Cowen Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good afternoon, ladies and gentlemen and thank you for joining Cowen Group Incorporated's Conference Call to discuss the Financial Results for the 2017 Third Quarter. By now, you should have received a copy of the company’s earnings release, which can be accessed at Cowen Group, Inc.’s 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, Inc. 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 those measures to GAAP is consistent with the company’s reconciliation as presented in today’s earnings release. Now, I would like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer.

[Peter Cohen:]

Thank you, operator and welcome everyone. Thank you for dialing in to our call. Special thanks to all our Cowen colleagues who are interested enough to dial into, thinking about their own company, anyway, good afternoon. With me today are Jeff Solomon, our President and Steve Lasota, our CFO. Cowen reported economic income of $8.3 million or $0.26 per diluted share for the third quarter compared to an economic income of $11 million or $0.41 per diluted share for the third quarter of 2016. Just as a reminder, economic income during last year's third quarter included a one-time gain of $17 million from the sale of our interest in the Alternative Solutions business of Cowen's Investment Management Division. Economic income revenue for the quarter was $183 million compared to $154 million in the third quarter of last year. Our third quarter results reflect the fact that we have established a broader and more diversified platform over the past few years which we've talked about. We experienced solid levels of activity across our operating businesses and consistent performance in our invested capital. Capital raising environment was favorable in our focused sectors and continued to be quite strong in areas such as healthcare. As we mentioned in our first and second quarter calls our M&A business is developing nicely. Many of the investments made last year and in the prior years are bearing fruit. In spite of challenging equity trading volumes at low levels of equity and credit volatility we achieved important progress in furthering the equities franchise in the first full quarter with the acquired businesses from Convergex. With Cowen’s broader and larger platform, we are focused as ever on driving profitability through scale and cost effectiveness. Over the last several years we have broadened our range of product and service offerings in certain areas while in other areas we focus on doing fewer things but doing them better. You will continue to see us invest and optimize our operating businesses and capital base. Some of our more recent moves are results of the Convergex acquisition. For example, in August we began for the first time clearing our own balance sheet which released us of external capital requirements and we now are in a position to redeploy that excess capital towards newer businesses such as securities lending and create recurring income through margin financing. We've also lowered our account to revenue ratio with the change in business mix volume to Convergex acquisition. Steve will talk a little more about this in detail later on. Along with that, higher non-comp expenses as a percent of revenue that is also a byproduct of Convergex merger. Our primary goals are to deliver solid operating results to our shareholders while insulating the organization from economic adversity and deliver consistent alpha generating capabilities to our clients. Now let me provide you an update on the Investment Management Division and assets under management were $10.4 billion as of October 1, which is a decline of $557 million from July 1. This decline though is primarily due to distributions in the healthcare royalties and real estate strategies from the maturing of investments not from redemptions. Our long/short equity strategy which invests primarily in the communications, technology, media and consumer sectors has had positive performance in the quarter year-to-date and since inception. This strategy is gaining traction on the Morgan Stanley and Merrill Lynch distribution platforms and while long/short equity space has been very competitive investors and prospects remain actively interested in what we're doing. Merger arbitrage performance was slightly negative in the quarter although it is up strongly year-to-date. Year-to-date the strategy has outperformed the HFRI merger index by 390 basis points. Assets have been stable in the U.S. and we have seen encouraging inflows into the usage [ph] product in Europe which greatly expanded the strategies global footprint. [Indiscernible] had a had a productive quarter as it prepares for its final close through the fixed debt fund offering before year-end and expects to begin marketing two new equity vehicles this quarter. The healthcare royalty business has committed approximately 55% of fund [ph] and to date has returned 67% of called capital primarily driven by several large exits in the third quarter. The pipeline for our healthcare royalty investments remains robust with approximately $600 million of potential transactions under consideration as of today. We are continuing to focus the investment management platform on its essential strategies of growth potential and to position ourselves to explore new capabilities in 2018 that meets the growth and risk criteria that we've set for ourselves. And to that end we plan to launch a private healthcare strategy fund in the fourth quarter with external investors. This is a strategy that we have been incubating over the last five years with our own capital and a partner. The strategy makes mid to late stage investments in innovative private biopharmaco and healthcare companies which capitalizes on Cowan's well-regarded healthcare franchise. Our target is to raise $200 million and we believe we will be able to do that. Importantly we've also continued to pare back on strategy that have not shown an ability to scale such as the consumer focused long/short equity strategy. In September we announced a very important hire in the form of Elizabeth Flisser Rosman as Head of Strategy. Elizabeth has extensive experience sourcing, seeding and incubating alternative investment managers since 1999. She will work with our senior team on platform expansion. Moving to the investment performance on our capital for the quarter we generated $15.9 million in investment income compared to $19.7 million in the year ago period. Contributions by strategy were generally positive across the board. Before I turn the call over to Jeff, as always I would like to thank our colleagues for their hard work and contribution to the organization and to the success that we achieved in the quarter.

