Peter Cohen - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Operating Committee
Stephen Lasota - Chief Financial Officer, Principal Accounting Ofifcer and Member of Operating Committee
Jeffrey Solomon - Co-Founder, Chief Operating Officer, Chief Strategy Officer, Head of Investment Banking, Chairman of Investment Committee, Member of Executive Committee and Member of Operating Committee
Lauren Smith - Keefe, Bruyette, & Woods, Inc.
Devin Ryan - Sandler O'Neill + Partners, L.P.
Cowen Group (COWN) Q2 2011 Earnings Call August 5, 2011 9:00 AM ET
Good day, and good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Inc. Conference Call to discuss the financial results for the 2011 second quarter. By now, you should have received 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 the copy of the press release, please call Cowen Group, Inc. Investor Relations at (646) 562-1983.
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 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. Please proceed.
Thanks, operator. Good morning, everyone, and welcome to our second quarter earnings call. With me today are Jeff Solomon, our Chief Operating Officer and Head of Investor Banking; Stephen Lasota, our CFO; and Pete Poillon, Head of Investor Relations and Corporate Communications.
Later in this call, Jeff will take you through some of the operating business detail, more granularly than I will. We tried to put as much as we could in the press release recognizing that this is a Friday in the summer, and it comes on the heels of a pretty ugly day yesterday.
But look, in general, I'm pleased to report that this is our third consecutive quarter of positive income, despite what's been fairly difficult market conditions. As we all know, the markets hate uncertainty and the effects of the European debt crisis, and the whole U.S. debt ceiling debate, of course, increased market volatility, which has affected our business of late. Not terribly, but certainly, I think everyone has felt it.
Our cash equity business continues to suffer from lower volumes, as investors are reducing risk across the board in equities, and are just really sitting on the hand and think equity volume in the second quarter was down 30% over the same quarter a year ago. But we did considerably better than that.
But on the flip side of it, this kind of volatility is going to produce opportunities for us to bring in more talented people and continue to sort of build out our suite of activities.
Our asset management business, alternative investment management has been much less affected by these short-term swings. And the kind of a suite of product that we have are -- seems to be in the right spot for our clients. These, right now, and you have in the press release more information about asset growth. It was a very, very good second quarter in terms of asset growth and in terms of building backlog from future asset growth. We're continuing to win mandates. And while it may take a while for those mandates to get funded, this volatility isn't going to really affect us that much.
And finally, something which we emphasize all the time, our balance sheet continues to be managed very well. We had excellent second quarter results. And while this volatility has its short-term effects, it really gives us the ability to take advantage of some of the dislocation and make money there.
So despite kind of difficult conditions, we're making a lot of progress at Cowen, as we did in the second quarter and we will continue in the third quarter. And we're just building on a lot of momentum that we've been able to create over the last year, as we've really retooled the firm. As you all know, in June, we closed the LaBranche merger. It has a lot of benefits for us. But I suppose, the greatest significance is it puts in a really strong capital position. We have no long-term debt. We have significant amount of liquidity, and are really in a great position to deploy that liquidity in any number of ways to help grow the businesses and make money in our capital. And the integration of that technology is underway, which is going to advance our sales and trading activity, as we think substantially.
Secondly, we did announce a $20 million share repurchase program. And everyone should be aware that, that has not gone into effect yet because we were in a blackout period ending at least today of these earnings. So some number of days in the future, that blackout period will be over and we would probably commence that buyback program, assuming that we can do it at prices that we think produces the right rate of return for us.
We try to maintain a very active dialogue with all of you, our investor base, and listening to your suggestions. We know the stocks and also the pretty big discount for tangible book value. And we'll pick and choose our spots to try and create value by buying stock back cheaper, if the market gives us the opportunity.
And lastly, as the continuation from prior quarters, we announced a number of strategic hires during the quarter to enhance both the alternatives business, as well as our broker-dealer activities. Particularly in investment banking, we made some very important hires, building out our tech practice, expanding our Asia practice and our consumer practice. And as we've said in the past calls, we're really kind of reconstructing our whole sales trading effort, bringing in a number of different portals of businesses that will allow us to get paid for research. Some of these are taking a little bit longer to get themselves up and running and get all the paperwork done. But we're starting to see revenue in the third quarter, and that will accelerate into the fourth quarter.
And with that, I'm going to turn it over to Jeff, who will take you through a little bit more, granularly, some of the details. We'll try and keep this a little bit briefer than past calls and give you an opportunity to ask more questions because we know everybody's going to be anxious to get back to their screens. So, Jeff, you want to take it from here?
Thank you, Peter. I'd like to start by discussing some of the recent developments at Ramius, our Alternative Investment Management group. As compared to the end of the quarter, assets under management increased by 9%, or approximately $900 million. This marks the sixth consecutive quarter of asset increases, as our traditional and recently developed products continue to gain traction in the marketplace. We saw net cash inflows across many of our investment products, including alternative solutions, cash management, Health Care royalties, credit and Starboard Value in opportunity platforms. While some of the increase came in our higher fee-paying products, which would be the credit in the Starboard hedge funds and our Health Care royalty funds, our average annualized management fee remained flat to the first quarter of 2011 at 61 basis points, which is slightly down from 62 basis points in the second quarter of last year.
