Cowen Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Cowen Group, (COWN)

Cowen Group (NASDAQ:COWN)

Q1 2012 Earnings Call

May 04, 2012 9:00 am ET

Executives

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

Thomas W. Strauss - Member of The Board of Directors, Member of Executive Committee, Member of Operating Committee, Chief Executive Officer of Ramius Alternative Solutions and President of Ramius Alternative Solutions

Jeffrey Marc Solomon - Chief Operating Officer, Head of Investment Banking, Director, Chief Executive Officer of Cowen & Company, Member of Executive Committee and Member of Operating Committee

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

Analysts

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

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

Donald Destino

Unknown Analyst

Operator

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Incorporated Conference Call to discuss the financial results for the 2012 first 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 the 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 those and other risks and uncertainties and assumptions, which 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.

Peter Anthony Cohen

Thank you, operator, good morning, everyone. Welcome to Cowen's first quarter 2012 earnings call. With me here today are Jeff Solomon, CEO of Cowen and Company, our investment bank broker-dealer arm; Steve Lasota, our CFO; and Tom Strauss, Chairman of our Asset Management business.

In the first quarter, we generated approximately $4 million in GAAP income, or $0.03 per share. While on an economic income basis, we recorded $6 million of income and an economic income cash gain of well in excess of $12 million. While we still have plenty of work to do to further increase profitability, our first quarter results reflect the improvements we are making across the firm. As you know, we've been working pretty hard towards creating a sustainable platform, sustainable for this environment, for all of our businesses, lowering costs, figuring out new ways to add revenue, and we are seeing some of these efforts starting to take shape.

Taking a look at the performance of our operating businesses, we made some progress during the period. At Ramius, which I will discuss in greater detail or Tom will shortly, even though our total assets under management slightly decreased, we had solid inflows in certain hedge fund products as well as growth in several existing custom solution mandates during the quarter. We also generated over $20 million in investment incomes for the management of our proprietary capital, but as Tom will talk about, some of our legacy assets, which we are committed to return, were returned during the quarter.

At Cowen and Company, we grew the total segment revenue by 19% from the fourth quarter including an uptick in the brokerage arms activity. We recorded a strong underwriting quarter, thanks, in part to the favorable equity environment and the ongoing success in rebuilding our healthcare banking franchise. In fact, in the first quarter, we completed our most public underwriting transactions since the middle of 2007.

Jeff will discuss other developments within the broker-dealer later in the call. In terms of cost, we reduced our quarterly run rate expenses by 30% rate in the first quarter or approximately $12 million in the fourth quarter of last year. Our compensation expense also tracked lower from late last year following reductions in headcount and the elimination of non-core businesses. And expect to realize additional expense savings over the year and are currently on track to achieve our $40 million run rate expense savings target in 2012.

Let me turn it over to Tom Strauss now to talk about the Asset Management business, and then I'll come back and then we'll go to Jeff.

Thomas W. Strauss

Thank you, Peter. In the first quarter, our total asset base remained relatively flat. Total AUM decreased by 1% from the start of the year, approximately $100 million to $10.2 billion. The decrease was primarily driven by redemptions in our lower fee paying products, including cash management, which has more fluid movement on AUM, and a custom hedging mandate within our solution businesses, where we had a redemption for approximately $540 million and also a very low fee paying assignment. These decreases were partially offset by an increase in assets of approximately $230 million within our single strategy hedge fund products and increases in other parts of our solutions business. We generated $14 million in management fees, flat compared to the prior year and down 27% from the recent fourth quarter. The decline relative to the fourth quarter was primarily due to the result of fees that we received in the fourth quarter from our health care royalty investment platform and based on a very successful closing of their second fund vehicle.

Average management fees for the quarter was 55 basis points compared to 61 basis points for the first quarter of 2011. The decrease in average fee was primarily due to the fees we earned in 2011 first quarter from an increase in committed capital at our health care royalty funds. Excluding cash management activities, which we think is the appropriate way to look at this metric, our average fee was 68 basis points compared to 75 basis points in the prior year period.

In our solutions business, we continue to see strong demand across various areas, especially our customized hybrid portfolios where we blend a core set of alpha generating managers with several liquid replication strategies. For clients who currently invest in the portfolio of hedge funds or directly into a fund of funds, our hybrid portfolio solutions offer improved liquidity, transparency, enhanced ability to manage risk, and clearly lower fees.

But on the real estate lending side, the first quarter presented our real estate funds with several first mortgage opportunities which returns, on a risk-adjusted basis, were extremely attractive. We're able to successfully close on a number of these loans in the quarter and have others in the pipeline which we hope to close early in the second quarter. We also continue to actively market this strategy.

