million or $0.09 per share, compared to a loss of $21.1 million or $0.41 per share in the prior-year period. If we adjust economic income to exclude certain noncash items such as D&A, share-based and other noncash deferred compensation expense and our real estate incentive fee loss, our pro forma economic income for the fourth quarter was $12.8 million, compared to a loss of $14.2 million in the fourth quarter of 2009. More specifically, these adjustments include deferred compensation expense of $1.5 million and $3.8 million in 2010 and 2009 periods, respectively; G&A expense of $4.4 million and $2.4 million, respectively; and noncash negative incentive fees of $400,000 and $700,000, respectively.
Turning to our summary results for 2010 full year. The company reported a pro forma economic loss of $35.6 million or $0.49 per share, compared to a loss of $67.9 million or $1.66 per share in the prior-year period. Excluding certain noncash items, pro forma economic income in 2010 was $10.3 million, compared to $23.8 million in the prior year period. Our fourth quarter revenues increased by 45% to $101 million from the prior-year period. On a sequential basis, our revenues increased by 65% or $39.7 million compared to the third quarter.
The year-over-year increase in total revenue was primarily due to increased investment income and incentive income, partially offset by lower brokerage revenue, as cash equity volumes remain depressed in the 2010 period. The increase on a quarter-over-quarter basis was primarily attributable to an increase in investment income, greater investment banking fees and an increase in incentive income.
Turning to specific revenue line items. Investment banking revenues were $15.8 million during the quarter, flat compared to $15.7 million in the prior year period and an increase of $8.6 million compared to $7.2 million in the third quarter of 2010. Our M&A revenues for the quarter were $4.6 million, as compared to $5.3 million in the prior-year period and $2.7 million in the third quarter. In terms of the number of transactions, our M&A activity was down slightly on a year-over-year basis but up sequentially. We completed three transactions in the fourth quarter, as compared to four transactions in the fourth quarter 2010 and two transactions in the last quarter.
On the underwriting side of our business, revenues were $9.9 million for the quarter, an increase of $2.9 million compared to $7 million in the prior year period and an increase of $8.6 million compared to $3.5 million in the third quarter. During the quarter, we continued to execute on our backlog and completed 11 underwritten transactions for the period, which is the most we have completed in 12 quarters. Approximately 25% of these transactions were lead managed. We completed nine underwritten transactions in both the fourth quarter of 2009 and the third quarter of 2010.
Our private placement revenue was $1.3 million in the third (sic) [fourth] quarter, down from $3.5 million in the fourth quarter of 2009 but up from $1.1 million in the third quarter. In the fourth quarter of 2010, we executed three private transactions, as compared to five transactions in the fourth quarter of 2009 and one transaction in the third quarter of 2010.
Moving to our Sales and Trading business. Revenue decreased by $4.2 million or 13% to $26.8 million, compared to $31 million in the fourth quarter of 2009. This compares to a 16% decline in aggregate NASDAQ and New York Stock Exchange volumes during the period. However, we believe that cash equity volumes were down by even more. On a quarter-over-quarter basis, revenues increased by 3%, compared to the $26 million booked in the third quarter despite the fact that aggregate NASDAQ and NYSE volumes declined by 7%.
On the Alternative Investment Management side of our business, we recorded management fees of $15.1 million in the fourth quarter of 2010, an increase of $1.1 million or 8% as compared to $14 million in the fourth quarter of 2009 and an increase of 31% or $3.6 million compared to $11.5 million in the third quarter. The increase in fees on a year-over-year and quarter-over-quarter basis was primarily due to an increase in management fees associated with the closing at our healthcare royalty funds and an increase in total assets under management.
In the 2010 fourth quarter, assets under management increased by $800 million to $9 billion as of January 1, 2011. As compared to January 1, 2010 total assets under management increased by $1.2 billion or 15%. On a blended basis over the quarter, our average management fee was 69 basis points, which includes lower fee paying products such as our Cash Management business and our Mortgage Advisory business, where we're not collecting management fees. This compares to a blended average management fee of 71 basis points in the 2009 fourth quarter and 57 basis points in the third quarter. For the 2010 full year, the average management fee was 61 basis points, as compared to 67 basis points in 2009.
The annual decrease in our average management fee was primarily related to a change in the mix of assets under management over the two periods as we have significantly increased AUM in our alternative solutions area including advisory services and our Cash Management area. The decline also reflects fee reductions in UniCredit assets based on both the July modification agreement and the original agreement executed at the time of the Cowen Ramius merger.