Keep in mind that we're moving the average annualized management fee off of a fairly significant base. But based on our current backlog of mandates that are not yet funded, we expect to see improvement in this measure in the near future.
We also reported incentive fees for the quarter, a second quarter of $5.7 million, as compared to the incentive fee loss of $500,000 in the prior-year period. The improved incentive fees resulted in [Audio Gap] a testament to our exceptional portfolio managers, as certain of our funds were able to generate risk-adjusted returns, positive risk-adjusted returns, even during a period when the broader markets declined, as they did in the second quarter. To highlight a couple of our notable fund performance in the second quarter. Our global credit fund was increased by 3.4%. Our equity real estate group increased by 12.1%, following several positive valuation adjustments during the quarter. The Starboard fund declined only 50 basis points, but outperformed the Russell 2000 was dropped 1.6%. And to give you a benchmark, the HFRI's fund-weighted composite index was up 92 basis points, and the Merrill Lynch High Yield Master II Index was up 99 basis points.
We remain focused on marketing our existing investment strategies and to build a solid pipeline. During the second quarter, we continue to execute on this pipeline and broaden gross new funds of over $800 million in our platform. Notable wins include the Australian asset management firm, Advanced Asset Management, which is a member of the BT Financial Group, which funded a $400 million-customized hybrid portfolio. Advanced was recently honored as the Funds Manager of the Year in Australia.
A European insurance company client added $100 million to their existing investments in the global credit strategy -- in our global credit strategy. And the Florida FPA began funding its $125 million mandate for Starboard, what we've mentioned on previous calls.
We're proud to be partnered with such high quality clients, and we believe that their choosing us, is a testament to our teams and our well-regarded institutional approach to managing investments. Also, our Health Care royalties platform continue to make progress in the quarter, closing on their 14th investment. The group continues to enhance its robust portfolio of royalties agreements, with assets under management now exceeding $1.2 billion.
As per our real estate funds, amongst several positive valuation adjustments during the quarter, the clear highlight of the period was the announcement of a significant lease signing at Worldwide Plaza, an iconic class A office tower located in Midtown Manhattan and one of the largest investments held by the RCG Longview equity fund. The lease representing over 900,000 square feet was signed by one of the largest global investment banking and security firms in the world, and will become its America's headquarters.
The lease will take the occupancy of Worldwide Plaza to over 95%. And this had considerable impact on the value of this asset, which has been reflected in the operating results for both the fund and the firm in the second quarter.
Finally, the Ramius platform still has significant capacity for asset growth. So along its -- so along those lines, we've hired 2 senior marketing individuals during the quarter to bolster our asset gathering efforts in both real estate and alternative solutions, in particular.
I'd now like to turn to Cowen and Company, our investment bank. But before I walk you through the business, I want to reiterate our stated objective that we put forth to the team at Cowen and Company back in September, as I took over the head of investment banking. And that is to be the preeminent, profitable, mid-tier investment bank. And that may sound unoriginal, or even clichéd to some of you, but I can't tell you how remarkable it's been to have such a helpful and straightforward goal. As we set out to remake the business over the past 9 months, we're using the statement as a lens through which we're making our decisions, forging partnerships across the platform and establishing strategy. More importantly, we're using it as an aspiration to retain and recruit talented people, something we've done quite well thus far in 2011.
Following our robust first quarter, our investment banking segment delivered a solid second quarter, in line with our expectations. We made progress in the banking effort, but the cash equities business account still remains challenged, as it does in almost every other firm on the street.
While it may not be obvious from reading our financials, we've done a good job at reducing non-comp expenses. However, we've reinvested some of those savings in businesses where we believe we either have significant growth opportunities or where we need to round out what we believe to be a very thin product offering. As a reminder, those initiatives, including expansion of our cash equity and sales platform into fixed income sales and trading, equity derivatives, electronic products and our expanded program trading, those are the products -- those products or initiatives are in various stages of execution.
Additionally, we added headcount and research in investment banking, in areas such as Health Care and TMT, as well as in debt and equity capital markets, which were also important new initiatives. We're not able to publicly break out our financial statements between businesses that were in place 12 months ago, versus the new investments that we're making in initiatives. So we do analyze that business internally, that kind of information. And what we seen is that the core businesses that we were in for the first 6 months of 2010 versus 2011, the non-comp expenses, the fixed non-comp expenses, have declined significantly. When combined with the strong revenues from banking in particular, we've been able to improve economic income.
The expense of investing in the new initiatives, which you would expect, has just not generate a material revenue to date, as it takes some time for those businesses to take hold. But none of that should come to as a surprise to any of you who have listened in on the previous calls and investor meetings, where we've been consistent about discussing the need to retrench certain aspects of our business.
To do this, we need to make investments in the platform in new businesses that we believe will drive our market position, even if they may reduce our current bottom line on a quarterly basis.
Now some of the specific highlights of the quarter.
Starting with our investment banking capital market segment, I'm pleased to note that through the second quarter, we've already generated more on equity underwriting revenue than we brought in for all of 2010. During the period, we closed a total of 13 transactions across all products, generating $14 million of revenues, compared to revenues of $10 million for a total of 12 transactions in the comparable prior-year period.
