COWEN INC. The discussion contains forward-looking statements, which involve numerous risks and uncertainties, including, but not limited to, those described in the sections titled "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K") and in Item 1A of this Quarterly Report on Form 10-Q, many of which risks are currently elevated by, and may or will continue to be elevated by, the COVID-19 pandemic. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes ofCowen Inc. included elsewhere in this quarterly report. Actual results may differ materially from those contained in any forward-looking statements.
Overview
Cowen Inc. , aDelaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment banking, research, sales and trading, prime brokerage, global clearing, securities financing, commission management services and investment management through its two business segments: theOperating Company ("Op Co") and theAsset Company ("Asset Co").
Operating Company
The Op Co segment consists of four divisions: theCowen Investment Management ("CIM") division, the Investment Banking division, the Markets division (which includes sales and trading, prime brokerage, global clearing, securities financing and commission management services) and the Research division. The Company refers to the Investment Banking division, the Markets division and the Research division collectively as its investment banking businesses. Op Co's CIM division includes advisers to investment funds (including private equity structures and privately placed hedge funds), and registered funds. Op Co's investment banking businesses offer industry focused investment banking for growth-oriented companies including advisory and global capital markets origination, domain knowledge-driven research, sales and trading platforms for institutional investors, global clearing, commission management services and also a comprehensive suite of prime brokerage services. The CIM division is the Company's investment management business, which operates primarily under theCowen Investment Management name. CIM offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been registered with theSEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") since 1997. The Company's investment management business offers investors access to a number of strategies to meet their specific needs including healthcare investing, sustainable investing, healthcare royalties, merger arbitrage and activism. A portion of the Company's capital is invested alongside the Company's investment management clients. The Company has also invested capital in its insurance and reinsurance businesses. Op Co's investment banking businesses include investment banking, research, sales and trading, prime brokerage, global clearing, securities financing and commission management services provided primarily to companies and institutional investor clients. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, consumer, industrials, tech-enabled and business services, and energy. We provide research and brokerage services to over 6,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our sectors. The investment banking businesses also offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. Historically, we have focused our investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time, the Company invests in private capital raising transactions of its investment banking clients.
The Asset Co segment consists of the Company's private investments, private real estate investments and other legacy investment strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment.
Certain Factors Impacting Our Business
Our Company's businesses and results of operations are impacted by the following factors:
•Underwriting, private placement and strategic/financial advisory fees. Our
revenues from investment banking are directly linked to the underwriting fees we
earn in equity and debt securities offerings in which the Company acts as an
underwriter, private placement fees earned in non-underwritten transactions,
sales commissions earned in at-the-market offerings and success fees earned in
connection with advising both buyers and sellers, principally in mergers and
acquisitions. As a result, the future performance of our investment banking
business will depend on, among other things, our ability to secure lead manager
and co-manager roles in clients' capital raising transactions as well as our
ability to secure mandates as a client's strategic financial advisor.
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•Liquidity. As a clearing broker-dealer in theU.S. , we are subject to cash deposit requirements with clearing organizations, brokers and banks that may be large in relation to our total liquid assets. •Equity research fees. Equity research fees are paid to the Company for providing access to equity research. The Company also permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. Our ability to generate revenues relating to our equity research depends on the quality of our research and its relevance to our institutional customers and other clients. •Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities and net trading gains and losses on inventory and other Company positions. In certain cases, the Company provides liquidity to clients buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk. •Commissions. Our commission revenues depend for the most part on our customers' trading volumes and on the notional value of the non-U.S. securities traded by our customers. •Investment performance. Our revenues from incentive income and carried interest allocations are linked to the performance of the investment funds and accounts that we manage. Performance also affects assets under management because it influences investors' decisions to invest assets in, or withdraw assets from, the investment funds and accounts managed by us. •Fee and allocation rates. Our management fee revenues are linked to the management fee rates we charge as a percentage of contributed and invested capital. Our incentive income revenues are linked to the rates we charge as a percentage of performance-driven asset growth. Our incentive allocations are generally subject to "high-water marks," whereby incentive income is generally earned by us only to the extent that the net asset value of an investment fund at the end of a measurement period exceeds the highest net asset value as of the end of the earlier measurement period for which we earned incentive income. Our incentive allocations, in some cases, are subject to performance hurdles. Additionally, our revenues from management fees are directly linked to assets under management. Positive performance in our legacy funds increases assets under management which results in higher management fees. •Investment performance of our own capital. We invest our own capital and the performance of such invested capital affects our revenues. Investment income in the investment bank business includes gains and losses generated by the capital the Company invests in private capital raising transactions of its investment banking clients. Our revenues from investment income are linked to the performance of the underlying investments.
