Cowen Group's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Cowen Group, (COWN)

Cowen Group (NASDAQ:COWN)

Q3 2011 Earnings Call

November 04, 2011 9:00 am ET

Executives

Jeffrey Marc Solomon - Founder and Member of Operating Committee

Thomas W. Strauss - Founder, Principal, Managing Member, Chief Executive Officer of Ramius Alternative Solutions, President of Ramius Alternative Solutions, Member of Executive Committee and Member of Operating Committee

Stephen A. Lasota - Chief Financial Officer, Principal Accounting Ofifcer and Member of Operating Committee

Peter Anthony Cohen - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Operating Committee

Analysts

Louis Margolis - Select Advisors

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Operator

Good morning, ladies and gentlemen and thank you for joining the Cowen Group, Incorporated conference call to discuss the financial results for the 2011 third quarter. 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.

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, Incorporated has no obligation to update the information presented on the call. A more complete description of these risks and other 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. A 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.

Peter Anthony Cohen

Thank you, operator. Good morning, everyone, and welcome to Cowen Group's 2011 Third Quarter Earnings Call. With me today are Jeff Solomon, our Chief Executive of the Cowen and Company, subsidiary of Cowen Group; Steve Lasota, our CFO; and some number of other people who are involved in running this firm on a daily basis. I'll start with the general overview, followed by a more detailed discussion on Ramius. And later in the call, after I'm done, Jeff will take over and talk about Cowen and Company.

Third quarter was a difficult period in the markets, as everyone knows, driven by what was going on both in the United States and Europe with the debt ceiling crisis and the whole sovereign debt crisis over in Europe resulting in very significant volatility in the capital and credit markets. As a result, we recorded an economic loss for the quarter of $46 million or $0.40 per share. We are obviously very unhappy with these results for the quarter, and we just want to make note of a few things as we take you through it.

Performance was adversely impacted to a substantial extent by an unrealized mark-to-market and losses on our investment portfolio, which was mostly affected by spread widening in the global credit markets. In addition to that, a lot of the new initiatives that we've been putting in place did not yield the revenue that we would have expected in the third quarter because of the dislocation in the markets. And in addition, we had ongoing costs from those initiatives and the cost of LaBranche and the winding down of their operations, which closed on the end of the third -- second quarter, as you remember.

During the quarter, we had investment losses of about $17 million as compared to a gain last year of $14 million -- $14 million, sorry, in the prior quarter. So that's a swing of $31 million. The $17 million, essentially, all came from marks and our fixed income portfolio, some of which we have earned back in the fourth quarter already. And to give you some extent of the dislocation that happened in the portfolio, we had a negative return of about 4.5% compared with the 14% decline in the S&P and a 6.3% decline in the Merrill High Yield Master Index. And I think that sort of gives you some sense of -- not that you needed to be reminded how bad the quarter was.

Notwithstanding, for the first 9 months of the year, our investment income is still more than $22 million. And as I mentioned, we were able to recover some of the mark-to-market on our bond portfolio in the month of October. I want to make it very clear that our losses, our marks in the quarter were not the result of any sovereign debt exposure. We don't own the debt of any particular country, any country, other than perhaps the United States.

Unlike many firms in our industry, we run an investment portfolio with very little leverage. In September 30, the company had $442 million in invested equity with a long market value of $754 million, for a total invested asset-to-equity ratio of 1.7%. And needless to say, that investment portfolio is, by and large, highly liquid.

In addition, our overall liquidity picture as a firm is not impacted by these losses. With over $430 million in cash and net marketable equity securities, our balance sheet remains as strong, if not stronger than ever, given the LaBranche acquisition. Despite the challenging market environment, the top line results for both our core operating businesses improved during the quarter.

At Ramius, the investment management arm, we experienced our seventh consecutive quarter of asset growth and reported our highest level of management fees for a single quarter in nearly 3 years. At Cowen and Company, we actually recorded an increase in banking revenues and experienced a slight increase in the company's core cash asset -- core cash equity business.

And had it not been for the dislocation, I think, frankly, we would have done better in the core cash equity business and investment banking. Our investment bank has undergone significant change, and we are beginning to see focus in expanding revenue generation in both the investment bank and the sales and trading platforms. And again, Jeff will cover that in just a few minutes.

Nonetheless, there is still a significant amount of work to be done to reposition the company for profitability. And that's why last month, I made Jeff Solomon the CEO of Cowen and Company, to really accelerate all the development work we're doing and the integration of sales, trading, research and the investment banking arm of the company. We will continue to reshape the brokerage platform as we go through this to meet the needs of our clients and, basically, the reality of the marketplace. And while we did experience headwinds in the third quarter, we really think we did make progress, and we'll try and take you through that in a few minutes.

Non-comp expenses increased by 30% to $39 million from $29.6 million in the quarter. Steve can take you through why those expenses were up, mostly from extraneous, like the LaBranche acquisition and things like that, not from the core business, but he'll take you through those.