The increase in revenue was primarily driven by our lead managed public equity business, which continues to account for an increasing larger share of our backlog. During the quarter, we completed a total of 8 underwriting transactions, 3 of which were lead-managed. To compare this to last year's second quarter, we completed the same number of underwriting transactions, however, none of these were lead-managed.
In fact, to the first half of 2011, we've already completed more lead-managed equity transactions that were completed by Cowen in any full year since 2007.
When we started to rebuild our capital market and investments banking team in 2010, this was a critical aim for us. In order to improve our efficiency, we knew that we needed to build a team with knowledgeable, motivated bankers, who were willing to go head-to-head with larger banks and comparable banks to win these coveted positions.
Clearly, our clients are beginning to recognize our strengths as well. And I don't really want to overstate our success in just 2 quarters of performance because there's a lot of room for growth here. But this is a very positive development for us.
I do want to caution that despite some of these positive trends, we're still very much market-sensitive, and the current market volatility increases the likelihood that our banking backlog may get pushed out, as financing some merger transactions are more likely to get delayed if we continue to have the kind of volatility we've been witnessing over the past several weeks.
We did also complete 2 private transactions in the quarter compared to one private transaction in the second quarter of last year. And during the quarter, we also completed 3 merger advisory assignments, which is a trend we see continuing for the second half of the year, particularly in China, where our team is actively engaged in a number of strategic advisory discussions. This is roughly flat compared to the prior-year period, when we completed 3 advisory assignments as well.
Moving to our Debt Capital Markets group, we did not complete any credit transactions in the second quarter, as the number of our liability management transactions actually did not occur. Frankly, the uptake from our clients has been slower than we like, but the presence of this capability has improved our strategic dialogue with clients tremendously, as we are now pitching holistic client-focus solutions up and down the capital structures of our clients, and there's no question that our ability to do that is helping us to win business in the equity markets as well.
Our capital markets pipeline, both mandated and shadow, are still promising, but are highly dependent on functioning financing markets, which as I've mentioned, have not being particularly favorable so far in the third quarter.
I'd like to update you on our efforts to enhance certain of our sector-based banking platforms, as well as our Asia team. During the quarter, we announced the hiring of several senior bankers, including a new Head of Consumer, 3 senior bankers in TMT, including a new sector head and a senior banker to further ramp up our presence in industrials. I think it's important to remind you, it'll take some time for these new additions to settle in and generate new business. However, I'm confident that we're making investments in the right personnel, and those investments will generate returns relatively quickly in the quarters to come and certainly next year. I look forward to announcing those successes on future calls.
In China, we continue to look for opportunities to expand our footprint, particularly given the fact that there has been a slowdown of financing, there's some opportunities for us to hire some talented individuals from other platforms that may be trimming their headcount. We're being opportunistic there. And I think you can expect to see us take advantage of some of that dislocation in the weeks and months to come.
Turning to our Sales and Trading business. Cash equity volumes remained low in the second quarter, with aggregate New York Stock Exchange and NASDAQ volume down 28% from the second quarter of 2010. Once again, we fared better than the general market by having experienced a 17% year-over-year decline in brokers revenues, but obviously, those results are disappointing.
We expect cash equity volumes to continue to come under every pressure for the foreseeable future, and our focus on adjusting the platform accordingly, as Peter mentioned earlier. In the second quarter, we began to execute on a number of initiatives, so it will reshape the platform and allow us to expand into non-traditional trading businesses. For example, in April, we announced several important new hires in areas such as electronic products, quantitative trading solutions, institutional convertible securities and equity options. And in the next week or so, a team of 4 high-frequency options traders will join Cowen. This is a dialogue we've been having for the better part of 6 or 7 months.
These new initiatives will allow us to leverage our well-established sales and trading platforms in cash equities into revenue areas, where we have very little penetration but significant opportunities. These initiatives required us to find the right teams and individuals to drive profits fairly quickly, but if you would require some time to develop systems, get regulatory approvals and develop executable marketing plans, but you'll be hearing more from us in about these initiatives in the future.
I think our basic strategy here is all about being able to take the fixed cost structure, which we've done a good job at reducing, and bring in revenues that are really much more variable in nature, for the variable cost structure in nature so that we can lay off our fixed overhead in new businesses, where we don't currently have a presence.
Finally, I'd like to turn to our balance sheet. We've stated in the past how the stability of our balance sheet is a real differentiator for us, especially relative to our mid-sized peers. We've managed the investments of our firm capital since 1999, and we've managed to consistently generate attractive annualized returns. Despite the fairly volatile broad market activity during the second quarter, our balance sheet performance was once again good. We earned $22.7 million in invested income from various investment strategies. The increase was largely driven by our Luxembourg reinsurance captive transaction that we press released earlier in the quarter. But we also achieved positive performance across our various invested strategies that we manage, including real estate, credit and global macro.
We believe our balance sheet is conservatively invested and well diversified. On a blended basis, our trading strategy investments are only levered about 2.5x, and our merchant banking strategy investments, our private investments remain unlevered.