At Ramius, we have been actively reaching out to a broader array of investors, including NASDAQ fluid [ph] clients that can invest in our 2 liquid alternative mutual funds: the Ramius Trading Strategies Managed Futures Fund and the Ramius Dynamic Replication Fund. It's important that we raise awareness of the Ramius brand as an institutional caliber provider of liquid alternatives since we are not as well known in this channel as we are in the institutional channel.

Let me turn this back to Peter to touch on the investment portfolio and our capital.

Peter Anthony Cohen

I'll be very brief, but I wanted to point out, in the quarter, we generated $21.1 million in investment income, an increase to last year's first quarter, $17.2 million in investment income. The increase was largely driven by our investment in Cowen Investment in Value and Opportunity Fund, which put in very strong performance in the first quarter. And we also recorded a very strong quarter across our liquids trading strategies employed in the firm's capital, particularly in credit and event driven.

And as of March 31, we had $442 million of our capital, or 85% of our capital, being invested, which is the highest amount of capital, liquidatable capital, that we have ever had invested during a quarter.

Let me turn it over to Jeff Solomon, who will talk a little about Cowen and Company.

Jeffrey Marc Solomon

Thank you, Peter. We made some meaningful progress in Cowen and Company in the first quarter. To give you a few highlights, our Equity Capital Markets platform recorded a strong quarter, completing 17 public and private equity transactions and generating $13 million in revenue. Our health care banking franchise and the rest of our health care franchise continues to excel. We completed more transactions

[Audio Gap]

science coverage area than any other investment bank. It is important to note that our efforts to rebuild our breaking franchise are only a year old, and we're quite pleased with our ability to reestablish our presence in this critical area for the firm.

Our brokerage business saw an uptick in market activity with revenue increasing 14% from the fourth quarter, and we streamlined our cost structure, reducing quarterly run rate [Audio Gap]non-comp expenses at the broker-dealer segment by approximately $5 million from the fourth quarter of 2011. However, we still have work to accomplish to meet our objective of creating and sustaining a growth platform that is consistently profitable. We continue to adjust our model to opportunistically and strategically improve our businesses, and the efforts being forth -- being put forth by everyone in our organization to accomplish this goal is truly remarkable.

As I mentioned on our last call, one of our strategic objectives is to increase the platform's electronic footprint with institutional clients. Given that institutional buy side community now pays a majority of its commission dollars through electronic execution, Cowen must be able to compete in this area. As such, in early April, we closed on our previously announced acquisition of Algorithmic Trading Management, or ATM, a provider of global multi-asset class algorithmic execution trading models. ATM is actually a financial technology company that offers broker-neutral services to institutional buy side and sell side firms. It's unique product offering has already been adopted by a number of sell side firms, and we at Cowen have been a client for the better part of the last year. We expect to record modest revenues related to this business in the second quarter and are also analyzing and realizing expenses, trading cost efficiencies related to the combination.

In the latter half of 2012, we expect to drive incremental revenues as we further integrate the platform and execute a new business opportunities with our existing institutional clientele account. Kudos to everyone in our equity division, who has already embraced our culture of cross-selling when it comes to electronic products. It's a cornerstone of how we're going to be successful.

At Cowen, our core strength continues to be our fundamental research platform. We continue to look for ways to improve our overall client penetration and to that end, we will be announcing the addition of a new director of equity research and a new head of equity sales to augment our senior leadership team at Cowen. With our senior management team finally in place over the next few months, we will be able to intelligently expand our footprint by increasing both our efficiency on existing products as well as increasing the amount of relevant content that we are providing to clients around our core competencies.

Turning to the specifics of our business performance in the first quarter. We completed 20 investment banking transactions across all products, generating $15.6 million in revenue compared to 16 transactions for $14.7 million in the prior year period. The increase in revenues was primarily driven by our public and private equity underwriting product, which benefited from a strong financing environment. We also completed 1 advisory assignment and 2 Debt Capital Markets transactions.

While it's still early into the second quarter, our Debt Capital Markets group has been showing signs of real progress. The group has built their backlog to an all-time high, and we are well positioned to execute these mandates over the coming months and quarters.

In our Sales and Trading business, brokerage declined by 13% compared to the prior year period, but increased 14% from the fourth quarter, even as exchange-traded volumes were down 7% quarter-over-quarter. It is still too early to call this a trend, but it indicates the importance of our products within our core client base and our ability to gain market share. Our management changes and our strategic moves in electronic trading will enable us to improve our relevant market position over the remainder of the year.