[Jeff Solomon:]

Thanks peter. The investment banking and broker divisions both contributed to a solid quarter demonstrating improved product and industry diversification. In investment banking the overall environment for new issuance was positive in spite of the new trading volume during the summer months and a market pullback in mid August. The market recovered quickly sending stocks higher for the quarter. Industry wide equity proceeds in the U.S. for IPOs and follow-ons in our core sectors were about $23 billion and this is up 27% from the prior year period but down 13% from the second quarter of the year. There were 121 transactions completed across our core sectors compared to 115 in the prior year period and our 141 in the second quarter of 2017. The year-over-year increase was primarily driven by greater follow-on activity and the quarter-over-quarter decline was primarily due to a decline in IPO activity. At Cowan we broadly follow these trends. We performed well in our areas of additional strength such as healthcare and equity capital markets. We also saw continued momentum in other areas such as M&A. Some of the highlights from the quarter included the fact that we completed two equity transactions totaling $4.5 million in fees in the med tech space as we look to translate our success in biotech and other areas of healthcare. We were a book runner for a follow-on in the transportation sector, our first book on transaction in that sector in many years. We had another strong tech M&A quarter which included a multimillion dollar fee from a buy side contract and we closed on our first consumer M&A transactions since 2014. We also launched the leveraged finance business and we believe will be able to further advance our banking franchise into 2018. In equity capital markets we benefited from a favorable new issuance calendar. Our ECM revenue rose 77% year-over-year which is well in excess of the 27% year-over-year increase in total fee generated in our core sectors. We participated in 24 transactions compared with 22 in the prior year period and notably our average equity underwriting fee rose 64% to $1.8 million versus $1.1 million in the prior year period primarily due to transaction sizes and a greater number of book run transactions. Our M&A advisory business had its best quarter in years as we converted our strong backlog as I mentioned earlier in the year. The areas where we made investments in personnel in recent years such as technology, consumer, industrials, and financial sponsors are beginning to gain momentum and we expect to continue recruiting talent in the industries where we are seeing that momentum as we look to build upon the recent momentum we've been experiencing. So far in the current quarter and the fourth quarter we've actually closed on two transactions already including acting as a financial advisor for the acquisition of [indiscernible] which puts us on track for another significant quarter for M&A and a record quarter overall for M&A. The financial advisor fee in connection with the acquisition of [indiscernible] represented our single largest M&A fee since 2009 and it was a result of significant work done by both our capital markets and several banking sectors. Our M&A backlog remained strong as we've being replacing closed mandates with new mandates across industries. We do however expected a certain amount of our cross-border transactions in an advisory sense will take longer to clear [indiscernible] and so some of them will slip into 2018 as that process has been a slow one. Turning to our brokerage business included a first full quarter of contribution from the businesses acquired from Convergex and have produced record revenue and year-over-year growth of 75%. We are quite pleased to see the migration of client revenues to the combined platform is on budget validating our assertion that the legacy Convergex account businesses are