With the close of the LaBranche transaction in June 28, our liquidity position in the quarter was strong. Since quarter end, we've worked to invest the LaBranche liquid assets, primarily across our trading strategy portfolios. And we'll continue to judiciously invest portions of our longer-term merchant banking strategy when we see opportunities to do so.
With that, I will turn the call over to Steve, who will provide a more detailed overview of the financial results for the second quarter.
Thank you, Jeff. During the second quarter, we reported GAAP net income of $20 million, or $0.26 per diluted share, which included the impact of a $22.2 million bargain purchase gain associated with our acquisition of LaBranche at the end of June. This compares to a GAAP loss of $21.2 million, or $0.29 per share in the prior-year period.
In the second quarter, the company recorded a bargain purchase gain upon consummation of the acquisition of LaBranche because the fair value of LaBranche's identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration pay. Based on the purchase price allocation, the fair value of the net identifiable assets acquired and liabilities assumed amounted to $178.3 million, exceeding the fair value of the purchase price of $156.1 million, which was paid in Cowen Class A common shares.
This gain does not impact our income results, which aim to provide investors and analysts with a view of common core financial results.
For the 6-month period, we reported GAAP net income of $20.1 million, or $0.26 per diluted share, compared to a loss of $34.2 million, or $0.47 per share in the first half of 2010. In addition to our GAAP results, as I just mentioned, management utilizes non-GAAP measures, what we term as economic income, to analyze our core operating segments performance. We believe economic income provides a more accurate view of the business by excluding such items as the impact of one-time gain losses, such as the bargain purchase gain on the acquisition of LaBranche and expenses associated with one-time equity awards in connection with the November 2009 Ramius-Cowen transaction, acquisition-related expenses associated with the acquisition of LaBranche and other reorganization charges within the Alternative Investment Management business.
Economic income also excludes the impact of what we view as somewhat arcane accounting rules that require us to consolidate certain of our funds.
For the 3 months ended, June 30, 2011, the company reported economic income of $560,000, or $0.01 per diluted share, compared to an economic loss of $18 million, or $0.25 per share in the prior-year period. This improvement was largely driven by increased revenues for most of our business units, partially offset by increased deliverable expenses associated with the Luxembourg transactions that I will discuss later, as well as syndication and marketing expenses associated with a fund within our Alternative Investment Management business.
For the 2011 6-month period, we reported economic income of $7.5 million, compared to an economic loss of $29.1 million in the first 6 months of 2010. Adjusting economic income to exclude certain non-cash items, including depreciation and amortization, share-based and other non-cash deferred compensation expense in our real estate incentive fee gain or loss, economic income for the second quarter of 2011 was $2.8 million, compared to an adjusted economic loss of $12.8 million in the second quarter of 2010.
Second quarter economic income revenues increased by 70% to $82.4 million from the prior-year period, driven by increases in investment income, incentive income, investment banking fees and management fees, partially offset by a decline in brokers revenues.
I'll spend a little time discussing each of the economic income revenue line items. Investment banking revenues were $14.3 million during the quarter, an increase of 44% compared to $9.9 million in the prior-year period. In our Sales and Trading business, revenue decreased by $5.2 million, or 17%, to $24.6 million compared to $29.8 million in the second quarter of 2010. The decrease was driven by an industry-wide decrease in cash equities trading volumes over the same period. NYSE and NASDAQ-combined trading volumes declined more than 25%. On the Alternative Investment Management side of our business, we recorded management fees of $15.5 million in the second quarter of 2011, an increase of $3.4 million, or 28%, as compared to $12.1 million in the prior-year period.
The growth in management fees was primarily due to an increase in our assets under management, which have grown by $2.8 billion over the past 12 months, largely driven by our cash management and alternative solutions platforms. However, we are gaining traction and starting to see growth in our traditional hedge fund, specifically in the U.S. deep value fund and global credit fund.
We reported incentive fees of $5.7 million in the second quarter, as compared to an incentive fee loss of $450,000 in the prior-year period. The increase was driven by strong performance across our credit, in particular, our real estate strategies.
As Jeff mentioned, our real estate funds experienced several positive valuation adjustments during the quarter, including the Worldwide Plaza Holding. One of the major benefits in the mark up in the fair value of the asset was the reversal of what certain expense accruals related to a subordination agreement with a general partner of the RCG Longview Equity fund.
While these accruals have been slowly reversing in the past few quarters, given the improving values of the real estate portfolios, in the second quarter, we reversed $2.8 million of the accrual, representing the remainder of the balance.
I do want to mention that while we have reversed out the remainder of the accrued liability, this fund has not risen above its high watermark and is not currently eligible for traditional incentive fees.
Turning to our balance sheet performance. We recorded an investment income of $22.7 million during the second quarter, as compared to an investment loss of $2.9 million in the second quarter of 2010. The increase in investment income during the quarter was primarily driven by the closing of one Luxembourg captive reinsurance program, which contributed approximately $18 million in gross revenues. In connection with this transaction, we also incurred $4.3 million in expenses during the period, reported in variable expenses. As discussed in previous periods, these captive reinsurance transactions, that's sporadic in timing and size, are a well worth the effort, as this result reflects.
