Cowen Inc.
Q4 2014 Earnings Call Transcript

Published: 27 Feb 2015

[Operator:]

Good morning, ladies and gentlemen, and thank you for joining Cowen Group, Incorporated's conference call to discuss the financial results for the 2014 fourth quarter and full year. By now, you should have received a copy of the company's earnings release, which can be accessed at Cowen Group, Incorporated'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 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. For 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 like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer.

[Peter Anthony Cohen:]

Thanks, operator. Good morning, everyone, and welcome to Cowen's fourth quarter and full year earnings call. With me are Jeff Solomon, President of Cowen Group; and Steve Lasota, our CFO; and other people who are involved in the day-to-day running of the firm. The last 5 years have been pretty challenging for us, 5 years since we completed the Ramius Cowen merger. And as we have talked about, we had a lot of work to do to get everything right-sized and going in the right direction. And we made significant investment in that business as well as the Ramius business, which we completely recrafted also. But that's now behind us, and I think that the fourth quarter results and full year results reflect that, in spite of the challenging macro environment, we've been able to cut a path of sustainable growth with profitability. This morning, Cowen reported record revenue and economic income for 2014. It also marks the second straight year of consecutive positive economic income. Our revenue -- economic revenue for the year was $498 million, a 45% increase from last year's number. And that was all organic growth. Both of our business segments, Ramius and Cowen, showed positive year-over-year top line growth and year-over-year bottom line growth, continuing the momentum that's been building in recent years. Our economic income was $44 million, or $0.37 per diluted share. Also, as we had referenced in the past, our deferred tax valuation was released in the fourth quarter of '14, which resulted in a deferred tax benefit of $128.1 million. This puts our book value at $6.07 as of December 31, 2014, and Steve will walk you through the financials with a little more detail later. Our results were achieved by focusing our resources and delivering revenue opportunities derived from our core mission at Cowen, helping clients outperform. At Ramius, this means providing clients with access to differentiated alpha-generating alternative investment strategies, products and services. And over the past few years, our efforts to broaden our asset management platform has included adding a few new investment capabilities and expanding our suite of products around our existing capabilities, resulting in substantial growth in assets under management. At Cowen and Company, we focus on providing active portfolio managers with impactful equity research, nonconflicted-trading capabilities in high-quality capital market transactions and delivering to our investment banking clients what we believe is differentiated financing advice execution advisory services. To that end, we have enhanced our platform in banking, research and sales and trading by adding depth and scale across all of the segments of our business, which resulted in the record revenue and market share gains that are evidenced by our 2014 results. As we transform the organization capacity, we made sure we did so while being very efficient in managing costs and improving the operating disciplines within each of our business -- businesses. This enables us to make better decisions about the businesses we are in and identify opportunities for growth. Again, Steve will talk about the noncomp expenses and comp expenses in a few minutes, and you'll see sort of the discipline play out in the numbers. And even as we are experiencing positive operating results from these efforts, we remain well-positioned to capture increased market share in all of our businesses while maintaining the operating leverage that we have in our cost structure today. We have $678 million in equity capital, which is the strongest equity position we've been in yet. If you add our long-term debt, we have close to $900 million of capital resources available to invest in and grow the business. And I think it makes us probably, on a per capita basis, one of the best, if not best, capitalized firms in the business. That gives us tremendous flexibility to take advantage of opportunity. We've been running hard all year. But I wanted to take this opportunity to acknowledge and thank all of the people of Cowen, who really sort of contributed to these super results. They really did a tremendous job. We got a great culture, a great team of people, and it's a real pleasure for me and I know for a lot of other people to come to work everyday because it's exciting every single day. And finally, I'm very proud to announce John Holmes -- many of you don't know, but he's been with us for 9 years, promoted to Chief Operating Officer from Chief Administrative Officer and has done expense control and the sort of leveraging of our IT capabilities that John has been able to supply, which has helped provide the operating leverage that we've got. And I'll turn the call now over to Jeff to talk about the individual businesses, and then I'll be back to answer questions.

