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Cowen Group (NASDAQ:COWN)

Q3 2012 Earnings Call

November 08, 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 - Vice Chairman, Director, Member of Executive Committee, Member of Operating Committee

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

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

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 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 and other risks and uncertainties and assumptions is included in the company's filings with the SEC, which are available on the company's website and on the SEC website at www.sec.gov. Also on today's call, our speakers will reference certain non-GAAP financial measures, which the company believes will provide useful information for investors. Reconciliation of these measures to GAAP is consistent with the company's reconciliation as presented in today's earnings release.

Now I would now 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 Group's Third Quarter Earnings Call. With me here today are Jeff Solomon, CEO of the Cowen and Company division of the firm; Steve Lasota, our CFO; and Tom Strauss; the CEO of the asset management business; And our General Counsel, Owen Littman.

I will start with an overview of our performance for the quarter, followed by a discussion of our alternatives investment business, which Tom Strauss will talk about. Later in the call, Jeff will provide an update on our investment banking business, and Steve will take you through some of the detail of our third quarter financials.

During the quarter, we reported top line results, which were approximately flat on an Economic Income basis compared to the second quarter of 2012, but up 77% from last year's third quarter. Coming off a relatively choppy second quarter, we saw a bit more stability in the equity markets during the period, which benefit our investment banking business. Jeff will go into some more detail around banking in a few minutes, but I wanted to say, we are very happy with the progress we're making in that area.

We continue to gain traction with our Debt Capital Markets product, closing 3 transactions in the third quarter and maintained a very strong position in the Health Care equity underwriting. While our banking business performed well, our brokerage business was impacted by declining volumes in cash equities and lower volatility levels during the period.

In spite of the 32%, as we think, decline in activity in the equities market during the quarter, our cash equities volume were only down 8%. And we're actually quite pleased with that performance. We are expanding our brokerage platform by adding a securities lending capability through our acquisition of KDC Securities and that closed on November 1.

In the asset management business, Ramius, we launched our third liquid alternatives mutual fund, which Tom will get into. We've made significant progress during the quarter in building out our quantitative trading group and are incubating 4 new strategies in this area to add to our existing platform. We are taking a careful approach to the business and are closely monitoring it. And I don't want to overstate this, while it's making a contribution, it's very small right now while it's being incubated.

During the current focus -- given the current focus of the company's alternative investment management business in the areas where the company believes it can achieve long-term growth and profitability, we decided as of November 1 to no longer offer cash management services, and we're arranging for the transfer of the remaining cash management assets to another asset management company, which will, you will see, it will affect the assets under management but really not affect the fees or profitability because this was a business that was

[Audio Gap]

in this interest rate environment and most of the time, marginally profitable, if profitable at all. But it was a distraction and we decided better to part with it.

While a tremendous amount of uncertainty exists in the macroenvironment, we continue to see opportunities across all of our products in asset management, but particularly in areas of liquid alternatives and real estate. And Tom will get into a bit -- we have a lot going on in just a lot of the areas.

Compared to last year's third quarter, our results marked a significant improvement. While our third quarter results last year were impacted by volatility in the global equity and credit markets, they also reflect the state of our business before the expense reductions and savings initiatives, which were implemented last year in the fourth quarter.

So here's a stash out of our numbers. During the quarter, we recorded GAAP net loss of $10.6 million or $0.09 a share as compared to a net loss of $48.2 million or $0.42 a share last year in the same period. Loss included $5 million in net -- the loss last year included $5 million net losses from discontinued operations, which relate to our exiting of the remaining LaBranche businesses. Excluding these losses, our net loss for the prior year third quarter was approximately $43 million or $0.37 per share.

I would like to highlight that our results this quarter included $4.4 million in severance expense, largely attributable to headcount reductions at our Sales and Trading businesses and certain leadership changes made at Cowen and Company attributable to contracts that inherited by us at the time of the merger. We do not expect to record a meaningful amount of severance expenses in the fourth quarter.

On an Economic Income basis, which excludes losses from discontinued operations among other items, we reported a loss of $8.9 million in the third quarter as compared to a loss of $40.7 million in the prior year period. Exclusive our severance expense, our economic loss this quarter was approximately $4.5 million.

Our results in the prior year period included an investment loss of approximately $17 million, primarily related to the unrealized losses associated with our Global Credit trading strategy. Excluding noncash items, so cash-cash, we recorded an Economic Income cash loss of $800,000 for the quarter compared to a cash loss of $32.6 million in the prior year period. And for the first 9 months of the year, we reported an economic loss of approximately $9 million and a cash-based gain of $14 million. In 2011 9-month period, we recorded an economic loss of $33.2 million and a cash-based loss of $13.2 million, thereby, the swing in cash year-over-year was $27 million to the positive.

Turning to our efforts to reduce expenses, we reduced noncomp expenses by 17% compared to last year's third quarter. We also saw a 6% decline in our noncomp expense base compared to the second quarter of 2012. For the 9 months, we reduced noncomp expenses by approximately $16 million or 15% year-over-year. These reductions were partially offset by an increased comp expense attributable to our severance expense, as I mentioned earlier, that was incurred in the quarter.