Our fixed non-comp expenses increased due to a couple of factors. There, too, we had increased expenses from LaBranche, which were not included in last year's numbers. And we also recorded increases in recruitment fees as we added a number of professionals to our broker-dealer in the quarter. We experienced increase in variable expense in the quarter related to placement fees on the asset management side and an increase in professional fees incurred in connection with the potential future acquisitions of Luxembourg reinsurance companies.

It is that we remain vigilant about our operating efficiencies in this environment, and therefore, we've taken steps to further streamline costs to a considerable extent by consolidating operations and reducing headcount following LaBranche acquisition. These initiatives, too, will be discussed by Jeff later in the call.

Let me talk a little bit now about the asset management business. We recorded a solid third quarter, especially given the challenges that the asset management industry faced during the quarter. Our assets grew by 5% or $500 million to $11.2 billion. I'm happy to note that we have now increased assets under management in each consecutive quarter, going all the way back to the end of 2009. Our quarterly asset growth was driven by net subscription into Ramius products of $878 million during the quarter, partially offset by a performance-related reduction in assets of $350 million.

Subscription-related increase in assets was primarily driven by our cash management and healthcare royalties businesses. Third quarter management fees increased by 60% from last -- compared to last year, primarily due to an increase in management fees associated with the closing of our healthcare royalty funds. As a result of these fee increases, our average annual management fee increased to 67 basis points, its highest level in nearly a year. This marks an increase from 61 basis points in the prior quarter and 57 basis points in the 2000 -- and third quarter. Excluding cash management, which is a low -- very low fee paying business, our average management fee was 89 basis points in the third quarter as compared to 62 basis points in the prior year period on the same basis.

We are proud of our investment professionals and their ability to develop and successfully market new funds to meet the evolving needs of our global investor base. They've really acted with great foresight and conviction to launch some of these high-quality products and continue to respond accordingly in the third quarter with the formation of the Ramius Trading Strategies managed futures fund. This fund commenced operation in September and already has over $200 million in assets under management.

During the quarter, we reported an incentive fee loss of $600,000 as compared to an incentive fee gain of $1.8 million in the prior year. And this reversal was primarily associated with our global credit fund, which like the firm's balance sheet, also sustained a substantial reversal of profitability.

Turning to the -- to fund performance. Our funds faced a very volatile and challenging market environment. Not surprisingly, we experienced a difficult quarter. To highlight a couple of the more notable fund performances in the third quarter and for the year, our global credit fund increased by 10.4% in the quarter and is down 3% -- I'm sorry, our global credit fund decreased by 10.4% in the quarter and is down by 3% for the 9 months having -- after having been up substantially for the first half of the year.

The Starboard fund, our activist fund , declined by 4.3% but outperformed the Russell 2000, which dropped nearly 22%. And for the year, Starboard is still up 2.4%. To give you a benchmark, the HFRI Fund Weighted Composite Index was down 6.2%, and as I said before, the Merrill High Yield Master Index was down 6.3%.

We remain focused on marketing our existing investment strategies and have built a strong pipeline. During the quarter, we continued to execute on this pipeline and brought in gross new funds of $1.6 billion into our platform.

On the real estate side of our investment business, with the dislocation in the CMBS markets, we are seeing a surge in lending opportunities as borrowers are now faced with increased spreads and lower volumes from the conduit level -- lenders. While our portfolio lenders have stepped in, they are unwilling to reach high into the capital stack, allowing our debt fund to fill the void by providing financing solutions for borrowers where our experience and expertise gives us comfort to do so.

Next I'll talk -- touch on a few corporate matters. We recently filed a registration statement with the SEC to register distribution -- the distribution and resale of shares of Cowen stock issued to the former RCG Holdings. [indiscernible] November of '09. The registration covers the distribution of shares of Cowen stock currently held by RCG Holdings to RCG members, the former owners of Ramius, in accordance with the terms of our operating agreement.

The portion of the shares covered by the registration statement relate to membership interest awarded to certain of the key employees of Ramius at the time of the combination. These awards relate to shares of Cowen stock received by RCG in 2009, and they vested over a 3-year period with 50% of the awards having just vested November 2 and the remaining 50% next November.

We expect to file Form 4s on behalf of certain of our executive officers later today to report shares surrendered to Cowen in conjunction with the satisfaction of the tax liabilities associated with this vesting. So these Form 4s don't relate to any outright sale but a surrender of stock by people -- and I'm one of those people, so I'll tell you that right now -- to pay taxes on this vesting.

The prospectus also covers potential sale of Cowen shares attributable to certain executive officers and directors, though many of these individuals are still subject to lock-up agreements that prevent the sale of these shares. That's a lot of words, but in essence, the former RCG partnership holders are -- have the right to get stock over time. We had an obligation to register that stock. And to the best of our knowledge, being in touch with all these people on a regular basis, nobody is selling their stock.

During the quarter, we repurchased 2.5 million shares of our common stock at an average price of $3.35 under our previously announced share repurchase program. We acquired an additional 450,000 shares of our common stock at an average price of $3.46 as a result of net share settlement relating to the vesting of equity awards. And we have approximately $11.5 million of availability remaining under the existing approved share repurchase agreement to continue to buy stock back, which we intend to do.

I will now turn the call over to Jeff, who will give you an update on the activities of Cowen and Company, the broker-dealer.