quite are quite complementary. Total brokerage revenue averaged $1.5 million per trading day which is in line with our budget and compared to 805,000 per trading day in the year ago period. For purposes in this call and going forward we will broadly describe the individual units within the brokerage business as institutional brokerage and institutional services. Institutional brokerage includes cash equities, special situations, electronic trading options, convertibles and credit and institutional services includes prime services, global clearing, securities finance, and commission management services. Our institutional brokerage business was up 54% year-over-year. In spite of a generally low-volume environment we're seeing the benefits of the scaled equities platform and have received positive feedback from a number of clients on the combination with Convergex. In particular we feel extremely well positioned for life in an unbundled MiFID II world as we continue to demonstrate excellence in both research and non-comp agency execution. More on that specifically in a moment. The institutional services businesses rose 189% year-over-year and that growth reflects the diversification of the business that Peter talked about earlier on. The prior year period included only prime services. With Convergex we've added several new business lines including clearing, commission management, as well as Convergex's prime services business. We are making steady progress for the integration of those businesses and continue to expect the acquisition to be accretive to earnings in 2017. We are executing the integration in phases which will allow us to realize synergies in technology operations and corporate as well as scaling new business lines and this I will report before we begin the idea of cross-selling. Earlier this month we did announce the completion of the integration of Cowen and Convergex prime brokerage businesses under one umbrella. Finally, we've been preparing for the upcoming implementation of MiFID II and I want to spend a few moments on that given the fact that so many shareholders and so many constituents in Cowen have asked. First in Cowen we've been preparing for MiFID II for years and while no one knows exactly how all the regulations will play out we have positioned ourselves to take advantage of weaker players who have not prepared and we do think there will be some shakeout. The buy side has been consolidating their commissions for years toward those research providers that add the most value to their process and in that regard MiFID II is simply an extension of that trend through regulation. The winners in this world will continue to be those firms that provide differentiated capabilities in both research and trade execution. We have made a conscious choice to make significant improvements and are both standing in research because the great emphasis we have placed on providing sophisticated research and the alignment of the firm's efforts towards those clients that find value in what we do. And heading into 2018 we believe that we will be a major beneficiary of the reallocation of those commission dollars given our differentiated equities platform which offers both that strong research capabilities as well as sophisticated non-research agency execution at scale. We've also developed a MiFID II payment model to reflect each client's historical and anticipated needs and then we are sharing an understanding of that value as we have discussions with each individual client who is going through that transformation. With the addition of Westminster Research Associates which is a part of the Convergex acquisition we have a MiFID II implementation plan and a full service research payment account administrative solution which we think will be a value added proposition for our clients in Europe. I will now turn the call over to Steve Lasota who will review our financials.