Activity levels in all of our alternative investment products remain robust, and thus far in the first quarter of 2011, we've already been awarded mandates totaling over $700 million, all of which have been or are expected to be funded by April 1. During the fourth quarter, we reported incentive fee income of $6.3 million, compared to $1 million in the prior year period and $1.8 million in the third quarter of 2010. The improvement was a result of our strong performance in the fourth quarter which led to an increase in fees generated from our deep value hedge fund, certain fund-to-fund products and our global credit funds.
During the third quarter of 2010, our deep value fund went through its high watermarks for all investors other than those who transferred assets over from our multi-strategy funds. These investments carried over their high watermarks when they elected to transfer assets into our single strategy products. We recorded investment income of $36.8 million during the quarter compared to investment income of $5.3 million in the 2009 fourth quarter and $14.1 million in the third quarter 2010.
The improvement in investment income during the fourth quarter was primarily due to positive performance across our various investment strategies particularly event-driven, credit, real estate, global macro and commodity trading strategies. Additionally, the company recorded investment income of $18.1 million net of financing costs associated with the Luxembourg reinsurance program.
Turning to our expenses. We reported an aggregate compensation to revenue ratio of 62% for the quarter, compared to 82% in the fourth quarter of 2009. For the 2010 full year, our compensation to revenue ratio declined to 68% from 79% in 2009. This ratio, as well as economic income excludes one-time equity award expense from grants made in connection with the Cowen Ramius transaction of $2.1 million and $9 million for the 2010 fourth quarter and full year, respectively.
Similarly, compensation and benefits expense in 2009 fourth quarter and full year excludes $3.4 million in equity award expense related to these grants. Compensation expense was 59% of revenue in the fourth quarter, excluding reimbursed compensation expense of $1.7 million, severance expense of $1.2 million and compensation expense related to the 2008 acquisition of Latitude of $170,000. Likewise, for the 2010 full year, compensation expense was 63% of revenue, excluding reimbursed compensation expense of $6.4 million, severance expense of $8.5 million and compensation expense related to the 2008 acquisition of Latitude of $680,000.
Our headcount at the end of the year was 533, representing a 7% decline from the start of the year. Non-compensation expenses in the fourth quarter were $31.8 million, a 12% decrease from the $36.3 million in the fourth quarter of 2009 and a 7% increase from $29.6 million in the third quarter of 2010. Non-compensation expenses for the fourth quarter were $30.6 million excluding the reversal of a previously recorded unfavorable lease adjustment of $5.3 million and $2.2 million charge related to the write-off of certain fixed assets, both of which are a result of our reduction of New York office space and $4.3 million expenses associated with the Luxembourg reinsurance program.
During the fourth quarter, our fixed non-compensation expenses declined by 31% to $20.2 million from $29.3 million in the prior-year period. The variable non-compensation expenses, which include trade clearing and execution expenses and expenses associated with the Luxembourg reinsurance program, were $11.6 million for the fourth quarter, as compared to $7 million in the prior-year period. For the 2010 full year, non-comp expenses reduced by 3% to $126.8 million, as compared to $130.8 million in 2009. Excluding the same nonrecurring expenses that I previously mentioned and expenses associated with the Luxembourg reinsurance program, non-comp expenses were further reduced to $125.6 million.
In 2010, fixed expenses were reduced by 11% to $93.1 million from $104.2 million in 2009. This year-over-year decrease in total fixed expenses was primarily due to the realization of cost-cutting measures taken in connection with the transaction and other measures taken over the first half of the year. We expect fixed non-comp expenses to move lower in 2011, as we continue to benefit from these cost-saving measures. However, some of these savings will be offset by investments in new revenue-generating business initiatives. Variable non-comp expenses increased by 26% to $33.7 million in 2010 from $26.6 million in 2009, as a result of expenses associated with the Luxembourg reinsurance program and an increase in program trade clearing and execution expenses.
Although economic income is a pretax measure, I also want to briefly discuss our tax position. We have a full valuation allowance against our net deferred tax assets at the end of 2010, part of which are made up with net operating losses of approximately $54 million. As we have NOL carryforwards, we did not pay any taxes in the U.S. in 2010. But our foreign operations incurred taxes of about $1 million. In the fourth quarter of 2010, in order to obtain reinsurance coverage against certain risks, we acquired a group of affiliated entities in two unrelated Luxembourg reinsurance companies that had deferred tax liabilities. Upon these purchases, we recorded a deferred tax benefit of $22 million. This benefit is reflected in our revenues and economic income net of any acquisition financing cost.