Also, as a reminder, the gain that we reported backing on the income is shown as the tax benefit for GAAP purposes. Investment income is also driven by improved performance across certain investment strategies within our investment portfolio, particularly the real estate, credit and global macro strategy. As you all know, the second quarter was a bumpy ride in the market, as much of the gains from a strong April were given up in a rocky May in early June.
Turning to our expenses and starting with compensation. We recorded an aggregate compensation to revenue ratio of 51% for the quarter, compared to 74% in the second quarter of 2010. For the 6-month period, we recorded compensation to revenue ratio of 53% compared to 70% in the prior-year period. The decline of the cost of revenue ratio was driven by increased revenues, which as I mentioned, are up 70% for the quarter versus last year. Partially offsetting this trend was our share-based compensation expense, which increased by approximately $3 million in the quarter as compared to the prior-year period. So that when adjusting compensation expense which includes reimburse compensation expense of $1 million, severance expense of $1.2 million and cost expense related to a 2008 acquisition of Latitude of $170,000, the comp to revenue ratio declined to 49%.
Total non-compensation expenses in the second quarter increased by 20% with $38.8 million, compared to $32.2 million in the second quarter of 2010. The increase in expenses was largely the result of an increase to our variable expenses, which were impacted by the $4.3 million expenses related to the Luxembourg captive reinsurance transaction and $1.6 million related to syndication and marketing expenses related to one of our alternative investment funds.
Also, I wanted to note that when comparing our variable expenses to the first quarter of 2011, the increase was driven by those same 2 factors. Although economic income is a pre-tax measure, I also wanted to briefly discuss our tax position. After the recent acquisition of LaBranche, Cowen has approximately $240 million of net operating losses, or NOLs, that carry forward into the future.
The NOLs, along with other timing differences, caused a large deferred tax asset. There was 100% valuation allowance against that asset, but it has significant value to the firm. IRS rules associated with the acquisition of Cowen and Company in 2009, and LaBranche last quarter limits the amount of the NOL that a company will be able to utilize annually, but significant amounts of future earnings will be shielded from taxes by this asset.
Finally, turning to our balance sheet. Our stockholder's equity amounted to $638 million at June 30, and our book value per share was $5.49 per share. Tangible book value per share, which is a non-GAAP measure, was $5.11 per share. Book value measured decreased in the first quarter of this year, but that was driven by the increased number of shares outstanding. We acquired LaBranche, an 800% stock transaction, and as such, over 40 million shares of Cowen Class A common shares were issued to LaBranche shareholders in exchange for 100% of LaBranche shares outstanding on June 28. We also paid down the revolver, so we have no debt.
I will now turn the call back over to Peter for closing remarks.
Well, at this point, ladies and gentlemen, I don't have any closing remarks. I just like to open it up for questions that you may have. I was just -- I'll have just one comment, which is if you look at the change in the results of the firm over the last year since the acquisition, they're quite dramatic. We said this is going to be a long-term project, and I think that we're very pleased with the progress we've made, we've got a long way to go in terms of getting this to the place where we want it to be. And we're kind of just very well along that track. And despite of the environment, we're actually quite excited about what our prospects are, especially given that we've got this very strong balance sheet. And we are seeing just a tremendous amount of talented people who are attracted to our platform.
So we're upbeat. That we're all environment-bound. And we've seen this movie before. And we'll see it again, but out of it comes progress. Though why don't we see, if we have some questions out there we can take?
[Operator Instructions] Your first question comes from the line of Devin Ryan from Sandler O'Neill.
Devin Ryan - Sandler O'Neill + Partners, L.P.
So you guys obviously had very strong asset close in the quarter. So I was just wondering and also, I know that the timing of funding might be tough to predict, given that the market volatility. But can you guys give any more detail about the pipeline of mandates and just the level of conversations that you've had? Are those mandates pretty granular? Or are there some other kind of lumpy ones out there, maybe like the ones -- we saw a couple of lumpy ones in the second quarter? Just more detail there would be great.
Yes, it's a good question. Look, all of our mandates are going to be lumpy because our target client base is institutional worldwide, it's a big institutional. So when it comes, and it comes in the chunks. As we sit here today, we believe we've got between $400 million and $500 million of approved mandated fundings coming up, pending the paperwork. And given that these, many of them are governmental institutions in one form or another, whether it's a state pension funds or superannuation fund from Australia or something, they take their time to getting the paperwork done. But it gets done. So there is somewhere between $400 million or $500 million that we feel highly confident it's on its way. Our sort of shadow backlog, those people who we are engaged with in a dialogue with all the time, is a number, kind of, around 2.9 billion right now. Historically, the conversion rate on that is somewhere between 30% and 40%. I guess, depending on the environment, that could change. But the one thing, I think, that we feel really good about is that the suite of products that we've got, the very specific strategies we've got are really responses to people's needs, say, whether its credit, it's the act of this portfolio, get some exciting stuff going on in our trading advisory business that maybe we'll have more to talk about later in the summer. We are embarking on raising our new, would be our fifth real estate lending fund. And I think, given our record there, which is excellent, as will be our equity record that will be very successful in raising that money, that will take time. And our performance in credits has been outstanding. And we don't have quite a 3-year track record there yet, which is an important thing. Well, we're actually coming up on a 2-year track record. And you need at least 2 years to start getting people to pay attention to the fact that you really know what you're doing. After 3 years, maybe they really believe it. But so we're starting a lot of traction there. So it's going to be bumpy, but it's because the nature of the size of these tickets are kind of large. I mean, we're not appealing to the $5 million, $10 million investors. I will tell you that getting on the distribution platforms, like Morgan Stanley and Smith Barney, or eventually, Deutsche Bank, via Bayer or UBS. I mean, we're on Morgan Stanley with the activist. We're building a pipeline there. The number of investment management docs have gone out to people are very substantial. Those will be smaller tickets, and those -- but those will just sort of filter in over time.