[Steve Lasota:]

Thank you, Jeff. In the third quarter of 2017 we reported GAAP net income attributable to common shareholders of $3 million or $0.09 per diluted common share compared to a GAAP net loss attributable to common shareholders of $4.9 million or a loss of $0.18 per diluted common share in the prior year period. Third quarter of 2017 GAAP revenue was $178.8 million. Compensation and benefit expense was $103.3 million. Non-comp expenses excluding interest expense, depreciation and amortization and restructuring costs were $70.5 million. Net gain on investments and net gain from consolidated funds were $27.6 million. Income tax expense was $2.3 million and income attributable to non-controlling interest of $5.2 million. In addition to our GAAP results management utilizes non-GAAP financial measures which we refer to as economic income. Management uses economic income to measure our performance and to make certain operating decisions. In general, economic income is a pre-income tax measure that excludes the impact of accounting rules that require us to consolidate certain of our funds, certain other acquisition related adjustments and reorganization expenses, goodwill and intangible impairment and preferred stock dividends. The remainder of my comments will be based on these non-GAAP financial measures. In the third quarter of 2017 the company reported economic income of $8.3 million or $0.26 per diluted share. This compares to economic income of $11 million or $0.41 per diluted share in the prior year period. Third quarter 2017 economic income revenue was $182.6 million compared to $153.5 million in the prior year period. Investment banking revenue was $57.4 million compared to $36.7 million in the third quarter of 2016. Quarterly brokerage revenue increased 75% year-over-year to $90 million. Management fees were $13.8 million compared to $16.5 million in the prior year period. Incentive income was $4.6 million compared to $11.8 million in the prior area period. Investment income was $15.9 million compared to $19.7 million in the prior year period and other revenue was $939,000 compared to $17.2 million in the prior year period which included a $17 million gain associated with the sale of our interest in the Alternative Solutions business of Cowen's Investment Management Division. Compensation and benefits expense for the quarter was 56% of economic income revenue compared to 61% in the prior year period. As a result of the acquisition of Convergex a compensation to economic income revenue was lower than prior year levels. We expect this to be the case for the next few quarters given the shift in our business mix with the Convergex acquisition. Variable non-compensation expenses in the third quarter 2017 were $32 million compared to $14.8 million in the prior year period. This increase is primarily related to higher floor brokerage and trade execution costs related to the acquisition of Convergex and again for the next few quarters we expect our variable cost as a percentage of revenue to be greater than prior year levels due to certain acquired businesses and Convergex which have higher variable costs. Fixed non-comp expenses excluding depreciation and amortization totaled $33 million in the third quarter of 2017 compared to $25.3 million in the prior year period. And again for the next few quarters we expect our fixed costs as a percentage of revenue to be greater than prior year levels. And as Jeff discussed we are focused on the integration of Convergex and realizing synergies in areas such as technology, operations and corporate. Depreciation and amortization expenses were $3.1 million in the quarter compared to $2.7 million in the third quarter of 2016. This increase is related to an increase in amortization of intangible assets related to Convergex. Reimbursement from affiliates was $0.6 million in the quarter and is unchanged from the prior year period. Reimbursements from affiliates is a fixed charge and we expect it to remain at this quarterly level for the balance of the year. GAAP shareholders' equity increased by $71 million to $844 million at September 30, 2017 from $773 million at 12/31/2016. Common equity which is shareholders' equity stockholders less the preferred stock was $742 million compared to $671 million at 12/31/2016. Book value per share which is common equity divided by shares outstanding was $23.87 per share compared to $25.11 at 12,13,16. Tangible book purchase which is common equity less goodwill and intangible assets was $20.19 per share compared to $21.88 at 12 1 16. Invested capital with $691 million as of September 30 versus $657 million at 12/31/2016. Tangible book per share which is common equity, less goodwill and intangible assets was $20.90 per share compared to $21.88 at 12/31/2016. Invested capital was $691 million as of September 30 versus $657 million at 12/31/2016. I'll now turn the call back over to Jeff for closing remarks.

[Jeff Solomon:]

Thanks Steve. As you can see from our third quarter results we are continuing to transform the organization to bring greater to the platform. The investment management businesses is cross pollinating the expertise of talent to create new products and refocus itself for essential strategies that we believe will be successful on our platform. By scaling the equity franchise with the Convergex acquisition we made significant progress towards mitigating the quarter-to-quarter variability and here and some of our other revenue lines. And with the investments made last year and prior years investment bank is making great strides in improving its revenue diversification as well. As we have previously disclosed the completion of the transactions contemplated by the agreements we entered into with CST China is subject to certain approval from the Committee on Foreign Investment in the U.S. and certain other customer regulatory approvals and closing additions. We continue to work on obtaining the required approvals and satisfying those closing additions. But as you can see we are continuing to scale our business but not with the capital from CEFC. The progress we are making is not at all dependent on the completion of the transaction with CEFC. With approximately $1billion in total capital today we are fortunate to have the flexibility to make strategic investments and nurture new businesses to fuel our future growth. Our near term priority is to complete the integration of Convergex are there are significant opportunities to drive margin expansion through cost reduction and revenue synergies. Before we open the call to questions I just also want to thank everyone at Cowen for everything you do in making a difference at Cowen every day. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Devin Ryan of JMP Securities. Your line is open.

