00014665382022FYfalsehttp://fasb.org/us-gaap/2021-01-31#DebtAndCapitalLeaseObligationshttp://fasb.org/us-gaap/2021-01-31#DebtAndCapitalLeaseObligationsP2YP2YP1Y UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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| (Mark One) | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended: | December 31, 20172022 |
| or | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to | |
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| Commission file number: | 001-34516 |
Cowen Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 27-0423711 | |
| (State or other jurisdiction of
incorporation or organization)
| | 27-0423711
(I.R.S. Employer
Identification No.)
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599 Lexington Avenue
New York, New York 10022
(212) 845-7900(646) 562-1010
(Address, including zip code, and telephone number, including area code, of registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Trading Symbol | | Name of Exchange on Which Registered |
| Class A Common Stock, par value $0.01 per share | | COWN | | The Nasdaq Global Market |
7.35%7.75% Senior Notes due 2027
2033 | | COWNL | | The Nasdaq Global Market
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o☐ No Q☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o☐ No Q☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Q☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Q☒ No o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Annual Report on Form 10-K or any amendment to the Annual Report on Form 10-K. Q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. |
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| Large accelerated filero | ☒ | Accelerated filerQ | ☐ | Non-accelerated filero
(Do not check if a smaller
reporting company)
| ☐ | Smaller reporting companyo | ☐ | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No Q☒
The aggregate market value of Class A common stock held by non-affiliates of the registrant on June 30, 2017,2022, the last business day of the registrant's most recently completed second fiscal quarter, based upon the closing sale price of the Class A common stock on the NASDAQ Global Market on that date was $476,392,881.$621,959,226.
As of March 5, 2018February 27, 2023 there were 28,985,05128,242,343 shares of the registrant's Class A common stock outstanding.
Documents incorporated by reference:
Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant's Proxy Statement for its 20182022 Annual Meeting of Stockholders.
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
We have included or incorporated by reference into our Annual Report on Form 10-K (the "Annual Report"), and from time to time may make in our public filings, press releases or other public documents, certain statements, including (without limitation) those under Item 1—"Business," Item 1A—"Risk Factors," Item 3—"Legal Proceedings," Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A—"Quantitative and Qualitative Disclosures about Market Risk" that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking terms such as "may," "might," "will," "would," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "project," "possible," "potential," "intend," "seek" or "continue," the negative of these terms and other comparable terminology or similar expressions. In addition, our management may make forward-looking statements to analysts, representatives of the media and others. These forward-looking statements represent only the Company's beliefs regarding future events (many of which, by their nature, are inherently uncertain and beyond our control) and are predictions only, based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In particular, you should consider the risks outlined under Item 1A—"Risk Factors" in this Annual Report.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations.
PART I
When we use the terms "we," "us," "Cowen" and the "Company," we mean Cowen Inc., a Delaware corporation, its consolidated subsidiaries and entities in which it has a controlling financial interest, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.
Item 1. Business
Overview
Cowen Inc. (formerly Cowen Group, Inc.), a Delaware corporation formed in 2009, is a diversified financial services firm and,that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment management, investment banking, research, sales and trading, prime brokerage, global clearing, andsecurities financing, 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 (which includes sales and trading, prime brokerage, global clearing, securities financing and commission management services) and the Research division. The Company refers to the Investment Banking division, the Markets division and the Research division collectively as its investment management and broker-dealer. Thebanking businesses. Op Co's CIM division includes advisers to investment management segment includes private funds managed accounts, commodity pools, real estate funds,(including private equity structures and privately placed hedge funds), and registered funds. Op Co's investment companies and listed vehicles and also manages a significant portion of the Company’s proprietary capital. The broker-dealer segment offersbanking businesses offer industry focused investment banking for growth-oriented companies including advisory and global capital markets origination, and domain knowledge-driven research, sales and trading platformplatforms for institutional investors, global clearing, and commission management services and also a comprehensive suite of prime brokerage services.
The CIM division is the Company's investment management platform,business, which operates primarily under the Cowen Investment Management name (formerly "Ramius"),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 United States ("U.S.") Securities and Exchange Commission (the “SEC”"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 long/short equity,healthcare investing, sustainable investing, healthcare royalties, merger arbitrage activism, health care royalties, private healthcare and private real estate. The Company's investment management business focuses on attracting and retaining talented in-house and affiliated investment teams and providing seed capital and working capital, an institutional infrastructure, robust sales and marketing and industry knowledge.activism. A significant 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 aviationinsurance and reinsurance businesses. Our
Op Co's investment management business had approximately $11.0 billion of assets under management as of January 1, 2018. See the section titled "Assets Under Management and Fund Performance" for further analysis.
Our broker-dealerbanking businesses include investment banking, research, sales and trading, prime brokerage, global clearing, securities financing and commission management services provided primarily to companies and primarily institutional investor clients. Our primary target sectors ("Target Sectors") areSectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, informationconsumer, industrials, tech-enabled and technologybusiness services, consumer, aerospace and defense, industrials, energy and transportation.energy. We provideprovide research and brokerage services to over 4,0006,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our target sectors. The broker-dealer segmentinvestment banking businesses also offersoffer 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.
On December 5, 2016,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.
Principal Business Lines
Investment Banking
Our investment banking department provides strategic advisory and capital raising services to U.S. and international public and private companies, private equity and venture capital firms, and family offices. Our clients are primarily focused on our sectors. Our strategic advisory services include, among other things, acquisitions, divestitures, fairness opinions, de-SPACs, spin-offs, and partnerships. Our capital markets group consists of two groups: (i) equity capital markets (including convertible securities), which focuses on raising equity capital in the public markets, and (ii) private capital solutions, which focuses on providing clients with alternative sources of capital, including private equity, venture capital, family offices, and various forms of non-dilutive financing. A significant amount of our investment banking revenue has been earned from high-growth small and mid-capitalization companies. From time to time, the Company effected a one-for-four reverse stock splitinvests in private capital raising transactions of its clients.
Brokerage
Our team of brokerage professionals serves institutional investor clients in the U.S. and internationally. We trade common stocks, listed options, equity-linked securities and other financial instruments on behalf of our common stock. Except whereclients and offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. We provide our clients with an electronic execution suite. We provide global, multi-asset class algorithmic execution trading models to both buy side and sell side clients and also offer execution capabilities relating to these trading models through ATM Execution LLC ("ATM Execution"). We also provide our clients with commentary on political, economic and market conditions. We have relationships with over 6,000 institutional investor clients. Our brokerage team is comprised of experienced professionals dedicated to our sectors, which allows us to develop a level of knowledge and focus that we believe differentiates our brokerage capabilities from those of many of our competitors. We tailor our account coverage to the unique needs of our clients. We believe that our sector traders are able to provide superior execution because of their knowledge of the interests of our institutional investor clients in specific companies in our sectors.
In connection with the brokerage services we provide, our sales professionals also provide our institutional investor clients with corporate access to management teams of public and private companies outside the context indicates otherwise, all shareof financing transactions. These meetings are commonly referred to as non-deal road shows. Non-deal road shows allow companies to increase their visibility within the institutional investor community while providing our institutional investor clients with the opportunity to further educate themselves on companies and per share information has been retroactively adjustedindustries through meetings with management. We believe our deep relationships with company management teams and our sector-focused approach provide us with broad access to reflectmanagement teams for the reverse stock split.benefit of our institutional investor clients.
Principal Business LinesResearch
Investment Management ProductsAs of December 31, 2022, we had a research team of more than 60 senior analysts covering about 975 stocks. Within our equity coverage universe, approximately 38% are healthcare companies, 24% are TMT (technology, media and Servicestelecom) companies, 12% are energy companies, 10% are capital goods, industrial and basic materials companies, and 15% are consumer companies. Our approach to research, underpinned by our marquee Ahead Of The Curve® Series reports, focuses our analysts' efforts toward delivering differentiated investment ideas and de-emphasizes maintenance research. We place significant emphasis on analyst collaboration, both within and between sectors. We sponsor a number of conferences every year that are focused on the sectors and sub-sectors our analysts cover. During these conferences we highlight our investment research and provide significant investor access to corporate management teams. We provide research through our broker-dealers in connection with our provision of brokerage services.
Investment Management Strategies
The Company's investment management strategies are focusedbusiness, within the Op Co segment, focuses on addressing the needs of institutional investors and high net worth individuals to preserve and grow allocated capital. The Company and its affiliatedrelated investment advisors offer a variety of investment management products that provide access to a number of strategies, including healthcare investing, sustainable investing, healthcare royalties, merger arbitrage long/short equity,and activism.
The Company's investment management business, within the Asset Co segment, consists of the Company's private investments, private real estate investments and private healthcare. Theother legacy investment strategies. Certain multi-strategy hedge funds managed by the Company and one of its affiliated investment advisors also manage certain multi-strategy private funds that are currently in wind-down. The majority of assets remaining in these privatehedge funds include investments in private companies, real estate investments and special situations.
Real Estate
Our real estate business focuses on generating attractive, risk adjusted returns by creating and offering to investors vehicles that invest in real estate using an owner/manager approach. We underwrite securities issued by and provide advice and
financing in connection with redevelopment of all real estate property types and have done so since 1999. This approach emphasizes a focus on real estate fundamentals and potential market inefficiencies. The RCG Longview platform of real estate funds provides senior bridge loans, subordinated mortgages, mezzanine loans, and preferred equity through its debt fund series, and makes equity investments through its equity funds. As of December 31, 2017, the members of the general partners of the RCG Longview platform of funds and their affiliates, independent of the RCG Longview funds, collectively owned interests in and/or managed over 21,000 apartments and approximately 21 million square feet of commercial space for their own accounts. The Company's ownership interests in the various general partners of the RCG Longview funds range from 20% to 55%.
HealthCare Royalty Partners
The Company’s healthcare royalties business primarily purchases royalties and uses debt-like structures to invest in commercial or near-commercial stage life science assets (through the funds managed by HealthCare Royalty Partners). We share the net management fees from the HealthCare Royalty Partners funds equally with the founders of HealthCare Royalty Partners. In addition, we have interests in the general partners of the HealthCare Royalty Partners funds ranging from 25% to 40.2%.
Broker-Dealer Business
Investment Banking
Our investment banking professionals are focused on providing strategic advisory and capital raising services to United States ("U.S.") and international public and private companies in our Target Sectors. By focusing on our Target Sectors over a long period of time, we have developed a significant understanding of the unique challenges and demands with respect to public and private capital raising and strategic advice in these sectors. Our advisory and capital raising capabilities begin at the early stages of a private company's accelerated growth phase and continue through its evolution as a public company. Our advisory business focuses on mergers and acquisitions, including providing fairness opinions and providing advice on other strategic transactions. Our capital markets capabilities include equity, including private investments in public equity and registered direct offerings, credit and fixed income, including public and private debt placements, exchange offers, consent solicitations and tender offers, as well as origination and distribution capabilities for convertible securities. We have a unified capital markets group which we believe allows us to be effective in providing cohesive solutions for our clients. Historically, a significant majority of our investment banking revenue has been earned from high-growth small and mid-capitalization companies. The Company, from time to time, may invest in private capital raising transactions of its clients.
Brokerage
Our team of brokerage professionals serves institutional investor clients in the U.S. and internationally. We trade common stocks, listed options, equity-linked securities and other financial instruments on behalf of our clients and offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. We provide our clients with an electronic execution suite. We provide global, multi-asset class algorithmic execution trading models to both buy side and sell side clients and also offer execution capabilities relating to these trading models through ATM Execution LLC ("ATM Execution"). We also provide our clients with commentary on political, economic and market conditions. We have relationships with over 4,000 institutional investor clients. Our brokerage team is comprised of experienced professionals dedicated to our Target Sectors, which allows us to develop a level of knowledge and focus that we believe differentiates our brokerage capabilities from those of many of our competitors. We tailor our account coverage to the unique needs of our clients. We believe that our sector traders are able to provide superior execution because of their knowledge of the interests of our institutional investor clients in specific companies in our Target Sectors.
In connection with the brokerage services we provide, our sales professionals also provide our institutional investor clients with access to the management of our investment banking clients outside the context of financing transactions. These meetings are commonly referred to as non-deal road shows. Non-deal road shows allow our investment banking clients to increase their visibility within the institutional investor community while providing our institutional investor clients with the opportunity to further educate themselves on companies and industries through meetings with management. We believe our deep relationships with company management teams and our sector-focused approach provide us with broad access to management for the benefit of our institutional investor and investment banking clients.
Research
As of December 31, 2017, we had a research team of 49 senior analysts covering approximately 931 companies. Within our equity coverage universe, approximately 30% are healthcare companies, 23% are TMT (technology, media and telecom) companies, 16% are energy companies, 13% are capital goods and industrial companies, 4% are basic materials companies and 14% are consumer companies. Our differentiated approach to research focuses our analysts' efforts toward delivering specific investment ideas and de-emphasizes maintenance research. We place significant emphasis on analyst collaboration, both within and between sectors. We sponsor a number of conferences every year that are focused on our Target
Sectors and sub-sectors. During these conferences we highlight our investment research and provide significant investor access to corporate management teams. We provide research solely through our broker-dealers in connection with our provision of brokerage services.
Information About Geographic Areas
We are principally engaged in providing investment management services to global institutional investors and investment banking sales and trading and research services to corporations and institutional investor clients primarily in the United States.States and Europe. We provide brokerage services to companies and institutional investor clients in Europe through our broker-dealers located in the United Kingdom ("U.K.") Cowen International Limited ("Cowen International Ltd") and Convergex Limited (subsequently renamed to Cowen Execution Services Limited) (“Limited ("Cowen Execution Ltd”Ltd"). Cowen and Company (Asia) Limited ("Cowen Asia") is registered with and subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong.
EmployeesHuman Capital
Our success depends on the talented, capable and dedicated team we have built, so we aim to attract and retain the best people by providing a strong, connected and inclusive culture. We strive to attract individuals who are smart, ambitious, work collaboratively and most importantly share our core values of vision, empathy, sustainability and tenacious teamwork.
As of March 5, 2018,December 31, 2022, we employed 1,534 employees: 1,264 in the Company had 1,124U.S., 259 in Europe, and 11 in Asia (or Hong Kong). Our values help ensure that collaboration is a standard operating procedure for our employees across the globe.
Attracting and retaining talented people
We believe our focus on inclusion expands our thinking. We believe employees and candidates are drawn to our culture of teamwork and collaboration. We strive to keep people engaged by helping them thrive and build fulfilling long-term careers.
We reward and recognize our colleagues with competitive benefits packages that promote financial and physical wellbeing for everyone. Our compensation philosophy is founded on two essential principles:
1.Pay fairly and competitively relative to the industry and local labor market
2.Reward exceptional performance against expectations
Our highly competitive Investment Banking Summer Analyst program is an important channel for sourcing talent. Successful candidates attend one week of formal training followed by nine weeks working within our Investment Banking division. This program then feeds into our Full-Time Investment Banking Analyst Program – at least 80% of those who attend the Investment Banking Summer Analyst program are expected to go on to the full-time program.
In addition to Cowen’s Investment Banking Summer Analyst program, our Markets division offers a series of summer programs. The Cowen's Markets Summer Analyst Program provides our interns with exposure to senior experienced professionals through on-the-job training and department rotations including Institutional Research Sales, Sales Trading, Trading, Electronic Trading, and Options and Event Strategies. In addition to Cowen’s Markets Summer Analyst Program, we offer individual group focused summer internship programs with our Cross Asset Summer Analyst Program and Commission Management Services Internship Program.
We also offer entry-level opportunities in our Business Operations division through programs for interns and apprentices. Our Multiverse program aims to create a channel for high-potential young people to join the organization by providing an outstanding alternative to university and corporate training. We also offer our Year Up program in partnership with a non-profit dedicated to creating job pathways for young adults.
Our efforts have been rewarded with strong engagement and loyalty from our team members. In 2022, employee turnover rate was just 15% at a time when the US saw a sharp increase in colleagues leaving their jobs.
Building fulfilling careers
To support continuous development, we provide high-quality programs that challenge and grow with our colleagues. People have opportunities to pursue job-related professional qualifications in financial analysis and are supported to gain and maintain the licenses needed to work in the securities industry. We also offer a range of job-related seminars and continuing education courses for colleagues at all levels, including career development, time management, and health and wellness. Colleagues can continue their education and take advantage of tuition reimbursement.
In 2021 and 2022, we issued shares of Cowen Class A common stock to every eligible colleague. By giving our colleagues an ownership stake in the firm, we not only recognized their contribution to our success but gave them the opportunity to share in our future success.
Promoting Health, Safety and Wellness
Our employee benefits program is built around physical, mental and financial wellbeing, and designed to be inclusive for all members of our community. In 2022, we introduced two wellness days as part of our leave offerings to support employees and encourage them to take care of their physical and emotional well-being. We believe that when employees are happy and healthy, we can be more productive, innovative, and resilient. Colleagues can access mental health services and support via our mental health programs, which include virtual sessions and other tools that help employees build personal resilience in the face of adversity and stress.
We provide 12 weeks of paid Parental Leave to all eligible employees in connection with the birth, adoption or foster care placement of a child. Employees who experience a period of disability in connection with pregnancy or childbirth are eligible for additional 6 – 8 weeks of paid leave depending on method of delivery. We also offer back-up child and elder care programs to help meet last-minute family needs. In addition, colleagues can claim commuter benefits, and we match employee contributions to their 401(k).
We regularly examine our current benefit offering, consult with our benefits partners and solicit employee feedback to make sure our benefits package is meeting their needs. We also review various plan utilization analytics and any insights we capture are used to inform our employee benefits strategy.
Diversity, Equity & Inclusion
At Cowen, DE&I is a business imperative, built upon our core values – enabling us to excel and outperform. When it comes to DE&I, Cowen adopts a holistic approach, involving both systemic change to mitigate biases and advance inclusion through the use of metrics, governance, reporting, and accountability, as well as culture change to build awareness and to create an atmosphere of inclusion for all employees regardless of background.
Our empathetic and collaborative culture helps us harness the power of diversity to transform the status quo. We embrace different perspectives and recognize that inclusion expands our thinking to generate better outcomes for clients. We also know that if we are not actively including, then we may be accidentally excluding.
To that end, we are very intentional about our approach to diversity, equity and inclusion. We have embedded the principles of diversity, equity and inclusion throughout our HR policies and processes, actively engage our leaders in key initiatives, and promote diversity through recruitment initiatives, diversity programming and training and business resource groups.
This holistic approach to DE&I comprises three inter-connected focus areas: Talent, Culture, and Community.
Talent
Cowen is focused on building an inclusive talent pool through recruiting diverse talent and providing professional development, growth and visibility opportunities for diverse colleagues. We partner with an array of leading national organizations creating access to jobs in finance for underrepresented groups, and also offer mentoring programs and leadership development sessions.
Cowen’s 7 Business Resource Groups ("BRGs") bring together diverse colleagues and allies, providing opportunities for colleagues to foster cross-collaboration and partnerships across business units. Taken together, the Black, LGBTQ+, LatinX, Asian, Women, Veterans, and Volunteering communities engage 31% of Cowen employees. These employee-led business resource groups host a broad range of events to celebrate the power of diversity in all dimensions (race, gender, sexual orientation and identity) within our organization, including for Heritage Months. BRGs at Cowen are paired with executive sponsors from management and also partner with external organizations for networking and development purposes, and also support recruiting and volunteer programs
Culture
We pride ourselves on our empathetic and collaborative culture, where the power of diversity is harnessed to transform the status quo. Our focus on inclusion expands our thinking in order to generate better outcomes for clients, while striving to increase fairness and equity for our colleagues. We want our employees to feel that they can bring their full, authentic selves to work to make their fullest contribution to our business and to realize their aspirations. We measure the effectiveness of our DE&I efforts by listening and acting on feedback received from employees. Regular Inclusion Circles and Business Resource Group-hosted discussions provide a safe space for colleagues to learn, share and discuss current trends and themes around diversity and inclusion. We also monitor the diversity of our workforce to track our progress and identify opportunities for improvement.
We believe all individuals have a right to be treated with dignity and respect without discrimination or retaliation. An inclusive culture is one of Cowen’s hallmarks, and we our programs and initiative in DE&I are predicated on the belief that a culture of inclusion and belonging are fundamental to our performance.
We do not tolerate sexual harassment, offensive conduct or discrimination based on protected characteristics. We expect all colleagues to respect differences and strive to provide a work environment based on mutual respect that is free from harassment and discrimination. This expectation is communicated in detail via our Employee Handbook and a summarized on our website.
Community
We have an active Volunteer and Corporate Giving programs that encourage employee participation and contributions to causes aligned with Cowen’s DE&I strategy and organizational values. Cowen also supports partner organizations which advance social equity and justice causes aligned to our employee, corporate and client priorities. We also partner with a range of leading DE&I organizations to keep abreast of best practice and the latest thought leadership in the space.
Competition
We compete with many other firms in all aspects of our business, including raising funds, seeking investment opportunities and hiring and retaining professionals, and we expect our business will continue to be highly competitive. The investment management and broker-dealerinvestment banking industries are currently undergoing contraction and consolidation, reducing the number of industry participants and generally resulting in the larger firms being better positioned to retain and gain market share. We compete in the United States and globally for investment opportunities, investor capital, client relationships, reputation and talent. We face competitors that are larger than we are and have greater financial, technical and marketing resources. Certain of these competitors continue to raise additional amounts of capital to pursue investment strategies that may be similar to ours. Some of these competitors may also have access to liquidity sources that are not available to us, which may pose challenges for us with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments than we do, allowing them to consider a wider variety of investments and establish broader networks of business relationships. Our competitive position depends on our reputation, our investment performance and processes, the breadth of our business platform and our ability to continue to attract and retain qualified employees while managing compensation and other costs. For additional information regarding the competitive risks that we face, see "Item 1A Risk Factors-Risks Related to the Company's Investment Management Business" and "Risk Factors-Risks Related to the Company's Broker-Dealer Business.Factors."
Regulation and Compliance
Our businesses, as well as the financial services industry generally, are subject to extensive regulation, including periodic examinations by governmental and self-regulatory organizations, in the United States and the jurisdictions in which we operate around the world. As a publicly traded company in the United States, we are subject to the U.S. federal securities laws and regulation by the SEC. Through our investment management and broker-dealerand/or investment bank businesses we are subject to regulation by the SEC, the U.S. Commodity Futures Trading Commission (the "CFTC"("CFTC"), the Financial Industry Regulatory Authority, Inc. (“FINRA”("FINRA") the National Futures Association (“NFA”("NFA"), other self-regulatory organizations and exchanges related to the financial services industry and the fifty state securities commissions in the U.S. and by the U.K. Financial Conduct Authority (“FCA”("FCA"). and the Securities and Finance Commission ("SFC") of Hong Kong.
Virtually all aspects of our business are subject to various laws and regulations both inside and outside the United States,U.S., some of which are summarized below. Regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. Governmental authorities in the United States and in the other countries in which we operate from time to time propose additional disclosure requirements and regulations covering our broker-dealers and investment management funds, our broker-dealers and our asset management business.businesses. The rules governing the regulation of the various aspects of our business are very detailed and technical. Accordingly, the discussion below is general in nature, does not purport to be complete and is current only as of the date of this report.
Our businesses have operated for many years within a legal framework that requires us to be able to monitor and comply with a broad range of legal and regulatory developments that affect our activities both in the United States and abroad. As noted above, certain of our businesses are subject to compliance with laws and regulations of United States federal and state governments, foreign governments, their respective agencies and/or various self-regulatory organizations or exchanges, and any failure to comply with these regulations could expose us to liability and/or reputational damage. Additional legislation, changes in rules promulgated by the SEC, our other regulators and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect the mode of our operation and profitability. The United States and non-United States government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion or deregulation of a broker-dealer, an investment advisor or its directors, officers or employees.
Rigorous legal and compliance analysis of our businesses and investments is important to our culture and risk management. We conduct regular training of our personnel to ensure that they are familiar withregarding the laws and regulations governing our business and applicable to our clients as well as with our company's policies and procedures. In addition, we have adopted and implemented disclosure controls and procedures and internal controls over financial reporting, which have been documented, tested and assessed for design and operating effectiveness in compliance with the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"). We strive to maintain a culture of compliance through the use of policies and procedures such as oversight compliance, codes of conduct, compliance systems, communication of compliance guidance, conduct of annual compliance reviews and on-going employee education and training. Our corporate risk management function further analyzes our business, investment and other key risks, reinforcing their importance in our environment. We have a compliance group that monitors our compliance with all of the regulatory requirements to which we are subject and manages our compliance policies
and procedures. Our General Counsel supervises our compliance group, which is responsible for addressing all regulatory and compliance matters that affect our activities. Our compliance policies and procedures address a variety of regulatory and compliance risks such as the handling of material non-public
information, position reporting, personal securities trading, valuation of investments, on a fund-specific basis, document retention, potential conflicts of interest and the allocation of investment opportunities. Our compliance group also monitors the information barriers that we maintain between those of our different businesses that we are required to conduct separately or which present conflicts of interest, which we address through the use of physical and systematic information barriers. We believe that our various businesses' access to the intellectual capital, contacts and relationships that reside throughout our company's benefitsbenefit all of our businesses. However, in order to maximize that access without compromising our legal and contractual obligations, our compliance group oversees and monitors the communications between or among our company's different businesses to ensure that we maintain material non-public information, client information and other confidential information in strict confidence. All parts of our business including our brokerage and our investment management businesses, from time to time are subject to regulatory exams, investigations and proceedings, and our broker-dealers have received fines and penalties for infractions of various regulations relating to our activities. For additional information regarding the regulatory and compliance risks that we face, see "Item 1A Risk Factors-Risks Related to the Company's Investment Management Business" and "Risk Factors-Risks Related to the Company's Broker-Dealer Business.Factors."
Investment Management Business
The investment advisers responsible for the Company's investment management businessbusinesses are all registered as investment advisers with the SEC or rely upon the registration of an affiliated adviser. In addition, two of our investment advisersadviser, and all are also registeredcurrently exempt from registration as Commodity Pool Operators (“CPOs”) and therefore are also subject to regulation by the NFA and the CFTC in respect to the futures and commodity-related fund business conducted by it.Commodity Trading Advisors.
Registered investment advisers are subject to the requirements of the Advisers Act and the regulations promulgated thereunder. Such requirements relate to, among other things, fiduciary duties to clients, maintaining an effective compliance program, operational and marketing requirements, disclosure obligations, conflicts of interest, fees and prohibitions on fraudulent activities. The NFA and the CFTC each also administer a comparable regulatory system covering futures contracts and various other financial instruments that provide exposure to commodities, including swaps in which certain investment management products operated by the Company or its investment advisory affiliates or subsidiaries may invest.
The investment activities of our investment management businessbusinesses are also subject to regulation under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended, (the "Securities Act"), the Investment Company Act of 1940, as amended ("the Investment Company Act") and various other statutes, as well as the laws of the fifty states and the rules of various United States and non-United States securities exchanges related and self-regulatory organizations, including laws governing trading on inside information, market manipulation and a broad number of technical requirements (e.g., options and futures position limits, execution requirements and reporting obligations) and market regulation policies in the United States and globally. Congress, regulators, tax authorities and others continue to explore and implement regulations governing all aspects of the financial services industry. Most of ourPursuant to systemic risk reporting requirements adopted by the SEC, the Company's affiliated registered investment advisers with private investment fund clients are required to report certain information about a number of their investment management funds to the SEC and the two advisers registered as CPOs are also required to report certain information about a number of their commodity pools to the CFTC, pursuant to systemic risk reporting requirements adopted by both agencies.SEC.
In addition, certain of our investment advisers may act as a “fiduciaries”"fiduciaries" under the Employee Retirement Income Security Act of 1974 (“ERISA”("ERISA") and similar state laws with respect to private and public benefit plan clients. As such, the advisers, and certain of the investment management funds they advise, may be subject to ERISA and similar state law requirements and to regulations promulgated thereunder. ERISA, similar state laws and applicable provisions of the Internal Revenue Code of 1986 (the “IRC”"IRC"), which regulate services provided to individual retirement accounts, impose duties on persons who are fiduciaries and other types of service providers to benefit plans and individual retirement accounts under ERISA, such state laws and the IRC, prohibit specified transactions involving IRA and benefit plan clients subject to ERISA or similar state laws (absent the availability of specified exemptions) and provide monetary penalties for violations of these prohibitions. In 2016, the U.S. Department of Labor (the “DOL) adopted amendments to the definition of “fiduciary” under the ERISA, which became applicable in June 2017, but is subject to delays in enforcement of certain of the provisions, including with respect to the applicability date for certain exemptions that were published by the DOL in connection with the amendments to the fiduciary rule. The fiduciary rule impacts certain aspects of the Company’s business, including sales of interest in private funds to IRAs and structuring of financial services to ERISA plans and IRAs. The Company has restructured its documentation and aspects of its business to comply with the fiduciary rule and to ensure that the Company does not become an unintended fiduciary.
Enacted on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was expansive in scope and led to the adoption of extensive regulations by the CFTC, the prudential regulators, the SEC and other governmental agencies. The current administration has suggested that it will seek to roll back some of this regulation, although it is not possible to predict whether changes will be made. Since its adoption, the Dodd-Frank Act has had an impact on the
costs associated with derivatives trading by the Company and its clients, including as a result of requirements that transactions be margined and trade reported and, in some cases, centrally cleared.reported.
The Dodd-Frank Act established the Financial Services Oversight Council (the "FSOC") to identify threats to the financial stability of the United States, promote market discipline, and respond to emerging risks to the stability of the United States financial system. The FSOC is empowered to determine whether the material financial distress or failure of a non-bank financial company would threaten the stability of the United States financial system, and such a determination can subject a non-banking finance company to supervision by the Board of Governors of the Federal Reserve and the imposition of standards and supervision including stress tests, liquidity requirements and enhanced public disclosures including the authority to require the supervision and regulation of systemically significant non-bank financial companies. We do not believe we are at risk of being considered a systemically significant non-bank financial company.
The regulation of swaps and derivatives under the Dodd-Frank Act directly affects the manner by which our investment management businessbusinesses utilizes and trades swaps and other derivatives, and has generally increased the costs of derivatives trading conducted on behalf of our clients. The European Union ("E.U."EU") (and some other countries) are now in the process of implementing similar requirements that will affect derivatives transactions with a counterparty organized in that country or otherwise subject to that country’scountry's derivatives regulation. The mandatory minimum margin requirements for bilateral derivatives
adopted by the U.S. government and the E.U.EU came into effect in March 2017 inwith respect to variation margin and will be transitioned inwas implemented through 2020a phase-in compliance in respect to initial margin.margin last September 1, 2022. Required margining of derivatives has affected our investment management businessbusinesses as these requirements generally increase costs associated with derivatives transactions and makes derivatives transactions more expensive.
Given our investment and insurance activities are carried out around the globe, we are subject to a variety of regulatory regimes that vary country by country. Our captive insurance companies are regulated by the New York State Department of Finance; our non-captive insurance company is regulated by the Malta Financial Services Authority and our reinsurance companies by the Luxembourg Commissariat aux Assurances and the Guernsey Financial Services Commission. Our captive insurance and reinsurance companies are regulated by both the New York State Department of Finance and the Luxembourg Commissariat aux Assurances, respectively. E.U.EU financial reforms included a number of initiatives to be reflected in new or updated directives and regulations, the most significant of which is the amendment to the pan-European regulatory regime, the Markets in Financial Instruments Directive (“("MiFID II”II"), which went into effect in January 2018. MiFID II regulates the provision of investment services and activities throughout the European Economic Area. MiFID II requires that investment managers and investment advisers located in the E.U. “unbundle”EU "unbundle" research costs from commissions. As a result, investment firms subject to MiFID II may no longer pay for research using client commissions or “soft"soft dollars.”" Going forward, such costs must be paid directly by the investment firm or through a research payment account funded by clients and governed by a budget that is agreed by the client. In the U.S., our investment management business expectsbusinesses expect to continue to pay for research using soft dollars consistent with applicable law. The change in regulations has also impacted the provisions of research by our U.S. broker-dealers. Because the acceptance of hard dollar payments would, under U.S. law, require registration as an investment adviser, our broker-dealers are requiring clients to continue to pay for research on a soft dollar basis unless the client is subject to MiFID II and we can rely on SEC no-action relief so as not to have to register as an investment adviser.
Our businesses have operated for many years within a legal framework that requires us to be able to monitor and comply with a broad range of legal and regulatory developments that affect our activities both in the United States and abroad. As noted above, certain of our businesses are subject to compliance with laws and regulations of United States federal and state governments, foreign governments, their respective agencies and/or various self-regulatory organizations or exchanges relating to the privacy of client information, and any failure to comply with these regulations could expose us to liability and/or reputational damage. Additional legislation, changes in rules promulgated by the The SEC the CFTC, our other regulators and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect the mode of our operation and profitability. The United States and non-United States government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion or deregulation of a broker-dealer, an investment advisor or its directors, officers or employees.
Broker-Dealer Businessno-action relief expires on July 3, 2023, unless further extended.
Cowen and Company, LLC ("Cowen and Company") is a, ATM Execution LLC ("ATM Execution"), and Westminster Research Associates LLC ("Westminster") are registered broker-dealeras broker-dealers with the SEC and in all 50 states, the District of Columbia and Puerto Rico and is a memberare members in good standing with FINRA. Self-regulatoryAll broker-dealers are registered with various U.S. states and territories except for ATM Execution. In addition to FINRA, some of these Cowen broker-dealers are also members of other self-regulatory organizations, including FINRA,various registered securities exchanges. Self-regulatory organizations adopt and enforce rules governing the conduct and activities of itstheir member firms, including Cowen and Company, ATM Execution, and Cowen Prime Services LLC ("Cowen Prime"), Convergex Execution Solutions LLC (subsequently renamed to Cowen Execution Services LLC) ("Cowen Execution") and Westminster Research Associates LLC (“Westminster”). In addition, state securities regulators have regulatory or oversight authority over our broker-dealer entities.firms. Accordingly, Cowen and Company, ATM Execution, Cowen Prime, Cowen Execution, and Westminster are subject to regulation and oversight by the SEC, the U.S. states and territories in which they are registered, and FINRA and the other self-regulatory organizations of which they are members. Cowen Prime, Cowen Execution and Westminster areCompany is also registered with the CFTC and subject to oversight byis a member of the NFA. The Company's U.S. broker-dealers are also members of,NFA as an introducing broker and, consequently, is subject to regulation and oversight by various exchanges,
based on their lines of business.them. Additionally, Cowen International Ltd and Cowen Execution Ltd are primarily regulated in the U.K. by the U.K. FCA.FCA and Cowen and Company Asia is registered with and subject to the financial resources requirements of the SFC of Hong Kong.
Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers' funds, conflicts of interest, securities and information, capital structure, research/banking interaction, record-keeping, the financing of customers' purchases and the conduct and qualifications of directors, officers and employees. In particular, as registered broker-dealers and members of various self-regulatory organizations, Cowen and Company, ATM Execution, Cowen Prime, Cowen Execution and Westminster are subject to the SEC's uniform net capital rule.rule 15c3-1 ("SEC Rule 15c3-1"). SEC Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant part of a broker-dealer's assets be kept in relatively liquid form. The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SEC's uniform net capital ruleSEC Rule 15c3-1 requires us to give prior notice to the SEC for certain withdrawals of capital. As a result, our ability to withdraw capital from our broker-dealer subsidiaries may be limited.
The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. The CFTC has finalized rules establishing capital requirements and financial reporting requirements for CFTC registered swap dealers not subject to regulation by a banking regulator. The SEC has finalized rules establishing similar standards for an entity registering as a standalone securities-based swaps dealer. On October 6, 2021, Cowen Financial Products LLC (“CFP”) became subject to the SEC’s standalone securities-based swap regulatory requirements. CFP registered as a securities-based swap dealer with the SEC with an effective date of November 1, 2021. Under the rules there is a minimum net capital requirement for, among others, an entity that acts as a dealer in security-based swaps, which is the greater of $20 million or 2% of risk margin amount. The risk margin amount means the sum of (i) the total initial margin required to be maintained by the SEC securities-based swaps dealer at each clearing agency with respect to securities-based swaps transactions cleared for securities-based swap customers and (ii) the total initial margin amount calculated by the SEC securities-based swaps dealer swaps dealer with respect to non-cleared securities-based swaps under new SEC rules.
The effort to combat money laundering and terrorist financing is a priority in governmental policy with respect to financial institutions. The Bank Secrecy Act ("BSA"), as amended by Title III of the USA PATRIOT Act of 2001 and its implementing regulations ("Patriot Act"), requires broker-dealers and other financial servicesservices companies to maintain an anti-money laundering compliance program that includes written policies and procedures, designated compliance officer(s), appropriate training, independent review of the program, standards for verifying client identity at account opening and obligations to report suspicious activities and certain other financial transactions. Through these and other provisions, the BSA and Patriot Act seek to promote the identification of parties that may be involved in financing terrorism or money laundering. We must also comply with sanctions programs administered by the U.S. Department of Treasury's Office of Foreign Asset Control, which may include prohibitions on transactions with designated individuals and entities and with individuals and entities from certain countries.
Anti-money laundering laws of certain countries outside the United States contain similar diligence and verification provisions. The obligation of financial institutions, including ours, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls that have increased, and may continue to increase, our costs. Any failure with respect to our programs in this area could subject us to serious regulatory consequences, including substantial fines, and potentially other liabilities.
AvailableCertain of our businesses are subject to laws and regulations enacted by U.S. federal and state governments, the EU or other non-U.S. jurisdictions and/or enacted by various regulatory organizations or exchanges relating to the privacy of the information of clients, employees or others, including the European Union’s General Data Protection Regulation (the “GDPR”), the California Consumer Privacy Act (the “CCPA”), and the Gramm-Leach-Bliley Act (the “GLBA”). In the U.S. and elsewhere, additional privacy legislation has been proposed and may be passed, changes in existing regulations may be made or changes in the interpretation or enforcement of existing laws and rules may be made.
Available Information
We routinely file annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. You may read and copy any document we file with the SEC at the SEC's public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings also are available to the public from the SEC's internet site at http://www.sec.gov.
We maintain a public internet site at http://www.cowen.com and make available free of charge through this site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers, as well as any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We also post on our website the charters for our Board of Directors' Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines, our Code of Business Conduct and Ethics governing our directors, officers and employees and other related materials. The information on or accessible through our website is not incorporated by reference into this Annual Report.
Item 1A. Risk Factors
SUMMARY RISK FACTORS
Some of the factors that could materially and adversely affect our business, financial condition, results of operations or prospects include the following:
Market, Strategy and Industry Risk
a.Market volatility could have an adverse effect on our businesses, results of operations and financial condition.
b.Volatility in the value of our assets and liabilities could adversely affect our results of operations and statement of financial condition.
c.We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.
d.Our Opnet (formerly known as Linkem) and Polysign investment may not be successful and may adversely affect our results of operations or financial condition.
Human Capital Risk
a.Our businesses have traditionally relied on collaboration among our employees. Accordingly, our business could be adversely affected by a prolonged period of employees working remotely.
b.The loss of key senior personnel would have a material adverse effect on our businesses.
c.Employee misconduct could harm investor retention and could cause legal liability, reputational harm and loss of revenue.
Business Risks
a.Deteriorations in the business environment in sectors focused on by our investment banking businesses could materially affect our business and cause substantial fluctuations in financial results from period-to-period.
b.Our capital markets and strategic advisory engagements do not generally provide for subsequent engagements and can lead to payment risk.
c.Larger and more frequent capital commitments in our trading and underwriting businesses increase the potential for significant losses.
d.The market structure in which our market-making business operates may make sustained profitability difficult.
e.Electronic trading and new trading technology may adversely affect this business and may increase competition.
f.We are subject to potential losses and default risks as a result of our clearing and execution activities.
g.Our securities business and related global clearing operations expose us to material liquidity risk, including as a result of international market events, decreases in equity trading activity and declining securities prices.
h.Failures by our third-party clearing agents could materially impact our business and operating results.
i.Our ability to increase revenues and improve profitability will depend on increasing assets under management in existing investment strategies and marketing new investment products and strategies.
j.We may be unable cover our exposure if a counterparty defaults under one of our derivative or non-derivative contracts.
k.We may suffer losses in connection with the insolvency of agents whose services we use and who may hold our investment funds’ assets.
l.Risk management activities may materially adversely affect the return on our investment funds' investments.
m.Our third party reinsurance business could expose us to losses.
n.Investments made by investment funds, including the investments of the Company’s own capital in the Company’s investment funds, is subject to risks that may have a material adverse effect on our revenues, net income and cash flow.
Operational Risks
a.Operational risks relating to the failure of data processing systems and other information systems and technology or other infrastructure may disrupt our business and result in losses or limit our operations and growth.
b.Any cyber attack or other security breach of or vulnerability in our technology systems, or those of our clients or other third party vendors we rely on, could have operational impacts, subject us to significant liability and harm our reputation.
Liquidity Risks
a.We rely upon our subsidiaries for cash flows and servicing our debt and funding our necessary capital expenditures. We may not have sufficient cash flow to pay our substantial debt or to fund our necessary capital expenditures.
b.The terms of the credit agreement governing our revolving credit facility and term loan may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
Litigation and Regulatory Risk
a.Our subsidiaries may become subject to additional regulations which could increase the costs and burdens of compliance or impose additional restrictions.
b.We are subject to third party litigation risk and regulatory risk which could result in significant liabilities and reputational harm.
c.A failure to appropriately identify and deal with conflicts of interest could adversely affect our businesses.
d.Increased regulatory focus could result in regulation that limits how we invest.
Merger Risks
a.The consummation of the proposed Toronto-Dominion Bank merger (the "Merger")is subject to a number of conditions, many of which are largely outside of the control of the parties to the Merger Agreement.
b.Failure to complete the Merger could adversely affect our stock price and business, results of operations or financial condition.
c.While the Merger is pending, we are subject to business uncertainties and certain contractual restrictions that could adversely affect our business, results of operations or financial condition.
d.The Company will incur substantial transaction fees and Merger-related costs in connection with the Merger that could adversely affect the business and operations of the Company if the Merger is not completed.
e.The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire the Company.
f.Litigation against the Company, TD or the members of their respective boards, could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.
g.Uncertainty about the Merger may adversely affect the relationships between us and our clients, vendors and employees.
h.If the Merger is not consummated by August 1, 2023, either we or TD may terminate the Merger Agreement.
Other Risks to Our Stockholders
a.We could change our existing dividend policy in the future.
b.The terms of our Series A Convertible Preferred Stock contain certain restrictions on our ability to pay dividends and repurchase our capital stock, and, under certain circumstances, provides the holders thereof the right to elect two additional directors to our Board of Directors.
c.Our failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business.
Risks Related to the Company's Businesses and Industry
For purposes of the following risk factors, references made to the Company's investment funds include the various investment management products advised by the Company’sCompany's investment management business and the investment management productsfunds through which the Company invests its own capital,capital. The Company's investment banking businesses include the Investment Banking division, the Markets division and real estate funds. References tothe Research division.
Market, Strategy and Industry Risk
Difficult market conditions, market disruptions and volatility have adversely affected, and may in the future adversely affect, the Company's broker-dealer business include Cowenbusinesses, results of operations and Company, ATM Execution, Cowen Execution, Westminster and Cowen Prime.
The Companyfinancial condition.
The Company's businesses, by their nature, do not produce predictable earnings, and all of the Company's businesses have in the past been, and may in the future be affected by conditions in the global financial markets and by global economic conditions, such as interest rates, the availability of credit, inflation rates, economic uncertainty, changes in laws, commodity prices, asset prices (including real estate), currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts, protests or security operations). Challenging market conditions have in the past affected and in the future could affect the level and volatility of securities prices and the liquidity and the value of investments in the Company's investment funds or other investments in which the Company has investments of its own capital, and the Company may not be able to effectively manage its investment management business's exposure to challenging market conditions. Challenging market conditions have in the past adversely affected and in the future could also adversely affect the Company's investment banking business as increased volatility and lower stock prices can make companies less likely to conduct transactions.
In addition, global economic conditions and global financial markets remain vulnerable to the potential risks posed by certain events, which could include, among other things, political and financial uncertainty in the United States and the European Union, renewed concern about China's economy, complications involving terrorism and armed conflicts around the world, or other challenges to global trade or travel, such as have occurred or might occur in the event of a worldwide pandemic such as the COVID-19 pandemic. More generally, because our businesses are closely correlated to the general economic outlook, a significant deterioration in that outlook or realization of certain events would likely have an immediate and significant negative impact on our businesses and overall results of operations.
The effects of the outbreak of COVID-19 have negatively affected the global economy, the United States economy and the global financial markets, and have disrupted and may further disrupt our operations and our clients' operations. The effects of the COVID-19 pandemic could in future periods have an adverse effect on our business, financial condition and results of operations.
The ongoing effects of COVID-19 remain challenging to predict due to multiple uncertainties, including the transmissibility, severity, duration and resurgences of the outbreak; new virus variants and their spread; the application and effectiveness of health and safety measures that are voluntarily adopted by the public or required by government or public health authorities, including vaccines and treatments; the speed and strength of an economic recovery; and the impact to our employees and our operations, our clients’ operations, suppliers and business partners. Impacts to our businesses could include the following:
•Employees contracting COVID-19
•Reductions in our operating effectiveness as our employees work from home or disaster-recovery locations
•Unavailability of key personnel necessary to conduct our business activities
•Unprecedented volatility in global financial markets
•Reductions in revenue across our operating businesses
•Declines in collateral value
•Declines in demand for our products or services
•Unavailability of critical services provided to us by third parties
•Operational failures due to changes in our normal business practices
•Credit losses
We are taking precautions to protect the safety and well-being of our employees. However, no assurance can be given that the steps being taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption which will occur to our employee's ability to service our clients and provide support for our businesses, particularly if the COVID-19 pandemic persists for a long period of time. Furthermore, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the COVID-19 pandemic could harm our ability to operate our businesses or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
In the event that the COVID-19 pandemic persists and leads to increased volatility and lower stock prices for many companies, our investment banking activity could be materiality disrupted.
In addition, a sustained and continuing market downturn could lead to or exacerbate declines in the number ofsecurity transactions executed for customers and, therefore, to a decline in the revenues we receive from commissions and spreads.
In addition, revenues from our investment management businesses could be negatively impacted by decreased securities prices, as well as widely fluctuating securities prices. Because our investment management businesses hold long and short positions in securities, changes in the prices of these securities, as well as any decrease in the liquidity of these securities, may adversely affect our revenues from investment management.
Any one or more of these developments could cause, contribute to or exacerbate the other risks and uncertainties discussed in this Annual Report. Furthermore, such developments may remain prevalent for a significant period of time and may in the future adversely affect our business, financial condition and results of operations even after the COVID-19 pandemic has subsided.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as COVID-19, or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, could create, and in the case of COVID-19 have created, and may continue to create, economic and financial disruptions, and in the case of COVID-19 have led to, and other future events could lead to, operational difficulties (including travel limitations) that may impair our ability to manage our businesses.
Our businesses have traditionally relied on collaboration among our employees, particularly in our markets business. While our employees have been able to work remotely since March 2020, we do not know how a continuing and prolonged period of
remote working by our employees will impact our ability to collaborate. Accordingly, our business could be adversely affected by a prolonged period of employees working remotely.
Our business has traditionally relied on collaboration among our employees. In particular, the trading floor environment in our markets business facilitates idea generation and is more conducive to active trading. While we have been able to continue to operate all of our businesses, including our markets business, with our employees primarily working remotely since March 2020,we do not know how a continuing and prolonged period of remote working by our employees will impact our ability to collaborate. Accordingly, our businesses could be adversely affected by a continuing and prolonged period of employees working remotely.
The Company may be unable to successfully identify, manage and execute future acquisitions, investments and strategic alliances, which could adversely affect our results of operations.
We intend to continually evaluate potential acquisitions, investments and strategic alliances to expand our business. In the future, we may seek additional acquisitions, investments, strategic alliances or similar arrangements, which may expose us to risks such as:
•the difficulty of identifying appropriate acquisitions, investments, strategic allies or opportunities on terms acceptable to us;
•the possibility that senior management may be required to spend considerable time negotiating agreements and monitoring these arrangements;
•potential regulatory issues applicable to the financial services business;
•the loss or reduction in value of the capital investment;
•our inability to capitalize on the opportunities presented by these arrangements; and
•the possibility of insolvency of a strategic ally.
Furthermore, any future acquisitions of businesses could entail a number of risks, including:
•problems with the effective integration of operations;
•inability to maintain key pre-acquisition business relationships;
•increased operating costs;
•exposure to unanticipated liabilities; and
•difficulties in realizing projected efficiencies, synergies and cost savings.
There can be no assurance that we would successfully overcome these risks or any other problems encountered with these acquisitions, investments, strategic alliances or similar arrangements.
The Company's future results will suffer if the Company does not effectively manage its expanded operations.
The Company may continue to expand its operations through new product and service offerings and through additional strategic investments, acquisitions or joint ventures, some of which may involve complex technical and operational challenges. The Company's future success depends, in part, upon its ability to manage its expansion opportunities, which pose numerous risks and uncertainties, including the need to integrate new operations into its existing business in an efficient and timely manner, to combine accounting and data processing systems and management controls and to integrate relationships with customers and business partners. In addition, future acquisitions or joint ventures may involve the issuance of additional shares of common stock of the Company, which may dilute the ownership of the Company's stockholders.
Volatility in the value of the Company's investments and securities portfolios or other assets and liabilities, including investment funds, or negative returns from the investments made by the Company have in the past and could in the future adversely affect the Company's results of operations and statement of financial condition.
The Company invests a significant portion of its capital base to help drive results and facilitate growth of its investment management and broker-dealer businessesinvestment bank businesses. As of December 31, 2022, the Company's invested capital amounted to a net value of $911.2 million (supporting a long market value of $1,048.1 million), representing approximately 86% of Cowen's stockholders' equity presented in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). In accordance with US GAAP, we define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. US GAAP also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Changes in fair value are reflected in the statement of operations at each measurement period. Therefore, continued volatility in
the value of the Company's investments and securities portfolios or other assets and liabilities, including investment funds, will result in volatility of the Company's results. We have incurred lossesexperienced this type of volatility in prior periods andperiods. In addition, the investments made by the Company may incur lossesnot generate positive returns. As a result, changes in value or negative returns from investments made by the Company may have an adverse effect on the Company's financial condition or operations in the future.
Our investments in Opnet (formerly known as Linkem) and Polysign may not prove to be successful and may adversely affect our results of operations or financial condition.
6As of December 31, 2022, we had an approximately $46.8 million investment in Opnet, the largest fixed wireless broadband service provider in Italy. Many factors, most of which are outside of our control, can affect Opnet's business, including the state of the Italian economy and capital markets in general, competition in the Italian telecommunications markets and other factors that directly and indirectly affect the results of operations, including the sales and profitability of Opnet, and consequently may adversely affect our results of operations or financial condition.
December 31, 2022, we had an approximately $57.2 million investment in PolySign, Inc., a company that develops state-of-the-art, secure, scalable infrastructure for financial institutions to fully leverage their digital assets. Many factors, most of which are outside of our control, can affect PolySign’s business, including the level of acceptance in the market of digital assets, regulation of digital assets, competition among companies vying to be the provider of choice for digital asset related infrastructure and other factors that directly and indirectly affect the results of operations, including the profitability of PolySign, and consequently may adversely affect our results of operations or financial condition.
The Company faces strong competition from larger firms.
WhileThe research, brokerage and investment banking industries are intensely competitive, and the Company expects them to remain so. The Company competes on the basis of a number of factors, including client relationships, reputation, the abilities of the Company's broker-dealer business was profitable on an economic income basis forprofessionals, market focus and the year ended December 31, 2017,relative quality and price of the Company's investment management business incurred a loss.services and products. The Company has experienced intense price competition in some of its businesses, including trading commissions and spreads in its brokerage business. In addition, pricing and other competitive pressures in investment banking, including the trends toward multiple book runners, co-managers and financial advisors, and a larger share of the underwriting fees and discounts being allocated to the book-runners, could adversely affect the Company's broker-dealer businessrevenues from its investment bank business.
The Company is a relatively small investment bank. Many of the Company's competitors in the research, brokerage and investment management business have incurred losses in prior periods. For example, the Company's broker-dealer business incurred losses in each of the years ended December 31, 2016, 2013 and 2012. In addition, the Company's investment management business incurred losses in each of the years ended December 31, 2016, 2009 and 2008. The Company may incur losses in any of its future periods. Future losses maybanking industries have a significant effect on the Company's liquidity as well as our ability to operate.
In addition, we may incur significant expenses in connection with any expansion, strategic acquisition or investment with respect to our businesses. Specifically, we have invested,broader range of products and will continue to invest, in our broker-dealer business, including hiringservices, greater financial resources, larger customer bases, greater name recognition and marketing resources, a larger number of senior professionals to expandserve their clients' needs, greater global reach and more established relationships with clients than the Company has. These larger competitors may be better able to respond to changes in the research, brokerage and investment banking industries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally.
The scale of our competitors in the investment banking industry has increased in recent years as a result of substantial consolidation among companies in the research, brokerage and investment banking industries. In addition, a number of large commercial banks and other broad-based financial services firms have established or acquired underwriting or financial advisory practices and broker-dealers or have merged with other financial institutions. These firms have the ability to offer a wider range of products than the Company does which may enhance their competitive position. They also have the ability to support their investment banking and salesadvisory groups with commercial banking and trading product offerings. Accordingly, the Company will needother financial services in an effort to increase its revenues at a rate greater than its expenses to achievegain market share, which has resulted, and maintain profitability. Ifcould further result, in pricing pressure in the Company's revenues do not increase sufficiently, or even if its revenues increase but it isbusinesses. If we are unable to manage its expenses,compete effectively with our competitors in the Company will not achieveinvestment banking industry, the Company's business and maintain profitabilityresults of operations may be adversely affected.
Human Capital Risk
Our businesses are heavily dependent on our personnel so any adverse effects on their well-being or morale could adversely affect our business.
COVID-19 presents a significant threat to our employees’ well-being and morale and the longer the pandemic persists the more significant the challenges could be to our employees' morale. While we have implemented a business continuity plan to protect the health of our employees, our business continuity plan cannot anticipate all scenarios and we may experience potential loss of productivity or a delay in future periods. As an alternative to increasing its revenues, the Company may seek additional capital throughroll out of certain strategic plans as a result of the sale of additional common stock or other forms of debt or equity financing. The Company cannot be certain that it would have access to such financing on acceptable terms.COVID-19 pandemic.
The Company depends on its key senior personnel and the loss of their services would have a material adverse effect on the Company's businesses and results of operations, financial condition and prospects.
The Company depends on the efforts, skill, reputations and business contacts of its principals and other key senior personnel, the information and investment activity these individuals generate during the normal course of their activities and the
synergies among the diverse fields of expertise and knowledge held by the Company's senior professionals. Accordingly, the Company's continued success will depend on the continued service of these individuals. Key senior personnel may leave the Company in the future, and we cannot predict the impact that the departure of any key senior personnel will have on our ability to achieve our investment and business objectives. The loss of the services of any of them could have a material adverse effect on the Company's revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing investment funds or raise additional funds in the future. Our senior and other key personnel possess substantial experience and expertise and have strong business relationships with the investors in its investment funds, clients and other members of the business community. As a result, the loss of such personnel could have a material adverse effect on the Company's businesses and results of operations, financial condition and prospects.
The Company's ability to retain its senior professionals is critical to the success of its businesses, and its failure to do so may materially affect the Company's reputation, business and results of operations.
Our people are our most valuable resource. Our success depends upon the reputation, judgment, business generation capabilities and project execution skills of our senior professionals. Our employees' reputations and relationships with our clients are critical elements in obtaining and executing client engagements. The Company may encounter intense competition for qualified employees from other companies inside and outside of their industries. From time to time, the Company has experienced departures of professionals. Losses of key personnel have occurred and may occur in the future. In addition,Moreover, if any of our client-facing employees or executive officers were to join an existing competitor or form a competing company, some of our clients could choose to use the services of that competitor instead of the services of the Company.
The success of our businesses is based largely on the quality of our employees and we must continually monitor the market for their services and seek to offer competitive compensation. In challenging market conditions, which occurred in recent years, it may be difficult to pay competitive compensation without the ratio of our compensation and benefits expense to revenues becoming higher. In addition, a portionfor our investment professionals whose performance-based compensation represents substantially all of the compensation the professional is entitled to receive in any year, negative performance which results in the professional not being entitled to receive any performance-based compensation could incentivize the professional to join a competitor.
Employee misconduct could harm the Company by, among other things, impairing the Company's ability to attract and retain investors and subjecting the Company to significant legal liability, reputational harm and the loss of revenue from its own invested capital.
It is not always possible to detect and deter employee misconduct. The precautions that the Company takes to detect and prevent this activity may not be effective in all cases, and we may suffer significant reputational harm and financial loss for any misconduct by our employees. The potential harm to the Company's reputation and to our business caused by such misconduct is impossible to quantify.
There is a risk that the Company's employees or partners could engage in misconduct that materially adversely affects the Company's business, including a decrease in returns on its own invested capital. The Company is subject to a number of obligations and standards arising from its businesses. The violation of these obligations and standards by any of the Company's employees could materially adversely affect the Company and its investors. For instance, the Company's businesses require that the Company properly deal with confidential information. If the Company's employees were to improperly use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships. If one of the Company's employees were to engage in misconduct or were to be accused of such misconduct, the business and reputation of the Company could be materially adversely affected.
Business Risks
The Company's investment banking businesses focus principally on specific sectors of the economy, and deterioration in the business environment in these sectors or a decline in the market for securities of companies within these sectors could materially affect our investment banking businesses.
Volatility in the business environment in the Company's sectors or in the market for securities of companies within these sectors could substantially affect the Company's financial results. The business environment for companies in these sectors has been subject to substantial volatility, and the Company's financial results have consequently been subject to significant variations from year to year. The market for securities in each of the Company's sectors may also be subject to industry-specific risks. For example, changes in policies of the United States Food and Drug Administration, along with changes to Medicare and government reimbursement policies, may affect the market for securities of healthcare companies. In addition, increased antitrust enforcement, in both the United States and internationally, and changes to how governments review foreign acquisitions of domestic companies may calm merger and acquisition activity and may make executing merger and acquisition transactions more
difficult. In addition, revenue generated by the Company in its consumer sector could be adversely affected by changes in law or regulatory action with respect to companies that are in cannabis related businesses.
As an investment bank which focuses primarily on specific growth sectors of the economy, the Company also depends significantly on private company transactions for sources of revenues and potential business opportunities. To the extent the pace of these private company transactions slows or the average size declines due to a decrease in private equity financings, difficult market conditions in the Company's sectors or other factors, the Company's business and results of operations may be adversely affected.
The financial results of the Company's investment banking businesses may fluctuate substantially from period to period.
The Company has experienced, and we expect the Company to experience in the future, significant periodic variations in its revenues and results of operations. These variations may be attributed in part to the fact that its investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond the Company's control. In most cases, the Company receives little or no payment for investment banking engagements that do not result in the successful completion of a transaction. As a result, our investment bank business is highly dependent on market conditions as well as the decisions and actions of its clients and interested third parties. For example, a client's acquisition transaction may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the client's or counterparty's business. If the parties fail to complete a transaction on which the Company is advising or an offering in which the Company is participating, we will earn little or no revenue from the transaction, and we may incur significant expenses that may not be recouped. This risk may be intensified by the Company's focus on growth companies in its sectors as the market for securities of these companies has experienced significant variations in the number and size of equity offerings. Many companies initiating the process of an IPO are simultaneously exploring other strategic alternatives, such as a merger and acquisition transaction. The Company's investment bank revenues would be adversely affected in the event that an IPO for which it is acting as an underwriter is preempted by the company's sale if the Company is not also engaged as a strategic advisor in such sale. As a result, our investment banking businesses are unlikely to achieve steady and predictable earnings on a quarterly basis.
Pricing and other competitive pressures may impair the revenues of the Company's brokerage business.
The Company's brokerage business accounted for approximately 38.5% of the Company's revenues during 2022. Along with other firms, the Company has experienced price competition in this business in recent years. In particular, the ability to execute trades electronically and through alternative trading systems has increased the pressure on trading commissions and spreads. We expect to continue to experience competitive pressures in these and other areas in the future as some of our competitors in the investment banking industry seek to obtain market share by competing on the basis of price or use their own capital to facilitate client trading activities. In addition, the Company faces pressure from larger competitors, who may be better able to offer a broader range of complementary products and services to clients in order to win their trading or prime brokerage business. We are committed to maintaining and improving the Company's comprehensive research coverage to support its brokerage business and the Company may be required to make additional investments in the Company's research capabilities.
Further, fund investors and shareholders are increasingly focused on ESG matters and certain fund investors consider ESG factors in determining whether to invest in our funds and our common stock. In addition, some fund investors use third-party benchmarks or scores to measure our ESG practices and decide whether to invest in our funds, and capital commitments to us and may condition capital commitments on taking or refraining from taking certain actions. Investors and stockholders may choose not to invest in our funds or exclude our common stock from their investments if our ESG practices do not fit their investment profiles, or if we fail to demonstrate progress towards our ESG goals, which could adversely impact our reputation or our ability to raise capital and could cause the price of our common stock to decrease.
The Company's capital markets and strategic advisory engagements are singular in nature, do not generally provide for subsequent engagements and can lead to payment risk.
The Company's investment banking clients generally retain the Company on a short-term, engagement-by-engagement basis in connection with specific capital markets or mergers and acquisitions transactions, rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and the Company's engagements with these clients may not recur, the Company must seek out new engagements when its current engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If the Company is unable to generate a substantial number of new engagements that generate fees from new or existing clients, the Company's investment bank business and results of operations would likely be adversely affected. In addition, investment banking clients may on occasion refuse to pay investment banking fees owed pursuant to the terms of our engagement
and we may need to expend resources to enforce our contracts. Any failure to pay the investment banking fees owed to us could adversely affect our results of operations.
Larger and more frequent capital commitments in the Company's trading and underwriting businesses increase the potential for significant losses.
There has been a trend toward larger and more frequent commitments of capital by financial services firms in many of their activities. For example, in order to compete for certain transactions, investment banks may commit to purchase large blocks of stock from publicly traded issuers or significant stockholders, instead of the more traditional marketed underwriting process in which marketing is completed before an investment bank commits to purchase securities for resale. To the extent the total net capital of the Company's broker-dealers allows it, the Company anticipates participating in this trend and, as a result, the Company will be subject to increased risk as it commits capital to facilitate business. Furthermore, the Company may suffer losses as a result of the positions taken in these transactions even when economic and market conditions are generally favorable for others in the industry.
The Company may enter into large transactions in which it commits its own capital as part of its trading business to facilitate client trading activities. The number and size of these large transactions may materially affect the Company's results of operations in a given period. Market fluctuations may also cause the Company to incur significant losses from its trading activities. To the extent that the Company owns assets (i.e., has long positions), a downturn in the value of those assets or in the markets in which those assets are traded could result in losses. Conversely, to the extent that the Company has sold assets it does not own (i.e., has short positions), in any of those markets, an upturn in the value of those assets or in markets in which those assets are traded could expose the Company's investment banking businesses to potentially large losses as they attempt to cover short positions by acquiring assets in a rising market.
The market structure in which our employees takesmarket-making business operates may make it difficult for this business to maintain profitability.
Market structure changes have had an adverse effect on the formresults of restricted stock operations of our market-making business. These changes may make it difficult for us to maintain and/or deferredpredict levels of profitability of, or may cause us to generate losses in, our market-making business.
The growth of electronic trading and the introduction of new technology in the markets in which our market-making business operates may adversely affect this business and may increase competition.
The continued growth of electronic trading and the introduction of new technologies is changing our market-making business and presenting new challenges. Securities, futures and options transactions are increasingly occurring electronically, through alternative trading systems. It appears that the trend toward alternative trading systems will continue to accelerate. This acceleration could further increase program trading, increase the speed of transactions and decrease our ability to participate in transactions as principal, which would reduce the profitability of our market-making business. Some of these alternative trading systems compete with our market-making business and with our algorithmic trading platform, and we may experience continued competitive pressures in these and other areas. Significant resources have been invested in the development of our electronic trading systems, which includes our ATM business, but there is no assurance that the revenues generated by these systems will yield an adequate return on the investment, particularly given the increased program trading and increased percentage of stocks trading off of the historically manual trading markets.
We are subject to potential losses and default risks as a result of our clearing and execution activities.
As a clearing member firm providing services to certain of our brokerage customers, we are ultimately responsible for their financial performance in connection with various securities transactions. Our clearing operations require a commitment of our capital and involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. We are required to finance customers' unsettled positions from time to time, and we could be held responsible for the defaults of those customers. If customers default on their obligations, we remain financially liable for such obligations, and while some of these obligations may be collateralized, we are still subject to market risk in the liquidation of customer collateral to satisfy those obligations. While we have risk management procedures designed to mitigate certain risks, there can be no assurance that our risk management procedures will be adequate. Although we regularly review our credit exposure to customers, default risk may arise from events or circumstances that may be difficult to detect or foresee. Default by our customers may also give rise to the Company incurring penalties imposed by execution venues, regulatory authorities and clearing and settlement organizations. Any liability arising from clearing operations could have a material adverse effect on our business, financial condition and results of operations.
We are also exposed to credit risk from third parties that owe us money, securities or other obligations, including our trading counterparties. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons, and we could be held responsible for such defaults. In addition, customer trading errors may cause us to incur financial losses, which customers may be unable or unwilling to cover. Volatile securities markets, credit markets and regulatory changes may increase our exposure to our customers' and counterparties' credit profiles, which could adversely affect our financial condition and operating results. Our review of the credit risk of customers and trading counterparties may not be adequate to provide sufficient protection from these risks.
Our securities business and related clearing operations expose us to material liquidity risk.
We may be required to provide considerable additional funds with clearing and settlement organizations of which we are members, such as the National Securities Clearing Corporation ("NSCC") or Depository Trust and Clearing Corporation in the U.S., especially during periods of high market volatility or when we are obligated to clear large notional amounts of securities that are not eligible for settlement through the NSCC's Continuous Net Settlement system and, consequently, may be subject to higher margin requirements. In addition, regulatory agencies have recently required these clearing and settlement organizations to increase the level of margin deposit requirements, and they may continue to do so in the future. We rely on our excess cash, certain established credit facilities and the use of outsourced clearing arrangements to meet or reduce these demands. While we have historically met requests for additional margin deposits, there is no guarantee that vest overour excess cash and our established credit facilities and clearing arrangements will be sufficient for future needs, particularly if there is an increase in requirements. There is also no guarantee that these established credit facilities will be extended beyond their expiration.
As a clearing member firm of securities clearing houses in the U.S., we are also exposed to clearing member credit risk. Securities clearing houses require member firms to deposit cash and/or government securities to a clearing fund. If a clearing member defaults in its obligations to the clearing house in an amount larger than its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. The clearing houses of which we are members also have the authority to assess their members for additional funds if the clearing fund is depleted. A large clearing member default could result in a substantial cost to us if we are required to pay such assessments.
In certain jurisdictions we are dependent on third-party clearing agents and any failures by such clearing agents could materially impact our business and operating results.
In certain jurisdictions we are dependent on agents for the clearing and settlement of securities transactions. If our agents fail to properly facilitate the clearing and settlement of our customer trades, we could be subject to financial, legal and regulatory risks and costs that may impact our business and operating results. In addition, it could cause our clients to reduce or cease their trading with us, which would adversely affect our revenues and financial results.
Moreover, certain of the clearing agreements provide our clearing agents with rights to increase our deposit requirements or to terminate the agreements upon short notice. There is no guarantee we will be able to satisfy any increased deposit requirements within the time frames demanded by our clearing agents, and if we fail to satisfy such demands on a timely basis, it could constitute a default under our clearing agreements. If our clearing agents terminate a clearing agreement on short notice, there is no guarantee that we could obtain alternative services in a timely manner and any interruption of the normal course of our trading and clearing operations could have a material impact on our business and results of operations.
Our clearing and execution operations are global and international market events could adversely impact our financial results.
Because we offer brokerage products and services on a global basis, our revenues derived from non-U.S. operations are subject to risk of loss from social or political instability, changes in government policies or policies of central banks, downgrades in the credit ratings of sovereign countries, expropriation, nationalization, confiscation of assets and unfavorable legislative and political developments in such non-U.S. jurisdictions. Revenues from the trading of non-U.S. securities may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations on our results could be magnified because generally non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.
Decreases in equity trading activity by active fund managers and declining securities prices could harm our business and profitability.
Declines in the trading activity of active fund managers generally result in lower revenues from our brokerage products and services. In addition, securities' price declines adversely affect our trading commissions outside North America, which are based on the value of transactions. The demand for our brokerage products and services is directly affected by factors such as economic, regulatory and political conditions that may lead to decreased trading activity and prices in the securities markets in the U.S. and
in all of the foreign markets we serve. Significant flows of investments out of actively managed equity funds have curtailed their trading activity, which has weighed on our buy-side trading volumes and the use of some of our higher value services. Volatility levels also impact the amount of trading activity. Sustained periods of low volatility can result in lower levels of trading activity and trading activity tends to decline in periods following extreme levels of volatility. In addition, any substantial shift from active fund management to passive fund management could have an adverse effect on our trading commissions.