Peter, I just -- one thing I think that's really important for everybody to understand, and that's once these things are funded, they really aren't subject to the times that market volatility swings. And these are investors who take their sweet time in making their decisions and then their sweet time in actually funding the mandates once it's been awarded. But once they're awarded, they stay around for a long time. And so, yes, it may be chunky, but this is stuff that doesn't roll off very quickly. I think, when we look at that and as opposed to the platform distribution business, which we're just ramping, we like the fact that their asset flows are a little more diversified. And our goal over time is to have a healthy balance between the 2. But as we talked about in our last call, we just recently got on our first platform, and it's going to take some time to ramp that business up.
And all of that, by the way, is going to also serve the purpose of raising the average fee substantially. So the offsets of that is sort of an anomaly, but our cash management business results have been so good, but that's attracting more money. We've been advised of another of $0.75 billion that will be coming into cash management, and that's very low-yielding business. So it sort of masks what's going on in the higher yielding stuff because the numbers are big.
Devin Ryan - Sandler O'Neill + Partners, L.P.
I got you, and the numbers that you throw out there in terms of what the $400 million to $500 million in improved net, that's not cash management?
No, that doesn't include cash management.
Devin Ryan - Sandler O'Neill + Partners, L.P.
Got it. Okay, great. And just with LaBranche closed, thinking about the capital, obviously, the marginal capital you're getting from that, how much is already been invested in kind of permanently in terms of you're already putting into the strategies that you want it to be in versus, and then how much is going to go, I guess into the investment portfolio versus deploying it into seeding and growing new funds or building out the investment bank? Do you have kind of targets for how you'd like to allocate that? Or is it more just a function of being opportunistic?
Well, since cash and investments kind of were all fundable. Until we have another better way to use the cash and investing it, it's going to get invested. We're sitting on a lot of cash, I mean, we're still pulling stuff through the accounting pipeline from LaBranche, and you look at our December 30, June 30 balance sheet, it'll show about $110 million of cash on the balance sheet. We have probably, half-deployed on the LaBranche capital at this point in time. And we'll get it all deployed, as we see the opportunity. And if then there's -- I mean, we'll keep certain amount of cash just laying around as working capital. And the commitments we'll make to fund the new businesses, when they come, we'll pull the money back out of the portfolio for those businesses as the need arises. But for instance, you'd take the real estate lending business, we'll make a substantial GP commitment with our GP partner, in the file group, to that fund, maybe as much as $50 million between the 2 of us, to raise $500 million to $700 million. But that money is on call. So we're not really stripping anything out of the portfolio to fund that, until we actually have transactions that need funding. So we're kind of halfway to where we want to be in terms of the LaBranche portfolio, and we're kind of going through a little bit of reassessment process, or sort of, let's just check next week about where we want to have capital in this environment because, I mean, we'll make it some kind of a nice rally today based on the jobs numbers. But if you look at what happened in Washington, that whole circus, really, nothing was accomplished at all. What they did is they bought some time. The President thinks he bought enough time to get this ceiling debate pushed out beyond the next election. I don't think he's going to make it because all of the numbers predicated on GDP growth, which is highly unlikely to occur. And therefore, the tax revenues attenuated or attached to that growth aren't going to be there. So we're kind of very suspicious about where things are. And one of the good things that's happened here is as credits spreads have widened out, the opportunity to put some money, not in treasuries, obviously, but in corporate, so the chance would, sort of, deploy more money in our short-dated corporate activities are good, very good. And with what's happened in the market, merger off-spreads have pushed way out. We've taken some short-term payment, but we've got wonderful portfolio, and we've got plenty of buying power put to work there in merger [indiscernible] capital available in that space today. So I mean, it's going to be a little choppy. But I think we're going to be really well positioned in terms of taking advantage of this whole restructuring the markets going on.
Devin Ryan - Sandler O'Neill + Partners, L.P.
Okay, and just in terms of investing in the investment bank. Obviously, you brought headcount down and you guys made some cuts there. And I think you clearly didn't lose much on it on the revenue side from doing that. But as you build back up, how do you do it in a way that is very cognitive of maybe some of the problems that were there in the past and not kind of getting out of your skives, where you're investing and it's a drag on earnings, but the revenues ultimately don't come or don't come to the degree that maybe...
Well, I'm going to let Mr. Solomon answer that question, maybe in more detail. But I'll just say that the people we're hiring, we're hiring people with proven records. We do a tremendous amount of deep diving on these people and their relationships and how real they are and their ability to generate revenue before we bring them in. I mean, this is -- we're not throwing darts at the board. This is very targeted in terms of who we want, where we want them from. And Jeff, why don't you just amplify that?