[Devin Ryan:]

Great. Good afternoon guys. How are you?

[Peter Cohen:]

Hi, Devin.

[Jeff Solomon:]

Hi Devin.

[Devin Ryan:]

Maybe just first one here on the investment bank I'm just looking at ECM results year-to-date and clearly revenues are much stronger than last year I think up 80% year-over-year. Last year was kind of a low bar. So just trying to kind of get some perspective around how you would frame this equity underwriting backdrop right now. I mean is this kind of we've reverted to normal or is there still room to go to the it feels like that the broader markets are functioning obviously but it’s still feels like maybe there's some pent up issuance to come through. So, I'm just curious how you guys would frame that and the potential from here after kind of a good snap back?

[Peter Cohen:]

Yes, so I would say, I mean we tend to focus on the sectors where we think there's actually ECM to do which is healthcare, I mean we tend to focus on healthcare because one thing about those companies is almost regardless of the market environment they need to raise money and so there's and we're really good at that sector as we've noted in the past. And I think what we're seeing is the continued approval of new drugs, continued funding of new drugs, the continued growth. And now every time there is an acquisition in this sector like we saw with Kite Pharma which we advised on this quarter those CEO's go off to start new companies and raise more money and so they're I believe that what we're seeing here in that sector is an extended, is an extension of a trend that began six or seven years ago with an equity as in FDA a good regulatory environment. The science finally maturing in capital markets that understand how to price these. 2016 was largely the overhang was largely from due to drug pricing and there I think that debate continues to raise but it's less impactful as investors think that's going to be a harder thing to really implement and so that sector is so much of our ECM business that I almost I don't look at the challenges in the tech sector per se as having a deep impact on us because those deals tend to be much larger and they tend to be trying to rationalize price between unicorns and with the public market will pay for it. And while we're involved in some of those discussions we can't make that a central part of our business model because really we have no ability to effect to a rationalization of private market valuations and public market valuation. So, I still think that for what we do in ECM we are extremely well positioned and we continue to look at other things. For example like stock issuance and a bunch of other areas where we can compete head-to-head and do a really good job and taking market share. And so that's why I continue to remain bullish. The backlog looks as strong as it ever has and we continue to think things are going well.

[Devin Ryan:]

Okay, good to hear. May be one on just the outlook for incentive fees it sounds like royalty partners and realization activity has picked up there. And I know there are some kind of. unrealized to feed. I haven't moved to the P&L yet tied to that fund. So just curious how we should think about modelling incentive fees and if there's a pickup in realizations or should we be thinking about it of that way?

[Peter Cohen:]

Well, I think that the, in those funds they're private equity style funds, so if you talked about it those performance fees get hung up in the last few investments you have in those portfolios. So, I know the team is working feverishly on monetizing those. I don't have a strong insight as to when that's going to occur and of course we figured that when we start talking about this a few years ago we think that those will be rolling off more quickly. They have just taking time to mature and so we're not really giving sort of future guidance on that. We know they are there. Those have been there for a while and when we realize those final investments in those funds they will roll in the income.

[Devin Ryan:]

Okay, got it. Yes that’s helpful. I'm just trying to figure out if it's imminent or little more drawn out but it sounds like probably still...

[Peter Cohen:]

While I can tell you that the team working everybody's got economic alignment around making that happen sooner rather than later. But sometimes these are early stage companies in some instances it just takes longer for those realizations to occur and everybody's laser focused on it. I just I'm more cautious about throwing a timeframe because I just don't have insight there.

[Devin Ryan:]

Yes, okay fair enough. Maybe you want to just talk on Convergex integration it sounds like thus far things have been going pretty much on plan. You are obviously talking about some of the additional revenue opportunities and kind of expense opportunities above and beyond maybe what was initially targeted. How should we think about kind of framing those, is there any way to - orders of magnitude of where revenues where what's the biggest and kind of a sense of the size and same thing on the expense side, but how big those could be just trying to also think about this from a remodelling perspective?