Moving to our share repurchase program. In the third quarter, we repurchased 1.4 million shares in the open market and approximately 319,000 shares as a result of net share settlement related to vesting of equity awards. The total cost of the program in the quarter was $4.5 million or approximately -- or $2.62 per share. Since we announced our original repurchase program in July of 2011, we have repurchased 6.9 million shares in the open market and an additional 2.3 million shares as a result of the net share settlement related to the vesting of equity awards. The total cost of the program through the third quarter of 2012 was $25.9 million, which represents an average price of $2.84.

Now I'm going to turn this over to Tom Strauss and let him talk about our investment management business.

Thomas W. Strauss

Thank you, Peter. At Ramius, total assets under management decreased by 10% or approximately $1.1 billion to $10.4 billion. The decrease was attributable to a large redemption in our cash management product, to which Peter referred earlier, as well as a redemption from our low-margin advisory mandate and alternative solutions group.

Combined, these 2 redemptions totaled $1.5 billion, but the economic impact will not be significant going forward since both assets are very low fee paying. Again, as a reminder, we are no longer providing cash management services effective the beginning of November. These redemptions were offset by a slight increase in assets at our hedge funds and alternative solutions products. We generated $13.4 million in asset management fees during the third quarter, down 27% from the prior year period. The decline relative to last year's third quarter was primarily the result of fees we received last year from our healthcare royalty investment platform in connection with the additional closings of their second fund vehicle. Excluding that impact, our management fees were down 16% year-over-year.

Our average management fee for the quarter was 49 basis points compared to 67 basis points over the third quarter. The decrease in average fee was primarily due to the retrospective management fees earned in the 2011 third quarter from an increase in committed capital at our healthcare royalties funds. Including the impact of these fees, our annualized average fee in last year's third quarter was 58 basis points. Excluding cash management activities, to which we'll no longer refer in the future, our average management fee was 66 basis points in the quarter.

We are pleased to announce that on October 26, we launched Ramius Strategic Volatility mutual fund, the symbol is RVOAX, which we mentioned on our last earnings call. This is our third liquid alternatives mutual fund product and it's already -- has approximately $100 million in assets under management. We believe that the structure of this fund and its fee structure as well will have widespread applicability across institutional and high net worth portfolios and look forward to broadening the distribution of that fund over the next few quarters. In fact, all 3 of our liquid alternatives mutual fund products are garnering interest from some major distribution platforms, and we're optimistic this will lead to asset management growth. We're also proud to announce that the alternative solutions group won Offshore Manager of the Year at the AIMA Australian Hedge Fund Awards in September against some very impressive competition, highlighting the team's successful inroads into the Australian market.

Peter Anthony Cohen

Thanks, Tom. Turning to our balance sheet. We finished the quarter with approximately $350 million in cash and liquid securities as compared to $328 million in the prior period -- or prior quarter, excuse me, prior year quarter. And with $420 million in invested capital at September 30, 83% of our total equity is invested across our investment strategies. In the third quarter, we generated $9 million in investment income for a quarterly return of approximately 2% on our investment portfolio.

Finally, turning to a recent development, last week, we and our investment funds executed claims determination deeds with respect to our unsecured claims against Lehman Brothers International Europe in an aggregate amount of approximately $50 million, all of which relates to claims held by our fiduciary funds -- almost all of which. And I want to make that clear, it's mostly our fiduciary funds, not the firm. By entering into these deeds, we and LBIE have reached agreement on our unsecured claims, and our funds will be entitled to participate in the first dividend to unsecured creditors of LBIE, which is expected to be paid before the end of the year, though the amount of that dividend has not yet been determined.

With that, let me turn the call over to Jeff to talk about Cowen and Company.

Jeffrey Marc Solomon

Thank you, Peter. In the third quarter, our investment banking and capital markets franchise continued to gain contraction, but were offset by ongoing industry-wide declines in trading volumes affecting our equities business. We generated $41.4 million in combined banking and brokerage revenues, up 13% from last year's third quarter. This metric does that include any invested income allocated to the broker-dealer. For the 9 months, our core revenues are up 4% from a comparable 2011 levels, with investment banking and capital markets revenues up 27% year-to-date versus 2011, and equity brokerage down 8% for the same period.

First, let me discuss our investment banking and capital markets progress. Following the investments we made in 2010 and 2011, our investment banking business is showing encouraging signs of consistent growth with revenue generated across industry sectors from a variety of products.

To give you some highlights. We recorded our third consecutive quarter of increased revenues and generated the most fees for a single quarter since mid-2008. We completed 15 banking transactions during the quarter, generating nearly $19 million in fees. During the period, we saw a nice rebound in equity issuance activity, following a somewhat slow second quarter. In terms of fees paid to the Street, public equity underwriting was up about 20% in our 4 core verticals from last quarter, and we participated nicely in that trend. We completed 11 equity underwriting transactions, including one registered direct offering and one convertible note offering, and more importantly, we acted as the lead manager on over half of these transactions. Year-to-date, we have acted as lead manager on 43% of our public equity deals, up from 34% last year and just 13% in 2010. We also maintained our lead positions in the health care sector, closing more public equity deals in our coverage area than any other investment bank of any size during the quarter.