[Jeffrey Marc Solomon:]

Thanks, Peter. Let me begin with a review of Ramius, which had a very successful 2014. Assets under management as of December 31, stood at $12.5 billion, up $3.1 billion in the year, which includes $2.4 billion of net inflows across almost all of our strategies. We experienced strong interest in our products as our core business expanded assets under management. We also launched or enhanced 5 new products and 1 new capability. Assets under management growth was driven by our diverse range of investment capabilities, including our activist, healthcare royalties, alternative solutions, real estate, event-driven managed features and global macro products. Our unique alpha capabilities are resonating with clients. It is difficult to find capabilities that are differentiated and institutional-quality with long-term track records. So when our products are out -- open to receiving increased capital, we continue to see strong interest. For example, our alternative solutions business ended the year with $3.8 billion in AUM, up almost $850 million from the start of the year. As an advisory-driven business, we experienced particular success in winning large mandates. AUM across our hedged fund strategies was $4.2 billion, up $1 billion during the year. Our -- the largest of our hedge fund strategies, our activist product, not only had strong performance in 2014 but has had consistently strong performance for over 1 decade. Healthcore -- healthcare royalties assets under management stood at $2.6 billion at the end of the year and raised $1.1 billion during the year. Healthcare royalties enjoyed scarcity value as it is a unique asset class with a limited number of players. And finally, our real estate strategies had $1.7 billion in AUMs on December 31. Management fees continued to grow both in the quarter and the year. Management fee run rate, or the progression of our average monthly management fees, grew 31% to $6.1 million in the fourth quarter of 2014 from $4.6 million per month in the fourth quarter of 2013. While we don't manage the business to this metric, our average management fee in the fourth quarter was 59 basis points, unchanged over the prior year quarter. For the year, it was 55 basis points. Importantly, the average management fee calculation includes the growth in committed but uninvested capital and some of our newly raised funds. Incentive fees more than doubled in the year, which primarily reflects the performance of our activist fund in the fourth quarter and for the year. In 2015, we intend to opportunistically onboard emerging teams as we did with Quadratic Capital in the fourth quarter. We are also seeking partnerships with mature alternative businesses who can work with us to develop new products and capabilities. The impact of these new ventures will be de minimis as they scale but will serve as an important driver of growth in the years to come. Now turning to Cowen and Company. We produced our strongest years since the Cowen/Ramius business combination in 2009, driven by both our investment banking and brokerage divisions. It was a record year for IPOs in the United States, with 263 companies making their debut, surpassing the previous year's record. But in growth sectors we cover in banking capital markets there were 194 IPOs and 397 follow-on offerings. As one of the top underwriters in the growth sectors like Health Care, Cowen was and continues to be favorably positioned to actively participate in the strong new issue calendar. 2014 was the strongest year for our ATM business and the fourth quarter 2014 was one of the best revenue quarters of the year. Our life sciences underwriting was particularly robust. But we also saw a growing contribution from our technology, media and telecommunications vertical. We closed on a total of 129 equity underwriting transactions in the year, up from 78 in 2013. And our average fee per transaction increased 15% year-over-year. In Debt Capital Markets, we closed on 16 transactions in 2014. Our strategic advisory business also strengthened modestly during the year, closing 12 transactions in 2014, reflecting our ongoing efforts to strengthen our capabilities in this area as well. Our equity business had a strong year, despite a shrinking wallet for U.S. commission dollars. We continue to see customers consolidating their business to their top brokers and we have emerged as one of them in our designated areas of expertise. We've been in deep commitment to high-quality research. With an expanded research platform, we are providing customers with not just more content but with content that actually adds value. Today, we cover over 800 stocks, up from 400 two years ago, making us one of the largest providers of equity research in the United States outside of the bulge-bracket firms. We have also added a variety of product enhancements and have several initiatives underway to ensure that we are in a better position to monetize our capabilities across the entire platform. According to the latest market research data, we rank among our Focus 150 accounts, we ranked extremely high and have improved several spots in just 1 year. I will now turn the call over to Steve Lasota, who will review our financials. Steve?