The Company's revenues and, in particular, its ability to earn incentive and investment income, would be adversely affected if there are reversals to previously accrued incentive fees or if its investment funds fall beneath their "high-water marks" as a result of negative performance.
For our private equity funds, the incentive fee crystallizes upon realization of the investment. In those circumstances, until the investment is realized, the accrued incentive fees are subject to reversal even if those accruals were made in prior years. The Company's incentive allocations are also subject, in some cases, to performance hurdles or benchmarks. To the extent the Company's investment funds experience negative investment performance, the investors in or beneficial owners of these investment funds would need to recover cumulative losses before the Company can earn investment income at the end of the performance period with respect to the investments of those who previously suffered losses. With respect to our hedge fund products, incentive income, is, in most cases, subject to "high-water marks" whereby incentive income is earned by the Company only to the extent that the net asset value of an investment advisory product at the end of a measurement period exceeds the highest net asset value as of the end of a preceding measurement period for which the Company earned incentive income. The Company recognizes incentive income charged to the Company's hedge funds based on the net profits of the hedge funds. For a majority of the hedge funds, the incentive fee crystallizes annually when the high-water mark for such hedge funds is reset, which delays recognition of the incentive fee until year end. As a result, negative performance could adversely affect the Company’s incentive and investment income from both its private equity and hedge fund products.
The Company's ability to increase revenues and improve profitability will depend on increasing assets under management in existing investment strategies and developing and marketing new investment products and strategies, including identifying and hiring or affiliating with new investment teams.
The Company's investment management business generates management and incentive fee income based on its assets under management. If the Company is unable to increase its assets under management in its existing products it may be difficult to increase its revenues. The Company may launch new investment management products and hire or affiliate with new investment teams focusing on new investment strategies. If these products or strategies are not successful, or if the Company is unable to hire or affiliate with new investment teams, or successfully manage its relationships with its affiliated investment teams, the Company's profitability could be adversely affected.
Certain of the Company's investment funds may invest in relatively high-risk, illiquid assets, and the Company may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principal amounts of these investments.
Certain of the Company's investment funds invest a significant portion of their assets in securities that are not publicly traded. In many cases, they may be prohibited by contract or by applicable securities laws from selling such securities for a period of years, whichtime or there may not be a public market for such securities. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of downward movement in market prices during the disposition period. Accordingly, under certain conditions, the Company's investment funds may be forced to either sell securities at lower prices than they had expected to realize or defer, potentially for a considerable period of time, sales that they had planned to make. Investing in these types of investments can involve a high degree of risk, and the Company's investment funds may lose some or all of the principal amount of such investments, including our own invested capital.
The due diligence process that the Company's investment management business undertakes in connection with investments by the Company's investment funds is inherently limited and may not as attractive to existing and potential employees as compensation consisting solely of cash or a lesser percentage of stock or other deferred compensationreveal all facts that may be offeredrelevant in connection with making an investment.
Before making investments, particularly investments in securities that are not publicly traded, the Company endeavors to conduct a due diligence review of such investment that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, the Company is often required to evaluate critical and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants, investment bankers and financial analysts may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, the Company is limited to the resources available, including information provided by the target of the investment and, in some circumstances, third party investigations. The due diligence investigation that the Company conducts with respect to any investment opportunity
may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful, which may adversely affect the performance of the Company's investment funds and the Company's ability to generate returns on its own invested capital from any such investment.
Investors and beneficial owners in the Company's hedge funds can generally redeem investments with prior notice. The rate of redemptions could accelerate at any time. Historically, redemptions have created difficulties in managing the liquidity of certain of the Company's hedge funds, reduced assets under management and adversely affected the Company's revenues, and may do so in the future.
Investors and beneficial owners in the Company's hedge funds may generally redeem their investments with prior notice, subject to certain initial holding periods. Investors may reduce the aggregate amount of their investments, or transfer their investments to other hedge funds or asset managers with different fee rate arrangements, for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. Furthermore, investors in the Company's hedge funds may be investors in products managed by other asset managers where redemptions have been restricted or suspended. Such investors may redeem capital from Company's hedge funds, even if the Company's hedge funds' performance is superior, due to an inability to redeem capital from other managers. Increased volatility in global markets could accelerate the pace of redemptions. Redemptions of investments in the Company's hedge funds could also take place more quickly than assets may be sold by those hedge funds to meet the price of such redemptions, which could result in the relevant hedge funds and/or the Company being in breach of applicable legal, regulatory and contractual requirements in relation to such redemptions, resulting in possible regulatory and investor actions against the Company and/or the Company's hedge funds. If the Company's hedge funds underperform, existing investors may decide to reduce or redeem their investments or transfer asset management responsibility to other asset managers and the Company may be unable to obtain new investment management business. Any such action could potentially cause further redemptions and/or make it more difficult to attract new investors.
The redemption of investments in the Company's hedge funds could also adversely affect the revenues of the Company's investment management business, which are substantially dependent upon its assets under management. If redemptions of investments cause revenues to decline, they would likely have a material adverse effect on our competitors.
Difficultbusiness, results of operations or financial condition. If market conditions, negative performance or other factors cause an increased level of redemption activity returns, it could become more difficult to manage the liquidity requirements of the Company's hedge funds, making it more difficult or more costly for the Company's hedge funds to liquidate positions rapidly to meet redemption requests or otherwise. This in turn may negatively impact the Company's returns on its own invested capital.
In addition to the impact on the market disruptionsvalue of assets under management, illiquidity and volatility of the global financial markets could negatively affect the ability of the Company's investment management business to manage inflows and outflows from the Company's hedge funds. A number of asset management firms, including the Company's investment management business, have adversely affected,in the past exercised, and may in the future exercise, their rights to limit, and in some cases, suspend, redemptions from the investment management products they advise. The Company's investment management business has also negotiated, and may in the future negotiate, with investors or exercise such rights in an attempt to limit redemptions or create a variety of other investor structures to bring assets and liquidity requirements into a more manageable balance. To the extent that the Company's investment management business has negotiated with investors to limit redemptions, it may be likely that such investors will continue to seek further redemptions in the future. Such actions may have an adverse effect on the ability of the Company's hedge funds to attract new capital or to develop new investment platforms. Poor performance relative to other asset management firms may result in reduced investments in the Company's hedge funds and increased redemptions. As a result, investment underperformance would likely have a material adverse effect on the Company's results of operations and financial condition.
Investments made by investment funds, including the investments of the Company's own capital in the Company's investment funds, are subject to other additional risks.
Investments by the Company's investment funds are subject to certain risks that may result in losses. Decreases to assets under management as a result of investment losses or client redemptions may have a material adverse effect on the Company's revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing investment funds or raise additional funds in the future. Additional risks include the following:
•Generally, there are few limitations on investment funds' strategies, which are often subject to the sole discretion of the management company or the general partner of such funds.
•Investment funds may engage in short selling, which is subject to a theoretically unlimited risk of loss because there is no limit on how much the price of a security sold short may appreciate before the short position is closed out. An investment
fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found or if the investment fund is otherwise unable to borrow securities that are necessary to hedge its positions. Furthermore, the SEC and other regulatory authorities outside the United States have imposed reporting requirements on short selling, which in certain circumstances may impair an investment fund's ability to use short selling effectively.
•The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall market position through a combination of financial instruments. An investment fund's trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the investment fund might only be able to acquire some but not all of the components of the position, or if the overall position were in need of adjustment, the investment fund might not be able to make such an adjustment. As a result, an investment fund would not be able to achieve the market position selected by the management company or general partner of such fund, and might incur a loss in liquidating its position.
•Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their respective liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This "systemic risk" may adversely affect the financial intermediaries (such as clearing agencies, clearing houses, banks, securities firms, other counterparties and exchanges) with which the investment funds interact on a daily basis.
•Investment funds are subject to risks due to the potential illiquidity of assets. Investment funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. The timely sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which they may be a party, and changes in industry and government regulations. It may be impossible or highly costly for investment funds to liquidate positions rapidly to meet margin calls, redemption requests or otherwise, particularly if there are other market participants seeking to dispose of similar assets at the same time, if the relevant market is otherwise moving against a position or in the event of trading halts or daily price movement limitations on the market. In addition, increased levels of redemptions may result in increased illiquidity as more liquid assets are sold to fund redemptions.
•Investment fund assets are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the commodities underlying them. In addition, investment funds' assets are subject to the risk of the failure of any of the exchanges on which their positions trade.
•Investment fund assets that are not denominated in the U.S. dollar are subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. Officials in foreign countries may, from time to time, take actions in respect of their currencies that could significantly affect the value of an investment fund's assets denominated in those currencies or the liquidity of such investments. For example, a foreign government may unilaterally devalue its currency against other currencies, which would typically have the effect of reducing the U.S. dollar value of investments denominated in that currency. A foreign government may also limit the convertibility or repatriation of its currency or assets denominated in that currency. While the Company generally expects to hedge its exposure to currencies other than the U.S. dollar, and may do so through foreign currency futures contracts and options thereon, forward foreign currency exchange contracts, swaps or any combination thereof, but there can be no assurance that such hedging strategies will be implemented, or if implemented, will be effective. While an investment fund may enter into currency hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance than if it had not engaged in such hedging transactions. For a variety of reasons, the Company may not seek to establish a perfect correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Company from achieving the intended hedge or expose an investment fund to risk of loss.
•Investment funds are also subject to the risk that war, terrorism, and related geopolitical events may lead to increased short-term market volatility and have adverse long-term effects on the U.S. and world economies and markets generally,
as well as adverse effects on issuers of securities and the value of investments. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and non-U.S. economies and markets generally. Those events, as well as other changes in U.S. and non-U.S. economic and political conditions, also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment and other factors affecting the value of the investment fund's assets.
If the Company's investment fund's counterparty for any of its derivative or non-derivative contracts defaults on the performance of those contracts, the Company may not be able to cover its exposure under the relevant contract.
The Company's investment funds enter into numerous types of financing arrangements with a wide array of counterparties around the world, including loans, hedge contracts, swaps, repurchase agreements and other derivative and non-derivative contracts. The terms of these contracts are generally complex and often customized and generally are not subject to regulatory oversight. The Company is subject to the risk that the counterparty to one or more of these contracts may default, either voluntarily or involuntarily, on its performance under the contract. Any such default may occur at any time without notice. Additionally, the Company may not be able to take action to cover its exposure if a counterparty defaults under such a contract, either because of a lack of the contractual ability or because market conditions make it difficult to take effective action. The impact of market stress or counterparty financial condition may not be accurately foreseen or evaluated and, as a result, the Company may not take sufficient action to reduce its risks effectively.
Counterparty risk is accentuated where the investment management product has concentrated its transactions with a single or small group of counterparties. Generally, investment funds are not restricted from concentrating any or all of their transactions with one counterparty. Moreover, the Company's internal review of the creditworthiness of their counterparties may prove inaccurate. The absence of a regulated market to facilitate settlement and the evaluation of creditworthiness may increase the potential for losses.
In addition, these financing arrangements often contain provisions that give counterparties the ability to terminate the arrangements if any of a number of defaults occurs with respect to the Company's investment funds, including declines in performance or assets under management and losses of key management personnel, each of which may be beyond our control. In the event of any such termination, the Company's investment funds may not be able to enter into alternative arrangements with other counterparties and our business may be materially adversely affected.
The Company may suffer losses in connection with the insolvency of prime brokers, custodians, administrators and other agents whose services the Company uses and who may hold assets of the Company's investment funds.
Most of the Company's investment funds use the services of prime brokers, custodians, administrators or other agents to carry out certain securities transactions and to conduct certain business of the Company's investment funds. In the event of the insolvency of a prime broker and/or custodian, the Company's investment funds might not be able to recover equivalent assets in full as they may rank among the prime broker's and custodian's unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the Company's investment funds' cash held with a prime broker or custodian (if any) may not be segregated from the prime broker's or custodian's own cash, and the investment funds will therefore rank as unsecured creditors in relation thereto.
Risk management activities may materially adversely affect the return on the Company's investment funds' investments if such activities do not effectively limit exposure to decreases in investment values or if such exposure is overestimated.
When managing the Company's investment funds' exposure to market risks, the relevant investment management product may use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative financial instruments to limit its exposure to changes in the relative values of investments that may result from market developments, including changes in interest rates, currency exchange rates and asset prices. The success of such derivative transactions generally will depend on the Company's ability to accurately predict market changes in a timely fashion, the degree of correlation between price movements of a derivative instrument, the position being hedged, the creditworthiness of the counterparty and other factors. As a result, these transactions may result in poorer overall investment performance than if they had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases. A perfect correlation between the instruments used in a hedging or other derivative transaction and the position being hedged may not be attained. An imperfect correlation could give rise to a loss. Also, it may not be possible to fully or perfectly limit exposure against all changes in the value of an investment because the value of an investment is likely to fluctuate as a result of a number of factors, many of which will be beyond the Company's control or ability to hedge.
Our third party reinsurance business could expose us to losses.
We provide third party reinsurance coverage through our Luxembourg subsidiary, Cowen Reinsurance S.A (formerly “Hollenfels Re S.A.”) ("Cowen Re") and through our Guernsey subsidiary, Kelvin Re Limited (“Kelvin Re”). We have written polices relating to property and casualty, workers' compensation, general liability and construction performance bonds and may issue reinsurance policies relating to other types of insurance. Because we write reinsurance, the success of our underwriting efforts depends, in part, upon the policies, procedures and expertise of the ceding companies making the original underwriting decisions. We face the risk that these ceding companies may fail to accurately assess the risks that they assume initially, which, in turn, may lead us to inaccurately assess the risks we assume. If we fail to establish and receive appropriate premium rates or the claims we receive exceed the premiums and retrocession recoverables we are able to collect, we will suffer losses.
We may be unable to purchase retrocession reinsurance and our retrocession agreements subject us to third-party credit risk.
We may enter into retrocession agreements with third parties in order to limit our exposure to losses from the reinsurance coverage provided by Cowen Re and Kelvin Re. Changes in the availability and cost of retrocession reinsurance, which are subject to market conditions that are outside of our control, may reduce to some extent our ability to use retrocession reinsurance to balance exposures across our reinsurance operations. Accordingly, we may not be able to obtain our desired amounts of retrocession reinsurance. In addition, even if we are able to obtain such reinsurance, we may not be able to negotiate terms that we deem appropriate or acceptable or obtain such reinsurance from entities with satisfactory creditworthiness. While we seek to do business with creditworthy counterparties, if the parties who provide us with retrocession are not able to meet their obligations to us or fail to make timely payments under the terms of our retrocession agreements, we could be materially and adversely affected because we may remain liable under the terms.
The Company may incur losses in the future.
The Company may incur losses in any of its future periods. Future losses may have a significant effect on the Company's liquidity as well as our ability to operate. In addition, we may incur significant expenses in connection with any expansion, strategic acquisition or investment with respect to our businesses. Specifically, we have invested, and will continue to invest in, and hire senior professionals to expand our investment banking businesses. Accordingly, the Company will need to increase its revenues at a rate greater than its expenses to achieve and maintain profitability. If the Company's revenues do not increase sufficiently, or even if its revenues increase but it is unable to manage its expenses, the Company will not achieve and maintain profitability in future periods. As an alternative to increasing its revenues, the Company may seek additional capital through the sale of additional common stock or other forms of debt or equity financing. The Company cannot be certain that it would have access to such financing on acceptable terms.
Operational Risks
We have taken steps to protect our businesses from cybersecurity attacks while our employees have been working remotely, but remote working environments may be less secure and more susceptible to cybersecurity attacks which could adversely affect our ability to securely process transactions and maintain confidential financial, personal and other information.
The Company's businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions that the Company processes have become increasingly complex. As a result of the COVID-19 pandemic virtually all of our employees, including those who process our transactions, are spending a substantial amount of time working remotely. While we have implemented risk management and contingency plans and taken other precautions with respect to the COVID-19 pandemic, such measures may not adequately protect our businesses from the full impact of the COVID-19 pandemic as remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. Accordingly, if our systems are breached as a result of a cybersecurity attack that takes advantage of the COVID-19 pandemic, our ability to securely process transactions and maintain confidential financial, personal and other information could be adversely affected.
In addition, the effects of the COVID-19 pandemic, including remote working arrangements for employees, may also impact our financial reporting systems and internal control over financial reporting, disclosure controls and procedures, however, to date, these arrangements have not materially affected our ability to maintain our business operations.
Our information and technology systems are critical components of our business and operations, and a failure of those systems or other aspects of our business operations may disrupt our business, cause financial loss, increase our legal liability and constrain our growth.
Our operations rely extensively on the secure processing, storage and transmission of confidential financial, personal and other information in our computer systems and networks. Although we take protective measures and devote significant resources to maintaining and upgrading our systems and networks with measures such as intrusion and detection prevention systems,
monitoring firewalls to safeguard critical business applications and supervising third party providers that have access to our systems, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. Additionally, if a client's computer system, network or other technology is compromised by unauthorized access, we may face losses or other adverse consequences by unknowingly entering into unauthorized transactions. If one or more of such events occur, this potentially could jeopardize our or our clients' or counterparties' confidential and other information processed and stored in and transmitted through our computer systems and networks. Furthermore, such events may cause interruptions or malfunctions in our, our clients', our counterparties' or third parties' operations, including the transmission and execution of unauthorized transactions. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not covered or not fully covered through our insurance. The increased use of smartphones, tablets and other mobile devices as well as cloud computing may also heighten these and other operational risks. Similar to other firms, we and our third party providers continue to be the subject of attempted unauthorized access, computer viruses and malware, and cyber attacks designed to disrupt or degrade service or cause other damage and denial of service. Additional challenges are posed by external parties, including foreign state actors. There can be no assurance that such unauthorized access or cyber incidents will not occur in the future, and they could occur more frequently and on a larger scale. We are also subject to laws and regulations relating to the privacy and security of the information of our clients, employees or others, and any failure to comply with these regulations could expose us to liability and/or reputational damage.
Operational risks relating to the failure of data processing systems and other information systems and technology or other infrastructure may disrupt the Company's business and result in losses or limit our operations and growth in the industry.
The Company's business is highly dependent on its ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions that the Company processes have become increasingly complex. The inability of the Company's systems to accommodate an increasing volume of transactions could also constrain the Company's ability to expand its business. If any of these systems do not operate properly or are disabled, or if there are other shortcomings or failures in the Company's internal processes, people or systems, the Company could suffer impairments, financial loss, a disruption of its business, liability to clients, regulatory intervention or reputational damage.
The Company has outsourced certain aspects of its technology infrastructure including data centers and wide area networks, as well as some trading applications. The Company is dependent on its technology providers to manage and monitor those functions. A disruption of any of the outsourced services would be out of the Company's control and could negatively impact our business. The Company has experienced disruptions on occasion, none of which has been material to the Company's operations and results. However, there can be no guarantee that future material disruptions with these providers will not occur.
The Company also faces the risk of operational failure of or termination of relations with any of the clearing agents, exchanges, clearing houses or other financial intermediaries that the Company uses to facilitate its securities transactions. Any such failure or termination could adversely affect the Company's ability to effect transactions and to manage its exposure to risk.
In addition, the Company's ability to conduct its business may be adversely impacted by a disruption in the infrastructure that supports Company and the communities in which we are located. This may affect, among other things, the Company's financial, accounting or other data processing systems. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which the Company conducts business, whether due to fire, other natural disaster, power or communications failure, act of terrorism or war or otherwise. Nearly all of our employees in our primary locations in New York, Boston, San Francisco and London work in close proximity to each other. Although the Company has a formal disaster recovery plan in place, if a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other locations, the Company's ability to service and interact with its clients may suffer, and the Company may not be able to implement successfully contingency plans that depend on communication or travel.
Our business also relies on the secure processing, storage and transmission of confidential and other information in its computer systems and networks. The Company's computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this could jeopardize our or our clients' or counterparties' confidential and other information processed and stored in, and transmitted through, the Company's computer systems and networks, or otherwise cause interruptions or malfunctions in our business', its clients', its counterparties' or third parties' operations. The Company may be required to expend significant additional resources to modify its protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and the Company may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by the Company.
Any cyber attack or other security breach of or vulnerability in our technology systems, or those of our clients or other third party vendors we rely on, could have operational impacts, subject us to significant liability and harm our reputation.
Our operations rely heavily on the secure processing, storage and transmission of sensitive and confidential financial, personal and other information in our computer systems and networks. There have been several highly publicized cases involving financial services companies reporting the unauthorized disclosure of client or other confidential information in recent years, as well as cyber attacks involving theft, dissemination and destruction of corporate information or other assets, in some cases as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties. Like other financial services firms, we have been the target of attempted cyber attacks. Cyber attacks can originate from a variety of sources, including third parties affiliated with foreign governments, organized crime or terrorist organizations and malicious individuals both outside and inside a targeted company. Malicious actors may also attempt to compromise or induce our employees, clients or other users of our systems to disclose sensitive information or provide access to our data, and these types of risks may be difficult to detect or prevent. Although cybersecurity incidents among financial services firms are on the rise, we are not aware of any material losses relating to cyber attacks or other information security breaches. However, the techniques used in these attacks are increasingly sophisticated, change frequently and are often not recognized until launched. Although we monitor the changing cybersecurity risk environment and seek to maintain a robust suite of authentication and layered information security controls, these controls could fail to detect, mitigate or remediate these risks in a timely manner. Despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, ransomware, computer viruses and other malicious code, and other events that could damage to our reputation, and have an ongoing impact on the security and stability of our operations and expose us to class action lawsuits and regulatory investigation, action and penalties and significant liability.
We also rely on numerous third-party service providers to conduct other aspects of our business operations, and we face similar risks relating to them. While we regularly conduct security assessments on these third-party vendors, we cannot be certain that their information security protocols are sufficient to withstand a cyber attack or other security breach. In addition, in order to access our products and services, our customers may use computers and other devices that are beyond our security control systems and processes.
Notwithstanding the precautions we take, if a cyber attack or other information security breach were to occur, this could jeopardize the information we confidentially maintain, or otherwise cause interruptions in our operations or those of our clients and counterparties, exposing us to liability. As attempted attacks continue to evolve in scope and sophistication, we may be required to expend substantial additional resources to modify or enhance our protective measures, to investigate and remediate vulnerabilities or other exposures or to communicate about cyber attacks to our customers. Though we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits or are not covered under any of our current insurance policies. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Additionally, the SEC issued guidance in February 2018 stating that, as a public company, we are expected to have controls and procedures that relate to cybersecurity disclosure, and are required to disclose information relating to certain cyber attacks or other information security breaches in disclosures required to be made under the federal securities laws. Further, successful cyber attacks at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the financial system in general, which could result in a loss of business.
Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties, and the increasing sophistication of malicious actors, a cyber attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack would take substantial amounts of time and resources, and that there may be extensive delays before we obtain full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered. All of which would further increase the costs and consequences of such an attack.
We may also be subject to liability under various data protection laws including, the GDPR and the CCPA. We are subject to numerous laws and regulations designed to protect personal information. These laws and regulations are increasing in complexity and number. If any person, including any of our associates, vendors or other service providers, negligently disregards or intentionally breaches our established controls with respect to sensitive or confidential client, employee or other data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client, employee or other data, whether through system failure, vendor fault, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue. Potential liability in the event of a security breach of sensitive or confidential data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
Liquidity Risks
The soundness of other financial institutions may adversely affect Cowen.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Cowen has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and institutional clients. Many of these transactions expose Cowen to credit risk in the event of a default by a counterparty or client. In the past, defaults by, or even speculation about, one or more financial services institutions or the financial services industry generally during moments of economic crisis have led to market-wide liquidity problems. The economic volatility resulting from the current COVID-19 pandemic could, as similar events in the past have, result in similar defaults and, as a result, impair the confidence of our counterparties and ultimately affect our ability to effect transactions. In addition, Cowen’s credit risk may be exacerbated when the collateral held by Cowen cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit exposure due to Cowen. Any such losses could have an adverse effect on Cowen’s financial condition and results of operations.
Higher volumes and price volatility in the markets due to COVID-19 and other factors could lead to higher cash requirements relating to our clearing activities, which could adversely affect our liquidity position.
Since the COVID-19 pandemic began, the capital markets have experienced a higher level of stress due to the global COVID-19 pandemic. Higher volumes and price volatility have led to increased margin requirements at clearing corporations and exchanges, along with increased levels of fails due to operational friction in the financial system. Certain of these higher cash requirements have required us, and may continue to require us, to use more liquidity relating to our clearing activities and our overall liquidity could, in the future, be adversely affected as a result.
Limitations on access to capital by the Company and its subsidiaries could impair its liquidity and its ability to conduct its businesses.
Liquidity, or ready access to funds, is essential to the operations of financial services firms. Failures of financial institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our trading business and clearing activities and perceived liquidity issues may affect the willingness of the Company's clients and counterparties to engage in brokerage transactions with us. Our liquidity could be impaired due to circumstances that the Company may be unable to control, such as a general market disruption or an operational problem that affects the Company, its trading clients or third parties. Furthermore, the Company's ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.
The Company primarily depends on its subsidiaries to fund its operations. Cowen and Company, ATM Execution, CFP and Westminster are subject to the net capital requirements of the SEC and various self-regulatory organizations of which they are members. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Cowen International Ltd, and Cowen Execution Ltd. are also subject to capital requirements in the U.K. by the FCA. Any failure to comply with these capital requirements could impair the Company's ability to conduct its investment banking businesses.
We are a holding company and rely upon our subsidiaries for cash flow to make payments of principal and interest on our outstanding indebtedness.
We are a holding company with no business operations or assets other than the capital stock of our direct and indirect subsidiaries. Consequently, we are dependent on dividends, distributions, loans and other payments from these subsidiaries to make payments of principal and interest on all of our indebtedness including our senior notes due 2024 (the "2024 Notes") and our senior notes due 2033 (the "2033 Notes") and together with the 2024 Notes, (the "Notes") and under our term loan B (“Term Loan”) under our Credit Agreement.The ability of our subsidiaries to pay dividends and make other payments to us will depend on their cash flows and earnings, which, in turn, will be affected by all of the factors discussed in this annual report. The ability of our direct and indirect subsidiaries to pay dividends and make distributions to us may be restricted by, among other things, applicable laws and regulations and by the terms of any debt agreements or other agreements into which they enter. If we are unable to obtain funds from our direct and indirect subsidiaries as a result of restrictions under their debt or other agreements, applicable laws and regulations or otherwise, we may not be able to pay cash interest or principal on the Notes or Term Loan when due.
Servicing our debt and funding our necessary capital expenditures requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt or to fund our necessary capital expenditures.
Our ability to make scheduled payments of the principal and to pay interest on or to refinance our indebtedness, including the Notes and Term Loan depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Furthermore, to the extent that businesses are unable to generate cash flows sufficient to fund necessary capital expenditures during the COVID-19 pandemic, we may be required to seek additional capital through issuances of debt or equity securities; however, we may be unable to complete any such transactions on favorable terms to us, or at all.
Despite our current consolidated debt levels, we may incur substantially more debt or take other actions which would intensify the risks discussed above.
We may be able to incur substantially more debt in the future, including secured debt. Although the Notes and the Credit Agreement contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions, including with respect to our ability to incur additional senior secured debt, securing existing or future debt or recapitalizing our debt. The additional debt we may incur in compliance with these restrictions could be substantial. Additionally, we have the option to raise incremental term loans or increase commitments under the Credit Agreement by certain amounts pursuant to the terms thereof. Any such increases would be secured debt. These actions that could diminish our ability to make payments on the Term Loan or the Notes, or to make repayments of any revolving borrowings under our Credit Agreement.
The terms of the credit agreement governing our revolving credit facility and term loan may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
We are party to a credit agreement (the "Credit Agreement") pursuant to which the lenders party thereto made available to us an initial term loan B in an aggregate principal amount of $300 million (the “Initial Term Loan”), an incremental term loan B in an aggregate principal amount of $150 million, fungible with the Initial Term Loan (the “Incremental Term Loan” and, together with the Initial Term Loan, the “Term Loan”) and a revolving credit facility with aggregate commitments of $25 million (with a $5 million sub-limit for the issuance of letters of credit) . As of December 31, 2022, the revolving credit facility was unfunded and $450 million was drawn under the Term Loan. The terms of the Credit Agreement contain a number of restrictive covenants that impose significant operating and financial restrictions on us and our restricted subsidiaries and may limit our ability to engage in actions that may be in our long-term best interest. The restrictive covenants include (subject to customary exceptions, thresholds, qualifications and “baskets”) restrictions on our ability to:
• incur additional indebtedness and guarantee indebtedness;
• pay dividends or make other distributions or repurchase or redeem capital stock;
• prepay, redeem or repurchase certain indebtedness;
• issue certain preferred stock or similar equity securities;
• make loans and investments;
• dispose of assets;
• incur liens;
• enter into transactions with affiliates;
• alter the businesses we conduct;
• enter into agreements restricting our subsidiaries’ ability to pay dividends;
• engage in sale and leaseback transactions; and
• consolidate, merge or sell all or substantially all of our assets.
The restrictive covenants in the Credit Agreement also require us to comply with a financial maintenance covenant, consisting of a maximum total net leverage ratio of no greater than 3.35 to 1.00, measured as of the last day of each fiscal quarter on which outstanding borrowings under the revolving credit facility exceed 35.0% of the commitments thereunder (excluding certain letters of credit).
In addition, our obligations under the Credit Agreement are guaranteed by certain of our wholly-owned domestic subsidiaries (excluding our broker-dealer subsidiaries) (the “Guarantors”) and secured by substantially all of our and our Guarantors’ assets, subject in each case to certain customary exceptions.
A breach of the covenants or restrictions under the Credit Agreement could result in an event of default. An event of default would allow the lenders to accelerate the indebtedness under the Credit Agreement, and could result in the acceleration of any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, an event of default would permit the lenders under our revolving credit facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our Credit Agreement, those lenders could proceed against the collateral granted them to secure that indebtedness. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:
• limited in how we conduct our business;
• unable to raise additional debt or equity financing to operate during general economic or business downturns; and
• unable to compete effectively or to take advantage of new business opportunities.
In addition, our Term Loan and new revolving credit facility have a variable rate of interest, which increases our exposure to interest rate fluctuations, to the extent we elect not to hedge such exposures.
Any substantial and sustained downturn in our operations due to the COVID-19 pandemic or other factors may cause us to be in breach of our debt covenants which would limit our ability to incur additional indebtedness.
The instruments governing our existing indebtedness, including the Credit Agreement, require us to comply with certain restrictive covenants and any substantial and sustained downturn in our operations due to the COVID-19 pandemic or other factors may cause us to be in breach of such covenants.If we breach these covenants our ability to incur additional indebtedness would be limited.In addition, to the extent we borrow under our $25 million revolving credit facility a breach of the maintenance covenants under that facility could constitute an event of default and cause our outstanding indebtedness under the revolving credit facility to be declared immediately due and payable. If applicable, such acceleration of our outstanding indebtedness could cause our secured lenders to foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. Any inability to obtain additional liquidity as and when needed, or to maintain compliance with the instruments governing our indebtedness, would have a material adverse effect on our financial condition and results of operations.
In addition, the current uncertain condition of the capital markets and their actual or perceived effects on our business, financial condition and results of operations, along with the current unfavorable economic environment in the United States and much of the world resulting from the COVID-19 pandemic, may increase the likelihood that one or more of the major independent credit agencies would downgrade our credit ratings, which could have a negative effect on our access to capital and the cost of any future debt financing. In addition, the terms of future debt agreements could include more restrictive covenants or require incremental collateral, which may further restrict our business operations.
We will be required to use a significant amount of cash to redeem our Series A Cumulative Perpetual Convertible Preferred Stock, which could adversely affect our liquidity position and could make it more difficult for us to elect to redeem these securities.
We have irrevocably elected to cash settle $1,000 of our obligation in respect of the redemption of any share of our 5.625% Series A Cumulative Perpetual Convertible Preferred Stock. As a result, the redemption of the Series A Cumulative Perpetual Convertible Preferred Stock would require us to use a significant amount of cash, which could adversely affect our liquidity position and could make it more difficult for us to elect to redeem these securities.
Litigation and Regulatory Risk
The Company's subsidiaries may become subject to additional regulations which could increase the costs and burdens of compliance or impose additional restrictions which could have a material adverse effect on the Company's businesses and the performance of the Company's investment funds.
Market disruptions like those experienced in 2008 have led to an increase in governmental as well as regulatory scrutiny from a variety of regulators, including the SEC, CFTC, FINRA, NFA, U.S. Treasury, the NYSE and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. The Company may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. The Company also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. The Company could be fined, prohibited from engaging in some of its business activities or subjected to limitations or conditions on its business activities. In addition, the Company could incur significant expense associated with compliance with any such legislation or regulations or the regulatory and enforcement environment generally. Substantial legal liability or significant regulatory action against the Company could
have a material adverse effect on the financial condition and results of operations of the Company or cause significant reputational harm to the Company, which could seriously affect its business prospects.
The activities of certain of the Company's subsidiaries and affiliates are regulated primarily within the U.S. by the SEC, FINRA, the NFA, the CFTC and other self-regulatory organizations, as well as various state agencies, and are also subject to regulation by other agencies in the various jurisdictions in which they operate and are offered, including the FCA, the European Securities and Markets Authority, or ESMA, and the SFC of Hong Kong. Certain legislation proposing greater regulation of the industry is regularly considered by the U.S. Congress - as well as by the governing bodies of non-U.S. jurisdictions - and from time to time adopted as in the case of the Dodd-Frank Act in the U.S. and MiFID II in the EU.
The investment advisers responsible for the Company's investment management business are all registered as investment advisers with the SEC or rely upon the registration of an affiliated adviser. Certain investment advisors and/or the investment funds they advise are also subject to regulation by various regulatory authorities outside the U.S., including the U.K. FCA and the ESMA and may indirectly be subject to MiFID II regulations. Moreover, certain non-U.S. regulatory bodies have imposed reporting requirements on short selling, which have impacted certain of the investment strategies implemented on behalf of the investment funds it manages, and continued restrictions on or further regulations of short sales could also negatively impact their performance.
These and other regulators in these jurisdictions have broad regulatory powers dealing with all aspects of financial services including, among other things, the authority to make inquiries of companies regarding compliance with applicable regulations, to grant permits and to regulate marketing and sales practices and the maintenance of adequate financial resources as well as significant reporting obligations to regulatory authorities. Under the EU Alternative Investment Fund Managers Directive, the Company will only be permitted to actively market its investment funds in the EU if certain disclosure and reporting obligations are met, and certain cooperation arrangements with the domicile of the investment vehicle are in place. As such, the Company may need to modify its strategies or operations, face increased constraints on its investment management business or incur additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment. It is difficult to predict the impact of such legislative initiatives on the Company and the markets in which it operates and/or invests.
It is difficult to predict what other changes may be instituted in the future in the regulation of the Company or the markets in which they invest, or the counterparties with which it does business, in addition to those changes already proposed or adopted in the U.S. or other countries. Any such regulation could have a material adverse effect on the profit potential of the Company's operations.
Financial services firms are subject to numerous perceived or actual conflicts of interest, which have drawn and which we expect will continue to draw scrutiny from the SEC, other federal and state regulators, and self-regulatory organizations. For example, the research areas of investment banks have been and remain the subject of heightened regulatory scrutiny, which has led to increased restrictions on the interaction between equity research analysts and investment banking personnel at securities firms. Regulations have also been focusing on potential conflicts of interest or issues relating to impermissible disclosure of material nonpublic information. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if it fails to do so. Such policies and procedures to address or limit actual or perceived conflicts may also result in increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation.
We are also subject to laws and regulations, such as the GDPR, the CCPA and the GLBA, relating to the privacy of the information of clients, employees or others, and any failure to comply with these laws and regulations could expose us to liability and/or reputational damage. As new privacy-related laws and regulations are implemented and as the interpretation and enforcement of existing requirements evolves, the time and resources needed for us to comply with such laws and regulations, as well as our potential liability for non-compliance and reporting obligations in the case of data breaches, may significantly increase.
The Company is subject to third party litigation risk and regulatory risk which could result in significant liabilities and reputational harm which, in turn, could materially adversely affect its business, results of operations and financial condition.
The Company depends to a large extent on its reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with the Company's businesses,services, it may be relatively more damaging to the Company than to other businesses. Moreover, the Company's role as advisor to clients on underwriting or merger and acquisition transactions involves complex analysis and the exercise of professional judgment, including rendering "fairness opinions" in connection with mergers and other transactions. Such activities may subject the Company to the risk of significant legal liabilities, not covered by their nature, do not produce predictable earnings,insurance, to clients and allaggrieved third parties, including stockholders of clients who could commence litigation against the Company. Moreover, many of the Company's businessesclients within the Company’s sectors tend to have higher risk profiles than more established companies, particularly healthcare and cannabis companies. Cowen currently is, and may be materially affected by conditions in the global financial markets and by global economic conditions, suchfuture be, named as interest rates,a
defendant in securities-class action lawsuits alleging violations of the availability of credit, inflation rates, economic uncertainty, changes in laws, commodity prices, asset prices (including real estate), currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts, protests or security operations). Challenging market conditions could affect the level and volatility of securities prices and the liquidity and the value of investments inlaws. Although the Company's funds or other investments in which the Company has investments ofinvestment banking engagements typically include broad indemnities from its own capital,clients and provisions to limit exposure to legal claims relating to such services, these provisions may not protect the Company, may not be ableenforceable, or may be with foreign companies requiring enforcement in foreign jurisdictions which may raise the costs and decrease the likelihood of enforcement. As a result, the Company may incur significant legal and other expenses in defending against litigation and may be required to effectively managepay substantial damages for settlements and/or adverse judgments. In addition, Cowen Prime Advisors, a registered investment advisor, provides advice to retail investors and retains discretion over some retail investment accounts. The Company could be exposed to potential litigation and liability if any of these clients are not satisfied with the investment advisory services being provided. Substantial legal liability or significant regulatory action against the Company could have a material adverse effect on our results of operations or cause significant reputational harm, which could seriously harm our business and prospects.
In general, the Company is exposed to risk of litigation by investors in its investment management business's exposurebusiness if the management of any of its investment funds is alleged to
challenging market conditions. Challenging market conditions can also adversely affectinvestment funds could sue to recover amounts lost due to any alleged misconduct, up to the Company's broker-dealer business as increased volatility and lower stock prices can make companies less likely to conduct transactions.
Volatility in the valueentire amount of the Company's investments and securities portfolios or other assets and liabilities, including funds, or negative returns from the investments made byloss. In addition, the Company could adversely affectfaces the Company'srisk of litigation from investors and beneficial owners of any of its investment funds if applicable restrictions are violated. In addition, the Company is exposed to risks of litigation or investigation relating to transactions that presented conflicts of interest that were not properly addressed. In the majority of such actions the Company would be obligated to bear legal, settlement and other costs, which may be in excess of any available insurance coverage. In addition, although the Company is contractually entitled to indemnification from its investment funds, our rights to indemnification may be challenged. If the Company is required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds, if any, or is not wholly indemnified, our business, results of operations and statement of financial condition.
The Company invests a significant portion of its capital base to help drive results and facilitate growth ofcondition could be materially adversely affected. In its investment management business, the Company is exposed to the risk of litigation if an investment fund suffers catastrophic losses due to the failure of a particular investment strategy or due to the trading activity of an employee who has violated market rules or regulations. Any litigation arising in such circumstances is likely to be protracted, expensive and broker-dealer businesses. As of December 31, 2017,surrounded by circumstances which are materially damaging to the Company's invested capital amountedreputation and businesses.
The potential for conflicts of interest within the Company, and a failure to appropriately identify and deal with conflicts of interest could adversely affect our businesses.
Due to the combination of our investment management and investment banking businesses, we face an increased potential for conflicts of interest, including situations where our services to a net value $695.3 million (supportingparticular client or investor or our own interests in our investments conflict with the interests of another client. Such conflicts may also arise if our investment banking businesses have access to material non-public information that may not be shared with our investment management business or vice versa. Additionally, our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through detailed examinations of specific transactions.
Appropriately identifying and dealing with conflicts of interest is complex and difficult, and the willingness of clients to enter into transactions or engagements in which such a long market valueconflict might arise may be affected if we fail to identify and appropriately address potential conflicts of $1,063.8 million), representing approximately 93% of Cowen's stockholders' equity presentedinterest. In addition, potential or perceived conflicts could give rise to litigation or enforcement actions.
Increased regulatory focus could result in accordance with accounting principles generally acceptedregulation that may limit the manner in which the Company and its investment management business invest, materially impacting the Company's business.
The Company's investment management business may be adversely affected if new or revised legislation or regulations are enacted, or by changes in the United Statesinterpretation or enforcement of America ("US GAAP"). In accordance with US GAAP, we define fair value asexisting rules and regulations imposed by the priceSEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants atsupervise the measurement date. US GAAP also establishes a framework for measuring fair valuefinancial markets and a valuation hierarchy based upontheir participants. Such changes could place limitations on the transparencytype of inputs usedinvestor that can invest in the valuationCompany's investment funds or on the conditions under which such investors may invest. Further, such changes may limit the scope of an assetinvesting activities that may be undertaken by the Company's investment funds. It is impossible to determine the extent of the impact of any new or liability. Changesrecently enacted laws or any other regulations or initiatives that may be proposed, or whether any proposed regulations or initiatives will become law. Compliance with any new laws or regulations could be difficult and expensive and affect the manner in fair value are reflected inwhich the statementCompany's investment management business conducts itself, which may adversely impact its results of operations, at each measurement period. Therefore, continued volatilityfinancial condition and prospects.
Additionally, as a result of highly publicized financial scandals, investors, regulators and the general public have exhibited concerns over the integrity of both the U.S. financial markets and the regulatory oversight of these markets. As a result, the business environment in which Company's investment management business operates is subject to heightened regulation. With respect to the valueCompany's investment funds, in recent years, there has been debate in both U.S. and foreign governments about new rules or regulations, including increased oversight or taxation, in addition to the recently enacted legislation described above. As calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and
other investment activities of investment funds, including the Company's investment funds. Such investigations may impose additional expenses on the Company, may require the attention of senior management and may result in fines if any of the Company's investmentsinvestment funds are deemed to have violated any regulations.
The U.K. exit from the EU could adversely impact our business, results of operations and securities portfoliosfinancial condition.
The U.K. left the EU on January 31, 2020, with a transition period until December 31, 2020 during which time the U.K. followed EU rules and a U.K.-EU trade agreement was negotiated governing EU and U.K. relations from January 1, 2021 resulting in a Trade and Cooperation Agreement together with a Political Declaration covering a number of areas including financial services. The Trade and Cooperation Agreement does not include substantive provisions for financial services, in particular it does not allow U.K. investment firms to provide services into the EU under the Passporting regime.
We conduct business in Europe primarily through our U.K. subsidiaries. Under the Trade and Cooperation Agreement, our U.K. subsidiaries are currently not able to rely on "Passporting" that allows immediate access to the single EU market. If the U.K. and EU do not agree to a Passporting regime, we may need to establish one or more new regulated subsidiaries in the EU in order to provide our trading platform and certain post-trade services to clients in the EU.
In general, the potential impacts related to Brexit or the terms of the developing economic and security relationship between the U.K. and the EU on the movement of goods, services, people and capital between the U.K. and the EU, customer behavior, economic conditions, interest rates, currency exchange rates, availability of capital or other assetsmatters are unclear and liabilities,could adversely affect our businesses, including funds, will resultour revenues from our trading activities, particularly in volatilityEurope, and our results of the Company's results. In addition, the investments made by the Company may not generate positive returns. As a result, changes in value or negative returns from investments made by the Company may have an adverse effect on the Company'soperations and financial condition or operations in the future.condition.
If the Company were deemed an investment company under the U.S. Investment Company Act, applicable restrictions could make it impractical for the Company to continue its respective businesses as contemplated and could have a material adverse effect on the Company's businesses and prospects.
We are primarily engaged in a non-investment company business and believe the nature of our assets and the sources of our income exclude us from the definition of an investment company under the Investment Company Act.
The Investment Company Act and the rules thereunder contain detailed requirements for the organization and operation of investment companies. Among other things, the Investment Company Act and the rules thereunder limit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain governance requirements. The Company intends to conduct its operations so that the Company will not be deemed to be an investment company under the Investment Company Act. If anything were to happen which would cause the Company to be deemed to be an investment company under the Investment Company Act, requirements imposed by the Investment Company Act, including limitations on its capital structure, ability to transact business with affiliates (including subsidiaries) and ability to compensate key employees, could make it impractical for the Company to continue its business as currently conducted, impair the agreements and arrangements between and among it, its subsidiaries and its senior personnel, or any combination thereof, and materially adversely affect its business, financial condition and results of operations. Accordingly, the Company may be required to limit the amount of investments that it makes as a principal or otherwise conduct its business in a manner that does not subject the Company to the registration and other requirements of the Investment Company Act.
Limitations on access to capital by the Company and its subsidiaries could impair its liquidity and its ability to conduct its businesses.Merger Risks
Liquidity, or ready access to funds, is essential to the operations of financial services firms. Failures of financial institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to Cowen and Company's trading business and Cowen Execution's clearing business and perceived liquidity issues may affect the willingnessThe consummation of the Company's broker-dealer clients and counterparties to engage in brokerage transactions with Cowen and Company and Cowen Execution. Cowen and Company's and Cowen Execution's liquidity could be impaired due to circumstances that the Company may be unable to control, such as a general market disruption or an operational problem that affects Cowen and Company and Cowen Execution, its trading clients or third parties. Furthermore, the Company's ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.
The Company primarily depends on its subsidiaries to fund its operations. Cowen and Company, ATM Execution, Cowen Prime, Cowen Execution, and Westminster are subject to the net capital requirements of the SEC and various self-regulatory organizations of which they are members. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Cowen International Ltd, Ramius UK Ltd. ("Ramius UK"), Cowen Execution and the Company's U.K. registered broker-dealer subsidiaries, are subject to the capital requirements of the U.K. FCA. Any failure to comply with these capital requirements could impair the Company's ability to conduct its broker-dealer business.
The Company's investment management and broker-dealer businesses' subsidiaries may become subject to additional regulations which could increase the costs and burdens of compliance or impose additional restrictions which could have a material adverse effect on the Company's businesses and the performance of the Company's funds.
Market disruptions like those experienced in 2008 have led to an increase in governmental as well as regulatory scrutiny from a variety of regulators, including the SEC, CFTC, FINRA, NFA, U.S. Treasury, the NYSE and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. The Company may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. The Company also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. The Company could be fined, prohibited from engaging in some of its business activities or subjected to limitations or conditions on its business activities. In addition, the Company could incur significant expense associated with compliance with any such legislation or regulations or the regulatory and enforcement environment generally. Substantial legal liability or significant regulatory action against the Company could have a material adverse effect on the financial condition and results of operations of the Company or cause significant reputational harm to the Company, which could seriously affect its business prospects.
The activities of certain of the Company's subsidiaries and affiliates are regulated primarily within the U.S. by the SEC, FINRA, the NFA, the CFTC and other self-regulatory organizations, as well as various state agencies, and are also subject to regulation by other agencies in the various jurisdictions in which they operate and are offered, including the FCA and the European Securities and Markets Authority. Certain legislation proposing greater regulation of the industry is regularly considered by the U.S. Congress - as well as by the governing bodies of non-U.S. jurisdictions - and from time to time adopted as in the case of the Dodd-Frank Act in the U.S. and MiFID II in the E.U.
The investment advisers responsible for the Company's investment management business are all registered as investment advisers with the SEC or rely upon the registration of an affiliated adviser. In addition, two of our investment advisers are also registered as CPOs and therefore subject to CFTC and NFA regulations. Certain investment advisors and/or the investment management products they advise are also subject to regulation by various regulatory authorities outside the U.S., including the U.K. FCA, the Swedish FCA and the European Securities and Markets Authority and may indirectly be subject to MiFID II regulations. Moreover, recent rulemaking by the SEC and certain non-U.S. regulatory bodies have imposed trading restrictions and reporting requirements on short selling, which have impacted certain of the investment strategies implemented on behalf of the Company's Funds, and continued restrictions on or further regulations of short sales could also negatively impact their performance.
These and other regulators in these jurisdictions have broad regulatory powers dealing with all aspects of financial services including, among other things, the authority to make inquiries of companies regarding compliance with applicable regulations, to grant permits and to regulate marketing and sales practices and the maintenance of adequate financial resources as well as significant reporting obligations to regulatory authorities. Under the E.U. Alternative Investment Fund Managers Directive, the Company will only be permitted to actively market its funds in the E.U. if certain disclosure and reporting obligations are met, and certain cooperation arrangements with the domicile of the investment vehicle are in place. As such, the Company may need to modify its strategies or operations, face increased constraints on its investment management business or incur additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment. It is difficult to predict the impact of such legislative initiatives on the Company and the markets in which it operates and/or invests.
It is difficult to predict what other changes may be instituted in the future in the regulation of the Company or the markets in which they invest, or the counterparties with which it does business, in addition to those changes already proposed or adopted in the U.S. or other countries. Any such regulation could have a material adverse effect on the profit potential of the Company’s operations.
Finally, financial services firms are subject to numerous perceived or actual conflicts of interest, which have drawn and which we expect will continue to draw scrutiny from the SEC and other federal and state regulators. For example, the research areas of investment banks have been and remain the subject of heightened regulatory scrutiny, which has led to increased restrictions on the interaction between equity research analysts and investment banking personnel at securities firms. Regulations have also been focusing on potential conflicts of interest or issues relating to impermissible disclosure of material nonpublic information. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if it fails to do so. Such policies and procedures to address or limit actual or perceived conflicts may also result in increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation.
The Company is subject to third party litigation risk and regulatory risk which could result in significant liabilities and reputational harm which, in turn, could materially adversely affect its business, results of operations and financial condition.
The Company depends to a large extent on its reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with the Company's services, it may be more damaging in its business than in other businesses. Moreover, the Company's role as advisor to clients on underwriting or merger and acquisition transactions involves complex analysis and the exercise of professional judgment, including rendering "fairness opinions" in connection with mergers and other transactions. Such activities may subject the Company to the risk of significant legal liabilities, not covered by insurance, to clients and aggrieved third parties, including stockholders of clients who could commence litigation against the Company. Although the Company's investment banking engagements typically include broad indemnities from its clients and provisions to limit exposure to legal claims relating to such services, these provisions may not protect the Company, may not be enforceable, or may be with foreign companies requiring enforcement in foreign jurisdictions which may raise the costs and decrease the likelihood of enforcement. As a result, the Company may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for settlements and/or adverse judgments. In addition, in some instances Cowen Prime serves as a registered investment advisor providing advice to retail investors and retaining discretion over some retail investment accounts. The Company could be exposed to potential litigation and liability if any of these clients are not satisfied with the investment advisory services being provided. Substantial legal liability or significant regulatory action against the Company could have a material adverse effect on our results of operations or cause significant reputational harm, which could seriously harm our business and prospects.
In general, the Company is exposed to risk of litigation by investors in its investment management business if the management of any of its funds is alleged to have been grossly negligent or fraudulent. Investors or beneficial owners of the Company’s funds could sue to recover amounts lost due to any alleged misconduct, up to the entire amount of the loss. In addition, the Company faces the risk of litigation from investors and beneficial owners of any of its funds if applicable restrictions are violated. In addition, the Company is exposed to risks of litigation or investigation relating to transactions that presented conflicts of interest that were not properly addressed. In the majority of such actions the Company would be obligated to bear legal, settlement and other costs, which may be in excess of any available insurance coverage. In addition, although the Company is contractually entitled to indemnification from its funds, our rights to indemnification may be challenged. If the Company is required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds, if any, or is not wholly indemnified, our business, results of operations and financial condition could be materially adversely affected. In its investment management business, the Company is exposed to the risk of litigation if a fund suffers catastrophic losses due to the failure of a particular investment strategy or due to the trading activity of an employee who has violated market rules or regulations. Any litigation arising in such circumstances is likely to be protracted, expensive and surrounded by circumstances which are materially damaging to the Company's reputation and businesses.
The potential for conflicts of interest within the Company, and a failure to appropriately identify and deal with conflicts of interest could adversely affect our businesses.
Due to the combination of our investment management and broker-dealer businesses, we face an increased potential for conflicts of interest, including situations where our services to a particular client or investor or our own interests in our investments conflict with the interests of another client. Such conflicts may also arise if our broker-dealer business has access to material non-public information that may not be shared with our investment management business or vice versa. Additionally, our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through detailed examinations of specific transactions.
Appropriately identifying and dealing with conflicts of interest is complex and difficult, and the willingness of clients to enter into transactions or engagements in which such a conflict might arise may be affected if we fail to identify and appropriately address potential conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or enforcement actions.
Employee misconduct could harm the Company by, among other things, impairing the Company's ability to attract and retain investors and subjecting the Company to significant legal liability, reputational harm and the loss of revenue from its own invested capital.
It is not always possible to detect and deter employee misconduct. The precautions that the Company takes to detect and prevent this activity may not be effective in all cases, and we may suffer significant reputational harm and financial loss for any misconduct by our employees. The potential harm to the Company's reputation and to our business caused by such misconduct is impossible to quantify.
There is a risk that the Company's employees or partners could engage in misconduct that materially adversely affects the Company's business, including a decrease in returns on its own invested capital. The CompanyMerger is subject to a number of obligations and standards arising from its businesses. The violationconditions, many of these obligations and standards by anywhich are largely outside of the Company's employeescontrol of the parties to the Merger Agreement, and, if these conditions are not satisfied or waived on a timely basis, the Merger Agreement may be terminated and the Merger may not be completed.
The obligation of the parties to consummate the Merger is subject to various conditions, including: (i) the receipt of the Requisite Regulatory Approvals (as defined in the Merger Agreement), which include expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Act of 1976, approval of the Superintendent of Financial Institutions, approval of the Financial Industry Regulatory Authority and approvals from certain other U.S., Canadian and foreign regulatory authorities (subject to TD not being obligated to close if there is a Materially Burdensome Regulatory Condition (as defined in the Merger Agreement)); and (ii) the absence of any legal restraint or legal prohibition preventing or prohibiting the consummation of the Merger. In addition, each of the Company’s and TD’s obligation to consummate the Merger is subject to: (i) the accuracy of the representations and warranties of the other party (subject to customary materiality qualifiers) and (ii) the other party’s performance in all material respects of its covenants and obligations contained in the Merger Agreement. The failure to satisfy all of the required conditions could materially adversely affectdelay the Company and its investors. For instance,completion of the Company's businesses require Merger by a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause the parties to the Merger Agreement to not realize some or all of the benefits that are expected to be achieved if the Merger is successfully completed within the expected timeframe. There can be no assurance
that the Company properly deal with confidential information. If the Company's employees wereconditions to improperly use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships. If oneclosing of the Company's employees wereMerger will be satisfied or waived or that the Merger will be completed within the expected timeframe or at all.
Failure to engage in misconduct or were to be accused of such misconduct,complete the business and reputation of the Company could be materially adversely affected.
The Company may be unable to successfully identify, manage and execute future acquisitions, investments and strategic alliances, whichMerger could adversely affect our stock price and business, results of operations.operations or financial condition.
We intend to continually evaluate potential acquisitions, investments and strategic alliances to expand our investment management and broker-dealer businesses. In the future, we may seek additional acquisitions, investments, strategic alliances or similar arrangements, which may expose us to risks such as:
the difficulty of identifying appropriate acquisitions, investments, strategic allies or opportunities on terms acceptable to us;
the possibility that senior management may be required to spend considerable time negotiating agreements and monitoring these arrangements;
potential regulatory issues applicable to the financial services business;
the loss or reduction in value of the capital investment;
our inability to capitalize on the opportunities presented by these arrangements; and
the possibility of insolvency of a strategic ally.
Furthermore, any future acquisitions of businesses could entail a number of risks, including:
problems with the effective integration of operations;
inability to maintain key pre-acquisition business relationships;
increased operating costs;
exposure to unanticipated liabilities; and
difficulties in realizing projected efficiencies, synergies and cost savings.
There can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed. If the Merger is not completed within the expected timeframe or at all, our ongoing business could be adversely affected and we would successfully overcomewill be subject to a variety of risks and possible consequences associated with the failure to complete the Merger, including the following: (i) we will incur certain transaction costs, including legal, accounting, financial advisor, filing, printing and mailing fees, regardless of whether the Merger closes; (ii) under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to the closing of the Merger, which may adversely affect our ability to execute certain of our business strategies; (iii) we may lose key employees during the period in which we and TD are pursuing the Merger, which may adversely affect us in the future if we are not able to hire and retain qualified personnel to replace departing employees; and (iv) the proposed Merger, whether or not it closes, will divert the attention of certain of our management and other key employees from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us. If the Merger is not completed, these risks could materially affect our business, results of operations or financial condition and stock price, including to the extent that the current market price of our common stock is positively affected by a market assumption that the Merger will be completed.
While the Merger is pending, we are subject to business uncertainties and certain contractual restrictions that could adversely affect our business, results of operations or financial condition.
In connection with the pending Merger, some of our clients, vendors or other third parties may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with us, which could adversely affect our revenues, earnings, cash flows and expenses, regardless of whether the Merger is completed. In addition, due to certain restrictions in the Merger Agreement on the conduct of business prior to completing the Merger, we may be unable (without TD’s prior written consent), during the pendency of the Merger, to pursue certain strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial and may cause us to forego certain opportunities we might otherwise pursue. In addition, the pendency of the Merger may make it more difficult for us to effectively retain and incentivize key personnel and may cause distractions from our strategy and day-to-day operations for our current employees and management.
The Company will incur substantial transaction fees and Merger-related costs in connection with the Merger that could adversely affect the business and operations of the Company if the Merger is not completed.
The Company expects to incur non-recurring transaction fees, which include legal and advisory fees and substantial Merger-related costs associated with completing the Merger, and which could adversely affect the business operations of the Company if the Merger is not completed.
The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire the Company.
The Merger Agreement prohibits the Company from initiating, soliciting, knowingly encouraging or knowingly facilitating any competing acquisition proposals, subject to certain limited exceptions. The Merger Agreement also contains certain termination rights and provides that, if the Merger Agreement is terminated under certain circumstances, the Company will be required to pay TD a termination fee of $42,250,000 in cash. The termination fee and restrictions could discourage other companies from trying to acquire the Company even though those other companies might be willing to offer greater value to the Company’s stockholders than TD has offered in the Merger.
Litigation against the Company, TD or the members of their respective boards, could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.
It is a condition to the Merger that no order, injunction or decree issued by any court or governmental entity of competent jurisdiction or other legal restraint or prohibition enjoining, preventing, prohibiting or otherwise making illegal the consummation of the Merger shall be in effect. It is possible that lawsuits may be filed by our stockholders challenging the Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other problems encounteredliabilities that may be incurred in connection with the litigation of these acquisitions, investments,claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may delay the consummation of the Merger in the expected timeframe, or may prevent the Merger from being consummated at all. Whether or not any plaintiff’s claim is successful, this type of litigation can result in significant costs and divert management’s attention and resources from the closing of the Merger and ongoing business activities, which could adversely affect our operations.
Uncertainty about the Merger may adversely affect the relationships between us and our clients, vendors and employees, whether or not the Merger is completed.
In response to the announcement of the Merger, existing or prospective clients, vendors and other third party relationships of ours may delay, defer or cease providing goods or services, delay or defer other decisions concerning us, refuse to extend credit to us, or otherwise seek to change the terms on which they do business with us. Any such delays or changes to terms could materially harm our business.
In addition, as a result of the Merger, current and prospective employees could experience uncertainty about their future with us. These uncertainties may impair our ability to retain, recruit or motivate key management and other personnel.
If the Merger is not consummated by August 1, 2023, either we or TD may terminate the Merger Agreement, subject to certain exceptions.
Either we or TD may terminate the Merger Agreement if the Merger has not been consummated by August 1, 2023. However, this termination right will not be available to a party to the Merger Agreement if that party failed to comply with its obligations under the Merger Agreement and that failure was the principal cause of the failure to consummate the Merger on or prior to such date. In the event the Merger Agreement is terminated by either party due to the failure of the Merger to close by August 1, 2023 or for any other reason provided under the Merger Agreement, we will have incurred significant costs and will have diverted significant management focus and resources from other strategic alliancesopportunities and ongoing business activities without realizing the anticipated benefits of the Merger.
Other Risks to Our Stockholders
We could change our existing dividend policy in the future and there can be no assurance that we will continue to declare cash dividends.
We began paying quarterly cash dividends to holders of record of our Class A common stock in March 2020. Although we expect to continue to pay dividends to our stockholders in accordance with our dividend policy, as described under the heading "Dividend Policy", we have no obligation to pay any dividend, and our dividend policy may change at any time without notice. The declaration and payment of dividends on our Class A common stock is at the discretion of our Board of Directors in accordance with applicable law after taking into account various factors, including general economic and business conditions; our financial condition and operating results; our available cash and current and anticipated cash needs; capital requirements; contractual restrictions (including under agreements related to indebtedness to which we are a party), legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or similar arrangements.by our subsidiaries to us; and such other factors as our board of directors may deem relevant. For example, in the event that there is deterioration in our financial performance and/or our liquidity position, a downturn in global economic conditions or disruptions in the credit markets and our ability to obtain financing, our Board of Directors could decide to suspend dividend payments in the future. As a Delaware corporation, we are required to meet certain surplus thresholds for our Board of Directors to declare a dividend in accordance with the Delaware General Corporation Law. As a result, we may not pay dividends at all in the future.
The Company's future results will suffer if the Company does not effectively manage its expandedterms of our Series A Convertible Preferred Stock contains certain restrictions on our operations.
The Company may continue to expand its operations through new productcertificate of designations governing our Series A Convertible Preferred Stock contains certain restrictions on our and service offerings and through additional strategic investments, acquisitions or joint ventures, some of which may involve complex technical and operational challenges. The Company's future success depends, in part, upon itsour subsidiaries' ability to, manage its expansion opportunities, which pose numerous risksamong other things, pay dividends on, redeem or repurchase our Class A common stock and, uncertainties, including the need to integrate new operations into its existing business in an efficient and timely manner, to combine accounting and data processing systems and management controlsunder certain circumstances, our Series A Convertible Preferred Stock, and to integrate relationships with customersissue additional preferred stock. Additionally, if dividends on our Series A Convertible Preferred Stock are in arrears and business partners. In addition, future acquisitionsunpaid for at least six or joint ventures may involvemore quarterly periods, the issuanceholders (voting as a single class) of our outstanding Series A Convertible Preferred Stock will be entitled to elect two additional sharesdirectors to our Board of common stock of the Company, which may dilute the ownership of the Company's stockholders.Directors until paid in full.
The Company's failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on the Company's financial condition, results of operations and business and the price of our Class A common stock.
The Sarbanes‑OxleySarbanes-Oxley Act and the related rules require our management to conduct an annual assessment of the effectiveness of our internal control over financial reporting and require a report by our independent registered public accounting firm addressing our internal control over financial reporting. To comply with Section 404 of the Sarbanes‑OxleySarbanes-Oxley Act, we are required to document formal policies, processes and practices related to financial reporting that are necessary to comply with Section 404. Such policies, processes and practices are important to ensure the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our organization.
If we fail for any reason to comply with the requirements of Section 404 in a timely manner, our independent registered public accounting firm may, at that time, issue an adverse report regarding the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis
and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial statements. Any such event could adversely affect our financial condition, results of operations and business, and result in a decline in the price of our Class A common stock.
Certain provisions of the Company's amended and restated certificate of incorporation and bylaws and Delaware law may have the effect of delaying or preventing an acquisition by a third party.
The Company's amended and restated certificate of incorporation and bylaws contain several provisions that may make it more difficult for a third party to acquire control of the Company, even if such acquisition would be financially beneficial to the Company's stockholders. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in the Company's stockholders receiving a premium over the then-current trading price of our common stock. For example, the Company's amended and restated certificate of incorporation authorizes its board of directors to issue up to 10,000,000 shares of "blank check" preferred stock. Without stockholder approval, the board of directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire the Company. In addition, the Company's amended and restated bylaws provide for an advance notice procedure with regard to the nomination of candidates for election as directors and with regard to business to be brought before a meeting of stockholders. The Company is also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes an "interested stockholder," the Company may not enter into a "business combination" with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of control. For the purposes of Section 203, "interested stockholder" means, generally, someone owning 15% or more of the Company's outstanding voting stock or an affiliate of the Company that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has adversely affected, and may continue to adversely affect, the Company's business.
Enacted on July 21, 2010, the Dodd-Frank Act was expansive in scope and led to the adoption of extensive regulations by the CFTC, the prudential regulators, the SEC and other governmental agencies. The current administration has suggested that it will seek to roll back some of this regulation, although it is not possible to predict whether changes will be made. Since its adoption, the Dodd-Frank Act has had an impact on the costs associated with derivatives trading by the Company and its clients, including as a result of requirements that transactions be margined, trade reported and, in some cases, centrally cleared.
Heightened cyber-security risks may disrupt our businesses, result in losses or limit our growth.
We may be subject to cyber-attacks on our critical data and we may not be able to anticipate or prevent all such attacks. We may not have the resources or technical sophistication to anticipate or prevent current or rapidly evolving types of cyber- attacks. Attacks may be targeted at us, our clients or our vendors. We may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information and communication systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. In addition, advances in computer capabilities, or other technological developments may result in the technology and security measures used by us to protect our systems being breached or compromised. Breaches can also occur as a result of non-technical issues, including intentional or inadvertent breach by our employees or by persons with whom we have commercial relationships.
The occurrence of any failure, interruption or security breach of our information or communication systems could damage our reputation, result in a loss of business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.
If securities analysts stop publishing research or reports about us or our business or if they downgrade our common stock, the market price of our common stock and, consequently, the trading price of our other securities could decline.
The market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. If any analyst who covers us downgrades our stock or lowers its future stock price targets or estimates of our operating results, our stock price could decline rapidly. Furthermore, if any analyst ceases to cover us, we could lose visibility in the market, which in turn could cause the market price of our securities to decline.
Risks relating to the Company's financing transactions.
We are a holding company and rely upon our subsidiaries for cash flow to make payments of principal and interest on our outstanding indebtedness.
We are a holding company with no business operations or assets other than the capital stock of our direct and indirect subsidiaries. Consequently, we are dependent on dividends, distributions, loans and other payments from these subsidiaries to
make payments of principal and interest on all of our indebtedness including our senior notes due 2027 (the “2027 Notes”), our cash convertible notes due 2019 (the “2019 Convertible Notes”) and our convertible notes due 2022 (the "2022 Convertible Notes" and together with the 2019 Convertible Notes , the “Convertible Notes”)(the 2022 Convertible Notes, and together with the 2027 Notes and the 2019 Convertible Notes , the “Notes”). The ability of our subsidiaries to pay dividends and make other payments to us will depend on their cash flows and earnings, which, in turn, will be affected by all of the factors discussed in this annual report. The ability of our direct and indirect subsidiaries to pay dividends and make distributions to us may be restricted by, among other things, applicable laws and regulations and by the terms of any debt agreements or other agreements into which they enter. If we are unable to obtain funds from our direct and indirect subsidiaries as a result of restrictions under their debt or other agreements, applicable laws and regulations or otherwise, we may not be able to pay cash interest or principal on the Notes when due.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Despite our current consolidated debt levels, we may still incur substantially more debt or take other actions which would intensify the risks discussed above.
Despite our current consolidated debt levels, we may be able to incur substantially more debt in the future, including secured debt. We are not restricted under the terms of the indentures governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indentures governing the Notes but that could diminish our ability to make payments on the Notes.
Future sales of our common stock in the public market could adversely impact the trading price of our securities.
In the future, we may sell additional shares of our common stock to raise capital. In addition, a substantial number of shares of our common stock are reserved for issuance upon vesting of restricted stock units and performance-linked restricted stock units and upon the conversion of the Convertible Notes.Preferred. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock, or the perceptionperception that such issuances and sales may occur, could adversely affect the trading price of our securities and impair our ability to raise capital through the sale of additional equity securities.
The conditional conversion feature ofchange in accounting guidance for our outstanding Series A Cumulative Perpetual Convertible Preferred Stock may have an adverse effect on our diluted earnings per share in future periods.
Accounting Standards Codification (the "Accounting Standards") 470-20, simplifies the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, we may besettlement assessment that entities are required to pay cashperform to settle any such conversion, which could adversely affect our liquidity.
determine whether a contract qualifies for equity classification. The accountingguidance requires entities to use the if-converted method for all convertible debt securitiesinstruments in the diluted earnings per share calculation and include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash such asor shares, except for certain liability-classified share-based payment awards. The guidance requires new disclosures about events that occur during the 2022 Convertible Notes, could have a material effect on our reported financial results.