Jeffrey Marc Solomon

Thank you, Peter. First, let me say in the past few years, the financial performance of Cowen and Company has been unacceptable. The fact is that the broker-dealer hasn't had a profitable quarter since we acquired it in 2009. I'd like to tell you that's going to change in the fourth quarter. But with the current market volatility in the capital markets, that's unlikely as the implementation of our plans to change the future of Cowen and Company will take some time. So a month ago, we set out to lay out those plans to rectify the situation.

Before I start, I want to say -- thank everyone in research and sales and trading, whom I've had the chance to spend a lot of time with over the course of the past month. Your candor and insight has helped me to understand why the Cowen brand remains incredibly strong with our clients, even in a difficult environment.

My assessment of the challenges facing the business is twofold. First, the current market environment is one of the most challenging we've seen. And second, the market structure and competitive landscape are undergoing significant change in our business. We need to respond accordingly and align our platform with this new landscape in order to improve our position with clients. We are already making progress on both fronts.

First, let me address the market environment and our performance in the third quarter. Even with the current equity and credit market volatility, I'm pleased to report that our equity brokerage revenue was up 2% to $26.5 million in the third quarter. The slight increase was achieved even without any growth in the new products and offerings and options in electronic market making that are launching in the fourth quarter. Frankly, we expect to see some progress in those areas in the third quarter, but for a variety of reasons, their launches were delayed. I expect those businesses to be more impactful as we head into 2012.

We face similar macro challenges in our investment banking and capital market activities, where revenues were up year-over-year but down quarter-over-quarter. The global shutdown of the -- the shutdown of the global capital markets in August and September and, now, into the fourth quarter has made it difficult for us to continue on to the trajectory that we were on during the first half of the year.

Still, in investment banking, we completed 12 transactions across all products, generating $10.8 million in revenues in the quarter compared to 11 transactions for $7.2 million in the prior year period. The increase in revenue was primarily driven by our strategic advisory products, where we completed 3 transactions for $6.3 million. The improvement on a year-over-year basis reflects some of the changes that we made and speaks to our successful reorganization efforts we made over the past year, though third quarter results fell short of the pace we were setting -- that we were setting in the beginning of the year when we made $30 million.

Despite these conditions, there are a number of positive takeaways. First, we begin to show signs of progress on our lead managed business. During the quarter, 40% of our underwriting transactions were lead managed compared to 13% in the entire year of 2010. This momentum is also evident in our backlog numbers as well. Additionally, our healthcare franchise continues to gain traction following the hires we've made, and we recorded a very strong underwriting quarter. Indeed, yesterday, we printed one of the first significant follow-on equity financings in the healthcare space since the capital markets shut down in August and the first healthcare deal that we printed in the equity capital markets in over 6 weeks.

We have continued to selectively invest in the franchise through this quarter, so our compensation numbers, while down, were only down slightly due to our successful recruiting initiatives. Remember, over the last year, our objective was to retain or recruit talented investment banking and capital markets individuals that leverage -- that can leverage their individual brands into our franchise. While we have been quite successful in this initiative, we've recruited, just to give you an idea, 13 senior bankers and capital markets over the past 5 quarters with 7 of those folks coming on board this year. The investments we've made on individuals and new product offerings in banking, capital markets and sales and trading have resulted in compensation remaining higher than what it would have otherwise been given the challenges of the current market.

Finally, it's crucial that a firm of our size be vigilant about our expense structure, especially given what's going on. In the past 4 weeks, our team has identified and implemented steps to reduce our cost structure significantly in 2012 by consolidating operations and reducing headcount. We are targeting a 15% or approximately $35 million expense reduction at the broker-dealer based on our current cost structure. I want to be clear here. We are being thoughtful and precise in our decisions to reduce expenses and headcounts while making sure that we remain in a position to serve clients profitably when the markets turn.

Next, I'd like to discuss the changing market structure and what we're doing to meet evolving client needs. The traditional cash equities high touch business continues to show little growth as our institutional clients have moved away from the high touch cash equity execution models. It's no secret that Cowen's brokerage revenues have been impacted by this transition over the past 5 years. The real question is, what are we doing about it?

We have discussed on previous calls how we've taken steps to reposition the platform towards growth-oriented products. Our general focus is to invest in businesses that are variable costs in nature so that we can create operating leverage off of our fixed cost structure. More specifically, we are broadening our electronic capabilities to meet the demands of our clients. And in doing so, we're acknowledging an entirely new revenue area in which little market share -- in which a little market share can move the revenue needle for us significantly.

We've also taken steps to increase our presence in listed equity options, a market that has grown nearly fivefold over the past decade and continues to expand. We recently added 2 individuals to service co-heads of our institutional options group along with several other team members which we've added to our existing efforts. This team also launched Cowen’s first sell-side event-driven strategies group, which includes both equity and also [ph] sales trading.

Again, this is a product capability that not only serves the needs of our existing clients, but it opens up a whole new set of clientele who want access to our high quality research products. The options and events strategy dovetails very nicely with our current cash equity and research sales effort as cross-selling is going to be key for us to be successful. These initiatives will allow us to leverage our well established sales and trading platform and cash equities into revenue areas where we have had very little penetration historically but where we have significant revenue opportunity over time.