As you'll recall, last year, we made a number of investments to bring the right professionals to enhance certain businesses in key areas of importance, especially in banking, sales and trading. With now the deeply skilled and knowledgeable leadership teams in place and we're growing our band -- our brand in critical sectors like life sciences and health care, we're -- and we believe we are well positioned to gain share in several high-growth products. I believe the foundation has been set in our first quarter performance that is reflective to the traction we're gaining, but I would temper that by saying we still have considerable work to accomplish.

Looking ahead, I think there's some encouraging signs for our business in general. As you know, the president recently signed the Job Act into law, and this important piece of legislation should make it easier for small companies to access investment capital required to grow their businesses, especially in the public markets. We expect to benefit from this change in regulation in the quarters and in the years to come.

Our organization long ago realized significant challenges that capital raising impose on private companies and on publicly traded growth companies, and we've been quite active in accelerating this legislative reform. Over the past 6 months, our leadership here is met with a number of senior legislators on this topic and we sought to spread the awareness of the issue through various media venues. As a member of the committee on capital markets regulation, I am acutely aware of the real impact these measures should have on emerging companies and U.S. capital formation as a whole. We are now actively working with our clients to update them on these recent changes. They're the ones who actually stand to gain the most, and we'll make sure that we're there to help them do that.

With that, I'll let Steve Lasota give you an update on our financial performance.

Stephen A. Lasota

Thank you, Jeff. In the first quarter of 2012, we reported GAAP net income of $4 million, or $0.03 per share, compared to a gain of $82,000, or $0.00 per share, on the prior year period. In addition to our GAAP results, management utilizes non-GAAP measures that we term as economic income to analyze our core operating segment performance. We believe economic income provides a more accurate view of the operating businesses by excluding the impact of the expenses associated with one-time equity awards made in connection with the November 2009 Ramius/Cowen transaction and acquisition-related expenses and other reorganization charges.

Economic income also excludes the impact of accounting rules that require us to consolidate certain of our funds. For the 3 months ended March 31, 2012, the company reported economic income of $5.9 million, or $0.05 per share, compared to economic income of $7 million, or $0.09 per share, in the prior year period. The slight year-over-year decrease in economic income was principally driven by a $3.2 million, or 7%, increase in compensation expense, attributable to an increase in headcount, deferred stock comp expense, partially offset by a reduction in our non-compensation expenses.

First quarter revenues were largely unchanged at $79.2 million compared to $79.7 million in the first quarter of 2011. We generated $21.1 million in investment income during the first quarter and ended the period with $442 million in invested capital. During the 2011 first quarter, we earned $17.2 million in investment income. The increase was largely attributable to performance in the Value and Opportunity fund. We also recorded a strong quarter across our liquid trading strategies, which represented 56% of our total equity amount at March 31.

On the alternative investment side of our business, we recorded management fees of $14 million during the first quarter of 2012, flat compared to the prior year period. Although the change is flat, the mix is comprised of an increase in management fees on a single strategy hedge fund products and Ramius trading strategies group, which launched its first -- mutual fund product last September, although they were offset by a decrease in fees from a discontinued multi-strategy hedge fund in our health care royalty fund. The decrease in the health care royalty management fees in the current year is due to an increase in committed capital in the prior year quarter that resulted in recognizing cumulative retrospective management fees.

We reported an incentive income of $4 million for the first quarter as compared to $5.2 million in the prior year period. The decrease in incentive income was primarily related to a decline in incentive income from our real estate funds and single strategy hedge fund products. In our broker-dealer segment, investment banking revenues were $15.6 million, an increase of 6% compared to $14.7 million in the prior year period. We completed a total of 20 transactions across all products in the most recent quarter compared to 16 transactions in the first quarter of 2011. Brokerage revenue was $24 million in the first quarter of 2012, a decrease of 13% compared to $27.6 million in the first quarter of 2011 due to decrease within the company's core cash equity business.

We reported an aggregate compensations to revenue ratio of 58% for the quarter, compared to 54% in the first quarter of 2011. The increase was primarily attributable to investments in new professionals and additional stock compensation expense, offset by a decrease in severance expense. In the current quarter, we incurred $1.3 million in compensation expense to activities, in which the company gets reimbursed in severance expenses of $619,000. Excluding these items, the compensation to revenue ratio was 56%.

Moving onto our non-comp expenses. Fixed non-comp expenses in the current quarter decreased by 2% to $21.2 million as compared to $21.6 million in the comparable prior year quarter. The decrease was due to decrease in service fees and occupancy and equipment expenses related to our expense reduction efforts made in 2011 to reduce excess service and space.