Our fixed income group closed 3 transactions during the period across 3 different industry verticals, industrials, health care and technology. All these assignments were lead-managed transactions. I'm pleased with the progress our debt capital markets area has made. What was a $2 million business for us in 2011 has already generated over $11 million for the 9 months ended this September. The revenue diversification we have created to our top line banking and capital markets revenues is one of our stated strategic objectives, and our success reflects our ability to become the trusted advisor for our client who are increasingly choosing us because we are product-agnostic when it comes to providing advice and execution services.

Looking forward, we'll continue to press our advantage for clients for whom we matter most, where we can clearly make a difference for them. To that end, we're focused on strengthening our relationships with several key VC and private equity firms, and as a part of this effort, we hired a Head of Financial Sponsors Coverage in July and are seeing some early signs of progress in our coverage areas. We've been making progress on rebuilding our advisor revenues by gaining an increasing number of mandates that we expect to convert into revenues in the coming months and quarters.

Turning to the brokerage side. Our business continues to be adversely infected -- affected by declining U.S. equity volumes. In the third quarter, average daily volumes across the market were hit by a summer slowdown and fell by over 10% compared to the second quarter. The business was also affected by lower volatility levels with the average VIX levels falling 20% compared to last quarter. And they were also down substantially more versus last year's third quarter, which saw a spike due to the U.S. debt downgrade.

As you already know, we've taken a number of steps to reposition this business for profitable growth, and our new leadership has begun to make progress. We are working more closely to align our sales force and research analysts and are looking for ways to better serve our largest institutional clients with more actionable ideas. We've always maintained a strong position as a top 100 U.S. account, but we believe there is an opportunity for improvement. Even modest gains to our market share here could result in revenue uptick despite market difficulties.

Additionally, we've announced over the weeks -- recent week, that we've made a few important additions to our research team in technology and consumer areas. There continues to be significant opportunity for us in electronic trading, and over the quarter, we made progress in further integrating our electronic product into the rest of the equities platform. This remains a top objective for us going forward.

Compared to our run rate at the start of the year, execution costs since the acquisition on a per share basis have been cut in half. That's also a stated objective we've accomplished in just 6 short months.

Finally, during the third quarter, we announced the opportunistic acquisition of KDC Securities, a small securities lending business. While the acquisition price was modest, we believe the business is well positioned to grow profitably in the short term and complements our existing equity platform, and we welcome those members to members of our team. As Peter mentioned earlier in the call, we closed this acquisition on November 1.

So while we certainly see our fair share of challenges, there are opportunities to grow our business even in this environment, and I believe we do that without materially increasing our fixed costs. Indeed, we continue to toe the line on expenses as we are coming in right on budget for the 2012 cost reduction strategy we laid out at the end of the year last year. A little over 2 years ago, we began to reshape our efforts -- reshape the Cowen and Company platform. We made investments in areas where we think there -- we're most relevant with clients like health care and technology and the banking side and product solutions that can generate profitable growth for us like debt capital markets. These investments have taken time to gain hold, but you can see their impact today.

I keep having to remind myself that we're in the early days of revitalizing our equities franchise. And I'm confident with the team we have in place, we can achieve the same kind of results. Finally, I just want to make sure to commend all of our employees in the efforts that you are making individually to advance the ball for us at Cowen. Keep up the great work.

And with that, I will turn it over to Steve Lasota who will give you an update on our financial performance.

Stephen A. Lasota

Thank you, Jeff. During the third quarter of 2012, we reported a GAAP net loss of $10.6 million or $0.09 per share compared to a loss of $48.2 million or $0.42 per share in the prior year period. Our GAAP loss in the prior year period included a $5.1 million net loss from discontinued operations related to the legacy LaBranche businesses we exited last year. Excluding these losses, our GAAP loss during last year's third quarter was $43.1 million or $0.37 per share.

For the 9 months ended of 2012 reported a GAAP net loss of $14.5 million or $0.13 per share compared to a loss of $28.1 million or $0.32 per share in the comparable 2011 period. In addition to the $5.1 million loss from discontinued operations, our results for the 2011 9-month period also included a $22.2 million bargain purchase gain related to the acquisition of LaBranche, as well as an $18.3 million tax benefit associated with the company's acquisition of a Luxembourg captive reinsurance company. Both of these items were incurred in the second quarter of 2011.

In addition to our GAAP results, management utilizes non-GAAP measures, what we term as Economic Income, to analyze our core operating segment's performance. We believe Economic Income provides a more accurate view of the operating businesses by excluding the impact of expenses associated with one-time equity awards made in connection with the November 2009 Ramius/Cowen transaction; one-time gains, losses and gains and losses from discontinued operations, including our loss of exiting the legacy LaBranche businesses last year; acquisition-related expenses and other reorg charges; and the bargain purchase gain, which is outed from the LaBranche acquisition.