Accounting Standards Codification 470-20, Debt with Conversionreporting period and Other Options, or ASC 470-20 requires an entitycause conversion contingencies to separately account for the liabilitybe met and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such as the 2022 Convertible Notes) in a manner that reflects the issuer’s economic interest cost for non-convertible debt. The liability component of the 2022 Convertible Notes is valued atabout the fair value of a similarpublic business entity’s convertible debt at the instrument that does not have an associated equity component andlevel. For public business entities, the guidance is reflectedeffective for reporting periods beginning after December 15, 2021. The Company adopted the guidance as a liability in our consolidated balance sheet. The equity component of January 1, 2022 under the 2022 Convertible Notes is included inmodified retrospective method. With the additional paid-in capital section of our stockholders’ equity on our consolidated balance sheet, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component. This original issue discount will be amortized to non-cash interest expense over the term of the 2022 Convertible Notes, and we will record a greater amount of non-cash interest expense as a resultadoption of this amortization. Accordingly, we will report lower net income in our financial results because ASC 470-20 will requireguidance, the interest expense associated with the 2022 Convertible NotesCompany is required to include both amortizationthe portion of the original issue discount and the 2022 Convertible Notes’ coupon interest, which could adversely affect our reported or future financial results and the trading price of our securities.
In addition, under certain circumstances, convertible debt instruments whose conversion may be settled entirely or partly in cash (such as the 2022 Convertible Notes) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon conversion of the 2022 Convertible Notes are not included in the calculation of diluted earnings per share unless the conversion value of the 2022 Convertible Notes exceeds their principal amount at the end of the relevant reporting period. If the conversion value exceeds their principal amount, then, for diluted earnings per share purposes, the 2022 Convertible Notes are accounted for as if the number of shares of common stock that would be necessary to settle the excess, if we elected to settle the excess in shares, are issued. The accounting standards in the future may not continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares, if any, issuable upon conversion of the 2022 Convertible Notes, then our diluted earnings per share could be adversely affected.
Notwithstanding the foregoing, because we may be required to elect to settle note conversions of the 2022 Convertible Notes solely in cash (or, subject to certain limitations, with a combination of cash and shares of our common stock) until we obtain the stockholder approval to issue shares of our common stock in full satisfaction of our conversion obligations, we have to separately account for the conversion option associated with the 2022 Convertible Notes as an embedded derivative under Accounting Standards Codification, or ASC, Topic 815, Derivatives and Hedging. Under this treatment, the 2022 Convertible Notes conversion option may be measured at its fair value and accounted for separately as a liability that is marked-to-market at the end of each reporting period. The initial value allocated to the conversion option will be treated as a debt discount that will be amortized into interest expense over the term of the Convertible Notes. For each financial statement period after the issuance of the 2022 Convertible Notes until we obtain the stockholder approval, a gain (or loss) will be reported in our statement of operations to the extent the valuation of the conversion option changes from the previous period.
As a result, we may experience related non-cash volatility to our net income (loss). In addition, as a result of the amortization of the debt discount, the interest expense associated with the 2022 Convertible Notes will be greater than the coupon rate on the 2022 Convertible Notes, which will result in lower reported net income. If we obtain the stockholder approval referred to above, then we expect that the conversion option will qualify for equity treatment and will no longer be marked to market at the end of each reporting period. However, we may never obtain this stockholder approval.
Certain provisions in the indentures governing the Convertible Notes could delay or prevent an otherwise beneficial takeover or takeover attempt of us.
Certain provisions in the Convertible Notes and the indentures governing the Convertible Notes could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change, holders of the Convertible Notes will have the right to require us to repurchase their Convertible Notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their Convertible Notes in connection with such takeover. In either case, and in other cases, our obligations under the Convertible Notes and the indentures could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.
The ability to use our tax net operating loss ("NOL") carryforwards could be limited.
As of December 31, 2017, we had NOL carryforwards of $248.4 million available for use in future years. Section 382 of the IRC, as amended, provides that if a loss corporation undergoes an “ownership change” the use of its pre-change losses is limited, generally, to an amount each year equal to the product of the value of the Company’s equity and the long-term tax-exempt rate for the month in which the ownership change occurs. An “ownership change” is defined as an increase in the ownership of the loss corporation by so-called 5% shareholders of more than 50% over a rolling three-year period. Cowen did not undergo an ownership change during 2017.
Based on the facts in existence on the date hereof, we do not believe any material portion of our losses is subject to limitation under Section 382, or that conversion of the Convertible Notes into our common stock would trigger an ownership change. There can be no assurance that purchases or other acquisitions of our shares will not in the future trigger an ownership change, thereby substantially limiting our ability to use our NOLs going forward.
We may not be able to realize the value of our deferred tax assets.
At December 31, 2017, we have significant deferred tax assets that we have recognized based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We have recognized deferred tax assets because management believes, based on earnings and financial projections, that it is more likely than not that we will have sufficient future earnings to utilize these assets to offset future income tax liabilities. We regularly review our deferred tax assets for recoverability based on our history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets requires us to apply significant judgment and is inherently speculative because it requires the future occurrence of circumstances that cannot be predicted with certainty and ultimately depends on the existence of sufficient future taxable income. There can be no assurance that we will achieve sufficient future taxable income as the basis for the ultimate realization of our deferred tax assets. Changes in facts and circumstances or unforeseen negative economic
developments could require us to establish a valuation allowance in the future, potentially causing a material adverse effect on our future operating results and financial condition. In addition, as was the case in 2017 pursuant to the Tax Cuts and Jobs Act that was enacted in the US in December 2017, changes in statutory tax rates may change our deferred tax asset or liability balances, with either favorable or unfavorable impacts on our effective tax rate. Our deferred tax assets may also be impacted by new legislation or regulation.
The terms of our Series A Convertible Preferred Stock contains certain restrictions on our operations.
The certificatethat can be settled in Class A common stock (the amount in excess of designations governing our$1,000 per share of the Series A Convertible Preferred Stock contains certain restrictions on our and our subsidiaries’ ability to, among other things, pay dividends on, redeem or repurchase our Class A common stock and, under certain circumstances, our Series A Convertible Preferred Stock, and to issue additional preferred stock. Additionally, if dividends on our Series A Convertible Preferred Stock are in arrears and unpaid for at least six or more quarterly periods, the holders (voting as a single class) of our outstanding Series A Convertible Preferred Stock will be entitled to elect two additional directors to our Board of Directors until paid in full.
Risks Related to the Company's Investment Management Business
The Company's profitability may be adversely affected by decreases in revenue relating to changes in market and economic conditions.
Market conditions have been and remain inherently unpredictable and outside of the Company's control, and may result in reductionsStock) in the Company's revenue anddiluted earnings per share calculation. This adoption as of January 1, 2022 results of operations. Such reductions may be caused by a decline in assets under management, resulting in lower management fees and incentive income, an increase in the costinclusion of financial instruments, lower investment returns or reduced demand for assets held by investment management products advised by the Company's investment management business, which would negatively affect its ability to realize value from such assets or continued investor redemptions, resulting in lower fees and increased difficulty in raising new capital.
These factors may reduce the Company's revenue, revenue growth and income and may slow the growth of the investment management business or may cause the contraction of the investment management business. In particular, negative performance reduces assets under management, which decreases the management fees and incentive income that the Company ultimately earns. Negative performance of the Company's funds or its own proprietary investments also decreases revenue derived from the Company's returns on investment of its own capital.
The Company's ability to increase revenues and improve profitability will depend on increasing assets under management in existing investment strategies and developing and marketing new investment products and strategies, including identifying and hiring or affiliating with new investment teams.
The Company’s investment management business generates management and incentive fee income based on its assets under management. If the Company is unable to increase its assets under management in its existing products it may be difficult to increase its revenues. The Company may launch new investment management products and hire or affiliate with new investment teams focusing on new investment strategies. If these products or strategies are not successful, or if the Company is unable to hire or affiliate with new investment teams, or successfully manage its relationships with its affiliated investment teams, the Company's profitability could be adversely affected.
The Company's revenues and, in particular, its ability to earn incentive income, would be adversely affected if its funds fall beneath their "high-water marks" as a result of negative performance.
Incentive income, which has historically comprised a substantial portion of the Company’s investment management business annual revenues, is, in most cases, subject to "high-water marks" whereby incentive income is earned by the Company only to the extent that the net asset value of an investment advisory product at the end of a measurement period exceeds the highest net asset value as of the end of a preceding measurement period for which the Company earned incentive income. The Company's incentive allocations are also subject, in some cases, to performance hurdles or benchmarks. To the extent the Company's funds experience negative investment performance, the investors in or beneficial owners of these funds would need to recover cumulative losses before the Company can earn incentive income with respect to the investments of those who previously suffered losses.
It may be difficult for the Company's investment management business to retain investment professionals during periods where market conditions make it more difficult to generate positive investment returns.
Certain of the Company's funds face particular retention issues with respect to investment professionals whose compensation is tied, often in large part, to such performance thresholds. This retention risk is heightened during periods where market conditions make it more difficult to generate positive investment returns. For example, several investment professionals receive performance-based compensation at the end of each year based upon their annual investment performance, and this performance-based compensation represents substantially all of the compensation the professional is entitled to receive during
the year. If the investment professional's annual performance is negative, the professional may not be entitled to receive any performance-based compensation for the year. If the Company's funds produce investment results that are negative (or below the applicable hurdle or benchmark), the affected investment professionals may be incentivized to join a competitor because doing so would allow them to earn performance-based compensation without the requirement that they first satisfy the high-water mark.
Investors and beneficial ownersapproximately 1,565,000 additional shares in the Company's funds can generally redeem investments with prior notice. The ratedenominator of redemptions could accelerate at any time. Historically, redemptions have created difficulties in managing the liquidity of certain of the Company's funds, reduced assets under management and adversely affected the Company's revenues, and may do so in the future.
Investors and beneficial owners in the Company's funds may generally redeem their investments with prior notice, subject to certain initial holding periods. Investors may reduce the aggregate amount of their investments, or transfer their investments to other funds or asset managers with different fee rate arrangements, for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. Furthermore, investors in the Company's funds may be investors in products managed by other asset managers where redemptions have been restricted or suspended. Such investors may redeem capital from Company's funds, even if the Company's funds' performance is superior, due to an inability to redeem capital from other managers. Increased volatility in global markets could accelerate the pace of redemptions. Redemptions of investments in the Company's funds could also take place more quickly than assets may be sold by those funds to meet the price of such redemptions, which could result in the relevant funds and/or the Company being in breach of applicable legal, regulatory and contractual requirements in relation to such redemptions, resulting in possible regulatory and investor actions against the Company and/or the Company's funds. If the Company's funds underperform, existing investors may decide to reduce or redeem their investments or transfer asset management responsibility to other asset managers and the Company may be unable to obtain new investment management business. Any such action could potentially cause further redemptions and/or make it more difficult to attract new investors.
The redemption of investments in the Company's funds could also adversely affect the revenues of the Company's investment management business, which are substantially dependent upon its assets under management. If redemptions of investments cause revenues to decline, they would likely have a material adverse effect on our business, results of operations or financial condition. If market conditions, negative performance or other factors cause an increased level of redemption activity returns, it could become more difficult to manage the liquidity requirements of the Company's funds, making it more difficult or more costly for the Company's funds to liquidate positions rapidly to meet redemption requests or otherwise. This in turn may negatively impact the Company's returns on its own invested capital.
In addition to the impact on the market value of assets under management, illiquidity and volatility of the global financial markets could negatively affect the ability of the Company's investment management business to manage inflows and outflows from the Company's funds. Several investment management managers, including the Company's investment management business, have in the past exercised, and may in the future exercise, their rights to limit, and in some cases, suspend, redemptions from the investment management products they advise. The Company's investment management business has also negotiated, and may in the future negotiate, with investors or exercise such rights in an attempt to limit redemptions or create a variety of other investor structures to bring assets and liquidity requirements into a more manageable balance. To the extent that the Company's investment management business has negotiated with investors to limit redemptions, it may be likely that such investors will continue to seek further redemptions in the future. Such actions may have an adverse effect on the ability of the Company's funds to attract new capital or to develop new investment platforms. Poor performance relative to other asset management firms may result in reduced investments in the Company's funds and increased redemptions. As a result, investment underperformance would likely have a material adverse effect on the Company's results of operations and financial condition.
Investments made by private funds, including the investments of the Company's own capital in the Company's private funds, are subject to other additional risks.
Investments by the Company's private funds are subject to certain risks that may result in losses. Decreases to assets under management as a result of investment losses or client redemptions may have a material adverse effect on the Company's revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing funds or raise additional funds in the future. Additional risks include the following:
Generally, there are few limitations on private funds' investment strategies, which are often subject to the sole discretion of the management company or the general partner of such funds.
Private funds may engage in short selling, which is subject to a theoretically unlimited risk of loss because there is no limit on how much the price of a security sold short may appreciate before the short position is closed out. A fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot
be found or if the fund is otherwise unable to borrow securities that are necessary to hedge its positions. Furthermore, the SEC and other regulatory authorities outside the United States have imposed trading restrictions and reporting requirements on short selling, which in certain circumstances may impair private funds' ability to use short selling effectively.
The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall market position through a combination of financial instruments. A private fund's trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the fund might only be able to acquire some but not all of the components of the position, or if the overall position were in need of adjustment, the fund might not be able to make such an adjustment. As a result, a private fund would not be able to achieve the market position selected by the management company or general partner of such fund, and might incur a loss in liquidating its position.
Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their respective liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This "systemic risk" may adversely affect the financial intermediaries (such as clearing agencies, clearing houses, banks, securities firms, other counterparties and exchanges) with which the private funds interact on a daily basis.
Private funds are subject to risks due to the potential illiquidity of assets. Private funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. The timely sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which they may be a party, and changes in industry and government regulations. It may be impossible or highly costly for private funds to liquidate positions rapidly to meet margin calls, redemption requests or otherwise, particularly if there are other market participants seeking to dispose of similar assets at the same time, if the relevant market is otherwise moving against a position or in the event of trading halts or daily price movement limitations on the market. In addition, increased levels of redemptions may result in increased illiquidity as more liquid assets are sold to fund redemptions.
Private fund assets are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the commodities underlying them. In addition, private funds' assets are subject to the risk of the failure of any of the exchanges on which their positions trade.
Private fund assets that are not denominated in the U.S. dollar are subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. Officials in foreign countries may, from time to time, take actions in respect of their currencies that could significantly affect the value of a private fund’s assets denominated in those currencies or the liquidity of such investments. For example, a foreign government may unilaterally devalue its currency against other currencies, which would typically have the effect of reducing the U.S. dollar value of investments denominated in that currency. A foreign government may also limit the convertibility or repatriation of its currency or assets denominated in that currency. While the Company generally expects to hedge its exposure to currencies other than the U.S. dollar, and may do so through foreign currency futures contracts and options thereon, forward foreign currency exchange contracts, swaps or any combination thereof, but there can be no assurance that such hedging strategies will be implemented, or if implemented, will be effective. While a private fund may enter into currency hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance than if it had not engaged in such hedging transactions. For a variety of reasons, the Company may not seek to establish a perfect correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Company from achieving the intended hedge or expose a private fund to risk of loss.
Private funds are also subject to the risk that war, terrorism, and related geopolitical events may lead to increased short-term market volatility and have adverse long-term effects on the U.S. and world economies and markets generally, as well as adverse effects on issuers of securities and the value of investments. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and non-U.S. economies and markets generally. Those events, as well as other changes in U.S. and non-U.S. economic and political conditions, also could adversely affect individual issuers or
related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment and other factors affecting the value of the private fund's assets.
If the Company's fund's counterparty for any of its derivative or non-derivative contracts defaults on the performance of those contracts, the Company may not be able to cover its exposure under the relevant contract.
The Company's funds enter into numerous types of financing arrangements with a wide array of counterparties around the world, including loans, hedge contracts, swaps, repurchase agreements and other derivative and non-derivative contracts. The terms of these contracts are generally complex and often customized and generally are not subject to regulatory oversight. The Company is subject to the risk that the counterparty to one or more of these contracts may default, either voluntarily or involuntarily, on its performance under the contract. Any such default may occur at any time without notice. Additionally, the Company may not be able to take action to cover its exposure if a counterparty defaults under such a contract, either because of a lack of the contractual ability or because market conditions make it difficult to take effective action. The impact of market stress or counterparty financial condition may not be accurately foreseen or evaluated and, as a result, the Company may not take sufficient action to reduce its risks effectively.
Counterparty risk is accentuated where the investment management product has concentrated its transactions with a single or small group of counterparties. Generally, private funds are not restricted from concentrating any or all of their transactions with one counterparty. Moreover, the Company's internal review of the creditworthiness of their counterparties may prove inaccurate. The absence of a regulated market to facilitate settlement and the evaluation of creditworthiness may increase the potential for losses.
In addition, these financing arrangements often contain provisions that give counterparties the ability to terminate the arrangements if any of a number of defaults occurs with respect to the Company's funds, including declines in performance or assets under management and losses of key management personnel, each of which may be beyond our control. In the event of any such termination, the Company's funds may not be able to enter into alternative arrangements with other counterparties and our business may be materially adversely affected.
The Company may suffer losses in connection with the insolvency of prime brokers, custodians, administrators and other agents whose services the Company uses and who may hold assets of the Company's funds.
All of the Company's funds use the services of prime brokers, custodians, administrators or other agents to carry out certain securities transactions and to conduct certain business of the Company's funds. In the event of the insolvency of a prime broker and/or custodian, the Company's funds might not be able to recover equivalent assets in full as they may rank among the prime broker's and custodian's unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the Company's funds' cash held with a prime broker or custodian (if any) may not be segregated from the prime broker's or custodian's own cash, and the funds will therefore rank as unsecured creditors in relation thereto.
Operational risks relating to the failure of data processing systems and other information systems and technology may disrupt our investment management business, result in losses and/or limit the business's operations and growth.
The Company's investment management business and its funds rely heavily on financial, accounting, trading and other data processing systems to, among other things, execute, confirm, settle and record transactions across markets and geographic locations in a time-sensitive, efficient and accurate manner. If any of these systems does not operate properly or are disabled, the Company could suffer financial loss, a disruption of its business, liability to the Company's funds, regulatory intervention and/or reputational damage. In addition, the Company's investment management business is highly dependent on information systems and technology, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate the operational needs of the Company's investment management business, or an increase in costs related to such information systems, could have a material adverse effect on the Company, both with respect to a decrease in the operational performance of its investment management business and an increase in costs that may be necessary to improve such systems.
The Company depends on its presence in New York, New York, where most of the Company's investment management personnel are located, for the continued operation of its business. We have taken precautions to limit the impact that a disruption to operations at our New York headquarters could cause (for example, by ensuring that the Company can operate independently of offices in other geographic locations). Although these precautions have been taken, a disaster or a disruption in the infrastructure that supports our investment management business, including a disruption involving electronic communications or other services used by the third parties with whom the Company's investment management business conducts business or directly affecting the New York, New York, headquarters, could have a material adverse impact on the Company's ability to continue to operate its investment management business without interruption. The Company's disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance might only partially reimburse us for our losses, if at all. Finally, the Company relies on third party service providers for certain aspects of its business, including for certain information systems and technology and administration of the
Company's funds. Severe interruptions or deteriorations in the performance of these third parties or failures of their information systems and technology could impair the quality of the Company's investment management business operations and could impact the Company's reputation and materially adversely affect our investment management business.
Certain of the Company's funds may invest in relatively high-risk, illiquid assets, and the Company may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principal amounts of these investments.
Certain of the Company's funds invest a portion of their assets in securities that are not publicly traded. In many cases, they may be prohibited by contract or by applicable securities laws from selling such securities for a period of time or there may not be a public market for such securities. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of downward movement in market prices during the disposition period. Accordingly, under certain conditions, the Company's funds may be forced to either sell securities at lower prices than they had expected to realize or defer, potentially for a considerable period of time, sales that they had planned to make. Investing in these types of investments can involve a high degree of risk, and the Company's funds may lose some or all of the principal amount of such investments, including our own invested capital.
Risk management activities may materially adversely affect the return on the Company's funds' investments if such activities do not effectively limit exposure to decreases in investment values or if such exposure is overestimated.
When managing the Company's funds' exposure to market risks, the relevant investment management product may use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative financial instruments to limit its exposure to changes in the relative values of investments that may result from market developments, including changes in interest rates, currency exchange rates and asset prices. The success of such derivative transactions generally will depend on the Company's ability to accurately predict market changes in a timely fashion, the degree of correlation between price movements of a derivative instrument, the position being hedged, the creditworthiness of the counterparty and other factors. As a result, these transactions may result in poorer overall investment performance than if they had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases. A perfect correlation between the instruments used in a hedging or other derivative transaction and the position being hedged may not be attained. An imperfect correlation could give rise to a loss. Also, it may not be possible to fully or perfectly limit exposure against all changes in the value of an investment because the value of an investment is likely to fluctuate as a result of a number of factors, many of which will be beyond the Company's control or ability to hedge.
Fluctuations in currency exchange rates could materially affect the Company's investment management business and its results of operations and financial condition.
The Company uses U.S. dollars as its reporting currency. Investments in the Company's funds and managed accounts are made in different currencies, including Euros, Pounds Sterling, Australian Dollar and Yen. In addition, the Company's funds and managed accounts hold investments denominated in many foreign currencies. To the extent that the Company's revenues from its investment management business are based on assets under management denominated in such foreign currencies, our reported revenues may be significantly affected by the exchange rate of the U.S. dollar against these currencies. Typically, an increase in the exchange rate between U.S. dollars and these currencies will reduce the impact of revenues denominated in these currencies in the financial results of our investment management business. For example, management fee revenues derived from each Euro and Australian Dollar of assets under management denominated in Euros and Australian Dollar will decline in U.S. dollar terms if the value of the U.S. dollar appreciates against the Euro and Australian Dollar. In addition, the calculation of the amount of assets under management is affected by exchange rate movements as assets under management denominated in foreign currencies are converted to U.S. dollars. The Company's investment management business also incurs a portion of its expenditures in currencies other than U.S. dollars. As a result, our investment management business is subject to the effects of exchange rate fluctuations with respect to any currency conversions and the Company’s ability to hedge these risks and the cost of such hedging or the Company’s decision not to hedge could impact the performance of the Company's funds and our investment management business and its results of operations and financial condition.
The due diligence process that the Company's investment management business undertakes in connection with investments by the Company's funds is inherently limited and may not reveal all facts that may be relevant in connection with making an investment.
Before making investments, particularly investments in securities that are not publicly traded, the Company endeavors to conduct a due diligence review of such investment that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, the Company is often required to evaluate critical and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants, investment bankers and financial analysts may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an
investment, the Company is limited to the resources available, including information provided by the target of the investment and, in some circumstances, third party investigations. The due diligence investigation that the Company conducts with respect to any investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful, which may adversely affect the performance of the Company's funds and the Company's ability to generate returns on its own invested capital from any such investment.
The Company's real estate business is subject to the risks inherent in the ownership and operation of real estate and the construction and development of real estate.
The Company's real estate business is subject to the risks inherent in the ownership and operation of real estate and real estate-related businesses and assets. These risks include those associated with general and local economic conditions, changes in supply of and demand for competing properties in an area, changes in environmental regulations and other laws, various uninsured or uninsurable risks, natural disasters, changes in real property tax rates, changes in interest rates, the reduced availability of mortgage financing which may render the sale or refinancing of properties difficult or impracticable, environmental liabilities, contingent liabilities on disposition of assets, terrorist attacks, war and other factors that are beyond our control. Further, the U.S. Environmental Protection Agency has found that global climate change could increase the severity and perhaps the frequency of extreme weather events, which could subject real property to increased weather-related risks in the coming years. There are also presently a number of current and proposed regulatory initiatives, both domestically and globally, that are geared towards limiting and scaling back the emission of greenhouse gases, which certain scientists have linked to global climate change. Although not known with certainty at this time, such regulation could adversely affect the costs to construct and operate real estate in the coming years, such as through increased energy costs.
The commercial real estate markets in the United States generally have experienced major disruptions in the past due to the lack of available capital, in the form of either debt or equity, and declines in value as a result of overall economic decline. If these conditions were to occur again transaction volume may drop precipitously, negatively impacting the valuation and performance of the Company's real estate investments significantly. Additionally, if the Company's real estate business acquires direct or indirect interests in undeveloped land or underdeveloped real property, which may often be non-income producing, they will be subject to the risks normally associated with such assets and development activities, including risks relating to the availability and timely receipt of zoning and other regulatory or environmental approvals, the cost, potential for cost overruns and timely completion of construction (including risks beyond the control of the investor, such as weather or labor conditions or material shortages) and the availability of both construction and permanent financing on favorable terms.
The investment management industry is intensely competitive, which may adversely affect the Company's ability to attract and retain investors and investment professionals.
The investment management industry is extremely competitive. Competition includes numerous international, national, regional and local asset management firms and broker-dealers, commercial bank and thrift institutions, and other financial institutions. Many of these institutions offer products and services that are similar to, or compete with, those offered by us and have substantially more personnel and greater financial resources than the Company does. The key areas for competition include historical investment performance, the ability to identify investment opportunities, the ability to attract and retain the best investment professionals and the quality of service provided to investors. The Company's ability to compete may be adversely affected if it underperforms in comparison to relevant benchmarks, peer groups or competing asset managers. The competitive market environment may result in increased downward pressure on fees, for example, by reduced management fee and incentive allocation percentages. The future results of operations of the Company's investment management business are dependent in part on its ability to maintain appropriate fee levels for its products and services. In the current economic environment, many competing asset managers experienced substantial declines in investment performance, increased redemptions, or counterparty exposures which impaired their businesses. Some of these asset managers have reduced their fees in an attempt to avoid additional redemptions. Competition within the investment management industry could lead to pressure on the Company to reduce the fees that it charges its clients for investment management products and services. A failure to compete effectively may result in the loss of existing clients and business, and of opportunities to generate new business and grow assets under management, each of which could have a material adverse effect on the Company's investment management business and results of operations, financial condition and prospects. Furthermore, consolidation in the investment management industry may accelerate, as many asset managers are unable to withstand the substantial declines in investment performance, increased redemptions, and other pressures impacting their businesses, including increased regulatory, compliance and control requirements. Some competitors may acquire or combine with other competitors. The combined business may have greater resources than the Company does and may be able to compete more effectively against the Company and rapidly acquire significant marketdiluted earnings per share.
Increased regulatory focus could result in regulation that may limit the manner in which the Company and its funds invest, materially impacting the Company's business.
The Company's investment management business may be adversely affected if new or revised legislation or regulations are enacted, or by changes in the interpretation or enforcement of existing rules and regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets and their participants. Such changes could place limitations on the type of investor that can invest in the Company's funds or on the conditions under which such investors may invest. Further, such changes may limit the scope of investing activities that may be undertaken by the Company's funds. It is impossible to determine the extent of the impact of any new or recently enacted laws, including the Dodd-Frank Act and MiFID II, or any other regulations or initiatives that may be proposed, or whether any proposed regulations or initiatives will become law. Compliance with any new laws or regulations could be difficult and expensive and affect the manner in which the Company's investment management business conducts itself, which may adversely impact its results of operations, financial condition and prospects.
Additionally, as a result of highly publicized financial scandals, investors, regulators and the general public have exhibited concerns over the integrity of both the U.S. financial markets and the regulatory oversight of these markets. As a result, the business environment in which Company's investment management business operates is subject to heightened regulation. With respect to the Company's funds, in recent years, there has been debate in both U.S. and foreign governments about new rules or regulations, including increased oversight or taxation, in addition to the recently enacted legislation described above. As calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and other investment activities of investment funds, including the Company's funds. Such investigations may impose additional expenses on the Company, may require the attention of senior management and may result in fines if any of the Company's funds are deemed to have violated any regulations.
The Company's investment management business may suffer as a result of loss of business from key investors.
The loss of all or a substantial portion of the business provided by key investors could have a material impact on income derived from management fees and incentive allocations and consequently have a material adverse effect on our investment management business and results of operations or financial condition.
The success of our Cowen Aviation business depends on our ability to lease the aircraft we own and to dispose of the aircraft at the end of the lease terms.
Our Cowen Aviation business leases specialized aircraft to various counterparties. We may incur losses if these counterparties do not renew their leases with us if we are unable to re-lease the aircraft to different counterparties. In addition, we may also incur losses if the residual value of the aircraft at the end of the lease terms is less than what we expected the value to be or if we are unable to dispose of the aircraft at the end of the lease term.
Our third party reinsurance business could expose us to losses.
We provide third party reinsurance coverage through our Luxembourg subsidiary, Hollenfels Re S.A (“Hollenfels”). We have written polices relating to property and casualty, workers' compensation, general liability and construction performance bonds and may issue reinsurance policies relating to other types of insurance. Because we write reinsurance, the success of our underwriting efforts depends, in part, upon the policies, procedures and expertise of the ceding companies making the original underwriting decisions. We face the risk that these ceding companies may fail to accurately assess the risks that they assume initially, which, in turn, may lead us to inaccurately assess the risks we assume. If we fail to establish and receive appropriate premium rates or the claims we receive exceed the premiums and retrocession recoverables we are able to collect, we will suffer losses.
We may be unable to purchase retrocession reinsurance and our retrocession agreements subject us to third-party credit risk.
We may enter into retrocession agreements with third parties in order to limit our exposure to losses from the reinsurance coverage provided by Hollenfels. Changes in the availability and cost of retrocession reinsurance, which are subject to market conditions that are outside of our control, may reduce to some extent our ability to use retrocession reinsurance to balance exposures across our reinsurance operations. Accordingly, we may not be able to obtain our desired amounts of retrocession reinsurance. In addition, even if we are able to obtain such reinsurance, we may not be able to negotiate terms that we deem appropriate or acceptable or obtain such reinsurance from entities with satisfactory creditworthiness. While we seek to do business with creditworthy counterparties, if the parties who provide us with retrocession are not able to meet their obligations to us or fail to make timely payments under the terms of our retrocession agreements, we could be materially and adversely affected because we may remain liable under the terms.
Risks Related to the Company's Broker-Dealer Business
The Company's broker-dealer business focuses principally on specific sectors of the economy, and deterioration in the business environment in these sectors or a decline in the market for securities of companies within these sectors could materially affect our broker-dealer business.
The Company focuses principally on the Target Sectors of the economy. Therefore, volatility in the business environment in these sectors or in the market for securities of companies within these sectors could substantially affect the Company's financial results. The business environment for companies in these sectors has been subject to substantial volatility, and the Company's financial results have consequently been subject to significant variations from year to year. The market for securities in each of the Company's target sectors may also be subject to industry-specific risks. For example, changes in policies of the United States Food and Drug Administration, along with changes to Medicare and government reimbursement policies, may affect the market for securities of healthcare companies, and changes to how the U.S. government reviews foreign acquisitions of U.S. based companies may make executing M&A transactions more difficult.
As an investment bank which focuses primarily on specific growth sectors of the economy, the Company also depends significantly on private company transactions for sources of revenues and potential business opportunities. To the extent the pace of these private company transactions slows or the average size declines due to a decrease in private equity financings, difficult market conditions in the Company's target sectors or other factors, the Company's business and results of operations may be adversely affected.
The financial results of the Company's broker-dealer business may fluctuate substantially from period to period.
The Company has experienced, and we expect to experience in the future, significant periodic variations in its revenues and results of operations. These variations may be attributed in part to the fact that its investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond the Company's control. In most cases, the Company receives little or no payment for investment banking engagements that do not result in the successful completion of a transaction. As a result, our broker-dealer business is highly dependent on market conditions as well as the decisions and actions of its clients and interested third parties. For example, a client's acquisition transaction may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the client's or counterparty's business. If the parties fail to complete a transaction on which the Company is advising or an offering in which the Company is participating, we will earn little or no revenue from the transaction, and we may incur significant expenses that may not be recouped. This risk may be intensified by the Company's focus on growth companies in the Target Sectors as the market for securities of these companies has experienced significant variations in the number and size of equity offerings. Many companies initiating the process of an IPO are simultaneously exploring other strategic alternatives, such as a merger and acquisition transaction. The Company's broker-dealer revenues would be adversely affected in the event that an IPO for which it is acting as an underwriter is preempted by the company's sale if the Company is not also engaged as a strategic advisor in such sale. As a result, our broker-dealer business is unlikely to achieve steady and predictable earnings on a quarterly basis.
Pricing and other competitive pressures may impair the revenues of the Company's brokerage business.
The Company's brokerage business accounted for approximately 56% of the broker-dealer segment's revenues during 2017. Along with other firms, the Company has experienced price competition in this business in recent years. In particular, the ability to execute trades electronically and through alternative trading systems has increased the pressure on trading commissions and spreads. We expect to continue to experience competitive pressures in these and other areas in the future as some of our competitors in the investment banking industry seek to obtain market share by competing on the basis of price or use their own capital to facilitate client trading activities. In addition, the Company faces pressure from larger competitors, who may be better able to offer a broader range of complementary products and services to clients in order to win their trading or prime brokerage business. We are committed to maintaining and improving the Company's comprehensive research coverage to support its brokerage business and the Company may be required to make additional investments in the Company's research capabilities.
The Company faces strong competition from larger firms.
The research, brokerage and investment banking industries are intensely competitive, and the Company expects them to remain so. The Company competes on the basis of a number of factors, including client relationships, reputation, the abilities of the Company's professionals, market focus and the relative quality and price of the Company's services and products. The Company has experienced intense price competition in some of its businesses, including trading commissions and spreads in its brokerage business. In addition, pricing and other competitive pressures in investment banking, including the trends toward
multiple book runners, co-managers and financial advisors, and a larger share of the underwriting fees and discounts being allocated to the book-runners, could adversely affect the Company's revenues from its broker-dealer business.
The Company is a relatively small investment bank. Many of the Company's competitors in the research, brokerage and investment banking industries have a broader range of products and services, greater financial resources, larger customer bases, greater name recognition and marketing resources, a larger number of senior professionals to serve their clients' needs, greater global reach and more established relationships with clients than the Company has. These larger competitors may be better able to respond to changes in the research, brokerage and investment banking industries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally.
The scale of our competitors in the investment banking industry has increased in recent years as a result of substantial consolidation among companies in the research, brokerage and investment banking industries. In addition, a number of large commercial banks and other broad-based financial services firms have established or acquired underwriting or financial advisory practices and broker-dealers or have merged with other financial institutions. These firms have the ability to offer a wider range of products than the Company does which may enhance their competitive position. They also have the ability to support their investment banking and advisory groups with commercial banking and other financial services in an effort to gain market share, which has resulted, and could further result, in pricing pressure in the Company's businesses. If we are unable to compete effectively with our competitors in the investment banking industry, the Company's business and results of operations may be adversely affected.
The Company's capital markets and strategic advisory engagements are singular in nature and do not generally provide for subsequent engagements.
The Company's investment banking clients generally retain the Company on a short-term, engagement-by-engagement basis in connection with specific capital markets or mergers and acquisitions transactions, rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and the Company's engagements with these clients may not recur, the Company must seek out new engagements when its current engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If the Company is unable to generate a substantial number of new engagements that generate fees from new or existing clients, the Company's broker-dealer business and results of operations would likely be adversely affected.
Larger and more frequent capital commitments in the Company's trading and underwriting businesses increase the potential for significant losses.
There has been a trend toward larger and more frequent commitments of capital by financial services firms in many of their activities. For example, in order to compete for certain transactions, investment banks may commit to purchase large blocks of stock from publicly traded issuers or significant stockholders, instead of the more traditional marketed underwriting process in which marketing is completed before an investment bank commits to purchase securities for resale. To the extent the total net capital of the Company's broker-dealers allows it, the Company anticipates participating in this trend and, as a result, the Company will be subject to increased risk as it commits capital to facilitate business. Furthermore, the Company may suffer losses as a result of the positions taken in these transactions even when economic and market conditions are generally favorable for others in the industry.
The Company may enter into large transactions in which it commits its own capital as part of its trading business to facilitate client trading activities. The number and size of these large transactions may materially affect the Company's results of operations in a given period. Market fluctuations may also cause the Company to incur significant losses from its trading activities. To the extent that the Company owns assets (i.e., has long positions), a downturn in the value of those assets or in the markets in which those assets are traded could result in losses. Conversely, to the extent that the Company has sold assets it does not own (i.e., has short positions), in any of those markets, an upturn in the value of those assets or in markets in which those assets are traded could expose the Company's broker-dealer business to potentially large losses as it attempts to cover short positions by acquiring assets in a rising market.
Operational risks relating to the failure of data processing systems and other information systems and technology or other infrastructure may disrupt the Company's broker-dealer business and result in losses or limit our operations and growth in the industry.
The Company's broker-dealer business is highly dependent on its ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions that the Company processes have become increasingly complex. The inability of the Company's systems to accommodate an increasing volume of transactions could also constrain the Company's ability to expand its broker-dealer business. If any of these systems do not operate properly or are disabled, or if there are other shortcomings or failures in the Company's internal processes, people or systems, the Company could suffer impairments, financial loss, a disruption of its broker-dealer business, liability to clients, regulatory intervention or reputational damage.
The Company has outsourced certain aspects of its technology infrastructure including data centers and wide area networks, as well as some trading applications. The Company is dependent on its technology providers to manage and monitor those functions. A disruption of any of the outsourced services would be out of the Company's control and could negatively impact our broker-dealer business. The Company has experienced disruptions on occasion, none of which has been material to the Company's operations and results. However, there can be no guarantee that future material disruptions with these providers will not occur.
The Company also faces the risk of operational failure of or termination of relations with any of the clearing agents, exchanges, clearing houses or other financial intermediaries that the Company uses to facilitate its securities transactions. Any such failure or termination could adversely affect the Company's ability to effect transactions and to manage its exposure to risk.
In addition, the Company's ability to conduct its broker-dealer business may be adversely impacted by a disruption in the infrastructure that supports Company and the communities in which we are located. This may affect, among other things, the Company's financial, accounting or other data processing systems. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which the Company conducts business, whether due to fire, other natural disaster, power or communications failure, act of terrorism or war or otherwise. Nearly all of our broker-dealer employees in our primary locations in New York, Boston, San Francisco and London work in close proximity to each other. Although the Company has a formal disaster recovery plan in place, if a disruption occurs in one location and our broker-dealer employees in that location are unable to communicate with or travel to other locations, the Company's ability to service and interact with its clients may suffer, and the Company may not be able to implement successfully contingency plans that depend on communication or travel.
Our broker-dealer business also relies on the secure processing, storage and transmission of confidential and other information in its computer systems and networks. The Company's computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this could jeopardize our or our broker-dealer clients' or counterparties' confidential and other information processed and stored in, and transmitted through, the Company's computer systems and networks, or otherwise cause interruptions or malfunctions in our broker-dealer business', its clients', its counterparties' or third parties' operations. The Company may be required to expend significant additional resources to modify its protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and the Company may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by the Company.
Our business could be adversely affected by the recent implementation of MiFID II in Europe.
MiFID II, which went into effect in January 2018, regulates the provision of investment services and activities throughout the European Economic Area. MiFID II requires that investment managers and investment advisors located in the E.U. “unbundle” research costs from commissions. As a result, investment firms subject to MiFID II may no longer pay for research using client commissions or “soft dollars”. Going forward, such costs must be paid directly by the investment firm or through a research payment account funded by clients and governed by a budget that is agreed by the client. Because the MiFID II requirements are just taking effect, we cannot predict the effects that this new regulation will have on our research and sales and trading businesses. If investment managers and investment advisors decide to reduce their spending on research or decide to trade with other broker-dealers as a result of the new MiFID II regulations our business could be adversely affected.
The market structure in which our market-making business operates may make it difficult for this business to maintain profitability.
Market structure changes have had an adverse effect on the results of operations of our market-making business. These changes may make it difficult for us to maintain and/or predict levels of profitability of, or may cause us to generate losses in, our market-making business.
The growth of electronic trading and the introduction of new technology in the markets in which our market-making business operates may adversely affect this business and may increase competition.
The continued growth of electronic trading and the introduction of new technologies is changing our market-making business and presenting new challenges. Securities, futures and options transactions are increasingly occurring electronically, through alternative trading systems. It appears that the trend toward alternative trading systems will continue to accelerate. This acceleration could further increase program trading, increase the speed of transactions and decrease our ability to participate in transactions as principal, which would reduce the profitability of our market-making business. Some of these alternative trading systems compete with our market-making business and with our algorithmic trading platform, and we may experience continued competitive pressures in these and other areas. Significant resources have been invested in the development of our
electronic trading systems, which includes our ATM business, but there is no assurance that the revenues generated by these systems will yield an adequate return on the investment, particularly given the increased program trading and increased percentage of stocks trading off of the historically manual trading markets.
We are subject to potential losses and default risks as a result of our clearing and execution activities.
As a clearing member firm providing services to certain of our brokerage customers, we are ultimately responsible for their financial performance in connection with various securities transactions. Our clearing operations require a commitment of our capital and involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. We are required to finance customers’ unsettled positions from time to time, and we could be held responsible for the defaults of those customers. If customers default on their obligations, we remain financially liable for such obligations, and while some of these obligations may be collateralized, we are still subject to market risk in the liquidation of customer collateral to satisfy those obligations. While we have risk management procedures designed to mitigate certain risks, there can be no assurance that our risk management procedures will be adequate. Although we regularly review our credit exposure to customers, default risk may arise from events or circumstances that may be difficult to detect or foresee. Default by our customers may also give rise to the Company incurring penalties imposed by execution venues, regulatory authorities and clearing and settlement organizations. Any liability arising from clearing operations could have a material adverse effect on our business, financial condition and results of operations.
We are also exposed to credit risk from third parties that owe us money, securities or other obligations, including our trading counterparties. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons, and we could be held responsible for such defaults. In addition, customer trading errors may cause us to incur financial losses, which customers may be unable or unwilling to cover. Volatile securities markets, credit markets and regulatory changes may increase our exposure to our customers’ and counterparties’ credit profiles, which could adversely affect our financial condition and operating results. Our review of the credit risk of customers and trading counterparties may not be adequate to provide sufficient protection from these risks.
Our securities business and related clearing operations expose us to material liquidity risk.
We may be required to provide considerable additional funds with clearing and settlement organizations of which we are members, such as the National Securities Clearing Corporation or Depository Trust and Clearing Corporation in the U.S., especially during periods of high market volatility. In addition, regulatory agencies have recently required these clearing and settlement organizations to increase the level of margin deposit requirements, and they may continue to do so in the future. We rely on our excess cash, certain established credit facilities and the use of outsourced clearing arrangements to meet or reduce these demands. While we have historically met requests for additional margin deposits, there is no guarantee that our excess cash and our established credit facilities and clearing arrangements will be sufficient for future needs, particularly if there is an increase in requirements. There is also no guarantee that these established credit facilities will be extended beyond their expiration.
As a clearing member firm of securities clearing houses in the U.S., we are also exposed to clearing member credit risk. Securities clearing houses require member firms to deposit cash and/or government securities to a clearing fund. If a clearing member defaults in its obligations to the clearing house in an amount larger than its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. The clearing houses of which we are members also have the authority to assess their members for additional funds if the clearing fund is depleted. A large clearing member default could result in a substantial cost to us if we are required to pay such assessments.
In certain jurisdictions we are dependent on third-party clearing agents and any failures by such clearing agents could materially impact our business and operating results.
In certain jurisdictions we are dependent on agents for the clearing and settlement of securities transactions. If our agents fail to properly facilitate the clearing and settlement of our customer trades, we could be subject to financial, legal and regulatory risks and costs that may impact our business and operating results. In addition, it could cause our clients to reduce or cease their trading with us, which would adversely affect our revenues and financial results.
Moreover, certain of the clearing agreements provide our clearing agents with rights to increase our deposit requirements or to terminate the agreements upon short notice. There is no guarantee we will be able to satisfy any increased deposit requirements within the time frames demanded by our clearing agents, and if we fail to satisfy such demands on a timely basis, it could constitute a default under our clearing agreements. If our clearing agents terminate a clearing agreement on short notice, there is no guarantee that we could obtain alternative services in a timely manner and any interruption of the normal course of our trading and clearing operations could have a material impact on our business and results of operations.
Our clearing and execution operations are global and international market events could materially adversely impact our financial results.
Because we offer brokerage products and services on a global basis, our revenues derived from non-U.S. operations are subject to risk of loss from social or political instability, changes in government policies or policies of central banks, downgrades in the credit ratings of sovereign countries, expropriation, nationalization, confiscation of assets and unfavorable legislative and political developments in such non-U.S. jurisdictions. Revenues from the trading of non-U.S. securities may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations on our results could be magnified because generally non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.
Decreases in equity trading activity by active fund managers and declining securities prices could harm our business and profitability.
Declines in the trading activity of active fund managers generally result in lower revenues from our brokerage products and services. In addition, securities’ price declines adversely affect our trading commissions outside North America, which are based on the value of transactions. The demand for our brokerage products and services is directly affected by factors such as economic, regulatory and political conditions that may lead to decreased trading activity and prices in the securities markets in the U.S. and in all of the foreign markets we serve. Significant flows of investments out of actively‑managed equity funds has curtailed their trading activity, which has weighed on our buy‑side trading volumes and the use of some of our higher value services. Volatility levels also impact the amount of trading activity. Sustained periods of low volatility can result in lower levels of trading activity. In addition, trading activity tends to decline in periods following extreme levels of volatility.
The U.K. electorate voted in favor of a U.K. exit from the E.U. in a referendum, which could adversely impact our business, results of operations and financial condition.
The U.K. has voted in an advisory referendum to leave the European Union (commonly referred to as “Brexit”) and at the end of March 2017 the U.K. provided formal notice of withdrawal to the E.U. Under the process for withdrawing from the E.U. contemplated in the Treaty on European Union, the U.K. will remain a member state until a withdrawal agreement is entered into or, if later (and no extension is agreed), two years following the date notification of the U.K.’s intention to withdraw was provided to the E.U. The effects of Brexit on us will depend on any agreements the U.K. makes to retain access to E.U. markets (including for financial services) either during a transitional period or more permanently. Brexit is expected to significantly affect the fiscal, monetary and regulatory landscape in the U.K., and could have a material impact on its economy and the future growth of its various industries, including the financial services industry in which we operate.
We conduct business in Europe primarily through our U.K. subsidiaries. Depending on the terms of Brexit, we could face new regulatory costs and challenges. For instance, our U.K. subsidiaries may not be able to rely on the existence of a “passporting” regime that allows immediate access to the single E.U. market. If this occurred, we may need to establish one or more new regulated subsidiaries in the E.U. in order to provide our trading platform and certain post-trade services to clients in the E.U.
Changes to U.K. immigration policy could likewise occur as a result of Brexit. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Any such new laws and regulations in the U.K. may be difficult and/or costly to implement.
Although it is not possible at this point in time to predict the effects of an exit of the U.K. from the E.U., any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations. In addition, Brexit may impact our ability to comply with the extensive government regulation to which we are subject.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal offices, all of which are leased, are located in New York City, Boston, San Francisco, Stamford and London.the United Kingdom. Our other offices, all of which are leased, are located in Atlanta, Chicago, Cleveland, Greenwich, Houston, Jersey City, Menlo Park, Orlando, Stamford, Washington D.C., Luxembourg, Belfast,throughout the United States, Europe and other various locations.Asia. Our corporate headquarters are located in New York, New York and comprise approximately 98,000150,357 square feet of leased space pursuant to a lease agreement through 2022.2029. Our additional New York locations are comprised of approximately 77,00019,000 square feet pursuant to a lease agreementagreements through 2019 and approximately 41,000 square feet pursuant to a lease agreement through 2022.2032. We lease approximately 19,00019,100 square feet of space in Boston pursuant to a lease agreementagreements expiring in 2023, which is used primarily by our broker-dealer segment.through 2023. In San Francisco, we lease approximately 26,00034,700 square feet of space, pursuant to a lease agreementagreements expiring in 2025 which is used by our broker-dealer segment.through 2025. In Stamford, we lease approximately 43,000 square feet of space, pursuant to lease agreements expiring through 2030. Our LondonUnited Kingdom offices are subject to lease agreements expiring in 2022 which are used by our investment management and broker-dealer segments.through 2034.
Item 3. Legal Proceedings
In the ordinary course of business, wethe Company and its affiliates, subsidiaries and current and former officers, directors and employees (the "Company and Related Parties") are named as defendants in, or as parties to, various legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of securities, banking, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief.
In the ordinary course of business, wethe Company and Related Parties are also subject to governmental and regulatory examinations, information gathering requests (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Certain of our affiliates and subsidiaries are investment banks, registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, commodity futures and other regulators. In connection with formal and informal inquiries by these regulators, we receive requests and orders seeking documents and other information in connection with various aspects of our regulated activities. The Company is currently cooperating with the SEC in connection with an investigation of the Company’s business’ compliance with record preservation requirements relating to business communications and/or electronic messaging channels. The SEC is reportedly conducting similar investigations of record preservation practices at other broker-dealers and investment advisors.
Due to the global scope of our operations, and presence in countries around the world, wethe Company and Related Parties may be subject to litigation, and governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and informal), in multiple jurisdictions with legal and regulatory regimes that may differ substantially, and present substantially different risks, from those weto which the Company and Related Parties are subject to in the United States.
The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. For many legal and regulatory matters, we are unable to estimate a range of reasonably possible loss.
In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss because the conditions above are not met. The Company's disclosure includeswould include an estimate of the reasonably possible loss or range of loss for those matters, for which an estimate can be made. Neither a reserve nor disclosure is required for losses that are deemed remote.
The Company appropriately reserves for certain matters where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. Such amounts are included within accounts payable, accrued expenses and other liabilities in the accompanying consolidated statements of financial condition. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters. The Company accrues legal fees as incurred.
The following information reflects developments with respect to the Company’s legal proceedings that occurred during the year ended December 31, 2017.
On December 27, 2013, Landol Fletcher filed a putative class action lawsuit against Convergex Holdings, LLC, Convergex Group, LLC, Cowen Execution, Convergex Global Markets Limited and G-Trade Services LLC (collectively, “Convergex”) in the United States District Court for the Southern District of New York (Landol Fletcher and all others similarly situated v. Convergex Group LLC, Cowen Execution, Convergex Global Markets Ltd., Convergex Holdings LLC, G-Trade Services LLC, & Does 1-10, No. 1:13-CV-09150-LLS). The suit alleges breaches of fiduciary duty and prohibited transactions under ERISA and seeks to maintain a class action on behalf of all ERISA plan participants, beneficiaries and named fiduciaries whose plans were impacted by net trading by Convergex Global Markets Limited from October 2006 to December 2011. On April 11, 2014, Landol Fletcher and Frederick P. Potter Jr., filed an amended complaint raising materially similar allegations. This matter was assumed by the Company as a result of the Company’s previously announced acquisition of Convergex Group, which was completed on June 1, 2017. On February 17, 2016, the District Court granted Convergex’s motion to dismiss the amended complaint. Plaintiffs filed an appeal to the Second Circuit, and the AARP and Department of Labor filed amicus briefs on plaintiffs' behalf. The appeal was argued on December 12, 2016. On February 10, 2017, the Second Circuit Court of Appeals (1) reversed the District Court, finding that plaintiff has constitutional standing in a “representative” capacity to sue for damages to the ERISA defined benefit plan in which he is a participant, and (2) remanded to the District Court to reconsider, in light of the Circuit Court’s decision, the issue whether plaintiff has standing to pursue claims on behalf of ERISA plans in which plaintiff is not a participant. Convergex filed a petition for rehearing, and the Court of Appeals denied the petition. On June 30, 2017, the Company filed a notice of motion and memorandum of law in support of a motion to stay the proceedings in the District Court pending resolution of its petition for writ of certiorari, which the Company intended to file with the U.S.
Supreme Court. On August 16, 2017, the District Court granted the Company’s motion to stay the proceedings in the District Court pending resolution of the Company’s petition for writ of certiorari. On September 1, 2017, the Company filed a petition with the United States Supreme Court for a writ of certiorari requesting review of the decision of the Court of Appeals. On January 8, 2018, the U.S. Supreme Court denied the Company’s petition for a writ of certiorari. The previously granted stay of the proceedings in the District Court will now lift and the case will proceed in the District Court. We are indemnified against losses arising from this matter pursuant to, and subject to, the provisions of the purchase agreement relating to the acquisition of Convergex Group. Because the case is in its preliminary stages, the Company cannot predict the outcome at this time, but it does not currently expect this case to have a material effect on its financial position or its results of operations.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Price Information and Stockholders
Our Class A common stock is listed and trades on the NASDAQ Global Market under the symbol "COWN." As of March 5, 2018,February 27, 2023, there were approximately 4340 holders of record of our Class A common stock. This number does not include stockholders for whom shares were held in "nominee" or "street" name.
The following table contains historical quarterly price information for the year ended December 31, 2017. On December 5, 2016, we effected a one-for-four reverse stock split. On March 5, 2018, the last reported sale price of our Class A common stock was $14.45.
|
| | | | | | | |
| 2017 Fiscal Year | High | | Low |
| First Quarter | $ | 16.65 |
| | $ | 12.45 |
|
| Second Quarter | 16.95 |
| | 13.00 |
|
| Third Quarter | 17.95 |
| | 15.00 |
|
| Fourth Quarter | 18.25 |
| | 13.50 |
|
| | | | |
| 2016 Fiscal Year | High | | Low |
| First Quarter | $ | 15.88 |
| | $ | 9.88 |
|
| Second Quarter | 15.56 |
| | 10.92 |
|
| Third Quarter | 15.32 |
| | 11.48 |
|
| Fourth Quarter | 16.75 |
| | 11.60 |
|
Dividend Policy
We have never declared or paid anyThough we currently expect that cash dividends on Class A common stock or any other class of common stock. Any payment of cash dividends on stockpaid by us during our most recently completed fiscal year will continue to be paid in the future, the declaration and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account: general economic and will depend uponbusiness conditions; our results of operations, earnings, capital requirements, financial condition future prospects,and operating results; our available cash and current and anticipated cash needs; capital requirements; contractual restrictions (including under agreements related to indebtedness to which we are a party), legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us; and such other factors deemed relevant byas our board of directors. directors may deem relevant.
We currently intendcredit dividend equivalents on all unvested Restricted Stock Units and Performance Share Awards concurrently with the payment of dividends to retain any future earningsthe holders of Class A common stock. The dividend equivalents have the same vesting and delivery terms as the underlying award agreements relating to fund the operation, developmentRestricted Stock Units and expansion of our business, and therefore we do not anticipate paying any cash dividends on common stock in the foreseeable future.Performance Share Awards.
Issuer Purchases of Equity Securities: Sales of Unregistered Securities
As of December 31, 2017,2022, the Company's Board of Directors has approved a share repurchase program that authorizes the Company to purchase up to $138.3$466.4 million of Cowen Class A common stock from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. The specific timing and amount of repurchases will vary depending on various factors, including, among others, market conditions and competing needs for the use of our capital. We may elect to conduct future share repurchases through open market purchases, private transactions or automatic share repurchase programs under SEC Rule 10b5-1. During the year ended December 31, 2017,2022, through the share repurchase program, the Company repurchased 1,401,8661,069,002 shares of Cowen Class A common stock at an average price of $13.90$29.07 per share.
The table below sets forth the information with respect to purchases made by or on the behalf of the Company or any “affiliated purchaser”"affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange Act, as amended), of our Class A common stock during the year ended December 31, 2017. All amounts have been retroactively updated to reflect the one-for-four reverse stock split, which was effective December 5, 2016.
2022. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | |
| Month 1 (January 1, 2022 – January 31, 2022) | | | | | | | | |
| Common stock repurchases(1) | | 379,002 | | | $ | 33.23 | | | 379,002 | | | $ | 43,526,497 | |
| Employee transactions(2) | | — | | | $ | — | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 379,002 | | | $ | 33.23 | | | 379,002 | | | |
| Month 2 (February 1, 2022 – February 28, 2022) | | | | | | | | |
| Common stock repurchases(1) | | 30,000 | | | $ | 29.55 | | | 30,000 | | | $ | 42,639,886 | |
| Employee transactions(2) | | — | | | $ | — | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 30,000 | | | $ | 29.55 | | | 30,000.00 | | | |
| Month 3 (March 1, 2022 – March 31, 2022) | | | | | | | | |
| Common stock repurchases(1) | | 389,300 | | | $ | 27.38 | | | 389,300 | | | $ | 31,979,581 | |
| Employee transactions(2) | | 374,149 | | | $ | 32.83 | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 763,449 | | | $ | 30.05 | | | 389,300 | | | |
| Month 4 (April 1, 2022 – April 30, 2022) | | | | | | | | |
| Common stock repurchases(1) | | 120,700 | | | $ | 27.24 | | | 120,700 | | | $ | 28,691,809 | |
| Employee transactions(2) | | 23 | | | $ | 26.22 | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 120,723 | | | $ | 27.24 | | | — | | | |
| Month 5 (May 1, 2022 – May 31, 2022) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | |
| Common stock repurchases(1) | | — | | | $ | — | | | — | | | $ | 28,691,809 | |
| Employee transactions(2) | | 164,490 | | | $ | 24.02 | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 164,490 | | | $ | 24.02 | | | — | | | |
| Month 6 (June 1, 2022 – June 30, 2022) | | | | | | | | |
| Common stock repurchases(1) | | — | | | $ | — | | | — | | | $ | 28,691,809 | |
| Employee transactions(2) | | 12,537 | | | $ | 26.06 | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | |
| Total | | 12,537 | | | $ | 26.06 | | | — | | | |
| Month 7 (July 1, 2022 – July 31, 2022) | | | | | | | | |
| Common stock repurchases(1) | | 150,000 | | | $ | 24.33 | | | 150,000 | | | $ | 25,042,021 | |
| Employee transactions(2) | | — | | | $ | — | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 150,000 | | | $ | 24.33 | | | 150,000 | | | |
| Month 8 (August 1, 2022 – August 31, 2022) | | | | | | | | |
| Common stock repurchases(1) | | — | | | $ | — | | | — | | | $ | — | |
| Employee transactions(2) | | — | | | $ | — | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | — | | | $ | — | | | — | | | |
| Month 9 (September 1, 2022 – September 30, 2022) | | | | | | | | |
| Common stock repurchases(1) | | — | | | $ | — | | | — | | | $ | — | |
| Employee transactions(2) | | 314,052 | | | $ | 38.46 | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 314,052 | | | $ | 38.46 | | | — | | | |
| Month 10 (October 1, 2022 – October 31, 2022) | | | | | | | | |
| Common stock repurchases(1) | | — | | | $ | — | | | — | | | $ | — | |
| Employee transactions(2) | | — | | | $ | — | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | — | | | $ | — | | | — | | | |
| Month 11 (November 1, 2022 – November 30, 2022) | | | | | | | | |
| Common stock repurchases(1) | | — | | | $ | — | | | — | | | $ | — | |
| Employee transactions(2) | | 203 | | | $ | 38.40 | | | — | | | — | |
| Total | | 203 | | | $ | — | | | — | | | |
| Month 12 (December 1, 2022 – December 31, 2022) | | | | | | | | |
| Common stock repurchases(1) | | — | | | $ | — | | | — | | | $ | — | |
| Employee transactions(2) | | 193,479 | | | $ | 38.42 | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 193,479 | | | $ | — | | | — | | | |
| | | | | | | | |
| Total (January 1, 2022 – December 31, 2022) | | | | | | | | |
| Common stock repurchases(1) | | 1,069,002 | | | $ | 29.07 | | | 1,069,002 | | | $ | 25,042,024 | |
| Employee transactions(2) | | 1,058,933 | | | $ | 34.07 | | | — | | | — | |
| Other (3) | | — | | | $ | — | | | — | | | — | |
| Total | | 2,127,935 | | | $ | 31.56 | | | 1,069,002 | | | |
(1) The Company's Board of Directors have authorized the repurchase, subject to market conditions, of up to $466.4 million of the Company's outstanding Class A common stock.
(2) Represents shares of common stock withheld in satisfaction of tax withholding obligations upon the vesting of equity awards or other similar transactions.
(3) Represents shares of common stock distributed to the Company from an escrow account established to satisfy the Company's indemnification claims arising under the terms of the purchase agreement entered into in connection with the Company's acquisition of Convergex Group, LLC.
Item 6. [Reserved]
|
| | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |
| Month 1 (January 1, 2017 – January 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 19,626 |
| | $ | 14.84 |
| | — |
| | — |
| |
| Total | | 19,626 |
| | $ | 14.84 |
| | | | | |
| Month 2 (February 1, 2017 – February 28, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 6,355 |
| | $ | 15.79 |
| | — |
| | — |
| |
| Total | | 6,355 |
| | $ | 15.79 |
| | | | | |
| Month 3 (March 1, 2017 – March 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 302,257 |
| | $ | 13.44 |
| | — |
| | — |
| |
| Total | | 302,257 |
| | $ | 13.44 |
| | | | | |
| Month 4 (April 1, 2017 – April 30, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 5,324 |
| | $ | 13.49 |
| | — |
| | — |
| |
| Total | | 5,324 |
| | $ | 13.49 |
| | | | | |
| Month 5 (May 1, 2017 – May 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
| |
| Employee transactions(2) | | 337,798 |
| | $ | 15.00 |
| | — |
| | — |
| |
| Total | | 337,798 |
| | $ | 15.00 |
| | | | | |
| Month 6 (June 1, 2017 – June 30, 2017) | | | | | | | | | |
| Common stock repurchases(1) | |
|
| | $ | — |
| |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 111,029 |
| | $ | 15.19 |
| | — |
| | — |
| |
| Total | | 111,029 |
| | $ | 15.19 |
| | | | | |
| Month 1 (July 1, 2017 – July 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
|
|
| Employee transactions(2) | |
|
| |
|
| | — |
| | — |
| |
| Total | | — |
| |
| | | | | |
| Month 2 (August 1, 2017 – August 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | |
|
| |
|
| |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 17 |
| | $ | 15.00 |
| | — |
| | — |
| |
| Total | | 17 |
| | $ | 15.00 |
| | | | | |
| Month 3 (September 1, 2017 – September 30, 2017) | | | | | | | | | |
| Common stock repurchases(1) | |
|
| |
|
| |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 9,321 |
| | $ | 16.55 |
| | — |
| | — |
| |
| Total | | 9,321 |
| | $ | 16.55 |
| | | | | |
| Month 10 (October 1, 2017 – October 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 134 |
| | $ | 17.95 |
| | — |
| | — |
| |
| Other (3) | | 97,612 |
| | $ | 16.66 |
| | — |
| | — |
| |
| Total | | 97,746 |
| | $ | 16.66 |
| | — |
| | | |
| Month 11 (November 1, 2017 – November 30, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | — |
| | $ | — |
| | — |
| | 20,916,234 |
|
|
| Employee transactions(2) | | 152 |
| | $ | 14.75 |
| | — |
| | — |
| |
| Total | | 152 |
| | $ | 14.75 |
| | | | | |
| Month 12 (December 1, 2017 – December 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | 1,401,866 |
| | $ | 13.90 |
| | 1,401,866 |
| | 1,430,297 |
|
|
| Employee transactions(2) | | 30,983 |
| | $ | 14.56 |
| | — |
| | — |
| |
| Total | | 1,432,849 |
| | $ | 13.91 |
| | | | | |
| Total (January 1, 2017 – December 31, 2017) | | | | | | | | | |
| Common stock repurchases(1) | | 1,401,866 |
| | $ | 13.90 |
| | 1,401,866 |
| | 1,430,297 |
|
|
| Employee transactions(2) | | 822,996 |
| | $ | 14.45 |
| | — |
| | — |
| |
| Other (3) | | 97,612 |
| | $ | 16.66 |
| | — |
| | — |
| |
| Total | | 2,322,474 |
| | $ | 14.21 |
| | $ | 1,401,866 |
| | | |
| |
(1) | The Company's Board of Directors have authorized the repurchase, subject to market conditions, of up to $138.3 million of the Company's outstanding common stock. |
| |
(2) | Represents shares of common stock withheld in satisfaction of tax withholding obligations upon the vesting of equity awards or other similar transactions. |
| |
(3) | Represents shares of common stock distributed to the Company from an escrow account established to satisfy the Company’s indemnification claims arising under the terms of the purchase agreement entered into in connection with the Company’s acquisition of Convergex Group, LLC. |
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial and other data for the years ended December 31, 2017, 2016, 2015, 2014, and 2013. The selected consolidated statements of financial condition data and consolidated statements of operations data as of and for the years ended December 31, 2017, 2016, 2015, 2014, and 2013 have been derived from our audited consolidated financial statements. Our selected consolidated financial data are only a summary and should be read in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (in thousands except per share data) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Revenues | | | | | | | | | |
| Investment banking | $ | 223,614 |
| | $ | 133,279 |
| | $ | 222,781 |
| | $ | 170,506 |
| | $ | 105,333 |
|
| Brokerage | 293,610 |
| | 199,180 |
| | 157,722 |
| | 140,132 |
| | 114,593 |
|
| Management fees | 33,245 |
| | 40,612 |
| | 41,906 |
| | 40,627 |
| | 37,303 |
|
| Incentive income | 5,383 |
| | 8,334 |
| | 1,466 |
| | 2,785 |
| | 12,586 |
|
| Interest and dividends | 49,440 |
| | 14,732 |
| | 13,796 |
| | 48,870 |
| | 39,454 |
|
| Reimbursement from affiliates | 2,860 |
| | 10,504 |
| | 21,557 |
| | 12,495 |
| | 10,434 |
|
| Aircraft lease revenue | 3,751 |
| | 4,161 |
| | — |
| | — |
| | — |
|
| Reinsurance premiums | 30,996 |
| | 32,459 |
| | — |
| | — |
| | — |
|
| Other revenues | 8,561 |
| | 22,355 |
| | 3,726 |
| | 9,446 |
| | 5,418 |
|
| Consolidated Funds revenues | 7,321 |
| | 5,949 |
| | 1,613 |
| | 2,915 |
| | 3,398 |
|
| Total revenues | 658,781 |
| | 471,565 |
| | 464,567 |
| | 427,776 |
| | 328,519 |
|
| Expenses | | | | | | | | | |
| Employee compensation and benefits | 404,087 |
| | 310,038 |
| | 321,386 |
| | 305,483 |
| | 207,248 |
|
| Non-compensation expense | 310,499 |
| | 198,112 |
| | 180,678 |
| | 180,740 |
| | 151,630 |
|
| Reinsurance claims, commissions and amortization of deferred acquisition costs | 30,486 |
| | 29,904 |
| | — |
| | — |
| | — |
|
| Goodwill impairment | — |
| | — |
| | — |
| | 2,334 |
| | — |
|
| Consolidated Funds expenses | 12,526 |
| | 9,064 |
| | 2,310 |
| | 1,634 |
| | 2,039 |
|
| Total expenses | 757,598 |
| | 547,118 |
| | 504,374 |
| | 490,191 |
| | 360,917 |
|
| Other income (loss) | | | | | | | | | |
| Net gains (losses) on securities, derivatives and other investments | 76,179 |
| | 23,381 |
| | 36,789 |
| | 104,928 |
| | 39,651 |
|
| Bargain purchase gain | 6,914 |
| | — |
| | — |
| | — |
| | — |
|
Gain/(loss) on debt extinguishment
| (16,039 | ) | | — |
| | — |
| | — |
| | — |
|
| Consolidated Funds net gains (losses) | 38,725 |
| | 20,685 |
| | 14,497 |
| | 15,323 |
| | 11,044 |
|
| Total other income (loss) | 105,779 |
| | 44,066 |
| | 51,286 |
| | 120,251 |
| | 50,695 |
|
| Income (loss) before income taxes | 6,962 |
| | (31,487 | ) | | 11,479 |
| | 57,836 |
| | 18,297 |
|
| Income tax expense (benefit) | 44,053 |
| | (19,092 | ) | | (47,496 | ) | | (124,944 | ) | | 457 |
|
| Net income (loss) | (37,091 | ) | | (12,395 | ) | | 58,975 |
| | 182,780 |
| | 17,840 |
|
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | 23,791 |
| | 6,882 |
| | 15,246 |
| | 15,564 |
| | 13,193 |
|
| Net income (loss) attributable to Cowen Inc. | (60,882 | ) | | (19,277 | ) | | 43,729 |
| | 167,216 |
| | 4,647 |
|
| Preferred stock dividends | 6,792 |
| | 6,792 |
| | 4,075 |
| | — |
| | — |
|
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | (67,674 | ) | | $ | (26,069 | ) | | $ | 39,654 |
| | $ | 167,216 |
| | $ | 4,647 |
|
| | | | | | | | | | |
| Weighted average common shares outstanding: | |
| | |
| | |
| | |
| | |
|
| Basic (a) | 29,492 |
| | 26,857 |
| | 27,522 |
| | 28,731 |
| | 29,175 |
|
| Diluted (a) | 29,492 |
| | 26,857 |
| | 29,043 |
| | 29,871 |
| | 30,279 |
|
| Earnings (loss) per share: | | | | | | | | | |
| Basic (a) | $ | (2.29 | ) | | $ | (0.97 | ) | | $ | 1.44 |
| | $ | 5.82 |
| | $ | 0.16 |
|
| Diluted (a) | $ | (2.29 | ) | | $ | (0.97 | ) | | $ | 1.37 |
| | $ | 5.60 |
| | $ | 0.15 |
|
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Statements of Financial Condition Data: | (dollars in thousands) |
| Total assets | $ | 3,296,252 |
| | $ | 2,018,523 |
| | $ | 1,787,659 |
| | $ | 2,399,718 |
| | $ | 1,842,000 |
|
| Total liabilities | 2,107,629 |
| | 866,668 |
| | 810,755 |
| | 1,635,967 |
| | 1,248,420 |
|
| Redeemable non-controlling interests | 440,604 |
| | 379,205 |
| | 186,911 |
| | 86,076 |
| | 85,814 |
|
| Total Stockholders' Equity | $ | 748,019 |
| | $ | 772,650 |
| | $ | 789,993 |
| | $ | 677,675 |
| | $ | 507,766 |
|
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following 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, 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 our auditedthe consolidated financial statements and the related notes that appear elsewhere in this Annual Report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management's expectations. See "Special Note Regarding Forward-Looking Statements"of Cowen Inc. included elsewhere in this Annualannual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements.