[Stephen A. Lasota:]

Thank you, Jeff. In the fourth quarter of 2014, we reported GAAP net income of $142.5 million, or $1.21 per diluted common share compared to GAAP net income of $2.5 million, or $0.02 per diluted common share in the prior year period. For the full year of 2014, we reported GAAP net income of $167.2 million, or $1.40 per diluted common share compared to GAAP net income of $4.6 million, or $0.04 per diluted common share on the prior year period. GAAP net income includes the release of the company's deferred tax valuation allowance, which happened in the fourth quarter of 2014. I will provide more information on this in the tax section. In addition to our GAAP results, management utilizes non-GAAP financial 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 accounting rules that require us to consolidate certain of our funds, certain other acquisition-related expenses, reorganization expenses and taxes and goodwill and intangible impairment. The remainder of my comments will be based on these non-GAAP financial measures. In the fourth quarter of '14, the company reported economic income of $18.9 million, or $0.16 per diluted share. This compares to economic income of $2.7 million, or $0.02 per diluted share in the prior year period. Fourth quarter '14 economic income revenues were $165.8 million, compared to $96.5 million in the prior year period. Fourth quarter of fixed noncomps rose $5.9 million year-over-year to $26.6 million. Variable non-comp expenses were $12.5 million, compared to $9.8 million in the prior year quarter. Moving to our full year 2014 results. The company reported economic income of $44.2 million, or $0.37 per diluted share. This compares to economic income of $6.5 million, or $0.05 per diluted share in '13. Economic income revenue was $497.6 million, compared to $343.8 million in the prior year period. Investment banking revenue was $170.5 million, up 62% year-over-year, compared to $105.3 million in the prior year. Brokerage revenue rose 21% year-over-year to $146.2 million. Management fees were $64.8 million versus $57 million in the prior year. Incentive income was $45.7 million, compared to $21.2 million in the prior year. And we generated $65.2 million in investment income, compared to $36.7 million in the prior year. Comp and benefits expense for the year was 61% of economic income revenue, compared to 60% in the prior year. Non-comp expenses increased 13% year-over-year, mostly from increases in variable non-comp expenses, which were up 22% year-over-year to $45.7 million. This increase in variable non-comps is primarily related to syndication costs related to a capital raise by an alternative investment asset fund and increased firm-wide marketing activity. Fixed non-comp expenses were up 9% year-over-year to $95.5 million. This increase was primarily due to higher professional fees related to debt issuances during the first and fourth quarter of 2014 and an increase in cost from equity method investments. While economic income is a pretax measure, I would like to briefly touch on our tax situation. After the acquisition of LaBranche, Cowen had significant net operating losses, or NOLs, to use the carryforward into the future of $321 million. Due to recent positive operating results and with our fourth quarter of 2014 results, we are now in a 3-year cumulative income position. As a result of this and other positive factors, we released $128.1 million of the $137 million valuation allowance. We previously had 100% valuation allowance to $137 million against our net DTA. The release of the deferred tax valuation allowance was the primary reason for an increase in our income tax benefit and is reflected in our GAAP net income. Accordingly, stockholders equity increased by $170 million in the year to $678 million, and book value per share is $6.07 at year end. Tangible book value per share, which includes the deferred tax asset, was $5.68. Invested capital is -- stands at $665 million as of December 31. Finally, moving to our share repurchase program. In the fourth quarter, we repurchased approximately 2 million shares in the open market and 9000 shares as the result of net share settlement related to the vesting of equity awards at an average price of $4.38 per share and a total cost of $8.8 million. For the year, we repurchased approximately 6.3 million shares in the open market and 1.4 million shares as a result of net share settlement related to the vesting of equity awards at an average price of $4.15 per share and a total cost of $31.7 million. As of December 31, $10.3 million remained available under our share repurchase program. Since we announced our original repurchase program in July 2011, we have repurchased 17.6 million shares in the open market and an additional 5.4 million shares as a result of net share settlement. The total cost of all buybacks through the fourth quarter of '14 was $77.9 million, which represents an average price of $3.38 per share. On February 25, 2015, Cowen's Board of Directors approved an increase to the company's share repurchase program that authorizes Cowen to purchase up to an additional 14.7 million of Cowen's Class A common shares. The 14.7 million increase is in addition to the company's existing 70.3 million share purchase program. With this increase, the total amount available for repurchase under the program is $25 million. I will now turn it over to Jeff for closing remarks.