Economic Income also excludes the impact of accounting rules that require us to consolidate certain of our funds. For the 3 months ended September 30, 2012, the company reported an economic loss of $8.9 million or $0.08 per share compared to an economic loss of $40.7 million or $0.35 per share in 2011 third quarter. The 9 months ended this year reported an economic loss of $9 million compared to an economic loss of $33.2 million for the first 9 months of 2011.

Third quarter Economic Income revenues were $66 million, an increase of $28.8 million compared to $37.2 million in the 2011 third quarter. The increase in revenues is primarily attributable to an increase in investment income and investment banking fees, partially offset by a decrease in management fees and brokerage revenue. We generated $9.2 million in investment income during the third quarter and ended the period with $420 million in invested capital. During the 2011 third quarter, we reported a $17 million investment loss, primarily attributable to unrealized losses in our Global Credit strategy.

For the alternative investment side of our business, we recorded management fees of $13.4 million during the third quarter of 2012, down $5.1 million compared to the prior year period. There was a decline in fees attributable to our healthcare royalty funds due to an increase in committed capital in the prior year quarter that resulted in recognizing cumulative retrospective management fees. This decrease was partially offset by an increase in management fees related to our hedge fund products, specifically our Value and Opportunity funds and our Ramius Trading Strategy funds.

We reported incentive fee income of $1.7 million in the third quarter as compared to an incentive fee loss of $643,000 in the third -- in the prior year period. This was primarily a result of an increase in performance fees earned in our Global Credit fund, partially offset by a decrease in performance fees earned on our real estate funds.

In our broker-dealer segment, investment banking revenues were $18.7 million, an increase of 73% compared to $10.8 million in the prior year period. We completed a total of 15 transactions across all products in the most recent quarter compared to 12 transactions in the 2011 third quarter. Brokerage revenue was $22.7 million in the third quarter of 2012, a decrease of $3 million compared to the prior year period. This is primarily attributable to lower commission revenues due to reduction in customer trading volumes.

In the third quarter, we reported compensation benefits expense of $46.2 million, a 10% increase compared to $42.2 million in the third quarter of 2011. This is primarily attributable to an increase in the amortization of deferred comp, severance expense and investments in new professionals. However, this was partially offset by lower variable compensations.

For the quarter, we reported an aggregate compensation-to-revenue ratio of 70% compared to 113% in the third quarter of 2011. The current quarter, we incurred $1.4 million in compensation expense for activities, which the company gets reimbursed, and severance expense of $4.4 million. Excluding these 2 items, the comp-to-rev ratio was 61%.

Moving to our noncomp expenses. Fixed noncomp expenses in the current quarter decreased by 7% to $24 million as compared to $25.8 million in the comparable prior year quarter. The decrease was due to a decrease in service fees and occupancy and equipment expenses related to our expense reduction efforts made in 2011. Variable noncomp expenses were $5.7 million in the third quarter of 2012, down 42% compared to $9.9 million in the third quarter of 2011. The decrease was primarily due to syndication costs related to a capital raise by our alternative investment assets fund in the third quarter of 2011 and professional fees that were incurred relating to the closing of the Luxembourg reinsurance deals in the prior year quarter.

While Economic Income is a pretax measure, I'd like to briefly touch on our tax situation. After the acquisition of LaBranche, Cowen has significant net operating losses in the U.S. to carry forward into the future of $316 million. The associated gross deferred tax asset currently amounts to $125 million. There is a 100% valuation allowance against that asset, but adds significant value to the firm.

The IRS rules associated with the acquisition of Cowen and Company in 2009 and LaBranche in 2011 partially limit the amount of NOLs 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 $504 million at December 30, and our book value per share was $4.42. Tangible book value per share, which is a non-GAAP measure, was $4.09 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. Well, you've heard it all, so I'm not going to repeat in my closing remarks anything that was said. And why don't we just open it up to questions and then perhaps, that will give rise to some further commentary.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Devin Ryan.

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

So just within the alternatives business, you mentioned the new liquid alternatives mutual fund that you just launched. Would just love to get a sense of how big you think that could get. What did the ramp look like with the other 2 funds that have already been launched? And what are the fees in that business?

Thomas W. Strauss

Well, the significant difference between this fund and the prior 2 funds is the breadth of application. So the first 2 funds are predominantly mass affluent and retail-driven based on the fee structures. The fee structure of this fund has a management fee of a 120 basis points, but the leverage -- the fund is actually 3x leveraged. So when you look at the notional exposure, per dollar of notional exposure, the fee is 40 basis points, which is institutional by any standards. Clearly, the fund will be much more volatile just based on the imputed leverage, and the structure of the fund being long volatility with some of that premium being offset by a portfolio of carry strategies, we think, gives this fund broad appeal to institutions and private clients that are looking to figure out how to get long volatility.

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

Is there anything else specifically out there already that's like that or is this a little bit of a unique product that you guys are spearheading?