Overview
Cowen Inc. (formerly Cowen Group, Inc.), a Delaware corporation formed in 2009, is a diversified financial services firm and,that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment management, investment banking, research, sales and trading, prime brokerage, global clearing, andsecurities financing, 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 (which includes sales and trading, prime brokerage, global clearing, securities financing and commission management services) and the Research division. The Company refers to the Investment Banking division, the Markets division and the Research division collectively as its investment management and broker-dealer. Thebanking businesses. Op Co's CIM division includes advisers to investment management segment includes private funds managed accounts, commodity pools, real estate funds,(including private equity structures and privately placed hedge funds), and registered funds. Op Co's investment companies and listed vehicles and also manages a significant portion of the Company’s proprietary capital. The broker-dealer segment offersbanking businesses offer industry focused investment banking for growth-oriented companies including advisory and global capital markets origination, and domain knowledge-driven research, sales and trading platformplatforms for institutional investors, global clearing, and commission management services and also a comprehensive suite of prime brokerage services.
The CIM division is the Company's investment management platform,business, which operates primarily under the Cowen Investment Management name (formerly "Ramius"),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 long/short equity,healthcare investing, sustainable investing, healthcare royalties, merger arbitrage activism, health care royalties, private healthcare and private real estate. The Company's investment management business focuses on attracting and retaining talented in-house and affiliated investment teams and providing seed capital and working capital, an institutional infrastructure, robust sales and marketing and industry knowledge.activism. A significant 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 aviationinsurance and reinsurance businesses. Our
Op Co's investment management business had approximately $11.0 billion of assets under management as of January 1, 2018. See the section titled "Assets Under Management and Fund Performance" for further analysis.
Our broker-dealerbanking businesses include investment banking, research, sales and trading, prime brokerage, global clearing, securities financing and commission management services provided primarily to companies and primarily institutional investor clients. Our primary target sectors ("Target Sectors") areSectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, informationconsumer, industrials, tech-enabled and technologybusiness services, consumer, aerospace and defense, industrials, energy and transportation.energy. We provideprovide research and brokerage services to over 4,0006,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our target sectors. The broker-dealer segmentinvestment banking businesses also offersoffer 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.
On December 5, 2016,Asset Company
The Asset Co segment consists of the Company effected a one-for-four reverse stock splitCompany's private investments, private real estate investments and other legacy investment strategies. The focus of our common stock. Except whereAsset Co is to drive future monetization of the context indicates otherwise, all share and per share information has been retroactively adjusted to reflectinvested capital of the reverse stock split.segment.
Certain Factors Impacting Our Business
Our investment management businessCompany's businesses and results of operations are impacted by the following factors:
Assets under management. Our revenues from management fees are directly linked to assets under management. As a result, the future performance of our investment management business will depend on, among other things, our ability to retain assets under management and to grow assets under management from existing and new products. In addition, positive performance increases assets under management which results in higher management fees.
Investment performance. Our revenues from incentive income are linked to the performance of the 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 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 assets under management. 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 a 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.
Investment performance of our own capital. We invest our own capital and the performance of such invested capital affects our revenues.
Our broker-dealer business and results of operations are impacted by the following factors:
•Underwriting, private placement and strategic/financial advisory fees. Our revenues from investment banking are directly linked to the underwriting fees we earn in equity and debt securities offerings in which the Company acts as an underwriter, private placement fees earned in non-underwritten transactions, sales commissions earned in at-the-market offerings and success fees earned in connection with advising both buyers and sellers, principally in mergers and acquisitions. As a result, the future performance of our investment banking business will depend on, among other things, our ability to secure lead manager and co-manager roles in clients' capital raising transactions as well as our ability to secure mandates as a client's strategic financial advisor.
•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.
Commissions.•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 commissionability to generate revenues depend for the most part onrelating to our customer trading volumes andequity research depends on the notional valuequality of the non-U.S. securities traded by our customers.
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.
Equity•Commissions. Our commission revenues depend for the most part on our customers' trading volumes and credit research fees. Equityon the notional value of the non-U.S. securities traded by our customers.
•Investment performance. Our revenues from incentive income and credit researchcarried interest allocations are linked to the performance of the investment funds and accounts that we manage. Performance also affects assets under management ("AUM"), because AUM generally reflects, at least in part, the fair market value of the relevant assets. Additionally, performance may influence investors' decisions to make new allocations to our funds. Finally, performance can affect investor’s decisions to add or redeem capital from funds that allow for redemptions.
•Fee and allocation rates. Our management fee revenues are linked to the management fee rates we charge as a percentage of contributed and invested capital. Our incentive income revenues are linked to the rates we charge as a percentage of performance-driven asset growth. Our incentive allocations are generally subject to "high-water marks," whereby incentive income is generally earned by us only to the extent that the net asset value of an investment fund at the end of a measurement period exceeds the highest net asset value as of the end of the earlier measurement period for which we earned incentive income. Our incentive allocations, in some cases, are subject to performance hurdles. Additionally, our revenues from management fees are paiddirectly linked to the Company for providing equity and credit 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 toassets under management. Positive performance in our equity and credit research depends on the quality of our research and its relevance to our institutional customers and other clients.
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 broker-dealerinvestment 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.
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.
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, lowstable inflation, lowstable interest rates, low unemployment,full employment, strong business profitability and high business and investor confidence. Unfavorable or uncertain economic or market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability (or increases in the cost of) credit and capital, increases in inflation or interest rates, exchange rate volatility, unfavorable global asset allocation trends, outbreaks of hostilities or other geopolitical instability, such as the ongoing war in Ukraine, corporate, political or other scandals that reduce investor confidence in the capital markets, global health crisis, such as the ongoing COVID-19 pandemic, or a combination of these or other factors. Until the COVID-19 pandemic subsides, we could experience reduced levels in certain of our investment banking activities, reduced revenues from incentive income in our investment management business and reduced investment income. Our businesses and profitability have been and may continue to be adversely affected by market conditions in many ways, including the following:
•Our broker-dealerinvestment 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 broker-dealerinvestment management business can be adversely affected by unanticipated levels of requested redemptions from those funds or accounts that permit 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
capital formation by smaller companies. Therefore, our broker-dealerinvestment bank business could be affected differently than overall market trends.
Our•The Federal Reserve ("FED") announced intentions to increase the Federal Funds Rate over future periods continuing a process it began in 2022. The FED’s stated goal is to tighten financial conditions in order to fight the risk of continued inflation. The FED has also signaled a desire to maintain interest rates at a level significantly higher than markets have been accustomed to post the Great Financial Crisis of 2008. These changes in policy are intended to reduce inflation by slowing economic activity possibly leading to a recession. In the event the U.S. economy enters a period of economic contraction, during such period our investment banking revenues could be depressed, fund raising for our investment management business cancould be impaired with low or no incentive fee accruals and our balance sheet investments could decrease in value. While our markets business might not be adversely affected by unanticipated levelsan economic recession, our overall our results of requested redemptions. We experienced significant levels of requested redemptionsoperation could be negatively affected 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 fund performance.such period.
Our businesses, by their nature, do not produce predictable earnings. Our results in any period can be materially affected by conditions in global financial markets and economic conditions generally. We are also subject to various legal and regulatory actions that impact our business and financial results.
Recent Developments
On December 27, 2017, Jeffrey M. Solomon became Chief Executive Officer ofAugust 1, 2022, the Company, The Toronto-Dominion Bank, a Canadian chartered bank (“TD”), and Crimson Holdings Acquisition Co., a Delaware corporation and an indirect wholly owned subsidiary of TD (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, upon the Company’s succession plan. Peter A. Cohen remains Chairmanterms and subject to the conditions set forth therein, Merger Sub will be merged with and into the Company (the “Merger”), with the Company surviving the merger as a wholly-owned subsidiary of theTD.
The Board of Directors of the Company.
On December 8, 2017Company determined that it is in the best interests of the Company completed a public offering of $120.0 million of 7.35% senior notes due 2027. On December 14, 2017and its stockholders to consummate the underwriters exercisedtransactions provided for in full their optionthe Merger Agreement and, in furtherance thereof, adopted the Merger Agreement and approved the transactions contemplated thereby (including the Merger), and resolved to purchase an additional $18.0 million principal amountsubmit the Merger Agreement to the holders of the notes. The net proceedsClass A common stock of the offering, after deductingCompany for adoption and to recommend that the underwriting discount and estimated offering expenses payable byholders of Class A common stock of the Company were approximately $133.0 millionadopt the Merger Agreement and were usedapprove the transactions contemplated thereby (including the Merger).
Completion of the Merger is subject to redeemcustomary closing conditions, including obtaining the Requisite Regulatory Approvals (as defined in the Merger Agreement) required to be obtained to consummate the transactions contemplated thereby (including the Merger) from the relevant U.S., Canadian and foreign regulatory authorities. Upon completion of the Merger, TD will become the owner of all the Company’s outstanding ($63.25 million principal amount) 8.25% senior notes due 2021shares of Class A common stock, the Company will become a private company and the shares of Class A common stock of the Company will no longer be publicly listed or traded on the Nasdaq Global Market.
Pursuant to the Merger Agreement, at the effective time of the Merger (the “2021 Notes”“Effective Time”) following whicheach share of Class A common stock of the 2021 Notes were delisted from NASDAQ.
On December 14, 2017,Company and each share of Class B common stock of the Company issued $135.0 million aggregate principaland outstanding immediately prior to the Effective Time, (other than Exception Shares (as defined in the Merger Agreement)) will be converted into the right to receive an amount in cash equal to $39 per share (representing approximately $1.3 billion in the aggregate), payable to the holder thereof, without interest.
Pursuant to rules adopted by the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 3.00% convertible senior notes due 2022. The1934 as amended (the “Exchange Act”), the Company usedprepared and filed with the net proceeds fromSEC, and thereafter mailed to its stockholders, a Schedule 14A Proxy Statement where additional information about the offering, together with cash on hand, for general corporate purposes, includingMerger can be found. On November 15, 2022, the repurchase or repaymentholders of $115.1 milliona majority of the Company’s outstanding 3.0% cash convertible senior notes due 2019 and the repurchase of approximately $19.5 millionClass A common stock of the Company’s shares of its common stock from purchasersCompany outstanding and entitled to vote on the matter approved the adoption of the notes in privately negotiated transactions, which were consummated substantially concurrently with the closing of the offering.Merger Agreement.
Basis of presentationPresentation
The consolidated financial statements of the Company in this Form 10-K are prepared in accordance with Generally Accepted Accounting Principles in the United States ("US GAAPGAAP") 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 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 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 consolidated financial statements appearing elsewhere in this Form 10-K.10-K. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.The consolidated financial statements of the Company in this Form 10-K 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.
Acquisition and Divestitures
On June 1, 2017,2022, the Company completed its acquisition of Kelvin Re Limited (“Kelvin”) by acquiring all of the issued and outstanding ordinary shares in Kelvin from CS IRIS A Fund Limited. Kelvin is a general reinsurance company incorporated and domiciled in Guernsey whose principal activity was the provision of property and natural catastrophe reinsurance business. In December 2020, Kelvin ceased underwriting new business and has been operating as a run-off entity. Cowen acquired Kelvin to manage the outstanding reinsurance claims arising from its existing portfolio.
On December 16, 2021, the Company, through its indirect wholly owned subsidiary, Cowen CVPC Acquisition LLC, entered into a securities purchase agreement with, among others, Convergex Holdings LLC to acquire all the outstanding interests in Convergex Group, LLC ("Convergex Group") (subsequently renamed to Cowen Execution Holdco LLC). This acquisition was accounted for under the acquisition method of accounting in accordance with US GAAP. As such, results of operations for Convergex Group are included in the accompanying consolidated statements of operations since the date of acquisition, and the assets acquired and liabilities assumed were recorded at their fair value as of the acquisition date.
On May 6, 2016, the Company completed its previously announced acquisition of the credit products, credit research, special situationsPortico Capital Advisors and emerging markets units from CRT Capital Group LLCcertain assets and liabilities of its European operations (“CRT”Portico”). The acquisitionPortico was completed for a combination of cash of $6.3 millionprivately-held mergers and contingent consideration payable annually basedacquisitions advisory firm focused on future revenues exceeding specific targets. The acquisition was accounted for underthe software, data, and analytics sectors.
On February 26, 2021, the Company, through its indirect wholly owned subsidiary, Cowen Malta Holdings Ltd., completed the acquisition method of accounting in accordance with US GAAP. As such, the results of operations of the businesses acquired are included in the accompanying consolidated statements of operations since the date of the acquisition and the assets acquired, liabilities assumed and the resulting goodwill were recorded at their fair values within their respective line items on the accompanying consolidated statement of financial condition.
On April 22, 2016, Cowen Aviation Finance Holdings Inc. ("Cowen Aviation Finance") entered into a transaction whereby Cowen Aviation Finance acquired Low Country III, LLC, which is comprised of a portfolio of four specialized aircraft currently on lease in exchange for an immaterial upfront payment and a minority equity interest in Cowen Aviation Finance. As part of
the transaction Cowen Aviation Finance also acquired the associated debt financing and lease contracts for each aircraft. Separate from the transaction, Cowen Aviation Finance entered into services agreements with Tempus Applied Solutions, Inc., a related party through common directors, which, among other services, will provide marketing, maintenance, and lease administration services for Cowen Aviation Finance's current aircraft fleet. This acquisition was accounted for as an asset acquisition in accordance with US GAAP because, upon separation from the seller, the acquired assets do not meet the definition of a business.
Divestitures
On September 23, 2016, the Company and the portfolio managers of Ramius Alternative Solutions LLC ("RASL") completed the sale of their respective ownership interests in RASL, an investment advisor, and RASL was deconsolidated as of that date. RASL offered a range of customized hedge fund investment solutions with approximately $2.5 billion in client assets. As the Company will continue to offer its investment management platform to institutional and retail investors, the sale was not presented as discontinued operations. The overall impact on the consolidated financial position, results of operations and cash flows is not expected to be significant.
Effective as of August 2017, Cowen and the relevant sub-adviser, Archview Investment Group LP, elected to close the Ramius Archview Credit & Distressed Fund, to which Cowen had been a sponsor and held a significant minority interest.
Effective as of the beginning of the fourth quarter of 2017, Cowen withdrew from its partnership with Caerus Investors, LLC, an equity long short strategy in which Cowen had a significant minority interest.
Effective as of January 31, 2018, Cowen withdrew from its partnership with Quadratic Capital Management LLC, an options-based discretionary macro strategy in which Cowen had a significant minority interest.
Revenue recognition
Our principal sources of revenue are derived from two segments: an investment management segment and a broker-dealer segment, as more fully described below.
Our investment management segment generates revenue through three principal sources: management fees, incentive income and investment income from the Company's own capital.
Our broker-dealer segment generates revenue through three principal sources: investment banking, brokerage and investment income.
Management fees
The Company earns management fees from affiliated private funds and certain managed accounts that it serves as the investment manager based on assets under management. The actual management fees received vary depending on distribution fees or fee splits paid to third parties either in connection with raising the assets or structuring the investment.
Several management companies of the private funds are owned jointly by the Company and third parties. Accordingly, the management fees generated by these funds are split between the Company and these third parties. Pursuant to US GAAP, these fees received by the management companies that are accounted for under the equity method of accounting and are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for capital inflows and redemptions. While some investors may have separately negotiated fees, in general the management fees are as follows:
Private Funds. Management fees for the Company's private funds, including the private healthcare fund, are generally charged at an annual rate of up to 2% of assets under management or notional trading level. Management fees are generally calculated monthly based on assets under management at the end of each month before incentive income.
Real Estate. Management fees from the Company's real estate business are generally charged at an annual rate from 0.25% to 1.50% of total capital commitments during the investment period and of invested capital or net asset value of the applicable fund after the investment period has ended. Management fees are typically paid to the general partners on a quarterly basis, at the beginning of the quarter in arrears, and are prorated for changes in capital commitments throughout the investment period and invested capital after the investment period.
HealthCare Royalty Partners. In HealthCare Royalty Partners main funds, during the investment period (as defined in the relevant partnership agreements), management fees are generally charged at an annual rate of 1% to 2% of committed capital. After the investment period, management fees for these funds are generally charged at an annual rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the funds.
For the other funds (and managed accounts) managed by Healthcare Royalty Partners, the management fee ranges from 0.2% to 1% and there is no adjustment based on an investment period. Management fees for the HealthCare Royalty Partners funds are calculated on a quarterly basis.
Cowen Trading Strategies. Advisory fees for the Company's collateral management advisory business are typically paid quarterly based on assets under management but generally subject to a minimum fee.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management agreements) with respect to certain of the Company's investment management products, allocable for each fiscal year that exceeds cumulative unrecovered net losses, if any, that have been carried forward from prior years. For the products we offer, incentive income earned is typically up to 20% for private funds (in certain cases on performance in excess of a benchmark), of the net profits earned for the full year that are attributable to each fee-paying investor. Generally, incentive income on real estate funds is earned after the investor has received a full return of their invested capital, plus a preferred return. However, for certain real estate funds, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred return on a current basis or on an investor by investor basis. These funds are generally subject to a potential clawback of these incentive fees upon the liquidation of the fund if the investor has not received a full return of its invested capital plus the preferred return thereon. Incentive income in the HealthCare Royalty Partners funds is generally earned only after investors receive a full return of their capital plus a preferred return. Several general partners of the Company's private funds are jointly owned by the Company and third parties. Accordingly, the incentive fees generated by these funds are split between the Company and these third parties. Pursuant to US GAAP, incentive income received by the general partners that are accounted for under the equity method of accounting are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a “high-water mark.” The Company has elected to record incentive income revenue in accordance with “Method 2” of US GAAP. Under Method 2, the incentive income from the Company's investment management products for any period is based upon the net profits of those investment management products at the reporting date. Any incentive income recognized in the accompanying consolidated statement of operations may be subject to future reversal based on subsequent negative performance prior to the conclusion of the fiscal year, when all contingencies have been resolved.
Carried interest in the real estate funds and HealthCare Royalty Partners funds are subject to clawback to the extent that the carried interest actually distributed to date exceeds the amount due to the Company based on cumulative results. As such, the accrual for potential repayment of previously received carried interest, which is a component of accounts payable, accrued expenses and other liabilities, represents all amounts previously distributed to the Company, less an assumed tax liability, that would need to be repaid to certain funds if these funds were to be liquidated based on the current fair value of the underlying funds' investments as of the reporting date. The actual clawback liability does not become realized until the end of a fund's life.
Investment Banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's Target Sectors.
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees and placement and sales agent fees.
Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible security offerings. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the underwriting process have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i)outstanding equity interests of Axeria Insurance Limited, an insurance company organized under the issuer's registration statement has become effective with the SEC or the other offering documents are finalized; (ii)laws of Malta whose principal business activity is to provide insurance coverage to third parties. Axeria Insurance Limited was renamed Cowen Insurance Company Ltd upon acquisition.
On October 1, 2020, the Company, has made a firm commitment for the purchasethrough its indirect wholly owned subsidiary, Cowen and Company LLC, completed its previously announced acquisition of securities from the issuer; and (iii) the Company has been informed of the number of securities that it has been allotted.
When the Company is not the lead manager for an underwriting transaction, management must estimate the Company's share of transaction-related expenses incurred by the lead manager in order to recognize revenue. Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company
recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.
Strategic/financial advisory fees. The Company's strategic advisory revenues include success fees earned in connection with advising companies, principally in mergers, acquisitions and restructuring transactions. The Company also earns fees for related advisory work such as providing fairness opinions. The Company records strategic advisory revenues when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.
Placement and sales agent fees. The Company earns agency placement fees and sales agent commissions in non-underwritten transactions such as private placements of loans and debt and equity securities, including, private investment in public equity transactions (“PIPEs”), and as sales agent in at-the-market offerings of equity securities. The Company records placement revenues (which may be in cash and/or securities) when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured. The Company records sales agent commissions on a trade date basis. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.
Brokerage
Brokerage revenue consists of commissions, principal transactions, equity and credit research fees and trade conversion revenue.
Commissions. Commission revenue includes fees from executing and clearing client transactions and commission sharing arrangements. These fees are recognized on a trade date basis. The Company permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Commissions on soft dollar brokerage are recorded net of the related expenditures on an accrual basis. The costs of commission recapture arrangements are recorded on an accrual basis for each eligible trade and shown net of commission revenue. Commission revenues also includes fees from making algorithms available to clients.
Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and trading gains and losses on inventory and other Company positions, which include warrants previously received as part of investment banking transactions. In certain cases, the Company provides liquidity to clients by 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. These positions are typically held for a very short duration.
Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and credit research. Revenue is recognized once an arrangement exists, access to research has been provided, the fee amount is fixed or determinable, and collection is reasonably assured.
Trade conversion revenue. Trade conversion revenue includes the fee earned from converting foreign securities into an American Depository Receipt (“ADR”) and the fee earned from converting an ADR into foreign securities on behalf of customers, and margins earned from facilitating customer foreign exchange transactions. Trade conversion revenue is recognized on a trade date basis.
Investment Income
Investment income earned by the investment management and broker-dealer segments are earned from investing the Company's capital in various strategies and from investments in private capital raising transactions of its investment banking clients.
Interest and Dividends
Interest and dividends are earned by the Company from various sources. The Company receives interest and dividends primarily from securities finance activities and securities held by the Company for purposes of investing capital, investments held by its Consolidated Funds and its brokerage balances. Interest is recognized on an accrual basis and interest income is recognized on the debt of those issuers that is deemed collectible. Interest income and expense includes premiums and discounts amortized and accreted on debt investments based on criteria determined by the Company using the effective yield method, which assumes the reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.
Reimbursement from Affiliates
The Company allocates, at its discretion, certain expenses incurred on behalf of its private fund and real estate businesses. These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition, pursuant to the funds' offering documents, the Company charges certain allowable expenses to the funds, including charges and personnel costs for legal, compliance, accounting, tax compliance, risk and technology expenses that directly relate to administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees, communications, occupancy and equipment, client services and business development and other.
Aircraft lease revenue
Aircraft lease revenue associated with the Company's aircraft leasing business is recorded on a straight-line basis over the term of the lease, net of deferred rent and/or prepaid initial direct costs.
Reinsurance premiums
Premiums for insurance-related contracts are earned over the coverage period. In most cases, premiums are recognized as revenues ratably over the term of the contract with unearned premiums computed on a monthly basis. In accordance with US GAAP, for each of its contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk. If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk, the Company records the contract under the deposit method of accounting with any net amount receivable reflected as an asset in other assets and any net amount payable reflected as a liability within accounts payable, accrued expensesliabilities of MHT Partners, LP (“MHT Partners”). MHT Partners is an investment bank, based primarily in Dallas and other liabilitiesSan Francisco, focused on the consolidated statements of financial condition.
The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, including reported losses. Estimated ultimate payment amounts are based upon (1) reports of losses from policyholders, (2) individual case estimates and (3) estimates of incurred but not reported losses.
Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and estimates of recoverable amounts and are includedrepresenting innovative companies in other expenses on the consolidated statements of operations.
Costs of acquiring new policies, which vary with and are directly related to the production of new policies, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting and are included within other assets on the consolidated statements of financial condition.growing markets.
Expenses
The Company's expenses consist of compensation and benefits, interestinsurance and dividends, reinsurance costs, general, administrative and other, and consolidated fundConsolidated Funds expenses.
•Compensation and Benefits. Compensation and benefits is comprised of salaries, benefits, discretionary cash bonuses and equity-based compensation. Annual incentive compensation is variable, and the amount paid is generally based on a combination of employees' performance, their contribution to their business segment, and the Company's performance. Generally, compensation and benefits comprise a significant portion of total expenses, with annual incentive compensation comprising a significant portion of total compensation and benefits expenses.
Interest•Insurance and Dividends. Interest and dividends expense relates primarily to securities finance activities, trading activity with respect to the Company's investments and interest expense on debt.
Reinsurance claims, commissions and amortization of deferred acquisition costs. Reinsurance relatedInsurance and reinsurance-related expenses reflect loss and claim reserves, acquisition costs and other expenses incurred with respect to our insurance and reinsurance operations.
•Operating, General Administrative and Other.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. Certain funds are consolidated by the Company pursuant to US GAAP. As such, the The Company's consolidated financial statements reflect the expenses of these consolidated entitiesthe Consolidated Funds and the portion attributable to other investors is allocated to a redeemable non-controlling interest.
Income Taxes
The taxable results of the Company’s U.S. operations are subject to U.S. federal, state and citylocal 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 DTAdeferred 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 DTA.deferred tax assets.
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”Temporary Equity
Temporary equity consists of Redeemable 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock") was enacted.. The 2017 Tax Act represents major tax reform legislation that, among other provisions, reduces the U.S. corporate tax rate. Certain income tax effectsCompany has irrevocably elected to cash settle $1,000.00 of each conversion of any share of the 2017 Tax Act, including $46.6 millionSeries A Convertible Preferred Stock. As the holders can exercise the conversion option on their shares of tax expense recorded principally due toSeries A Convertible Preferred Stock at any time and require cash payment upon conversion, the re-measurement of our net deferred tax assets at this new rate, are reflectedCompany has classified the Series A Convertible Preferred Stock preferred stock in our financial results in accordance with Staff Accounting Bulletin No. 118 (SAB 118), which provides SEC staff guidance regarding the application of Accounting Standards Codification (ASC) Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act became law. See Note 21 to the consolidated financial statements for further information on the financial statement impact of the 2017 Tax Act.temporary equity.
Redeemable Non-controllingNon-Redeemable Non-Controlling Interests
Redeemable non-controllingNon-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. Due to the factWhen non-controlling interest holders do not have redemption features that the non-controlling interests are redeemablecan be exercised at the option of the holder they havecurrently or contingent upon the occurrence of future events, their ownership has been classified as temporarya component of permanent equity. Ownership which has been classified in permanent equity are non-controlling interests for which the holder does not have the unilateral right to redeem its ownership interests.
Assets Under Management andInvestment Fund Performance
and Assets Under Management
Assets under management refer to all of our investment management products, solutionsFor the year ended December 31, 2022, the Company's activist and services including private funds, managed accounts, commodity pools, real estate funds, private equity structures, registered investment companies and listed vehicles.merger arbitrage strategies had positive results. The Company's investment management segment includes such strategieshealthcare royalty strategy is now making allocations from the strategy's fourth fund and closed on a new vehicle that permits recycling of capital. The Company’s healthcare investments strategy is now deploying capital from its fourth fund. Finally, our sustainable investing strategy continues to deploy capital, with four investments made as long/short equity, merger arbitrage, activism, health care royalties, private healthcare and private real estate.
Assets under management also include the fair value of assetsDecember 31, 2022. The liquidation of certain multi-strategy hedge funds advised by the Company manages pursuant to separately managed accounts, collateralized debt obligations for which the Company is the collateral manager, and, as indicated in the footnotes to the table below, proprietary assets which the Company has invested in these products. Also, as indicated, assets under management for certain products may represent committed capital or committed funding that may not be under our control but forms part of the investment management product’s trading level. also continues.
As of January 1, 2018,of December 31, 2022, the Company had assets under management of $11.0of $14.5 billion a 4.4% increase as compared to assets under management of $10.5 billion as of January 1, 2017. The $0.5 billion increase in assets under management during the year ended December 31, 2017 primarily resulted from subscriptions in private. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Strategy | | Healthcare Investments | | Healthcare Royalties | | Activism | | Merger Arbitrage | | Sustainable Investments | | Other (a) |
| | (dollars in millions) |
| AUM | | $1,136 | | $3,455 | | $7,399 | | $206 | | $1,190 | | $1,129 |
| Team | | | | | | | | | | | | |
| Private Equity | | ü | | ü | | | | | | ü | | |
| Hedge Fund | | | | | | ü | | ü | | | | |
| Managed Account | | | | ü | | ü | | ü | | ü | | |
| UCITS | | | | | | | | ü | | | | |
| Other | | | | | | | | | | | | ü |
(a) Other strategies include legacy funds and real estate and offset by distributions or redemptions in the healthcare royalty andother private funds businesses.investment strategies.
The following table is a breakout of total assets under management by platform as of January 1, 2018 (which excludes cross investments from other Ramius platforms):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Platform |
| | | Private Funds
(a) (b) (g) | | Alternative Solutions (a) | | Cowen Trading Strategies
(h) | | Real Estate (a) (d) (i) | | Healthcare Royalty Partners
(c) (d) (i) | | Private Healthcare (d) (i) (k) | | Other (j) | | Total |
| | | (dollars in millions) |
| January 1, 2015 | | $ | 4,218 |
| | $ | 3,784 |
| | $ | 147 |
| | $ | 1,707 |
| | $ | 2,582 |
| | $ | — |
| | $ | 48 |
| | $ | 12,486 |
|
| Subscriptions | | 2,725 |
| | 997 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,722 |
|
| Redemptions | | (572 | ) | | (810 | ) | | (49 | ) | | (65 | ) | | (178 | ) | | — |
| | (14 | ) | | (1,688 | ) |
| Performance (e) | | (781 | ) | | (419 | ) | | (3 | ) | | — |
| | 5 |
| | — |
| | — |
| | (1,198 | ) |
| Net Return (f) | | (18.52 | )% | | (11.07 | )% | | (2.04 | )% | | — | % | | 0.19 | % | | — | % | | — | % | | (9.59 | )% |
| January 1, 2016 | | 5,590 |
| | 3,552 |
| | 95 |
| | 1,642 |
| | 2,409 |
| | — |
| | 34 |
| | 13,322 |
|
| Subscriptions | | 1,537 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,537 |
|
| Redemptions | | (714 | ) | | (3,641 | ) | | (40 | ) | | (220 | ) | | (137 | ) | | — |
| | (21 | ) | | (4,773 | ) |
| Performance (e) | | 362 |
| | 89 |
| | (3 | ) | | — |
| | 10 |
| | — |
| | — |
| | 458 |
|
| Net Return (f) | | 6.48 | % | | 2.51 | % | | (3.16 | )% | | — | % | | 0.42 | % | | — | % | | — | % | | 3.44 | % |
| January 1, 2017 | | 6,775 |
| | — |
| | 52 |
| | 1,422 |
| | 2,282 |
| | — |
| | 13 |
| | 10,544 |
|
| Subscriptions | | 823 |
| | — |
| | 163 |
| | 583 |
| | — |
| | 179 |
| | 51 |
| | 1,799 |
|
| Redemptions | | (1,168 | ) | | — |
| | (59 | ) | | — |
| | (521 | ) | | (12 | ) | | — |
| | (1,760 | ) |
| Performance (e) | | 430 |
| | — |
| | 1 |
| | — |
| | (26 | ) | | 15 |
| | — |
| | 420 |
|
| Net Return (f) | | 6.35 | % | | — | % | | 1.92 | % | | — | % | | (1.14 | )% | | — | % | | — | % | | 3.98 | % |
| January 1, 2018 | | $ | 6,860 |
| | $ | — |
| | $ | 157 |
| | $ | 2,005 |
| | $ | 1,735 |
| | $ | 182 |
| | $ | 64 |
| | $ | 11,003 |
|
| |
(a) | The Company owns between 20% and 55% of the general partners, investment managers or managing members of the real estate business, the activist business, and the global macro business and the equity long/short business. The Company does not possess unilateral control over any of the foregoing businesses. The Company owns 100% of the investment manager of the event-driven equity business. On September 23, 2016, the Company completed the sale of its interest in the alternative solutions business, thereby reducing the Company’s estimated assets under management by approximately $2.5 billion. |
| |
(b) | These amounts include the Company's invested capital of approximately $160.9 million, $176.6 million and $173.6 million as of January 1, 2018, January 1, 2017 and 2016, respectively (including interests in both a registered investment company and an Undertakings for Collective Investment Trust (UCITS), each of which pursues a private fund-style strategy). Assets under management amounts are as of January 1, 2018 and include approximately $611.2 million of committed but undrawn capital that will be charged fees when invested. |
| |
(c) | These amounts include the Company's invested capital of approximately $5.6 million, $10.5 million and $20.2 million as of January 1, 2018, January 1, 2017 and 2016, respectively. |
| |
(d) | This amount includes unfunded capital commitments. |
| |
(e) | Performance and net returns are net of all management and incentive fees and includes the effect of any foreign exchange translation adjustments and leverage in certain funds. |
| |
(f) | Performance net returns are calculated on the platform as a whole. Net return of individual funds will vary. |
| |
(g) | The Company’s actively marketed private fund products have varying liquidity terms typically ranging from daily to quarterly liquidity with less liquidity applying to certain co-investment vehicles. In 2010, the Company suspended redemption rights with respect to certain private funds that are being wound down. The private funds that have suspended redemption rights represent approximately 3.13% of the total private fund assets under management. |
| |
(h) | Cowen Trading Strategies advised a managed futures mutual fund that was fully liquidated as of April 30, 2017. The Company began managing the assets of a Collateralized Debt Obligation ("CDO") on May 4, 2017. The CDO is an amortizing pool of assets with cash returned to investors in periodic distributions as it becomes available. Assets under management reflects the outstanding face amount of such CDO. The Company owns 100% of the investment manager of the Cowen Trading Strategies business. |
| |
(i) | The real estate, healthcare royalty and private healthcare funds do not provide investors with redemption rights. Investors receive distributions upon dispositions of the funds’ underlying investments. |
| |
(j) | Includes the assets of separate accounts managed by the Company for non-institutional clients that had been managed prior to July 1, 2017 but had not previously been included in the Company’s calculation of its assets under management. Prior to June 1, 2017, “Other” assets under management included the assets of a CDO managed by the Company, which are now part of the Cowen Trading Strategies business. |
| |
(k) | The Company began managing a private healthcare funds in September 2015. This amount includes the Company’s investment of $36.9 million as of January 1, 2018. The Company owns 100% of the investment manager of the private healthcare business. |
Fund Performance
For the quarter ended December 31, 2017 the Company's investment strategies had mixed results, with performance varying in comparison to relevant benchmarks. As had been the case throughout the year, there were no significant drawdowns in any strategy. Our activist strategy had positive performance for the quarter and for the year. The merger arbitrage strategy finished the quarter with modestly negative results, primarily due to hedging costs earlier in the quarter, followed by spread widening after the government’s decision to contest the Time Warner / AT&T transaction but there was some recovery in December and overall the strategy had modest positive results for the year. The UCITS Merger Fund, in partnership with Bank of America Merrill Lynch, also had positive performance for the year. The fund has met expectations for its more diversified portfolio since the July 2016 launch.
Our options-based global macro strategy had modestly negative performance for the quarter and the year, given the persistence of continued low levels of implied volatility across multiple asset classes. Depressed volatility, especially in equities, has been a dominant condition throughout both 2016 and 2017.
Our equity long/short affiliate, which follows a multi-sector approach with a focus on technology and consumer companies, finished the quarter with positive results, led by a strong month in October. The strategy had positive results for the year.
The internally managed multi-strategy vehicles continued to execute opportunistic sales of certain holdings throughout the year. In addition, the maturity of certain real estate loans and the elimination of a currency hedge on European private equity positions allowed for three distributions of capital to investors during 2017. With regard to the longer-dated investment vehicles in real estate, the largest legacy real estate debt and equity vehicles experienced minimal changes in value for the fourth quarter and the year. Certain of the legacy real estate funds, inclusive of these two, are in the process of returning capital to investors. The fifth, and most recent, real estate debt vehicle remains active, with interim results meeting performance expectations and a sixth fund completed its capital raising during the fourth quarter.
Our healthcare royalty strategy’s third fund still remains in its investment period. Ongoing opportunities in the pharmaceutical and healthcare sectors remain robust. As a result, the strategy has been able to invest significant capital in both its latest commingled fund and separate managed accounts.
Our new health care portfolio team, having produced strong results in its first fund, launched a second fund in November 2017 which completed its capital raising in January 2018. The strategy invests in private companies with potentially transformative therapeutics. The fund is a medium-term vehicle with private equity drawdown features.
Invested Capital
The Company invests a significant portion of its capital base to help drive results and facilitate the growth of its investmentthe Op Co and Asset Co business segments. Within Op Co, management and broker-dealer businesses. Management allocates capital to three primary investment categories: (i) broker-dealer capital and related trading strategies; (ii) merchant banking investments;liquid alternative trading strategies; and (iii) real estate investments. The Company seeks to make strategicpublic and opportunisticprivate healthcare strategies. Broker-dealer capital and related trading strategies include capital investments in varying capital structures across a diverse array of businesses, private fundsthe Company's broker-dealers as well as securities finance and mutual funds.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 strategy portfolio isstrategies portfolios are invested alongside the Company's investment management clientsclients. The Company's liquid alternative trading strategies include merger arbitrage and includes liquid investment strategies such as corporate credit trading, event driven, macro trading, and enhanced cash management. Within its merchant banking investments, management generally takes a long-term view that typically involves investing directly in public and private companies globally, private equity funds and alongside its investment management clients.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 investment strategy focuses on making investments alongside the investment management clients invested in the RCG Longview funds, as well as in direct investments in commercial real estate projects.investments.
As of December 31, 2017,2022, the Company's invested capital amounted to a net value of $695.3$911.2 million (supporting a long market value of $1,063.8$1,048.1 million), representing approximately 93%86% 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 December 31, 2017.2022. The total net values presented in the table below do not tie to Cowen's consolidated statement of financial condition as of December 31, 20172022 because they are included in variousrepresent only some of the line items ofin the accompanying consolidated statement of financial condition, including “securities owned, at fair value”, “other investments”, “cash and cash equivalents”, and “consolidated funds-securities owned, at fair value”.condition.
|
| | | | | |
| Strategy | Net Value | | % of Stockholders' Equity |
| | (dollars in millions) | | |
| Trading | $ | 503.7 |
| | 67% |
| Merchant Banking | 148.8 |
| | 20% |
| Real Estate | 42.8 |
| | 6% |
| Total | 695.3 |
| | 93% |
| Stockholders' Equity | $ | 748.0 |
| | 100% |
| | | | | | | | | | | |
| Strategy | Net Value | | % of Stockholders' Equity |
| (dollars in millions) | | |
| Op Co | | | |
| Broker-dealer capital and related trading | $ | 713.2 | | | 67.0% |
| Public and Private Healthcare | 32.1 | | | 3.0% |
| Liquid Alternative Trading | 66.2 | | | 6.2% |
| Other | 17.0 | | | 1.6% |
| Asset Co | | | |
| Private Investments | 82.7 | | | 7.8% |
| | | |
| Total | 911.2 | | | 85.6% |
| Cowen Inc. Stockholders' Equity | $ | 1,064.2 | | | |
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 investment managementOp Co and broker-dealerAsset 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 consolidated financial statements, income earned from the Company's 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 27 to the accompanying Company's consolidated financial statements, appearing elsewhere in this Form 10-K, for a reconciliation of Economic Income (Loss) to total Company US GAAP net income (loss).
Year Ended December 31, 20172022 Compared with Year Ended December 31, 2016 |
| | | | | | | | | | | | | | |
| | Consolidated Statements of Operations |
| | Year Ended December 31, | | Period to Period |
| | 2017 | | 2016 | | $ Change | | % Change |
| | (dollars in thousands) |
| Revenues | | | | | | | |
| Investment banking | $ | 223,614 |
| | $ | 133,279 |
| | $ | 90,335 |
| | 68 | % |
| Brokerage | 293,610 |
| | 199,180 |
| | 94,430 |
| | 47 | % |
| Management fees | 33,245 |
| | 40,612 |
| | (7,367 | ) | | (18 | )% |
| Incentive income | 5,383 |
| | 8,334 |
| | (2,951 | ) | | (35 | )% |
| Interest and dividends | 49,440 |
| | 14,732 |
| | 34,708 |
| | 236 | % |
| Reimbursement from affiliates | 2,860 |
| | 10,504 |
| | (7,644 | ) | | (73 | )% |
| Aircraft lease revenue | 3,751 |
| | 4,161 |
| | (410 | ) | | (10 | )% |
| Reinsurance premiums | 30,996 |
| | 32,459 |
| | (1,463 | ) | | (5 | )% |
| Other revenues | 8,561 |
| | 22,355 |
| | (13,794 | ) | | (62 | )% |
| Consolidated Funds revenues | 7,321 |
| | 5,949 |
| | 1,372 |
| | 23 | % |
| Total revenues | 658,781 |
| | 471,565 |
| | 187,216 |
| | 40 | % |
| Expenses | | | | | | | |
| Employee compensation and benefits | 404,087 |
| | 310,038 |
| | 94,049 |
| | 30 | % |
| Interest and dividends | 60,949 |
| | 29,308 |
| | 31,641 |
| | 108 | % |
| Reinsurance claims, commissions and amortization of deferred acquisition costs | 30,486 |
| | 29,904 |
| | 582 |
| | 2 | % |
| Operating, general, administrative and other expenses | 227,709 |
| | 156,091 |
| | 71,618 |
| | 46 | % |
| Depreciation and amortization expense | 13,078 |
| | 12,713 |
| | 365 |
| | 3 | % |
| Restructuring costs | 8,763 |
| | — |
| | 8,763 |
| | NM |
|
| Consolidated Funds expenses | 12,526 |
| | 9,064 |
| | 3,462 |
| | 38 | % |
| Total expenses | 757,598 |
| | 547,118 |
| | 210,480 |
| | 38 | % |
| Other income (loss) | | | | | | | |
| Net gains (losses) on securities, derivatives and other investments | 76,179 |
| | 23,381 |
| | 52,798 |
| | 226 | % |
| Bargain purchase gain, net of tax | 6,914 |
| | — |
| | 6,914 |
| | NM |
|
Gain/(loss) on debt extinguishment
| (16,039 | ) | | — |
| | (16,039 | ) | | NM |
|
| Consolidated Funds net gains (losses) | 38,725 |
| | 20,685 |
| | 18,040 |
| | 87 | % |
| Total other income (loss) | 105,779 |
| | 44,066 |
| | 61,713 |
| | 140 | % |
| Income (loss) before income taxes | 6,962 |
| | (31,487 | ) | | 38,449 |
| | 122 | % |
| Income tax expense (benefit) | 44,053 |
| | (19,092 | ) | | 63,145 |
| | 331 | % |
| Net income (loss) | (37,091 | ) | | (12,395 | ) | | (24,696 | ) | | (199 | )% |
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | 23,791 |
| | 6,882 |
| | 16,909 |
| | 246 | % |
| Net income (loss) attributable to Cowen Inc. | (60,882 | ) | | (19,277 | ) | | (41,605 | ) | | (216 | )% |
| Preferred stock dividends | 6,792 |
| | 6,792 |
| | — |
| | — | % |
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | (67,674 | ) | | $ | (26,069 | ) | | $ | (41,605 | ) | | (160 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Operations |
| |
| | Year Ended December 31, | | Period to Period |
| | 2022 | | 2021 | | $ Change | | % Change |
| | (dollars in thousands) |
| Revenues | | | | | | | |
| Investment banking | $ | 494,842 | | | $ | 1,067,162 | | | $ | (572,320) | | | (54) | % |
| Brokerage | 592,292 | | | 585,162 | | | 7,130 | | | 1 | % |
| Investment income (loss) | | | | | | | |
| Securities principal transactions, net | 112,829 | | 122,110 | | (9,281) | | (8) | % |
| Portfolio fund principal transactions, net | (4,442) | | 338 | | (4,780) | | (1,414) | % |
| Carried interest allocations | (31,555) | | 5,059 | | (36,614) | | (724) | % |
| Total investment income (loss) | 76,832 | | | 127,507 | | | (50,675) | | | (40) | % |
| Management fees | 66,670 | | | 72,287 | | | (5,617) | | | (8) | % |
| Incentive income | 646 | | | 2,732 | | | (2,086) | | | (76) | % |
| Interest and dividends | 312,134 | | | 219,292 | | | 92,842 | | | 42 | % |
| | | | | | | |
| | | | | | | |
| Insurance and reinsurance premiums | 36,522 | | | 39,631 | | | (3,109) | | | (8) | % |
| Other revenues, net | 7,010 | | | 5,211 | | | 1,799 | | | 35 | % |
| Consolidated Funds revenues | (49,225) | | | (6,185) | | | (43,040) | | | (696) | % |
| Total revenues | 1,537,723 | | | 2,112,799 | | | (575,076) | | | (27) | % |
| Interest and dividends expense | 259,126 | | | 211,387 | | | 47,739 | | | 23 | % |
| Total net revenues | 1,278,597 | | | 1,901,412 | | | (622,815) | | | (33) | % |
| Expenses | | | | | | | |
| Employee compensation and benefits | 771,386 | | | 1,046,371 | | | (274,985) | | | (26) | % |
| Insurance and reinsurance claims, commissions and amortization of deferred acquisition costs | (12,260) | | | 33,938 | | | (46,198) | | | (136) | % |
| Operating, general, administrative and other expenses | 424,470 | | | 430,250 | | | (5,780) | | | (1) | % |
| Depreciation and amortization expense | 27,725 | | | 19,004 | | | 8,721 | | | 46 | % |
| | | | | | | |
| | | | | | | |
| Consolidated Funds expenses | 248 | | | 630 | | | (382) | | | (61) | % |
| Total expenses | 1,211,569 | | | 1,530,193 | | | (318,624) | | | (21) | % |
| Other income (loss) | | | | | | | |
| Net gains (losses) on other investments | 9,613 | | | 35,494 | | | (25,881) | | | (73) | % |
| Bargain purchase gain, net of tax | — | | | 3,855 | | | (3,855) | | | NM |
| Gain/(loss) on debt extinguishment | — | | | (4,538) | | | 4,538 | | | NM |
| | | | | | | |
| Total other income (loss) | 9,613 | | | 34,811 | | | (25,198) | | | (72) | % |
| Income (loss) before income taxes | 76,641 | | | 406,030 | | | (329,389) | | | (81) | % |
| Income tax expense (benefit) | 10,786 | | | 102,039 | | | (91,253) | | | (89) | % |
| | | | | | | |
| | | | | | | |
| Net income (loss) | 65,855 | | | 303,991 | | | (238,136) | | | (78) | % |
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | (10,603) | | | 8,380 | | | (18,983) | | | (227) | % |
| Net income (loss) attributable to Cowen Inc. | 76,458 | | | 295,611 | | | (219,153) | | | (74) | % |
| Preferred stock dividends | 6,792 | | | 6,792 | | | — | | | — | % |
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | 69,666 | | | $ | 288,819 | | | $ | (219,153) | | | (76) | % |
Revenues
Investment Banking
Investment banking revenues increased $90.3decreased $572.4 million to $223.6$494.8 million for the year ended December 31, 20172022 compared with $133.3$1,067.2 million in the prior year period.period. During the year ended December 31, 2017,2022, the Company completed 10348 underwriting transactions 16and 138 strategic advisory transactions, and twoincluding 23 debt capital marketmarkets transactions. During the year ended December 31, 2016,2021, the Company completed 76190 underwriting transactions, 15159 strategic advisory transactions and seven20 debt capital marketmarkets transactions. The average underwriting fee per transaction was 33.8% greater for the year ended December 31, 2017 as compared to the prior year period.
Brokerage
Brokerage revenues increased $94.4$7.1 million to $293.6$592.3 million for the year ended December 31, 20172022 compared with $199.2$585.2 million in the prior year period. This was attributable to an increaseincreases in revenues due to the initiation of the credit trading
businessOptions, Non-USD, and Prime Services commission offset by decreases in May 2016 and the acquisition of Convergex Group in June 2017.Special Situations commissions. Customer trading volumes across the industry (according to Bloomberg) decreased 11%increased 5% for the year ended December 31, 20172022 compared to the prior year period.year.
Management FeesInvestment Income (loss)
Management feesSecurities principal transactions, net
Securities principal transactions, net decreased $7.4$9.3 million to $33.2$112.8 million for the year ended December 31, 20172022 compared with $40.6$122.1 million in the prior year period. The decrease in securities principal transactions, net was primarily attributable to the decrease in event strategy market making activity and unrealized losses of our Linkem investment driven by lower projected future cash flows and a decline in market value of comparables offset partially by a mark-to-market gain on an interest rate swap used to offset interest on floating-rate debt and an increase in the value of our investments in our digital business.
Portfolio fund principal transactions, net
Portfolio fund investment income (loss) decreased $4.7 million to a loss of $4.4 million for the year ended December 31, 2022 compared with $0.3 million in the prior year period. The decrease is primarily related to losses in merchant banking, private investments as well as our activist investments.
Carried interest allocations
Carried interest allocations decreased $36.7 million to a loss of $31.6 million for the year ended December 31, 2022 compared with an income of $5.1 million in the prior year period. The primary driver of the decrease was a decrease in allocations from our sustainable funds partially as well as a decrease in allocations from our healthcare funds.
Management Fees
Management fees decreased $5.6 million to $66.7 million for the year ended December 31, 2022 compared with $72.3 million in the prior year period. This decrease in management fees was primarily related to management fees earned from new investors entering the sale of our interestCowen Sustainable funds in the alternative solutions businessfirst quarter of 2021 when, during the third quarter, of 2016 andthe fund had multiple capital raises as well as a decrease in management fees from the real estate business.Cowen Healthcare investments funds.
Incentive Income
Incentive income decreased $2.9$2.1 million to $5.4$0.6 million for the year ended December 31, 2017,2022 compared with $8.3 million in the prior year period. This decrease was primarily related to a decrease in performance fees from the multi-strategy business.
Interest and Dividends
Interest and dividends increased $34.7 million to $49.4 million for the year ended December 31, 2017 compared with $14.7 million in the prior year period. This was primarily attributable to securities financing activities during the second half of the year from the June 2017 acquisition of Convergex Group.
Reimbursements from Affiliates
Reimbursements from affiliates decreased $7.6 million to $2.9 million for the year ended December 31, 2017 compared with $10.5 million in the prior year period. The decrease is primarily related to a decrease in reimbursements from the activist business.
Aircraft Lease Revenues
Aircraft lease revenues decreased to $3.8 million for the year ended December 31, 2017 compared to $4.2$2.7 million in the prior year period. This decrease was related to lower income earned in our Ramius Merger Fund LLC. Due to revenue recognition accounting standards the saleCompany recognizes the majority of one plane duringincentive income allocated to the third quarter of 2017.Company as carried interest allocations, included in investment income (loss).
Reinsurance PremiumsInterest and Dividends
Reinsurance premiums decreased $1.5Interest and dividends increased $92.8 million to $31.0$312.1 million for the year ended December 31, 20172022 compared with $32.5$219.3 million in the prior year period. The increase in interest and dividends is primarily attributable to dividends receivable from event strategy market making activity and securities finance activity. The increase in the securities finance activity is due to higher customer demand which has created more matched book opportunities for international securities.
Insurance and Reinsurance Premiums
Insurance and reinsurance premiums decreased $3.1 million to $36.5 million for the year ended December 31, 2022 compared with $39.6 million in the prior year period. This decrease reflects the reduction,is driven by a decrease in 2017,premiums (net of our quota share participationreinsurance) in one of the reinsurance policies.Cowen Re. and run-off premium adjustments from Kelvin Re Limited offset by an increase in net premiums from Cowen Insurance Company.
Other RevenuesRevenues, net
Other revenues increased$1.8 million to $7.0 million for the year ended December 31, 2022 compared with $5.2 million in the prior year period. This primarily related to foreign currency exchange rate fluctuations from our Non-US Dollar transactions.
Consolidated Funds Revenues
Consolidated Funds revenues decreased $13.8$43.0 million to $8.6a loss of $49.2 million for the year ended December 31, 20172022 compared with $22.4a loss of $6.2 million in the prior year period. The decrease primarily relates to the sale of our interest in the alternative solutions business and the principal owners of Starboard Value exercising their right to acquire a portion of the Company’s ownership interest in the activist business in the prior year.
Consolidated Funds Revenues
Consolidated Funds revenues increased $1.4 million to $7.3 million for the year ended December 31, 2017 compared with $5.9 million in the prior year period. The increase is due to interestthe losses related the Enterprise LP fund primarily driven by unrealized losses of our Linkem investment driven by lower projected future cash flows and dividends income from the consolidated funds.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses increased $94.0 million to $404.1 million for the year ended December 31, 2017 compared with $310.0 milliona decline in the prior year period.market value of comparables. The increase is primarily due to $187.2 million higher total revenues and $61.7 million more other income (loss) during 2017 as compared to 2016 resulting in a higher compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 53% for the year ended December 31, 2017, compared with 60% in the prior year period.
Interest and Dividends
Interest and dividends expenses increased $31.6 million to $60.9 million for the year ended December 31, 2017 compared with $29.3 million in the prior year period. This was primarily attributable to securities finance activities during the second half of the year from the June 2017 acquisition of Convergex Group, an increase in debt, an increase in the number of investments sold short and an increase in margin balances during 2017 as compared to 2016.
Reinsurance Claims, Commissions and Amortization of Deferred Acquisition Costs
Reinsurance related expenses increased $0.6 million to $30.5 million for the year ended December 31, 2017 compared with $29.9 million in the prior year period. This increase was predominantly due to higher than expected claims that resulted from severe weather events in the US in the third and fourth quarters of 2017.
General, Administrative and Other Expenses
General, administrative and other expenses increased $71.6 million to $227.7 million for the year ended December 31, 2017 compared with $156.1 million in the prior year period. The increase is primarily related to higher floor brokerage and trade execution costs, due to higher brokerage revenue, and increased marketing and business development expenses, legal and other professional fees and increased occupancy costs, which are mostly related to the acquisition of Convergex Group during June 2017.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $0.4 million to $13.1 million for the year ended December 31, 2017 compared with $12.7 million in the prior year period. The increase is primarily related to an increase in amortization of intangible assets related to recent acquisitions.
Restructuring Costs
Restructuring costs expenses were $8.8 million for the year ended December 31, 2017. In conjunction with the integration of the acquired businesses of Convergex Group, the Company evaluated the combined broker-dealer businesses and operations and incurred integration and restructuring costs which primarily related to exit and disposal costs, discontinuation of redundant technology services and severance costs.
Consolidated Funds Expenses
Consolidated Funds expenses increased $3.4 million to $12.5 million for the year ended December 31, 2017 compared with $9.1 million in the prior year period. The increase is due to increased interest and dividends expense in one of the consolidated funds.
Other Income (Loss)
Other income (loss) increased $61.7 million to $105.8 million for the year ended December 31, 2017 compared with $44.1 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital and the bargain purchase gain related to the acquisition of Convergex Group during June 2017 partially offset by costs associated with extinguishing debt. The gains and lossesamounts shown under Consolidated Funds reflect the consolidated total performance for such
investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to redeemable non-controlling interests.
Income TaxesInterest and Dividends Expense
Income taxInterest and dividends expense increased $63.0$47.7 million to $259.1 million for the year ended December 31, 2022 compared with $211.4 million in the prior year period. Interest and dividends amounts are primarily attributable to securities finance activities. There was an increase in the securities finance activity due to higher customer demand which has created more matched book opportunities for international securities.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses decreased $275.0 million to $44.1$771.4 million for the year ended December 31, 20172022 compared with an income tax benefit of $19.1$1,046.4 million in the prior year period. This increase in expenseThe decrease is primarily attributabledue to $575.1 million lower total revenues as well as a decrease of $25.2 million in net gains (losses) on other investments during 2022 as compared to 2021 and thus resulting in a lower compensation and benefits accrual. The compensation to revenue ratio, including net gains (losses) on other investments was 49.9% for the impact ofyear ended December 31, 2022, compared with 48.7% in the federal tax reform enacted in 2017prior year period.
Insurance and higher non-deductible expenses.Reinsurance Claims and Commissions
Income (Loss) Attributable to Redeemable Non-controlling Interests
Income (loss) attributable to redeemable non-controlling interests increased $16.9Insurance and reinsurance-related expenses decreased $46.2 million to $23.8a benefit of $12.3 million for the year ended December 31, 20172022 compared with $6.9$33.9 million the prior year period. The decrease was caused, in the main, by a reduction in the overall claims provision realized by Kelvin Re Limited.
Operating, General, Administrative and Other Expenses
Operating, general, administrative and other expenses decreased $5.8 million to $424.5 million for the year ended December 31, 2022 compared with $430.3 million in the prior year period. The decrease is primarily related to the fair market value adjustments to the contingent consideration liabilities for previous acquisitions as well as a decrease in underwriting fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $8.7 million to $27.7 million for the year ended December 31, 2022 compared with $19.0 million in the prior year period. The increase wasis primarily related to two acquisitions which closed during 2021.
Consolidated Funds Expenses
Consolidated Funds expenses decreased $0.4 million to $0.2 million for the result of losses incurred by one of the consolidated fundsyear ended December 31, 2022 compared with $0.6 million in the prior year period. During the first quarter of 2022, the Company deconsolidated Cowen Private Investments LP as the fund was liquidated. During the first quarter of 2021, the Company deconsolidated Cowen Sustainable Investments I, LP due to the Company's ownership being diluted through a capital equalization event. The amounts shown under Consolidated Funds reflect the consolidated total performance for such investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to non-controlling interests.
Other Income (Loss)
Other income (loss) decreased $25.2 million to $9.6 million for the year ended December 31, 2022 compared with $34.8 million in the prior year period. The decrease in other income (loss), which primarily represents our equity method investments, was primarily attributable to a decrease in performance in our activist investments and also the bargain purchase gain on an acquisition from the first quarter of 2021, offset partially by a loss on debt extinguishment.
Income Taxes
Income tax expense decreased$91.2 million to $10.8 million for the year ended December 31, 2022 compared with $102.0 million in the prior year period. This change is primarily attributable to the utilization of tax credits and the change in the Company’s income before income taxes in 2022 compared to 2021.
Net Income (Loss) Attributable to Non-controlling Interests
Net income (loss) attributable to non-controlling interests decreased $19.0 million to a loss of $10.6 million for the year ended December 31, 2022 compared with income of $8.4 million in the prior year period. The decrease is due to the losses related the Enterprise LP fund primarily driven by unrealized losses of our Linkem investment driven by lower projected future cash flows and a decline in market value of comparables. These losses are offset only partially by gains related to higher valuation in the Company's digital investment. 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.
Preferred Stock Dividends
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. The Company accrued $6.8 million preferred stock dividends for the periods ended December 31, 2022, 2021 and 2020, respectively.
Year Ended December 31, 20162021 Compared with the Year Ended December 31, 2015 |
| | | | | | | | | | | | | | |
| | Consolidated Statements of Operations |
| | Year Ended December 31, | | Period to Period |
| | 2016 | | 2015 | | $ Change | | % Change |
| | (dollars in thousands) |
| Revenues | | | | | | | |
| Investment banking | $ | 133,279 |
| | $ | 222,781 |
| | $ | (89,502 | ) | | (40 | )% |
| Brokerage | 199,180 |
| | 157,722 |
| | 41,458 |
| | 26 | % |
| Management fees | 40,612 |
| | 41,906 |
| | (1,294 | ) | | (3 | )% |
| Incentive income | 8,334 |
| | 1,466 |
| | 6,868 |
| | 468 | % |
| Interest and dividends | 14,732 |
| | 13,796 |
| | 936 |
| | 7 | % |
| Reimbursement from affiliates | 10,504 |
| | 21,557 |
| | (11,053 | ) | | (51 | )% |
| Aircraft lease revenue | 4,161 |
| | — |
| | 4,161 |
| | NM |
|
| Reinsurance premiums | 32,459 |
| | — |
| | 32,459 |
| | NM |
|
| Other revenues | 22,355 |
| | 3,726 |
| | 18,629 |
| | 500 | % |
| Consolidated Funds revenues | 5,949 |
| | 1,613 |
| | 4,336 |
| | 269 | % |
| Total revenues | 471,565 |
| | 464,567 |
| | 6,998 |
| | 2 | % |
| Expenses | | | | | | | |
| Employee compensation and benefits | 310,038 |
| | 321,386 |
| | (11,348 | ) | | (4 | )% |
| Interest and dividends | 29,308 |
| | 26,220 |
| | 3,088 |
| | 12 | % |
| Reinsurance claims, commissions and amortization of deferred acquisition costs | 29,904 |
| | — |
| | 29,904 |
| | NM |
|
| Depreciation and amortization | 12,713 |
| | 9,498 |
| | 3,215 |
| | 34 | % |
| General, administrative and other expenses | 156,091 |
| | 144,960 |
| | 11,131 |
| | 8 | % |
| Consolidated Funds expenses | 9,064 |
| | 2,310 |
| | 6,754 |
| | 292 | % |
| Total expenses | 547,118 |
| | 504,374 |
| | 42,744 |
| | 8 | % |
| Other income (loss) |
| |
| | | | |
| Net gain (loss) on securities, derivatives and other investments | 23,381 |
| | 36,789 |
| | (13,408 | ) | | (36 | )% |
| Consolidated Funds net gains (losses) | 20,685 |
| | 14,497 |
| | 6,188 |
| | 43 | % |
| Total other income (loss) | 44,066 |
| | 51,286 |
| | (7,220 | ) | | (14 | )% |
| Income (loss) before income taxes | (31,487 | ) | | 11,479 |
| | (42,966 | ) | | (374 | )% |
| Income tax expense (benefit) | (19,092 | ) | | (47,496 | ) | | 28,404 |
| | 60 | % |
| Net income (loss) | (12,395 | ) | | 58,975 |
| | (71,370 | ) | | (121 | )% |
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | 6,882 |
| | 15,246 |
| | (8,364 | ) | | (55 | )% |
| Net income (loss) attributable to Cowen Inc. | (19,277 | ) | | 43,729 |
| | (63,006 | ) | | (144 | )% |
| Preferred stock dividends | 6,792 |
| | 4,075 |
| | 2,717 |
| | 67 | % |
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | (26,069 | ) | | $ | 39,654 |
| | $ | (65,723 | ) | | (166 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Operations |
| | Year Ended December 31, | | Period to Period |
| | 2021 | | 2020 | | $ Change | | % Change |
| | (dollars in thousands) |
| Revenues | | | | | | | |
| Investment banking | $ | 1,067,162 | | | $ | 769,486 | | | $ | 297,676 | | | 39 | % |
| Brokerage | 585,162 | | | 524,361 | | | 60,801 | | | 12 | % |
| Investment income (loss) | | | | | | | |
| Securities principal transactions, net | 122,110 | | 124,667 | | (2,557) | | | (2) | % |
| Portfolio fund principal transactions, net | 338 | | 20,434 | | (20,096) | | | (98) | % |
| Carried interest allocations | 5,059 | | 59,250 | | (54,191) | | | (91) | % |
| Investment income (loss) | 127,507 | | | 204,351 | | | (76,844) | | | (38) | % |
| Management fees | 72,287 | | | 47,515 | | | 24,772 | | | 52 | % |
| Incentive income | 2,732 | | | 592 | | | 2,140 | | | 361 | % |
| Interest and dividends | 219,292 | | | 187,459 | | | 31,833 | | | 17 | % |
| | | | | | | |
| | | | | | | |
| Reinsurance premiums | 39,631 | | | 30,147 | | | 9,484 | | | 31 | % |
| Other revenues, net | 5,211 | | | 10,503 | | | (5,292) | | | (50) | % |
| Consolidated Funds revenues | (6,185) | | | (18,488) | | | 12,303 | | | (67) | % |
| Total revenues | 2,112,799 | | | 1,755,926 | | | 356,873 | | | 20 | % |
| Interest and dividends expense | 211,387 | | | 187,725 | | | 23,662 | | | 13 | % |
| Total net revenues | 1,901,412 | | | 1,568,201 | | | 333,211 | | | 21 | % |
| Expenses | | | | | | | |
| Employee compensation and benefits | 1,046,371 | | | 860,531 | | | 185,840 | | | 22 | % |
| Reinsurance claims, commissions and amortization of deferred acquisition costs | 33,938 | | | 33,905 | | | 33 | | | — | % |
| Operating, general, administrative and other expenses | 430,250 | | | 369,840 | | | 60,410 | | | 16 | % |
| Depreciation and amortization expense | 19,004 | | | 22,677 | | | (3,673) | | | (16) | % |
| | | | | | | |
| | | | | | | |
| Consolidated Funds expenses | 630 | | | 5,409 | | | (4,779) | | | (88) | % |
| Total expenses | 1,530,193 | | | 1,292,362 | | | 237,831 | | | 18 | % |
| Other income (loss) | | | | | | | |
| Net gains (losses) on other investments | 35,494 | | | 18,879 | | | 16,615 | | | 88 | % |
| Bargain purchase gain, net of tax | 3,855 | | | — | | | 3,855 | | | NM |
| Gain/(loss) on debt extinguishment | (4,538) | | | 2,719 | | | (7,257) | | | NM |
| | | | | | | |
| Total other income (loss) | 34,811 | | | 21,598 | | | 13,213 | | | 61 | % |
| Income (loss) before income taxes | 406,030 | | | 297,437 | | | 108,593 | | | 37 | % |
| Income tax expense (benefit) | 102,039 | | | 90,373 | | | 11,666 | | | 13 | % |
| Net income (loss) | 303,991 | | | 207,064 | | | 96,927 | | | 47 | % |
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | 8,380 | | | (9,299) | | | 17,679 | | | (190) | % |
| Net income (loss) attributable to Cowen Inc. | 295,611 | | | 216,363 | | | 79,248 | | | 37 | % |
| Preferred stock dividends | 6,792 | | | 6,792 | | | — | | | — | % |
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | 288,819 | | | $ | 209,571 | | | $ | 79,248 | | | 38 | % |
Revenues
Investment Banking
Investment bankingbanking revenues decreased $89.5increased$297.7 million to $133.3$1,067.2 million for the year ended December 31, 20162021 compared with $222.8$769.5 million in the prior year period. During the year ended December 31, 2016,2021, the Company completed 76190 underwriting transactions, 15159 strategic advisory transactions and seven20 debt capital marketmarkets transactions. During the year ended
December 31, 2015,2020, the Company completed 129165 underwriting transactions, 1374 strategic advisory transactions and seven12 debt capital marketmarkets transactions. The average underwriting fee per transaction was 12.2% less for the twelve months ended December 31, 2016 as compared to the prior year.
Brokerage
Brokerage revenues increased $41.5$60.8 million to $199.2$585.2 million for the year ended December 31, 20162021 compared with $157.7$524.4 million in the prior year period. This was attributable to higher commissions due to an increase in customer trading volumes, the initiation of the prime brokerage businesses in the thirdInstitutional Brokerage, primarily Cash, Special Situations, and fourth quarters of 2015 and the initiation of the credit trading business in May 2016.Non-Dollar commission revenue. Customer trading volumes across the industry (according to Bloomberg) increased 6% for the twelve months ended December 31, 2016 compared to the prior year.
Management Fees
Management fees decreased $1.3 million to $40.6 million4% for the year ended December 31, 20162021 compared to the prior year period.
Investment Income (loss)
Securities principal transactions, net
Securities principal transactions, net decreased$2.6 million to $122.1 million for the year ended December 31, 2021 compared with $41.9$124.7 million in the prior year period. The decrease in securities principal transactions, net was primarily relatedattributable to lower management fees from the alternative solutions business (duea decrease in our merchant banking investments as prior period included a positive mark to the salemarket of our interest in the business)Nikola investment offset partially by an increase in management fees fromour swaps business as the prime services business (acquired during the fourth quarter of 2015)Company added both additional clients and the macro options business.increased activity with existing clients.
Incentive IncomePortfolio fund principal transactions, net
IncentivePortfolio fund investment income increased $6.8(loss) decreased$20.1 million to $8.3$0.3 million for the year ended December 31, 2016,2021 compared with $1.5 million in the prior year period. This increase was primarily related to an increase in performance fees from certain private investments.
Interest and Dividends
Interest and dividends increased $0.9 million to $14.7 million for the year ended December 31, 2016 compared with $13.8 million in the prior year period. This was primarily attributable to an increase in the number of investments in interest bearing securities during 2016 as compared to 2015.
Reimbursements from Affiliates
Reimbursements from affiliates decreased $11.1 million to $10.5 million for the year ended December 31, 2016 compared with $21.6$20.4 million in the prior year period. The decrease is primarily related to public positions in our healthcare fund investments.
Carried interest allocations
Carried interest allocations decreased$54.2 million to $5.1 million for the year ended December 31, 2021 compared with $59.3 million in the prior year period. The primary driver of the decrease was a decrease in reimbursementsallocations from the activist business.our healthcare funds offset only partially from an increase in allocations from our sustainable funds.