Finally, turning to the balance sheet. Our equity is $449.3 million with a book value per share of $5.95 and tangible book value per share of $5.42. There's a lot going on, and we are focused on increasing revenues and decreasing our fixed non-comp expenses. With that I'll turn it back over to Peter.
Thanks, Steve. Thank you very much, Jeff. So at this point, ladies and gentlemen, we'll open it up to any questions that you may have.
[Operator Instructions] And our first question is from the line of Devin Ryan from Sandler O'Neill.
Devin Ryan - Sandler O'Neill + Partners, L.P.
Starting on the Alternatives business, so net inflows were, obviously, very strong in the quarter but I was a bit surprised that the performance-related appreciation in AUM was only roughly $40 million just given it was really strong performance in your funds. So I'm not sure if I'm just reading something wrong there but I want to understand that.
No, that's correct. I mean the funds that are having the really strong performance just aren't that big yet. Though with respect to credit and what we do in the V&O, fund those strong results are reflected in the investment income part of the firm's revenue because one of the things that we have done always is put our capital side-by-side with our fiduciary money. So while the funds on that as big as they're going to be -- and in fact today, there's more money invested in those strategies from the standpoint of the firm's capital. So part of the results you see are kind of an alignment of the growth in assets but the assets are buried in our balance sheet.
Devin Ryan - Sandler O'Neill + Partners, L.P.
And then, I appreciate the detail on the spin-off and the value in opportunity business in there, and I guess I understand the rationale there. But in terms of the impact on result, I mean, is there going to be anything material in terms of how it impacts Cowen? And how are you guys going to report that when you do spin it off? Is it going to flow in like an equity interest or is it going to flow into management fees?
Well, I'll deal with the impact and on the reporting on earnings, and I'll let Steve talk about how we're going to report it from a consolidation point of view. But in essence, we don't think it has any material impact on the income -- revenue and income of the firm, based on how it's structured.
And from a GAAP perspective, Devin, we still haven't run the analysis to determine whether it would be consolidated or treat it as an equity method of accounting. But either way, as Peter said, it won't change the results much.
Devin Ryan - Sandler O'Neill + Partners, L.P.
In investment banking, I again appreciate the detail on the backlog and obviously looks very strong there. On the advisory side, of those 18 deals you said, are there any sizable deals in that backlog? And then just generally for advisory and underwriting, have deals been getting completed on the original time line, recently. I know the markets have been a bit choppy and just how are bankers feeling today about the likelihood of deals in the backlog pricing or closing on time or on the original time line?
Let me answer that. Good question. First, I think on the advisory side, yesterday, we announced the Global Tech transaction, which is a huge win for us organizationally. It's public so I can talk about it. It’s obviously a significant merger advisory fee for us. It's also a company that we took public as a book runner in November of '09, and the investors we put in that name probably received about an 86% rate of return from November of '09 until the time the business was sold. It reflects the strength of our Aerospace Defense business and the presence that we have in research, as well as banking. So that was a transaction that was probably listed in the backlog here that was signed yesterday. Now whether that shows up in first quarter earnings or not, it just depends on when it closes. But we feel very comfortable that, that it is going to close and that we will do well there. The rest of the backlog -- I mean, things are closing. We're not seeing buyers walk away or delays. It's typical stuff. We're running auction processes. Sometimes it takes a little bit longer than you'd like but we're not seeing things. We're not seeing anybody walking away from transactions after they've agreed to them. As far as the IPO market, it's really industry selective. I would say we're certainly seeing new issue of healthcare IPOs, particularly life sciences IPOs has been a choppy market. There've been a number of transactions that have actually been pulled or have come at significant discounts to their initial filing range. And I think that's something that we are dealing with. But I would say to you, as we think about our backlog and we think about the probability waiting in the backlog, we're not overly dependent on that and don't expect it to be a significant revenue contributor. In the areas where we are really focusing, which is PIPEs, RDs and follow-on offerings, these opportunities, oftentimes, are in the backlog for such a short period of time. You get the mandate, you org and you price quickly. And so we're struggling to figure out how to communicate to you what the shadow backlog looks like. And we can't really talk about that. But the number of things that either are hanging fire or where we're -- we get them in and out of backlog so quickly, is growing significantly. And there we're seeing stuff close. We're not seeing the same kind of challenges that we're seeing in some of the new-issue IPO stuff. In other areas, it's just really deal dependent and certainly for good names and good stories and good opportunities stuff is getting done.