Yes, I think that's spot on. What we've -- if I take a look at our senior revenue producers across banking and capital markets, over the past 12 months, we've, 50% of that team is new. So you talk about the hiring, we're going after very specific areas around our core competency. We're really going after areas where we have significant research footprint that was currently under-banked on this platform. And so it'd take time for those bankers to ramp up. And this is not like a one-quarter bet, or a 2-quarter bet. This is a fundamental bet that our organization can be well-positioned to take advantage of other people vacating their seats. I think there's a lot of instability, and we hear this, there's a lot of instability in the other places. So if Cowen really suffered from that instability a couple of years ago, and investment banking when clients are making choices, they're making choices to go in stable platforms, Cowen had that problem a couple of years ago. Now we're hearing -- we don't hear that too much about Cowen anymore. Just the buzz in the marketplace that we heard, is people want to come and work here. And I can tell you that the inbound calls that we're getting from people who are at other platforms, who had either heard what we're doing, they know who we've hired, or they see us putting prints up, we've actually had to create a process internally to handle the inbound calls. Now we're being -- that means we can afford to be selective. And as we hire individuals, we're doing our best to try and line up their compensation with what we think their market opportunity is. But we've identified what we think works best in terms of the kind of person, how do we want the skill set that we're looking for. This is clearly a team environment. We are looking very specifically at how we score our bankers not just on production, but on the quality of the calls that they're making and their willingness and ability to reach across the platform to win business. We know, we all know how difficult it is to win business. We're not looking for lone wolves, who think they could do it all by themselves. This is a chance for us to actually bring people into an organization who are willing to pull me into a pitch, willing to take Peter, Tom Strauss, Morgan Stark, their partners in other areas bringing in debt capital markets or equity capital market guys to win visits. And where we've done that, we can feel very specifically that we've gained significant traction with clients by wins. I mean, so these are the kinds of people that we're looking to bring onto the organization. While the number of people that want to come is significant, we're really doing a very good job, as Peter said, of screening the type of individual because, really, this is a collaborative effort.
Devin Ryan - Sandler O'Neill + Partners, L.P.
Okay, great. And then just lastly for me, I may have missed this. But what is the current deferred tax asset valuation allowance? And now that you have been profitable for 3 consecutive quarters, can you just maybe talk a little bit about the timing of when this DTA could come back on balance sheet? And just how we should think about that going forward?
Well, Jeff, we have $240 million of NOLs, approximately 240 million of NOLs. It's not the timing differences that cause us DTA with full valuation allowance. But that's the argument with the accounting firms, right? I mean, if -- when you need to show progression that you'll be able to use those NOLs, before they're going to let you set, take down that valuation allowance. We'll be working on that over the next few quarters. But I -- it could be -- it's going to be some point in the future, it won't be in the next quarter or so.
Yes, they are what they are. I mean, it's sort of a bullshit asset once it gets, it plays you that work, and it looks very nice. But you've got to earn it to make it worth its value on the balance sheet. So it's kind of a nice cosmetic to have. But frankly, I don't really care too much about. And it also has to pull through the income statement. So we'll have some bizarre things continue to improve some bizarre quarter when we booked this enormous, this allowance through the income statement. But it's that cash, so it will happen when it happens.
Your next question comes from the line of Ms. Lauren Smith of KBW.
Lauren Smith - Keefe, Bruyette, & Woods, Inc.
I guess, just a couple of questions drilling down the numbers a little bit. So when we look at this comp ratio in the quarter, I mean, is this like a pretty good run rate? Or was it -- I mean, I'm glad it's going in the right direction. But something about the mix of business this quarter that allowed you to bring that down? Or is the 51% kind of range good going forward?
I think, Lauren, the mix is -- I mean, the mix definitely has an impact on it because the better we do, or the more income we produce from capital, the lower the payout is on that. And I mean, if you go back and you will look at sort of Goldman's, kind of, blowout great quarters, 2009, they had, based on restraining -- training profits, the counts of revenue was down to like 40% or something like that. But that's not real. I mean, so frankly, I'd rather see that comp to revenue ratio be a little bit higher just because we're producing so much business in banking and certain other areas of the firm, while we still deploy our capital. So I wouldn't hang my hat on that number. But I don't think it goes up terribly too much from where it is. And if we do really well with our capital, it could go down lower. But no one should believe that, that's kind of where we wanted to be.
Lauren, if you look at where we were 6 months in 2010, 6 months in 2011, we have $7.9 million more of compensation books in the 6 months ending, 2011. So yes, a lot of it is driven by the increase in revenue. We have $51.8 million more of revenue this -- 6 months this year compared to last year. But based on our headcount that we currently have, we're $7.9 million more book to cost this year than last year.
Even if that ratio has come down.
Yes, that's the point.
Lauren Smith - Keefe, Bruyette, & Woods, Inc.
Yes, got it. Okay, and what was your headcount at a quarter end? And how many people ultimately are there from the LaBranche franchise?
So it's 573, not including LaBranche. 604, I think including LaBranche.
Sorry, but the important point of this is there's only 2 days of LaBranche included in these 6-month numbers.