Thomas W. Strauss

Our research tells us there's nothing comparable.

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

Okay, great. And just more generally, clearly, you guys have a lot going on within the investment management business, a lot of balls in the air. But just trying to think about timing of maybe once some of these things hit and actually when we could see the impact from a flow perspective? I mean, are there things that in the near term, you expect could be realized, where you could see some meaningful bumps in AUM? Or are a lot of things that you're working on now more longer-term types of opportunities?

Thomas W. Strauss

I'd make 2 comments. One, the fund raising environment is poor, just given hedge fund performance in general. That's sort of the top line news. That said, we think the first quarter will have significant asset flows based on mandates that we believe will be won in that period of time, either kind of signed or recently closed.

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

And can you maybe just touch on the sort of the traction that you're having on some of the retail platforms that you've -- the distribution platforms that you guys have fairly recently been added to?

Thomas W. Strauss

Well, the 2 platforms that to which we've been added actually, we got positive results from those 2 firms in the past 30 days. So it's a little bit early. So I think that's an early 2000 event. We saw -- we've seen very, very small flows to start, but I expect that to build.

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

Okay, great. And just on the Enterprise Fund, could you just give an update in terms of timing of how much is left there and just when you expect to be totally out or is that to be totally wound down?

Stephen A. Lasota

Yes. Devin, there's $218 million left in that fund. We did -- there was a over $20 million distribution in the last quarter. We continue to look for opportunities to wind that down. We are in discussions where we may be able to speed that up, but there's really nothing that we can report on at this point.

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

Okay. That's fine. And then I just wanted to move on to the broker-dealer, a couple of questions for Jeff. Clearly, a very good investment banking quarter for you guys and especially in the context of remaining kind of a very challenging environment, and you're seeing some traction on the debt underwriting side as well. How do you guys feel about just your backlog broadly by products? And any negative implications or potential coming with the fiscal cliff issues up ahead or negative outcomes as a result of the election?

Jeffrey Marc Solomon

Well, I think, first of all, to answer your backlog question, our backlog continues to be very steady. I like the pace at which we're adding mandates as we do deals. So we've seen no material change in the backlog. As you know, we've had a pretty significant uptick in backlog of transactions over the course of the year, which is good. We've also seen an increase in the number of M&A advisory deals, and I like that as well. We don't have a lot of advisory income, and that's a result of basically restarting our efforts over the past year, 1.5 years. And so that stuff, it just takes time and I'm glad that we've got mandates, and we're hopeful that these mandates will actually be able to close over the course of the next, call it, 3 to 6 months. So I think to answer your broader political question, I will tell you, things felt heavier yesterday, no shock there, than they did the day before. But I still think things get done. I mean, most of the companies we're talking to have to get some financing done at a level. So I expect that we'll continue to see them get done unless there's a significant issue with regards to the cliff. In other words, if the government shuts down or we go through mass amounts of political rancor, that's just going to be much more difficult. My hope, and I don't have any insight in this, my hope is that with the return to status quo, that this election really is across both the legislative branches and the executive branch, that the politicians recognize that they've got to figure out how to work together to get some of these problems solved. And so far, the words that you're hearing suggest everybody recognizes they've got to get back to work and solve some of these challenges. As long as there's collective cooperation, I would say the markets will remain functional. If we get to a point where it's evolved into significant political rancor, like it did around the debt crisis in 2011, I just think people will wait. And so we're going to know here reasonably soon. But certainly, heading into the end of the quarter, there's a lot to get done. And from what I can tell with the deals we have on the road, people are putting their heads down in trying to figure out how to get them done.

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

Got you. Okay. And I know this may be somewhat political as well, but yes, I know that you have been a proponent of bringing back your fractions in equity trading for certain companies. So just love to get any comments on the type of traction that you're seeing this get and maybe how this could impact your business to the extent that something actually curves on this front.

Jeffrey Marc Solomon

Well, I think, first of all, it's not fractions as much as it is wider tick increments. I think we're going to have decimals, so I just want to be really clear. People refer to it as fractions, but really, it's just going to be wider tick increments. And we are very much focused on small cap stocks. Because as you know, Devin, the most important thing that happens in a small cap stock after an offering is the support in the aftermarket. And there's so little trading volume that goes on in the aftermarket, it's hard to justify research coverage and a bunch of other things for small cap stocks. So we've made pretty good progress in articulating that. There are a lot of people in Washington that understand it. I think the biggest concern would be the impact on consumers, which I think we need to address. But I'm hopeful that in the process of the bipartisan cooperation that we saw in the JOBS Act, that there's certainly enough people on both sides of the aisle who are interested in seeing this -- something happening here, that we could do something. But it's still in the very early stages, and we continue to work very, very hard. But I can't give you any insight as to when something is going to happen.

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

Okay. Good, I just appreciate the color. And then just lastly, in terms of the headcount falling a bit in the quarter, was that just driven by the changes made in the Sales and Trading business? I know you guys highlighted it in your remarks, or was there something else in those numbers as well.