Devin Ryan - Sandler O'Neill + Partners, L.P.
And lastly, on the expense front, I know you guys have done a great job bringing down the fixed costs in the business. As we look at 2011, just trying to read through your comments that there'll be some more fixed cost saves but there should be some new cost from investments in the business. How should we think about balancing that? Should we expect that expenses overall may pick up a little bit or trend down a bit? Or just trying to kind of get some more color on those comments. And then just also on the comp ratio, as we look at 2011, assuming we're kind of in a more normal world for you guys if that is the case, what type of comp range is reasonable?
This is Peter. Let me go to the last question first, the comp. We still think that comp to revenue is too high. Our goal is to push that down into the 50s. To a certain extent, it'll be -- the mix of revenue will affect what the comp-to-revenue ratio is because the better we do on the investment side, the lower the comp to revenue is going to be. And that's maybe less predictable than other revenues in the firm. With respect to expenses, I think non-comp fixed expenses are going to continue to go down. Some of that savings is going get reinvested in comp, as we bring on new people and new businesses over the next, I don't know, few weeks, months we will be talking about or announcing some new business activities and the joining of the firm, people in some new areas and joining of the firm or people in some of the existing areas that we are in the process of strengthening and/or building. So I think the sense that I can give you is that expenses, overall, hopefully, remain flattish. While in fact, I hope comp goes up because revenue goes up, and I hope non-comp comes down. And I think that's what you can look forward to seeing. But I think the comp-to-revenue ratio overall goes down in the middle of all that.
Your next question is from the line of Errol Rudman from Rudman Capital.
Errol Rudman - Rudman Capital Management, LLC
Can you share with us the rationale for the spin-off? And can you share with us how much the managers are contributing to the new entity, and what will the ratios be?
We really can't. The rationale, I can. And kind of the details since they're a private group, and we have confidentiality agreement with them as to what we'll divulge about their end of it or not. It's something that we're going to live with. But the rationale is really quite simple, and it's quite compelling, actually. It is an area, an investment area that has a certain degree of controversy attached to it. And it's an area that it's highly intense. And we found in marketing the product that a number of very substantial and institutional investors who wanted to invest with us were worried about this group sort of being under the umbrella of a broker-dealer or inside and the conflicts that might arise from it. And we have a fair degree of comfort that by giving them, basically, everything they already had but in a separate entity outside of the firm, meaning the independence to make their investment decisions and to pursue their opportunities, that the assets that will come to V&O are substantially enhanced. I mean, it's not speculation or conjecture, I mean a very specific, very sizable institutional mandates that we believe will now come to the fund that were in separate accounts that would not have under the current umbrella. And frankly, on the flip side of it, on the investment banking world, a number of clients I think had some reservations about that activity inside an investment bank that was seeking to obtain mandates and do business with a wide variety of tech companies, biotech companies, healthcare companies, et cetera. And so over the year, we learned that from both sides, the investment side and the investment banking side, all of our needs and goals were probably best met by spinning this group out.
Errol Rudman - Rudman Capital Management, LLC
It's a very complete and excellent description. Could you also help us to understand why you're only getting a minority interest in the spin-out as opposed to owning 100%, and why you can't disclose now what the terms are and when you can disclose it? I noticed that it was your best performing fund in the last couple of years.
Right, it was. And it's actually been the best single performing asset class in the firm for a long while. But the amount of outside money we had in that fund was actually, directly, was very small because as we were running multi-strategy portfolio, the big allocation came from multi-strategy down. So as we've been exiting that business, that the amount that we've contributed to the fund has shrunk considerably. The economics to the firm don't change materially. If we own the 100%, we would not accomplish the objective of the degree of independence that these institutional investors want and that potential banking clients would hope to see because of all the compliance-related complications of being 100% owner. So this was a very clean way of getting this multiple objective structured in a way that our economics are not impaired. I feel comfortable in saying that if we grow the asset base to where we believe it's going grow, our economics are actually going to improve substantially because this will be a much bigger asset class for us than it could have been stuck under the -- inside the firm with the investment banking activities of the firm.
Errol Rudman - Rudman Capital Management, LLC
And when will the details be made available, the terms of the spin-off and so on?
Well, I guess, to the extent, we're obligated to -- when we're filing requirements, it will be spelled out when will be filed our Q or 8-K.