Aircraft lease revenuesManagement Fees
Aircraft lease revenues were $4.2Management fees increased $24.8 million to $72.3 million for the year ended December 31, 2016 relating2021 compared with $47.5 million in the prior year period. This increase is primarily related to the new aircraft leasing business which began during 2016.our healthcare and sustainable investments businesses.
Reinsurance premiumsIncentive Income
Reinsurance premiums of $32.5 million relate to premiums from the insurance-related business (which was entered into at the end of the fourth quarter of 2015).
Other Revenues
Other revenuesIncentive income increased $18.7$2.1 million to $22.4$2.7 million for the year ended December 31, 20162021. This increase was related to income earned in our Merger Fund. Due to revenue recognition standards, effective January 1, 2018, the Company recognizes the majority of incentive income allocated to the Company as carried interest allocations, included in investment income (loss).
Interest and Dividends
Interest and dividends increased$31.8 million to $219.3 million for the year ended December 31, 2021 compared with $3.7$187.5 million in the prior year period. Interest and dividends amounts are primarily attributable to securities finance activity. The increase primarily relates to the sale of our interest in the alternative solutions business.securities finance activity is due to higher customer demand which has created more matched book opportunities for international securities.
Consolidated Funds RevenuesInsurance and Reinsurance Premiums
Consolidated FundsInsurance and reinsurance premiums increased$9.5 million to $39.6 million for the year ended December 31, 2021 compared with $30.1 million in the prior year period. This increase is driven by $8.8 million of premiums from the insurance entity acquired in the first quarter of 2021 and a small increase from our reinsurance entity.
Other Revenues, net
Other revenues increased $4.3decreased$5.3 million to $5.9$5.2 million for the year ended December 31, 20162021 compared with $1.6$10.5 million in the prior year period. This primarily related to foreign currency exchange rate fluctuations from our Non-US Dollar transactions.
Consolidated Funds Revenues
Consolidated Funds revenues increased$12.3 million to a loss of $6.2 million for the year ended December 31, 2021 compared with a loss of $18.5 million in the prior year period. The increase is due to the consolidation of new funds during 2016.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses decreased $11.3 million to $310.0 million for the year ended December 31, 2016 compared with $321.4 millionlosses in the prior year period. The decrease is primarily due to $7.0 million higher total revenues offset by $7.2 million lower other income (loss) during 2016 as compared to 2015, resulting in a lower compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 60% for the year ended December 31, 2016, compared with 62% in the prior year period.
Interest and Dividends
Interest and dividends expenses increased $3.1 million to $29.3 million for the year ended December 31, 2016 compared with $26.2 million in the prior year period. This was primarily attributable to an increase in the number of debt securities held during 2016 as compared to 2015.
Reinsurance claims, commissions and amortization of deferred acquisition costs
Reinsurance related expenses of $29.9 million relate to loss and claim reserves, acquisition costs and other expensesperiod related to the insurance and reinsurance related policies entered intoUCITS fund as the merger strategy experienced significant challenges in Q1 2020. The UCITS fund was deconsolidated during the second quarter of 2016 and are related to our respective businesses which commenced at the end of the fourth quarter of 2015.
General, Administrative and Other Expenses
General, administrative and other expenses increased $11.1 million to $156.1 million for2020. Losses remaining during the year ended December 31, 2016 compared with $145.0 million in the prior year period. The increase is2021 are primarily related to higher floor brokerage andthe Enterprise LP fund primarily driven by foreign revaluation of our Linkem investment. We have offset this revaluation risk outside the fund with
trade execution costs, due to higher brokerage revenue, and increased marketing and business development expenses, legal and other professional fees and increased occupancy costs, some of which is related to acquisitions during late 2015 and during 2016.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $3.2 million to $12.7 million for the year ended December 31, 2016 compared with $9.5 million in the prior year period.foreign forwards. The increase is primarily related to an increase in amortization on intangible assets related to recent acquisitions.
Consolidated Funds Expenses
Consolidated Funds expenses increased $6.8 million to $9.1 million for the year ended December 31, 2016 compared with $2.3 million in the prior year period. The increase is due to the consolidation of new funds during 2016.
Other Income (Loss)
Other income (loss) decreased $7.2 million to $44.1 million for the year ended December 31, 2016 compared with $51.3 million in the prior year period. The decrease primarily relates to decrease in performance of the Company's own invested capital. The gains and lossesamounts shown under Consolidated Funds reflect the consolidated total performance for such investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to redeemable non-controlling interests.
Income TaxesInterest and Dividends Expense
Income tax benefit decreased $28.4Interest and dividends expense increased$23.7 million to $211.4 million for the year ended December 31, 2021 compared with $187.7 million in the prior year period. Interest and dividends amounts are primarily attributable to securities finance activities. There was an increase in the securities finance activity due to higher customer demand which has created more matched book opportunities for international securities.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses increased$185.9 million to $1,046.4 million for the year ended December 31, 2021 compared with $860.5 million in the prior year period. The increase is primarily due to $356.9 million higher total revenues as well as an increase of $13.2 million in other income (loss) during 2021 as compared to 2020 and thus resulting in a higher compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 49% for the year ended December 31, 2021, compared with 48% in the prior year period.
Insurance and Reinsurance Claims and Commissions
Insurance and reinsurance-related expenses remained fairly flat at$33.9 million for the year ended December 31, 2021 compared with the prior year period. An increase of $6.5 million of such expenses from an acquired insurance company was offset by a corresponding decrease in reinsurance-related expenses.
Operating, General, Administrative and Other Expenses
Operating, general, administrative and other expenses increased $60.5 million to $19.1$430.3 million for the year ended December 31, 20162021 compared with an income tax benefit of $47.5$369.8 million in the prior year period. This decrease in benefitThe increase is primarily attributablerelated to the deferred tax benefit recognized by the Company’s Luxembourg subsidiaryhigher brokerage and trade execution costs due to higher brokerage and investment banking revenues as well as an increase in 2015, partially offset by the reversal of a basis difference in the Company’s Luxembourg subsidiaries in 2016.professional, advisory and other fees.
Income (Loss) Attributable to Redeemable Non-controlling InterestsDepreciation and Amortization Expenses
Income (loss) attributable to redeemable non-controlling interestsDepreciation and amortization expenses decreased $8.4$3.7 million to income of $6.9$19.0 million for the year ended December 31, 20162021 compared with income of $15.2$22.7 million in the prior year period. The decrease is primarily related to certain intangible assets being fully amortized in the first quarter of 2021.
Consolidated Funds Expenses
Consolidated Funds expenses decreased $4.8 million to $0.6 million for the year ended December 31, 2021 compared with $5.4 million in the prior year period. The decrease is due to the deconsolidation of one fund during 2021 and two in 2020. The amounts shown under Consolidated Funds reflect the consolidated total performance for such investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to non-controlling interests.
Other Income (Loss)
Other income (loss) increased $13.2 million to $34.8 million for the year ended December 31, 2021 compared with $21.6 million in the prior year period. The increase in other income (loss), which primarily represents our equity method investments, was primarily attributable to an impairment of $11.3 million occurring in 2020 as well as an increase in performance in our activist investments and also the bargain purchase gain on an acquisition from the first quarter of 2021, offset partially by a loss on debt extinguishment.
Income Taxes
Income tax expense increased $11.6 million to $102.0 million for the year ended December 31, 2021 compared with $90.4 million in the prior year period. This change is primarily attributable to the increase in the Company’s income before income taxes in 2021 compared to 2020.
Net Income (Loss) Attributable to Non-controlling Interests
Net income (loss) attributable to non-controlling interests increased$17.7 million to $8.4 million for the year ended December 31, 2021 compared with a loss of $9.3 million in the prior year period. The increase was primarily the result losses in the first half of losses incurred by one2020 related to weaker performance in the UCITS fund, which was deconsolidated during the second quarter of 2020 as well as increased income allocated to the consolidated funds.merchant SPVs. 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.
Preferred Stock Dividends
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock.Convertible Preferred Stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Segment Analysis, and Economic Income (Loss)
Segments
The Company conducts its operations through two segments: an investment management segment and a broker-dealer segment.
For the years ended December 31, 2017, 2016, and 2015, the Company's investment management segment includes private funds, managed accounts, commodity pools, real estate funds, private equity structures, registered investment companies and listed vehicles operating results and other investment platforms operating results.
For the years ended December 31, 2017, 2016, and 2015, the Company's broker-dealer segment includes investment banking, research, sales and trading, prime brokerage, global clearing and commission management services businesses' operating results.related components
Economic Income (Loss) and related components
The performance measure used by the Company for each segment ispresents supplemental financial measures that are not prepared in accordance with US GAAP. These Non-GAAP financial measures include (i) Pre-tax Economic Income (Loss) (ii) Economic Income (Loss), (iii) Economic Operating Income (Loss), (iv) Economic Proceeds and related components, (v) Net Economic Proceeds and related components, (vi) Economic Expenses and related components and (vii) related per share measures. The Company believes that these Non-GAAP financial measures, viewed in addition to, and not in lieu of, the Company’s reported US GAAP results, provide useful information to investors and analysts regarding its performance and overall results of operations as it presents investors and analysts with a supplemental operating view of the Company’s financials to help better inform their analysis of the Company’s performance.
These Non-GAAP financial measures are an integral part of the Company’s internal reporting to measure the performance of its business segments, allocate capital and other strategic decisions as well as assess the overall effectiveness of senior management. The Company believes that presenting these Non-GAAP measures may provide expanded transparency into the Company’s business operations, growth opportunities and expense allocation decisions.
The Company’s primary Non-GAAP financial measures of profit or loss are Pre-tax Economic Income (Loss), Economic Income (Loss) and Economic Operating Income (Loss). Pre-tax Economic Income (Loss) is a pre-tax measure which (i) includes management reclassifications which the Company believes provide additional insight on the performance of the Company’s core businesses and divisions; (ii) eliminates the impact of consolidation for Consolidated Funds; and excludes (iii) goodwill and intangible impairment, (iv) certain other transaction-related adjustments and/or reorganization expenses, as well as (v) certain costs associated with debt. Economic Income (Loss) is a similar measure, but after tax, which includes the Company’s income tax expense or benefit calculated on Pre-tax Economic Income (Loss) once all currently available net operating losses have been utilized (this occurred during tax year 2020) and is presented after preferred stock dividends. Economic Operating Income (Loss) is a similar measure to Economic Income (Loss), but before depreciation and amortization expenses. The Company believes that these Non-GAAP financial measures provide analysts and investors transparency into the measures of profit and loss management uses to evaluate the financial performance of and to make operating decisions for the segments including determining appropriate compensation levels. Additionally, the measures provide investors and analysts with additional insight into the activities of the Company’s core businesses, taking into account, among other things, the impact of minority investment stakes, securities borrowing and lending activities and expenses from investment banking activities on US GAAP reported results. The Company presents Pre-tax Economic Income (Loss) in addition to Economic Income (Loss) and Economic Operating Income (Loss) to provide insight to investors and analysts on how the Company manages its tax position over time.
In addition to Pre-tax Economic Income (Loss), Economic Income (Loss) and Economic Operating Income (Loss), the Company also presents Economic Proceeds, Net Economic Proceeds, Economic Expenses, as a wholewell as their related components. These measures include management reclassifications and each segment. Accordingly, management assessesthe elimination of the impact of the consolidation for Consolidated funds as described above. These adjustments are meant to provide comparability to our peers as well as to provide investors and analysts with transparency into how the Company manages its operating businesses and how analysts and investors review and analyze the Company’s and its peers’ similar lines of businesses. For example, among others, within the Company’s Op Co business by analyzingsegment, investors and analysts typically review and analyze the performance of each segmentinvestment banking revenues net of underwriting expenses and believes thatexcluding the impact of reimbursable expenses. Additionally, the performance of the Company’s Markets business is typically analyzed as a unit incorporating commissions, interest from securities financing transactions and gains and losses from proprietary and facilitation trading. The Company’s investment management business performance is analyzed and reviewed by investors should reviewand analysts through investment income, incentive income and management fees. The presentation of Economic Proceeds, Net Economic Proceeds, Economic Expenses as well as their related components align with these and other examples of how the sameCompany’s business activities and performance measure that it usesare reviewed by analysts and investors in addition to analyzeproviding simplification related to legacy businesses and investments for which the Company maintains long-term monetization strategies. Additionally, the Company manages its segmentoperating businesses to an Economic Compensation-to-Proceeds ratio. Presentation of Economic Compensation Expense and business performance. InEconomic Proceeds provides transparency in addition management believes that Economic Income (Loss) is helpful to gain an understanding of its segment results of operations because it reflects such results on a consistent basis for all periods presented.the Company’s US GAAP Compensation Expense.
Our Economic Income (Loss)Reconciliations to comparable US GAAP measures are presented along with the Company’s Non-GAAP financial measures. The Non-GAAP measures presented herein may not be comparable to similarly titled measures usedpresented by other companies. We use Economic Income (Loss) as a measurepublic companies and are not identical to corresponding measures used in our various agreements or public filings.
These Non-GAAP measures should not be considered in isolation or as a substitute for operatingrevenue, expenses, income (loss) before income taxes, net income, operating cash flows,
investing and financing activities, or other income or cash flow statement data prepared in accordance with US GAAP. As a result of the adjustments made to arrive at Economic Income (Loss), Economic Income (Loss) hasthese Non-GAAP measures described below, these Non-GAAP measures have limitations in that it doesthey do not take into account certain items included or excluded under US GAAP, including our Consolidated Funds. Economic Income (Loss) is considered by management as a supplemental measure to the US GAAP results to provide a more complete understanding of each segment's performance as measured by management. its consolidated funds.
For a reconciliation of Economic Income (Loss) to US GAAP net income (loss) to Pre-tax Economic Income (Loss), Economic Income (Loss) and Economic Operating Income (Loss) for the periods presented and additional information regarding the reconciling adjustments discussed above, see Note 27the following section "Reconciliation of US GAAP (Unaudited) to theNon-GAAP Measures".
The Company conducts its operations through two segments: Op Co and Asset Co. The Company's consolidated financial statementsprinciple sources of revenues included elsewhere in this Form 10-K.
In general, Economic Income (Loss) is a pre-tax measure that (i) eliminatesare derived from activities in the impact of consolidation for consolidated fundsfollowing business segments. The Op Co and excludes (ii) goodwill and intangible impairment (iii) certain other transaction-related adjustments and/or reorganization expenses (iv) the bargain purchase gain which resulted from the Convergex Group acquisition (v) certain costs associated with debt and (vi) preferred stock dividends. In addition, Economic Income (Loss) revenues includeAsset Co segments do not conduct inter-segment transactions.
The Op Co segment generates revenue through several principal sources: investment income that represents the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes, these items are included in each of their respective line items. Economic Income (Loss) revenues also includebanking revenue, brokerage revenue, management fees, incentive income, and investment income earned throughfrom the Company's investment as a general partner in certain real estate entities and the Company's investment in the activist business. For US GAAP purposes, all of these items are recorded in other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for US GAAP purposes is presented gross as part of revenue.
Economic Income (Loss) Revenuesown capital.
The Company's principal sources of Economic Income (Loss) revenues are derived from activities in the following business segments:
Our investment managementAsset Co segment generates Economic Income (Loss) revenuesrevenue through three principal sources: management fees, incentive income and investment income from ourthe Company’s own capital. Management fees are directly impacted by any increase or decrease in assets under management, while incentive income is impacted by our funds' performance and resulting increase or decrease in assets under management. Investment income from the Company's own capital is impacted by the performance of the funds and other securities in which our capital is invested.
Our broker-dealer segment generates Economic Income (Loss) revenues through two principal sources: investment banking and brokerage. The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's Target Sectors: healthcare, technology, media and telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and transportation. The Company's brokerage revenues consist of commissions, principal transactions and fees paid for equity and credit research and trade conversion. Cowen's broker-dealer segment also offers a full-service suite of prime brokerage services. Management reviews brokerage revenue on a combined basis as the vast majority of the revenue is derived from the same group of clients. The Company derives its brokerage revenue primarily from trading equity and equity-linked securities on behalf of institutional investors. The majority of the Company's trading gains and losses are a result of activities that support the facilitation of client orders in both listed and over-the-counter securities, although all trading gains and losses are recorded in brokerage revenue in the accompanying consolidated statement of operations.
Economic Income (Loss) Expenses
The Company's Economic Income (Loss) expenses consist of non-interest expenses and interest expense. Non-interest expenses consist of compensation and benefits and non-compensation expenses (fixed and variable), less reimbursement from affiliates. Interest expense is primarily interest from indebtedness, not trading activity (which is included within investment income (loss)).
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 partners of such entities.
Year Ended December 31, 20172022 Compared with Year Ended December 31, 2016 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Total Period-to-Period |
| | 2017 | | 2016 | |
| | Investment
Management | | Broker-Dealer | | Total | | Investment
Management | | Broker-Dealer | | Total | | $ Change | | % Change |
| | (dollars in thousands) |
| Economic Income Revenues | | | | | | | | | | | | | | | |
| Investment banking | $ | — |
| | $ | 223,614 |
| | $ | 223,614 |
| | $ | — |
| | $ | 133,279 |
| | $ | 133,279 |
| | $ | 90,335 |
| | 68 | % |
| Brokerage | 38 |
| | 312,742 |
| | 312,780 |
| | — |
| | 207,040 |
| | 207,040 |
| | 105,740 |
| | 51 | % |
| Management fees | 52,239 |
| | 3,148 |
| | 55,387 |
| | 64,086 |
| | 3,162 |
| | 67,248 |
| | (11,861 | ) | | (18 | )% |
| Incentive income (loss) | 26,028 |
| | — |
| | 26,028 |
| | 26,274 |
| | — |
| | 26,274 |
| | (246 | ) | | (1 | )% |
| Investment income (loss) | 31,447 |
| | 13,695 |
| | 45,142 |
| | 3,015 |
| | 1,008 |
| | 4,023 |
| | 41,119 |
| | NM |
|
| Other income (loss) | 1,575 |
| | 1,656 |
| | 3,231 |
| | 29,202 |
| | 565 |
| | 29,767 |
| | (26,536 | ) | | (89 | )% |
| Total economic income revenues | $ | 111,327 |
| | $ | 554,855 |
| | $ | 666,182 |
| | $ | 122,577 |
| | $ | 345,054 |
| | 467,631 |
| | 198,551 |
| | 42 | % |
Economic Income (Loss)2021
Total Economic Operating Income (Loss) was $15.8$80.5 million for the year ended December 31, 2017, an increase2022, a decrease of $44.6$245.9 million compared to Economic Operating Income (Loss) of $326.4 million in the prior year period. Total Economic Income (Loss) was $60.0 million for the year ended December 31, 2022 compared to Economic Income (Loss) whichof $312.2 million in the prior year period. Total Pre-tax Economic Income (Loss) was $90.3 million for the year ended December 31, 2022, a lossdecrease of $28.7$337.9 million compared to Pre-tax Economic Income (Loss) of $428.2 million in the prior year period.
TotalEconomic Proceeds included in total Economic Income (Loss) revenues were $666.2$1,312.8 million for the year ended December 31, 2017, an increase2022, a decrease of $198.6$577.8 million compared to Economic Income (Loss) revenues of $467.6$1,890.6 million in the prior year period. This was primarily related to an increasea decrease in investment banking and brokerage activity and an increaseincentive fees.
Operating Company Segment
Economic Proceeds | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period |
| | 2022 | | 2021 | | $ Change | | % Change |
| | (dollars in thousands) |
| Economic Proceeds | | | | | | | |
| Investment banking | $ | 478,184 | | | $ | 1,025,688 | | | $ | (547,504) | | | (53) | % |
| Brokerage | 719,208 | | | 728,525 | | | (9,317) | | | (1) | % |
| Management fees | 82,681 | | | 79,255 | | | 3,426 | | | 4 | % |
| Incentive income (loss) | (12,678) | | | 34,579 | | | (47,257) | | | (137) | % |
| Investment income (loss) | 21,226 | | | 8,542 | | | 12,684 | | | 148 | % |
| Other income (loss) economic proceeds | 57,299 | | | 7,942 | | | 49,357 | | | 621 | % |
| Total: Economic Proceeds | 1,345,920 | | | 1,884,531 | | | (538,611) | | | (29) | % |
| Economic Interest Expense / (Income) | 5,233 | | | 23,914 | | | (18,681) | | | (78) | % |
| Net Economic Proceeds | $ | 1,340,687 | | | $ | 1,860,617 | | | $ | (519,930) | | | (28) | % |
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Economic ProceedsThe Op Co segment economic proceeds included in performance in investment income.
Investment Management Segment Revenues
Investment management segment Economic Income (Loss) revenues were $111.3$1,345.9 million for the year ended December 31, 2017,2022, a decrease of $11.3$538.6 million compared to Economic Income (Loss) revenues of $122.6$1,884.5 million in the prior year period.
Management Fees. Management fees for the segmentInvestment Banking Economic Proceeds decreased $11.9$547.5 million to $52.2$478.2 million for the year ended December 31, 20172022 compared with $64.1 million in the prior year period. This decrease in management fees was primarily related to the sale of our interest in the alternative solutions business during the third quarter of 2016 and a decrease in management fees from the real estate business.
Incentive Income (Loss). Incentive income for the segment decreased $0.3 million to $26.0 million for the year ended December 31, 2017 compared with $26.3 million in the prior year period. This decrease was related to a decrease in performance fees from the multi-strategy business offset partially by an increase in performance from the activist business.
Investment Income (Loss). Investment income for the segment increased $28.4 million to income of $31.4 million for the year ended December 31, 2017 compared with $3.0 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital.
Other Income (Loss). Other income (loss) for the segment decreased $27.6 million to $1.6 million for the year ended December 31, 2017 compared with $29.2 million in the prior year period. The decrease primarily relates to the sale of our interest in the alternative solutions business and the principal owners of Starboard Value exercising their right to acquire a portion of the Company’s ownership interest in the activist business in the prior year.
Broker-Dealer Segment Revenues
Broker-dealer segment Economic Income (Loss) revenues were $554.9 million for the year ended December 31, 2017, an increase of $209.8 million compared with Economic Income (Loss) revenues of $345.1 million in the prior year.
Investment Banking. Investment banking revenues increased $90.3 million to $223.6 million for the year ended December 31, 2017 compared with $133.3$1,025.7 million in the prior year period. During the year ended December 31, 2017, 2022, the Company completed 10348 underwriting transactions 16and 138 strategic advisory transactions, and twoincluding 23 debt capital marketmarkets transactions. During the year ended December 31, 2016, 2021, the Company completed 76190 underwriting transactions, 15159 strategic advisory transactions and seven20 debt capital marketmarkets transactions. The average underwriting fee per transaction was 33.8% greater for the year ended December 31, 2017 as compared to the prior year period.
Brokerage.Brokerage revenues increased $105.7Economic Proceeds decreased $9.3 million to $312.7$719.2 million for the year ended December 31, 2017,2022, compared with $207.0$728.5 million in the prior year period. This was attributable to an increasea decrease in Institutional Brokerage, primarily related to a decrease in Special Situations and Cross Asset Trading revenues due to the initiationoffset by increases in Options, Non-US Dollar, and ADR revenues. Institutional Services revenues increased, primarily Prime Services and Securities
Finance. Customer trading volumes across the industry (according to Bloomberg) decreased 11%increased 5% for the year ended December 31, 20172022 compared to the prior year.
Management Fees Economic Proceedsfor the segment increased $3.4 million to $82.7 million for the year ended December 31, 2022 compared with $79.3 million in the prior year period. This increase in management fees was primarily related to an increase management fees from the Cowen Healthcare investments funds and activist funds offset partially by a decrease in fees when, in the first quarter of 2021, new investors were entering the Cowen Sustainable funds through multiple capital raises.
Incentive Income (Loss) Economic Proceeds for the segment decreased $47.3 million to a loss of $12.7 million for the year ended December 31, 2022 compared with $34.6 million in the prior year period. This decrease was primarily related to a decrease in performance fees from our Cowen Sustainable funds partially offset by an increase in performance fees from our Cowen Healthcare investment funds.
Investment Income (Loss). Investment income Economic Proceeds for the segment increased $12.7 million to $13.7$21.2 million for the year ended December 31, 2017,2022 compared with $1.0$8.5 million in the prior year period. The increase primarily relates to gains from our digital investments and portfolio hedges offset partially by decreases in the performance of investments across most of our strategies including activist, merchant banking, healthcare and merger.
Other Income (Loss). Other income (loss) Economic Proceeds for the segment increased $1.1$49.4 million to $1.7$57.3 million for the year ended December 31, 2017,2022 compared with $0.6 million in the prior year period.
Non-Interest Expenses
Non-interest expenses. Total non-interest expenses increased $154.0 million to $625.4 million for the year ended December 31, 2017, compared with $471.4 million in the prior year period.
Compensation and benefits expenses. Compensation and benefits expenses, included within non-interest expenses, increased $87.6 million to $388.0 million for the year ended December 31, 2017 compared with $300.4 million in the prior year period. The increase is due to $198.6 million higher revenues during 2017 as compared to 2016 which resulted in a higher compensation and benefits accrual. The compensation to revenue ratio was 58% for the year ended December 31, 2017 compared with 64% in the prior year period.
Non-compensation Expenses—Fixed. Fixed non-compensation expenses, included within non-interest expenses, increased $21.1 million to $122.1 million for the year ended December 31, 2017 compared with $101.0income of $7.9 million in the prior year period. The increase is primarily related to the acquisition of Convergex Group during June 2017.driven by an improved insurance result and foreign currency exchange rate gains from our Non-US Dollar transactions.
The following table shows the components of the non-compensation expenses—fixed, for the year ended December 31, 2017 and 2016: |
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| | Year Ended December 31, | | Period-to-Period |
| | 2017 | | 2016 | | $ Change | | % Change |
| | (dollars in thousands) |
| Non-compensation expenses—fixed: | | | | | | | |
| Communications | $ | 23,378 |
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| $ | 17,752 |
| | $ | 5,626 |
| | 32 | % |
| Professional, advisory and other fees | 20,944 |
| | 17,280 |
| | 3,664 |
| | 21 | % |
| Occupancy and equipment | 33,928 |
| | 29,975 |
| | 3,953 |
| | 13 | % |
| Service fees | 14,896 |
| | 7,831 |
| | 7,065 |
| | 90 | % |
| Expenses from equity investments | 11,156 |
| | 15,844 |
| | (4,688 | ) | | (30 | )% |
| Other | 17,819 |
| | 12,297 |
| | 5,522 |
| | 45 | % |
| Total | $ | 122,121 |
| | $ | 100,979 |
| | $ | 21,142 |
| | 21 | % |
Depreciation and amortization expenses. Depreciation and amortization expenses increased $0.6 million to $11.6Economic Interest Expenses /(Income) were $5.2 million for the year ended December 31, 20172022, a decrease of expenses of $18.7 million compared with $11.0$23.9 million in the prior year period. The 2022 interest expense / (income) includes a gain from a mark-to-market adjustment on an interest rate swap used to offset interest on floating-rate debt.
Net Economic Proceedswere $1,340.7 million for the year ended December 31, 2022, a decrease of $519.9 million compared with $1,860.6 million in the prior year period.
Economic Expenses | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period |
| | 2022 | | 2021 | | $ Change | | % Change |
| Economic Expenses | (dollars in thousands) |
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| Employee compensation and benefits | $ | 772,202 | | | $ | 1,046,730 | | | $ | (274,528) | | | (26) | % |
| Non-Compensation Expense | 412,192 | | | 359,577 | | | 52,615 | | | 15 | % |
| Depreciation & Amortization | 27,702 | | | 18,982 | | | 8,720 | | | 46 | % |
| Non-Controlling Interest | 2,314 | | | 5,314 | | | (3,000) | | | (56) | % |
| Total: Economic Expenses | $ | 1,214,410 | | | $ | 1,430,603 | | | $ | (216,193) | | | (15) | % |
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Economic Expenseswere$1,214.4 millionfor theyear endedDecember 31, 2022, a decrease of $216.2 million compared with $1,430.6 million in the prior year period.
Economic Compensation Expenseswere $772.2 million compared to $1,046.7 million in the prior year period. The decrease was due to lower revenues. The economic compensation-to-proceeds ratio increased to 57.4% compared to 55.5% in the prior year period.
Economic Non-compensation Expenses—Variable.Expenses Fixed non-compensation expense increased $11.7 million to $171.8 million for the year ended December 31, 2022 compared with $160.1 million in the prior year period. The increase primarily related to an increase in professional and advisory fees and communication costs. Variable non-compensation expenses, included within non-interest expenses which primarily are comprised of expenses whichthat are incurred as a direct result of the processing and soliciting of revenue generating activities, increased $44.6$40.9 million to $105.8$240.4 million for the year ended December 31, 20172022 compared with $61.2$199.5 million in the prior year period. The increase is related to increased client services and business development costs, floor brokerage costs and an increase in costs from our insurance and reinsurance businesses.
Economic Depreciation and Amortization Expenses increased to $27.7 million for the year ended December 31, 2022 compared with $19.0 million in the prior year period. The increase is primarily related to higher floor brokerage and trade execution costs, related to the acquisition of Convergex Grouptwo acquisitions which closed during June 2017.2021.
The following table shows the components of the non-compensation expenses—variable, for the year ended December 31, 2017 and 2016:
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| | Year Ended December 31, | | Period-to-Period |
| | 2017 | | 2016 | | $ Change | | % Change |
| | (dollars in thousands) |
| Non-compensation expenses—Variable: | | | | | | | |
| Floor brokerage and trade execution | $ | 73,133 |
| | $ | 29,432 |
| | $ | 43,701 |
| | 148 | % |
| HealthCare Royalty Partners syndication costs | 528 |
| | 528 |
| | — |
| | — | % |
| Expenses related to Luxembourg companies | 3,279 |
| | 2,406 |
| | 873 |
| | 36 | % |
| Marketing and business development | 27,336 |
| | 26,163 |
| | 1,173 |
| | 4 | % |
| Other | 1,510 |
| | 2,649 |
| | (1,139 | ) | | (43 | )% |
| Total | $ | 105,786 |
| | $ | 61,178 |
| | $ | 44,608 |
| | 73 | % |
Reimbursement from Affiliates. Reimbursements from affiliates, included within non-interest expenses, which relate to the investment management segmentEconomic Non-controlling interests decreased $0.3by $3.0 million to $2.0$2.3 million for the year ended December 31, 20172022 compared to $2.3with $5.3 million in the prior year period.
Interest expense
Interest expense increased $1.7 million to $18.9 million for the year ended December 31, 2017 compared with $17.2 million in the prior year period. Interest expense primarily relates to debt issued during 2014 and 2017.
Non-Controlling Interest
Income (loss) attributable to redeemable non-controlling interests decreased by $1.7 million to $6.1 million for the year ended December 31, 2017 compared with $7.8 million in the prior year period. Non-Controlling Non-controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
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| | Year Ended December 31, | | Total Period-to-Period |
| | 2016 | | 2015 | |
| | Investment Management | | Broker-Dealer | | Total | | Investment
Management | | Broker-Dealer | | Total | | $ Change | | % Change |
| | (dollars in thousands) |
| Economic Income Revenues | | | | | | | | | | | | | | | |
| Investment banking | $ | — |
| | $ | 133,279 |
| | $ | 133,279 |
| | $ | — |
| | $ | 222,781 |
| | $ | 222,781 |
| | $ | (89,502 | ) | | (40 | )% |
| Brokerage | — |
| | 207,040 |
| | 207,040 |
| | — |
| | 160,436 |
| | 160,436 |
| | 46,604 |
| | 29 | % |
| Management fees | 64,086 |
| | 3,162 |
| | 67,248 |
| | 68,989 |
| | 1,026 |
| | 70,015 |
| | (2,767 | ) | | (4 | )% |
| Incentive income (loss) | 26,274 |
| | — |
| | 26,274 |
| | (1,544 | ) | | — |
| | (1,544 | ) | | 27,818 |
| | 1,802 | % |
| Investment income (loss) | 3,015 |
| | 1,008 |
| | 4,023 |
| | 49,244 |
| | 13,352 |
| | 62,596 |
| | (58,573 | ) | | (94 | )% |
| Other income (loss) | 29,202 |
| | 565 |
| | 29,767 |
| | 14,492 |
| | 890 |
| | 15,382 |
| | 14,385 |
| | 94 | % |
| Total economic income revenues | 122,577 |
| | 345,054 |
| | 467,631 |
| | 131,181 |
| | 398,485 |
| | 529,666 |
| | (62,035 | ) | | (12 | )% |
Economic Income (Loss)and Economic Operating Income
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| | Year Ended December 31, | | Total Period-to-Period |
| | 2022 | | 2021 | | $ Change | | % Change |
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| Pre-tax Economic Income (Loss) | $ | 126,277 | | | $ | 430,014 | | | $ | (303,737) | | | (71) | % |
| Economic income tax expense | 32,832 | | | 109,654 | | | (76,822) | | | (70) | % |
| Preferred stock dividends | 5,943 | | | 5,841 | | | 102 | | | 2 | % |
| Economic Income (Loss) | 87,502 | | | 314,519 | | | (227,017) | | | (72) | % |
| Add back: Depreciation and amortization expense, net of taxes | 20,500 | | | 14,142 | | | 6,358 | | | 45 | % |
| Economic Operating Income (Loss) | $ | 108,002 | | | $ | 328,661 | | | $ | (220,659) | | | (67) | % |
Preferred Stock Dividends.On May 19, 2015, the Company completed its offering of 120,750 shares of Series A Convertible Preferred Stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Asset Co Segment | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period | |
| | 2022 | | 2021 | | $ Change | | % Change | |
| Economic Proceeds | (dollars in thousands) | |
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| Management fees | $ | 850 | | | $ | 1,200 | | | $ | (350) | | | (29) | % | |
| Incentive income (loss) | (13,143) | | | (1,153) | | | (11,990) | | | 1,040 | % | |
| Investment income (loss) | (20,837) | | | 6,014 | | | (26,851) | | | (446) | % | |
| Other income (loss) economic proceeds | 7 | | | (2) | | | 9 | | | (450) | % | |
| Total: Economic Proceeds | (33,123) | | | 6,059 | | | (39,182) | | | (647) | % | |
| Economic Interest Expense / (Income) | 283 | | | 3,779 | | | (3,496) | | | (93) | % | |
| Net Economic Proceeds | $ | (33,406) | | | $ | 2,280 | | | $ | (35,686) | | | (1,565) | % | |
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Economic ProceedsThe Asset Co segment proceeds included in Economic Income (Loss) waswere a loss of $28.7$33.1 million for the year ended December 31, 2016,2022, a decrease of $63.2$39.2 million compared to Economic Income (Loss)with an income of $34.5$6.1 million in the prior year period.
TotalManagement Fees Economic Proceedsfor the segment remained fairly flat for the year ended December 31, 2022 compared with the prior year period.
Incentive Income (Loss) revenuesEconomic Proceeds for the segment increased the loss by $12.0 million to a loss of $13.1 million for the year ended December 31, 2022 compared with a loss of $1.2 million in the prior year period. This incentive income loss increase was related to a decrease in performance fees from the Company's multi-strategy business.
Investment Income (Loss) Economic Proceeds for the segment decreased $26.8 million to a loss of $20.8 million for the year ended December 31, 2022, compared with income of $6.0 million in the prior year period. The decrease primarily relates to unrealized losses of our Linkem investment driven by lower projected future cash flows and a decline in market value of comparables.
Economic Interest Expenses / (Income) were $467.6$0.3 million for the year ended December 31, 2016,2022, a decrease to expenses of $3.5 million compared with an income of $3.8 million in the prior year period. The 2022 interest expense included an allocation of a gain from a mark-to-market adjustment on an interest rate swap used to offset interest on floating-rate debt.
Net Economic Proceedsfor the segment were a loss of $33.4 million for the year ended December 31, 2022, compared with income of $2.3 million in the prior year period.
Economic Expenses
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| | Year Ended December 31, | | Total Period-to-Period | |
| | 2022 | | 2021 | | $ Change | | % Change | |
| | (dollars in thousands) | |
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| Economic Expenses | | | | | | | | |
| Employee compensation and benefits | $ | 2,330 | | | $ | 3,871 | | | $ | (1,541) | | | (40) | % | |
| Non-Compensation Expense | 232 | | | 187 | | | 45 | | | 24 | % | |
| Depreciation & Amortization | 23 | | | 22 | | | 1 | | | 5 | % | |
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| Total: Economic Expenses | $ | 2,585 | | | $ | 4,080 | | | $ | (1,495) | | | (37) | % | |
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Economic Expenseswere $2.6 million for the year ended December 31, 2022, a decrease of $62.1$1.5 million compared to $4.1 million in the prior year period.
Economic Compensation Expenseswere $2.3 million for the year ended December 31, 2022, a decrease of $1.6 million compared to $3.9 million in the prior year period. The decrease was due to lower total economic proceeds related to investment income (loss).
Economic Non-compensation Expenses Fixed non-compensation expense remained consistent for the year ended December 31, 2022 compared with the prior year period. Variable non-compensation expenses, which remained consistent for the year ended December 31, 2022 compared with the prior year period, are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities.
Economic Depreciation and Amortization Expenses remained consistent for the year ended December 31, 2022 compared to the prior year period and relates to costs allocated from general company assets.
Economic Income and Economic Operating Income | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period | |
| | 2022 | | 2021 | | $ Change | | % Change | |
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| Pre-tax Economic Income (Loss) | $ | (35,991) | | | $ | (1,800) | | | $ | (34,191) | | | 1,900 | % | |
| Economic income tax expense | (9,358) | | | (460) | | | (8,898) | | | 1,934 | % | |
| Preferred stock dividends | 849 | | | 951 | | | (102) | | | (11) | % | |
| Economic Income (Loss) | (27,482) | | | (2,291) | | | (25,191) | | | 1,100 | % | |
| Add back: Depreciation and amortization expense, net of taxes | 17 | | | 16 | | | 1 | | | 6 | % | |
| Economic Operating Income (Loss) | $ | (27,465) | | | $ | (2,275) | | | $ | (25,190) | | | 1,107 | % | |
Preferred Stock Dividends.On May 19, 2015, the Company completed its offering of 120,750 shares of Series A Convertible Preferred Stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020
Total Economic Operating Income (Loss) was $326.4 million for the year ended December 31, 2021, a decrease of $9.5 million compared to Economic Operating Income (Loss) of $335.9 million in the prior year period. Total Economic Income (Loss) was $312.2 million for the year ended December 31, 2021 compared to Economic Income (Loss) revenues of $529.7$313.2 million in the prior year period. Total Pre-tax Economic Income (Loss) was $428.2 million for the year ended December 31, 2021, an increase of $108.2 million compared to Pre-tax Economic Income (Loss) of $320.0 million in the prior year period.
Economic Proceeds included in total Economic Income (Loss) were $1,890.6 million for the year ended December 31, 2021, an increase of $334.3 million compared to $1,556.3 million in the prior year period. This was primarily related to an increase in investment banking, brokerage revenues and management fees only partially offset by a decrease in investment banking activityincome (loss) and a decreaseincentive income.
Operating Company Segment
Economic Proceeds | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period |
| | 2021 | | 2020 | | $ Change | | % Change |
| | (dollars in thousands) |
| Economic Proceeds | | | | | | | |
| Investment banking | $ | 1,025,688 | | | $ | 729,180 | | | $ | 296,508 | | | 41 | % |
| Brokerage | 728,525 | | | 652,647 | | | 75,878 | | | 12 | % |
| Management fees | 79,255 | | | 58,154 | | | 21,101 | | | 36 | % |
| Incentive income (loss) | 34,579 | | | 83,435 | | | (48,856) | | | (59) | % |
| Investment income (loss) | 8,542 | | | 37,786 | | | (29,244) | | | (77) | % |
| Other income (loss) economic proceeds | 7,942 | | | 775 | | | 7,167 | | | 925 | % |
| Total: Economic Proceeds | 1,884,531 | | | 1,561,977 | | | 322,554 | | | 21 | % |
| Economic Interest Expense / (Income) | 23,914 | | | 24,519 | | | (605) | | | (2) | % |
| Net Economic Proceeds | $ | 1,860,617 | | | $ | 1,537,458 | | | $ | 323,159 | | | 21 | % |
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Economic ProceedsThe Op Co segment economic proceeds included in performance in investment income offset partially by an increase in brokerage activity, incentive fees and other income.
Investment Management Segment Revenues
Investment management segment Economic Income (Loss) revenues were $122.6$1,884.5 million for the year ended December 31, 2016, a decrease2021, an increase of $8.6$322.5 million compared to $1,562.0 million in the prior year period.
Investment Banking Economic Income (Loss) revenues of $131.2Proceedsincreased$296.5 million to $1,025.7 million for the year ended December 31, 2021 compared with $729.2 million in the prior year period. During the year ended December 31, 2021, the Company completed 190 underwriting transactions, 159 strategic advisory transactions and 20 debt capital markets transactions. During the year ended December 31, 2020, the Company completed 165 underwriting transactions, 74 strategic advisory transactions and 12 debt capital markets transactions.
Brokerage Economic Proceedsincreased $75.9 million to $728.5 million for the year ended December 31, 2021, compared with $652.6 million in the prior year period.
Management Fees. Management fees forThis was attributable to an increase in Institutional Brokerage, primarily Cash, Special Situations, and Non-US Dollar commission revenue. Customer trading volumes across the segment decreased $4.9 millionindustry (according to $64.1 millionBloomberg) increased 4% for the year ended December 31, 20162021 compared to the prior year period.
Management Fees Economic Proceedsfor the segment increased$21.1 million to $79.3 million for the year ended December 31, 2021 compared with $69.0$58.2 million in the prior year period. This increase in management fees was primarily related to an increase in management fees from the Cowen Healthcare investments and Cowen Sustainable funds.
Incentive Income (Loss) Economic Proceeds for the segment decreased$48.8 million to $34.6 million for the year ended December 31, 2021 compared with income of $83.4 million in the prior year period. This decrease was primarily related to a decrease in
management fees for the alternative solutions and the activist businesses offset partially by an increase in management performance fees from the macro options and equities businesses.our healthcare investments funds.
IncentiveInvestment Income (Loss). Incentive income Economic Proceeds for the segment increased $27.8decreased $29.3 million to $26.3$8.5 million for the year ended December 31, 20162021 compared with a loss of $1.5 million in the prior year period. This increase was primarily related to an increase in performance from the activist business and certain private investments.
Investment Income (Loss). Investment income for the segment decreased $46.2 million to $3.0 million for the year ended December 31, 2016 compared with $49.2$37.8 million in the prior year period. The decrease primarily relates to a prior year deferred tax benefit recorded pursuant to the acquisition of Hollenfels and a decrease in performance investments across most of the Company's own invested capital.our strategies including healthcare, merchant banking and portfolio hedge.
Other Income (Loss). Other income (loss) Economic Proceeds for the segment increased $14.7$7.1 million to $29.2$7.9 million for the year ended December 31, 20162021 compared with $14.5income of $0.8 million in the prior year period. The increase comes from a higher insurance result due to the acquisition of an insurance business in the first quarter of the year.
Economic Interest Expenses were $23.9 million for the year ended December 31, 2021, a decrease of $0.6 million compared with $24.5 million in the prior year period.
Net Economic Proceedswere $1,860.6 million for the year ended December 31, 2021, an increase of $323.1 millioncompared with $1,537.5 million in the prior year period. This increase is primarily related to the sale
Broker-Dealer Segment RevenuesEconomic Expenses | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period |
| | 2021 | | 2020 | | $ Change | | % Change |
| | (dollars in thousands) |
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| Economic Expenses | | | | | | | |
| Employee compensation and benefits | $ | 1,046,730 | | | $ | 860,753 | | | $ | 185,977 | | | 22 | % |
| Non-Compensation Expense | 359,577 | | | 312,173 | | | 47,404 | | | 15 | % |
| Depreciation & Amortization | 18,982 | | | 22,655 | | | (3,673) | | | (16) | % |
| Non-Controlling Interest | 5,314 | | | 6,892 | | | (1,578) | | | (23) | % |
| Total: Economic Expenses | $ | 1,430,603 | | | $ | 1,202,473 | | | $ | 228,130 | | | 19 | % |
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Broker-dealer segment Economic Income (Loss) revenues Expenseswere $345.1$1,430.6 millionfor theyear endedDecember 31, 2016, a decrease2021, an increase of $53.4$228.1 million compared with Economic Income (Loss) revenues of $398.5 million in the prior year.
Investment Banking. Investment banking revenues decreased $89.5 million to $133.3 million for the year ended December 31, 2016 compared with $222.8$1,202.5 million in the prior year period. During the year ended December 31, 2016, the Company completed 76 underwriting transactions, 15 strategic advisory transactions and seven debt capital market transactions. During the year ended December 31, 2015, the Company completed 129 underwriting transactions, 13 strategic advisory transactions and seven debt capital market transactions. The average underwriting fee per transaction was 12.2% less for the twelve months ended December 31, 2016 as
Economic Compensation Expenseswere $1,046.7 million compared to the prior year.
Brokerage. Brokerage revenues increased $46.6 million to $207.0 million for the year ended December 31, 2016, compared with $160.4 million in the prior year period. This was attributable to higher commissions due to an increase in customer trading volumes, the initiation of the prime brokerage businesses in the third and fourth quarters of 2015 and the initiation of the credit trading business in May 2016. Customer trading volumes across the industry (according to Bloomberg) increased 6% for the twelve months ended December 31, 2016 compared to the prior year.
Investment Income (Loss). Investment income for the segment decreased $12.4 million to $1.0 million for the year ended December 31, 2016, compared with $13.4 million in the prior year period. The decrease is a result of a decrease in overall investment income which is allocated amongst the segments.
Other Income (Loss). Other income (loss) for the segment decreased $0.3 million to $0.6 million for the year ended December 31, 2016, compared with $0.9 million in the prior year period.
Non-Interest Expenses
Non-interest expenses. Total non-interest expenses increased $1.6 million to $471.4 million for the year ended December 31, 2016, compared with $469.8 million in the prior year period.
Compensation and benefits expenses. Compensation and benefits expenses, included within non-interest expenses, decreased $17.2 million to $300.4 million for the year ended December 31, 2016 compared with $317.6 million in the prior year period. The decrease is due to $62.1 million lower revenues during 2016 as compared to 2015 which resulted in a lower compensation and benefits accrual. The compensation to revenue ratio was 64% for the year ended December 31, 2016 compared with 60% in the prior year period.
Non-compensation Expenses—Fixed. Fixed non-compensation expenses, included within non-interest expenses, increased $6.8 million to $101.0 million for the year ended December 31, 2016 compared with $94.2 million in the prior year period. This increase was primarily due to higher communications and increased occupancy costs both of which are primarily related to acquisitions during late 2015 and during 2016.
The following table shows the components of the non-compensation expenses—fixed, for the year ended December 31, 2016 and 2015: |
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| | Year Ended December 31, | | Period-to-Period |
| | 2016 | | 2015 | | $ Change | | % Change |
| | (dollars in thousands) |
| Non-compensation expenses—fixed: | | | | | | | |
| Communications | $ | 17,752 |
| | $ | 14,320 |
| | $ | 3,432 |
| | 24 | % |
| Professional, advisory and other fees | 17,280 |
| | 17,605 |
| | (325 | ) | | (2 | )% |
| Occupancy and equipment | 29,975 |
| | 26,739 |
| | 3,236 |
| | 12 | % |
| Service fees | 7,831 |
| | 7,503 |
| | 328 |
| | 4 | % |
| Expenses from equity investments | 15,844 |
| | 14,156 |
| | 1,688 |
| | 12 | % |
| Other | 12,297 |
| | 13,913 |
| | (1,616 | ) | | (12 | )% |
| Total | $ | 100,979 |
| | $ | 94,236 |
| | $ | 6,743 |
| | 7 | % |
Depreciation and amortization expenses. Depreciation and amortization expenses increased $1.5 million to $11.0 million for the year ended December 31, 2016 compared with $9.5$860.8 million in the prior year period. The increase iswas due to higher revenues. The economic compensation-to-proceeds ratio increased to55.5% compared to 55% in the prior year period.
Economic Non-compensation Expenses Fixed non-compensation expense increased $18.4 million to $160.1 million for the year ended December 31, 2021 compared with $141.7 million in the prior year period. The increase primarily related to an increase in amortization of intangible assets related to acquisitions during late 2015professional and during 2016.
Non-compensation Expenses—Variable.advisory fees and communication costs. Variable non-compensation expenses, included within non-interest expenses which primarily are comprised of expenses whichthat are incurred as a direct result of the processing and soliciting of revenue generating activities, increased $5.0$29.0 million to $61.2$199.5 million for the year ended December 31, 20162021 compared with $56.2$170.5 million in the prior year period. The increase is primarily related to higher floorincreased brokerage and trade execution costs due to higher brokerage revenue, and increased marketingvariable professional and business development expenses, some ofadvisory fees, which isincludes employment agency fees and legal fees directly related to acquisitions during late 2015revenues.
Economic Depreciation and during 2016. Costs relatedAmortization Expenses decreased to the 2015 acquisition of Hollenfels also decreased.
The following table shows the components of the non-compensation expenses—variable, for the year ended December 31, 2016 and 2015:
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| | Year Ended December 31, | | Period-to-Period |
| | 2016 | | 2015 | | $ Change | | % Change |
| | (dollars in thousands) |
| Non-compensation expenses—Variable: | | | | | | | |
| Floor brokerage and trade execution | $ | 29,432 |
| | $ | 24,054 |
| | $ | 5,378 |
| | 22 | % |
| HealthCare Royalty Partners syndication costs | 528 |
| | 528 |
| | — |
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| Expenses related to Luxembourg companies | 2,406 |
| | 5,475 |
| | (3,069 | ) | | (56 | )% |
| Marketing and business development | 26,163 |
| | 23,367 |
| | 2,796 |
| | 12 | % |
| Other | 2,649 |
| | 2,726 |
| | (77 | ) | | (3 | )% |
| Total | $ | 61,178 |
| | $ | 56,150 |
| | $ | 5,028 |
| | 9 | % |
Reimbursement from Affiliates. Reimbursements from affiliates, included within non-interest expenses, which relate to the investment management segment, decreased $5.4 million to $2.3$19.0 million for the year ended December 31, 20162021 compared with $7.7$22.7 million in the prior year period.
Interest expense
Interest expense, which The decrease is primarily relatesrelated to debt issued duringcertain intangible assets being fully amortized in the first and fourth quartersquarter of 2014, increased $0.62021.
Economic Non-controlling interests decreased by $1.6 million to $17.2$5.3 million for the year ended December 31, 20162021 compared with $16.6$6.9 million in the prior year period.
Non-Controlling Interest
Income (loss) attributable to redeemable non-controlling interests decreased by $1.0 million to $7.8 million for the year ended December 31, 2016 compared with $8.8 million in the prior year period. Non-Controlling Non-controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries.
Economic Income and Economic Operating Income | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period |
| | 2021 | | 2020 | | $ Change | | % Change |
| | (dollars in thousands) |
| Pre-tax Economic Income (Loss) | $ | 430,014 | | | $ | 334,985 | | | $ | 95,029 | | | 28 | % |
| Economic income tax expense * | 109,654 | | | — | | | 109,654 | | | NM |
| Preferred stock dividends | 5,841 | | | 5,604 | | | 237 | | | 4 | % |
| Economic Income (Loss) | $ | 314,519 | | | $ | 329,381 | | | $ | (14,862) | | | (5) | % |
| Add back: Depreciation and amortization expense | 14,142 | | | 22,655 | | | (8,513) | | | (38) | % |
| Economic Operating Income (Loss) | $ | 328,661 | | | $ | 352,036 | | | $ | (23,375) | | | (7) | % |
* Economic Income (Loss) is presented net of associated taxes starting in the first quarter of 2021. The Company has utilized all available federal net operating losses not subject to limitation during 2020
Preferred Stock Dividends.On May 19, 2015, the Company completed its offering of 120,750 shares of Series A Convertible Preferred Stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Asset Co Segment
Economic Proceeds | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, | | Total Period-to-Period | |
| | 2021 | | 2020 | | $ Change | | % Change | |
| Economic Proceeds | (dollars in thousands) | |
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| Management fees | $ | 1,200 | | | $ | 946 | | | $ | 254 | | | 27 | % | |
| Incentive income (loss) | (1,153) | | | 1,927 | | | (3,080) | | | (160) | % | |
| Investment income (loss) | 6,014 | | | (8,564) | | | 14,578 | | | 170 | % | |
| Other income (loss) economic proceeds | (2) | | | 5 | | | (7) | | | (140) | % | |
| Total: Economic Proceeds | 6,059 | | | (5,686) | | | 11,745 | | | (207) | % | |
| Economic Interest Expense / (Income) | 3,779 | | | 5,123 | | | (1,344) | | | (26) | % | |
| Net Economic Proceeds | $ | 2,280 | | | $ | (10,809) | | | $ | 13,089 | | | (121) | % | |
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Economic ProceedsThe Asset Co segment proceeds included in Economic Income (Loss) were $6.1 million for the year ended December 31, 2021, an increase of $11.8 million compared with negative proceeds (due to losses) of $5.7 million in the prior year period.
Management Fees Economic Proceedsfor the segment increased $0.3 million to $1.2 million for the year ended December 31, 2021 compared with $0.9 million in the prior year period. This increase was related to an increase in management fees from the Company's multi-strategy business.
Incentive Income (Loss) Economic Proceeds for the segment decreased $3.1 million to a loss of $1.2 million for the year ended December 31, 2021 compared with income of $1.9 million in the prior year period. This decrease was related to a decrease in performance fees from the Company's multi-strategy business.
Investment Income (Loss) Economic Proceeds for the segment increased$14.6 million to $6.0 million for the year ended December 31, 2021, compared with a loss of $8.6 million in the prior year period. The increase primarily relates to an impairment of an equity method investment during 2020 and increased performance of our multi-strategy funds in 2021.
Economic Interest Expenses were $3.8 million for the year ended December 31, 2021, a decrease of $1.3 million compared with $5.1 million in the prior year period.
Net Economic Proceedsfor the segment were proceeds of $2.3 million for the year ended December 31, 2021, an increase of $13.1 million compared with negative proceeds (due to losses) of $10.8 million in the prior year period.
Economic Expenses
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| | Year Ended December 31, | | Total Period-to-Period | |
| | 2021 | | 2020 | | $ Change | | % Change | |
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| Economic Expenses | | | | | | | | |
| Employee compensation and benefits | $ | 3,871 | | | $ | 3,767 | | | $ | 104 | | | 3 | % | |
| Non-Compensation Expenses | 187 | | | 350 | | | (163) | | | (47) | % | |
| Depreciation & Amortization | 22 | | | 22 | | | — | | | — | % | |
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| Total: Economic Expenses | $ | 4,080 | | | $ | 4,139 | | | $ | (59) | | | (1) | % | |
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Economic Expensesremained fairly flat at $4.1 million for the year ended December 31, 2021 compared to the prior year period.
Economic Compensation Expenseswere $3.9 million for the year ended December 31, 2021, an increase of $0.1 million compared to $3.8 million in the prior year period. The increase was due to higher revenues related to investment income (loss).
Economic Non-compensation Expenses Fixed non-compensation expense decreased $0.2 million for the year ended December 31, 2021 compared with the prior year period. The decrease is primarily related to decreased professional, advisory and other fees. Variable non-compensation expenses, which remained consistent for the year ended December 31, 2021 compared with the prior year period, are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities.
Economic Depreciation and Amortization Expenses remained consistent for the year ended December 31, 2021 compared to the prior year period and relates to costs allocated from general company assets.
Economic Income and Economic Operating Income
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| (unaudited) | |
| | Year Ended December 31, | | Total Period-to-Period | |
| | 2021 | | 2020 | | $ Change | | % Change | |
| | (dollars in thousands) | |
| Pre-tax Economic Income (Loss) | $ | (1,800) | | | $ | (14,948) | | | 13,148 | | | (88) | % | |
| Economic income tax expense * | (460) | | | — | | | (460) | | | NM | |
| Preferred stock dividends | 951 | | | 1,188 | | | (237) | | | (20) | % | |
| Economic Income (Loss) | $ | (2,291) | | | $ | (16,136) | | | $ | 13,845 | | | (86) | % | |
| Add back: Depreciation and amortization expense | 16 | | | 22 | | | (6) | | | (27) | % | |
| Economic Operating Income (Loss) | $ | (2,275) | | | $ | (16,114) | | | $ | 13,839 | | | (86) | % | |
* Economic Income (Loss) is presented net of associated taxes starting in the first quarter of 2021. The Company has utilized all available federal net operating losses not subject to limitation during 2020
Preferred Stock Dividends.On May 19, 2015, the Company completed its offering of 120,750 shares of Series A Convertible Preferred Stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Reconciliation of US GAAP to Non-GAAP Measures for the year ended December 31, 2022,2021 and 2020
The following tables reconciles total US GAAP Revenues to total Economic Proceeds for the year ended December 31, 2022, 2021 and 2020:
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| | (unaudited) |
| | Year Ended December 31, 2022 |
(Dollar amounts in thousands) | | Investment Banking | | Brokerage | | Investment Income | | Management Fees | | Incentive Income | | Interest and Dividends | | | | Reinsurance Premiums | | Other Revenues, net | | Consolidated Funds Revenues | | Other Income (Loss) | | Total |
| Total US GAAP Revenues and Other Income (Loss) | | $ | 494,842 | | | $ | 592,292 | | | $ | 76,832 | | | $ | 66,670 | | | $ | 646 | | | $ | 312,134 | | | | | $ | 36,522 | | | $ | 7,010 | | | $ | (49,225) | | | $ | 9,613 | | | $ | 1,547,336 | |
| Management Presentation Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | |
| Underwriting expenses | a | (4,914) | | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | | | (4,914) | |
| Reimbursable client expenses | b | (11,744) | | | — | | | — | | | — | | | — | | | — | | | | | — | | | (1,101) | | | — | | | — | | | (12,845) | |
| Securities financing interest expense | c | — | | | (10,363) | | | — | | | — | | | — | | | (103,924) | | | | | — | | | — | | | — | | | — | | | (114,287) | |
| Fund start-up costs, distribution and other fees | d | — | | | — | | | — | | | (1,513) | | | — | | | — | | | | | — | | | (2,445) | | | — | | | — | | | (3,958) | |
| Certain equity method investments | e | — | | | — | | | — | | | 18,208 | | | 7,135 | | | — | | | | | — | | | — | | | — | | | (16,040) | | | 9,303 | |
| Carried interest | f | — | | | — | | | 31,555 | | | — | | | (28,781) | | | — | | | | | — | | | — | | | — | | | — | | | 2,774 | |
| Proprietary trading, interest and dividends | g | — | | | (55,407) | | | (67,956) | | | — | | | (4,821) | | | (98,139) | | | | | — | | | 5,060 | | | — | | | 92,981 | | | (128,282) | |
| Insurance related activities expenses | h | — | | | — | | | — | | | — | | | — | | | — | | | | | (36,522) | | | 48,782 | | | — | | | — | | | 12,260 | |
| Facilitation trading gains and losses | i | — | | | 192,686 | | | (7,547) | | | — | | | — | | | (110,071) | | | | | — | | | — | | | — | | | (86,554) | | | (11,486) | |
| Total Management Presentation Reclassifications: | | (16,658) | | | 126,916 | | | (43,948) | | | 16,695 | | | (26,467) | | | (312,134) | | | | | (36,522) | | | 50,296 | | | — | | | (9,613) | | | (251,435) | |
| Fund Consolidated Reclassifications | l | — | | | — | | | (32,495) | | | 166 | | | — | | | — | | | | | — | | | — | | | 49,225 | | | — | | | 16,896 | |
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| Total Economic Proceeds | | $ | 478,184 | | | $ | 719,208 | | | $ | 389 | | | $ | 83,531 | | | $ | (25,821) | | | $ | — | | | | | $ | — | | | $ | 57,306 | | | $ | — | | | $ | — | | | $ | 1,312,797 | |
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| | (unaudited) |
| | Year Ended December 31, 2021 |
| (Dollar amounts in thousands) | | Investment Banking | | Brokerage | | Investment Income | | Management Fees | | Incentive Income | | | Interest and Dividends | | | | Reinsurance Premiums | | Other Revenues, net | | Consolidated Funds Revenues | | Other Income (Loss) | | Total |
| Total US GAAP Revenues and Other Income (Loss) | | $ | 1,067,162 | | | $ | 585,162 | | | $ | 127,507 | | | $ | 72,287 | | | $ | 2,732 | | | | $ | 219,292 | | | | | $ | 39,631 | | | $ | 5,211 | | | $ | (6,185) | | | $ | 34,811 | | | $ | 2,147,610 | |
| Management Presentation Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Underwriting expenses | a | (24,978) | | | — | | | — | | | — | | | — | | | | — | | | | | — | | | — | | | — | | | — | | | (24,978) | |
| Reimbursable client expenses | b | (16,496) | | | — | | | — | | | — | | | — | | | | — | | | | | — | | | (1,206) | | | — | | | — | | | (17,702) | |
| Securities financing interest expense | c | — | | | 8,006 | | | — | | | — | | | — | | | | (153,928) | | | | | — | | | — | | | — | | | — | | | (145,922) | |
| Fund start-up costs, distribution and other fees | d | — | | | (361) | | | — | | | (9,190) | | | — | | | | — | | | | | — | | | (2,633) | | | — | | | — | | | (12,184) | |
| Certain equity method investments | e | — | | | — | | | — | | | 15,142 | | | 25,802 | | | | — | | | | | — | | | — | | | — | | | (32,261) | | | 8,683 | |
| Carried interest | f | — | | | — | | | (5,059) | | | — | | | 5,486 | | | | — | | | | | — | | | — | | | — | | | — | | | 427 | |
| Proprietary trading, interest and dividends | g | — | | | 44,241 | | | (92,900) | | | — | | | (494) | | | | (19,233) | | | | | — | | | 875 | | | — | | | 46,918 | | | (20,593) | |
| Insurance related activities expenses | h | — | | | — | | | — | | | — | | | — | | | | — | | | | | (39,631) | | | 5,693 | | | — | | | — | | | (33,938) | |
| Facilitation trading gains and losses | i | — | | | 91,477 | | | (11,034) | | | — | | | — | | | | (46,131) | | | | | — | | | — | | | — | | | (50,151) | | | (15,839) | |
| Total Management Presentation Reclassifications: | | (41,474) | | | 143,363 | | | (108,993) | | | 5,952 | | | 30,794 | | | | (219,292) | | | | | (39,631) | | | 2,729 | | | — | | | (35,494) | | | (262,046) | |
| Fund Consolidated Reclassifications | l | — | | | — | | | (3,958) | | | 2,216 | | | (100) | | | | — | | | | | — | | | — | | | 6,185 | | | — | | | 4,343 | |
| Income Statement Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bargain purchase gain | n | — | | | — | | | — | | | — | | | — | | | | — | | | | | — | | | — | | | — | | | (3,855) | | | (3,855) | |
| Debt extinguishment loss | p | — | | | — | | | — | | | — | | | — | | | | — | | | | | — | | | — | | | — | | | 4,538 | | | 4,538 | |
| Total Income Statement Adjustments: | | — | | | — | | | — | | | — | | | — | | | | — | | | | | — | | | — | | | — | | | 683 | | | 683 | |
| Total Economic Proceeds | | $ | 1,025,688 | | | $ | 728,525 | | | $ | 14,556 | | | $ | 80,455 | | | $ | 33,426 | | | | $ | — | | | | | $ | — | | | $ | 7,940 | | | $ | — | | | $ | — | | | $ | 1,890,590 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (unaudited) |
| | Year Ended December 31, 2020 |
(Dollar amounts in thousands) | | Investment Banking | | Brokerage | | Management Fees | | Incentive Income | | Investment Income | | Interest and Dividends | | | | | | Reinsurance Premiums | | Other Revenues, net | | Consolidated Funds Revenues | | Other Income Gain/Loss | | Total |
| Total US GAAP Revenues and Other Income (Loss) | | $ | 769,486 | | | $ | 524,361 | | | $ | 47,515 | | | $ | 592 | | | $ | 204,351 | | | $ | 187,459 | | | | | | | $ | 30,147 | | | $ | 10,503 | | | $ | (18,488) | | | $ | 21,598 | | | $ | 1,777,524 | |
| Management Presentation Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Underwriting expenses | a | (22,565) | | | — | | | — | | | — | | | — | | | — | | | | | | | — | | | — | | | — | | | — | | | (22,565) | |
| Reimbursable client expenses | b | (17,741) | | | — | | | — | | | — | | | — | | | — | | | | | | | — | | | (1,099) | | | — | | | — | | | (18,840) | |
| Securities financing interest expense | c | — | | | 14,499 | | | — | | | — | | | — | | | (142,997) | | | | | | | — | | | — | | | — | | | — | | | (128,498) | |
| Fund start-up costs and distribution fees | d | — | | | (293) | | | (3,970) | | | — | | | — | | | — | | | | | | | — | | | (2,529) | | | — | | | — | | | (6,792) | |
| Certain equity method investments | e | — | | | — | | | 12,540 | | | 24,121 | | | — | | | — | | | | | | | — | | | — | | | — | | | (28,347) | | | 8,314 | |
| Carried interest | f | — | | | — | | | — | | | 60,649 | | | (61,367) | | | — | | | | | | | — | | | — | | | — | | | — | | | (718) | |
| Proprietary trading gains and losses | g | — | | | 79,955 | | | — | | | — | | | (102,381) | | | (17,443) | | | | | | | — | | | (2,346) | | | — | | | 9,468 | | | (32,747) | |
| Insurance related activities expenses | h | — | | | — | | | — | | | — | | | — | | | — | | | | | | | (30,147) | | | (3,759) | | | — | | | — | | | (33,906) | |
| Facilitation trading gains and losses | i | — | | | 34,125 | | | — | | | — | | | (13,342) | | | (27,019) | | | | | | | — | | | — | | | — | | | — | | | (6,236) | |
| Total Management Presentation Reclassifications: | | (40,306) | | | 128,286 | | | 8,570 | | | 84,770 | | | (177,090) | | | (187,459) | | | | | | | (30,147) | | | (9,733) | | | — | | | (18,879) | | | (241,988) | |
| Fund Consolidated Reclassifications | l | — | | | — | | | 3,015 | | | — | | | 1,961 | | | — | | | | | | | — | | | 10 | | | 18,488 | | | — | | | 23,474 | |
| Income Statement Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt extinguishment | p | — | | | — | | | — | | | — | | | — | | | — | | | | | | | — | | | — | | | — | | | (2,719) | | | (2,719) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Income Statement Adjustments: | | — | | | — | | | — | | | — | | | — | | | — | | | | | | | — | | | — | | | — | | | (2,719) | | | (2,719) | |
| Total Economic Proceeds | | $ | 729,180 | | | $ | 652,647 | | | $ | 59,100 | | | $ | 85,362 | | | $ | 29,222 | | | $ | — | | | | | | | $ | — | | | $ | 780 | | | $ | — | | | $ | — | | | $ | 1,556,291 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table reconciles total US GAAP interest and dividends expense to total Economic Interest Expense for the year ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (unaudited) |
| | | | Year Ended December 31, |
| (Dollar amounts in thousands) | | | | | 2022 | | 2021 | | 2020 |
| Total US GAAP Interest & Dividend Expense | | | | | | $ | 259,126 | | | $ | 211,387 | | | $ | 187,725 | |
| Management Presentation Reclassifications: | | | | | | | | | | |
| Securities financing interest expense | c | | | | | (114,287) | | | (145,922) | | | (128,498) | |
| Fund start-up costs, distribution and other fees | d | | | | | (3,204) | | | (2,257) | | | — | |
| Proprietary trading gains and losses | g | | | | | (124,324) | | | (12,515) | | | (18,850) | |
| Facilitation trading gains and losses | i | | | | | (11,486) | | | (15,839) | | | (6,236) | |
| Total Management Presentation Reclassifications: | | | | | | (253,301) | | | (176,533) | | | (153,584) | |
| | | | | | | | | | |
| Income Statement Adjustments: | | | | | | | | | | |
| Accelerated debt costs | p | | | | | — | | | (5,557) | | | — | |
| Amortization of discount/(premium) on debt | m | | | | | (309) | | | (1,604) | | | (4,499) | |
| Total Income Statement Adjustments: | | | | | | (309) | | | (7,161) | | | (4,499) | |
| Total Economic Interest Expense | | | | | $ | 5,516 | | | $ | 27,693 | | | $ | 29,642 | |
| | | | | | | | | | |
The following tables reconcile total US GAAP Expenses and non-controlling interests to total Economic Expenses for the year ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (unaudited) |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| (Dollar amounts in thousands) | | Employee Compensation and Benefits | | Non-compensation US GAAP Expenses | | Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | Total | | Employee Compensation and Benefits | | Non-compensation US GAAP Expenses | | | | Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | Total |
| Total US GAAP | | $ | 771,386 | | | $ | 440,183 | | | $ | (10,603) | | | $ | 1,200,966 | | | $ | 1,046,371 | | | $ | 483,822 | | | | | $ | 8,380 | | | $ | 1,538,573 | |
| Management Presentation Reclassifications: | | | | | | | | | | | | | | | | | | |
| Underwriting expenses | a | — | | | (4,914) | | | — | | | (4,914) | | | — | | | (24,978) | | | | | — | | | (24,978) | |
| Reimbursable client expenses | b | — | | | (12,845) | | | — | | | (12,845) | | | — | | | (17,702) | | | | | — | | | (17,702) | |
| | | | | | | | | | | | | | | | | | |
| Fund start-up costs, distribution and other fees | d | — | | | (754) | | | — | | | (754) | | | — | | | (9,927) | | | | | — | | | (9,927) | |
| Certain equity method investments | e | — | | | 9,303 | | | — | | | 9,303 | | | — | | | 8,683 | | | | | — | | | 8,683 | |
| Carried interest | f | — | | | 2,774 | | | — | | | 2,774 | | | — | | | 427 | | | | | — | | | 427 | |
| Proprietary trading, interest and dividends | g | — | | | 2,583 | | | (6,541) | | | (3,958) | | | — | | | 5,275 | | | | | (13,353) | | | (8,078) | |
| Insurance related activities expenses | h | — | | | 12,260 | | | — | | | 12,260 | | | — | | | (33,938) | | | | | — | | | (33,938) | |
| | | | | | | | | | | | | | | | | | |
| Associated partner/banker compensation | j | 4,509 | | | (4,509) | | | — | | | — | | | 5,621 | | | (5,621) | | | | | — | | | — | |
| Management company non-Controlling interest | k | (1,363) | | | (951) | | | 2,314 | | | — | | | (1,391) | | | (3,923) | | | | | 5,314 | | | — | |
| Total Management Presentation Reclassifications: | | 3,146 | | | 2,947 | | | (4,227) | | | 1,866 | | | 4,230 | | | (81,704) | | | | | (8,039) | | | (85,513) | |
| Fund Consolidated Reclassifications | l | — | | | (248) | | | 17,144 | | | 16,896 | | | — | | | (630) | | | | | 4,973 | | | 4,343 | |
| Income Statement Adjustments: | | | | | | | | | | | | | | | | | | |
| Acquisition related amounts | n | — | | | (16,293) | | | — | | | (16,293) | | | — | | | (6,593) | | | | | — | | | (6,593) | |
| Contingent liability adjustments | n | — | | | 13,560 | | | — | | | 13,560 | | | — | | | (15,118) | | | | | — | | | (15,118) | |
| Goodwill and/or other impairment | r | — | | | — | | | — | | | — | | | — | | | (1,009) | | | | | — | | | (1,009) | |
| Total Income Statement Adjustments: | | — | | | (2,733) | | | — | | | (2,733) | | | — | | | (22,720) | | | | | — | | | (22,720) | |
| Total Economic Expenses | | $ | 774,532 | | | $ | 440,149 | | | $ | 2,314 | | | $ | 1,216,995 | | | $ | 1,050,601 | | | $ | 378,768 | | | | | $ | 5,314 | | | $ | 1,434,683 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | (unaudited) |
| | | | Year Ended December 31, 2020 |
| (Dollar amounts in thousands) | | | | | | | | | | | | Employee Compensation and Benefits | | Non-compensation US GAAP Expenses | | | | Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | Total |
| Total US GAAP | | | | | | | | | | | | $ | 860,531 | | | $ | 431,831 | | | | | $ | (9,299) | | | $ | 1,283,063 | |
| Management Presentation Reclassifications: | | | | | | | | | | | | | | | | | | | | |
| Underwriting expenses | a | | | | | | | | | | | — | | | (22,565) | | | | | — | | | (22,565) | |
| Reimbursable client expenses | b | | | | | | | | | | | — | | | (18,840) | | | | | — | | | (18,840) | |
| Securities financing interest expense | c | | | | | | | | | | | — | | | — | | | | | — | | | — | |
| Fund start-up costs and distribution fees | d | | | | | | | | | | | — | | | (6,792) | | | | | — | | | (6,792) | |
| Certain equity method investments | e | | | | | | | | | | | — | | | 8,314 | | | | | — | | | 8,314 | |
| Carried interest | f | | | | | | | | | | | — | | | (718) | | | | | — | | | (718) | |
| Proprietary trading gains and losses | g | | | | | | | | | | | — | | | 5,687 | | | | | (19,584) | | | (13,897) | |
| Insurance related activities expenses | h | | | | | | | | | | | — | | | (33,906) | | | | | — | | | (33,906) | |
| Facilitation trading gains and losses | i | | | | | | | | | | | — | | | — | | | | | — | | | — | |
| Associated partner/banker compensation | j | | | | | | | | | | | 5,377 | | | (5,377) | | | | | — | | | — | |
| Management company non-Controlling interest | k | | | | | | | | | | | (1,388) | | | (5,504) | | | | | 6,892 | | | — | |
| Total Management Presentation Reclassifications: | | | | | | | | | | | | 3,989 | | | (79,701) | | | | | (12,692) | | | (88,404) | |
| Fund Consolidated Reclassifications | l | | | | | | | | | | | — | | | (5,409) | | | | | 28,883 | | | 23,474 | |
| Income Statement Adjustments: | | | | | | | | | | | | | | | | | | | | |
| Acquisition adjustments | n | | | | | | | | | | | — | | | (606) | | | | | — | | | (606) | |
| Contingent liability adjustments | n | | | | | | | | | | | — | | | (8,492) | | | | | — | | | (8,492) | |
| Goodwill and/or other impairment | r | | | | | | | | | | | — | | | (2,423) | | | | | — | | | (2,423) | |
| Total Income Statement Adjustments: | | | | | | | | | | | | — | | | (11,521) | | | | | — | | | (11,521) | |
| Total Economic Expenses | | | | | | | | | | | | $ | 864,520 | | | $ | 335,200 | | | | | $ | 6,892 | | | $ | 1,206,612 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The following table reconciles US GAAP Net Income (loss) Attributable to Cowen Inc. Common Stockholders to Pre-tax Economic Income (Loss), Economic Income (loss), and Economic Operating Income (loss) for the year ended December 31, 2022, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | (unaudited) |
| | | | | | | | Year Ended December 31, |
| (Dollar amounts in thousands) | | | | | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | | | | |
| US GAAP Net income (loss) attributable to Cowen Inc. common stockholders | | | | | | | | | $ | 69,666 | | | $ | 288,819 | | | $ | 209,571 | |
| Income Statement Adjustments: | | | | | | | | | | | | | |
| US GAAP Income tax expense (benefit) | o | | | | | | | | 10,786 | | | 102,039 | | | 90,373 | |
| Amortization of discount (premium) on debt | m | | | | | | | | 309 | | | 1,604 | | | 4,499 | |
| Goodwill and/or other impairment | r | | | | | | | | — | | | 1,009 | | | 2,423 | |
| Debt extinguishment gain (loss) and/or accelerated debt costs | p | | | | | | | | — | | | 10,095 | | | — | |
| Bargain purchase gain | n | | | | | | | | — | | | (3,855) | | | (2,719) | |
| Contingent liability adjustments | n | | | | | | | | (13,560) | | | 15,118 | | | 8,492 | |
| Acquisition related amounts | n | | | | | | | | 16,293 | | | 6,593 | | | 606 | |
| Preferred stock dividends | q | | | | | | | | 6,792 | | | 6,792 | | | 6,792 | |
| Pre-tax Economic Income (Loss) | | | | | | | | | 90,286 | | | 428,214 | | | 320,037 | |
| Economic income tax expense | | | | | | | | | (23,474) | | | (109,194) | | | — | |
| Preferred stock dividends | | | | | | | | | (6,792) | | | (6,792) | | | (6,792) | |
| Economic Income (Loss) | | | | | | | | | $ | 60,020 | | | $ | 312,228 | | | $ | 313,245 | |
| Add back: Depreciation and amortization expense, net of taxes | | | | | | | | | 20,517 | | | 14,158 | | | 22,677 | |
| Economic Operating Income (Loss) | | | | | | | | | $ | 80,537 | | | $ | 326,386 | | | $ | 335,922 | |
| | | | | |
| |
| Management Reclassifications |
| Management reclassification adjustments and fund consolidation reclassification adjustments have no effect on Economic Operating Income (Loss). These adjustments are reclassifications to change the location of certain line items. |
| a | Underwriting expenses: Economic Proceeds presents investment banking revenues net of underwriting expenses. |
| b | Reimbursable client expenses: Economic Proceeds presents expenses reimbursed from clients and affiliates within their respective expense category but is included as a part of revenues under US GAAP. |
| c | Securities financing interest expense: Brokerage within Economic Proceeds included net securities borrowed and securities loaned activities which are shown gross in interest income and interest expense for US GAAP. |
| d | Fund start-up costs, distribution and other fees: Economic Proceeds and Economic Interest Expense are net of fund start-up costs and distribution fees paid to agents and other debt service costs. |
| e | Certain equity method investments: Economic Proceeds and Economic Expenses recognize the Company's proportionate share of management and incentive fees and associated share of expenses on a gross basis for equity method investments within the activist business, real estate operating entities and the healthcare royalty business. The Company applies the equity method of accounting to these entities and accordingly the results from these businesses are recorded within Other Income (Loss) for US GAAP. |
| f | Carried interest: The Company applies an equity ownership model to carried interest which is recorded in Investment income - Carried interest allocation for US GAAP. The Company presents carried interest as Incentive Income Economic Proceeds. |
| g | Proprietary trading, interest and dividends: Economic Proceeds presents interest and dividends from the Company's proprietary trading in investment income. |
| h | Insurance related activities expenses: Economic Proceeds presents underwriting income from the Company's insurance and reinsurance related activities, net of expenses, within other revenue. The costs are recorded within expenses for US GAAP reporting. |
| i | Facilitation trading gains and losses: Economic Brokerage Proceeds presents gains and losses on investments held as part of the Company's facilitation and trading business within brokerage revenues as these investments are directly related to the markets business activities while these are presented in Investment income - Securities principal transactions, net for US GAAP reporting. |
| j | Associated partner/banker compensation reclassification: Economic Compensation Expense presents certain payments to associated banking partners as compensation rather than non-compensation expenses. |
| k | Management company non-controlling interest: Economic Expenses non-controlling interest represents only operating entities that are not wholly owned by the Company. The Company also presents non-controlling interests within total expenses for Economic Income (Loss). |
| Fund Consolidation Reclassifications |
| l | The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income (Loss). Adjustments to reconcile to US GAAP Net Income (Loss) included elimination of incentive income and management fees earned from the Consolidated Funds and addition of investment fund expenses excluding management fees paid, investment fund revenues and investment income (loss). |
| Income Statement Adjustments |
| m | Pre-tax Economic Income (Loss) excludes the amortization of discount (premium) on debt. |
| n | Pre-tax Economic Income (Loss) excludes acquisition related adjustments (including bargain purchase gain and contingent liability adjustments). |
| o | Pre-tax Economic Income (Loss) excludes US GAAP income taxes. |
| p | Pre-tax Economic Income (Loss) excludes gain/(loss) on debt extinguishment and accelerated debt costs. |
| q | Pre-tax Economic income (Loss) excludes preferred stock dividends. |
| r | Economic Income (Loss) excludes goodwill and other impairments. |
Liquidity and Capital Resources
We continually monitor our liquidity position. The working capital needs of the Company's business have been met through current levels of equity capital, current cash and cash equivalents, and anticipated cash generated from our operating activities, including management fees, incentive income, returns on the Company's own capital, investment banking fees and
brokerage commissions. The Company expects that its primary working capital liquidity needs over the next twelve months will be:
•to pay our operating expenses, primarily consisting of compensation and benefits, interest on debt and other general and administrative expenses; and
•to provide capital to facilitate the growth of our existing business.