In closing, despite the challenges we're facing in this market, we're making sure that we're well positioned to take advantage of the markets when they return by both cutting expenses and maintaining our critical footprint to execute.

With that, I'll let Steve Lasota update you on the details of our financial performance.

Stephen A. Lasota

Thank you, Jeff. During the third quarter of 2011, we reported a GAAP net loss of $48.2 million or $0.42 per share, which included the impact of a $25 million net loss on securities, derivatives and other instruments. This compares to a GAAP loss of $15.4 million or $0.21 per share in the prior year period. For the 9-month ended period, we reported a GAAP net loss of $28.1 million or $0.32 per share compared to a loss of $49.5 million or $0.68 per share in the first 9 months of 2010.

In addition to our GAAP results, 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 businesses by excluding such items as the impact of onetime gains or losses, such as the bargain purchase gain on the acquisition of LaBranche and expenses associated with onetime equity awards made 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 taxes and the impact of accounting rules that require us to consolidate certain of our funds.

For the 3 months ended September 30, 2011, the company reported an economic loss of $45.8 million or $0.40 per share compared to economic loss of $12.9 million or $0.18 per share in the prior year period. The year-over-year decrease in economic Income was principally driven by our investment loss, which negatively impacts revenues on an economic income basis, and an increase in non-compensation expenses.

For the 2011 9-month period, we reported an economic loss of $38.3 million compared to an economic loss of $42 million in the 2010 9-month period. Third quarter economic income revenues decreased by 38% to $37.9 million from the prior year period, driven by an investment loss partially offset by higher management fees and investment banking revenues.

I'll spend some time discussing each of the economic income revenue line items.

Starting with our balance sheet performance, we recorded an investment loss of $17.1 million during the third quarter, a $32 million decrease compared to our investment gain of $14 million in the prior year period. It is important to note that the majority of this investment loss was due to unrealized losses associated with our global credit strategy, which were partially recovered in October.

On the alternative investment management side of our business, we recorded management fees of $18.5 million in the third quarter of 2011, an increase of nearly $7 million or 60%, as compared to $11.5 million in the prior year period. The increase was a result of higher management fees for our healthcare royalty funds of $6.9 million due to an increase in committed capital and fees earned and associated with a securitization. We also experienced an increase in management fees associated with our global credit fund and funds in our alternative solutions business.

We reported an incentive fee give-back of $600,000 in the third quarter as compared to incentive income of $1.8 million in the prior year period. The decrease in incentive income was primarily related to losses associated with our global credit fund, partially offset by incentive fees from our real estate funds.

Turning to the broker-dealer segment. Investment banking revenues were $10.8 million during the quarter, an increase of 50% compared to $7.2 million in the prior year period. The increase was driven by higher transaction volumes in larger assignments in our advisory business. Sales and trading revenues increased by 2% to $26.5 million compared to the third quarter of 2010. The slight increase was driven by the company's core cash equities business.

We reported an aggregate compensation-to-revenue ratio of 118% for the quarter compared to 75% for the third quarter of 2010. For the 9-month period, we reported compensation-to-revenue ratio of 65% compared to 72% in the prior year period. The quarterly increase in the comp-to-rev ratio was driven by decreased revenues which, as I mentioned, declined by 38% for the quarter versus last year.

During the quarter, compensation expense declined by 3% compared to the third quarter of 2010 due to lower variable compensation as our revenue increase did not meet expectations due to market conditions. This decline was partially offset by an increase in compensation due to additional headcount from our investments in new professionals in investment banking, capital markets and sales and trading and the acquisition of LaBranche.

Total non-compensation expenses in the second quarter increased by 32% to $39.2 million compared to $29.6 million in the third quarter of 2010. Fixed expenses increased by $5.2 million or 22% to $29.1 million compared to the prior period. This increase was due to new incremental fixed expenses associated with LaBranche, which was acquired by the company in June and thus, were not included in our results last year. Additionally, the increase was driven by higher employment agency fee expenses and an increase in expenses related to our data center services as we transitioned to a new provider. This data center transition was completed in the third quarter, and we do not expect to incur duplicate expenses in this area going forward.

Variable expenses increased by $4.4 million or 76% to $10.1 million compared to the prior year period. This increase was due to $2.1 million expenses incurred in connection with potential future acquisitions of Luxembourg reinsurance companies as well as $1.5 million in placement fees related to an alternative investment asset fund. There were no such expenses incurred in the third quarter of 2010.

Finally, turning to our balance sheet. Our stockholders' equity amounted to $585 million at September 30, and our book value per share was $5.09 per share. And as Peter mentioned, we have over $430 million in cash in net marketable securities. Tangible book value per share, which is a non-GAAP measure, was $4.72 per share.

I will now turn the call back over to Peter for closing remarks.