I'd like to point out that our non-comp expenses in the prior year period included a $1 million reversal of litigation reserve. Excluding this reversal, our non-comp expenses in the current quarter decreased

[Audio Gap]

by 6% from the prior year. Variable non-comp expenses were $6.9 million in the first quarter of 2012, down 23% compared to $8.9 million in the first quarter of 2011. The decrease was primarily due to syndication costs related to a capital raised by an alternative investment asset fund in the first quarter of 2011 and decreased comp-related expenses. While economic income was a pre-tax measure, I'd like to briefly touch on tax situation. After the acquisition of LaBranche, Cowen significant has net operating losses in the U.S. to carry forward into the future of $312 million. The associated gross deferred tax asset currently amounts to $124 million. There's a 100% valuation allowance against that asset, but it adds significant value to the firm. IRS rules associated with the acquisitions of Cowen and Company and LaBranche transaction primarily limit the amount of NOL that the company will be able to utilize annually but significant amounts of future earnings will be shielded from taxes by this asset.

Turning to our balance sheet. Our stockholders' equity amounted to $517 million at March 31, and our book value per share was $4.54 per share. Tangible book value, which is a non-GAAP measure, was $4.32 per share compared to $4.23 per share at the end of 2011.

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

Peter Anthony Cohen

Thanks, Steve. I'll open it up for questions in a second, but let me just say that this is a really difficult environment that we're living through. Everybody here is very intensely focused on taking all the steps we can to make sure that we come through this environment in the strongest possible shape. We've got a lot of new initiatives going on we're making real traction in the broker-dealer -- getting real traction in the broker-dealer with those new initiatives. The Asset Management business, I think, is poised for a lot of good growth in the future. Our internal investment processes are as good as they've ever been, and you may not hear the enthusiasm because it's Friday and we're tired, and we have a lot of work to do to get ready for reporting earnings, but this is a very enthusiastic group of people here. And we see light at the end of the tunnel, both in the industry and then especially for us because we think we're really well positioned to take advantage of it.

So with that, let me open up this to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Devin Ryan with Sandler O'Neill.

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

So within the Asset Management business, so you guys touched on a little bit on the fund performance, but just let me get some color on how you guys feel like your products performed relative to benchmarks? And then there's also, given some of the comments about mandates, just, I mean, would you expect net positive flows in the future quarters or you still expect to drag from the cash management business that contributed to the redemptions in the quarter?

Thomas W. Strauss

Good question, Devin. This is Tom Strauss. I'd say performance in the first quarter was very solid in both our credit and our value -- Starboard Value and Opportunity funds and I think we're pleased in that score. Our mutual fund continue to perform well versus their competition. And to address your second question, I think we're optimistically based on assignments that have been mandated but not funded [Audio Gap], and we think the second quarter is likely to be a solid one in terms of positive growth.

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

Are you guys seeing any change in timing of when once mandates are given versus when they're funded-- is that-- I know that it was-- we were in a stretch where that period had really lengthened. I mean, are you seeing any changes in that or is it starting to lengthen out again as volatility is maybe picking up here?

Thomas W. Strauss

I'm not sure what's the -- what the difference is between long and longer. But clearly, institutional mandates are taking a longer period of time than would've been the case a year or 2. Documentation is more thorough, due diligence is more thorough, the processes is just more, if you will, institutional, which I think in the long run plays to our strength because of the deep infrastructure that our firm has. But definitely, from initial inquiry for rate of funding the time duration has increased significantly.

Peter Anthony Cohen

It's no worse, Devin, than it's been but it just -- this is just -- there was a shift in the length of time it takes to fund the mandates, and it continues. So -- but we have strong backlog, very strong backlog. As Tom said, we expect some positive flows through the second quarter. And we feel pretty good about what's going on there.

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

I appreciate the color, and then a question for Jeff on the broker-dealer, you guys talked a lot about the new initiatives on the brokerage business specifically. But let me get there any sense or any additional color around how meaning do you think the revenue potential is from just a number of these new initiatives that you guys have announced over the past year or plus year and I guess, growth expectations for revenues, just any color around that just given that obviously, the traditional cash equity business has been in quite a soft patch here more recently?