[Steve Lasota:]

So what we've try to do is in this quarter Dev for the first time is really give you daily run rate numbers. So it will give you a sense as to the magnitude of the business relative to what the magnitude of business was prior to the acquisition. And what I will say is that I know really challenged July and August and I can’t stress enough how dead the market really was in terms of volumes in July and August. We did the numbers that we thought we would be seeing in January of next year. So, we certainly budgeted for an attrition of some sort a small amount. And what I’ll say is, clients are trading with us and not choosing not to trade with us and I think in a low volume environment if I want to look at the positive attributes of this in a low volume environment where people are choosing their counterparties extremely carefully like where they want to trade our budgeted numbers for this quarter are tracking to where we had hoped to be budgeting or hoped to be tracking in January after seven months of acquisition. So I feel like we're in a low and difficult environment we are actually tracking to a better number than we anticipated which is a super positive thing. In terms of incremental costs I think we've taken out a significant amount of compensation costs just prior to the closing or just after the closing of the transaction. What we're going to be looking to do is really try and drive down more of the duplicate costs of running parallel technology platforms. Orders of magnitude will be in the millions no question. I think we want to run in parallel. We're doing and there's still some systems that they're running at Convergex that were a little old, a little home grown and we have other systems we want to consolidate them on and we want to run them in parallel. So I think our goal is to realize several million dollars more in cost savings as we head into a run rate basis in 2018 and of course we're going to be working hard to try and reduce our variable transaction costs and I just want to spend two seconds on that as Steve highlighted. The big change in the model that you should be thinking about is that because of the clearing business, the international business and the ADR business those are high variable costs businesses. Good news and bad news, the good news is if those businesses slowdown the cost base of Cowen is much more variable in nature. That is if they are much higher variable costs associated with that business. The competition cost associated with that business are lower and so the mix of its meaningful enough for us that a change the way you should be building your model to look a lot more like what this quarter looks like in terms of revenue comp and non-comp expenses. We will go to - we're hard at work trying to figure out to how reduce our cost of clearing and I think Peter mentioned a number of ways where we can begin to internalize some of our own balance sheet to be more efficient, reduce some cost, reduce borrowing costs and those I think will as we head into 2018 we’re budgeting a couple million dollars in savings there as well. So, there's more to go and as it starts to unfold over the next few quarters will be a lot more transparent with those.

[Devin Ryan:]

Good, that’s great. Jeff, thanks for all the color and thanks guys for taking.

[Peter Cohen:]

Thanks Devin.

[Operator:]

Thank you and our next question comes from the line of Steven Chubak of Nomura Instinet. Your line is open.

[Sharon Leung:]

Hi guys this is actually Sharon Leung filling in for Steven. The first question kind of as a piggyback off of the Convergex expense question, you noted previously that you have planned to consolidate some of your broker dealers which needed approval from [indiscernible]. Could you give us an update of what's the timeline we're looking at or if you've already received that approval?

[Peter Cohen:]

Sure the approval - we have approval already to combine the two prime brokerage businesses which we are in the process of doing. We still need approval from there. We need approval to do some more combinations, but we're still waiting for that.

[Steve Lasota:]

We do, we expect it should happen in the next quarter or maybe at the beginning of the year, but I think our expectation and we budget is that it would be a good 180 to 270 days. Again it should allow us to consolidate so if it doesn’t happen in the fourth quarter it will happen early in the first quarter of next year and you'll begin to see the benefits of that consolidation in our 2018 numbers.

[Sharon Leung:]

Okay and then a quick one on your capital management priorities especially if you get the CTS [ph] approvals for the CEFC deal, can you just talk about your priorities between maybe pursuing some organic growth opportunities versus may be pursuing additional buyback?