Peter Anthony Cohen

Thanks, Steve. Well, I think you know -- you all heard that it was a lousy quarter, one that we're very, very unhappy with. No excuses for what happened, though I think we probably feel better about it than you all do because of what was going on here in terms of transitioning this firm and expenses that were running through the income statement without the corresponding revenue and the cost of LaBranche, et cetera. And we have to do better. We will do better. And why don't I just open it up to questions at this time?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Devin Ryan, representing Sandler O'Neill.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

In terms of -- on the expense initiatives that you guys spoke about, it sounds like they've already been launched. That was my takeaway. So I just wanted to get a sense of timeframe of that $35 million flowing through. Were there reductions there? And then how should we think about the breakdown between how much would come out of compensation and how much would come out of non-compensation expenses?

Peter Anthony Cohen

I’m going to let Jeffrey respond to that.

Jeffrey Marc Solomon

The -- it's about 50-50 between comp and non-comp. Those are expenses we expect to be fully implemented. We're already actually implementing them. It's an ongoing process. I don't expect that to be -- you to be able to see that in the fourth quarter, particularly around compensation, because we're so late in the year. But those are targeted to be in place full year 2012.

Peter Anthony Cohen

And let me, Devin, add. That's the Cowen and Company side of life in Cowen Group so far. Jeffrey developed a plan with his people over a very short period of time, did an amazing job in identifying a way to reduce expenses where we don't think revenue is going to be impacted. There's more work to do on the Cowen Group -- Cowen and Company side. There's work to do on the rest of the firm, too. And we're not going to be sort of Pollyanna-ish [ph] about the environment. It is as difficult an environment as I've ever lived through in 40-something years now of doing this. And so we're really taking the attitude that we have to size this expense structure of the firm for a very different environment, and let us be surprised that it's better than we think it's going to be.

Jeffrey Marc Solomon

Yes, but I think what's really important here is what happened at Cowen and Company, near as I can tell in the last downturn, is there was sort of significant cost reductions that really put the company out of position to benefit from the ride [ph] that occurred in '09 and '10. So I think that what we're doing here is isolating businesses and individuals we don't think are long term either going to be contributing or will drive revenues when the market does turn. And we're making what I would say pretty hard calculus decisions around expected ROI on businesses and on individuals and their ability to deliver well on the platform. So this is not a wholesale decision. This is a tactical decision, where we're literally going through individual by individual. And so the -- those kinds of changes have actually already been implemented. So what we're talking about now is just getting at the non-comp structure.

Peter Anthony Cohen

Devin, also, you should -- I mean, you look at what you want to look at, but one of the things that I look at very importantly is economic income after we've added back the non-cash expenses that mostly relate to depreciation but, more so, the legacy equity awards that were made as part of the compensation which vest, as you know, years after you put them and then you have to take the expense as they vest. So I tend to look at economic income with adding back all of the non-cash items. And then, of course, in this quarter, I look at the swing in the investment portfolio, and the actual cash lost to the firm is much smaller than the headline loss. And for the 9 months, it's much, much smaller, almost -- it's almost insignificant. And that's the thing that we focus on as we go through this transition, is to make sure we preserve cash to the extent possible. The vesting of these prior equity awards tend to accumulate. So this year, we've got 2 years' worth of vesting. We've got '09 and '10 running through the income statement. And then whatever we do in terms of deferred compensation, be it in equity awards or some other form of deferred, next year, we'll have 3 years, and then it'll flatten out because we'll be dropping '09 and '13, and we'll be picking up '11 and -- well, '11 and '12 and dropping -- we drop a year. We pick up a year, so it tends to flatten out. So -- but that's been a growing non-cash expense that there's nothing we can do about that.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Got it. Well -- and I guess, ultimately, besides this quarter, you guys have been profitable for a few quarters in a row. So just when you think about the firm today, how do you feel like you're positioned for profitability relative to where you were a couple of quarters ago or a year ago? Is it -- are you still, in terms of the current structure and expense structure, in a better position today than you were 6 to 9 months ago or a year ago?

Peter Anthony Cohen

I think this -- we're in a far better position today than we were a year ago, let alone 2 years ago. There's been a total transition in investment banking in terms of people out who could not be productive to really a fantastic group of people today. I mean, it's a real partnership of talented people up there. And as Jeffrey talked about, this underwriting that we led the other night is kind of indicative of new people and the confidence that issuers have in them.

Jeffrey Marc Solomon

Actually, if I could spend 2 seconds on that, because I think it's really instructive to give people a sense of what it means to rebuild.

Peter Anthony Cohen

Let me just finish, and then you can be instructive. On the asset management side, we've gone through this transition of returning assets winding down the multi-strategy funds. We still have expenses related to that, but they're getting smaller and smaller as we liquidate those funds and return assets to our clients. But all the new initiatives have real legs and are growing. Our Starboard fund has got mandates out there that are being, basically, paper today. We have, we think, a $1 billion capacity in that fund, where we're not nearly at $1 billion, and we think we're going to be there in a much shorter period of time than we would have thought 6 months ago or 9 months ago. Credit was growing. Of course, the setback -- it probably set them back a few quarters, but the RTS mutual fund, which I talked about, which we can build out our solutions group, which is winning very substantial mandates. So it's a completely different asset management business. Our fee realization is going up, so we feel kind of really good about that. And I think some of the new initiatives in the sales and trading side, while they were delayed in terms of generating revenue, they are starting to bite in the fourth quarter. We're starting to see revenue come from those. We've incurred the expense, built the systems, and now we think that can have a real meaningful impact. And there's -- and there are other things on horizon that we can do on the sales and trading side. But we've got -- we still have some wood to chop across the entire firm to get where we want to get to. And if it had been a better environment, it would have been easier to get there, but it's been a tough environment. Now I'll let Jeff talk about what he wanted to talk about.