Errol Rudman - Rudman Capital Management, LLC
If I understand your innuendo correctly, there'll be no shares available to spin-out but -- or the spin-off but there will be no shares available for public shareholders?
No. This is just -- the management of this group has formed a private entity, they're own entity to own their shares with us as a public company as their partner..
Your next question is from the line of Robert Louis [ph] from Chemco[ph] .
My questions are very similar to questions of Errol. It seems like a pretty big loss FIR Cowen. The Starboard Group was an exceptional performer and one of the biggest risks of having that group within Cowen is that they could leave and assets walk out your door at night they say in this business, and it seems to apply here. I presume that this is the better of two alternatives. The worst alternative would have been that Smith and his partners would've just gone out on their own and formed a new company called Starboard or whatever and run the company on their own and Ramius would have had no involvement. Is that a pretty fair depiction?
Sure. I mean that's true of any really good performing group inside any investment management company. They always have that ability. In fact, not that, that was the focus of what we were doing but we've de-risked that aspect of it considerably through this agreement because this is a long-term partnership agreement. And also, the firm's ability to access a strategy with its capital has not changed at all either. So this is kind of the best of all worlds. We de-risked that possibility. We've eliminated conflicts that affect the ability of the asset base to grow very substantially. And I think over the next three months, four months, as we have the opportunity to announce some of those mandates, you'll understand just why this was the right thing to do.
I also want to add we continue to market the fund, and that's a really important thing. One of the great opportunities for us is that we remain partners but not just economic partners, but functional operating partners. And our ability to distribute the funds to the distribution networks that we've been working so hard to develop those direct institutional, as well as the financial intermediary market, remains our primary objective. And so this is something that we can feel very comfortable going out and talking about because obviously we've been partners with these guys for a long time, and we have a tremendous amount of faith in their ability. And so the fact that we continue to be as engaged as we are on the distribution and sales effort, I think reflects the fact that this is not just a financial partnership but an operating partnership, and that's a very strong think to say. So the independence that they have is very significant. I don't want to understate that. They are running the portfolios, and that's a very important thing to understand but the marketing and distribution remains largely intact.
But it's not really the best of all worlds. In a perfect world, they would have grown within the Ramius/Cowen umbrella and you would have collected all the incentive and management fees less compensation directly to the Cowen shareholders. So this is sort of the best of two bad alternatives with them leaving, correct?
No, we don't agree with that all.
Errol Rudman - Rudman Capital Management, LLC
If you look at the map and say in the fourth quarter 2010 had this group been Starboard standalone with a small minority interest held by Cowen/Ramius, I presume that would have been dilutive.
No, not a material effect on our results. I mean without sort of going trying to do the math over the phone here, if you assume that the assets triple in size because conflict has been eliminated and do the math versus kind of slogging along growing more modestly, the math becomes extraordinarily compelling.
Errol Rudman - Rudman Capital Management, LLC
I understand that the perspective and I can see how that could be the case but I meant just looking back on a fourth quarter basis. I see your point and I hope your projections are correct.
[Operator Instructions] Our next question is from the line of Aaron Cadell [ph] from Hovde Capital
First going back, I'm unfamiliar with Global Tech and you kind of made a comment about the sale of that company and a possible M&A fee as well as an investment that the company has in that. Could you just describe that in a little more detail? I just have never heard of that.
It's not an investment we have. Global Defense Technology is a company that we took public. We have a lot of our institutional investors in that name. Obviously, a lot of relationships that we have, both with the company and both with the institutional investors and their names, so Global Defense Technology is not a name where we have an investment. But obviously, we've got a great relationship on the banking side and on the sales and trading side.
And so it’s just an M&A deal that was announced recently where you were the adviser, sort of.
We were the adviser. But we're also the people to take the company public. So it's a wonderful thing to be able to take a company public and continue to provide advice. And ultimately when they decide they want to pursue strategic alternatives, you get that phone call and you execute as well as we did. That's a great thing to be able to do.
And then for Peter, just want to get your thought on stock buyback as it relates to other potential uses of your capital, I guess both kind of now and pro forma for LaBranche. I mean your stock’s trading meaningfully below tangible book value. That tangible book value would presumably increase even with LaBranche. I would assume you would have some negative goodwill as part of that acquisition. So at 75% of tangible book and with whatever your cash is now and then you get another $90-plus million in cash from LaBranche. The economics for that are pretty compelling. How do you match that up relative to investing more on your funds or other proprietary investments or other potential acquisitions after LaBranche?