External Factors Impacting Our Business
Our financial performance is highly dependent on the environment in which our businesses operate. We believe a favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, low inflation, low interest rates, low unemployment, strong business profitability and high business and investor confidence. Unfavorable or uncertain economic or market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability (or increases in the cost of) credit and capital, increases in inflation or interest rates, exchange rate volatility, unfavorable global asset allocation trends, outbreaks of hostilities or other geopolitical instability, such as the ongoing war inUkraine , corporate, political or other scandals that reduce investor confidence in the capital markets, global health crisis, such as the ongoing COVID-19 pandemic, or a combination of these or other factors. Until the COVID-19 pandemic subsides, we could experience reduced levels in certain of our investment banking activities, reduced revenues from incentive income in our investment management business and reduced investment income. Our businesses and profitability have been and may continue to be adversely affected by market conditions in many ways, including the following: •Our investment bank business has been, and may continue to be, adversely affected by market conditions. Increased competition continues to affect our investment banking and capital markets businesses. The same factors also affect trading volumes in secondary financial markets, which affect our brokerage business. Commission rates, market volatility, increased competition from larger financial firms and other factors also affect our brokerage revenues and may cause these revenues to vary from period to period. •Our investment management business can be adversely affected by unanticipated levels of requested redemptions. We experienced significant levels of requested redemptions during the 2008 financial crisis and, while the environment for investing in investment management products has since improved, it is possible that we could intermittently experience redemptions above historical levels, regardless of investment fund performance. •Our investment bank business focuses primarily on small to mid-capitalization and private companies in specific industry sectors. These sectors may experience growth or downturns independent of general economic and market conditions, or may face market conditions that are disproportionately better or worse than those impacting the economy and markets generally. In addition, increased government regulation has had, and may continue to have, a disproportionate effect on 67
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capital formation by smaller companies. Therefore, our investment bank business could be affected differently than overall market trends.
•The Federal Reserve ("FED") has announced its intention to increase the Federal
Funds Rate over future periods and began this process by increasing the FED
Funds Rate throughout 2022. As a result of the risk of continued inflation, it
is likely that interest rates across the spectrum will continue increasing from
the record low levels of recent years. These changes in policy are intended to
reduce inflation and are likely to also reduce economic activity possibly
leading to a recession. In the event the U.S. economy enters a period of
economic recession, during such period our investment banking revenues could be
depressed, fund raising for our investment management business could be impaired
with low or no incentive fee accruals and our balance sheet investments could
decrease in value. While our markets business might not be adversely affected by
an economic recession, our overall our results of operation could be negatively
affected during such period.
Our businesses, by their nature, do not produce predictable earnings. Our results in any period can be materially affected by conditions in global financial markets and economic conditions generally. We are also subject to various legal and regulatory actions that impact our business and financial results.
Recent Developments
OnAugust 2, 2022 , the Company, The Toronto-Dominion Bank, a Canadian chartered bank ("TD"), andCrimson Holdings Acquisition Co. , aDelaware corporation and an indirect wholly owned subsidiary of TD ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the merger as a wholly-owned subsidiary of TD. The Board of Directors of the Company determined that it is in the best interests of the Company and its stockholders to consummate the transactions provided for in the Merger Agreement and, in furtherance thereof, adopted the Merger Agreement and approved the transactions contemplated thereby (including the Merger), and resolved to submit the Merger Agreement to the holders of the Class A common stock of the Company for adoption and to recommend that the holders of Class A common stock of the Company adopt the Merger Agreement and approve the transactions contemplated thereby (including the Merger). Completion of the Merger is subject to customary closing conditions, including the adoption of the Merger Agreement and approval of the transactions contemplated thereby (including the Merger) by the affirmative vote of a majority of the vote by the holders of Class A common stock of the Company, and obtaining the Requisite Regulatory Approvals (as defined in the Merger Agreement) required to be obtained to consummate the transactions contemplated thereby (including the Merger) from the relevantU.S. , Canadian and foreign regulatory authorities. Upon completion of the Merger, TD will become the owner of all the Company's outstanding shares of Class A common stock, the Company will become a private company and the shares of Class A common stock of the Company will no longer be publicly listed or traded on the Nasdaq Global Market. Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time") each share of Class A common stock of the Company and each share of Class B common stock of the Company issued and outstanding immediately prior to the Effective Time, (other than Exception Shares (as defined in the Merger Agreement)) will be converted into the right to receive an amount in cash equal to$39 per share (representing approximately$1.3 billion in the aggregate), payable to the holder thereof, without interest.
Pursuant to rules adopted by the
Basis of Presentation
The unaudited condensed consolidated financial statements of the Company in this Form 10-Q are prepared in accordance with US GAAP as promulgated by theFinancial Accounting Standards Board ("FASB") through Accounting Standards Codification (the "Accounting Standards") as the source of authoritative accounting principles in the preparation of financial statements and include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest or a substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in the condensed consolidated financial statements, are not subject to these consolidation provisions with respect to their own investments pursuant to their specialized accounting. The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to US GAAP as described below (the "Consolidated Funds"). Consequently, the Company's condensed consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds which are not owned by the Company are reflected as redeemable and non-redeemable non-controlling interests in consolidated subsidiaries in the condensed consolidated financial statements appearing 68
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elsewhere in this Form 10-Q. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.
Expenses
The Company's expenses consist of compensation and benefits, insurance and reinsurance costs, general, administrative and other, and Consolidated Funds expenses.