Jeffrey Marc Solomon

No, I think, once we've grown internally, they take longer as to the ones we announced last year, those have been greatly organic. We've made the investments in the technology and customer ramp is -- it's a 3-step process with electronic. First, you got to get the meeting. Second, you got to get the customers to install. And then third, you got to get them to utilize it. And I say, on the ones we announced last year, things are going a little slower than what we would've liked. But I think we're finally starting to see those start to ramp a little bit in the first quarter. As it relates to ATM, it's different. That is an operating business, It's been around for a number of years. With the revenue base, I think, we said in the last call, we announced that acquisition, that it will be accretive, it is. It was a profitable company before we purchased it. And we actually think this is a much more of a situation where we can bring to bear our distribution capability. Because we talk to all of these institutional accounts that ATM will never would have had difficulty on the buy side talking to those guys. And so for us, this is sort of taking an existing profitable business and being able to penetrate our clientele much more aggressively with a new product offering. So, I'd say early days, as we're less than a month into or about a month into this acquisition. On that 3-step process, we haven't had any client tell us, no, we don't want to see you. That's good. We've had a few say they want to see us, and when they've seen us, they're taking it to the next level, really putting it through its paces. I think for us, we're not trying to compete with the guys who do huge amounts of algorithmic trading. For us, this is really going in, trying to address the client needs in a much more specific way, and so I believe the sales cycle might take a little longer on the buy side, but I think you'll see out of the gate with ATM is positive impact day 1, even as the new buy side business starts to ramp.

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

And I guess just on the -- from a revenue perspective, I mean, do you look at this, the brokers business, as a whole as kind of a good growth business for the firm or is it -- or is it -- is it a 5% to 10% growth businesses, is it a 10% to 20% growth business or do you think it can be even more. I'm trying to get to some perspective around that. I don't know if it's kind of a tough question to answer, but...

Jeffrey Marc Solomon

Yes, I actually don't -- I look at a much more in where, is there low-hanging fruit for Cowen to really penetrate clients in the way that were not penetrating. So we're still in a position where, given our research footprint, there's more that we can be doing in the core business even as the overall macro environment is challenging. There are some places where we can be doing better at penetrating our clientele with our fundamental research product, and I think you'll see we're making 2 key senior hires in the core business of equities, which is our director of research or new head of sales. And that's really to make sure that we're maximizing the impact at our clients. So I don't know that I think about it in terms of where I see that business growing in the context of a difficult market environment, I think that there's just some stuff on the table for us to be capturing that we're currently not capturing. And with a little bit better organization and with a broader product array where we can basically make sure that clients don't have any excuse not to pay us, we can make inroads in terms of increasing our market footprint even in a difficult environment. So I know it doesn't answer your questions specifically about percentages. All I can say is we're making putting ourselves in a position to increase our footprint even if market conditions stay the same.

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

And then, just on the Investment Banking backlog, just any color there as well? How is that feeling, is it building our client feeling a little bit more comfortable after the first quarter had a combination of market move? And any insight into how things are trending maybe advisory versus underwriting?

Jeffrey Marc Solomon

We still are very much tilted towards the underwriting business. We have ways to go on building our advisory business. So the backlog in advisory moved up nicely in the first quarter in terms of mandated M&A backlog. And that's one of those things, honestly. Remember, our team is so relatively new on the investment banking side and that just -- it just takes time. You've got to be on this platform for a while in order to really make significant inroads in advisory. I'm pleased that, as I mentioned, the Debt Capital Markets business, we've been investing there for almost 2 years and really in the first quarter and coming into the second quarter, we've seen significant uptick from clients across all 4 of our industry specialties clients who really are availing themselves of what we can offer in terms of providing Debt Capital Markets activity. And so I'm encouraged by that. What I would say to you is just like anything else, when you have a history of winning and you can put up numbers on the board and you've got a momentum, clients recognize that. And we're beyond the stage of proving that we can do it, and I think one of the challenges we're having is frankly, as we take on all of these acquisitions, making sure that we continue to deliver the high quality service. And in particular, in health care space, where we are across from a execution standpoint in terms of the amount of effort trying to get it done. So I feel like I'm optimistic about it. It's still very much tilted towards equity capital markets as you might imagine, but we continue to build a solid pipeline away from that, which I think gives us more breadth and a better foundation for the future.

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

And then just on the expense front, you guys did a really nice job on the expense reductions and the initiatives that you put in place, but it sounds like from the comments that there may still be some additional reductions to come in the future quarters? I just wanted to make sure that I interpreted that correctly and just how we should be thinking about the non-comp run rate, I guess, moving forward relative to this quarter's level?

Stephen A. Lasota

Yes, Devin, you can see last year that our non-comps ramped up quite a bit in the latter half of the year. We did have an acquisition and things like that, but all the work we did at the end of last year, we see more non-comp reductions coming down the line, things that -- technology-type things that will come through in the second and third and fourth quarters. So we feel really good about what's going on in a non-comp situation and we're at it every day, every minute.

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

And then just lastly, I didn't see anything on the release on share repurchases, I just wanted to get your thoughts on the buyback here?