Based on our historical results, management's experience, our current business strategy and current assets under management, the Company believes that its existing cash resources will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next twelve months. However, the Company’s assessment could be affected by various risks and uncertainties, including but not limited to, the effects of the COVID-19 pandemic. Our cash reserves include cash, cash equivalents and assets readily convertible into cash such as our securities held in inventory. Securities inventories are stated at fair value and are generally readily marketable. As of December 31, 2017,2022, we had cash and cash equivalents of $130.1$1,139.7 million and net liquid investment assets of $400.6 million,$1.5 billion, which includes cash and cash equivalents and short-term investments held by foreign subsidiaries as of December 31, 20172022 of $15.6$258.8 million. The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in the United Kingdom, Malta, Germany, Switzerland, Israel, Canada, and Hong Kong subsidiaries.Kong.
The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which can make up a significant portion of total compensation, are generally paid once a year by March 15th.
As a clearing member firm providing services to certain of our brokerage customers, we are subject to cash deposit requirements with clearing organizations, brokers and banks that may be large in relation to total liquid assets and may fluctuate significantly based upon the nature and size of customers’customers' trading activity and market volatility. At December 31, 2017, we2022, the Company had security deposits totaling $94.0$87.9 million with clearing organizations in the U.S. for the settlement of equity trades. In the normal course of our U.S. settlement activities, we may also need to temporarily finance customer securities positions from short settlements or delivery failures.
The Company may incur additional indebtedness or raise additional capital under certain circumstances to respond to market opportunities and challenges. Current market conditions may make it more difficult or costly to borrow additional funds or raise additional capital.
Unfunded commitments
The following table summarizes unfunded commitments as of December 31, 2017:2022: | | | | | | | | | | | | | | |
| Entity | | Unfunded Commitments | | Commitment term |
| | (dollars in thousands) | | |
| HealthCare Royalty Partners funds (a) | | $ | 6,064 | | | 2.0 years |
| Eclipse Ventures Fund I, L.P. | | $ | 28 | | | 2.0 years |
| Eclipse Fund II, L.P. | | $ | 12 | | | 3.0 years |
| Eclipse Continuity Fund I, L.P. | | $ | 10 | | | 4.0 years |
| Cowen Healthcare Investments III LP | | $ | 1,552 | | | 4.0 years |
| Cowen Healthcare Investments IV LP | | $ | 4,758 | | | 5.0 years |
| Cowen Sustainable Investments I LP | | $ | 8,729 | | | 7.0 years |
|
| | | | | | |
| Entity | | Unfunded Commitments | | Commitment term |
| | | (dollars in millions) | | |
| Real estate (a) | | $ | 19.5 |
| | (a) |
| HealthCare Royalty Partners funds (b) | | 6.2 |
| | 2 years |
| Eclipse Ventures Fund I, L.P. (formerly Formation8 Partners Hardware Fund I, L.P.) | | 0.4 |
| | 7 years |
| Lagunita Biosciences, LLC | | 2.0 |
| | 3 years |
| Eclipse Fund II, L.P. | | 0.9 |
| | 8 years |
| Eclipse Continuity Fund I, L.P. | | 0.6 |
| | 9 years |
(a) The Company had unfunded commitments pertaining to capital commitments in six real estate investments held by the Company, all of which pertain to related party investments. Such commitments can be called at any time up to four years, subject to advance notice.
(b) The Company is a limited partner of the HealthCare Royalty Partners funds (which are managed by Healthcare Royalty Management) and is a member of HealthCare Royalty Partners General Partners. The Company will make its pro-rata investment in the HealthCare Royalty Partners funds along with the other limited partners.
Due to the nature of the securities business and our role as a market-maker and execution agent, the amount of our cash and short-term investments, as well as operating cash flow, may vary considerably due to a number of factors, including the dollar value of our positions as principal, whether we are net buyers or sellers of securities, the dollar volume of executions by our customers and clearing houseclearinghouse requirements, among others. Certain regulatory requirements constrain the use of a portion of our liquid assets for financing, investing or operating activities. Similarly, due to the nature of our business lines, the capital necessary to maintain current operations and our current funding needs subject our cash and cash equivalents to different requirements and uses.
Preferred Stock and Purchase of Capped Call Option
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock")Stock that provided $117.2 million of proceeds, net of underwriting fees and issuance costs of $3.6 million. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum, which will be payable, when and if declared by the board of directors of the Company, quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
the Series A Convertible Preferred Stock of $1.7 million and $6.8 million for the years ended December 31, 2022 and 2021.
Each share of Series A Convertible Preferred Stock is non-voting and has a liquidity preference over the Company's Class A common stock and ranks senior to all classes or series of the Company's Class A common stock, but junior to all of the Company's existing and future indebtedness with respect to divideddividend rights and rights upon the Company's involuntary liquidation, dissolution or winding down.
EachUpon issuance, each share of Series A Convertible Preferred Stock iswas convertible, at the option of the holder, into a number of shares of ourthe Company's Class A common stock equal to the liquidation preference of $1,000 divided by the conversion rate. The initial conversion rate (subsequent to the December 5, 2016 reverse stock split) is 38.0619 shares (which equates to $26.27 per share) of the Company's Class A common stock for each share of the Series A Convertible Preferred Stock. At any time on or after May 20, 2020, when the Company's capped call option expired, the Company maywas able to elect to convert all outstanding shares of the Series A Convertible Preferred Stock into shares of the Company’sCompany's Class A common stock, cash or a combination thereof, at the Company’sCompany's election, in each case, based on the then-applicable conversion rate, if the last reported sale price of the Company’sCompany's Class A common stock equals or exceeds 150% of the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion, the conversion rate may be adjusted based on certain events, including but not limited to the issuance of cash dividends or Class A common stock as a dividends to the Company's Class A common shareholders or a share split or combination.
In connection withOn December 31, 2021, the issuance and saleCompany irrevocably elected that, upon the conversion of any share of the outstanding Series A Convertible Preferred Stock, the Company entered into a capped call option transaction (the “Capped Call Option Transaction”) with Nomura Global Financial Products Inc. (the “option counterparty”) for $15.9 million. The Capped Call Option Transaction is expected generallywill settle $1,000.00 of its conversion obligation in cash. With respect to reduce the potential dilutioneach conversion, to the Company’s Class A common stock (ifextent the Company elects to convert to common shares) and/or offset any cash payments that the Company is required to make upon conversion obligation per share of any Series A Convertible Preferred Stock. The Capped Call Option Transaction has an initial effective strike priceStock is greater than $1,000.00, the Company may satisfy its conversion obligation in respect of $26.27 per share, which matchessuch excess using any settlement method permitted under the initialCertificate of Designations. As the holders can exercise the conversion priceoption on their shares of Series A Convertible Preferred Stock at any time and require cash payment upon conversion, the Company reclassified the Series A Convertible Preferred Stock and a cap price of $33.54 per share. However, to the extent that the market price of Class A common stock, as measured under the terms of the Capped Call Option Transaction, exceeds the cap price thereof, there would nevertheless be dilution and/or such cash payments would not be offset. As the Capped Call Option Transaction is a free standing derivative that is indexed to the Company's own stock price and the Company controls if it is settled in cash or stock it qualifies fortemporary equity classification as a reduction to additional paid in capital.
The Company may also incur additional indebtedness or raise additional capital under certain circumstances to respond to market opportunities and challenges. Current market conditions may make it more difficult or costly to borrow additional funds or raise additional capital.at December 31, 2021.
Regulation
Regulatory Capital
As registered broker-dealers with the United States Securities and Exchange Commission ("SEC"), Cowen and Company, Cowen Execution, ATM Execution Cowen Prime and Westminster are subject to the SEC's Uniform Net Capital Rule 15c3-1, (the “Rule”"SEA Rule 15c3-1," under the Securities Exchange Act ("SEA"), of 1934, which requires the maintenance of minimum net capital. Each registered broker-dealer has elected to compute net capital under the alternative method permitted by the Rule. that rule.
Under the alternative method, Cowen and Company's minimum net capital requirement, as defined in (a)(4) of SEA Rule 15c3-1, is equal to the Rule, is $1.0 million. Cowen Execution,greater of $1.5 million or 2% of aggregate debits arising from customer transactions. ATM Execution, Cowen Prime and Westminster are required to maintain minimum net capital, as defined in (a)(1)(ii) of theSEA Rule 15c3-1, equal to the greater of $250,000 or 2% of aggregate debits arising from customer transactions. Advances to affiliates, repayment of borrowings, distributions, dividend payments, and other equity withdrawals are subject to certain notification and other requirementsprovisions of theSEA Rule 15c3-1 and other regulatory bodies.
Cowen Executionand Company is also subject to certain net capital rule requirements under the Regulation 1.17 of the Commodity Futures Trading Commission ("CFTC") under Commodities Exchange Act (“CEA”) as an introducing broker. Under Regulation 1.17, (“Regulation 1.17”)Cowen and Options Clearing Corporation (“OCC”) Rule 302. Regulation 1.17 requires Cowen ExecutionCompany is required to maintain net capital equal to or in excess of $45,000 or the amount of net capital required by SEA Rule 15c3-1, whichever is greater. Additionally, as an options clearing member of the Options Clearing Corporation ("OCC") under OCC Rule 302, requires maintenance ofCowen and Company is required to maintain net capital equal to the greater of $2,000,000$2.0 million or 2% of aggregate debit items. At December 31, 2017, the2022, Cowen and Company had $108.7$478.3 million of net capital in excess of thisits minimum requirement.requirements under SEA Rule 15c3-1.
Ramius UK, The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010. The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. Cowen Financial Products, LLC ("Cowen Financial
Products") registered only with the SEC with an effective date of November 1, 2021 as a securities-based swap dealer and is not using models to compute its net capital. Under the rules there is a minimum net capital requirement for, among others, an entity that acts as a dealer in security-based swaps, which is the greater of $20 million or 2% of risk margin amount. The risk margin amount means the sum of (i) the total initial margin required to be maintained by the SEC securities-based swaps dealer at each clearing agency with respect to securities-based swaps transactions cleared for securities-based swap customers and (ii) the total initial margin amount calculated by the SEC securities-based swaps dealer swaps dealer with respect to non-cleared securities-based swaps under SEC rules. At December 31, 2022, Cowen Financial Products had $44.7 million of net capital in excess of its minimum requirements under SEA Rule 18a-1.
Cowen International Ltd and Cowen Execution Ltd are subject to the capital requirements of the FCA of the U.K. Financial Resources,Conduct Authority ("FCA"), as defined, and must exceed the minimum capital requirement set forth by the FCA. On 1 January 2022, the FCA adopted the Investment Firms Prudential Regime ("IFPR"). This is a new prudential regime which applies to MiFID investment firms authorized and regulated by the FCA in the UK. The IFPR refocuses prudential requirements and expectations away from the risks firms face, to also consider and look to manage the potential harm firms can pose to consumers and markets. Cowen International Ltd and Cowen Execution Ltd will both be designated as Class 2 firms under the new regime and will have a minimum capital requirement equal to the higher of; the Permanent minimum capital requirement, their respective Fixed Overhead requirement, and their Risk Responsive Computation ("K-factors").
Cowen Asia, a previously established entity, was re-registered with regulatory approval on May 17, 2019. Cowen Asia is subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong. Financial Resources must exceed the Total Financial Resources requirement of the FCA.SFC.
As of December 31, 2017, these regulated broker-dealers had2022, the regulatory net capital, or financial resources, regulatoryminimum net capital requirements or minimum FCA requirement and excess net capital of U.S. regulated broker dealers and swap dealer together with the equivalent of capital requirements and compliance information for foreign broker dealers registered with the FCA and the SFC are presented as follows: | | | | | | | | | | | | | | | | | | | | |
| Subsidiary | | Net Capital (a) | | Net Capital Requirement (b) | | Excess Net Capital |
| | | (dollars in thousands) |
| Cowen and Company | | $ | 482,309 | | | $ | 4,052 | | | $ | 478,257 | |
| ATM Execution | | $ | 5,775 | | | $ | 250 | | | $ | 5,525 | |
| Westminster | | $ | 21,440 | | | $ | 250 | | | $ | 21,190 | |
| Cowen Financial Products | | $ | 64,670 | | | $ | 20,000 | | | $ | 44,670 | |
| Cowen International Ltd (a) | | $ | 48,554 | | | $ | 13,592 | | | $ | 34,962 | |
| Cowen Execution Ltd (a) | | $ | 17,358 | | | $ | 7,022 | | | $ | 10,336 | |
| Cowen Asia (a) | | $ | 2,710 | | | $ | 384 | | | $ | 2,326 | |
(a)The equivalent of Net Capital under FCA rules is referred as “capital resources” and under SFC rules is referred as “net liquid capital.” The equivalent of Minimum Net Capital Requirement under FCA rules is referred as “minimum capital resources requirement" and under SFC rules is referred as “net liquid capital requirement."
|
| | | | | | | | | | | | |
| Subsidiary | | Net Capital | | Net Capital Requirement | | Excess Net Capital |
| | | (dollars in millions) |
| Cowen and Company | | $ | 40.2 |
| | $ | 1.0 |
| | $ | 39.2 |
|
| Cowen Execution | | $ | 111.4 |
| | $ | 2.7 |
| | $ | 108.7 |
|
| ATM Execution | | $ | 1.0 |
| | $ | 0.3 |
| | $ | 0.7 |
|
| Cowen Prime | | $ | 12.3 |
| | $ | 0.3 |
| | $ | 12.0 |
|
| Westminster | | $ | 7.6 |
| | $ | 0.3 |
| | $ | 7.3 |
|
| Ramius UK | | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.1 |
|
| Cowen International Ltd | | $ | 11.5 |
| | $ | 7.1 |
| | $ | 4.4 |
|
| Cowen Execution Ltd | | $ | 3.8 |
| | $ | 2.6 |
| | $ | 1.2 |
|
Cowen and Company, Cowen Prime and ATM Execution claim exemption from SECThe Company's U.S. broker-dealers must also comply with the customer protection provisions under SEA Rule 15c3-3 subparagraphwhich requires a computation of a reserve requirement for customer and maintenance of a deposit of cash or securities into a special reserve bank account for the exclusive benefit of customers; or claim an exemption pursuant to subparagraphs (k)(2)(i) or (k)(2)(ii) of that rule. Firms can rely on more than one exemption.
ATM Execution claims the Securities Exchange Act(k)(2)(ii) exemption with regard to all of 1934 since they clear their securitiescustomer accounts and transactions that are introduced on a fully disclosedfully-disclosed basis to their clearing agents for clearing, settlement and promptly transmits all customer funds and securities tocustody. Westminster claims the clearing broker-dealer that carries the accounts. Cowen and Company, Cowen Prime and Westminster claim exemption from SEC Rule 15c3-3 subparagraph (k)(2)(i) of the Securities Exchange Act of 1934 since they conduct primarily all financialexemption with regard to customer transactions with their customers through aand balances that are cleared, settled and custodied in bank accountaccounts designated as Special AccountAccounts for the Exclusive Benefit of Customers.Customers ("Special Bank Accounts"). Westminster also claims exemption for other business activities that are not covered under (k)(2)(i) contemplated by Footnote 74 of the SEC Release No. 34-70073 adopting amendments to 17 C.F.R. § 240.17a-5 for receiving transaction-based compensation in return for providing commission management services.
In accordance with the requirements of SECSEA Rule 15c3-3, Cowen Executionand Company may be required to deposit in a Special Reserve Account cash or acceptable qualified securities for the exclusive benefit of customers. As of December 31, 2017,2022, Cowen Executionand Company had segregated approximately $20.3$49.4 million of cash while its required deposit was $10.5 million.to satisfy the customer reserve provision of SEA Rule 15c3-3.
As a clearing and carrying broker-dealer, Cowen Executionand Company is required to compute a reserve requirement for proprietary accounts of broker-dealers (“PAB”("PAB"), as defined in SECSEA Rule 15c3-3. Cowen and Company performs a PAB calculationreserve computation
in order to determine the amount it is completedrequired to allowdeposit in its PAB Reserve Bank Accounts pursuant to SEA Rule 15c3-3. This allows each correspondent firm that uses Cowen Executionand Company as its clearing broker-dealer to classify its PAB account assets held byat Cowen Executionand Company as allowable assets in the correspondent's net capital calculation. At December 31, 2017,2022, Cowen Executionand Company had $29.7$40.4 million of cash on deposit in special reserve bankPAB Reserve Bank Accounts. Cowen and Company and ATM Execution also maintain certain assets in PAB accounts for PAB, which was in excess of its required deposit of $17.1 million.
PAB held at externaltheir respective clearing brokers. Each treats its assets held in those PAB accounts at the respective clearing brokers are consideredas allowable assets for net capital purposes,purposes.
Cowen Financial Products, as a registered securities based swap dealer, claims Rule 18a-4(f) exemption under the Securities Exchange Act of 1934 (the “Act”) with regard to its swap counterparties on the basis that it has provided sufficient notice to its swap counterparties of their respective rights to require segregation of funds or other property used to secure uncleared security based swaps pursuant to agreements between section 3E(f)(1)(A)-(B) of the Act (15 U.S.C. 78c-5(f)(1)(A)). Any margin collateral received and held by the security-based swap dealer with respect to uncleared security-based swaps will not be subject to a segregation requirement. The notice outlines how a claim of those swap counterparties for the collateral would be treated in a bankruptcy or other formal liquidation proceeding of the security-based swap dealer.
Other Regulatory Requirements
Cowen and Company, ATM Execution, Cowen Prime, and their clearing brokers, which require, among other things, that those clearing brokers perform computations for PAB and segregate certain balances on behalf of Cowen and Company, ATM ExecutionInsurance Co and Cowen Prime, if applicable.
Cowen’s Luxembourg reinsurance companies, Vianden RCG Re SCA (“Vianden”) and Hollenfels,Kelvin are individually required to maintain a solvency capital ratio as calculated by relevant European Commission directives and local regulatory rules in Luxembourg.Malta, Luxembourg and Guernsey, respectively. Each company’scompany's individual solvency capital ratio ascalculated at the end of each regulatory determined period must exceed a minimum requirement. As of December 31, 20172021, the last testing date for Cowen Re, the solvency capital ratio was in excess of thisthe minimum regulatory requirement. As of September 30, 2022, the last testing date for Cowen Insurance Co and Kelvin, the solvency capital ratios were in excess of the minimum regulatory requirement.
Based on minimum capital and surplus requirements pursuant to the laws of the state of New York that apply to captive insurance companies, RCG Insurance Company, Cowen’sCowen's captive insurance company incorporated and licensed in the state of New York, was required to maintain capital and surplus of approximately $0.3 million as of December 31, 2017.2022. RCG Insurance Company’s capital and surplus as of December 31, 20172022 totaled approximately $28.7$4.6 million.
Cash Flows Analysis
The Company's primary sources of cash are derived from its operating activities, fees and realized returns on its own invested capital.capital and borrowings on debt. The Company's primary uses of cash include compensation and general and administrative expenses.
Operating Activities. Net cash usedprovided by operating activities of $116.4$171.6 million for the year ended December 31, 20172022 was primarily related to (i) an increase in proceeds from the sale of short investments offset by payments to cover short investments (ii) an increase from net income (iii) and an increase in stock loan partially offset by (iii) an increase in compensation payable and an increase in securities sold, not yet purchased, at fair value, held at broker-dealer. Net cash provided by operating activities of $306.6 million for the year ended December 31, 2021 was primarily related to (i) Company net income, (ii) a decrease in securities owned, at fair value, (iii) an increase in proceeds from sales of securities owned, at fair value, (iv) increase in payable to customers and (v) a decrease in stock loan. Net cash provided by operating activities of $513.2 million for the year ended December 31, 2020 was primarily related to (i) Company net income, (ii) proceeds from securities owned, at fair value, held at broker-dealers (iii) increase in payable to customers offset partially by the decrease in purchases of securities owned, at fair value, the decrease in securities borrowed, and the decrease in receivable from brokers, dealers and clearing organizations.
Investing Activities. Net cash provided by investing activities of $175.2 million for the year ended December 31, 2022 was primarily related to purchase of assets through acquisition, net of cash acquired partially offset by a decrease in securities purchased under agreements to resell. Net cash used in investing activities of $75.5 million for the year ended December 31, 2021 was primarily related to (i) purchases of securities owned, at fair value and an increase in receivable from brokers, dealers and clearing organizationsother investments only partially offset by an increase in payable to customers, cash acquired through acquisitions andwith the proceeds from sales of securities owned, at fair value.other investments and (ii) purchases of assets through acquisition, net of cash acquired. Net cash used in operatinginvesting activities of $354.5$43.0 million for the year ended December 31, 2016 was primarily related to purchases of other investments and cash used to pay for year end bonuses. Net cash used in operating activities of $68.6 million for the year ended December 31, 2015 was primarily related to purchases of securities and other investments partially offset by a decrease in cash held at other brokers.
Investing Activities. Net cash used in investing activities of $2.4 million for the year ended December 31, 2017 was primarily related to the purchase of Convergex Group, loans issued and purchases of other investments offset partially by sales of other investments and fixed assets. Net cash provided by investing activities of $58.5 million for the year ended December 31, 2016 was primarily related to repayment of certain loans made for investing purposes and sales of other investments offset partially by the purchases of other investments and fixed assets. Net cash used in investing activities of $47.4 million for the year ended December 31, 20152020 was primarily related to the purchases of businesses, other investments and fixed assetsonly partially offset by the proceeds from sales of other investments.
Financing Activities.$55.4 million was primarily related to (i) purchase of treasury stock (net of re-issue) (ii) cash dividends paid (iii) a decrease in contingent liability as well as (iv) an increase in repayments on notes and other debt . Net cash used in financing activities for the year ended December 31, 2021 of $15.7 million was primarily related to (i) borrowings on notes and other debt partially offset by repayments on notes and other debt and (ii) purchase of treasury stock and (iii) repayments on convertible debt. Net cash provided by financing activities for the year ended December 31, 20172020 of $137.9$25.6 million was primarily related to proceeds from the issuance of convertible debt,(i) capital contributions by non-controlling interests in Consolidated Funds offset only partially by capital withdrawals by non-controlling interests in Consolidated Funds and (ii) borrowings on notes and other debt and contributions from non-controlling interests in Consolidated Funds offset only partially by repayments on convertible debt, notes and other debt, withdrawals from non-controlling interests in Consolidated Funds and purchasedebt.
Debt
Convertible Debt
December 2022 Convertible Notes
The Company, on December 14, 2017, issued $135.0 million aggregate principal amount of 3.00% convertible senior notes due December 2022 (the “2022“December 2022 Convertible Notes”). The December 2022 Convertible Notes are due onhave a final maturity date of December 15, 2022 unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such date. The interest on the December 2022 Convertible Notes is payable semi-annually on December 15 and June 15 of each year. The notesDecember 2022 Convertible Notes are senior unsecured obligations of Cowen. The 2022 Convertible Notes may be converted into cash or shares of Class A common stock at the Company's election based on the current conversion price. TheDecember 2022 Convertible Notes were issued with an initial conversion price of $17.375 per share of Cowen’sCowen's Class A common stock.
The Company usedPursuant to the net proceeds, together with cash on hand, fromindenture governing the offering for general corporate purposes, including the repurchase or repayment of $115.1 millionDecember 2022 Convertible Notes, conversions of the Company’s outstanding 3.0% cash convertible senior notes due 2019 (the "2019December 2022 Convertible Notes") andNotes will be settled by the repurchasedelivery and/or payment, as the case may be, of approximately $19.5 million of the Company’s shares of itsCowen’s Class A common stock, which were consummated substantially concurrently withCommon Stock, cash, or a combination thereof, at the closing of the offering.Company's election.
The Company recorded interest expense of $0.2 million for the year ended December 31, 2017. The Company recognized the embedded cash conversion option at issuance date fair value, which also represents the initial unamortized discount on the December 2022 Convertible Notes of $23.4 million and is shown net in convertible debt in the accompanying consolidated statements of financial condition. On June 26, 2018, the Company received shareholder approval for the Company to settle the December 2022 Convertible Notes entirely in Class A common stock. Upon receiving shareholder approval, the Company reclassified the separately recognized conversion option from a derivative liability to equity.
During December 2020, the Company repurchased and extinguished $46.9 million of the outstanding principal amount of the December 2022 Convertible Notes for cash consideration of $70.5 million. In conjunction with the partial extinguishment of the December 2022 Convertible Notes, the Company accelerated the pro rata unamortized discount of $3.6 million and capitalized debt issuance costs of $0.4 million. The Company allocated $29.6 million of the cash consideration paid to the extinguishment of the equity component of the December 2022 Convertible Notes. The Company recognized $2.7 million of gain on debt extinguishment.
On March 24, 2021, the Company issued a redemption notice announcing that the Company would redeem all of the December 2022 Convertible Notes, and provided holders the option to elect to settle the as-converted value of the December 2022 Convertible Notes as allowed under the terms of the December 2022 Convertible Notes. As a result of the Company’s call for redemption of the December 2022 Convertible Notes, the December 2022 Convertible Notes were convertible, at the option of the holder at any time prior to June 22, 2021, the second business day prior to the December 2022 Convertible Notes' Redemption Date. On June 24, 2021 (the "Redemption Date"), the Company redeemed all of the outstanding principal amount of the December 2022 Convertible Notes. The redemption amount was determined based on the holders election to convert, which allowed for either 100.00% of the principal amount thereof plus accrued and unpaid interest on such principal amount up to June 15, 2021, to, but not including the Redemption Date of the December 2022 Convertible Notes, or the value of the Company's Class A common stock to be issued on conversion. The settlement method for the December 2022 Convertible Notes was $88.1 million in cash, (the outstanding principal amount of the December 2022 Convertible Notes) and 2,938,841 shares of the Company’s Class A common stock, (the remainder of the conversion obligation in excess of the principal amount). The conversion rate on the December 2022 Convertible Notes on the Redemption Date was 33.35 shares of the Company’s Class A common stock per $1,000.00 principal amount of December 2022 Convertible Notes converted. In conjunction with the redemption of the remaining December 2022 Convertible Notes, the Company accelerated the pro rata unamortized discount of $5.1 million and capitalized debt issuance costs of $0.5 million.
Amortization on the discount, included within interest and dividends expense in the accompanying consolidated statements of operations is $0.2$6.7 million and $4.6 million for the yearyears ended December 31, 2017,2021 and 2020, based on an effective interest rate of 7.13%. The Company capitalized the debt issuance costs in the amount of $2.1$2.2 million, which is a direct deduction from the carrying value of the debt and was amortized over the life of the December 2022 Convertible Notes in interest and dividends expense in the accompanying consolidated statements of operations. The Company recorded interest expense of $1.2 million and $4.0 million for the years ended December 31, 2021 and 2020, respectively.
Notes Payable
May 2024 Notes
On May 7, 2019, the Company completed its private placement of $53.0 million aggregate principal amount of 7.25% senior notes due May 2024 (the "May 2024 Notes") with certain institutional investors. On September 30, 2019, the Company issued an additional $25.0 million of the same series of notes. The additional May 2024 Notes were purchased at a premium of $0.5 million, which is shown net in notes payable in the accompanying consolidated statement of financial condition. To date the May 2024 Notes have maintained their initial private rating. Interest on the May 2024 Notes is payable semi-annually in arrears on May 6
and November 6. The Company recorded interest expense of $5.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company capitalized debt issuance costs of approximately $1.5 million in May 2019 and $0.6 million in September 2019, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the May 2024 Notes in interest and dividends expense in the accompanying consolidated statements of operations.
June 2033 Notes
On June 11, 2018, the Company completed its public offering of $90.0 million of 7.75% senior notes due June 2033 (the "June 2033 Notes") and subsequently the underwriters exercised in full their option to purchase an additional $10.0 million principal amount of the June 2033 Notes. Interest on the June 2033 Notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15. The Company recorded interest expense of $7.7 million, $7.7 million and $7.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company capitalized debt issuance costs of approximately $3.6 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the 2022 Convertible Notes.
2019 ConvertibleJune 2033 Notes
On March 10, 2014, the Company issued $149.5 million of 3.0% cash convertible senior notes (the "2019 Convertible Notes"). The 2019 Convertible Notes are due on March 15, 2019 unless earlier repurchased by the Company or converted by the holder into cash in accordance with their terms prior to such date. The interest on the 2019 Convertible Notes is payable semi-annually on March 15 and September 15 of each year. The 2019 Convertible Notes are senior unsecured obligations of the Company. The 2019 Convertible Notes may be converted into cash, upon the occurrence of certain events, whereby a holder will receive, per $1,000 principal amount of notes being converted, an amount equal to the sum of principal amount outstanding and the conversion amount based on the current conversion price (the "Conversion Option"). The 2019 Convertible Notes were issued with an initial conversion price of $21.32 per share (per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016). During December 2017, the Company repurchased and extinguished $115.1 million of the outstanding balance of the 2019 Convertible Notes.
The Company recorded interest expense of $4.3 million, $4.5 million and $4.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. The initial unamortized discount on the 2019 Convertible Notes was $35.7 million and is shown net in convertible debt in the accompanying consolidated statements of financial condition. Amortization on the discount, included within interestdividends expense in the accompanying consolidated statements of operations is $7.3 million, $6.9 million and $6.3 million for the years ended operations.
December 31, 2017, 2016, and 2015, respectively, based on an effective interest rate of 8.89%. The Company capitalized the debt issuance costs in the amount of $0.9 million, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the 2019 Convertible Notes. In conjunction with the partial extinguishment of the 2019 Convertible Notes, the Company accelerated the pro-rata unamortized discount and capitalized debt issuance costs. The Company recognized $11.6 million of gain/ (loss) on debt extinguishment.
Of the net proceeds from the sale of the 2019 Convertible Notes, approximately $20.5 million was applied to pay the net cost of a cash convertible note economic hedge and warrant transaction, which increased the effective conversion price to $28.72 (see Note 6) (per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective
as of December 5, 2016), and approximately $0.3 million was applied to repurchase shares of Cowen Class A common stock. The remainder of the net proceeds is being used for general corporate purposes.
Note Payable
2027 Notes
On December 8, 2017, the Company completed its public offering of $120$120.0 million of 7.35% senior notes due December 2027 (the “2027 Notes”"December 2027 Notes") and subsequently the underwriters exercised in full their option to purchase an additional $18.0 million principal amount of the December 2027 Notes. Interest on the December 2027 Notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15. The Company recorded interest expense of $0.6$2.5 million and $10.1 million for the yearyears ended December 31, 2017.2021 and 2020, respectively. The Company capitalized debt issuance costs of approximately $5.1$5.0 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the December 2027 Notes.Notes in interest and dividends expense in the accompanying consolidated statements of operations. The net proceeds of the offering, after deducting the underwriting discount and estimated offering expenses payable by the Company were used to redeem all of its 8.25% senior notes due October 2021 (the "2021 Notes") and for general corporate purposes.
On March 24, 2021, Notes
Thethe Company redeemed the Company'sdelivered payment of and discharged all $138.0 million outstanding $63.25 millionaggregate principal amount of the 2021 Notes, following which the 2021 Notes were delisted from NASDAQ. The redemption was made pursuant to the terms of the 2021 Notes and the indenture governing the 2021 Notes. The redemption price for the 2021 Notes was equal to 106.188% of the principal amount of the 2021December 2027 Notes plus accrued and unpaid interest.interest through the effective redemption date of April 23, 2021. In conjunction with the extinguishment of the December 2027 Notes, the Company accelerated the pro-rata capitalized debt issuance costs. For the year ended December 31, 2021, the Company recognized $4.4 million of loss on debt extinguishment.
Term Loan
March 2028 Term Loan
On March 24, 2021, the Company borrowed $300 million of first lien term loan due March 24, 2028. On December 15, 2021, the Company borrowed an additional $150 million first lien termloan under the same terms and conditions as, and fungible with, the initial first lien term loan (collectively, the “March 2028 Term Loan”). The aggregate amount borrowed under the March 2028 Term Loan is $450 million. The March 2028 Term Loan bears interest at an annual rate equal to, at the option of the Company, either the (a) London Inter-bank Offered Rate ("LIBOR") (adjusted for reserves and subject to a floor of 0.75%) plus a margin of 3.25% or (b) an alternate base rate plus a margin of 2.25%. The Company recordedis required to pay amortization of approximately 1.00% per annum of the original principal amount of the March 2028 Term Loan. Additionally, the Company has entered into an interest rate swap to offset the floating interest rate of the March 2028 Term Loan (See Note 6). The obligations of the Company for the March 2028 Term Loan are guaranteed by certain of the Company’s wholly-owned domestic subsidiaries (excluding its broker-dealer subsidiaries) (the “Guarantors”) and secured by substantially all of the assets of the Company and the Guarantors, subject in each case to certain customary exceptions. The terms of the March 2028 Term Loan contain customary affirmative and negative covenants, subject to certain customary exceptions, thresholds, qualifications and “baskets”. Proceeds from the March 2028 Term Loan were used to (i) satisfy and discharge and redeem the Company’s 2027 Senior Notes, (ii) redeem the Company’s December 2022 Convertible Notes that remained outstanding as of March 31, 2021 and pay the cash settlement amount in connection with the conversion of December 2022 Convertible Notes prior to that redemption date, and (iii) for the payment of fees, commissions, premiums, expenses and other transaction costs (including original issue discount or upfront fees) payable in connection with the transactions related thereto. As of December 31, 2022, the outstanding principal amount of the March 2028 Term Loan was $442.1 million.
Interest expense of $5.3 million, $5.2for the March 2028 Term Loan was $22.8 million and $5.2$9.7 million for the years ended December 31, 2017, 2016,2022 and 2015 respectively. In conjunction with the extinguishment of the 2021, Notes, the Company expensed the unamortized capitalized debt issuance costs. The Company recognized $5.6 million of lossbased on debt extinguishment.
Term Loan
On June 30, 2017, the Company borrowed $28.2 million to fund general corporate purposes. This term loan has an effective interest rate of LIBOR plus 3.75% with4.46%. In March 2021, the Company capitalized debt issuance costs of approximately $6.6 million and initial unamortized discount of $1.5 million related to the March 2028 Term Loan which is a lump sum payment ofdirect deduction from the entire principal amount due on June 29, 2018. The loan is secured by thecarrying value of the debt and will be amortized over the life of the March 2028 Term loan in interest and dividends expense in the accompanying consolidated statements of operations. In December 2021, the Company capitalized debt issuance costs of approximately $2.7 million and unamortized discount of $1.5 million related to the additional borrowing of
$150 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the March 2028 Term loan in interest and dividends expense in the accompanying consolidated statements of operations.
The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that all US Dollar LIBOR settings will either cease to be provided by any administrator or no longer be representative as of June 30, 2023. As the March 2028 Term Loan represents the Company’s only significant exposure to LIBOR, the transition to an alternative Inter-bank Offer Rate is not expected to have a material impact on Company's limited partnership interests in two affiliated funds. The Company has provided a guarantee for this loan. The Company recorded interest expense of $0.7 million for the year ended December 31, 2017.consolidated financial statements.
Other Notes Payable
During January 2017,2022, the Company borrowed $2.1$4.0 million to fund insurance premium payments. This note hashad an effective interest rate of 1.50%2.01% and iswas due onin December 31, 2017,2022, with monthly payment requirements of $0.2$0.4 million. As of December 31, 2017,2022, the note was fully repaid. Interest expense for the year ended December 31, 20172022 was insignificant. immaterial.
On September 30, 2020, the Company borrowed $72.0 million from Purple Protected Asset S-81 ("PPA S-81"), a Luxembourg entity unrelated to Cowen. The Company has entered into various financingrepaid $60.0 million of the PPA S-81 loan in June 2021. The loan is payable on September 30, 2023, had an initial interest rate of 1.4 times the Secured Overnight Financing Rate ("SOFR") plus 6.07% until December 31, 2020 and 1.4 times the SOFR plus 5.8% until June 30, 2021 and 3.65 times the SOFR plus 4.0% thereafter with quarterly interest payments. The loan obligation, as well as a loan issued by Cowen to The Military Mutual Ltd (a United Kingdom company unrelated to Cowen) with principal of $28.4 million that was sold by Cowen Re to PPA S-81 at fair value for its aircraft.no gain or loss on September 30, 2020, are fully cash collateralized through a reinsurance policy provided by Cowen Re which is reflected in cash collateral pledged in the consolidated statements of financial condition as of December 31, 2020 (see Notes 4 and 22). The aircraft financing, netCompany capitalized debt issuance costs of debt costs,approximately $1.7 million which is recordeda direct deduction from the carrying value of the loan and will be amortized over the life of the loan in notes payableinterest and short-term borrowingsdividends expense shown in the accompanying consolidated statements of financial condition.operations. The debt maturities ranged from January 2019 to April 2021 andCompany recorded interest rates ranged from 4.21% to 7.25%. Asexpense of December 31, 2017, and 2016, the remaining balance on the aircraft financing agreements was $8.2$2.5 million, $3.0 million and $14.4 million, respectively. Interest expense was $0.7 million and $0.8$1.2 million for the years ended December 31, 20172022, 2021 and 2016,2020, respectively, related to its loan payable to PPA S-81.
During November 2019, the Company borrowed $2.6 million to fund general corporate capital expenditures. This note had an effective interest rate of 6% and is due in November 2024, with monthly payment requirements of $0.1 million. As of December 31, 2022, the outstanding balance on this note was $1.1 million. Interest expense for the years ended December 31, 2022, 2021 and 2020 was $0.1 million, respectively.
CapitalFinance Lease Obligations
The Company has entered into a capital lease for computer equipment, which amounted to $6.9 million and is recorded in fixed assets as capital lease obligations. In addition, as part of the Convergex Group acquisition, the Company holds two capitalvarious finance leases for computer equipment which amounted to $0.8 million and are recorded as capital lease obligations.equipment. These capitalfinance lease obligations are included in short-term borrowingsnotes payable and other debt in the accompanying consolidated statements of financial condition, and have lease terms that range from 48 to 60 months and interest rates that range from 3.70% to 5.69%. As of December 31, 2017, the remaining balance on these capital leases was $4.1 million. Interest expense was $0.1 million, $0.1 million, $0.2 million forcondition.
For the years ended December 31, 2017, 2016,2022, 2021 and 2015, respectively.2020, quantitative information regarding the Company's finance lease obligations reflected in the accompanying consolidated statements of operations, the supplemental cash flow information and certain other information related to finance leases were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) |
| Lease cost | | | | | | | | | |
| Finance lease cost: | | | | | | | | | |
| Amortization of finance lease right-of-use assets | | | | | $ | 1,109 | | | $ | 1,274 | | | $ | 1,232 | |
| Interest on lease liabilities | | | | | 58 | | | 116 | | | 171 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average remaining lease term - operating leases (in years) | | | | | 2.05 | | 1.71 | | 3.21 |
| Weighted average discount rate - operating leases | | | | | 5.39 | % | | 4.70 | % | | 4.88 | % |
Letters of Credit
As of December 31, 2017,2022, the Company has the following eight irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The Company also has pledged ascash collateral $11.8for reinsurance agreements which amounted to $119.5 million, as of December 31, 2017,2022, and $5.5$44.1 million, as of December 31, 2016, due between March 2018 and March 2021, forwhich are expected to be released periodically as per the terms of the reinsurance agreements.
policy.
| | | | | | | | | | | | | | |
| Location | | Amount | | Maturity |
| | (dollars in thousands) | | |
| New York | | $ | 2,309 | | | December 2023 |
| | | | |
| | | | |
| Boston | | 382 | | | November 2023 |
| San Francisco | | 455 | | | November 2023 |
| | | | |
| | $ | 3,146 | | | |
|
| | | | | | |
| Location | | Amount | | Maturity |
| | | (dollars in thousands) | | |
| Connecticut | | $ | 65 |
| | January 2018 |
| Boston | | $ | 382 |
| | March 2018 |
| New York | | $ | 355 |
| | April 2018 |
| New York | | $ | 70 |
| | May 2018 |
| New York | | $ | 596 |
| | October 2018 |
| New York | | $ | 2,250 |
| | October 2018 |
| New York | | $ | 1,600 |
| | November 2018 |
| San Francisco | | $ | 710 |
| | January 2019 |
To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of December 31, 20172022 and 2016,2021 there were no amounts due related to these letters of credit.
Contractual Obligations
The following tables summarize the Company's contractual cash obligations as of December 31, 2017: |
| | | | | | | | | | | | | | | | | | | |
| | Total | | < 1 Year | | 1-3 Years | | 3-5 Years | | More Than
5 Years |
| | (dollars in thousands) |
| Equipment/Aircraft Leases, Service Payments and Facility Leases | | | | | | | | | |
| Real Estate | $ | 101,927 |
| | $ | 25,960 |
| | $ | 39,079 |
| | $ | 29,534 |
| | $ | 7,354 |
|
| Service Payments | 34,494 |
| | 21,631 |
| | 12,526 |
| | 337 |
| | — |
|
| Equipment leases | 4,843 |
| | 2,251 |
| | 1,533 |
| | 1,059 |
| | — |
|
| Aircraft | 1,995 |
| | 1,260 |
| | 735 |
| | — |
| | — |
|
| Total | 143,259 |
| | 51,102 |
| | 53,873 |
| | 30,930 |
| | 7,354 |
|
| Debt | | | | | | | | | |
| Convertible Debt | 190,915 |
| | 4,840 |
| | 42,975 |
| | 143,100 |
| | — |
|
| Note Payable | 239,627 |
| | 10,340 |
| | 20,286 |
| | 20,286 |
| | 188,715 |
|
| Term Loan | 28,901 |
| | 28,901 |
| | — |
| | — |
| | — |
|
| Other Notes Payable | 9,317 |
| | 2,032 |
| | 4,773 |
| | 2,512 |
| | — |
|
| Total | $ | 468,760 |
| | $ | 46,113 |
| | $ | 68,034 |
| | $ | 165,898 |
| | $ | 188,715 |
|
Clawback obligations
For financial reporting purposes, the general partners of a real estate fund have recorded a liability for potential clawback obligations to the limited partners, due to changes in the unrealized value of the fund's remaining investments and where the fund's general partner has previously received carried interest distributions.
The clawback liability, however, is not realized until the end of the fund's life. The life of the real estate funds with a potential clawback obligation is currently in a winding-up phase whereby the remaining assets of the fund are being liquidated as promptly as possible so as to maximize value, however a final date for liquidation has not been set.
The fund is currently winding-down as of December 31, 2017 and the clawback obligations were $6.2 million (see Note 6 to the Company's consolidated financial statements).2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | < 1 Year | | 1-3 Years | | 3-5 Years | | More Than
5 Years |
| | (dollars in thousands) |
| Equipment, Service and Facility Leases | | | | | | | | | |
| Real Estate and Other Facility Rental | $ | 93,702 | | | $ | 24,653 | | | $ | 34,231 | | | $ | 15,820 | | | $ | 18,998 | |
| Service Payments | 68,477 | | | 32,919 | | | 24,930 | | | 6,528 | | | 4,100 | |
| Operating Equipment Leases | 1,795 | | | 523 | | | 994 | | | 278 | | | — | |
| | | | | | | | | |
| Total | 163,974 | | | 58,095 | | | 60,155 | | | 22,626 | | | 23,098 | |
| Debt | | | | | | | | | |
| | | | | | | | | |
| Notes Payable | 267,858 | | | 13,405 | | | 96,328 | | | 15,500 | | | 142,625 | |
| Term Loan | 612,021 | | | 37,700 | | | 74,471 | | | 73,020 | | | 426,830 | |
| | | | | | | | | |
| Finance Lease Obligation | 721 | | | 458 | | | 185 | | | 78 | | | — | |
| | | | | | | | | |
| Other Notes Payable | 14,046 | | | 13,503 | | | 543 | | | — | | | — | |
| Total | $ | 894,646 | | | $ | 65,066 | | | $ | 171,527 | | | $ | 88,598 | | | $ | 569,455 | |
Minimum payments for all debt outstanding
Annual scheduled maturities of debt and minimum payments for all debt outstanding as of December 31, 2017,2022, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Notes Payable | | | | Term Loan | | | | Other Notes Payable | | Finance Lease
Obligation |
| | | | (dollars in thousands) |
| 2023 | | | $ | 13,405 | | | | | $ | 37,700 | | | | | $ | 13,503 | | | $ | 458 | |
| 2024 | | | 88,578 | | | | | 37,451 | | | | | 543 | | | 104 | |
| 2025 | | | 7,750 | | | | | 37,020 | | | | | — | | | 81 | |
| 2026 | | | 7,750 | | | | | 36,680 | | | | | — | | | 50 | |
| 2027 | | | 7,750 | | | | | 36,340 | | | | | — | | | 28 | |
| Thereafter | | | 142,625 | | | | | 426,830 | | | | | — | | | — | |
| Subtotal | | | 267,858 | | | | | 612,021 | | | | | 14,046 | | | 721 | |
| Less (a) | | | (93,334) | | | | | (179,756) | | | | | (1,347) | | | (48) | |
| Total | | | $ | 174,524 | | | | | $ | 432,265 | | | | | $ | 12,699 | | | $ | 673 | |
60(a)Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes capitalized debt costs and the unamortized discount on the Company's convertible debt.
|
| | | | | | | | | | | | | | | | | | | |
| | Convertible Debt | | Note Payable | | Term Loan | | Other Note Payable | | Capital Lease
Obligation |
| | (dollars in thousands) |
| 2018 | $ | 4,840 |
| | $ | 10,340 |
| | $ | — |
| | $ | 2,032 |
| | $ | 2,059 |
|
| 2019 | 38,925 |
| | 10,143 |
| | 28,901 |
| | 3,410 |
| | 717 |
|
| 2020 | 4,050 |
| | 10,143 |
| | — |
| | 1,363 |
| | 639 |
|
| 2021 | 4,050 |
| | 10,143 |
| | — |
| | 2,512 |
| | 639 |
|
| 2022 | 139,050 |
| | 10,143 |
| | — |
| | — |
| | 420 |
|
| Thereafter | — |
| | 188,715 |
| | — |
| | — |
| | — |
|
| Subtotal | 190,915 |
| | 239,627 |
| | 28,901 |
| | 9,317 |
| | 4,474 |
|
| Less (a) | (49,413 | ) | | (106,657 | ) | | (780 | ) | | (1,070 | ) | | (354 | ) |
| Total | $ | 141,502 |
| | $ | 132,970 |
| | $ | 28,121 |
| | $ | 8,247 |
| | $ | 4,120 |
|
| |
(a) | Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes capitalized debt costs and the unamortized discount on the convertible debt. |
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as of December 31, 2017.2022. However, through indemnification provisions in our clearing agreements, customer activities may expose us to off-balance-sheet credit risk. Pursuant to the clearing agreements, we are required to reimburse our clearing broker, without limit, for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlyingunderlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.
Cowen and Company Cowen Prime, Cowen Execution and ATM Execution are members of various securities exchanges and clearing organizations. Under the standard membership agreement, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the various securities exchangeexchanges and clearing organizations, all other members would be required to meet the shortfall. The Company's liability under these arrangements is not quantifiable. Accordingly, no contingent liability is carried in the accompanying consolidated statements of financial condition for these arrangements.
Cowen and Company temporarily loans securities to other brokers in connection with its securities lending activities. Cowen and Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event that counterparty to these transactions does not return the loaned securities, Cowen and Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. Cowen and Company controls this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis, and by requiring additional cash as collateral or returning collateral when necessary. Cowen and Company temporarily borrows securities from other brokers in connection with its securities borrowing activities. Cowen and Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event that counterparty to these transactions does not return collateral, Cowen and Company may be exposed to the risk of selling the securities at prevailing market prices. Cowen and Company controls this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis, and by depositing additional collateral with counterparties or receiving cash when deemed necessary.
Critical Accounting Policies and Estimates
Critical accounting policies are those that require the Company to make significant judgments, estimates or assumptions that affect amounts reported in its consolidated financial statements or the notes thereto. The Company bases its judgments, estimates and assumptions on current facts, historical experience and various other factors that the Company believes to be reasonable and prudent. Actual results may differ materially from these estimates.
The following is a summary of what the Company believes to be its most critical accounting policies and estimates.
Consolidation
TheseThe Company's consolidated financial statements include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest, including the Consolidated Funds, in which the Company has a controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. The Company’sCompany's investment funds are not subject to these consolidation provisions with respect to their investments pursuant to their specialized accounting.
The Company’sCompany's consolidated financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the Consolidated Funds on a gross basis. The management fees and incentive income earned by the Company from the Consolidated Funds were eliminated in consolidation; however, the Company’sCompany's allocated share of net income from these investment funds was increased by the amount of this eliminated income. Hence, the consolidation of these investment funds had no net effect on the Company’sCompany's net earnings.
The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those investment funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary.
In accordance with these standards, during the twelve months ended December 31, 2017 the Company consolidated seven funds for which it acts (or acted) as the general partner and investment manager. As of December 31, 2017 the Company consolidated the following funds: Ramius Enterprise LP (“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), Cowen Healthcare Investments Fund II LP ("Cowen Healthcare II"), Caerus
Select Fund LP ("Caerus LP") (between May 1, 2016 through March 1, 2017 when the fund was liquidated), Ramius Archview Credit and Distressed Master Fund ("Archview Master Fund") (from December 31, 2015 through July 31, 2017 when the fund was liquidated) and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (collectively the "Consolidated Funds").
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting operating entityVoting Operating Entity ("VOE") or a variable interest entityVariable Interest Entity ("VIE") under US GAAP.
Voting Operating Entities—VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently, and (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance.performance and (iii) voting rights of equity holders are proportionate to their obligation to absorb losses or the right to receive returns.
Under US GAAP consolidation requirements, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units.
Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation
model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate it.
The Company reconsidersdetermines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE by performing a periodic qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the design of the VIE.
The VIEs the Company has invested in act as investment managers and/or investment companies that may be managed by the Company. The VIEs are financed through their operations and/or loan agreements with the Company.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily investment funds and real estate entities for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights. The Company consolidates these investment funds when its variable interest is potentially significant to the entity (see Note 6 for additional disclosures on VIEs).
The Company does not consolidate certain entities that are VIEsconsolidates investment funds for which it acts as it has concluded that it is not the primary beneficiary in each instance. Fund investors are entitled to all of their economics of these VIEs with the exception of the management feemanaging member/general partner and incentive income, if any, earned by the Company. The Company's involvement with funds and real estate entities that are unconsolidated VIEs is limited to providing investment management services in exchange for management fees and incentive income. Althoughmanager. At December 31, 2022, the Company may advance amountsconsolidated Ramius Enterprise LP (“Enterprise LP”), an investment fund. At December 31, 2021, the Company consolidated the following investment funds: Enterprise LP and pay certain expenses on behalfCowen Private Investments LP ("Cowen Private").
During the first quarter of 2022, the funds and real estate entities that it considersCompany deconsolidated Cowen Private as the fund was liquidated. During the first quarter of 2021, the Company deconsolidated Cowen Sustainable Investments I, LP ("CSI I LP") due to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these entities outside of regular investment management services.the Company's ownership being diluted through a capital equalization event.
Equity Method Investments—For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in netNet gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary.
Other—If the Company does not consolidate an entity or apply the equity method of accounting, or account for an investment under the cost method, the Company accounts for its investment in such entitiesentity (primarily allconsisting of securities of such entity which are boughtpurchased and held principally for the purpose of selling them in the near term and classified as trading securities) in accordance with US GAAP,, at fair value with unrealized gains (losses) resulting from changes in fair value reflected within Investment income (loss) - Securities principal transactions, net gains (losses) on securities, derivatives and other investmentsor Investment income (loss) - portfolio fund investment income (loss) in the accompanying consolidated statements of operations.
Retention of Specialized Accounting—The Consolidated Funds and certain other consolidated companies are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized accounting for these funds pursuant to US GAAP.accounting. The Company reports its investments on the consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within Consolidated Funds - Principal transactions, net realized and unrealized gains (losses) on investments and other transactions.in the accompanying consolidated statements of operations. Accordingly, the accompanying consolidated financial statements reflect different accounting policies for investments depending on whether or not they are held through a consolidated investment company.
Certain portfolio fund investments qualify as equity method investments and are investment companies that apply specialized industry accounting. In applying equity method accounting guidance, the Company retains the specialized accounting of the investees and reports its investments on the consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within Investment Income - portfolio fund principal transactions, net in the accompanying consolidated statements of operations.
In addition, the Company's broker-dealer subsidiaries apply the specialized
industry accounting for brokers and dealers in securities, also prescribed under US GAAP. Thewhich the Company also retains specialized accounting upon consolidation.
Valuation of investments and derivative contracts
US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs (level 3 measurements). Thethreelevels of the fair value hierarchy are as follows:
Level 1Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has
the ability to access at the measurement date;
Level 2Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including
inputs in markets that are not considered to be active; and
Level 3Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little,
if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this
category requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's perceived risk of that instrument. For additional information regardingInputs reflect unadjusted quoted prices in active markets for identical assets or liabilities that the use of unobservable inputsCompany has the ability to fair value assets and liabilities see Note 7 inaccess at the accompanying consolidated Financial Statement in Part 1 Item 1.measurement date.
The Company and its operating subsidiaries act as the manager for the Consolidated Funds. Both the Company and the Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair value of these investmentsinvestment is generally estimated based on proprietary models developed bytheir proportional rights of the Company, which include discounted cash flow analysis, publicunderlying portfolio company and are valued using market comparables,quotations when readily available. When market quotations are unavailable or deemed not representative, the level 3 investments are valued using a market approach, an income approach, or a combination of both approaches. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques and may be based, at least in part, on independently sourced market information. The material estimatesto convert future cash flows to a single present value. In following these approaches, the significant inputs and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, the premium ascribed to a controlling financial interest, selected equity volatilities and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation goes intoimpact the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly from the fair values that would have been used had a ready market for the investments existed and such differences could be material.material.
The Company primarily uses the “market approach”market approach to value its financial instruments measured at fair value. In determining an instrument's level within the hierarchy, the Company categorizes the Company's financial instruments intothreecategories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further be divided between those held long or sold short.
The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected the fair value option for certain of its investments held by its operating companies. This option has been elected because the Company believes that it is consistent with the manner in which the business is managed, as well as the way that financial instruments in other parts of the business are recorded.
Securities—Securities with values based on quoted market prices in active markets for identical assets are classified within level 1 of the fair value hierarchy. These securities primarily include active listed equities, certain U.S. government and sovereign obligations, Exchange Traded Funds ("ETFs"), mutual funds and certain money market securities. The Company does not adjust the quoted price for such instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Certain positions for which trading activity may not be readily visible, consisting primarily of convertible debt, corporate debt and loans and restricted equities, are stated at fair value and classified within level 2 of the fair value hierarchy. The estimated fair values assigned by management are determined in good faith and are based on available information considering trading activity, broker quotes, quotations provided by published pricing services, counterparties and other market participants, and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. As
level 2 investments include positions that are not always traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability.
Derivative contracts—Derivative contracts can be exchange-traded or privately negotiated over-the-counter (“OTC”). Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC derivatives, such as generic forwards, swaps and options, haveare classified as level 2 when their inputs which can generally be corroborated by market data and are therefore classified within level 2. data. OTC derivatives, such as swaps and options, where market data is notwith significant inputs that cannot be corroborated by readily available or observable market data are classified as level 3.
Other investments—Other investments consist primarily of portfolio funds, real estate investmentscarried interest and equity method investments, which are valued as follows:
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i. | Portfolio funds—Portfolio funds (“Portfolio Funds”) include interests in funds andi. Portfolio funds—Portfolio funds include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company applies the practical expedient provided by the Company or its affiliates. The Company follows US GAAP regarding fair value measurements and disclosures guidance relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The guidance permits, as a practical expedient, an entity holding investments in certain entities that either are investment companies as defined by the American Institute of Certified Public Accountants ("AICPA") Audit and Accounting Guide, Investment Companies, or have attributes similar to an investment company, and calculate net asset value per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. In accordance with US GAAP, investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The practical expedient permits an entity holding investments in certain entities that either are investment companies or have attributes similar to an investment company, and calculate NAV per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy. |
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ii. | Real estate investments—Real estate debt and equity investments are valued at fair value. The fair value of real estate investments are estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. Real estate investments without a public market are valued based on assumptions and valuation techniques used by the Company. Such valuation techniques may include discounted cash flow analysis, prevailing market capitalization rates or earnings multiples applied to earnings from the investment, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties, consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence, as well as independent external appraisals. In general, the Company considers several valuation techniques when measuring the fair value of a real estate investment. However, in certain circumstances, a single valuation technique may be appropriate. Real estate investments are reviewed on a quarterly basis by the Company for significant changes at the property level or a significant change in the overall market which would impact the value of the real estate investment resulting in unrealized appreciation or depreciation.
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Real estate and capital markets are cyclical in nature. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates and interest and inflation rates. In addition, the Company invests in real estate and real estate related investments for which no liquid market exists. The market prices for such investments may be volatile and may not be readily ascertainable. Amounts ultimately realized by the Company from investments sold may differ from the fair values presented, and the differences could be material.
The Company's real estate investments are typically categorized as level 3 investments within the fair value hierarchy as management uses significant unobservable inputs in determining their estimated fair value.hierarchy.
Revenue recognition
The Company's principal sources of revenue are derived from two segments: an investment management segmentii. Carried Interest—For the private equity and a broker-dealer segment, as more fully described below.
Our investment management segment generates revenue through three principal sources: management fees,debt fund products the Company offers, the Company is allocated incentive income andby the investment incomefunds based on the extent by which the investment funds' performance exceeds predetermined thresholds. Carried interest allocations are generally structured from a legal standpoint as an allocation of capital in the Company's own capital.
Our broker-dealer segment generates revenue through three principal sources: investment banking, brokerage and investment income.