Jeffrey Marc Solomon

Thanks. I just -- when you talk about being able to increase and improve your brand, it takes some time. The deal we did yesterday was for a company called Dynavax. A year ago, we were -- a co-manager took a $250,000 fee on a deal that they did in November last year. We did it with the idea and the expectation that we could trade ourselves into a lead-managed position over the course of the year by doing what we do best, which is non-deal roadshows, an incredible sponsorship inside of the sales organization and, obviously, canvassing the company, significantly paying attention to their needs as the clients in the banking side. And in doing that, you're paying -- we're attention to them at a time when they obviously didn't need to pay a fee, but we expected at some point they would. And when they did, we wanted to be in that pole [ph] position. And this is banking and capital markets and sales and trading 101, but it takes a year. Yesterday, we printed this deal. We were the sole book manager, sole book runner, and we took 70% of the economics -- or 67% of the economics. It's a -- that is one example of a number of the ones that I see in our backlog, where we’ve transitioned from a co-manager position and getting very poor economics to ones in which we are in a joint book run position or a book run position and we're getting much more significant economics. If the markets -- when the markets open back up again, I think you'll see us print those. But if you're looking at what our backlog looks like today, including our shadow backlog, about 50% of the deals that we have in backlog or shadow backlog are joint book run positions versus I think it was 15% a year ago at this time. And so that -- when Peter talks about the transformation, I will tell you, I can see it. I wish that we had a market that would allow us to show everybody what it is. And we will someday, and we'll make significant money as a result of that.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Okay. That's very helpful. And just -- I guess maybe just on that backlog, completely understand that it is going to be market sensitive. But in terms of just the size of that backlog, how do you guys feel about where it is today versus where it was a year ago?

Jeffrey Marc Solomon

I feel -- I actually feel great about it. I mean, we all have our comfort zones, right? So when the market's not printing, what do I look at? I look at how well we're doing. Are we out on the road? Are we talking to clients? Are we winning mandates? Are we improving our position? That's what I look at, because in the absence of being able to see numbers go up on a scoreboard, I want to see the players playing and playing hard. I will tell you that we have not missed an opportunity to get in front of clients. And what's most interesting to me about this, and I don't want to gild the lily here, the fact that the capital markets are closed means that clients are more willing to spend time and talk with us. It gives us a chance to actually catch up to our competition because we can spend time with these folks at a time when they really are looking for good quality advice on what to do in the capital markets. And so I'm not surprised, given the caliber of people that we’ve brought into the organization, a team that we built, and our distribution reach, that we are moving up significantly in terms of our positioning.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Okay. Great. And then just maybe on the Ramius side for Peter. Just in terms of the flows you guys had were obviously very good. And I think relative to what we saw for many peers in the industry, just even that much better. When we think about the conversations you're having right now and maybe mandate expectations, can you give us a little bit of a help of how we should think about things the next couple of quarters? How optimistic are you about...

Peter Anthony Cohen

I'm going to let my partner, Mr. Strauss, who runs that business, answer that question.

Thomas W. Strauss

The flows into the business, despite a turbulent market, actually are about in line with our timeframe and our expectations. Things get delayed perhaps a month or 2, but the institutional interest remains quite strong. Bernanke's constant comments about keeping interest rates at 0 for some period of time are clearly encouraging institutions and private clients to look at the alternative space quite constructively. So barring something even worse than what we have seen, we fully expect the flows to continue in the months ahead.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Okay. Great. And just finally here, on the buyback, can you -- do you guys mind running through those numbers again? I just didn't get them all done in terms of what you guys repurchased and how much is remaining on the authorization. And then just some thoughts about the return on that investment here. Obviously, the stock has been beaten up quite a bit, and you guys are very liquid. So how much sense does it make to take -- even maybe get more aggressive on the buyback...

Peter Anthony Cohen

Yes. Well, all right. So we bought back 2.5 million shares in the open market. We bought back just shy of 500,000 shares through net settlement, where people, instead of selling stock in the market to pay the taxes, they sold it back to the firm, and the firm basically paid the taxes on their behalf. So that's roughly 3 million shares of stock. All of that was about $11 million against an authorization last summer of $20 million. So we have $9 million left to spend under the past authorization. And I think what we'll do is we'll spend that money, and our board will then revisit the subject as to whether we should increase it. I mean we’re limited to how much we can buy. So we have to follow the buyback formula, which is I think a max 25% of the trailing 4-week average volume.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Right. I understand that. Great. Okay.

Peter Anthony Cohen

Steve, you want to add anything to that?

Stephen A. Lasota

Unless we do a 10b5 plan, which is we'll have to discuss with the board.