Jeffrey Marc Solomon

No, that's it. I mean, we're picking and then choosing the spots where we want to press forward. As you know, we've made some hires in some businesses, some of them didn't gain traction at the pace we wanted to. And certainly, now that we've got new management in place in the equity division, we feel a lot more comfortable adding capability in terms of our fundamental research business in research and research sales. We have some really good insight as to where we can press our advantages there with clients we already do business with where we should be doing more. And so for us, this is really refocusing some of those compensation dollars spent elsewhere to areas where we think we can actually impact profitability more specifically to our core businesses over the long term.

Operator

[Operator Instructions] And your next question comes from the line of Joel Jeffrey.

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

Jeff, I guess, a good question for you. I mean, what we've seen over the past years with certainly, issuance markets, lower -- sort of a lot of the larger cap banks coming downmarket to do deals. But you guys seem to be picking up market share on your lead managed deals. Can you just talk a little bit about what you're doing there to increase your market share and how -- if you think this is a sustainable thing?

Jeffrey Marc Solomon

Well, let's talk about where most of that comes from. It's certainly come from the strength of our Health Care sector. And in Health Care, if you take a look at the percentage of equity underwriting done by non-bulge banks, it's actually pretty significant. I think we've contributed vitally, actually, to those percentages moving much more towards the emerging growth banks like ourselves. But these are good examples of -- if you've got the ability to have connectivity fundamentally in a domain area, like we do in Health Care, our ability to bring transactions, it's indistinguishable from the -- irrespective of the size of your bank. So small or large, it doesn't matter. It just matters that you understand and you can drive content through and you're respected in the marketplace. And so that's where we recognized we had a strategic advantage over a lot of other players, and we pressed that advantage. Harder to say that, that applies to a lot of other areas. It can, but not necessarily. So I think where we continue to make market share gains and where we'll continue to do so will be in the Health Care space.

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

Okay, great. And in terms of your equity trading volumes, can you give us any sense for how much you're picking up on the electronics side versus the more traditional Sales and Trading activity?

Jeffrey Marc Solomon

Well, it's early days for us post the acquisition. I think we always say it's a 3-step process. First, you got to make sure your clients pick up the phone and take your phone call. The second, you got to get your algos and your electronic offerings on their desktop. And then third, you've got to convert them. So we've had very good uptake in the first 2 stages. So we've had a number of clients -- nobody said, "no, don't call us," so that's good. Pretty much, we've had a number of clients we're just working through, where we're focusing on the ones we think are most impactful or could be most impactful, to get them to install the product. And as we move into next year, there will be some very specific stated objectives to revenue mix. And those will be articulated to our clients, specifically. But we're viewing it very much as -- we want to be agnostic in terms of how you want to pay us. If you want to pay us by touch, we'll take it. If you want to pay us electronic, we'll take it. But we all have some expectations around revenue dollars for the products and services that we're providing. We do think we can actually sell through and add value in electronics, but we've got to get people to start using the product to demonstrate that first. And so, again, I think it's early days, but so far, the strategic vision we had when we did the acquisition is bearing out, and we'll see how things convert here in the next, again, 3 to 6 months from a revenue standpoint.

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

Okay, great. And then on the asset management side, I think you said sort of x cash management fees, the realization rate was about 66 basis points for the quarter. Is that a good way to think about that going forward?

Thomas W. Strauss

It's probably the best barometer that we have. But there are certain assignments that come with low management fees and generous incentive fees. So you kind of have to balance the 2. And in a year like this, where all of our funds are above high water at the moment, the incentive fees could be meaningful. But -- so it's not just a question of pure management fees, some of them come with incentive fees where there's more pressure on management fees.

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

Okay, great. And then just lastly, in terms of the severance expense that was included during the quarter, in thinking about the comp ratio going forward, is that 61% number, again, a good way to think about that or is there some variability within that?

Stephen A. Lasota

Yes, we feel the 60 -- we should be in the low 60s, Joel. The 61%, 62% is where we should come out for the year.

Operator

And your next question comes from the line of Tim Caffrey [ph].

Unknown Shareholder

Peter, if you could just elaborate on the Lehman claims. I believe you said it was $50 million. Is there any economic benefit at all to the firm?

Peter Anthony Cohen

Very small. But this is not all the Lehman claims. This is just the unsecured claims. So there are more claims resolution to come where the firm has a bigger stake in the outcome. But even here, where it's -- the firm has got a small, very small stake in the outcome, as we get to distribute more cash to our clients, some of that cash -- now I don't want to overstate it, but some of it will -- comes right back in into some of our existing funds where, when we closed those funds down, people opted to come either into Value and Opportunity fund or our Credit fund. So there's kind of a growth in asset benefit the faster we can unwind Lehman. The thing that's most telling about this is, and we are on the committee in -- for LBIE, so we probably know a lot more than most people about it who aren't directly in the committee, is that Lehman is -- the Lehman estate has a huge amount of liquidity building up in it. And it's sad to look back on it and think what could have been, but had the government provided in effect, sort of deep financing. I don't mean they should have put them in bankruptcy, but just as they did with JPMorgan facilitating with Bear Stearns, absorption with government financing, had the government done that with Lehman, Lehman would've wound down very orderly and we would have had a lot less disruption in the world than we did. But that's for the history books.