Management fees
Company’s capital account. The Company earns management fees from affiliated private funds and certain managed accounts that it serves asfor carried interest allocations by applying an equity ownership model. Accordingly, the investment managerCompany accrues performance allocations quarterly based on assets under management. The actual management fees received vary depending on distribution fees or fee splits paid to third parties either in connection with raising the assets or structuring the investment.
Several management companiesfair value of the private funds are owned jointly byunderlying investments assuming hypothetical liquidation at book value.
iii. Equity Method Investments—For operating entities over which the Company and third parties. Accordingly,exercises significant influence but which do not meet the management fees generated by these funds are split betweenrequirements for consolidation as outlined above, the Company and these third parties. Pursuant to US GAAP, these fees received by the management companies that are accounted for underapplies the equity method of accounting andaccounting. The Company's investments in equity method investees are reflected under net gains (losses) on securities, derivatives andrecorded in other investments in the accompanying consolidated statements of operations.
Management fees are generally paid on a quarterly basis at the beginningfinancial condition. The Company's share of each quarter in arrears and are prorated for capital inflows and redemptions. While some investors may have separately negotiated fees, in general the management fees are as follows:
Private Funds. Management fees for the Company's private funds, including the private healthcare fund, are generally charged at an annual rate of up to 2% of assets under managementearnings or notional trading level. Management fees are generally calculated monthly based on assets under management at the end of each month before incentive income.
Real Estate. Management feeslosses from the Company's real estate business are generally charged at an annual rate from 0.25% to 1.50% of total capital commitments during the investment period and of invested capital or net asset value of the applicable fund after the investment period has ended. Management fees are typically paid to the general partners on a quarterly basis, at the beginning of the quarter in arrears, and are prorated for changes in capital commitments throughout the investment period and invested capital after the investment period.
HealthCare Royalty Partners. In HealthCare Royalty Partners main funds, during the investment period (as defined in the relevant partnership agreements), management fees are generally charged at an annual rate of 1% to 2% of committed capital. After the investment period, management fees for these funds are generally charged at an annual rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the funds. For the other funds (and managed accounts) managed by Healthcare Royalty Partners, the management fee ranges from 0.2% to 1% and there is no adjustment based on an investment period. Management fees for the HealthCare Royalty Partners funds are calculated on a quarterly basis.
Cowen Trading Strategies. Advisory fees for the Company's collateral management advisory business are typically paid quarterly based on assets under management but generally subject to a minimum fee.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management agreements) with respect to certain of the Company's investment management products, allocable for each fiscal year that exceeds cumulative unrecovered net losses, if any, that have been carried forward from prior years. For the products we offer, incentive income earned is typically up to 20% for private funds (in certain cases on performance in excess of a benchmark), of the net profits earned for the full year that are attributable to each fee-paying investor. Generally, incentive income on real estate funds is earned after the investor has received a full return of their invested capital, plus a preferred return. However, for certain real estate funds, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred return on a current basis or on an investor by investor basis. These funds are generally subject to a potential clawback of these incentive fees upon the liquidation of the fund if the investor has not received a full return of its invested capital plus the preferred return thereon. Incentive income in the HealthCare Royalty Partners funds is generally earned only after investors receive a full return of their capital plus a preferred return. Several general partners of the Company's private funds are jointly owned by the Company and third parties. Accordingly, the incentive fees generated by these funds are split between the Company and these third parties. Pursuant to US GAAP, incentive income received by the general partners that are accounted for under the equity method of accounting are reflected under netinvestees is included in Net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a “high-water mark.” The Company has elected to record incentive income revenue in accordance with “Method 2” of US GAAP. Under Method 2, the incentive income from the Company's investment management products for any period is based upon the net profits of those investment management products at the reporting date. Any incentive income recognized in the accompanying consolidated statement of operations may be subject to future
reversal based on subsequent negative performance prior to the conclusion of the fiscal year, when all contingencies have been resolved.
Carried interest in the real estate funds and HealthCare Royalty Partners funds are subject to clawback to the extent that the carried interest actually distributed to date exceeds the amount due to the Company based on cumulative results. As such, the accrual for potential repayment of previously received carried interest, which is a component of accounts payable, accrued expenses and other liabilities, represents all amounts previously distributed to the Company, less an assumed tax liability, that would need to be repaid to certain funds if these funds were to be liquidated based on the current fair value of the underlying funds' investments as of the reporting date. The actual clawback liability does not become realized until the end of a fund's life.
Investment Banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's Target Sectors.
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees and placement and sales agent fees.
Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible security offerings. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the underwriting process have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment for the purchase of securities from the issuer; and (iii) the Company has been informed of the number of securities that it has been allotted.
When the Company is not the lead manager for an underwriting transaction, management must estimate the Company's share of transaction-related expenses incurred by the lead manager in order to recognize revenue. Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.
Strategic/financial advisory fees. The Company's strategic advisory revenues include success fees earned in connection with advising companies, principally in mergers, acquisitions and restructuring transactions. The Company also earns fees for related advisory work such as providing fairness opinions. The Company records strategic advisory revenues when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.
Placement and sales agent fees. The Company earns agency placement fees and sales agent commissions in non-underwritten transactions such as private placements of loans and debt and equity securities, including, private investment in public equity transactions (“PIPEs”), and as sales agent in at-the-market offerings of equity securities. The Company records placement revenues (which may be in cash and/or securities) when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured. The Company records sales agent commissions on a trade date basis. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.
Brokerage
Brokerage revenue consists of commissions, principal transactions, equity and credit research fees and trade conversion revenue.
Commissions. Commission revenue includes fees from executing and clearing client transactions and commission sharing arrangements. These fees are recognized on a trade date basis. The Company permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Commissions on soft dollar brokerage are recorded net of the related expenditures on an accrual basis. The costs of commission recapture arrangements are recorded on an accrual basis for each eligible trade and shown net of commission revenue.
Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and
trading gains and losses on inventory and other Company positions, which include warrants previously received as part of investment banking transactions. In certain cases, the Company provides liquidity to clients by 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. These positions are typically held for a very short duration.
Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and credit research. Revenue is recognized once an arrangement exists, access to research has been provided, the fee amount is fixed or determinable, and collection is reasonably assured.
Trade conversion revenue. Trade conversion revenue includes the fee earned from converting foreign securities into an American Depository Receipt (“ADR”) and the fee earned from converting an ADR into foreign securities on behalf of customers, and margins earned from facilitating customer foreign exchange transactions. Trade conversion revenue is recognized on a trade date basis.
Investment Income
Investment income earned by the investment management and broker-dealer segments are earned from investing the Company's capital in various strategies and from investments in private capital raising transactions of its investment banking clients.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.
In accordance with US GAAP requirements for testing for impairment of goodwill, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Under US GAAP,In testing for goodwill impairment, the Company has the option to first assesses theassess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amounts asamount. If, after assessing the totality of events and circumstances, the Company concludes that fair value exceeds its carrying amount, then performing a basis for determining if itquantitative impairment test is necessarynot necessary. If the Company concludes otherwise, the Company is required to perform the two-step approach. The first stepa quantitative impairment test that requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds theits fair value, there isthen the Company recognizes an indication that the related goodwill might be impaired and the step two is performed to measureimpairment charge for the amount of impairment, if any.
The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. Ifby which the carrying amount ofexceeds the reporting unit goodwill exceeds the impliedunit’s fair value of that goodwill, an impairment is recognized in an amount equal to that excess. Goodwill impairment tests involve significant judgment in determining the estimates of future cash flows, discount rates, economic forecast and other assumptions which are then used in acceptable valuation techniques, such as the market approach (earning and or transactions multiples) and/or income approach (discounted cash flow method). Changes in these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill.value.
Intangible assets
Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not
be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the accompanying consolidated statements of operations if the sum of the estimated discountedundiscounted cash flows relating tofrom the use or disposition of the asset or asset group is less than the corresponding carrying value.
Income taxes
The Company accounts for income taxes in accordance with US GAAP which requires the recognition of tax benefits or expenses based oncontinually monitors the estimated future tax effects of temporary differences between the financial statement and tax basis of its assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to an amount that is more likely than not to be realized. We evaluate our deferred tax assets for recoverability considering negative and positive evidence, including our historical financial performance, projections of future taxable income, future reversalsaverage useful lives of existing taxable
temporary differences, and tax planning strategies. We record a valuation allowance against our deferred tax assets to bring them to a level that it is more likely than not to be utilized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period. Because the recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income and the application of inherently complex tax laws, we have identified the assessment of deferred tax assets and the need for any related valuation allowance as a critical accounting estimate.intangible assets.
Legal Reserves
The Company estimates potential losses that may arise out of legal and regulatory proceedings and records a reserve and takes a charge to income when losses with respect to such matters are deemed probable and can be reasonably estimated, in accordance with US GAAP. These amounts are reported in other expenses, net of recoveries, in the consolidated statements of operations. See Note 22 "Commitments and Contingencies"27 in our accompanying consolidated financial statements for the annualquarter ended December 31, 20172022 for further discussion.
Recently adopted and future adoption of accounting pronouncements
For a detailed discussion, see Note 3 "Recently issued accounting2aa "Recent pronouncements" in our accompanying consolidated financial statements for the annualyear ended December 31, 2017.2022.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary exposure to market risk is a function of our role as investment manager for our funds and managed accounts, our role as a financial intermediary in customer trading and market makingmarket-making activities, as well as the fact that a significant portion of our own capital is invested in securities. Adverse movements in the prices of securities that are either owned or sold short may negatively impact the Company's management fees and incentive income, as well as the value of our own invested capital.
The market value of the assets and liabilities in our investment funds and managed accounts, as well as the Company's own securities, may fluctuate in response to changes in equity prices, interest rates, credit spreads, currency exchange rates, commodity prices, implied volatility, dividends, prepayments, recovery rates and the passage of time. The net effect of market value changes caused by fluctuations in these risk factors will result in gains (losses) for our investment funds and managed accounts which will impact our management fees and incentive income and for the Company's securities which will impact the value of our own invested capital as well as the capital utilized in facilitating customer trades. Some of the Company's investments are in private companies and other investments are in securities that are subject, from time to time, to contractual lock-up agreements or other resale restrictions. The private investments we have made generally have no established trading market or are generally subject to restrictions on resale. Our inability to liquidate these securities when it may be otherwise advantageous for us to do so could lead to volatility in the market value ascribed to these investments and securities which could adversely affect our investment income.
The Company's risk measurement and risk management processes are an integral part of our proprietary investment process as well as market making and customer facilitation trading activities. These processes are implemented at the individual position, strategy and total portfolio levels and are designed to provide a complete picture of the risks of the Company's balance sheet. The key elements of our risk reporting include sensitivities, exposures, stress testing and profit and loss attribution. As a result of our views of levels of risk being taken, the Company may undertake to hedge out some or all of any or all risks at either the individual position, strategy or total portfolio levels.
Impact on Management Fees
The Company's management fees are generally based on the net asset value of the Company's investment funds and managed accounts. Accordingly, management fees will change in proportion to changes in the market value of investments held by the Company's investment funds and managed accounts.
Impact on Incentive Income
The Company's incentive income is generally based on a percentage of the profits of the Company's various investment funds and managed accounts, which is impacted by global economies and market conditions as well as other factors. Consequently, incentive income cannot be readily predicted or estimated.
Custody and prime brokerage risks
There are risks involved in dealing with the custodians or prime brokers who settle trades. Under certain circumstances, including certain transactions where the Company's assets are pledged as collateral for leverage from a non-broker-dealer custodian or a non-broker-dealer affiliate of the prime broker, or where the Company's assets are held at a non-U.S. prime broker, the securities and other assets deposited with the custodian or broker may be exposed to credit risk with regard to such parties. In
addition, there may be practical or timing problems associated with enforcing the Company's rights to its assets in the case of an insolvency of any such party.
Market risk
Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is primarily related to the fluctuation in the fair values of securities owned and sold, but not yet purchased in the Company's investment funds and our role as a financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in financial instruments and risks arise in options, warrants and derivative contracts from changes in the fair values of their underlying financial instruments. Securities sold, but not yet purchased, represent obligations of the Company's investment funds to deliver specified securities at contracted prices and thereby create a liability to repurchase the securities at prevailing future market prices. We trade in equity securities as an active participant in both listed and over the counterover-the-counter markets. We typically maintain securities in inventory to facilitate our market making activities and customer order flow. We may use a variety of risk management techniques and hedging strategies in the ordinary course of our trading business to manage our exposures. In connection with our trading business, management also reviews reports appropriate to the risk profile of specific trading activities. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These activities are intended to ensure that our trading strategies are conducted within acceptable risk tolerance parameters, particularly when we commit our own capital to facilitate client trading. Activities include price verification procedures, position reconciliations and reviews of transaction booking. We believe these procedures, which stress timely communications between traders, trading management and senior management, are important elements of the risk management process.
A 10% change in the fair value of the investments held by the Company's investment funds as of December 31, 20172022 would result in a change of approximately $1.1 billion in our assets under management and would impact management fees by approximately $5.3$4.4 million on an annual basis. This number is an estimate. The amount would be dependent on the fee structure of the particular investment fund or funds that experienced such a change.
Currency risk
The Company is also exposed to foreign currency fluctuations. Currency risk arises from the possibility that fluctuations in foreign currency exchange rates will affect the value of such financial instruments, including direct or indirect investments in securities of non-U.S. companies. A 10% weakening or strengthening of the U.S. dollar against all or any combination of currencies to which the Company's investments or the Company's investment funds have exposure to exchange rates would not have a material effect on the Company's revenues, net loss or Economic Income.
Inflation risk
Because our assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial condition and results of operations in certain businesses.
Leverage and interest rate risk
There is no guarantee that the Company's borrowing arrangements or other arrangements for obtaining leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Company. Unfavorable economic conditions also could increase funding costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Company. In addition, a decline in market value of the Company's assets may have particular adverse consequences in instances where we have borrowed money based on the market value of those assets. A decrease in market value of those assets may result in the lender (including derivative counterparties) requiring the Company to post additional collateral or otherwise sell assets at a time when it may not be in the Company's best interest to do so.
Credit risk
The Company clears all of its securities transactions through clearing brokers on a fully disclosed basis. Pursuant to the terms of the agreements between the Company and the clearing brokers, the clearing brokers have the right to charge the Company for losses that result from a counterparty's failure to fulfill its contractual obligations. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing brokers, we believe there is no maximum amount assignable to this right. Accordingly, at December 31, 2017,2022, the Company had recorded no liability.
Credit risk is the potential loss the Company may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. The Company's exposure to credit risk at any point in time is represented by the fair value of the amounts reported as assets at such time.
In the normal course of business, our activities may include trade execution for our clients as well as agreements to borrow or lend securities. These activities may expose us to risk arising from price volatility which can reduce clients' ability to
meet their obligations. To the extent investors are unable to meet their commitments to us, we may be required to purchase or sell financial instruments at prevailing market prices to fulfill clients' obligations.
In accordance with industry practice, client trades are settled generally threetwo business days after trade date. Should either the client or the counterparty fail to perform, we may be required to complete the transaction at prevailing market prices.
We manage credit risk by monitoring the credit exposure to and the standing of each counterparty, requiring additional collateral where appropriate, and using master netting agreements whenever possible.
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We outsource all or a portion of certain critical business functions, such as clearing. Accordingly, we negotiate our agreements with these firms with attention focused not only on the delivery of core services but also on the safeguards afforded by back-up systems and disaster recovery capabilities. We make specific inquiries on any relevant exceptions noted in a service provider's System and Organization Controls (SOC) report on the state of its internal controls, when available.
Our service offerings in electronic and algorithmic trading require us to maintain consistent levels of speed and accuracy in the management of orders generated by our models. We monitor these activities on a continuous basis and do not believe that they comprise a material risk.
Our Internal Audit department oversees, monitors, measures, analyzes and reports on operational risk across the Company. The scope of Internal Audit encompasses the examination and evaluation of the adequacy and effectiveness of the Company's system of internal controls and is sufficiently broad to help determine whether the Company's network of risk management, control and governance processes, as designed by management, is adequate and functioning as intended. Internal Audit works with the senior management to help ensure a transparent, consistent and comprehensive framework exists for managing operational risk within each area, across the Company and globally.
We are focused on maintaining our overall operational risk management framework and minimizing or mitigating these risks through a formalized control assessment process to ensure awareness and adherence to key policies and control procedures. Primary responsibility for management of operational risk is with the businesses and the business managers therein. The business managers, generally, maintain processes and controls designed to identify, assess, manage, mitigate and report operational risk. As new products and business activities are developed and processes are designed and modified, operational risks are considered.
Legal risk
Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and standards. Legal risk also includes contractual and commercial risk such as the risk that a counterparty's performance obligations will be unenforceable. The Company has established procedures based on legal and regulatory requirements that are designed to achieve compliance with applicable statutory and regulatory requirements. The Company, principally through the Legal and Compliance Division, also has established procedures that are designed to require that the Company's policies relating to conduct, ethics and business practices are followed. In connection with its businesses, the Company has and continuously develops various procedures addressing issues such as regulatory capital requirements, sales and trading practices, new products, potential conflicts of interest, use and safekeeping of customer funds and securities, money laundering, privacy, cybersecurity, and recordkeeping. In addition, the Company has established procedures to mitigate the risk that a counterparty's performance obligations will be unenforceable, including consideration of counterparty legal authority and capacity, adequacy of legal documentation, the permissibility of a transaction under applicable law and whether applicable bankruptcy or insolvency laws limit or alter contractual remedies. The legal and regulatory focus on the financial services industry presents a continuing business challenge for the Company.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are listed in Item 15—"Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintainOur management, with the participation of the Chief Executive Officer and the Chief Financial Officer (the principal executive officer and principal financial officer, respectively), evaluated our disclosure controls and procedures as defined in Rule 13a-15(e) of December 31, 2022.
Based on that evaluation, the Exchange Act,Chief Executive Officer and the Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures are designedeffective to provide a reasonable assurance that information required to be disclosed by the Company in ourthe reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such informationreports is accumulated and communicated to our management, including ourthe Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer of the effectiveness of the design and operation ofCompany, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our disclosureinternal controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance level.
For Management's report on internal control over financial reporting see page F-2, and attestation report of our independent registered public accounting firm see page F-3.
In addition, there were no changes inthat occurred during the Company's fiscal year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, that occurred in the fourth quarter.for such period.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
DIRECTORS OF THE COMPANY
The number of directors currently serving on our Board of Directors is nine. The members of our Board of Directors are elected to serve a one-year term.
Set forth below is biographical information for each of the members of our Board of Directors. All ages are as of February 27, 2023.
Jeffrey M. Solomon. Age 56. Mr. Solomon is Chair and Chief Executive Officer of the Company and Chief Executive Officer of Cowen and Company, LLC, or Cowen and Company, and was appointed a director of the Company in December 2011. Previously, Mr. Solomon served as President of the Company, after serving in the definitive proxy statementroles of Chief Operating Officer and Head of Investment Banking. Mr. Solomon serves as a member of the Management Committee of Cowen. Mr. Solomon joined Cowen Investment Management (formerly Ramius) when it was founded in 1994 and was the co-portfolio manager responsible for our 2018 annual meetingthe development, management and oversight of stockholders under the captions "Executive Officers," "Boardmulti-strategy investment portfolio. Currently, Mr. Solomon is Vice Chair and an inaugural member of Directors," "Information Regardingthe Securities and Exchange Commission’s Small Business Capital Formation Advisory Committee which provides advice and recommendations on the Securities and Exchange Commission’s rules, regulations and policy matters related to small businesses, including smaller public companies. Mr. Solomon serves on the Board of Directors and Corporate Governance—Committees of the Board—AuditAmerican Securities Association and serves on the Executive Committee" "Information Regarding of the Partnership for NYC. Mr. Solomon is on the Board of Directors of the UJA-Federation of New York and Corporate Governance—Director Nomination Process," "Information Regardingis the Co-Chair of the King David Society. Mr. Solomon is also on the Board of Directors of the Foundation for Jewish Camp. Previously, Mr. Solomon was a member of the Committee on Capital Markets Regulation, an independent and nonpartisan 501(c)(3) research organization dedicated to improving the regulation of U.S. capital markets. Mr. Solomon graduated from the University of Pennsylvania in 1988 with a B.A. in Economics. Mr. Solomon provides the board with institutional knowledge of all aspects of the Company’s businesses and, as Chief Executive Officer, he is able to provide in-depth knowledge of the Company’s business and affairs, management’s perspective on those matters and an avenue of communication between the Board and senior management.
Brett H. Barth. Age 51. Mr. Barth was elected to our Board on June 26, 2018. Mr. Barth co-founded BBR Partners in 2000 and is a Co-CEO, co-managing the firm and overseeing all investment and client activity. He has extensive experience vetting investment opportunities across the asset class spectrum and through a range of market environments, working with both traditional and alternative investment managers. Mr. Barth is also a member of BBR’s Executive Committee and Investment Committee. Prior to founding BBR, Mr. Barth was in the Equities Division of Goldman Sachs. Previously, he served in Goldman’s Equity Capital Markets groups in New York and Hong Kong. He began his career in Goldman Sachs’ Corporate Governance—ProceduresFinance Department. Mr. Barth is an independent director of Golden Arrow Acquisition Corp (“GAMC”) and serves on GAMC’s Audit Committee. Mr. Barth is a trustee of the University of Pennsylvania as well as a member of the Board of Overseers of the Graduate School of Education. He previously served as both the Chair of the Penn Fund, the University of Pennsylvania’s undergraduate annual giving program, and as the Inaugural Chair of the Undergraduate Financial Aid Leadership Council. He is a member of the board and executive committee of the UJA-Federation of New York, he co-chairs the Annual Campaign and he
serves on the endowment’s Investment Committee. Mr. Barth was awarded the Alan C. Greenberg Young Leadership Award by UJA-Federation of New York, Wall Street & Financial Services Division. In addition, Mr. Barth is a member of the Investment Advisory Counsel for NominatingWaycrosse, Inc., a premier multi-generational, single-family office based in Minneapolis, MN. Mr. Barth graduated summa cum laude with concentrations in Finance and Accounting from the Wharton School of the University of Pennsylvania. Mr. Barth provides the Board with extensive investment and wealth management expertise.
Katherine E. Dietze. Age 65. Ms. Dietze was appointed to our Board in June 2011 upon the completion of Cowen’s acquisition of LaBranche & Co., Inc., or LaBranche. Ms. Dietze was a member of LaBranche’s board of directors since January 2007. Ms. Dietze served as the Audit Committee Chair at LaBranche. Ms. Dietze spent over 20 years in the financial services industry prior to her retirement in 2005. From 2003 to 2005, Ms. Dietze was Global Chief Operating Officer for the Investment Banking Division of Credit Suisse First Boston. From 1996 to 2003, she was a Managing Director Candidates," "Information Regardingin Credit Suisse First Boston’s Telecommunications Group. Prior to that, Ms. Dietze was a Managing Director and Co-Head of the Telecommunications Group in Salomon Brothers Inc’s Investment Banking Division. Ms. Dietze began her career at Merrill Lynch Money Markets after which she moved to Salomon Brothers Inc. to work on money market products and later became a member of the Investment Banking Division. Ms. Dietze is a director, a member of the Governance Committee and Chair of the Finance Committee of Matthews International Corporation (MATW), a designer, manufacturer and marketer of memorialization products and brand solutions. Ms. Dietze was a member of the Board of Trustees for Liberty Property Trust, which was purchased by Prologis. Ms. Dietze holds a B.A. from Brown University and an M.B.A. from Columbia Graduate School of Business. Ms. Dietze provides the Board with extensive experience in Investment Banking management and corporate governance expertise as a public company director.
Gregg A. Gonsalves. Age 55. Mr. Gonsalves was appointed to our Board in April 2020. Mr. Gonsalves has been an advisory partner with Integrated Capital LLC, a leading, hotel-focused, private real estate advisory and investment firm since 2013. Prior to joining Integrated Capital, Mr. Gonsalves was a managing director at Goldman Sachs and was the partner responsible for the Real Estate Mergers & Acquisition business. In his 20-year career at Goldman Sachs, Mr. Gonsalves completed over 50 M&A transactions worth approximately $100 billion in deal value, working with a variety of companies in a wide range of industries. Mr. Gonsalves also serves on the public Boards of timberland REIT Rayonier Inc., and real estate REIT RREEF Property Trust, Inc., and recently served as Chairman of the Board of Cedar Realty Trust, a grocery anchored, publicly traded REIT, until its sale in 2022; he also serves on the private Boards of real estate REIT RREEF America REIT II, and POP Tracker LLC, a private start-up company focused on providing third party proof of performance to the out of home advertising industry. He began his career as a sales engineer at Mobil Oil Corporation from 1989 to 1991. Mr. Gonsalves received a B.S. from Columbia University and received an M.B.A. from Harvard Business School. Mr. Gonsalves is presently Chairman of the Board of Directors of the Jackie Robinson Foundation, where he has served as a Board member for approximately the past ten years. Mr. Gonsalves provides the Board with extensive investment banking and Corporate Governance—Codereal estate investment experience.
Lorence H. Kim M.D.. Dr. Kim was appointed to our Board on February 15, 2022. Dr. Kim is currently the co-founder and managing partner of Ascenta Capital, a biotech venture capital firm. Previously, he was a Venture Partner at Third Rock Ventures. From April 2014 until June 2020, he served as Chief Financial Officer of Moderna, leading efforts to raise $4.4 billion of capital to build the company’s mRNA platform and a pipeline of novel medicines. At the time of his departure, Moderna had raised the three largest private financings and the largest IPO in biotech history. Dr. Kim joined Moderna after spending 14 years at Goldman Sachs, most recently as a Managing Director and co-head of the U.S. biotechnology investment banking effort. Dr. Kim currently serves as a member of the Boards of Directors of Revolution Medicines, a precision oncology company focused on developing targeted therapies to inhibit frontier targets in RAS-addicted cancers, AmerisourceBergen, a global pharmaceutical solutions leader, Flare Therapeutics, a biotechnology company targeting transcription factors to discover precision medicines for cancer and other diseases, and Abata Therapeutics, a company focused on translating the biology of regulatory T cells (Tregs) into transformational medicines for patients living with severe autoimmune and inflammatory diseases, and on the Board of Governors of the American Red Cross. He previously served on the Board of Seres Therapeutics. Dr. Kim graduated magna cum laude from Harvard University with a bachelor’s degree in biochemical sciences. He earned an M.B.A. in healthcare management as a Palmer Scholar from the Wharton School of the University of Pennsylvania and an M.D. from the University of Pennsylvania School of Medicine. Dr. Kim provides the Board with expertise and insight into matters such as investment banking, biotechnology corporate finance, oversight and strategy.
Steven Kotler. Age 76. Mr. Kotler was elected to our Board on June 7, 2010. Mr. Kotler currently serves as Vice Chairman of the private equity firm Gilbert Global Equity Partners, which he joined in 2000. Prior to joining Gilbert Global, Mr. Kotler, for 25 years, was with the investment banking firm of Schroder & Co. and its predecessor firm, Wertheim & Co., where he served in various executive capacities including President & Chief Executive Officer, and Group Managing Director and Global Head of Investment and Merchant Banking. Mr. Kotler is a director of CPM Holdings, an international agricultural process equipment company; and Co-Chairman of Birch Grove Capital, an asset management firm. Mr. Kotler is a member of the Council on Foreign Relations; and, from 1999 to 2002, was Council President of The Woodrow Wilson International Center for Scholars. Mr. Kotler has previously served as a Governor of the American Stock Exchange, The New York City Partnership and Chamber of Commerce’s Infrastructure and Housing Task Force, The Board of Trustees of Columbia Preparatory School; and, the Board of Overseers of the California Institute of the Arts. Mr. Kotler also previously served as a director of Cowen Holdings from
September 2006 until June 2007. Mr. Kotler provides the Board with extensive experience in leading an international financial institution and expertise in private equity.
Lawrence E. Leibowitz. Age 62. Mr. Leibowitz was elected to our Board on June 26, 2018. Mr. Leibowitz is a finance and technology entrepreneur who specializes in business transformation and capital markets. Mr. Leibowitz serves as Vice Chairman of XCHG Xpansiv, an intelligent commodities exchange focusing on renewable energy products. Mr. Leibowitz also serves on the board of various other private companies in the data management and digital law businesses. Most recently, Mr. Leibowitz served as Chief Operating Officer, Head of Global Equities Markets and as a Member of the board of directors of NYSE Euronext, holding such positions from 2007 to 2013. Prior to that, Mr. Leibowitz served as Chief Operating Officer of Americas Equities at UBS, Co-head of Schwab Soundview Capital Markets, and CEO of Redibook. Mr. Leibowitz was formerly a founding partner at Bunker Capital, and Managing Director and Head of Quantitative Trading and Equities technology at CS First Boston. Mr. Leibowitz provides the Board with extensive capital markets knowledge, including trading microstructure, regulation, asset management and quantitative methods.
Margaret L. Poster. Age 70. Ms. Poster was appointed to our Board in April 2019. Ms. Poster is a Principal at MSP Advisors LLC. Ms. Poster served as Executive Managing Director, Co-Lead Legal Sector Advisory Group from 2019 through 2022. Ms. Poster served as Chief Operating Officer and Managing Director of Willkie Farr & Gallagher LLP from 1991 through 2018. Ms. Poster formerly served as President of Workbench, Inc., Chief Financial Officer of Barnes & Noble Bookstores Inc. and Chief Financial Officer of the Jewelry & Sporting Good Division at W.R. Grace & Co. Ms. Poster began her career as an auditor at PricewaterhouseCoopers LLP. Ms. Poster was a Director of Generation Citizen, where she was the Chair of the Finance Committee and Audit Committee, and was a trustee of Blythedale Children’s Hospital from 1992 until 2011. Ms. Poster is a certified public accountant and received a Masters of Business ConductAdministration from Harvard Business School. Ms. Poster provides the Board with comprehensive operating and Ethics"public accounting experience.
Douglas A. Rediker. Age 62. Mr. Rediker was appointed to our Board in April 2015. Mr. Rediker is the Managing Partner of International Capital Strategies, LLC, a policy and "Section 16(a) Beneficial Ownership Reporting Compliance"markets advisory boutique based in Washington, D.C. Until 2012, he was a member of the Executive Board of the International Monetary Fund representing the United States. He has held senior and visiting fellowships at Brookings, the Peterson Institute for International Economics and at the New America Foundation. He has written extensively and testified before Congress on the subject of state capitalism, global finance, Sovereign Wealth Funds and other issues surrounding the relationship between international economic policy, financial markets, global capital flows and foreign policy. Mr. Rediker previously served as a senior investment banker and private equity investor for a number of investment banks, including Salomon Brothers, Merrill Lynch and Lehman Brothers. Mr. Rediker began his career as an attorney with Skadden Arps in New York and Washington, D.C. Mr. Rediker’s experience on global macro issues provides the Board with expertise relating to capital markets, the economy and global governance.
EXECUTIVE OFFICERS OF THE COMPANY
Biographies of the current executive officers of the Company are set forth below, excluding Mr. Solomon’s biography, which is incorporated hereinincluded under “Directors of the Company” above. Each executive officer serves at the discretion of the Board.
John Holmes. Age 59. Mr. Holmes serves as Chief Operating Officer and serves as a member of the Management Committee of Cowen. Mr. Holmes previously served as the Company’s Chief Administrative Officer and was appointed an executive officer in May 2013. Mr. Holmes was the Head of Technology and Operations at Cowen following the merger between Cowen and Company and Cowen Investment Management (formerly Ramius). Mr. Holmes joined Cowen Investment Management in June 2006 as Global Head of Operations. Prior to joining Cowen Investment Management, Mr. Holmes was Global Head of the Equity Product Team at Bank of America Securities. Mr. Holmes has also held senior operations management positions at Deutsche Bank, Credit Lyonnais and Kidder Peabody. His experience includes treasury, foreign exchange, equity, fixed income & derivative operations. Mr. Holmes is NASD licensed as a General Securities Representative, General Securities Principal and a Financial & Operations Principal.
Stephen A. Lasota. Age 60. Mr. Lasota serves as Chief Financial Officer of Cowen and serves as a member of the Management Committee of Cowen. Mr. Lasota was appointed Chief Financial Officer in November 2009. Prior to the consummation of the business combination of Cowen Holdings and Cowen Investment Management (formerly Ramius) in November 2009, Mr. Lasota was the Chief Financial Officer of Cowen Investment Management and a Managing Director of the company. Mr. Lasota began working at Cowen Investment Management in November 2004 as the Director of Tax and was appointed Chief Financial Officer in May 2007. Prior to joining Cowen Investment Management, Mr. Lasota was a Senior Manager at PricewaterhouseCoopers LLP.
Owen S. Littman. Age 50. Mr. Littman serves as General Counsel and Secretary of Cowen and serves as a member of the Management Committee of Cowen. Mr. Littman was appointed General Counsel and Secretary in July 2010. Following the consummation of the business combination of Cowen Holdings and Cowen Investment Management (formerly Ramius) in November 2009, Mr. Littman was appointed Deputy General Counsel, Assistant Secretary and Managing Director of Cowen and General Counsel and Secretary of Cowen Investment Management. Mr. Littman began working at Cowen Investment Management in October 2005 as its senior transactional attorney and was appointed General Counsel in February 2009. Prior to
joining Cowen Investment Management, Mr. Littman was an associate in the Business and Finance Department of Morgan, Lewis & Bockius LLP.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted a current copy of the code on our website, www.cowen.com. In addition, we intend to post on our website all disclosures that are required by reference.law or NASDAQ Stock Market listing standards concerning any amendments to, or waivers from, any provision of the code. You may also request a copy of the code by writing to Cowen Inc., Attn: Secretary, 599 Lexington Avenue, New York, NY 10022.
AUDIT COMMITTEE
Our Board has established a separately-designated standing Audit Committee which operates under a charter that has been approved by our Board.
Our Board has determined that all of the members of the Audit Committee are independent as defined under the rules of the Nasdaq Stock Market, and the independence requirements contemplated by Rule 10A-3 under the Exchange Act.
The current members of our Audit Committee are Ms. Dietze (Chairperson), Mr. Gonsalves, Dr. Kim, Mr. Kotler and Mr. Leibowitz. The Board has determined that Dr. Kim is an “audit committee financial expert” as defined by applicable SEC rules.
Item 11. Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
Our Compensation Committee, which is composed entirely of independent directors, determined the 2022 compensation of our named executive officers:
•Jeffrey M. Solomon, Chief Executive Officer;
•Stephen A. Lasota, Chief Financial Officer;
•John Holmes, Chief Operating Officer; and
•Owen S. Littman, General Counsel and Secretary.
The above named executive officers represented all of our executive officers as of December 31, 2022.
Compensation Philosophy and Objectives
Our compensation programs, including compensation of our named executive officers, are designed to achieve the following objectives:
•Pay for Performance. A significant portion of the total compensation paid to each named executive officer is variable and is directly tied to the Company’s Economic Operating Income. The amount of compensation available to be paid to our named executive officers is determined based on: (i) the management committee compensation pool based on the Company’s performance as described in more detail below; (ii) the performance of the Company on an absolute basis and through a comparison of our results to competitor firms; (iii) an evaluation of each named executive officer’s contribution to the Company, including contributions related to the revenue and profitability of the Company as well as leadership in alignment with our core values of Vision, Empathy, Sustainability and Tenacious Teamwork; and (iv) specific performance against individual qualitative goals.
•Align Named Executive Officers’ Interests with Stockholders’ Interests. Our Compensation Committee reviews each named executive officer’s performance as well as the Company’s financial results in the context of the market environment when determining year-end, performance-related compensation allotted from the management committee compensation pool. In addition, our Compensation Committee evaluated the Company’s performance compared to the performance of its peers and also considered an analysis of competitive compensation levels of named executive officers at the Company’s peer firms that was conducted by Pay Governance LLC, the independent compensation consultant to the Compensation Committee. Our Compensation Committee believes year-end, performance-related compensation should be delivered in a combination of short-term and long-term instruments.
•Recruiting and Retention. We operate in an intensely competitive industry, and we believe that our success is closely related to our recruiting and retention of highly talented employees and a strong management team. We try to keep our
compensation program generally competitive with industry practices so that we can continue to recruit and retain talented executive officers and employees.
2022 Compensation Determinations
As noted above, compensation for our named executive officers comes from our management committee compensation pool. The following is a summary of the process for determining the 2022 management committee compensation pool:
Actions Taken at the Beginning of 2022
•In consultation with the Compensation Committee, at the beginning of 2022, the Company established a targeted Economic Income compensation-to-revenue ratio for the year of between 56% and 57%.
•The Company has set a goal of achieving mid-teens after-tax ROCE on a consistent basis and this objective was reviewed with the Compensation Committee at the beginning of 2022. ROCE is calculated by taking the sum of the Company’s Adjusted Economic Operating Income divided by the average Common Equity of the Company during the fiscal year (with the average Common Equity for the fiscal year calculated by adding the Common Equity at the beginning of the fiscal year and the Common Equity at the end of the fiscal year and dividing by two).
Actions Taken During the Course of 2022
•Following the signing of the Merger Agreement with TD Bank, the Company determined that it would limit the 2022 compensation to revenue ratio to the lesser of a 56% value given compensation to revenue ratio or a 59% economic income to revenue ratio.
Actions Taken at the End of 2022 to Determine Compensation
•At the end of 2022, compensation pools for investment banking, markets and investment management were finalized based on the revenue guidelines established at the beginning of the year, with some modifications made based on the Company’s overall strong performance for the year in each of these areas.
•Once the compensation pools for the various revenue generating and non-revenue generating departments were finalized, the Compensation Committee considered the amount of compensation to be included in the pool for the members of the Company’s management committee, which includes the Company’s named executive officers. This pool was determined with reference to (i) the Economic Income compensation-to-revenue ratio and (ii) the overall Economic Operating Income to Stockholders.
–The Compensation Committee approved a value given compensation-to-revenue ratio for 2022 of 56%.
–Management and the Compensation Committee believe that the compensation pool for members of the Company’s management committee, which includes the Company’s named executive officers, should be directly tied to the Company’s operating performance. Accordingly, the Compensation Committee has determined guidelines that the management committee’s participation in the Company’s Economic Operating Income should be a percentage of the total amount of Economic Operating Income, with the management committee’s incremental participation decreasing as Economic Operating Income increases.
•The Company’s ROCE for the 2022 fiscal year was approximately 16%.
•After the Compensation Committee determined the management compensation pool for 2022 as described above, the Compensation Committee then considered certain other facts in determining compensation for our named executive officers, including, without limitation, individual contributions, historical compensation, our financial performance compared to comparable companies and other market data.
Collective and Individual Factors Considered to Determine Compensation
•The Compensation Committee considered collective and individuals factor in determining the compensation for each named executive officer in 2022. Although our named executive officers are not compensated directly based on the revenue they generate or, with respect to Messrs. Holmes, Lasota and Littman, the profitability directly attributable to their teams’ in business operations, the Compensation Committee does take this into account when determining compensation for the named executive officers since each of our named executive officers plays an important role in revenue generation and driving profitability. The Compensation Committee also considered certain individual factors in its determination of 2022 compensation for each named executive officer, including, without limitation, each named executive officer’s integral role in the negotiations of the proposed merger with TD Bank and their significant contributions and continued leadership to their respective teams (or, in the case of Mr. Solomon, the Company).
2022 Compensation Program and Payments
Base Salary
The purpose of base salary is to provide a set amount of cash compensation for each named executive officer that is not variable in nature and is generally competitive with market practices. This was consistent with standard practice within the securities and asset management industries and we believe this allowed us to reward performance.
In 2022 Mr. Solomon received a base salary of $1,000,000 and each of Messrs. Lasota, Holmes and Littman received a base salary of $725,000.
Annual Cash Bonus
The Compensation Committee approved annual cash bonus amounts for each of our named executive officers after review and consideration of the above factors and within the scope and confines of the established management committee compensation pool.
Annual cash bonuses are determined based on an informed judgment with final amounts determined at the discretion of the Committee within the confines of the established management committee compensation pool. This is consistent with our view that a significant portion of compensation paid is to be based on the performance of the Company and of each named executive officer.
In 2022, Mr. Solomon received a cash bonus of $4,500,000, and Messrs. Holmes, Lasota and Littman each received a cash bonus of $1,965,000.
Deferred Compensation
The annual bonus is typically paid partially in cash, partially in deferred cash and partially in equity. In 2022, deferred compensation was paid entirely in deferred cash as a result of the cash merger with TD Bank. The Compensation Committee believes that the practice of paying a portion of each named executive officer’s annual bonus in the form of deferred compensation is a useful tool to continue aligning the long-term interests of our named executive officers with the interest of our stockholders. After determining the aggregate cash values of annual bonuses payable to each of our named executive officers in respect of fiscal 2022, the Compensation Committee considered the percentage of the annual bonus compensation that each of our named executive officers would receive in the form of deferred cash. Jeffrey Solomon, our Chief Executive Officer, developed a proposal for the allocation of annual bonus compensation among the cash and deferred cash awarded to Messrs. Holmes, Lasota and Littman. The Compensation Committee discussed and ultimately approved the proposal and established an allocation of annual bonus compensation delivered through cash and deferred cash awarded to Mr. Solomon.
Deferred Cash Awards
Deferred cash awards relating to fiscal 2022 annual bonuses were awarded to our named executive officers in February 2023. Mr. Solomon received a deferred cash award of $4,500,000. Messrs. Holmes, Lasota and Littman each received a deferred cash award of $1,310,000. The deferred cash awards will vest with respect to 10% on August 15, 2023, 15% on November 15, 2023, 25% on August 15, 2024, 25% on August 15, 2025, and 25% on August 15, 2026.
Setting Compensation
The Compensation Committee is responsible for approving the compensation paid to our named executive officers as well as certain other highly compensated employees. In making compensation determinations, the Compensation Committee reviews information presented to them by the Company’s management, compensation peer group information and the recommendations of an independent compensation consultant engaged by the Compensation Committee. The Compensation Committee also reviews our compensation-to-revenue ratio on a quarterly basis and may adjust the targeted compensation-to-revenue ratio in order to maintain the Company’s compensation philosophy of aligning the interests of our named executive officers and our stockholders.
Involvement of Executive Officers
Mr. Solomon, our Chief Executive Officer, in consultation with our Chief Financial Officer, our General Counsel, our Chief Operating Officer and employees in our Human Resources department, assist the Compensation Committee in making compensation determinations. These individuals prepare information that is provided to, and reviewed by, the Compensation Committee, and the Chief Executive Officer makes recommendations to the Compensation Committee for their consideration. Our Chief Executive Officer is often invited to participate in Compensation Committee meetings; however, he recuses himself from all discussions regarding his own compensation.
Compensation Consultants
The Compensation Committee exercised its sole authority pursuant to its charter to directly engage Pay Governance LLC. Pay Governance LLC was retained by the Compensation Committee to provide advice, analysis, and assessment of alternatives related to the amount and form of executive compensation. Pay Governance LLC prepared certain Compensation Committee presentation materials (including the peer group data described below) during December 2022 and early 2023 at the request of the
Compensation Committee. The Compensation Committee meets with Pay Governance LLC from time to time without management present.
The Compensation Committee has assessed the independence of Pay Governance LLC pursuant to SEC and NASDAQ rules and concluded that no conflict of interest exists that would prevent Pay Governance LLC from independently representing the Compensation Committee. The Compensation Committee reviewed and was satisfied with Pay Governance LLC’s policies and procedures to prevent or mitigate conflicts of interest and that there were no business or personal relationships between members of the Compensation Committee and the individuals at Pay Governance LLC supporting the Compensation Committee.
Compensation Peer Group
The Compensation Committee, with the assistance of its independent compensation consultant, annually identifies a compensation peer group of firms with which we compete for executive talent. Our peer group includes investment banks with revenues and market capitalizations similar to ours as well as companies with significant asset management operations. In making compensation decisions for 2022, our Compensation Committee reviewed compensation information for similarly titled individuals at comparable companies gathered from public filings made in 2022 related to 2021 annual compensation and from subscriptions for other market data. For 2022, Pay Governance provided the Compensation Committee with peer group compensation data of B. Riley Financial, Evercore Partners Inc., Greenhill & Co., Inc., Houlihan Lokey, Inc., Jefferies Group, Lazard Ltd., Moelis & Company, Oppenheimer & Co. Inc., Perella Weinberg Partners, Piper Sandler Companies, PJT Partners Inc., Raymond James Financial, and Stifel Financial Corp. The Compensation Committee believes that information regarding pay practices at comparable companies is useful in two respects. First, as discussed above, we recognize that our pay practices must be competitive in our marketplace. By understanding the compensation practices and levels of the Company’s peer group, we enhance our ability to attract and retain highly skilled and motivated executives, which is fundamental to the Company’s success. Second, this data is one of the many factors the Compensation Committee considers in assessing the reasonableness of compensation. Accordingly, the Compensation Committee reviewed trends among these peer firms and considered this data when determining our named executive officers’ 2022 annual bonuses and other compensation, but did not utilize the peer firm compensation as a sole benchmark for determining executive compensation.
Relationship of Compensation Policies and Practices to Risk Management
The Board has discussed whether our compensation policies are reasonably likely to have a material adverse effect on our results. The Board noted that, consistent with our performance-based model, many of our employees receive a significant portion of their compensation through discretionary compensation tied to their individual or business unit performance, or a combination thereof. The Board noted that a lower portion of the Company’s revenues are derived from proprietary trading businesses and that a significant portion of many employees’ compensation is provided in the form of deferred compensation that vests over time, which has the effect of tying the individual employee’s long-term financial interest to the firm’s overall success. The Board believes that this helps mitigate the risks inherent in our business.
The Board noted that our risk management team continuously monitors our various business groups, the level of risk they are taking and the efficacy of potential risk mitigation strategies. Senior management also monitors risk and the Board is provided with data relating to risk at each of its regularly scheduled meetings. The Head of Risk meets regularly with the Board to present his views and to respond to questions. For these reasons, the Board believes that our overall compensation policies and practices are not likely to have a material adverse effect on us.
Clawback Policy
In March 2015, the Company adopted a clawback policy that allows the Company to recover incentive compensation from any executive officer if that executive officer engages in intentional misconduct that caused or contributed to a restatement of the Company’s financial results. In the event of a restatement, a committee consisting of the non-management members of the Board (the “Independent Director Committee”) will review the performance-based compensation and annual bonus compensation paid in the form of both cash and equity under the Company’s equity and incentive plans to any such executive (the “Awarded Compensation”). If the Independent Director Committee determines, in good faith, that the amount of such performance-based compensation or annual bonus actually paid or awarded to any such executive officer would have been a lower amount had it been calculated based on such restated financial statements (the “Actual Compensation”) then the Independent Director Committee shall, subject to certain exceptions, seek to recover for the benefit of the Company the after-tax portion of the difference between the Awarded Compensation and the Actual Compensation.
Executive Officer Stock Ownership Guidelines
The Company adopted stock ownership guidelines on March 18, 2015 that require the Company’s executive officers to hold Company stock or RSUs within the later of the adoption of the policy or five years of being designated as an executive officer. All named executive officers are in compliance with the stock ownership guidelines, which are set forth below.
| | | | | | | | |
| Chief Executive Officer | 8× Base Salary | $8,000,000 |
| Other Named Executive Officers | 3× Base Salary | $2,175,000 |
Anti-Hedging Policy
In order to support alignment between the interests of stockholders and employees, the Company maintains an anti-hedging policy that prohibits the “short sale” of Company securities. The policy prohibits employees from trading in options, warrants, puts and calls or similar instruments on Company securities. We allow directors and executive officers to hold up to 50% of their Company stock in a margin account. During 2022, all named executive officers were in compliance with this policy.
Employment Agreements
Each of our named executive officers was party to an employment agreement with the Company in 2022. The Compensation Committee views the employment agreements as an important tool in achieving our compensation objective of recruiting and retaining talented employees and a strong management team. The severance and change-in-control arrangements provided by the employment agreements are intended to retain our named executive officers and to provide consideration for certain restrictive covenants that apply following a termination of employment. None of our named executive officers have minimum guaranteed bonuses in their employment agreements.
Tax and Accounting Impact and Policy
The financial and income tax consequences (including the effects of Section 162(m) of the Code) to the Company of individual executive compensation elements are important considerations for the Compensation Committee when analyzing the overall design and mix of compensation. The Compensation Committee seeks to balance an effective compensation package for our named executive officers with an appropriate impact on reported earnings and other financial measures.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and has recommended to the Board the inclusion of the Compensation Discussion and Analysis in this Form 10-K.
Compensation Committee of the Board of Directors of Cowen Inc.
Brett H. Barth, Chair
Lawrence E. Leibowitz
Margaret L. Poster
Douglas A. Rediker
Summary Compensation Table
The following table sets forth compensation information for our named executive officers in 2022.
| | | | | | | | | | | | | | | | | | | | |
| Name & Principal Position | Year | Salary ($) | Bonus ($)(1) | Stock Awards ($)(2) | All Other Compensation ($)(3) | Total ($) |
Jeffrey M. Solomon Chief Executive Officer | 2022 | 1,000,000 | 4,500,000 | 6,388,083 | 3,605,888 | 15,493,973 |
| 2021 | 1,000,000 | 16,000,000 | 8,383,130 | 3,176,410 | 28,559,540 |
| 2020 | 1,000,000 | 13,000,000 | 3,157,115 | 1,833,388 | 18,990,503 |
Stephen A. Lasota Chief Financial Officer | 2022 | 725,000 | 1,965,000 | 849,759 | 357,603 | 3,897,362 |
| 2021 | 700,000 | 4,613,000 | 595,292 | 384,635 | 6,292,927 |
| 2020 | 700,000 | 4,847,295 | 899,110 | 373,870 | 6,820,275 |
John Holmes Chief Operating Officer | 2022 | 725,000 | 1,965,000 | 935,322 | 401,503 | 4,026,825 |
| 2021 | 700,000 | 5,056,000 | 595,292 | 405,860 | 6,757,152 |
| 2020 | 700,000 | 5,347,295 | 927,220 | 386,842 | 7,361,357 |
Owen S. Littman General Counsel and Secretary | 2022 | 725,000 | 1,965,000 | 849,759 | 369,384 | 3,909,143 |
| 2021 | 700,000 | 4,613,000 | 595,292 | 389,075 | 6,299,141 |
| 2020 | 700,000 | 4,847,295 | 899,110 | 366,686 | 6,818,910 |
(1) The amounts in this column reflect cash bonuses paid to the named executive officers in 2023 from the bonus pool established in respect of performance during the 2022 year.
(2)The entries in the stock awards column reflect the aggregate grant date value of the RSU and PSA awards granted in 2022 in connection with 2021 performance in accordance with FASB ASC 718, disregarding for this purpose the estimate of forfeitures related to service-based vesting conditions. The value of the PSA awards reflects the grant date value of the awards based on the target level of performance, which is less than the maximum possible value. The grant date value of the PSA awards assuming that the highest level of the applicable performance conditions will be achieved
is $5,731,198 for Mr. Solomon, $1,094,525 for Mr. Lasota, $1,215,241 for Mr. Holmes and $1,094,525 for Mr. Littman. For information on the valuation assumptions with respect to awards made, refer to the Company’s Share-Based Compensation and Employee Ownership Plans Note in the financial statements to this Form 10-K.
(3)Other compensation includes:
| | | | | | | | | | | | | | |
| Other Compensation ($) | Jeffrey M. Solomon | Stephen A. Lasota | John Holmes | Owen S. Littman |
| Vested Deferred Cash Awards | 3,425,963 | 293,995 | 330,440 | 305,402 |
| Dividend Equivalents | 179,925 | 63,608 | 71,063 | 63,982 |
Grants of Plan Based Awards
The following table provides information regarding grants of compensation-related, plan based awards made to the named executive officers during fiscal year 2022. These awards are also included in the Summary Compensation Table above.
| | | | | | | | | | | | | | | | | | | | | | | |
| Estimated Future Payouts Under Equity Incentive Plan Awards(1) |
| Grant Date | Corporate Action Date | Threshold (#) | Target (#) | Maximum (#) | All Other Stock Awards: Number of Shares of Stock or Units (#)(2) | Grant Date Fair Value of Stock Awards ($)(3) |
| Jeffrey M. Solomon | 2/18/22 | 1/13/22 | | — | — | 112,360 | 3,522,486 |
| 3/1/22 | 2/25/22 | 49,993 | 99,986 | 199,972 | — | 2,865,599 |
| Stephen A. Lasota | 2/18/22 3/1/22 | 1/13/22 2/25/22 | 9,548 | —
19,095 | —
38,190 | 9,649
— | 302,496 547,263 |
| John Holmes | 2/18/22 3/1/22 | 1/13/22 2/25/22 | 10,601 | —
21,201 | —
42,402 | 10,453
— | 327,702 607,621 |
| Owen S. Littman | 2/18/22 3/1/22 | 1/13/22 2/25/22 | 9,548 | —
19,095 | —
38,190 | 9,649
— | 302,496 547,263 |
(1)The amounts reported in these columns represent Performance RSUs that are scheduled to vest on December 31, 2024 based on the attainment of AROE targets, subject to the named executive officer’s continued employment through the applicable vesting date. These columns represent the number of Performance RSUs that vest at threshold achievement, target achievement and maximum achievement of the performance metrics applicable to such awards. At or below the threshold performance level, no shares will be paid out. At the maximum performance level, payout in excess of 120% will be settled in cash.
(2)RSUs will vest with respect to 12.5% on September 1, 2022; 12.5% on June 1, 2023; 25% on June 1, 2024; 25% on June 1, 2025; and 25% on June 1, 2026.
(3)The entries in the “Grant Date Fair Value of Stock Awards” column reflect the aggregate grant date fair value of the awards granted in 2022 computed in accordance with FASB ASC 718, disregarding for this purpose the estimate of forfeitures related to service based vesting conditions. The value of the PSA awards reflects the grant date value of the awards based on the target level of performance, which is less than the maximum possible value. The grant date value of the PSA awards assuming that the highest level of the applicable performance conditions will be achieved is $5,731,198 for Mr. Solomon, $1,094,525 for Mr. Lasota, $1,215,241 for Mr. Holmes and $1,094,525 for Mr. Littman. For information on the valuation assumptions with respect to awards made, refer to Note 23 in the Financial Statements.
Narrative Disclosure Relating to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
In January 2020, the Company entered into amended and restated employment agreements with Messrs. Solomon, Holmes, Lasota and Littman (the “Employment Agreements”). The Employment Agreements provide for the following material terms:
•An initial term that expired December 31, 2020. Following the expiration of the initial term, the terms of the agreements automatically extend for successive one-year terms, unless either party elects not to extend the term.
•A minimum annual base salary of $1,000,000 for Mr. Solomon and $700,000 for Messrs. Holmes, Lasota, and Littman. Each named executive officer is also eligible to receive an annual performance-based bonus as determined by the Compensation Committee.
•Pursuant to Mr. Solomon’s Employment Agreement, if Mr. Solomon’s employment is terminated by the Company without Cause or Mr. Solomon resigns for Good Reason (as such terms are defined in the Solomon Agreement) prior to, in connection with or following a Change in Control (as described in the Solomon Agreement), then subject to Mr. Solomon executing and not revoking a release of claims, he will be entitled to a lump sum severance payment equal to two and one-half times the sum of (x) Mr. Solomon’s base salary on the date of termination plus (y) the average of the highest annual bonuses paid to Mr. Solomon in two of the three calendar years preceding his date of termination, except that the foregoing severance amount will not be less than $3,250,000 or greater than $5,000,000 if Mr. Solomon’s termination occurs prior to a Change in Control.
•If Mr. Solomon elects to transition to Senior Advisor status upon reaching age 55, the terms of Mr. Solomon’s service as a Senior Advisor will be governed by the Senior Advisor Agreement. In particular, Mr. Solomon’s service as a Senior Advisor will continue until the earliest of (i) 15 days following Mr. Solomon’s written notice that he is terminating as a Senior Advisor, (ii) the second anniversary of the date he commences Senior Advisor status, (iii) the date of Mr. Solomon’s death or disability and (iv) the date Mr. Solomon is terminated by the Company for Cause. In consideration for providing Senior Advisor services, Mr. Solomon will receive a base salary at an annualized rate of $150,000 and will be entitled to secretarial and administrative support. Mr. Solomon will also be entitled to receive certain additional benefits while a Senior Advisor, including office space (or, at the Company’s election, payment of up to $60,000 per year for office space), financial planning services at the Company’s expense and continued payment by the Company of life insurance premiums.
•Pursuant to the Executive Agreements with Messrs. Holmes, Lasota and Littman (collectively, the “Executive Agreements”), if the executive’s employment is terminated by the Company without Cause or the executive resigns for Good Reason (each as described in the Executive Agreements) prior to a Change in Control (as described in the Executive Agreements), the executive will receive a lump sum cash payment equal to one and one-half times the sum of (x) the executive’s base salary in effect at the end of the calendar year immediately preceding termination plus (y) the average of the highest annual bonuses paid to the executive in two of the three calendar years preceding his date of termination (such sum, the “Severance Amount”), except that the foregoing severance amount will not be greater than $1,500,000. Pursuant to the Executive Agreements, if the executive’s employment is terminated by the Company without Cause or the executive resigns for Good Reason in connection with or following a Change in Control, the executive will receive a lump sum cash payment equal to two and one-half times the Severance Amount, which lump sum will not be subject to a cap.
•In the event that the executive retires after attaining age 57.5 (or age 55, in the case of Mr. Solomon) and provides the Company with at least 90 days’ advance notice, all outstanding equity awards and unvested deferred compensation then held by the executive will continue to vest in accordance with their terms as if the executive had continued to be an active employee of the Company, provided he does not engage in competitive activity at any time prior to the applicable vesting date and refrains from interfering with the Company’s employees and customers for 12 months following his retirement. Messrs. Holmes, Lasota and Solomon have reached the Executive Agreement retirement age.
•The executives have agreed not to compete with, or solicit customers or employees of, the Company during the term of the employment agreement and for a period of 180 days for Mr. Solomon and 120 days for Messrs. Holmes, Lasota and Littman.
2020 Equity Incentive Plan
The Company maintains the 2020 Equity Incentive Plan, as amended (the “2020 Plan”). The 2020 Plan provides that generally, unless otherwise determined by the Compensation Committee or as set forth in an award or employment agreement, in the event of a change in control (as defined in the 2020 Plan), all outstanding awards shall become fully vested and exercisable and all restrictions, forfeiture conditions or deferral periods on any outstanding awards shall immediately lapse, and payment under any awards shall become due. The Compensation Committee has determined that all awards to our named executive officers under the 2020 Plan will vest on a double-trigger basis in the event of a change in control.
Outstanding Equity Awards at 2022 Fiscal Year End
The following table contains certain information regarding equity awards held by the named executive officers as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Awards |
| | Number of Shares that Have Not Vested (#) | | Market Value of Shares that Have Not Vested ($)(1) | | Equity Incentive Plan Awards: Number of Unearned Units That Have Not Vested (#) | | Equity Incentive Plan Awards: Market Value of Unearned Units That Have Not Vested ($)(1) |
Jeffrey M. Solomon
| | | | | | | | |
2019 RSU Award(2) | | 40,219 | | 1,533,258 | | — | | — |
2020 RSU Award(3) | | 64,967 | | 2,509,026 | | — | | — |
2021 RSU Award(4) | | 87,859 | | 3,393,115 | | — | | — |
2021 PSA Award(5) | | — | | — | | 33,250 | | 1,284,115 |
2022 RSU Award(6) | | 98,315 | | 3,796,925 | | — | | |
2022 PSA Award(7) | | — | | — | | 49,993 | | 1,930,730 |
| | | | | | | | |
| Stephen A. Lasota | | | | | | | | |
2019 RSU Award(2) | | 4,708 | | 181,823 | | — | | — |
2020 RSU Award(3) | | 9,746 | | 376,391 | | — | | — |
2021 PSA Award(5) | | — | | — | | 8,600 | | 332,132 |
2022 RSU Award(6) | | 8,443 | | 326,069 | | — | | |
2022 PSA Award(7) | | — | | — | | 9,548 | | 368,724 |
| | | | | | | | |
| John Holmes | | | | | | | | |
2019 RSU Award(2) | | 5,773 | | 222,953 | | — | | — |
2020 RSU Award(3) | | 10,551 | | 407,480 | | — | | — |
2021 PSA Award(5) | | — | | — | | 8,600 | | 332,132 |
2022 RSU Award(6) | | 9,147 | | 353,257 | | — | | |
2022 PSA Award(7) | | — | | — | | 10,601 | | 409,391 |
| | | | | | | | |
| Owen S. Littman | | | | | | | | |
2019 RSU Award(2) | | 5,238 | | 202,292 | | — | | — |
2020 RSU Award(3) | | 9,746 | | 376,391 | | — | | — |
2021 PSA Award(5) | | — | | — | | 8,600 | | 332,132 |
2022 RSU Award(6) | | 8,443 | | 326,069 | | — | | — |
2022 PSA Award(7) | | — | | — | | 9,548 | | 368,724 |
(1)The values in the column are based on the $38.62 closing price of our Class A common stock on the NASDAQ Global Select Market on December 30, 2022.
(2)RSUs awarded on February 20, 2019 vest with respect to 12.5% on September 1, 2019, 12.5% on May 15, 2020, 25% on May 15, 2021, 25% on May 15, 2022 and 25% on May 15, 2023.
(3)RSUs awarded on February 19, 2020 vest with respect to 12.5% on December 1, 2020, 12.5% on September 1, 2021, 25% on September 1, 2022, 25% on September 1, 2023 and 25% on September 1, 2024.
(4)RSUs awarded on February 17, 2021 vest with respect to 25% on December 1, 2021, 25% on December 1, 2022, 25% on December 1, 2023 and 25% on December 1, 2024.
(5)PSAs awarded on February 17, 2021 will, to the extent earned, vest on December 31, 2023. These PSAs are scheduled to vest based on the attainment of AROCE target for the applicable performance period, subject to the named executive officer’s continued employment through the applicable vesting date. In accordance with SEC rules, the number of unearned PSAs is reported in the “Equity Incentive Plan Awards: Market Value of Unearned Units That Have Not Vested” column based on achieving threshold performance goals (i.e., 50% of target).
(6)RSUs awarded on February 18, 2022 vest with respect to 12.5% on September 1, 2022, 12.5% on June 1, 2023, 25% on June 1, 2024, 25% on June 1, 2025 and 25% on June 1, 2026.
(7)PSAs awarded on March 1, 2022 will, to the extent earned, vest on December 31, 2024. These PSAs are scheduled to vest based on the attainment of AROCE target for the applicable performance period, subject to the named executive officer’s continued employment through the applicable vesting date. In accordance with SEC rules, the number of unearned PSAs is reported in the “Equity Incentive Plan Awards: Market Value of Unearned Units That Have Not Vested” column based on achieving threshold performance goals (i.e., 50% of target).
Option Exercises and Stock Vested
The following table sets forth certain information concerning stock vested during the year ended December 31, 2022. No stock options were exercised by any of the named executive officers in 2022.
| | | | | | | | |
| Name | Number of Shares Acquired on Vesting | Value Realized on Vesting ($)(1) |
| Jeffrey M. Solomon | 242,722 | 8,495,163 |
| Stephen A. Lasota | 89,826 | 3,113,594 |
| John Holmes | 100,386 | 3,396,977 |
| Owen S. Littman | 90,359 | 3,126,397 |
(1)The value realized upon vesting of the stock awards is based on the $36.10 closing sale price of our Class A common stock on March 10, 2022, the $24.02 closing sale price of our Class A common stock on May 15, 2022, the $38.46 closing sale price of our Class A common stock on September 1, 2022 and the $38.59 closing sale price of our Class A common stock on December 1, 2022, the applicable vesting dates of the awards.
Potential Payments Upon Termination or Change in Control
Pursuant to the employment agreements with our named executive officers, upon certain terminations of employment or a change in control of the Company, our named executive officers are entitled to certain payments of compensation and benefits as described above under “Narrative Disclosure Relating to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.” The table below reflects the amount of compensation and benefits that would have been payable to each named executive officer in the event that the named executive officer had experienced the following events as of December 31, 2022: (i) a termination for cause or resignation, or voluntary termination, (ii) involuntary termination, (iii) an involuntary termination that occurs in connection with a change in control, (iv) termination by reason of an executive’s death, or (v) termination by reason of an executive’s disability.
| | | | | | | | | | | | | | | | | | | | |
| | | Triggering Events |
| Name | Type of Payment | Voluntary Termination ($) | Involuntary Termination
($) | Involuntary Termination in Connection with a Change in Control(4)(5) ($) | Death
($) | Disability
($) |
| Jeffrey M. Solomon | Cash Severance(1) | — | 41,907,227 | 62,907,207 | 34,407,227 | 34,407,227 |
Equity Acceleration(2) | — | 17,682,013 | 17,682,013 | 17,682,013 | 17,682,013 |
| Total | — | 59,589,240 | 80,589,220 | 52,089,240 | 52,089,240 |
| Stephen A. Lasota | Cash Severance(3) | — | 7,795,897 | 13,989,395 | 6,476,617 | 6,476,617 |
Equity Acceleration(2) | — | 2,285,995 | 2,285,995 | 2,285,995 | 2,285,995 |
| Total | — | 10,261,892 | 16,275,390 | 8,762,612 | 8,762,612 |
| John Holmes | Cash Severance(3) | — | 8,565,196 | 15,104,447 | 7,066,947 | 7,066,947 |
Equity Acceleration(2) | — | 2,446,737 | 2,446,737 | 2,446,737 | 2,446,737 |
| Total | — | 11,031,933 | 17,571,184 | 9,533,684 | 9,533,684 |
| Owen S. Littman | Cash Severance(3) | — | 8,010,153 | 14,012,401 | 6,510,153 | 6,510,153 |
Equity Acceleration(2) | — | 2,306,464 | 2,306,464 | 2,306,464 | 2,306,464 |
| Total | — | 10,316,617 | 16,318,865 | 8,816,617 | 8,816,617 |
(1)Includes the value of a cash payment equal to the sum of (i) the average of Mr. Solomon’s 2021 and 2020 annual bonuses (the highest annual bonuses paid to Mr. Solomon in two of the three calendar years), comprised of cash bonus, deferred cash and deferred equity ($25,999,980), (ii) two and one-half times the sum of Mr. Solomon’s 2020 base salary ($1,000,000) and the average of Mr. Solomon’s 2020 and 2021 annual bonuses (subject to a $3.25 million minimum and a $5 million limit), (iii) a cash payment equal to 24 months of COBRA premiums, and (iv) the value of acceleration of unvested deferred cash compensation ($8,302,430, including interest accrued through December 31, 2022), which is payable to Mr. Solomon pursuant to the terms of his employment agreement. In connection with an involuntary termination following a change in control, the $5 million cash limit would not apply to the Cash Severance payment. Had Mr. Solomon experienced a termination by reason of death or disability, he would have been entitled to a cash payment equal to the sum of the amounts described under clauses (i), (iii), and (iv) above.
(2)Includes the value of acceleration of all unvested shares of restricted stock and all performance share and PSA awards, based on a price of $38.62 per share, which was the closing price of our Class A common stock on the NASDAQ Global Select Market on December 30, 2022. Pursuant to their employment agreements and the applicable award agreements, the executives are entitled to immediate vesting of outstanding equity awards upon an involuntary termination or a termination by reason of death or disability, except for the PSAs granted in February 2021, which will, upon an involuntary termination, remain outstanding until the completion of the applicable performance period without regard to the continued service requirement and will vest based on the actual level of the attainment of the applicable performance goals. For reporting purposes, target level performance was assumed.
(3)Includes the value of a cash payment equal to the sum of (i) the average of the 2020 and 2021 annual bonus comprised of cash bonus, deferred cash and deferred equity ($5,763,498, $6,287,500 and $5,763,498) for Messrs. Lasota, Holmes and Littman, respectively, (ii) one and one-half times the 2021 base salary and the average of the 2020 and 2021 annual bonuses for Messrs. Lasota, Holmes and Littman, respectively (subject to a $1.5 million limit), (iii) a cash payment equal to 24 months of COBRA premiums ($48,086 for Mr. Lasota, $46,335 for Mr. Holmes and $71,092 for Mr. Littman), and (iv) the value of acceleration of unvested deferred cash compensation ($664,314, $731,361 and $675,564) for each of Mr. Lasota, Mr. Holmes and Mr. Littman, respectively, including interest accrued through December 31, 2022, which is payable to Messrs. Lasota, Holmes and Littman pursuant to the terms of their employment agreements. Had Mr. Lasota, Mr. Holmes or Mr. Littman experienced a termination by reason of death or disability, each executive would have been entitled to a cash payment equal to the sum of the amounts described under clauses (i), (iii), and (iv) above.
(4)Includes the value of the same cash severance payments that would have been payable to Messrs. Lasota, Holmes and Littman in connection with an involuntary termination of employment (as described above), except that the applicable multiplier for the 2022 base salary and the average of the 2020 and 2021 annual bonuses for Messrs. Lasota, Holmes and Littman, respectively will be two and one-half times instead of one and one-half times and will not be subject to the $1.5 million limit. Pursuant to their employment agreements, Messrs. Lasota, Holmes and Littman will be entitled to receive this enhanced cash severance payment in the event of an involuntary termination of employment in connection with or following a change in control. In addition, pursuant to the terms of the applicable award agreements, each executive’s unvested deferred cash compensation will vest in the event that a change in control occurs and, following such change in control, the executive’s compensation or job responsibilities are reduced materially or the equity securities of the Company cease to trade on a national securities exchange.