Peter Anthony Cohen

Right.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Got it. Okay. I mean, that feedback was...

Peter Anthony Cohen

How do we look at it? I mean, we look at it that we're buying -- it's a very high return investment, because believing as we do that we're going to get this firm back to breakeven and then profitability, that we're buying book value at a very big discount, and it's got an implied return of 30% or 40%. I mean, unfortunately, you don't book that through the income statement, but that's the reality of it, it accretes tangible book value. It has book value.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Yes, absolutely. And then just lastly, on the Luxembourg comments, I guess should I take the expenses this quarter to mean that there are some more opportunities there on the near-term horizon? I know you guys have had some pretty big gains related to some of the acquisitions you've done on the Luxembourg captives.

Stephen A. Lasota

Yes, Devin. We are looking at a couple. And we hope to close a small one in the fourth quarter, and we're working on some other opportunities in the future as well.

Operator

Your next question comes from the line of Joel Jeffrey representing KBW.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Just a couple of quick questions. The investment banking number actually came in a little bit better than what we were thinking about, and it looked like it was probably M&A driven. Just wondering, were there any deals that may have closed earlier than you anticipated? I know you said the pipeline looks strong but just trying to get a sense for how to think about the quarters going forward.

Jeffrey Marc Solomon

There was -- there were deals. Actually, we did one that we didn't disclose here, one significant one in the third quarter that was not disclosed. So I can't really talk about it. The other was we had some activity in China, and it's interesting. This is an environment where it's certainly a target-rich environment for us in M&A. One of the biggest challenges we have is the folks that we have on our platform. Almost half of them senior bankers weren't here last year. M&A is a business, as you know, Joel, that you got to be in your -- you got to be good. You got to be trusted, and you got to be in your seat for a while in order for people to select you as an advisor. I wouldn't read anything into the mix. Last quarter, we just had a couple of transactions that occurred that were meaningful, and we're certainly happy about that. We do have some that could close between now and the end of the year. It's hard to say.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Great. And then thinking about your comments about your opportunities in the electronic brokerage space, is there any way to sort of quantify the revenue opportunity there? I know you said a small bit could be meaningful. And then just thinking about, does that in any way cannibalize your more high-touch business?

Jeffrey Marc Solomon

No. That's a great question, and I think it's actually very insightful. When you think about what we do, that's exactly the things that we're looking at. So let me give you a couple of stats. The size of the electronic trading market in 2012 was about -- sorry, the size of the overall U.S. commission market, both high touch and low touch, is about $12 billion. I’d just like to say to you that, that number is actually up over the last 6 years. So if you look at 2005, that number is about $11 billion. The low was in 2007. It was about $10 billion, but last year was $12 billion. So that's cash equities, both electronic and high touch. So when people say that the cash equities business is over, I beg to differ. I just think the mix has changed significantly. And when I say the mix has changed, obviously, the percentage of that flow that's gone on in the marketplace has changed significantly from high touch to cash -- to electronics. If I look at the numbers that we look at from Grant Associates and from TABB Group, about -- it's about half and half, I mean, give or take a few percentage points. So you can say that about $6 billion is high touch and $6 billion is electronic of some sort. And electronic, I consider that to be DMA, algo, Dark Pools and program. All right? So when I look at that and I see that we really have very little impact there, I'd say there's a great revenue opportunity for us. And if you look at the folks that made that decision to get into that business while they were maintaining their high touch business, their revenues actually haven't gone down. So what it says to me is clients are paying a number for your research, sales and trading and that they want to be free to make that mix as they see fit, but the numbers that they're going to pay you probably don't change significantly. My concern is if we don't have an electronic footprint that's meaningful, we know where the cash equity pie is going. It's going in one direction. And so when I look at what piece of the pie, just again, to bracket this for you, of that sort of $6 billion in high touch, about $1.3 billion is allocated to firms that we would consider to be of our size, so mid-tier growth banks or regional banks. That's a $1.3 billion budget. We did $100 million last year in that business. So I look at that and say, "Holy cow, we own 10% of that marketplace." That's the marketplace we compete for. That's huge, and it speaks volumes for our footprints and our sales efforts. It -- but I don't expect that to be 20%. I don't even expect that to be 15% next year because there's so many mouths to feed. And while I do think there's going to be a shakeout here, and there'll be fewer mouths to feed, we'll get some of that. But usually, when there's one less mouth to feed, everybody benefits, and it's probably not perceptible. And so our goal has to be to expand that $1.3 billion revenue pie for our cash equities business. And so when I talk about investments that we're making and ways for us to increase our presence, we're talking about 2 very specifically. We need to have an electronic footprint. We need to be able to take some interesting technology that we can acquire or develop. We already know that our clients -- I've talked to them in the past month. They will take our call. And if our algos are even remotely competitive, they want to pay us because we're very relevant to them. They just -- they don't really have a way to pay us right now. And our cost structure when we do take that DMA algo business, because we white label other people's products, is very cost prohibitive for us. We're literally paying away all the vig when we get an electronic order to the generic algo providers on the street. And so that's a real revenue chance for us, not only to make revenue increase our pie but a way for us to reduce our variable expenses.