I think once the transaction is -- nothing is going to happen between now and getting the transaction done. Once the transaction is done, then the sweep of opportunities open to us expands very dramatically. One of them, obviously, if the stock doesn't sort of want to recognize what we're doing, that opportunity always exists to accrete book value by buying stock back in the marketplace, if that happens to be the case. And we're still the client. But in addition to the technology platform that LaBranche brings to us, the Hong Kong broker-dealer, which we think potentially very important long term and when Jeff went through what happened -- in banking a number of transactions that we are generating in China, without the ability to operate Hong Kong solution for many of these companies is greatly enhanced by having that. By taking their ETF and FX businesses onto our institutional platform and integrating our sales effort through those businesses, I think the revenue opportunities and the associated trading opportunities are enhanced very substantially. The additional capital allows us to look at broadening the sweep of businesses in the Asset Management business that we might want to explore, go into. And specifically with respect to being able to align our capital with investors' interest, which is something we've always done. And whenever we do that we know with a successful record it helps us raise assets faster than otherwise because people take a high degree of comfort from the fact that our capital is side-by-side with them. So I mean, what LaBranche does is, I think, it multiplies the opportunities for us as a firm. This is more than one plus whatever LaBranche is equals some new number. I think it's more than one plus LaBranche equals a different number. We're kind of very excited about getting that technology in here and being able to sort of expand our horizons more rapidly than we would have in our current state.
And then just lastly, just in terms of timing you've mentioned the filing of a proxy and filing of a K. Are we talking next couple of weeks on that or next few months?
No, it will be the next couple of weeks.
The K will be next week, and then the proxy will be a week or two following that. That's the goal at this point
Your next question is from the line of Robert Louis [ph] from Chemco[ph] .
What is a decent description, if you could, Peter, of maybe your next snap-on, bolt-on acquisition target? Is it a broker-dealer in a diversified geography, away from where you are now, mostly in New York? Is it something in Asia? What would you like to see once LaBranche becomes part of Cowen?
First, we have always been and we will be opportunistic in terms of when opportunities present themselves. I can say generally, with comfort that, if we make acquisitions, they're going to have to have certain characteristics. One of them is we're going to want recurring revenue income businesses. So you can let your imagination take you wherever you want but things that produce constant fee income or where there are asset rich and have portfolio income where we can apply our investment talents to a portfolio. Two, over the years and -- unfortunately, you don't have the benefit of the Ramius history, although it was in the proxy at the time of the merger, but going back many, many years, we've been very successful in our merchant banking activities. So we would hope that having this additional capital when those opportunities present themselves, we'll be able to take advantage of them. Beyond that, we're looking for opportunities that are recurring asset rich and not overhead rich or people-rich types of ways to expand the business. The capital has a benefit of working at nights, Saturdays and Sundays. It doesn't require severance when you terminate it. It doesn't require benefits. Capital has a lot of advantages. And very concentrated group of very good people and a lot of capital and I think that over time we'll do very well.
But what do you feel about an entity that has a bank as its component? Let's say a target company that had a bank along the lines the way Morgan and Goldman Sachs during the crisis so wanted to have some kind of a bank component. Is that something you see as an advantage as well?
Well, no. I don't think that's something we are interested in, highly regulated, highly constrained businesses. And look, Morgan and Goldman, if they had their d’ruthers they wouldn't be banks. It was the price they have to pay to save themselves. And now they've checked into the Hotel California and they’re not checking out because the deal with the Fed was once you take this license, you're in. And the only way you get out -- the only way any bank gets to give up its federal charter is if the government says you can give it up. You just can't voluntarily hand it in one day and say, "See you". And if you look at what's been going on and the need to wind down their proprietary trading activities, there are a lot of constraints that we really don't have any interest in exposing ourselves to.
And at this time, there are no other questions in the queue. I'd turn the call back over to the management team for closing remarks.
Well, operator, thank you. And all I can to say, ladies and gentlemen, is thank you for having the interest in us. And for those who asked questions, asking questions. We'll be speaking to you in a few months when the first quarter is done. And I expect we're going to continue to make progress pursuing our objectives that we outlined all of last year and kind of reinforced again just now. So with that, everyone have a nice weekend, a nice day.
Ladies and gentlemen, thank you, all, for your participation in today's conference call. This concludes the presentation, and you may now disconnect.