[Jeffrey Marc Solomon:]

Thanks, Steve. Our 2014 results reflect the long-term investments we've made in people and process between 2010 and 2013. By staying true to our mission of helping clients outperform, whether that client is an active portfolio manager, an investment banking client or an asset management client, we are always evolving our businesses with this question in mind

[Operator:]

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

[Devin P. Ryan:]

I guess first question on capitalization. Obviously, highlighted the strength and maybe excess capital position. And now that you're not moving forward on the commercial finance company, at least for now, can you maybe speak in a little more detail on some of the areas you'll be looking to deploy that capital? And then any thoughts just as we're modeling that? How to think about how long that capital could take to become productive?

[Jeffrey Marc Solomon:]

So I think -- first of all, we're always looking at how we can be driving ROE. And certainly, looking at the time to build out like the finance business and where we currently think the credit markets are today, we think there are much better opportunities. So that was the statement we made. Certainly, building out our asset management capability, we have a number of potential opportunities to scale that business, where we can both deploy our capital on an attractive return characteristics as well as scale businesses. Those take a couple of years to do. But we feel very good about the queue of opportunities we have in that space. Secondly, I think we've -- we also recognize that as long as we continue to trade at a discount to our tangible book value, that there's an opportunity to do accretive things. And you can see that the Board has authorized us to continue the stock buyback program. Our goals going forward are to continue to look for ways to optimize our capitalization. And I know that a lot of shareholders and a lot of folks have asked us why do we think it's so important to have that capital? We've done a very good job at navigating some pretty treacherous waters, and the one thing that we found that really keeps our organization on a very solid ground is the fact that we have more than enough capital to be in a very safe place, and we don't leverage that capital aggressively. Again, that's part of -- then our philosophy, going back, it -- Ramius, for 20 years, it served us incredibly well. And we'll continue to look for ways to find the right optimization between the capitalization and driving ROE.

[Peter Anthony Cohen:]

Devin this is Peter. We are -- just because we're not going forward with the finance company as we described it, doesn't mean that we don't have some more alternatives in the general, sort of sphere of direct lending that we're not exploring. We are. That, in fact, we might find more attractive than how we perceived the direct lending business before. And the capital is not idle, it's invested. I mean, we happen to have an enormous amount of liquidity and it would be better served in a ramped up operating business than just invested on the balance sheet. But we'll get there. But there are a number of endeavors underway that we get that capital put to work.

[Devin P. Ryan:]

Got it. Yes. No, I just appreciate that perspective. Just wanted a little more detail that's helpful. And with the cash equities business in the quarter and I think results were pretty impressive against the backdrop. And then you highlighted in the release your options, electronic trading in addition to just the traditional cash equities. So I'm just trying to get some perspective. Were those items kind of unusually strong and that was more of kind of a lumpy quarter? Or the momentum that you had kind of ending the year something that's maybe carrying into 2015?

[Jeffrey Marc Solomon:]

So I think it's definitely a function of the fact we had momentum in those businesses. So what used to happen to us before we had an electronics business and before we had an option and events businesses, if you look at our fourth quarter numbers, that we'd see a trail off in our cash equity execution as discretionary wallets from the long-only were spent. So Cowen really only used to eat out of the discretionary bucket and most of it is long-only accounts because we didn't have an electronic product that was competitive. But over the past 3 years since we did the ATM acquisition, we've been able to take market share from other electronic players. So we're less dependent on just the discretionary commission bucket that gets paid. And so as those -- in the fourth quarter, the momentum that we had is more, I think, emblematic of the balance that we have in the business between cash and electronics. I will also say that having an option to the bank capability, especially when the event calendar has been as robust as it has been, is helpful. So when you have events that occurred like some of the events that occurred in the fourth quarter, especially around some of the unexpected events in the event space, people are repositioning those all the time. And as a result of that, we're pretty much -- we're in a position we can benefit from that significantly. So I think there were some uniqueness around maybe the event space for the fourth quarter. But I would say overall, it's pretty much been a very strong balance just the way the business has evolved.