Operator

[Operator Instructions] Your next question comes from the line of Louis Margolis, representing Select Advisors.

Louis Margolis - Select Advisors

One of the big competitive advantages you have organizationally is that you can do proprietary trading, and I'm wondering if you're interested in expanding that. That's the first question. The second is, you seem to be very successful at capital raising for proprietary products. I think both of these -- certainly, the first has more variability. The second has very high margins but very low variability. And the third big competitive advantage that we've all acknowledged is you mentioned that if you buy the stock, you make 30% or 40%. I don't quite understand the arithmetic there. But if you're buying stock at $2.70, and it's got a $5 tangible book, that's a big, big number. It would seem to me that exploring how to do something very significant in the stock here under $3 seems very compelling economically.

Peter Anthony Cohen

Well, the unknown is if you show up to do something that's very compelling, how many shares you actually can buy at that level. But that's not falling on deaf ears, so it's obviously something we think about all the time and/or continuing to think about. That may be, in the short run, a very good thing to do. In the long run, in terms of building the business, given that we have a long-term horizon, having the capital to build out further prop trading capability and asset management capability is equally important. So that's kind of a balancing thing that we go through all the time. We are looking at ways of expanding the proprietary -- it's really not a trading platform. It's an investment platform. I mean, we're not market makers against a flow in of big customer activity in a big variety of products on which we can get in front of that flow and make money. Our capital is basically invested where we think we can make equity returns far in excess of what the market will provide over time, and we've done that for a very long period of time, really since 1997. So it's almost 15 years now. And we are looking at ways of expanding on some of the things that we're doing and some new things to build that out. And every time we do explore, we're also looking at how can that be leveraged into a proprietary product for fiduciary money that we can grow a new strategy. So we are doing all those things, and we would hope, maybe not the next call but by sometime next year, we'll be able to talk about some of those new initiatives being in place and up and running.

Louis Margolis - Select Advisors

Just parenthetically, I am not an enthusiast of electronic trading. I think a lot of this high-frequency trading is quite predatory, but this is not a platform for me to articulate my views.

Peter Anthony Cohen

No, no. By the way, I don't disagree with you. But we're not talking about proprietary electronic trading. What we're talking about is electronic execution for customers.

Jeffrey Marc Solomon

Yes. This is -- there's a big difference between electronic trading and direct market access and then high frequency. This is like I want to put in a program trade or a -- or use an algorithm to execute a basket or a single stock. That is not -- we're not talking about high frequency here.

Operator

Your next question comes as a follow-up from the line of Devin Ryan representing Sandler O'Neill.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Yes, guys, I just had one quick follow-up here. Just on the management fee improvement, just wanted to get a sense of what drove that jump from last quarter. Was it just the higher asset level? And what was the mix of the assets that you brought in at a higher fee rate? It looks like, obviously, that the fee yield did go up. So just want to make sure that, that's kind of a sustainable improvement, just want to see if there's anything else going on there.

Stephen A. Lasota

Well, Devin, it was mainly driven by our healthcare royalty fund, which had an additional close -- it had a closing in the quarter. And as part of that closing, the management fees had a catch-up. And we also -- as you'll see, we closed on the RTS mutual fund, which generated some management fees as well.

Peter Anthony Cohen

It's a combination of both -- the growth is in higher fee-paying assets and the mix of the business. I mean, I suspect the cash management assets are going to kind of level off here. I don't expect them to grow as dramatically as they have in the past. And the asset growth in the future should be from higher fee-paying strategies. And we have to accrete the fee realization up, and that's one of our definite goals on the asset management side. But recognize that fees in general are coming down. Investors have gotten much smarter. Like for instance, all the -- a lot of the big institutional investors now depending on the product want to see -- they're willing to pay performance fees, but they want them indexed. And so it's not even a function of the hurdle. It's a function of if the market's up 20% and you're up 20%, why should I pay you an incentive fee? You just got the beta of the market, but I'll pay you for the alpha. So investors have gotten much smarter and much more diligent about sort of fees, but I -- we think we have a product suite that caters to the discerning view that they have about how we should get compensated.

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division

Got it. And then when I think about the flows or the increase in assets quarter-to-quarter, was that -- was it primarily at the end of the quarter? So I'm just trying to think about how much of the kind of the new assets you actually were able to bill your fees off of.

Stephen A. Lasota

Well, a lot of the new assets are -- were cash management as well as late in the quarter -- the mutual fund was launched late in the quarter. And as Peter mentioned, there are a lot -- there's a lot in the pipeline that we expect to close fairly quickly.

Operator

With no further questions at this time, I would now like to turn the call back to management for closing remarks.

Peter Anthony Cohen

Thank you, operator. Thank all of you who attended and listened to the call. Again, just to reiterate, we're very disappointed in the results, but at the same time, we have a very good understanding of why they were what they were. And they are unacceptable, and we have to get back to work and complete the program, the path we set out to transform this place into something special. And the numbers don't reflect how far along, in my opinion, we are in that process. So if we get decent markets, I think you'll see a different performance out of this company. And I think with that, we're done.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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