Stephen A. Lasota

We bought back -- we did buy back some shares, although the window was not open very long in the first quarter. Because by the time we filed our K and then we started with the Q, it's not a long window, but we will be buying back as soon as the window opens early next week and we'll continue -- I think, we're $12 million into the $20 million that we committed to. And we'll be buying back again next week.

Operator

And your next question comes from the line of Joel Jeffrey with KBW.

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

Just to build on one of the question that Devin asked, I mean, it sounds like clearly the electronic trading is going to contributed more in sort of the latter half of this year, but can you talk about any other contribution that made during the first quarter?

Jeffrey Marc Solomon

Well, ATM is a big initiative there. And so, we didn't -- it wasn't in the first quarter at all because we didn't close until April 2. I think -- want to draw a distinction here, we have an electronic product offering and I think a lot of people get confused over what that means because we've been doing the program business for a while, but the algorithmic front-end is really what is that the decision-making point at trading desk for the buy side. So we're you're talking about ultimately how you get paid, you get paid for fundamental research, you get your research both is really critical, you'll make sure you have high quality content going in at the portfolio manager level and at the investment analysis levels so you do well on your votes. But on a daily basis, decisions are being made on where to allocate daily trading volume. And we've got a very aggressive and pretty high end sales trading capability in the cash market and what we're giving those guys is a tool to basically engage with the sales traders on both cash and electronic trading, so cash and algorithmic. And that's the relatively new product offering for Cowen, but it really -- really what it says is, if a hundred cents are being paid by clients, 60% -- 60 of those cents are being paid electronically, we didn't really have a way to address that $0.60. And so, what we're saying is, we now have a way to address that $0.60 and we actually think that the ATM platform, given that they're actually broker neutral, is a differentiated product even and amongst the high-caliber algorithmic trading capabilities that our competitors provide. And so as our sales traders are talking to their-- to the guys that are ringing the register every day, we're just -- we're getting that entry into where the revenues gets produced on a daily basis in a more broad sense. So I think it's a very tactical move for us, and it will play out over time. But it's definitely going to take some time for us to make sure that we get through that where the utilization of the installed base actually kicks in.

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

And then -- I mean, sort of, I'm thinking about investment income, I appreciate the color you gave us on sort of where the strength came from this quarter, but I guess sort of looking out for the remainder of the year, I mean, is this going to be primarily driven by sort of market levels on how the equities markets perform or how should we be thinking about sort of modeling that number going forward?

Peter Anthony Cohen

Well it's a combination of all the activities we engage in our investment management business. And certainly, equities have a bearing on it, but the big contributors in the quarter were a number arbitrage activities such as M&A business continues to roll on. It will make a contribution, we believe. Our credit activities were a very big contributor. And I mean the kind of pure beta contribution to the results from the market, I'd say were not the dominant feature of where the results came from. Though we recognize a difficult equity markets, it's going to be harder to make money in merger urban in some of the other equity related activities. But not stealing credit, our real estate portfolio continues to do very well, makes contribution both our equity and on lending side, our health care royalties business makes contribution, our activist group, which is a fair amount of exposure there, V&O, our Value and Opportunity fund. I would say equity agnostic and certainly, good equity markets help their business but over time, that's proven not to be an obstacle in making money, when we look at the record over the last 10 or 11 years. So yes, I mean, look, it will be -- it'll definitely can be choppy, but we think we have our arms wrapped around risk pretty well, and we have a budgeted amount for the year, and we're optimistic we'll make it.

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

And then just lastly, I think with the LaBranche deal you guys picked up some in Asia component to that as well, was there any contribution from that business during the quarter and sort of how are you thinking about the outlook for that business?

Jeffrey Marc Solomon

So what we picked up was Hong Kong membership and mostly what they were doing over there was trading ETFs and that's the business that we closed last year. So we got some licensure and we got a licensure on our own. Actually, it's interesting, the ATM acquisition -- actually, we're going to drop that into the old LaBranche shell. And in ATM, we have the ability to do multi-asset class and multicurrency algorithms. And while we're focused primarily on the U.S., because I don't want to build out any expectations here, we do have some capability to execute algorithmically outside the U.S. So the LaBranche acquisition actually gives us the ability, if we choose, to trade on the Hong Kong Stock Exchange at some point. We're not doing that, but what it did give us was the ability to extend our trading footprint there when and if the time is right. So no revenues from that business in the first quarter, I don't anticipate there seeing business on in the second quarter, third quarter because we've got so much opportunity in front of us in the U.S. markets but as we look at how we address, our clients’ needs globally, which is a really big macro theme in equity trading, given the fact that U.S. equity funds continue to experience outflows and we see growth in equity funds more globally, we will be utilizing that at some point in the future as we develop our electronic capability in the Asian markets.