[Devin P. Ryan:]

Got it, helpful. And then, just lastly, I'm sure you probably don't want to talk too much about first quarter. But just looking at some of the investment banking trends. I mean, it looks like it's been -- just a phenomenal start to the year for you guys. And I know there's been a lot of activity in the Health Care space. But is there anything else that maybe changed that you see driving that or is that just a function of there's been a lot of deal flow and you guys are getting at least your fair share? And then kind of along the same lines, you mentioned expectation is to kind of continue to expand the advisory platform. So just any update there in terms of what you're doing? And are you still looking to hire kind of selectively some advisory-centered or -centric investment bankers?

[Jeffrey Marc Solomon:]

So to answer your first question. Yes, the calendar has been strong. Yes, we are in the middle of a wonderful time in the market for Health Care. I still think the Health Care dynamics, at least the supply/demand dynamics in Health Care, are, for the areas we cover, still pretty good. So a lot of folks have asked if we think that if we raised so much money. I want to give a couple of specifics for people to just -- so you can get your head around it. Last year in total, in biotech, the market raised $17.6 billion. That's all. If you take a look at the M&A that got taken out of the biotech space, even the most conservative numbers I've seen have been $80 billion to $100 billion got taken out. If you want to include some of the mega cap deals, you can get up to a 100 -- a couple of $100 billion that's take -- have been taken out in terms of market cap. And so I think what's happening here is there's money flowing into that space. There's been a real class of new companies that have developed with some emerging technologies that's really interesting and breakthrough. And the amount of capital that's been raised is actually relatively small compared to the amount of capital that's taken out of the business. So do I think it is sustainable? I do. Do I think we're going to have quarters like the fourth quarter and the first quarter all the time? No, but I think what we've noticed about -- the great thing about being in that business is these are companies that are always in need of capital. And we are in a position, where we have well over 100 new clients that we've done a great job for in the last couple of years to make sure that in multiple market environments, will -- they'll be using our services, provided that we continue to perform for them. So I think it's been great, and it will continue. The dynamics suggest that, that won't end abruptly. So that's really where we are on the capital formation side. We've also done some other things at our other businesses. Health Care's been so good. It's outshined where the products we've made in our other businesses. And I think the thing we've done here is those businesses in our other sectors are right-sized. So when we look at the metrics, we actually look at the number of bankers producing the amount of revenue. That's actually the metric I care most about. You can have a lot of bankers and still not do enough revenue. We actually have surprisingly a few number of professionals relative to the production. And so we're looking for people who we think can come to this organization and be productive in both capital markets and advisory business. And so as we've made some hires, and I think we've made some announcements, we're continuing to tactically look at where we can monetize our research footprint by adding bankers in those spaces where we already have the fixed costs associated and the domain knowledge associated. So selectively, we've done that. We've seen already this year several mandates to be added to the backlog in M&A. And I think that's a function of the fact that our platform is more mature. And so if you go back to where we were in 2010, we really did rebuild almost everything from banking. There are some people that weren't here then, but this is relatively new banking platform, and it just takes time for the platform to mature for the bankers to have consistent calling efforts, wearing the Cowen pinstripes. So I think what we're seeing now the function of that maturity on the platform.

[Operator:]

The next question comes from the line of Mike Adams from Sandler O'Neill.

[Michael Adams:]

So first question, a follow-up on the brokerage business. Just I mean, looking at almost 50% growth in the brokerage revenue year-over-year. I mean, really impressive. Could you maybe give us some of the headcount trends in that business in terms of research analyst sales and trading personnel? Because I'm just trying to figure out what the right run rate is for that looking forward over the next couple of years here.