[Peter Cohen:]

This is Peter. I think if we get CTS [ph] approval at the earliest, the transaction could conceivably close would be late this year and maybe more likely early next year. They were inundated in Washington is very slow. But assuming it does close I think that we're going to take the capital and really use it for organic growth internally. More than we’re thinking about buyback. Obviously we're always looking at sort of our investment opportunities versus our liquidity versus the price of our stock. So, I wouldn't say that we're not going to buy stock back, but it's not a priority when we have the opportunities like the Convergex surfaces and we have to write fairly significant check having that liquidity enabled us to do that. And I think you see a little bit of the evidence in the third quarter of the effect of Convergex just in our equity business. As Jeff has mentioned as we integrate more and more to get more of the cost savings out the benefit of Convergex can be substantial. So I'm not giving you a very exact answer, but that’s that kind of the best I can do right now.

[Steve Lasota:]

Sharon you saw the investments we made in personnel organically last year investment banking in a down year and certainly we're reaping the benefits for that. This year we do have an objective year to increase our M&A and our leverage finance businesses. Will that require significant capital? No, but we're going to be investing in humans and I think again the knowledge of balance sheet is a critical linchpin and people coming on to the platform and so, we will be doing things to grow the business. But as Peter said if it becomes super compelling for us to buy back stock relative to book value and we're not averse to doing that. We will be making those decisions as things unfold for us post the CEFC investment.

[Sharon Leung:]

Got it. And then one final one, could you just give us a quick progress report as to how you're, the build out of the sec lending businesses just playing out?

[Peter Cohen:]

Without being specific we are more than pleased with what's been achieved to date. It's off to a way better than expected start in terms of size and spread. So it's all good news. Well anything to share.

[Sharon Leung:]

All right...

[Peter Cohen:]

Well, what were you going to say Sharon?

[Sharon Leung:]

No, I was just going to say that was all my questions, but if you're going to keep answering...

[Steve Lasota:]

No what I'm just saying is I think, one of these is a point to and I think in our numbers if you take a look at the balance sheet, and that's a pretty obvious spot, but you can see the growth in the maths books from securities lending and you can see the increase in interest and dividends. And that, well but there's other stuff going on in there, that's a pretty good way to take a look at just spreads that we're getting in that business. And I think as we've said our balance sheet has been an under levered balance sheet for a long time because we're super conservative about the way that we run our business and so this is a very conservative way for us to bring leverage into the balance sheet with positive net interest margin and so that you’re going to start to see as you, this will be the first quarter which you can feel it a little bit and that will be a great way to track and see how it’s going.

[Sharon Leung:]

Thanks so much.

[Peter Cohen:]

You’re ramping during the quarter, our run rate is better than what’s reflected in the quarter’s numbers obviously.

[Operator:]

Thank you. [Operator Instructions] And the next question comes from the line of Nick Brown of Zazove Associates. Your line is open.

[Nick Brown:]

Thanks very much. Just one question about your economic income by business segment and you provide a lot of detail obviously in the press release on the revenue by segment, but it's when I look and see that the actual economic income declined by about $3 million sequentially from Q2 to Q3, but that's because of higher margin investment banking and incentive income in the quarter relative to Q2 or is it something else going on there?

[Peter Cohen:]

Yes, no that's pretty much yes.

[Nick Brown:]

Okay, thank you very much.

[Operator:]

Thank you. And at this time I’m showing no further questions. I'd like to turn the conference back over to management for any closing remarks.

[Peter Cohen:]

Well, I'd just again like to thank everybody for dialling in, thank again all of our colleagues at Cowen just as for everything they do every day. We're super optimistic about kind of where the firm is right now and all the things we've done over the years. It seems like everything takes a little bit longer now than it used to. I was in this business a long time ago. But nevertheless we're going to look into the same place. So we're very upbeat, very positive and look forward to being able to report favourably to you in the future.

[Steve Lasota:]

Thanks everybody.

[Operator:]

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everybody have a great day.