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

And just as a quick follow-up to that, was there any expenses tied to that during the quarter?

Jeffrey Marc Solomon

Any expenses tied to ATM?

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

To the Asian business at all?

Jeffrey Marc Solomon

No.

Operator

And your next question comes from the line of Donald Destino with Harvest Capital.

Donald Destino

Just quickly on the management fees, was there an explanation of why they were down as a percentage of AUM when it sounded like a mix was moved away from the lower margin cash to higher fee products?

Jeffrey Marc Solomon

Yes, that's a good question. There are different parts in the world and different groups of clients that have very strong biases towards structuring fee arrangements. So to take 2 extremes, there are a group of clients that say, look, we want to know what the management fee is, we're not going to pay incentive fees, price the mandate accordingly. There are another important group of clients that say, look, we want to drive our fixed cost, our fixed fees as low as possible, and we're going to pay you more than generous incentive fees. So some of that reduction that you're seeing has come from assets falling into the second category. Last year, for example, there were no

[Audio Gap]

incentive fees were very, very limited because of the performance of the overall hedge fund business, but I think in a normal environment, you'll see incentive fees kick in for some of these lower management fee mandates.

Stephen A. Lasota

And Don, just quarter-over-quarter, comparing first quarter of '12 to first quarter of '11, it's roughly flat but in the first quarter of '11, we did have a closing at our health care royalty partners, which has retroactive management fees, an increase in management fees. And that's why that had a lot to do with the -- that percentage.

Donald Destino

So when you give the percentages on management fees and I saw in the press release, you have a paragraph about management fees and a paragraph about incentives, but the percentages that you give was 55 basis points versus 70 basis points or whatever it was, those include incentive fees?

Stephen A. Lasota

No, that's just management fees over total AUM, with and without cash management because cash management is a low management fee business.

Donald Destino

So I thought the answer to why first quarter was down from fourth quarter was because of incentive fees.

Peter Anthony Cohen

Of fourth quarter, yes.

Donald Destino

Fourth quarter was down from...

Thomas W. Strauss

Incentive fees.

Donald Destino

First quarter was down from fourth quarter because of incentive fees? Is that what you're saying?

Stephen A. Lasota

No, no, no, that percentage is just management fee over total AUM. It has nothing to do with incentive fees. The reason why it's down is in the fourth quarter, we had a closing for CHRP as well for our health care royalty partners.

Donald Destino

What should I -- is there -- should I think of the first quarter, all else being equal, as kind of a run rate without any closings that kind of specific?

Stephen A. Lasota

Well we do expect that to increase because some of the new mandates are in our higher management fee paying products. So it's -- that's difficult answer. Some of our products -- some of the recent AUM is in a product that has higher management fee and then, we also have some mandates that could be coming from lower fee paying -- lower management fee paying. That's why Tom went into the explanation of we may get a lower management fee but a higher performance fee type arrangement.

Donald Destino

And then quickly, again, on the -- I appreciate the commentary on the backlog in health care. In the first quarter, how much of -- how did health care do? And do you have any sense on what you're kind of market share was? I know health care was pretty good at a lot of investment banks?

Jeffrey Marc Solomon

So health care was a pretty significant piece of the backlog -- a pretty significant piece of the execution in the first quarter, which was to be expected because we would kind of -- we made our investment there early and it was a very robust quarter. So it was good to see us hitting on an area that was pretty important for us. We can't look at the world between bulge banks and non-bulge banks. In terms of non -- it depends on where you put Jefferies but if you look at non-bulge banks and you include Jefferies in that, we were -- we've had the second-most amount of fees and that's how I look at fee income. Second-most amount of fees, if you look at everybody including all the bulge banks and health care, we were third behind JP Morgan and Jefferies. So I think what it says is when the window is open for health care, especially for growth companies like we've seen, we are right there.

Operator

[Operator Instructions] And your next question comes from the line of Mark Zschech [ph] with Kawa Capital [ph].

Unknown Analyst

I just wanted to get an idea of your goals going forward. If I were to understand it, excluding the invested capital of the firm, the company, the core Investment Banking business and just the assessment fee business from the Asset Management lost $15 million in the quarter. Is the goal to get you breakeven excluding the invested capital? Or do you think that's something that will be accomplished given the positive results this quarter?