[Jeffrey Marc Solomon:]

So we haven't added materially to the headcount in either area, after the post to Dahlman Rose' acquisition in 2013. We have -- where we've added to headcount has mostly been in associate support for senior analysts, which I'm sure is something that resonates with you. I -- and we think it's really important to scale the domain knowledge and one of the ways to do that you build out sustainable franchises and researches to have really talented associates who can grow into senior positions. So part of what the -- what's happened here is we've had some senior associates take on responsibility and initiate on some areas that were really interesting. And it's been an organic thing. That's not something that was happening here a number of years ago. So there hasn't been any material change in headcount since the Dahlman Rose acquisition in either research or in Sales and Trading. It's been a matter of really positioning our resources to have the maximum amount of impact. I know you know how this game works. This is about as much about vote getting and penetration as anything else. And I think our sales and research work extremely well together. We put some new processes in place, there's some new technology in place that allows us to have -- peer into our client base and ensure that they're getting the content they need and they want. And the more they can indicate to us what they want, the more of it will get to them. And we're not spending a lot of time with clients who don't want certain content. So it's -- again, this is really about optimization and making sure that we're in a mode where the content that we produce has the maximum amount of impact.

[Peter Anthony Cohen:]

And Mike, just what Jeff was saying earlier, the fourth quarter -- we used to have a fourth quarter slowdown, right? So we're up 21% year-over-year. For the fourth quarter, we're up over 35% in equities business. And I think we didn't experience that fourth quarter slowdown because of our electronics and options and how we've moved up in the vote and things like that. So the fourth quarter was -- has been sustainable, whereas in the past, we would experience a fourth quarter slowdown in the equities business.

[Jeffrey Marc Solomon:]

But one of the things that we track pretty aggressively is -- we're moving in an area where we're trying to be predictive with our votes. So when we see the amount of resources we're applying to a particular account, we have an expectation around where we should be. And we're trying to shorten the cycle time between how much we're permissioning and how long it will take us for us to get realization. And the dialogues we're having with accountants has -- have been productive around that. I say to people very clearly to our client, if we're not adding value to you in the things we're giving you, you should tell us because we can take that content, that effort and we can put it elsewhere where it's more appreciated, and that's an okay thing, too. I also feel like if we are adding value, then our clients have the responsibility to make sure that we're getting a good proportion amount of their share because that's how we ultimately end up in a position where we can continue to do what we do best.

[Michael Adams:]

Got it. And then sticking with the broker-dealer. Earlier this week, we saw few departures senior members of the DCM team, a business you spent 3 or 4 years building, and we're really starting to see some tangible benefits. Can you give us a strategic update there? And how are you going to go about rebuilding this time around?

[Jeffrey Marc Solomon:]

Well, I think it's a rebuild. I just -- we have actually a lot of talented professionals in that area. Obviously, we'll be looking to continue to recruit as we have been. And one thing that doesn't go away is our ability to source opportunities. Most of those opportunities came from the banking network. And the team that departed was doing most of the execution around that. So there is an embedded knowledge base here in the organization that certainly did not leave. And we continue to execute very well and win new mandates even without them.

[Michael Adams:]

Okay. And last one...

[Jeffrey Marc Solomon:]

You guys have to -- you're listening to the Urban Meyer of investment banking here, right? His third team is better than most people's first team.

[Michael Adams:]

So last question for me. On the comp ratio, a little bit of a true-up in the fourth quarter. I know that you guys have been talking about moving to more cash composition in terms of the comp mix. How do we think about that ratio moving forward, though? I mean, seems like less deferred comp, it should come down over time. But overall, like what's a good number for 2015?

[Jeffrey Marc Solomon:]

I think -- go ahead, Steve.

[Stephen A. Lasota:]

I mean, we're going to -- Mike, we're going to monitor what's going on in the marketplace, right? I mean, we talked about it on earlier calls because we saw our -- we do this -- we participate in the studies, we want to see what everybody else is doing because we don't want to lose our good people if we're not paying them enough cash and we give them too much deferred. It's a balancing act. You want people to -- you want people to have to -- that have skin in the game and work hard everyday and want to be committed to the firm. But we also need to pay enough cash to be competitive that we're not going to lose people. So we start -- we really want to get below a 60% comp to rev ratio. But if the market tells us we can't, then we may not be able to. But I would -- we usually -- we project around a 60% comp to rev ratio and we may be a bit below or a bit higher, depending on the revenue mix as well. But...

