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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Cowen Inc.    COWN


Real-time Estimate Quote. Real-time Estimate Cboe BZX - 01/25 03:56:09 pm
26.62 USD   -2.06%
07:30aKelly Weigel Joins Cowen's Management Committee
01/12Cowen Mourns the Passing of Director Jack H. Nusbaum
01/12Cowen to Hold Conference Call to Discuss Fourth Quarter 2020 Financial Results
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COWEN : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/29/2020 | 06:48am EST
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 ended December 31, 2019 (the "2019 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 of Cowen Inc. included elsewhere in this
quarterly report. Actual results may differ materially from those contained in
any forward-looking statements.

Cowen Inc., a Delaware 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, commission management services and
investment management through its two business segments: the Operating Company
("Op Co") and the Asset Company ("Asset Co").
Operating Company
The Op Co segment consists of four divisions: the Cowen Investment Management
("CIM") division, the Investment Banking division, the Markets division 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 the Cowen 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 the SEC 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 private healthcare investing, private sustainable investing,
healthcare royalties, activism and merger arbitrage. A portion of the Company's
capital is invested alongside the Company's investment management clients. The
Company has also invested some of its capital in its reinsurance businesses.
Op Co's investment banking businesses include investment banking, research,
sales and trading, prime brokerage, global clearing 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, information and
technology 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.
Asset Company
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
•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 the U.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. Commissions
associated with these transactions are also included herein. 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 customer's
trading volumes and on the notional value of the non-U.S. securities traded by
our customers.
•Investment performance. Our revenues from incentive income 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 incentive allocation
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,
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 expect 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

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capital formation by smaller companies. Therefore, our investment bank business
could be affected differently than overall market trends.
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
Recent Developments
The COVID-19 outbreak continues to cause significant disruption in business
activity both globally and in the United States. As a result of the spread of
COVID-19, economic uncertainties have arisen which may negatively impact our
businesses, financial condition, results of operations, cash flows, strategies
and prospects. The extent of the ultimate impact of COVID-19 on our operational
and financial performance will depend on certain developments, including the
duration and spread of the outbreak and impact on our clients, employees,
vendors and the markets in which we operate our businesses, all of which is
uncertain at this time and cannot be predicted.
Basis of Presentation
The unaudited condensed consolidated financial statements of the Company in this
Form 10-Q are prepared in accordance with Generally Accepted Accounting
Principles in the United States ("US GAAP") as promulgated by the Financial
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 nonredeemable
non-controlling interests in consolidated subsidiaries in the condensed
consolidated financial statements appearing elsewhere in this Form 10-Q. The
management fees and incentive income earned by the Company from these funds are
eliminated in consolidation.
The Company's expenses consist of compensation and benefits, 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
•Reinsurance claims, commissions and amortization of deferred acquisition costs.
Reinsurance-related expenses reflect loss and claim reserves, acquisition costs
and other expenses incurred with respect to our insurance and reinsurance
•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.
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Income Taxes
The taxable results of the Company's U.S. operations are subject to U.S.
federal, state and local taxation as a corporation. The Company is also subject
to foreign taxation on income it generates in certain countries.
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.
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 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
temporary equity. The remaining non-controlling interests have been classified
in permanent equity as the non-controlling interests are either not redeemable
at the option of the holder or the holder does not have the unilateral right to
redeem its ownership interests.
Investment Fund Performance and Assets Under Management
For the three months ended September 30, 2020, the performance of the Company's
activist strategy was modestly positive while the merger arbitrage investment
strategies (including the merger arbitrage-focused UCITS Fund) had, in the
aggregate, positive results. The Company's healthcare royalty strategy is now
making allocations from the strategy's fourth fund. Our private healthcare
strategy is now deploying capital from its third fund, having made fifteen
investments by the end of the three months ended September 30, 2020, with a
pipeline of opportunities ahead. Finally, our private sustainability strategy is
now deploying capital. The liquidation of certain multi-strategy hedge funds
advised by the Company also continues.
As of September 30, 2020, the Company had assets under management of $11.8
                            Private Healthcare
     Capability                Investments              Healthcare Royalties             Activism              Merger Arbitrage            Sustainability            Other (a)
                                                                                            (dollars in millions)
AUM                                $807$3,504$5,898$413$385$783
Private Equity                      ü                            ü                                                                               ü
Hedge Fund                                                                                  ü                         ü
Managed Account                                                  ü                          ü                         ü                          ü
UCITS                                                                                                                 ü
Other                                                                                                                                                                    ü

(a) Other capabilities include private equity funds, legacy funds, and other
trading strategies.
The Company's Invested Capital
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 Linkem, private equity funds Formation8 and Eclipse and
legacy real estate investments.

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As of September 30, 2020, the Company's invested capital amounted to a net value
of $911.8 million (supporting a long market value of $1,041.7 million),
representing approximately 100% 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 of
September 30, 2020. The total net values presented in the table below do not tie
to Cowen's condensed consolidated statement of financial condition as of
September 30, 2020 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  $                   624.4                            69%
   Public and Private Healthcare                                   62.1                             7%
   Liquid Alternative Trading                                      76.7                             8%
   Other                                                           20.9                             2%
Asset Co
   Private Investments                                            127.7                            14%

Total                                                             911.8                            100%
Cowen Inc. Stockholders' Equity               $                   911.2                            100%

The allocations shown in the table above will change over time.
Results of Operations
To provide comparative information of the Company's operating results for the
periods presented, a discussion of Economic Income (Loss) (which is a non-GAAP
measure) of our Op Co and Asset Co segments follows the discussion of our total
consolidated US GAAP results. Economic Income (Loss) reflects, on a consistent
basis for all periods presented in the Company's condensed consolidated
financial statements, income earned from the Company's investment funds and
managed accounts and from its own invested capital. Economic Income (Loss)
excludes certain adjustments required under US GAAP. See the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company-Segment Analysis and Economic Income (Loss)," and Note
22 to the accompanying Company's condensed consolidated financial statements,
appearing elsewhere in this Form 10-Q, for a reconciliation of Economic Income
(Loss) to US GAAP income (loss) before income taxes.



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Three Months Ended September 30, 2020 Compared with Three Months Ended

© Edgar Online, source Glimpses

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