Thomas W. Strauss

Yes, it's very hard to reach that conclusion, the conclusion you just did. Because our goal is to be profitable in every segment of the business. We are in the process of rebuilding the Investment Banking platform. And I mean, we're well into it and we think the big investment dollars to do that have been spent and there are ongoing costs, but all the extraordinary expenses of doing that are ongoing and I think that we are making a lot of progress across the whole platform from the sales trading side to the banking side. And we're not going to depend over the long-term or our investment income as we reach profitability. The Asset Management business is profitable and as we grow the asset base, we expect it to be a very profitable business, which it once was when we ran a multi-strategy shop. We've gone to a different model. I think that we're very happy that we did given what we know what was going on among multi-strategy managers in the universe who are all, or I won't say all, because I don't know all, but certainly the ones which we are familiar with are experiencing redemptions on a continuous basis. Because it's very hard for them to make money and our single strategy approach allows us to grow businesses that may not all be hitting all the cylinders at the same time, but enough of them are hitting their wall cylinders that we're going to grow that business. So I mean we're in transition. We feel pretty good about where we're going. And the fortunate part about how we view ourselves is that we have had this ability to make money out of our capital account over the long period of time, and we believe that we will continue and that will help us through this transition.

Peter Anthony Cohen

In terms of -- it's very hard to extrapolate from one thing to another because a lot depends on how expenses get allocated based on revenue during the quarter. So it's a fairly complicated but clearly, I think, I mean, we know exactly where we are in each of the businesses. We know exactly what we have to do, and we are laserly focused on achieving that. Having a better environment would certainly help a lot. And I think that's going to take a while. If you want to sort of talk big picture, it's going to be hard, I think, to get great clarity until we get through this election. Depending on the outcome, I think, of the election, we -- the world might feel better, but look, what's going on in Europe, what's going on in Asia weighs very heavily on this country. Anybody who thinks that the U.S. is immune to what happens in Europe is absolutely not tuned in. If we look at multinational companies and how much of their income is being generated out of Europe, which is going through a major contraction and will continue to because there's no secret sauce to figure out how to get them out of their problems. We suffer from our continued high structural unemployment in this country. It's hard to see how that's going to change any time soon. So demand in this country isn't going to be very robust. Put those factors together and then you got us sort of look at China and say, well, how robust is China going to be because they haven't been able to internalize demand to an extent that they need to do to soften the blows from their export business. So it's a very integrated world and a lot of issues that have to get resolved, I think, before people feel really good about equities. Frankly, I think the pension funds and as you read continuously about the shift from equities to an individual’s to fixed income, doing it exactly at the wrong time. They should be buying equities now because if we do have inflation, which we probably have to have to inflate our way out of here and to devalue all the debt that has been issued, equities are probably going to do very well in that environment. Because people are going to look to hide intangible things and operating company's pricing powers, et cetera. So I don't know when it's going to happen but at some point, we're going to have a real explosion in equities and when that happens, most people won't be there. Flows on the upside.

Unknown Analyst

And I want a follow-up question. In terms of just over the last year in the Asset Management business in the high-fee Asset Management business, if you excluded investment gains, what was the growth in AUM?

Thomas W. Strauss

Well we split it between the Compounding of the portfolio have been pretty modest. I mean most of the gains have come from raising new assets because if you look at performance generally across the hedge fund platform in 2011, the hedge fund business industry-wide lost money. And we had some -- we got positive performance but it would've been low-single digits when you think about compounding the overall portfolio. So most of the gains came from new assets. Does that make sense?

Unknown Analyst

And I have one final question. And based on the return in the first quarter when the equity markets rallied, I think, by 12%, your returns were lower than that, which is often a good sign to me, do you think that's a reflection of a overall a more conservative investment strategy? Or across your portfolios, what's your kind of your outlook in terms of that?

Peter Anthony Cohen

Yes, well, you can't look at the equity markets and look at our returns and try to draw a direct parallel because our capital is dispersed across a lot of different strategies. The biggest single allocation of our capital is to our credit-based investing activities. So there's carry income and then we have income of our real estate investment or carry off our investments in our lending portfolio for real estate to the health care royalties business. So equities is not a good benchmark. It's all very diversified. I mean, we certainly have equity exposure because we do run a merger arbitrage portfolio but that's actually less sort of prone to the volatility of the equity markets than pure, let's say, a pure equity portfolio. Our PIPEs portfolio is somewhat -- operates somewhat independently of the pure equity markets. I mean not entirely all the time. So it's really -- you just really can't draw a parallel from the equity markets to what happens in our investment portfolio.

Operator

We have no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Peter Anthony Cohen

Thank you, operator. And thank you, all, for dialing in this morning. And we'll keep plugging away and we'll speak to you in about 3 months. And all -- everyone have a nice weekend.

Operator

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

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