[Peter Anthony Cohen:]

We also -- we want to work down the deferred so that it kind of just flattens out because that's a future charge to earnings. So to the extent that we can afford to pay out more cash, it makes everyone a lot happier who's -- who works here. They deserve it, they've earned it. A lot of guys made a big investment in this place the last 5 years. And it was time, subject to being able to afford to do it to recognize that by paying more cash. And in the process, we just enhanced future earnings by reducing future deferred amortization. And as Steve said, we will continue to monitor it. But that's kind of the path we're on, which is also building future value into the earnings stream of the company.

[Jeffrey Marc Solomon:]

Peter makes a good point. So when people came here 4 years ago, especially in investment banking, there was definitely a career risk associated with that in their minds. I mean, I think it was -- what we talked about, what we were going to build was largely aspirational. We had a pretty good vision of what we wanted to do but there was no proof. And a lot of those folks took pretty significant deferred portions of their compensation in deferred. And I think this is the first year where that has really -- what we've been able to sow the seed -- or reap the benefits of the seeds that we sowed earlier. And so I think we did a really good job from a balance standpoint this year of being competitive. And as a result, I think we got some pretty good feedback.

[Operator:]

[Operator Instructions] The next question comes from the line of Joel Jeffrey from KBW.

[Joel Jeffrey:]

Just going back to the commercial finance unit. I mean, do you guys kind of announced your plans to get into this back in September. So you're kind of 4 or 5 months down the road before you decided to sort of pull the plug on it. And you had mentioned that you had about $125 million of capital that you could put towards it. I'm just kind of wondering how far along did you get in the process of building this business out when -- before you decided it wasn't really a -- something that could go forward?

[Jeffrey Marc Solomon:]

Well, I mean, I -- first of all, it's not a business that was going to be a very intense business from a headcount standpoint. In part because most of what our value-added proposition is in the origination side of the business where we already have everybody. So the incremental headcount that we had was 3 people in that business. And so it wasn't particularly far along in terms of cost. It had -- it cost us probably a couple of million dollars last year in total. And look, we carefully monitored where -- we continue to carefully monitor where we are in the credit cycle. And this is a business that you just can't get in and get out. So as we look at where and how the credit cycle was evolving and some of the things that are getting done in the marketplace, where we're going to have to bid competitively with our balance sheet in that particular sector of corporate credit, we just don't think it's getting a little longer in the tooth, and now might not be the right time to move forward on that. It doesn't mean that we're not going to be competitive in terms of our agency business. We still are very competitive. And we're still running lots of mandates, and interestingly enough, what we have recently reviewed the finance business as a product extension of what we're doing in the agency side, as we crawled into it a little bit more with our client base and our bankers, it didn't actually seem as if the clients we were banking were necessarily desirous of our actually having a lending capability. I mean, some were, some weren't, but as we move forward it, it wasn't a slam dunk to say, hey, we want to see Cowen in our lending syndicate. I think it -- what Peter mentioned is also true, what we are always looking at different ways to deploy capital. And there's some other things we're working on and things we're looking at that maybe exhibit better rates of return at lower risk. And do you remember? At our hearts, we are investors. And we look at businesses through an investment and a risk-reward lens all the time. And so when we are sitting down towards the end of the year and looking at the capital commitment and the return on equity and the risk in the business versus other things we were seeing, we made a tactical decision that now is not the right time to press forward. And it's not that we won't do it going forward or we won't find an opportunity to do it. But our view is it's more likely to be a stress in the stress cycle coming than there is to be a regular way lending business. And so we want to be judicious. That's our job.

[Peter Anthony Cohen:]

I mean, let's also -- it's worth a mention that the fellow who -- we brought in to run the business and lead the business, Craig Schiffer, had an untimely death over the Christmas holidays. He was buried in an avalanche in France. And so given our reservations about what was going on in the credit cycle, which -- and we were deeply into those discussions, and then all of a sudden, our lead horse is no longer with us. It was like big stop sign for us and reevaluate.