Unknown Shareholder

And regarding the buyback, how much remains on the buyback? And how do you think about that relative to tangible book year on sort of how aggressive we could be? When you look at some of your competitors like Friedman, Billings, which every couple of months seems to reload and buy another 8% to 10%, that started to see tangible book increase as a result, where we've seen sort of an unfortunate erosion in the last 1.5 years in tangible book.

Peter Anthony Cohen

Well, we have probably $15 million left to spend on the buyback based on our last authorization. And I think we're going to be very deliberate, very careful because while it does tend to increment tangible book value, we're a very different firm than FBR. They've shrunk down to a very tightly defined model where, it appears, they sort of aim to do a handful of very large transactions during the year, and it's almost an eat-what-you-kill kind of model, I think, for compensation purposes. Whereas, we're trying to grow businesses and it's going to take capital or cash to investing. Like for instance, in the alternative asset management space, we want to expand the product offering. We have to seed new funds. We're out in the market very successfully getting commitments for our next real estate debt fund. The general partner of the fund has to make a capital commitment to that. We'll do an equity fund probably next year. We'll have to make a capital commitment to that. We're negotiating right now a separate managed account for real estate equity with a foreign investor that is talking about putting up a substantial amount of money, but they want a commitment from the general partner for capital in that.

Unknown Shareholder

Do you think we'll see these funds all come out in the next 12 months? Because that is optimistic.

Peter Anthony Cohen

The debt -- the equity debt -- I mean, the real estate debt fund will be done in the next 12 months. The separate account may or may not happen, we're negotiating it. A quantitative trading group platform that we're building out and we're allocating very modest amount of capital to right now until our comfort level grows. But as it grows, we're going to want to commit more capital. It's the most efficient use of capital we have in front of us. We are selectively but increasingly seeing some kind of great investment opportunities coming out of investment banking relationships in the tech world and in the life sciences world. And we are making some investments there in terms of pre-IPO private placements that we're putting money into. So I don't want to predict what we're going to do with the buyback because we're about building a business, not about shrinking a business.

Unknown Shareholder

So as a long-term shareholder who's watched tangible book decline, how long do we have to continue this slog before we start bearing the fruits of some of these investments?

Peter Anthony Cohen

Well, hopefully, we're going to start to see the fruits of some of these investments next year. I mean, I have suffered probably more personal wealth disruption from the decline in tangible book value than anybody and we have had a lot more housecleaning that we had to do than, I think, we imagined at the time of the Cowen merger. And the environment basically has been an incredibly difficult one in the face of we've had a sort of double jeopardy. We had a tough environment and we had a lot of housecleaning. I mean, clearly, you can see from the numbers coming out of investment banking and Sales and Trading, where our revenues decline on the equity side is a lot less than what the markets are experiencing, that we're making a lot of progress. We have transitioned our investment management business from a multi-strategy platform 3 years ago, all internally managed to a bunch of silos, a very sort of distinct platform of distinct strategies that are more encapsulated unto themselves so that we don't have this sort of macro risk in those that the multi-strategy guys have experienced. I mean, look at a lot of the big multi-strategy guys this year. I mean they've suffered a great deal and are experiencing asset withdrawals. The more unique product we can put on the shelf, the more we'll grow. I think our overhead reductions are self-evident. We expect to get more overhead reductions next year. From some of the steps we've taken, it's going to -- our noncomp expense is going to go down. They went down in the third quarter, not even reflected in the numbers you see because they happened during the third quarter. So they'll be reflected going forward. So look, it's -- I don't know what to tell you. It's -- I mean, I'm not here to see my net worth continue to deteriorate.

Unknown Shareholder

No, I appreciate that. And I guess it's a shared frustration. But when you look at the broker-dealer, what should we think for, say, next year at cash break-even on that business? Where do we have to be annually to be profitable on that line?

Jeffrey Marc Solomon

Well, we haven't given guidance on that, so we need to be a little bit careful. But you can see from the numbers as they play out, we don't anticipate any significant increases in fixed costs and certainly, noncompensation costs. You can kind of see where we are from a compensation standpoint, and I think you can probably figure out where that is. We haven't given guidance there, but obviously, with some of the organic growth we're seeing and some of the things we think we can capture, our goal is to get there and get through there.

Peter Anthony Cohen

Also, and I can't quantify this, nobody could quantify it, but keep in mind that while the pie has shrunk, even in the third quarter, the pie has shrunk certainly on the equity side, the number of participants in the pie is shrinking also. And that's good for us. Nomura going basically only electronic is good for us. This poor event with Rochdale, I don't know what the outcome of that's going to be, but it's kind of difficult to imagine that they won't suffer some diminution of standing in the marketplace if they don't solve their capital problem very, very quickly. KBW going out and the Stifel merger. I mean, they're not going to keep all the revenue they had, it just doesn't happen. It's not 1 plus 1 equals 2. It's 1 plus 1 equals 1.5 or 1.75. And the whole benefit is wiping out all the infrastructure costs of KBW. That's what that's about. So no -- there have been a whole bunch.