Lauren Smith - Keefe, Bruyette, & Woods, Inc.
Right, got it. And then just sticking with expenses but on the non-comp or the variable non-comps. So $4.3 million, right, was from the Luxembourg transaction? So that's pretty much non-recurring, right?
Lauren Smith - Keefe, Bruyette, & Woods, Inc.
So but when this $1.6 million that you were going to buy for syndication and marketing expense, I mean, that's really -- wouldn't that be deemed more recurring? I mean, because you guys are out there, I mean, that's really the cost of doing business as you continue to look to...
Lauren, it's a little erratic because we don't use outside consultants in all of our fundraising activities. So that's going to be -- I mean, it's lumpy, yes, but it's a good news number because the revenue that derives from that is all back-ended. Revenue we're paying upfront but we have the assets first coming in to starting to turn fees. So but that will be lumpy. And frankly, the bigger that number gets over time, the better it is because it needs the asset base just to grow that much faster.
Lauren Smith - Keefe, Bruyette, & Woods, Inc.
Okay, just shifting gears, Peter, I know you've spent a lot of time over China and that's an important business for you guys. So maybe just give us an update on trends there? It seems like things have taken a little of pause over there, generally speaking. And then just you guys lost someone, I guess, a couple of weeks ago from your China business, who went to Lazard. I'm just curious how meaningful or not is that individual? And have you -- or are you going to replace him?
Sure. Sol, you want to?
Yes. So I think, first of all, let's just talk about the fact that China was the flavor of the month for the back half of 2010. Anything that had to work China in it or around it was selling like crazy. And someone flipped the switch and beginning in January, suddenly, and we know why. There were obviously a lot of concerns about the validity of a lot of the numbers coming out of China and that is still going. So with the exception of maybe, and a few Internet companies and some TNT companies, the new issue of business has slowed almost to, come to a halt. We have turned our whole business orientation, really, to merger advisory transactions. There's some really interesting things that are happening there, a lot of cross-border transactions. It's still a significant amount of capital that wants to be deployed in China by these CPE firms. And then there's a lot of Chinese companies that are looking at outside of China to do acquisitions. And so we're engaged in a number of dialogues, and in fact have closed a couple of transactions that are in cross-border transactions with Chinese clients. The fact that we had one individual who left, we are -- there's no question that across our investment bank, we are still sub-scale. So I want to be really clear about that. And it goes to Devon's question earlier, we're being careful with the rate of which we bring people on. But we still are a relatively small bank relative to what we can be as we ramp. So we're being very careful about this. The loss of that individual, any time you lose an individual, you don't like to see that happen, but it happens all the time. We're actually in active dialogues with 2 or 3 people that we think can replace that individual. And he made his decisions for reasons that are, I think, highly personal, and maybe just didn't see it to where he was going with his brackets lined up well with us. And so I have a pretty big philosophy about that, and it's the following, if you don't think you can be successful here, you shouldn't be here. And I'm okay with that. Because we really only have a limited number of slots, and we want people who genuinely think they can be successful here. And in doing so, I can say the inbound calls we've had, even for this position, we had calls the next day. So I'm not particularly concerned about it at all.
Also, I would say that our backlog in China is as good today as it's ever been, the mix is different. And we're starting to get traction on the debt capital markets side. I was over there 2 weeks ago. We signed an engagement letter to do a debt financing with what we think is a very creditworthy company. So the China effort, it marches on. And China will go through its own difficulties, but it's so for real that we are committed to make that work for us and getting the LaBranche broker-dealer. Just coincidently, we've got our own license about a week before the LaBranche thing closed, that we applied for. So -- but we've got a sort of core staff people, and now we're engaged with small groups of people saying who do we want to add to it. And then our conversations with the Chinese companies, having that ability to bring them to the HM market is a great value to them because if I had to guess that will continue to be the market of choice for a long time to come from a lot of these Chinese companies. But also, when I was over there, I spoke to the guy who's in charge with turning Shanghai into the next financial center of the world. I spent about 2 hours with him, and I think we're kind of getting ourselves well-positioned. And nobody's got a lock on China yet. It's wide open. And it's different than here because you've got to continue to show up and build bridges with these people, build relationships. You can't be a one-trip wonder over there and get business. And what I continue to hear is that they're looking for these kind of smaller, itchier firms, that relationships with where you actually go and walk around their factory, ask questions about how they make this or that, as opposed to I'm selling so from so and so, and here's my league table standing, you should give me the business. That doesn't sort of weigh that heavily with the Chinese. We should mention, actually, we're having our first like, kind of, China conference in the fall in November. Cowen's never had one. And what do we have now? About 50 companies have signed up, I'd believe it is?
A little more, a little more than that.
That concludes the question and answer session. I would now like to turn it to management for closing remarks.
Well, I don't think there's anything that's been left unsaid. And appreciate everybody's tuning in, listening to us. We'll continue to sort of make progress, as we have. Again, the environment is going to affect us, as everyone somewhat. But frankly, we're feeling very good about where we are and the track we're on, and we've got just a lot of irons in the fire, and hope we've been a lot of interesting things to be talking about in the future. So stay tuned. And everybody, have a great weekend.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.