[Joel Jeffrey:]

Then on the incentive income line, I mean, that was clearly very strong this quarter. Just wondering with the strength in the activist front, I mean, how challenging is that to surpass these high watermarks going into 2015?

[Stephen A. Lasota:]

Well, there's no high watermark going into 2015 in that business or any of our other businesses actually. I mean... go ahead, Joel.

[Joel Jeffrey:]

So in terms of thinking about incentive fees going forward on these funds, we shouldn't necessarily be concerned that the performance was extremely strong this quarter and any kind of slow down could negatively impact those?

[Stephen A. Lasota:]

Well, I mean, we may not have as strong a quarter as we did in the fourth quarter and have the same incentive fees. But if they -- if the returns across the funds are as strong as prior year, then we will have the same incentive fees.

[Joel Jeffrey:]

Okay. And then just lastly for me -- I apologize if I missed this earlier. What was the net inflows on the AUM side this quarter, sort of net of the fund sale?

[Peter Anthony Cohen:]

$2.8 billion?

[Stephen A. Lasota:]

Well, that's for the year. But just in the fourth quarter?

[Joel Jeffrey:]

Yes.

[Stephen A. Lasota:]

300 -- a little over $300 million.

[Operator:]

The next question comes from the line of Steven Chubak from Nomura Securities.

[Steven J. Chubak:]

So Steve, maybe just one point of clarification. Just given the strength in the incentive income line. I know there's some interesting dynamics in terms of how the incentive income is accrued for the healthcare royalty, but partner strategies specifically. And do you know if any of the benefits there were accrued in the fourth quarter or whether that's expected to be more of a 2015 event?

[Stephen A. Lasota:]

There's none -- there are no incentive fees for '14 from healthcare royalty partners. And for '15, we aren't -- we're not expecting any in '15, but we do expect them starting in '16.

[Steven J. Chubak:]

Okay. Can you remind us how it's -- how we think about the accrual of those incentive fees?

[Stephen A. Lasota:]

Well, it's -- the way it works is for Fund 1, the money has to be returned in a preferred. And then we get to book the incentive fees. So you don't book the incentive fee until it's actually earned. That we've -- we have working -- they're working -- the guys are working through Fund 1 now, but it's not complete. And when the money is returned plus the PRAF then we'll have our incentive fee. So something needs to be... go ahead.

[Steven J. Chubak:]

I'm sorry. You said -- did you say regarding expectations? That was my question.

[Stephen A. Lasota:]

Yes. We expect to start seeing incentive fees from Fund 1 in '16.

[Steven J. Chubak:]

Okay. And clearly, a strong investment banking results, particularly within ECM and M&A lines, I'm just looking on a year-on-year basis. DCM, it was down and just given some of the cautious commentary regarding the outlook for credit markets, given where we are in the cycle. I'm just wondering how that informs your thinking regarding the business at least as we enter 2015?

[Stephen A. Lasota:]

From a DCM?

[Steven J. Chubak:]

DCM. Debt Capital Markets.

[Jeffrey Marc Solomon:]

I don't think it -- I don't think it impacts us at all.

[Operator:]

Ladies and gentlemen, that's all the time we have for questions. I would like to now turn the call back over to management for closing remarks.

[Peter Anthony Cohen:]

Well, thanks, everyone for dialing in. I also would like to thank, which we don't do often enough, those shareholders of ours, who sort of were believers in what we were doing early on and bought our stock and have been with us during this whole sort of reincarnation of the Cowen Group franchise. And we appreciate your support, loyalty and patience. And look, we've -- this place has a lot of momentum, it's taking a long time to get it -- get where we are, but it is what it is. We are where are. And we're very excited about where we have to go in the future. Given our capital base, the talents of our organization, just kind of the depth and breadth of the activities of the firm, we just -- we feel like really good about the future and just appreciate all of your interest.

[Operator:]

Thank you very much. ladies and gentlemen, that concludes your participation in today's conference call. You may now disconnect. Thank you for joining, and have a very good day.