Jeffrey Marc Solomon

Yes, Ticonderoga, ThinkEquity, every day we're hearing about people that are just tossing in the towel on the equity side. And I think, again, when we see the progress we're making, it will certainly start to show through -- we think it will start to show through here pretty quickly. We think we can take market share and without significant amounts of fixed cost, that's our goal. And that's really our challenge here. We took those fixed costs down pretty significantly this year, the noncompensation costs. And our goal has to be to add businesses that are very costly in nature to leverage the fixed cost of the organization. And that's what we'll continue to do. That means taking market share from the weaker competitors, we've done it before and we'll continue to position ourselves to do it.

Peter Anthony Cohen

And I think to Jeff's point, our research footprint is only going to get stronger now since we instituted this change and brought in Bob Fagin, who's a really talented guy. And things are happening there fast. And we're remapping the whole world, and remapping the whole world as it relates to our research footprint, and we think there's real revenue leverageability out of our research footprint that we're going to see in the future.

Operator

And your next question comes from the line of Mark Mandel [ph].

Unknown Analyst

This is Ajay. I am Ajay Gupta [ph], analyst working for Mark. A couple of questions, I guess. First on the -- a couple easy ones on the balance sheet. Could you give us a number for the COIL investment and then ROIL? Those are both the acronyms.

Stephen A. Lasota

I don't know if we really disclosed that.

Peter Anthony Cohen

I don't think we do. No, the size of the COIL investment.

Stephen A. Lasota

Yes.

Peter Anthony Cohen

But they're both embedded in basically the liquid portion, which I referenced in my comments or Steve referenced in his.

Stephen A. Lasota

Yes, they're a part of that $420 million.

Peter Anthony Cohen

Yes.

Stephen A. Lasota

So the $420 million that is invested, part of it is through COIL and ROIL, and then part of it is through some of the funds that we consolidate that you can see in the Q that we're going to file later today.

Peter Anthony Cohen

But the liquid stuff is substantially COIL and ROIL.

Stephen A. Lasota

Yes.

Unknown Analyst

Okay. So no comment on the numbers? Okay. And then could you give us some more guidance on how coming to breakeven within the broker-dealer is shaping up for the year?

Jeffrey Marc Solomon

Well, I think it would be hard to break even from an Economic Income standpoint this year. And certainly, the artful balance here is in making sure that we are doing what we need to do to maintain the investments we've made and reposition ourselves. I think that -- we haven't managed the business for quarter-over-quarter numbers. It's just not something that we'll do. We've got some pretty significant and very realistic stated objectives as to where we're going revenue-wise, where you can see that the value of the investments we made on the investment banking side several years ago. And certainly, we didn't get our full management team in place until the middle of the year this year in the equity division. So I'm not so much focused on that, though I think we need to be super careful about cash burn and we'll continue to make sure that we're not doing anything to put ourselves in harm's way. I'm really looking out towards -- to the growth objectives and the market share that we think we can take in the next year. And so, as I said in my previous comments, you can pretty much do the math. We do not anticipate taking on any significant noncompensation expenses. We continue to work at chipping away our variable noncomp expenses, and we will continue to look for revenue opportunities that we think the costs are variable in nature. And that's the -- you take a look at what we do with KDC Securities, those are all pretty much variable costs in nature. There's no fixed costs associated with adding those. So you can figure out pretty much what you think the breakeven trajectory should look like given that guidance.

Unknown Analyst

Okay, great. And then final question on -- I know we've talked about banking going forward. Could you give us at least what's been booked so far, as far as maybe deal count or anything so far in the fourth quarter?

Jeffrey Marc Solomon

I can't. I mean, we haven't given that, and so we're not. All I can say is we continue to be active.

Peter Anthony Cohen

Listen, one of the things about banking to keep in mind is it's not using up cash. And as we get things sort of right sized, that's a very important metric for us, the cash generation. So as I commented on the swing year-over-year for the 9 months, about $27 million, $28 million positive cash to the firm. And that's an important metric for anybody in our business to keep their eye on. Because while we have lots of capital, we don't want to burn it up while we're fixing things. And we have a lot of legacy share-based comp that we're burning through. And that has a big effect on Economic Income, but it's noncash.

Operator

I would now like to turn the call over to management for closing remarks.

Peter Anthony Cohen

Well, I think we've covered everything that I might say and I thank you all for your continued interest and participating on the call. And let's just hope that our elected representatives in Washington figure out how to get their acts together and get us on the right path. Because if they don't, we're all going to be having a difficult time doing what we do for a living for a long time. And I want to be optimistic. History suggests that there's some big hurdles these guys are going to have to get over to get along down there. But if they do, it could ignite something pretty special in these markets and get companies to start thinking about investing forward again. So thank you, all. Have a good day.

Operator

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

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