•Compensation and Benefits. Compensation and benefits is comprised of salaries, benefits, discretionary cash bonuses and equity-based compensation. Annual incentive compensation is variable, and the amount paid is generally based on a combination of employees' performance, their contribution to their business segment, and the Company's performance. Generally, compensation and benefits comprise a significant portion of total expenses, with annual incentive compensation comprising a significant portion of total compensation and benefits expenses. •Insurance and Reinsurance claims, commissions and amortization of deferred acquisition costs. Insurance and reinsurance-related expenses reflect loss and claim reserves, acquisition costs and other expenses incurred with respect to our insurance and reinsurance operations. •Operating, General and Administrative. General, administrative and other expenses are primarily related to professional services, occupancy and equipment, business development expenses, communications, expenses associated with our reinsurance business and other miscellaneous expenses. These expenses may also include certain one-time charges and non-cash expenses. •Depreciation and Amortization. Depreciation and amortization is comprised of depreciation expense for tangible assets and the amortization of intangible assets. The depreciation of assets capitalized under finance leases is included in depreciation and amortization expenses as well.
•Consolidated Funds Expenses. The Company's condensed consolidated financial statements reflect the expenses of the Consolidated Funds and the portion attributable to other investors is allocated to a non-controlling interest.
Income Taxes
The taxable results of the Company's
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. Deferred tax liabilities that cannot be realized in a similar future time period and thus that cannot offset the Company's deferred tax assets are not taken into account when calculating the Company's net deferred tax assets.
Temporary Equity
Temporary equity consists of Redeemable 5.625% Series A cumulative perpetual
convertible preferred stock ("Series A Convertible Preferred Stock"). The
Company has irrevocably elected to cash settle $1,000.00 of each conversion of
any share of the Series A Convertible Preferred Stock. As the holders can
exercise the conversion option on their shares of Series A Convertible Preferred
Stock at any time and require cash payment upon conversion, the Company has
classified the Series A Convertible Preferred Stock preferred stock in temporary
equity.
Non-Redeemable Non-Controlling Interests
Non-controlling interests represent the pro rata share of the income or loss of
the non-wholly owned consolidated entities attributable to the other owners of
such entities. When non-controlling interest holders do not have redemption
features that can be exercised at the option of the holder currently or
contingent upon the occurrence of future events, their ownership has been
classified as a component of permanent equity. Ownership which has been
classified in permanent equity are non-controlling interests for which the
holder does not have the unilateral right to redeem its ownership interests.
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Investment Fund Performance and Assets Under Management
For the nine months endedSeptember 30, 2022 , the Company's activist and merger arbitrage strategy had negative results in a volatile market. The Company's healthcare royalty strategy is now making allocations from the strategy's fourth fund. The Company's healthcare investments strategy is now deploying capital from its fourth fund. Finally, our sustainable investing strategy continues to deploy capital, with four investments made as ofSeptember 30, 2022 . The liquidation of certain multi-strategy hedge funds advised by the Company also continues.
As of
Strategy Healthcare Investments Healthcare Royalties Activism Merger Arbitrage Sustainable Investments Other (a)
(dollars in millions)
AUM $1,135 $3,460 $6,891 $208 $1,259 $1,133
Team
Private Equity ü ü ü
Hedge Fund ü ü
Managed Account ü ü ü ü
UCITS ü
Other ü
(a) Other strategies include legacy funds and other private investment strategies.
The Company's
The Company invests a significant portion of its capital base to help drive results and facilitate the growth of the Op Co and Asset Co business segments. Within Op Co, management allocates capital to three primary investment categories: (i) broker-dealer capital and related trading strategies; (ii) liquid alternative trading strategies; and (iii) public and private healthcare strategies. Broker-dealer capital and related trading strategies include capital investments in the Company's broker-dealers as well as securities finance and special purpose acquisition company trading strategies to grow liquidity and returns within operating businesses. Much of the Company's public and private healthcare strategies and liquid alternative trading strategies portfolios are invested alongside the Company's investment management clients. The Company's liquid alternative trading strategies include merger arbitrage and activist fund strategies. In addition, from time to time, the Company makes investments in private capital raising transactions of its investment banking clients.
The Company allocates capital to Asset Co's private investments. Asset Co's
private investments include the Company's investment in Italian wireless
broadband provider
As ofSeptember 30, 2022 , the Company's invested capital amounted to a net value of$822.0 million (supporting a long market value of$949.1 million ), representing approximately 78% of Cowen's stockholders' equity presented in accordance with US GAAP. The table below presents the Company's invested equity capital by strategy and as a percentage of Cowen's stockholders' equity as ofSeptember 30, 2022 . The total net values presented in the table below do not tie to Cowen's condensed consolidated statement of financial condition as ofSeptember 30, 2022 because they represent only some of the line items in the accompanying condensed consolidated statement of financial condition. Strategy Net Value
% of Stockholders' Equity
(dollars in millions)
Op Co
Broker-dealer capital and related trading $ 628.0 59.6% Public and Private Healthcare 29.0 2.8% Liquid Alternative Trading 60.3 5.7% Other 13.8 1.3%Asset Co Private Investments 90.9 8.6% Total 822.0 78.0% Cowen Inc. Stockholders' Equity $ 1,053.3
The allocations shown in the table above will change over time.
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