(5)Under the employment agreements with Messrs. Solomon, Lasota, Holmes and Littman, severance payable following a change in control would have been subject to a so-called “modified golden parachute cutback” provision pursuant to which “excess parachute payments” would be reduced to the extent such reduction would result in greater after-tax benefits. The amounts disclosed above represent the full amounts payable, without application of any cutback.
PAY RATIO
Pursuant to Item 402(u) of Regulation S-K, presented below is the ratio of annual total compensation of Mr. Solomon, our Chief Executive Officer as of December 31, 2022, to the median annual total compensation of all our employees (excluding our Chief Executive Officer).
To determine the median annual total compensation of all our employees (excluding our Chief Executive Officer), a median employee was identified from the population of our 1,626 employees as of December 31, 2022. We did not include independent contractors in our determination.
In order to identify our median employee, we ranked each of our employees (other than our Chief Executive Officer) based on 2022 awarded compensation. For this purpose, 2022 awarded compensation was composed of each employee’s (i) salary earned during 2022, (ii) annual cash bonus paid in respect of 2022 performance, and (iii) deferred cash awards granted in respect of 2022 performance. In determining 2022 awarded compensation, we did not apply any cost-of-living adjustments or annualize any partial-year compensation.
Once we identified the median employee, we determined that individual’s annual total compensation in accordance with the requirements for determining total compensation in the Summary Compensation Table.
The 2022 annual total compensation for Mr. Solomon, our Chief Executive Officer, as reported in the Summary Compensation Table in this proxy statement, was $15,493,973. The 2022 annual total compensation for our median employee, determined in accordance with the requirements for determining total compensation in the Summary Compensation Table, was $215,000. The ratio of our Chief Executive Officer’s annual total compensation to the annual total compensation of our median employee for 2022 is 72 to 1. We believe that this ratio represents a reasonable estimate calculated in a manner consistent with Item 402(u).
The information disclosed in this section was developed and is provided solely to comply with specific legal requirements. We do not use this information in managing our Company. We do not believe this information provides stockholders with a useful mechanism for evaluating our management’s effectiveness, operating results, or business prospects, nor for comparing our company with any other company in any meaningful respect.
COMPENSATION PROGRAM FOR NON-EMPLOYEE DIRECTORS FOR 2022
Director Compensation Table
The following table sets forth compensation information for our non-employee directors for the year ended December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Director | | Fees Earned Paid in Cash ($) | | Stock Awards ($)(1) | | All Other Compensation ($) | | Total |
| Brett H. Barth | | 162,500 | | 162,500 | | 2,477 | (2) | 327,477 |
| Katherine E. Dietze | | 142,500 | | 142,500 | | — | | 285,000 |
| Gregg A. Gonsalves | | 125,000 | | 125,000 | | — | | 250,000 |
| Lorence Kim | | 133,334 | (3) | 200,000 | | — | | | 333,334 | |
| Steven Kotler | | 135,000 | | 135,000 | | — | | 270,000 |
| Lawrence E. Leibowitz | | 62,500 | | 187,500 | | — | | 250,000 |
| Margart L. Poster | | 125,000 | | 125,000 | | — | | 250,000 |
Douglas A. Rediker(4) | | — | | 250,000 | | — | | 250,000 |
| | | | | | |
| (1) | Represents the aggregate grant date fair value calculated in accordance with generally accepted accounting principles, disregarding for this purpose the estimate of forfeitures related to service-based vesting conditions. For information on the valuation assumptions with respect to awards made, refer to the Company’s Share-Based Compensation and Employee Ownership Plans Note __ in the Financial Statements. As of December 31, 2022, all outstanding stock awards held by our directors are fully vested. |
| | | | | | |
| (2) | Represents dividend equivalent shares awarded on delivered RSUs. |
| | | | | | |
| (3) | Dr. Kim received $83,334 for his Board service from February through June 2022. |
| | | | | | |
| (4) | | In 2022, Mr. Rediker elected to receive 100% of his director compensation in RSUs. Please see “Narrative Disclosure Relating to Director Compensation Table” below for additional information regarding non-employee director compensation in 2022. |
Narrative Disclosure Relating to Director Compensation Table
In 2022, each of our non-employee directors received annual compensation of $250,000. Mr. Barth, the Company’s Lead Director, received additional compensation of $50,000. Ms. Dietze, the Chair of the Audit Committee received additional compensation of $35,000 per annum. Mr. Barth, the Chair of the Compensation Committee received additional compensation of $25,000 per annum, and Mr. Kotler, the Chair of the Nominating and Corporate Governance Committee received additional compensation of $20,000 per annum. For 2022, a minimum of 50% of a director’s compensation was paid in the definitive proxy statementform of RSUs. In addition, each director was entitled to elect to receive any amount in excess of 50% of 2022 compensation in the form of RSUs. The RSUs were valued using the volume-weighted average price for the 30-day period prior to our 20182022 annual meeting of stockholders understockholders. RSUs are vested and not subject to forfeiture; however, except in the captions "Executive Compensation—Compensationevent of death, the underlying shares of Class A common stock will not be delivered to the holder for at least one year from the date of grant. Beginning in 2022, cash dividend equivalent payments are converted to additional RSUs and Benefits Committee Report," "Certain Relationships and Related Transactions—will be delivered to each director upon the delivery of the underlying shares of Class A common stock. These equity awards are intended to further align the interests of our directors with those of our stockholders. Directors who also are employed as executive officers of the Company receive no additional compensation for their service as a director.
Compensation and Benefits Committee Interlocks and Insider Participation"Participation
The Compensation Committee is comprised entirely of non-employee directors, none of whom has ever been an officer or employee of the Company and "Information Regardingnone of whom had any related person transaction involving the Company. None of our executive officers (1) served as a member of the board of directors or compensation committee of any other entity that had one or more of its executive officers serving as a member of our Compensation Committee or (2) served as a member of the compensation committee of any other entity that had one or more of its executive officers serving as a member of our Board of Directors and Corporate Governance—Compensation Program for Non-Employee Directors" is incorporated herein by reference.during 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in the definitive proxy statement for our 2018 annual meeting of stockholders under the captions "Security Ownership—Beneficial Ownership of Directors, Nominees and Executive Officers" "Security Ownership—
The following table shows how many shares of our Class A common stock were beneficially owned as of February 27, 2023, by each of our directors and named executive officers and by all of our directors and named executive officers as a group. Unless otherwise noted, the stockholders listed in the table have sole voting and investment power with respect to the shares owned by them.
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| Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
| Brett H. Barth | | 69,944 | (1) | * |
| Katherine E. Dietze | | 12,007 | (2) | * |
| Gregg A. Gonsalves | | 0 | (3) | * |
| Lorence Kim | | 30,000 | (4) | * |
| Steven Kotler | | 2,500 | (5) | * |
| Lawrence E. Leibowitz | | 8,000 | (6) | * |
| Margaret L. Poster | | 13,547 | (7) | * |
| Douglas A. Rediker | | 0 | (8) | * |
| Jeffrey M. Solomon | | 603,687 | | 2.1% |
| John Holmes | | 220,131 | | * |
| Stephen A. Lasota | | 257,055 | | * |
| Owen S. Littman | | 199,292 | (9) | * |
| All directors and executive officers as a group (12 persons) | | 1,438,663 | | 5.0% |
* corresponds to less than 1% of Cowen Inc. Class A common stock,
(1)The amount presented does not include 13,382 fully-vested RSUs that will be delivered to Mr. Barth upon his one-year anniversary of the grant date.
(2)The amount presented does not include 73,512 fully-vested RSUs that will be delivered to Ms. Dietze upon her retirement from the Board.
(3)The amount presented does not include 15,664 fully-vested RSUs that will be delivered to Mr. Gonsalves upon his retirement from the Board.
(4)The amount presented does not include 8,236 fully-vested RSUs that will be delivered to Dr. Kim upon his retirement from the Board.
(5)The amount presented does not include 70,347 fully-vested RSUs that will be delivered to Mr. Kotler upon his retirement from the Board.
(6)The amount presented does not include the 42,098 fully-vested RSUs that will be delivered to Mr. Leibowitz upon his retirement from the Board.
(7)The amount presented does not include 10,927 fully-vested RSUs that will be delivered to Ms. Poster upon her retirement from the Board.
(8)The amount presented does not include 72,384 fully-vested RSUs that will be delivered to Mr. Rediker upon his retirement from the Board.
(9)Includes 275 shares held in custodial accounts on behalf of Mr. Littman’s children.
Beneficial Owners of More than Five Percent of Our Class A Common Stock
Based on filings made under Section 13(d) and Section 13(g) of the Securities Exchange Act of 1934, as of February 27, 2023, the persons known by us to be beneficial owners of more than 5% of our Common Stock"Class A common stock were as follows:
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| Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
BlackRock, Inc.(1) 55 East 52nd Street New York, NY 10055 | | 2,334,921 | | 8.27% |
(1)This information is based on a Schedule 13G filed with SEC on February 7, 2023 by BlackRock, Inc. Blackrock reported that it has sole voting power as to 2,493,395 and "Securitiessole dispositive power as to 2,334,921 shares. The beneficial ownership indicated above represents the aggregate beneficial ownership of BlackRock, Inc., and its subsidiaries, BlackRock Life Limited, Aperio Group, LLC, BlackRock (Netherlands) B.V., BlackRock Advisors, LLC, BlackRock Asset Management Canada Limited, BlackRock Asset Management Ireland Limited, BlackRock Japan Co., Ltd, BlackRock Asset Management Schweiz AG, BlackRock Financial Management, Inc., BlackRock Fund Advisors, BlackRock Fund Managers Ltd., BlackRock Institutional Trust Company, N.A., BlackRock Investment Management, LLC, BlackRock Investment Management (Australia) Limited and BlackRock Investment Management (UK) Limited.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors to file initial reports of ownership of our securities and reports of changes in ownership of our securities with the Securities and Exchange Commission.
Based on a review of copies of such reports and on written representations from our executive officers and directors, we believe that all Section 16(a) filing and disclosure requirements applicable to our executive officers and directors for 2022 have been satisfied.
Securities Authorized for Issuance Under Equity Compensation Plans" are incorporated herein by reference.Plans
The following table summarizes, as of December 31, 2022, the number of shares of our common stock to be issued upon exercise of outstanding options granted under our 2020 Equity and Incentive Plan, the weighted-average exercise price of such options, and the number of shares remaining available for future issuance under the plans for all awards as of December 31, 2022. | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under the Equity Compensation Plan (Excluding Shares in First Column) |
| Equity compensation plans approved by security holders | | --- | | ---- | | 3,672,530 |
| Equity compensation plans not approved by security holders | | None | | N/A | | None |
(1)This number is based on the 31,207,533 shares authorized for issuance under the Company’s Equity and Incentive Plans as of December 31, 2022. As of January 31, 2023, we had 3,672,530 shares remaining under the equity plans, which exclude shares reserved for issuance based on certain performance criteria in existing agreements.
Item 13. Certain Relationships and Related Transactions
The informationDirector Independence
Under applicable Nasdaq Stock Market Rules, a director will only qualify as an “independent director” if, in the definitive proxy statement foropinion of our 2018 annual meetingBoard, that person does not have a relationship which would interfere with the exercise of stockholders underindependent judgment in carrying out the captions "Information Regardingresponsibilities of a director.
Our Corporate Governance Guidelines require that a majority of the Board be composed of Directorsdirectors who meet the independence criteria establish by NASDAQ Stock Market, Inc. Marketplace Rules. Under applicable NASDAQ Stock Market rules, a director will only qualify as an “independent director” if, in the opinion of our Board, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making its determination, the Board considers all relevant facts and Corporate Governance—circumstances, both with respect to the director and with respect to any persons or organizations with which the director has an affiliation, including immediate family members.
Our Board has determined that none of Mses. Dietze or Poster nor Messrs. Barth, Gonsalves, Kim, Kotler, Leibowitz or Rediker currently has a relationship that would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director and that each of these directors is an “independent director” as defined under Rule 4200(a)(15) of the NASDAQ Stock Market, Inc. Marketplace Rules.
Mr. Solomon cannot be considered an independent director under NASDAQ Stock Market rules because Mr. Solomon currently serves as our Chief Executive Officer. Therefore, the Board has determined that seven of our eight directors are independent.
Related Transactions Involving Our Executive Officers
Side-by-Side Investments
To the extent permissible by applicable law, our executive officers, directors and certain eligible employees, as well as such individuals’ immediate family members and other investors they refer to us, have historically been permitted to invest their own capital either directly in, or in side-by-side investments or managed accounts with, our alternative investment management funds and certain proprietary investment vehicles established by our broker-dealer segment. Side-by-side investments are investments in assets substantially similar to the investments of the applicable fund and the managed accounts are accounts that invest in the asset classes covered by our alternative investment business. Direct investment in managed accounts or side-by-side investments with, our funds by such individuals are generally made on the same terms and conditions as the investments made by other third party investors in the funds, except that such investments are subject to discounted management and performance fees.
Employment Arrangements
Kyle Solomon, the brother of Jeffrey M. Solomon, is a Managing Director Independence," "Certain Relationshipsof Cowen and Related Transactions—Transactions with Related Persons,"Company and "Certain Relationshipsearned approximately $1,155,009 in 2022, which amount includes Kyle Solomon’s base salary, cash bonus paid in 2022 relating to 2021 performance and Related Transactions—approximately $125,939 of deferred cash awards, RSUs granted in prior years that vested during 2022 and cash dividend equivalent payments. Kristy Holmes, the daughter of John Holmes, is a Vice President of the Company and earned approximately $160,000 in 2022. Ashley Lasota, the daughter of Stephen Lasota, is a Vice President of the Company and earned approximately $160,000 in 2022.
Review and Approval of Transactions with Related Persons"Persons
To minimize actual and perceived conflicts of interests, the Board has adopted a written policy governing transactions in which the Company is incorporated hereina participant, the aggregate amount involved is reasonably expected to exceed $120,000, and any of the following persons has or may have a direct or indirect material interest in the transaction: (a) our executive officers, directors (including nominees) and certain other highly compensated employees, (b) stockholders who own more than 5% of our Class A common stock, and (c) any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law or person (other than a tenant or employee) sharing the same household of any person described in (a) or (b) above. These transactions will be considered “related person transactions.”
Unless exempted from such policy as described below, the policy requires that related person transactions must be reported to our General Counsel or Chief Compliance Officer who will then submit the related person transaction for review by reference.our Audit Committee. The Audit Committee will review all relevant information available to it and will approve or ratify only those related person transactions that it determines are not inconsistent with the best interests of the Company. If our General Counsel or Chief Compliance Officer determines that advance approval of a related person transaction is not practicable under the circumstances, the Audit Committee will review, and, in its discretion, may ratify the related person transaction at its next meeting, or at the next meeting following the date that the related person transaction comes to the attention of our General Counsel or Chief Compliance Officer. However, the General Counsel or Chief Compliance Officer may present a related person transaction that arises between Audit Committee meetings to the Chair of the Audit Committee, who will review and may approve the related person transaction, subject to the Audit Committee’s ratification at its next meeting.
It is anticipated that any related person transaction previously approved by the Audit Committee or otherwise already existing that is ongoing will be reviewed annually by the Audit Committee to ensure that such transaction has been conducted in accordance with the previous approval granted by the Audit Committee, if any, and that all required disclosures regarding the related person transaction are made.
In addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule, the board anticipates it will determine that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related person transactions for purposes of the policy:
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| • | interests arising solely from the related person’s position as an executive officer of another entity (whether or not the person is also a director of such entity), that is a participant in the transaction, where (a) the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity, (b) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do not receive any special benefits as a result of the transaction, (c) the amount involved in the transaction equals less than the greater of $200,000 or 5% of the annual gross revenues of the company receiving payment under the transaction; |
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| • | a transaction with a significant stockholder, or such stockholder’s immediate family members, who has a current Schedule 13G filed with the SEC with respect to such stockholder’s ownership of our securities; and |
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| • | a transaction that is specifically contemplated by provisions of our charter or bylaws. |
The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the Compensation Committee in the manner specified in its charter.
Item 14. Principal AccountantAccounting Fees and Services
Independent Registered Public Accounting Firm Fees and Other Matters
The informationfollowing table presents the aggregate fees billed for services rendered by KPMG LLP, our independent registered public accounting firm for the fiscal years ended December 31, 2022 and December 31, 2021.
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| 2022 | | 2021 |
Audit Fees(1) | $6,911,001 | | $6,221,827 |
Audit-Related Fees(2) | 39,569 | | 50,156 |
Tax Fees(3) | 973,673 | | 1,096,363 |
All Other Fees(4) | 49,023 | | 235,422 |
| Total | 7,973,266 | | 7,603,768 |
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| (1) | Audit fees reflect audit fees incurred for the Cowen Inc. integrated audit and quarterly reviews as well as the financial statement audits of its consolidated subsidiaries. |
| (2) | Audit-Related Fees reflect fees for attestation procedures required by local regulations for consolidated subsidiaries. |
| (3) | Tax fees reflect tax compliance and tax advisory services. |
| (4) | All Other Fees relate to due diligence and other non-tax advisory and consulting services. |
KPMG LLP also provided services to entities affiliated with Cowen Inc. that were billed directly to those entities and, accordingly, were not included in the definitive proxy statementamounts disclosed above. These amounts included $1,035,280 and $1,470,715 for our 2018 annual meetingthe audits of stockholders underprivate equity funds, hedge funds and other fund structures within the captions "Audit Committee ReportCowen Investment Management business for the years ended December 31, 2022 and Payment of Fees to Our Independent Auditor—Auditor Fees" and "Audit Committee Report and Payment of Fees to Our Independent Auditor—December 31, 2021, respectively, as well as $93,000 for tax compliance services for fund structures within the Cowen Investment Management business for the year ended December 31, 2022.
Auditor Services Pre-Approval Policy"Policy
The Audit Committee has adopted an Audit Committee Policy Regarding Outside Auditor Services which includes a pre-approval policy that applies to services performed for the Company by our independent registered public accounting firm. In accordance with this policy, we may not engage our independent registered public accounting firm to render any audit or non-audit service unless the service was approved in advance by the Audit Committee or the engagement is incorporated hereinentered into pursuant to the pre-approval policies and procedures described below.
The pre-approval policy delegates to the Chair of the Audit Committee the authority to pre-approve any audit or non-audit services, provided that any approval by reference.the Chair is reported to the Audit Committee at the Audit Committee’s next regularly scheduled meeting. The Audit Committee may also pre-approve services that are expected to be provided to the Company by the independent registered public accounting firm during the next 12 months and at each regularly scheduled meeting of the Audit Committee, management or the independent registered public accounting firm must report to the Audit Committee each service actually provided to the Company pursuant to the pre-approval.
Our Audit Committee has determined that the provision of the non-audit services described in the table above was compatible with maintaining the independence of our independent registered public accounting firm. The Audit Committee reviews each non-audit service to be provided and assesses the impact of the service on the registered public accounting firm’s independence.
PART IV
Item 15. Exhibits and Financial Statement Schedules
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(a) | Documents filed as part of this Annual Report on Form 10-K: |
(a)Documents filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on page F-1 hereof. The required financial statements appear on pages F-1 through F-78F-74 hereof.
2. Financial Statement Schedules
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
See the Exhibit Index on pages E-1 through E-2 for a list
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| Exhibit No. | | Description |
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| 101.INS | | XBRL INSTANCE DOCUMENT |
| 101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT |
| 101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT |
| 101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT |
| 101.LAB | | XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT |
| 101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
| 104 | | | Cover Page Interactive Data File - (formatted as inline XBRL and contained in Exhibit 101) |
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* Signifies management contract or furnished withcompensatory plan or incorporated by reference into this Annual Report on Form 10-K.arrangement.
Item 16. Form 10-K Summary
Not Applicable.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Management's Report on Internal Control over Financial Reporting
Management of Cowen Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
As of the end of the Company's 20172022 fiscal year, management conducted an assessment of the Company's internal control over financial reporting based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 20172022 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements.
The Company's internal control over financial reporting as of December 31, 20172022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report included herein, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2017.2022.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders of
Cowen Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated statementstatements of financial condition of Cowen Inc. and subsidiaries (the “Company”)Company) as of December 31, 2017,2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the yearyears in the three-year period ended December 31, 2017,2022, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017,2022 and 2021, and the results of its operations and its cash flows for each of the yearyears in the three-year period ended December 31, 2017,2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for OpinionOpinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of fair value of certain level 3 financial assets measured on a recurring basis
As discussed in Notes 2f and 7 to the consolidated financial statements, the Company has recorded financial assets measured at fair value on a recurring basis classified as level 3 in the fair value hierarchy of $278.0 million as of December 31, 2022. Certain of these financial assets are valued based on their proportional rights of the underlying portfolio companies and are valued using market quotations when readily available. When market quotations are unavailable for these level 3 financial assets or deemed not representative of fair value, such investments are valued using a market approach, an income approach, or a combination of both approaches. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future cash flows to a single present value. In following these approaches, the significant inputs and assumptions include the premium ascribed to a controlling financial interest and selected equity volatilities.
We identified the assessment of the fair value measurement of certain financial assets classified as level 3 in the fair value hierarchy as a critical audit matter. These fair value measurements involved a high degree of measurement uncertainty and subjectivity, which required specialized skills and knowledge to evaluate. Specifically, the assessment of these fair value measurements encompassed the evaluation of the Company’s valuation methodologies and certain unobservable inputs and assumptions used in these fair value estimates, such as the premium ascribed to a controlling financial interest and selected equity volatilities.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the fair value measurement process, including controls related to the (1) development of the valuation methodologies (2) identification and determination of unobservable inputs and assumptions, including the premium ascribed to a controlling financial interest and selected equity volatilities, and (3) monitoring of changes to the methodology or inputs and assumptions.
We evaluated the Company’s process to develop the fair value measurement of certain financial assets classified as level 3 in the fair value hierarchy by testing certain sources of data and assumptions that the Company used and considered the relevance and reliability of such data and assumptions. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the reasonableness of the fair value measurement for a selection of level 3 financial assets through developing an independent estimate of the fair value of the financial asset and comparing the results of our estimate of fair value to the Company's fair value measurement. As part of this independent estimate, the valuation professionals developed independent pricing inputs, such as the premium ascribed to a controlling financial interest and selected equity volatilities.
/s/ KPMG LLP
We have served as the Company’s auditor since 2017.
/s/ KPMG LLP
New York, New York
March 6, 2018
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Member of Cowen Inc.:
In our opinion, the consolidated balance sheet as of December 31, 2016 and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the two years in the period ended December 31, 2016 present fairly, in all material respects, the financial position of Cowen Inc. and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 27, 201728, 2023
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Cowen Inc.
Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data) |
| As of December 31, 2022 | | As of December 31, 2021 |
| Assets | | | |
| Cash and cash equivalents | $ | 1,139,652 | | | $ | 914,343 | |
| Cash collateral pledged | 122,687 | | | 47,494 | |
| Segregated cash | 185,872 | | | 194,701 | |
| Securities owned, at fair value ($1,766,033 and $1,764,853 were pledged to various parties) | 2,424,194 | | | 2,660,742 | |
| Securities purchased under agreements to resell | 121,718 | | | — | |
| Receivable on derivative contracts, at fair value | 494,691 | | | 286,135 | |
| Securities borrowed | 1,298,056 | | | 1,704,603 | |
| Other investments ($132,285 and $137,986 at fair value, respectively) | 225,183 | | | 274,111 | |
| Deposits with clearing organizations, brokers and banks | 87,932 | | | 111,857 | |
| Receivable from brokers, dealers and clearing organizations, net of allowance of $62 and $636, respectively | 1,864,825 | | | 1,614,347 | |
| Receivable from customers, net of allowance of $605 and $687, respectively | 41,671 | | | 159,418 | |
| Fees receivable, net of allowance of $7,799 and $886, respectively | 113,217 | | | 145,809 | |
| Insurance and reinsurance assets | 133,786 | | | 30,073 | |
| Due from related parties | 22,293 | | | 31,449 | |
| Fixed assets, net of accumulated depreciation and amortization of $52,816 and $50,017, respectively | 23,407 | | | 25,976 | |
| Operating lease right-of-use assets | 78,565 | | | 93,655 | |
| Goodwill | 234,005 | | | 234,005 | |
| Intangible assets, net of accumulated amortization of $38,926 and $33,219, respectively | 31,337 | | | 44,167 | |
| Deferred tax asset, net | 50,810 | | | 21,765 | |
| Other assets, net of allowance of $1,583 and $0 respectively | 84,963 | | | 54,755 | |
| Consolidated Funds | | | |
| Cash and cash equivalents | 30 | | | 296 | |
| | | |
| | | |
| Other investments | 49,832 | | | 99,067 | |
| | | |
| Other assets | 48 | | | 46 | |
| Total Assets | $ | 8,828,774 | | | $ | 8,748,814 | |
| Liabilities, Temporary Equity and Permanent Equity | | | |
| Liabilities | | | |
| Securities sold, not yet purchased, at fair value | $ | 913,574 | | | $ | 1,201,448 | |
| Securities sold under agreements to repurchase | 133,130 | | | 63,469 | |
| Payable for derivative contracts, at fair value | 69,665 | | | 60,163 | |
| Securities loaned | 1,199,838 | | | 1,586,572 | |
| Payable to brokers, dealers and clearing organizations | 783,909 | | | 586,553 | |
| Payable to customers | 2,663,414 | | | 2,432,612 | |
| Commission management payable | 115,853 | | | 102,990 | |
| Insurance and reinsurance liabilities | 317,547 | | | 71,269 | |
| Compensation payable | 398,477 | | | 443,580 | |
| Operating lease liabilities | 85,222 | | | 98,883 | |
| Notes payable and other debt | 620,161 | | | 623,371 | |
| | | |
| Fees payable | 26,062 | | | 16,483 | |
| | | |
| Accounts payable, accrued expenses and other liabilities | 153,915 | | | 164,819 | |
| Consolidated Funds | | | |
| | | |
| Due to related parties | — | | | 23 | |
| | | |
| | | |
| | | |
| | | |
| Accounts payable, accrued expenses and other liabilities | 162 | | | 225 | |
| Total Liabilities | $ | 7,480,929 | | | $ | 7,452,460 | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | |
Cowen Inc. Consolidated Statements of Financial Condition (dollars in thousands, except share and per share data) |
| Assets | As of December 31, 2017 | | As of December 31, 2016 |
| Cash and cash equivalents | $ | 130,052 |
| | $ | 110,990 |
|
| Cash collateral pledged | 17,888 |
| | 13,342 |
|
| Segregated cash | 116,268 |
| | 1,024 |
|
| Securities owned, at fair value | 673,221 |
| | 700,876 |
|
| Receivable on derivative contracts, at fair value | 69,177 |
| | 22,901 |
|
| Securities borrowed | 443,148 |
| | — |
|
| Other investments | 141,548 |
| | 157,279 |
|
| Deposits with clearing organizations, brokers and banks | 93,996 |
| | 8,939 |
|
| Receivable from brokers, dealers and clearing organizations | 508,178 |
| | 78,898 |
|
| Receivable from customers, net of allowance of $1,550 and $0 respectively | 49,891 |
| | — |
|
| Fees receivable, net of allowance of $1,736 and $0, respectively | 111,784 |
| | 45,883 |
|
| Due from related parties | 34,814 |
| | 39,629 |
|
| Fixed assets, net of accumulated depreciation and amortization of $28,355 and $23,867, respectively | 40,496 |
| | 42,408 |
|
| Goodwill | 60,678 |
| | 60,678 |
|
| Intangible assets, net of accumulated amortization of $33,081 and $29,418, respectively | 29,955 |
| | 25,769 |
|
| Deferred tax asset, net | 116,323 |
| | 165,656 |
|
| Other assets | 88,268 |
| | 38,406 |
|
| Consolidated Funds | | | |
| Cash and cash equivalents | 21,988 |
| | 17,761 |
|
| Securities owned, at fair value | 165,916 |
| | 79,237 |
|
| Receivable on derivative contracts, at fair value | 2,520 |
| | 893 |
|
| Other investments | 374,111 |
| | 401,465 |
|
| Receivable from brokers | 5,644 |
| | 5,978 |
|
| Other assets | 388 |
| | 511 |
|
| Total Assets | $ | 3,296,252 |
| | $ | 2,018,523 |
|
| Liabilities and Stockholders' Equity | | | |
| Liabilities | | | |
| Securities sold, not yet purchased, at fair value | $ | 342,527 |
| | $ | 266,090 |
|
| Payable for derivative contracts, at fair value | 42,750 |
| | 20,762 |
|
| Securities loaned | 456,831 |
| | — |
|
| Payables to brokers, dealers and clearing organizations | 252,153 |
| | 210,309 |
|
| Payable to customers | 352,467 |
| | — |
|
| Commission management payable | 70,451 |
| | 3,590 |
|
| Compensation payable | 150,206 |
| | 98,084 |
|
| Notes payable and other debt | 173,458 |
| | 77,030 |
|
| Convertible debt | 141,502 |
| | 130,029 |
|
| Fees payable | 8,047 |
| | 3,272 |
|
| Due to related parties | 570 |
| | 573 |
|
| Accounts payable, accrued expenses and other liabilities | 96,533 |
| | 47,525 |
|
| Consolidated Funds | | | |
| Securities sold, not yet purchased, at fair value | — |
| | 883 |
|
| Payable for derivative contracts, at fair value | 7,130 |
| | 572 |
|
| Payable to brokers | 751 |
| | 3,700 |
|
| Contributions received in advance | — |
| | 2,000 |
|
| Capital withdrawals payable | 11,931 |
| | 1,408 |
|
| Accounts payable, accrued expenses and other liabilities | 322 |
| | 841 |
|
| Total Liabilities | $ | 2,107,629 |
| | $ | 866,668 |
|
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | |
Cowen Inc.
Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data) |
| As of December 31, 2022 | | As of December 31, 2021 |
| (continued) | | | |
| Commitments and Contingencies (Note 27) | | | |
| | | |
| | | |
| | | |
| Redeemable Series A Convertible Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding as of December 31, 2022 (aggregate liquidation preference of $120,750) and 10,000,000 shares authorized, 120,750 shares issued and outstanding as of December 31, 2021 (aggregate liquidation preference of $120,750) | $ | 120,750 | | $ | 120,750 | |
| | | |
| Permanent Equity | | | |
| Class A common stock, par value $0.01 per share: 62,500,000 shares authorized, 58,410,153 shares issued and 28,234,289 outstanding as of December 31, 2022 and 62,500,000 shares authorized, 55,826,893 shares issued and 27,778,964 outstanding as of December 31, 2021, respectively (including 950,919 and 901,374 restricted shares, respectively) | 334 | | | 334 | |
| Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding as of December 31, 2022 and 2021, respectively | — | | | — | |
| Additional paid-in capital | 1,162,714 | | | 1,100,667 | |
| Retained earnings | 515,395 | | | 461,982 | |
| Accumulated other comprehensive income (loss) | 1 | | | (2) | |
| Less: Class A common stock held in treasury, at cost, 30,175,864 and 28,047,929 shares as of December 31, 2022 and 2021, respectively | (614,272) | | | (547,112) | |
| Total Cowen Inc. Stockholders' Equity | 1,064,172 | | | 1,015,869 | |
| Nonredeemable non-controlling interests | 162,923 | | | 159,735 | |
| Total Permanent Equity | $ | 1,227,095 | | | $ | 1,175,604 | |
| Total Liabilities, Redeemable Preferred Stock and Permanent Equity | $ | 8,828,774 | | | $ | 8,748,814 | |
|
| | | | | | | |
Cowen Inc. Consolidated Statements of Financial Condition (dollars in thousands, except share and per share data) |
| | | | |
| | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
| (continued) | | | |
| Commitments and Contingencies (Note 22) |
| |
|
| Redeemable non-controlling interests | $ | 440,604 |
| | $ | 379,205 |
|
| Stockholders' equity | | | |
| Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding as of December 31, 2017 (aggregate liquidation preference of $120,750,000) and 10,000,000 shares authorized, 120,750 shares issued and outstanding as of as of December 31, 2016 (aggregate liquidation preference of $120,750,000), respectively | $ | 1 |
| | $ | 1 |
|
| Class A common stock, par value $0.01 per share: 62,500,000 shares authorized, 41,765,296 shares issued and 29,632,020 outstanding as of December 31, 2017 and 62,500,000 shares authorized,36,542,091 shares issued and 26,731,289 outstanding as of December 31, 2016, respectively (including 191,962 and 162,176 restricted shares, respectively) | 324 |
| | 292 |
|
| Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding as of December 31, 2017 and 2016, respectively | — |
| | — |
|
| Additional paid-in capital | 1,004,664 |
| | 928,646 |
|
| (Accumulated deficit) retained earnings | (70,116 | ) | | (2,442 | ) |
| Accumulated other comprehensive income (loss) | (8 | ) | | (2 | ) |
| Less: Class A common stock held in treasury, at cost, 12,133,276 and 9,810,802 shares, respectively | (186,846 | ) | | (153,845 | ) |
| Total Stockholders' Equity | $ | 748,019 |
| | $ | 772,650 |
|
| Total Liabilities and Stockholders' Equity | $ | 3,296,252 |
| | $ | 2,018,523 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | |
Cowen Inc.
Consolidated Statements of Operations
(in thousands, except per share data) |
| | | Year Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| Revenues | | | | | | | | | |
| Investment banking | | | | | $ | 494,842 | | | $ | 1,067,162 | | | $ | 769,486 | |
| Brokerage | | | | | 592,292 | | | 585,162 | | | 524,361 | |
| Investment income (loss) | | | | | | | | | |
| Securities principal transactions, net | | | | | 112,829 | | 122,110 | | 124,667 |
| Portfolio fund principal transactions, net | | | | | (4,442) | | 338 | | 20,434 |
| Carried interest allocations | | | | | (31,555) | | 5,059 | | 59,250 |
| Total investment income (loss) | | | | | 76,832 | | | 127,507 | | | 204,351 | |
| Management fees | | | | | 66,670 | | | 72,287 | | | 47,515 | |
| Incentive income | | | | | 646 | | | 2,732 | | | 592 | |
| Interest and dividends | | | | | 312,134 | | | 219,292 | | | 187,459 | |
| | | | | | | | | |
| Insurance and reinsurance premiums | | | | | 36,522 | | | 39,631 | | | 30,147 | |
| Other revenues, net | | | | | 7,010 | | | 5,211 | | | 10,503 | |
| Consolidated Funds | | | | | | | | | |
| Principal transactions, net | | | | | (49,234) | | | (6,194) | | | (24,338) | |
| Interest and dividends | | | | | — | | | 9 | | | 5,218 | |
| Other revenues | | | | | 9 | | | — | | | 632 | |
| Total revenues | | | | | 1,537,723 | | | 2,112,799 | | | 1,755,926 | |
| Interest and dividends expense | | | | | 259,126 | | | 211,387 | | | 187,725 | |
| Total net revenues | | | | | 1,278,597 | | | 1,901,412 | | | 1,568,201 | |
| Expenses | | | | | | | | | |
| Employee compensation and benefits | | | | | 771,386 | | | 1,046,371 | | | 860,531 | |
| Brokerage and trade execution costs | | | | | 162,598 | | | 153,831 | | | 139,034 | |
| Underwriting expenses | | | | | 4,914 | | | 24,978 | | | 22,565 | |
| Professional, advisory and other fees | | | | | 80,564 | | | 80,849 | | | 59,990 | |
| Service fees | | | | | 29,942 | | | 25,768 | | | 25,378 | |
| Communications | | | | | 38,041 | | | 37,499 | | | 32,593 | |
| Occupancy and equipment | | | | | 41,669 | | | 40,692 | | | 36,559 | |
| Depreciation and amortization | | | | | 27,725 | | | 19,004 | | | 22,677 | |
| Client services and business development | | | | | 39,333 | | | 29,607 | | | 20,526 | |
| | | | | | | | | |
| Insurance and reinsurance claims, commissions and amortization of deferred acquisition costs | | | | | (12,260) | | | 33,938 | | | 33,905 | |
| Change in fair value of contingent consideration | | | | | (13,560) | | | 15,119 | | | 8,492 | |
| Other expenses | | | | | 40,969 | | | 21,907 | | | 24,703 | |
| Consolidated Funds | | | | | | | | | |
| Interest and dividends | | | | | — | | | — | | | 2,064 | |
| Professional, advisory and other fees | | | | | 121 | | | 273 | | | 2,087 | |
| Brokerage and trade execution costs | | | | | — | | | — | | | 37 | |
| Other expenses | | | | | 127 | | | 357 | | | 1,221 | |
| Total expenses | | | | | 1,211,569 | | | 1,530,193 | | | 1,292,362 | |
| Other income (loss) | | | | | | | | | |
| Net gains (losses) on other investments | | | | | 9,613 | | | 35,494 | | | 18,879 | |
| Bargain purchase gain, net of tax | | | | | — | | | 3,855 | | | — | |
| Gain/(loss) on debt extinguishment | | | | | — | | | (4,538) | | | 2,719 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total other income (loss) | | | | | 9,613 | | | 34,811 | | | 21,598 | |
| Income (loss) before income taxes | | | | | 76,641 | | | 406,030 | | | 297,437 | |
| Income tax expense (benefit) | | | | | 10,786 | | | 102,039 | | | 90,373 | |
| Net income (loss) | | | | | 65,855 | | | 303,991 | | | 207,064 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | |
Cowen Inc. Consolidated Statements of Operations (dollars in thousands, except per share data) |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | | | | | |
| Investment banking | $ | 223,614 |
| | $ | 133,279 |
| | $ | 222,781 |
|
| Brokerage | 293,610 |
| | 199,180 |
| | 157,722 |
|
| Management fees | 33,245 |
| | 40,612 |
| | 41,906 |
|
| Incentive income | 5,383 |
| | 8,334 |
| | 1,466 |
|
| Interest and dividends | 49,440 |
| | 14,732 |
| | 13,796 |
|
| Reimbursement from affiliates | 2,860 |
| | 10,504 |
| | 21,557 |
|
| Aircraft lease revenue | 3,751 |
| | 4,161 |
| | — |
|
| Reinsurance premiums | 30,996 |
| | 32,459 |
| | — |
|
| Other revenues | 8,561 |
| | 22,355 |
| | 3,726 |
|
| Consolidated Funds | | | | | |
| Interest and dividends | 5,870 |
| | 4,792 |
| | 1,086 |
|
| Other revenues | 1,451 |
| | 1,157 |
| | 527 |
|
| Total revenues | 658,781 |
| | 471,565 |
| | 464,567 |
|
| Expenses | | | | | |
| Employee compensation and benefits | 404,087 |
| | 310,038 |
| | 321,386 |
|
| Floor brokerage and trade execution | 75,601 |
| | 32,286 |
| | 27,460 |
|
| Interest and dividends | 60,949 |
| | 29,308 |
| | 26,220 |
|
| Professional, advisory and other fees | 31,942 |
| | 23,190 |
| | 25,578 |
|
| Service fees | 14,999 |
| | 7,918 |
| | 7,535 |
|
| Communications | 23,460 |
| | 17,768 |
| | 14,325 |
|
| Occupancy and equipment | 35,184 |
| | 32,286 |
| | 29,055 |
|
| Depreciation and amortization | 13,078 |
| | 12,713 |
| | 9,498 |
|
| Client services and business development | 28,327 |
| | 27,828 |
| | 25,413 |
|
| Reinsurance claims, commissions and amortization of deferred acquisition costs | 30,486 |
| | 29,904 |
| | — |
|
| Restructuring costs | 8,763 |
| | — |
| | — |
|
| Other expenses | 18,196 |
| | 14,815 |
| | 15,594 |
|
| Consolidated Funds | | | | | |
| Interest and dividends | 9,836 |
| | 6,434 |
| | 1,104 |
|
| Professional, advisory and other fees | 1,145 |
| | 1,148 |
| | 654 |
|
| Floor brokerage and trade execution | 318 |
| | 431 |
| | 51 |
|
| Other expenses | 1,227 |
| | 1,051 |
| | 501 |
|
| Total expenses | 757,598 |
| | 547,118 |
| | 504,374 |
|
| Other income (loss) | | | | | |
| Net gains (losses) on securities, derivatives and other investments | 76,179 |
| | 23,381 |
| | 36,789 |
|
| Bargain purchase gain, net of tax | 6,914 |
| | — |
| | — |
|
Gain/(loss) on debt extinguishment
| (16,039 | ) | | — |
| | — |
|
| Consolidated Funds | | | | | |
| Net realized and unrealized gains (losses) on investments and other transactions | 19,660 |
| | 7,085 |
| | 12,517 |
|
| Net realized and unrealized gains (losses) on derivatives | 19,476 |
| | 13,503 |
| | 2,071 |
|
| Net gains (losses) on foreign currency transactions | (411 | ) | | 97 |
| | (91 | ) |
| Total other income (loss) | 105,779 |
| | 44,066 |
| | 51,286 |
|
| Income (loss) before income taxes | 6,962 |
| | (31,487 | ) | | 11,479 |
|
| Income tax expense (benefit) | 44,053 |
| | (19,092 | ) | | (47,496 | ) |
| Net income (loss) | (37,091 | ) | | (12,395 | ) | | 58,975 |
|
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | 23,791 |
| | 6,882 |
| | 15,246 |
|
| Net income (loss) attributable to Cowen Inc. | (60,882 | ) | | (19,277 | ) | | 43,729 |
|
| Preferred stock dividends | 6,792 |
| | 6,792 |
| | 4,075 |
|
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | (67,674 | ) | | $ | (26,069 | ) | | $ | 39,654 |
|
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | |
Cowen Inc. Consolidated Statements of Operations (dollars in thousands, except per share data) |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (continued) | | | | | |
| Weighted average common shares outstanding: | | | |
| | |
|
| Basic (a) | 29,492 |
| | 26,857 |
| | 27,522 |
|
| Diluted (a) | 29,492 |
| | 26,857 |
| | 29,043 |
|
| Earnings (loss) per share: | | | | | |
| Basic (a) | $ | (2.29 | ) | | $ | (0.97 | ) | | $ | 1.44 |
|
| Diluted (a) | $ | (2.29 | ) | | $ | (0.97 | ) | | $ | 1.37 |
|
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016. | | | | | | | | | | | | | | | | | | | | | |
Cowen Inc.
Consolidated Statements of Operations
(in thousands, except per share data) |
| | | Year Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| (continued) | | | | | | | | | |
| | | | | | | | | |
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | | | | (10,603) | | | 8,380 | | | (9,299) | |
| Net income (loss) attributable to Cowen Inc. | | | | | 76,458 | | | 295,611 | | | 216,363 | |
| Preferred stock dividends | | | | | 6,792 | | | 6,792 | | | 6,792 | |
| Net income (loss) attributable to Cowen Inc. common stockholders | | | | | $ | 69,666 | | | $ | 288,819 | | | $ | 209,571 | |
| | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | |
| Basic | | | | | 28,183 | | | 27,721 | | | 27,790 | |
| Diluted (See Note 26) | | | | | 31,544 | | | 32,628 | | | 29,519 | |
| Earnings (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 2.47 | | | $ | 10.42 | | | $ | 7.54 | |
| Diluted (See Note 26) | | | | | $ | 2.21 | | | $ | 8.85 | | | $ | 7.10 | |
The accompanying notes are an integral part of these consolidated financial statements.
Cowen Inc.
Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | | | | | | |
| | | | | 2022 | | 2021 | | 2020 |
| Net income (loss) | | | | | | | | | | | $ | 65,855 | | | | | $ | 303,991 | | | | | $ | 207,064 | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | 3 | | | | | 5 | | | | | (2) | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total other comprehensive income (loss), net of tax | | | | | | | | | | | 3 | | | | | 5 | | | | | (2) | |
| Comprehensive income (loss) | | | | | | | | | | | $ | 65,858 | | | | | $ | 303,996 | | | | | $ | 207,062 | |
| Less: Comprehensive income (loss) attributable to non-controlling interests | | | | | | | | | | | (10,603) | | | | | 8,380 | | | | | (9,299) | |
| Comprehensive income (loss) attributable to Cowen Inc. | | | | | | | | | | | $ | 76,461 | | | | | $ | 295,616 | | | | | $ | 216,361 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| Net income (loss) | | | $ | (37,091 | ) | | | | $ | (12,395 | ) | | | | $ | 58,975 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
| Foreign currency translation | (6 | ) | | | | (2 | ) | | | | (17 | ) | | |
| Total other comprehensive income (loss), net of tax | | | (6 | ) | | | | (2 | ) | | | | (17 | ) |
| Comprehensive income (loss) | | | $ | (37,097 | ) | | | | $ | (12,397 | ) | | | | $ | 58,958 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Cowen Inc.
Consolidated Statements of Changes in Equity
(dollars in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, | | | | |
| | | | | | | 2022 | | 2021 | | 2020 | | | | |
| Permanent Equity Shares | | | | | | (in shares) | | | | |
| Common Shares Outstanding | | | | | | | | | | | | | | |
| Beginning balance | | | | | | 27,778,964 | | | 26,845,628 | | | 28,610,357 | | | | | |
| Restricted stock awards issued | | | | | | 2,524,673 | | | 2,710,719 | | | 2,174,859 | | | | | |
| Common stock issuance for purchase of investment | | | | | | — | | | 68,980 | | | — | | | | | |
| Common stock issuance for partial settlement of contingent liability from prior acquisition | | | | | | 58,587 | | | 642,862 | | | 74,694 | | | | | |
| Purchase of treasury stock, at cost | | | | | | (2,127,935) | | | (5,428,066) | | | (4,014,282) | | | | | |
| Share settlement of convertible notes (See Note 18) | | | | | | — | | | 2,938,841 | | | — | | | | | |
| Ending balance | | | | | | 28,234,289 | | | 27,778,964 | | | 26,845,628 | | | | | |
| | | | | | | | | | | | | | | |
| Series A Convertible Preferred Shares Outstanding | | | | | | | | | | | | | | |
| Beginning balance | | | | | | — | | | 120,750 | | | 120,750 | | | | | |
| Reclassification of Series A Convertible Preferred Stock (See Note 17) | | | | | | — | | | (120,750) | | | — | | | | | |
| Ending balance | | | | | | — | | | — | | | 120,750 | | | | | |
| | | | | | | | | | | | | | | |
| Permanent Equity | | | | | | (in dollars) | | | | |
| Total Cowen Inc. Stockholders' Equity (beginning of period) | | | | | | $ | 1,015,869 | | | $ | 969,497 | | | $ | 809,855 | | | | | |
| Class A Common stock | | | | | | | | | | | | | | |
| Beginning balance | | | | | | 334 | | | 334 | | | 334 | | | | | |
| | | | | | | | | | | | | | | |
| Ending balance | | | | | | 334 | | | 334 | | | 334 | | | | | |
| | | | | | | | | | | | | | | |
| Series A Convertible Preferred stock | | | | | | | | | | | | | | |
| Beginning balance | | | | | | — | | | 1 | | | 1 | | | | | |
| Reclassification of Series A Convertible Preferred Stock (See Note 17) | | | | | | — | | | (1) | | | — | | | | | |
| Ending balance | | | | | | — | | | — | | | 1 | | | | | |
| | | | | | | | | | | | | | | |
| Treasury stock | | | | | | | | | | | | | | |
| Beginning balance | | | | | | (547,112) | | | (346,870) | | | (284,301) | | | | | |
| Purchase of treasury stock, at cost | | | | | | (67,160) | | | (200,242) | | | (62,569) | | | | | |
| Ending balance | | | | | | (614,272) | | | (547,112) | | | (346,870) | | | | | |
| | | | | | | | | | | | | | | |
| Additional Paid-in Capital | | | | | | | | | | | | | | |
| Beginning balance | | | | | | 1,100,667 | | 1,130,138 | | 1,110,635 | | | | |
| Reclassification of Series A Convertible Preferred Stock (See Note 17) | | | | | | — | | | (120,749) | | | — | | | | | |
| Common stock issuance for purchase of investment | | | | | | — | | | 2,500 | | | — | | | | | |
| Common stock issuance for partial settlement of contingent liability from prior acquisition | | | | | | 1,881 | | | 23,060 | | | 926 | | | | | |
| | | | | | | | | | | | | | | |
| Equity portion of convertible note extinguishment (See Note 18) | | | | | | — | | | — | | | (29,645) | | | | | |
| Amortization of share based awards | | | | | | 60,166 | | | 65,718 | | | 48,222 | | | | | |
| Ending balance | | | | | | $ | 1,162,714 | | | $ | 1,100,667 | | | $ | 1,130,138 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares Outstanding | | Common Stock | | Preferred Shares Outstanding | | Preferred Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings/ (Accumulated deficit) | | Total Stockholders' Equity | | Redeemable Non-controlling Interest |
| Balance, December 31, 2014 | 27,922,799 |
| | $ | 290 |
| | — |
| | $ | — |
| | $ | (79,771 | ) | | $ | 773,166 |
| | $ | 17 |
| | $ | (16,027 | ) | | $ | 677,675 |
| | $ | 86,076 |
|
| Net income (loss) attributable to Cowen Inc. | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 43,729 |
| | 43,729 |
| | — |
|
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,246 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (17 | ) | | — |
| | (17 | ) | | — |
|
| Capital contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 110,178 |
|
| Capital withdrawals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (24,589 | ) |
| Restricted stock awards issued | 1,068,227 |
| |
|
| | — |
| | — |
| | — |
| |
|
| | — |
| | — |
| | — |
| | — |
|
| Common stock issuance upon acquisition (See Note 2) | 137,156 |
| | 2 |
| | — |
| | — |
| | — |
| | 3,006 |
| | — |
| | — |
| | 3,008 |
| | — |
|
| Purchase of treasury stock, at cost | (2,752,019 | ) | |
|
| | — |
| | — |
| | (57,585 | ) | |
|
| | — |
| | — |
| | (57,585 | ) | | — |
|
| Preferred stock issuance, net of issuance costs (See Note 24) | — |
| | — |
| | 120,750 |
| | 1 |
| | — |
| | 117,194 |
| | — |
| | — |
| | 117,195 |
| | — |
|
| Preferred stock dividends (See Note 24) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,075 | ) | | (4,075 | ) | | — |
|
| Capped call option transaction (See Note 24) | — |
| | — |
| | — |
| | — |
| | — |
| | (15,878 | ) | | — |
| | — |
| | (15,878 | ) | | — |
|
| Stock options exercised | 25,000 |
| | — |
| | — |
| | — |
| | — |
| | 395 |
| | — |
| | — |
| | 395 |
| | — |
|
| Income tax effect from share based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | 3,806 |
| | — |
| | — |
| | 3,806 |
| | — |
|
| Amortization of share based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | 21,740 |
| | — |
| | — |
| | 21,740 |
| | — |
|
| Balance, December 31, 2015 | 26,401,163 |
| | $ | 292 |
| | 120,750 |
| | $ | 1 |
| | $ | (137,356 | ) | | $ | 903,429 |
| | $ | — |
| | $ | 23,627 |
| | $ | 789,993 |
| | $ | 186,911 |
|
| Net income (loss) attributable to Cowen Inc. | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (19,277 | ) | | (19,277 | ) | | — |
|
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,882 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | — |
|
| Capital contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 276,923 |
|
| Capital withdrawals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18,469 | ) |
| Deconsolidation of entity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (73,042 | ) |
| Restricted stock awards issued | 1,511,995 |
| |
|
| | — |
| | — |
| | — |
| |
|
| | — |
| | — |
| | — |
| | — |
|
| Purchase of treasury stock, at cost | (1,181,869 | ) | |
|
| | — |
| | — |
| | (16,489 | ) | |
|
| | — |
| | — |
| | (16,489 | ) | | — |
|
| Preferred stock dividends (See Note 24) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,792 | ) | | (6,792 | ) | | |
| Income tax effect from share based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | (822 | ) | | — |
| | — |
| | (822 | ) | | — |
|
| Amortization of share based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | 26,039 |
| | — |
| | — |
| | 26,039 |
| | — |
|
| Balance, December 31, 2016 | 26,731,289 |
| | $ | 292 |
| | 120,750 |
| | $ | 1 |
| | $ | (153,845 | ) | | $ | 928,646 |
| | $ | (2 | ) | | $ | (2,442 | ) | | $ | 772,650 |
| | $ | 379,205 |
|
| Net income (loss) attributable to Cowen Inc. | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (60,882 | ) | | (60,882 | ) | | — |
|
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 23,791 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) | | — |
|
| Capital contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 119,112 |
|
| Capital withdrawals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (81,504 | ) |
| Common stock issuance upon acquisition (See Note 2) | 3,162,278 |
| | 32 |
| | — |
| | — |
| | — |
| | 47,575 |
| | — |
| | — |
| | 47,607 |
| | — |
|
| Restricted stock awards issued | 2,060,927 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Purchase of treasury stock, at cost | (2,322,474 | ) | | — |
| | — |
| | — |
| | (33,001 | ) | | — |
| | — |
| | — |
| | (33,001 | ) | | — |
|
| Preferred stock dividends (See Note 24) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,792 | ) | | (6,792 | ) | | — |
|
| Amortization of share based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | 28,443 |
| | — |
| | — |
| | 28,443 |
| | — |
|
| Balance, December 31, 2017 | 29,632,020 |
| | $ | 324 |
| | 120,750 |
| | $ | 1 |
| | $ | (186,846 | ) | | $ | 1,004,664 |
| | $ | (8 | ) | | $ | (70,116 | ) | | $ | 748,019 |
| | $ | 440,604 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, | | | | |
| | | | | | | 2022 | | 2021 | | 2020 | | | | |
| | | | | | | (in dollars) | | | | |
| | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | | |
| Beginning balance | | | | | | (2) | | | (7) | | | (5) | | | | | |
| Foreign currency translation | | | | | | 3 | | | 5 | | | (2) | | | | | |
| Ending balance | | | | | | $ | 1 | | | $ | (2) | | | $ | (7) | | | | | |
| | | | | | | | | | | | | | | |
| Retained Earnings/ (Accumulated deficit) | | | | | | | | | | | | | | |
| Beginning balance | | | | | | $ | 461,982 | | | $ | 185,901 | | | $ | (16,809) | | | | | |
| Cumulative effect of the adoption of the new revenue recognition standard (See Note 2w) | | | | | | — | | | — | | | (10) | | | | | |
| Net income (loss) attributable to Cowen Inc. | | | | | | 76,458 | | 295,611 | | 216,363 | | | | |
| Preferred stock dividends (See Note 17) | | | | | | (6,792) | | | (6,792) | | | (6,792) | | | | | |
| Cash dividends to common stockholders (See Note 18) | | | | | | (16,253) | | | (12,738) | | | (6,851) | | | | | |
| Ending balance | | | | | | 515,395 | | 461,982 | | 185,901 | | | | |
| Total Cowen Inc. Stockholders' Equity (end of period) | | | | | | 1,064,172 | | | 1,015,869 | | | 969,497 | | | | | |
| | | | | | | | | | | | | | | |
| Nonredeemable Non-controlling Interests | | | | | | | | | | | | | | |
| Beginning balance | | | | | | $ | 159,735 | | | $ | 199,624 | | | $ | 94,320 | | | | | |
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | | | | | (10,603) | | | 8,380 | | 23,625 | | | | |
| Capital contributions | | | | | | 24,417 | | 55,556 | | 201,223 | | | | |
| Capital distributions | | | | | | (10,626) | | | (29,012) | | | (78,251) | | | | | |
| Consolidation of entity | | | | | | — | | | — | | | 48,596 | | | | |
| Deconsolidation of entity | | | | | | — | | | (74,813) | | | (89,889) | | | | | |
| Ending balance | | | | | | 162,923 | | 159,735 | | 199,624 | | | | |
| Total Permanent Equity | | | | | | $ | 1,227,095 | | | $ | 1,175,604 | | | $ | 1,169,121 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | |
Cowen Inc.
Consolidated Statements of Cash Flows
(dollars in thousands) |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 65,855 | | | $ | 303,991 | | | $ | 207,064 | |
| Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities: | | | | | |
| Bargain purchase gain, net of tax | — | | | (3,855) | | | — | |
| Depreciation and amortization | 27,725 | | | 19,004 | | | 22,677 | |
| | | | | |
| Amortization of debt issuance costs | 2,473 | | | 2,563 | | | 1,512 | |
| Amortization of debt discount (premium) | 309 | | | 6,727 | | | 4,490 | |
| Noncash lease expense | 1,429 | | | 734 | | | (561) | |
| Asset impairment | — | | | — | | | 2,425 | |
| (Gain) / loss on extinguishment of debt | — | | | 3,890 | | | (2,719) | |
| | | | | |
| Share-based awards | 60,272 | | | 65,718 | | | 48,222 | |
| Change in deferred taxes | (29,045) | | | (14,095) | | | 70,136 | |
| Net loss (gain) on disposal of fixed assets | 216 | | | — | | | — | |
| Contingent liability adjustment | — | | | (614) | | | — | |
| | | | | |
| Purchases of securities owned, at fair value | (1,202,243) | | | (1,136,928) | | | (1,682,598) | |
| Proceeds from sales of securities owned, at fair value | 999,934 | | | 1,007,261 | | | 1,793,934 | |
| Proceeds from sales of securities sold, not yet purchased, at fair value | 6,621,546 | | | 257,142 | | | 821,829 | |
| Payments to cover securities sold, not yet purchased, at fair value | (6,240,064) | | | (262,362) | | | (850,608) | |
| Proceeds from sales of other investments | 28,894 | | | 27,477 | | | 22,453 | |
| Investment income (loss) principal transactions, net | (157,798) | | | (66,219) | | | (161,699) | |
| Consolidated Funds | | | | | |
| Purchases of securities owned, at fair value | — | | | (4,000) | | | (1,912,137) | |
| Proceeds from sales of securities owned, at fair value | — | | | 13,748 | | | 1,793,528 | |
| | | | | |
| | | | | |
| Purchases of other investments | — | | | — | | | (2,090) | |
| Proceeds from other investments | — | | | 14,130 | | | 6,734 | |
| Investment income (loss) principal transactions, net | 49,235 | | | 5,990 | | | 21,597 | |
| (Increase) decrease in operating assets: | | | | | |
| | | | | |
| | | | | |
| Securities owned, at fair value, held at broker-dealer | 450,760 | | | (496,443) | | | (335,510) | |
| Receivable on derivative contracts, at fair value | (208,556) | | | (234,653) | | | 11,394 | |
| Securities borrowed | 406,547 | | | 203,584 | | | (1,153,746) | |
| Deposits with clearing organizations, brokers and banks | 23,925 | | | (6,905) | | | (13,197) | |
| Securities purchased under agreement to resell | (121,718) | | | 191 | | | (191) | |
| Receivable from brokers, dealers and clearing organizations | (250,478) | | | 115,397 | | | (1,048,049) | |
| Receivable from customers, net of allowance | 117,747 | | | (55,455) | | | 1,684 | |
| Fees receivable, net of allowance | 32,592 | | | 16,919 | | | (33,991) | |
| Insurance and reinsurance assets | 7,717 | | | (9,465) | | | (18,498) | |
| Due from related parties | 9,156 | | | (10,088) | | | 5,498 | |
| Other assets | (30,125) | | | (7,273) | | | 82,124 | |
| Consolidated Funds | | | | | |
| | | | | |
| Receivable on derivative contracts, at fair value | — | | | (2,917) | | | (19,710) | |
| Receivable from brokers | — | | | — | | | (961) | |
| Other assets | — | | | 13 | | | 564 | |
| Increase (decrease) in operating liabilities: | | | | | |
| Securities sold, not yet purchased, at fair value, held at broker-dealer | (503,565) | | | 473,516 | | | 286,105 | |
| Securities sold under agreement to repurchase | 69,661 | | | 58,433 | | | (18,208) | |
| Payable for derivative contracts, at fair value | 9,502 | | | (15,997) | | | 15,399 | |
| Securities loaned | (386,734) | | | (889,842) | | | 874,548 | |
| Payable to brokers, dealers and clearing organizations | 197,356 | | | 171,410 | | | 144,125 | |
| Payable to customers | 230,802 | | | 752,286 | | | 1,250,102 | |
| Commission management payable | 12,863 | | | (13,997) | | | 45,367 | |
| Insurance and reinsurance liabilities | (51,147) | | | 4,041 | | | 63,856 | |
| | | | | |
| Compensation payable | (81,185) | | | 29,833 | | | 134,522 | |
| Fees payable | 9,579 | | | (27,350) | | | 22,293 | |
| Due to related parties | (43) | | | (51) | | | 254 | |
| Accounts payable, accrued expenses and other liabilities | (1,714) | | | 11,666 | | | (7,977) | |
| | | | | |
|
| | | | | | | | | | | |
Cowen Inc.
Consolidated Statements of Cash Flows
(dollars in thousands) |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (37,091 | ) | | $ | (12,395 | ) | | $ | 58,975 |
|
| Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities: | | | | | |
|
| Bargain purchase gain, net of tax | (6,914 | ) | | — |
| | — |
|
| Depreciation and amortization | 13,078 |
| | 12,713 |
| | 9,498 |
|
| Net gain on sale of divested business | — |
| | (15,638 | ) | | — |
|
| Amortization of debt issuance costs | 1,261 |
| | 1,208 |
| | 1,163 |
|
| Amortization of debt discount | 7,435 |
| | 6,885 |
| | 6,302 |
|
Gain / (loss) on extinguishment of debt
| 10,551 |
| | — |
| | — |
|
| Tax (benefit) expense from share-based payment arrangements | — |
| | (822 | ) | | 3,806 |
|
| Share-based compensation | 28,443 |
| | 26,039 |
| | 21,740 |
|
| Deferred tax benefit | 45,856 |
| | (21,274 | ) | | (17,966 | ) |
| Deferred rent obligations | (2,192 | ) | | (880 | ) | | (2,333 | ) |
| Net loss (gain) on disposal of fixed assets | (2,346 | ) | | — |
| | 54 |
|
| Contingent liability adjustment | — |
| | 2,139 |
| | (200 | ) |
| Purchases of securities owned, at fair value | (4,943,394 | ) | | (4,483,975 | ) | | (5,856,112 | ) |
| Proceeds from sales of securities owned, at fair value | 5,131,938 |
| | 4,447,094 |
| | 6,039,719 |
|
| Proceeds from sales of securities sold, not yet purchased, at fair value | 2,455,876 |
| | 3,016,934 |
| | 2,730,939 |
|
| Payments to cover securities sold, not yet purchased, at fair value | (2,444,010 | ) | | (3,054,869 | ) | | (2,674,153 | ) |
| Net (gains) losses on securities, derivatives and other investments | (78,303 | ) | | (28,878 | ) | | (34,495 | ) |
| Consolidated Funds | | | | | |
| Purchases of securities owned, at fair value | (385,544 | ) | | (113,653 | ) | | (25,000 | ) |
| Proceeds from sales of securities owned, at fair value | 338,268 |
| | 73,011 |
| | — |
|
| Proceeds from sales of securities sold, not yet purchased, at fair value | 217 |
| | 2,226 |
| | — |
|
| Payments to cover securities sold, not yet purchased, at fair value | (899 | ) | | (1,799 | ) | | — |
|
| Purchases of other investments | (26,206 | ) | | (221,897 | ) | | (92,305 | ) |
| Proceeds from sales of other investments | 64,867 |
| | 17,116 |
| | 31,417 |
|
| Net realized and unrealized (gains) losses on investments and other transactions | (28,267 | ) | | (17,402 | ) | | (13,552 | ) |
| (Increase) decrease in operating assets: | | | | | |
| Cash acquired through acquisition | 30,562 |
| | — |
| | — |
|
| Cash collateral pledged | (4,546 | ) | | (3,257 | ) | | (1,779 | ) |
| Segregated Cash | 13,781 |
| | 229 |
| | (1,253 | ) |
| Securities owned, at fair value, held at broker-dealer | (102,137 | ) | | (17,005 | ) | | 14,877 |
|
| Receivable on derivative contracts, at fair value | (46,277 | ) | | 16,717 |
| | 10,259 |
|
| Securities borrowed | (184,827 | ) | | — |
| | 676,100 |
|
| Deposits with clearing organizations, brokers and banks | (32,460 | ) | | (1,874 | ) | | (6,965 | ) |
| Receivable from brokers, dealers and clearing organizations | (366,297 | ) | | 31,795 |
| | (20,785 | ) |
| Receivable from customers, net of allowance | (6,422 | ) | | — |
| | — |
|
| Fees receivable, net of allowance | (29,669 | ) | | (12,632 | ) | | 11,099 |
|
| Due from related parties | 4,815 |
| | (176 | ) | | (13,344 | ) |
| Other assets | (33,454 | ) | | (10,048 | ) | | 4,580 |
|
| Consolidated Funds | | | | | |
| Cash and cash equivalents | (4,227 | ) | | (3,827 | ) | | (13,433 | ) |
| Receivable on derivative contracts, at fair value | (1,627 | ) | | (893 | ) | | — |
|
| Receivable from brokers | 334 |
| | (5,978 | ) | | — |
|
| Other assets | 123 |
| | 152 |
| | 770 |
|
| Increase (decrease) in operating liabilities: | | | | | |
| Securities sold, not yet purchased, at fair value, held at broker-dealer | 19,226 |
| | 7,160 |
| | (11,747 | ) |
| Payable for derivative contracts, at fair value | (1,399 | ) | | (421 | ) | | (20,147 | ) |
| Securities loaned | 170,472 |
| | — |
| | (682,493 | ) |
| Payable to brokers, dealers and clearing organizations | (32,440 | ) | | 78,520 |
| | (204,186 | ) |
| Payable to customers | 340,666 |
| | — |
| | — |
|
| Commission management payable | (15,857 | ) | | 242 |
| | 2,225 |
|
| Compensation payable | 9,150 |
| | (60,279 | ) | | 5,540 |
|
| Fees payable | (639 | ) | | (2,366 | ) | | (693 | ) |
| Due to related parties | (3 | ) | | 244 |
| | (145 | ) |
| | Cowen Inc.
Consolidated Statements of Cash Flows
(dollars in thousands) | Cowen Inc.
Consolidated Statements of Cash Flows
(dollars in thousands) | Cowen Inc.
Consolidated Statements of Cash Flows
(dollars in thousands) |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| (continued) | | | | | | |
| Accounts payable, accrued expenses and other liabilities | 13,046 |
| | (9,133 | ) | | (5,337 | ) | |
| Consolidated Funds | | | | | | Consolidated Funds | | | |
| Contributions received in advance | (2,000 | ) | | 1,150 |
| | 850 |
| Contributions received in advance | — | | | — | | | 450 | |
| Payable to brokers | (2,949 | ) | | 3,699 |
| | — |
| Payable to brokers | — | | | — | | | 8,560 | |
| Payable for derivative contracts, at fair value | 6,558 |
| | 572 |
| | — |
| Payable for derivative contracts, at fair value | — | | | — | | | 11,967 | |
| | Due to related parties | (189 | ) | | 453 |
| | 3 |
| Due to related parties | (23) | | | 16 | | | (386) | |
| Accounts payable, accrued expenses and other liabilities | (330 | ) | | 528 |
| | (98 | ) | Accounts payable, accrued expenses and other liabilities | (63) | | | (353) | | | 436 | |
| Net cash provided by / (used in) operating activities | (116,392 | ) | | (354,545 | ) | | (68,605 | ) | Net cash provided by / (used in) operating activities | 171,594 | | | 306,818 | | | 513,013 | |
| Cash flows from investing activities: | | | | | | Cash flows from investing activities: | | | | | |
| Purchases of other investments | $ | (10,419 | ) | | $ | (33,786 | ) | | (14,149 | ) | Purchases of other investments | (63,875) | | | (98,375) | | | (48,634) | |
| Purchase of business (Note 2) | (55,049 | ) | | (6,258 | ) | | (38,416 | ) | |
| Purchase of business and/or asset acquisition | | Purchase of business and/or asset acquisition | 187,613 | | | (63,246) | | | (5,647) | |
| Cash at deconsolidated entity | | Cash at deconsolidated entity | — | | | (5,620) | | | (22,382) | |
| Proceeds from sales of other investments | 71,749 |
| | 54,068 |
| | 58,166 |
| Proceeds from sales of other investments | 64,017 | | | 99,142 | | | 44,371 | |
| Loans issued | (13,745 | ) | | — |
| | (46,000 | ) | |
| Proceeds from loans held for investment | 3,203 |
| | 42,800 |
| | — |
| |
| Proceeds from divested business, net of cash divested | — |
| | 17,303 |
| | — |
| |
| Purchase of fixed assets | (5,986 | ) | | (15,613 | ) | | (7,030 | ) | |
| | Purchase of fixed assets and intangibles | | Purchase of fixed assets and intangibles | (12,537) | | | (11,819) | | | (10,721) | |
| Sale of fixed assets | 7,850 |
| | — |
| | — |
| Sale of fixed assets | — | | | 4,183 | | | — | |
| Net cash provided by / (used in) investing activities | (2,397 | ) | | 58,514 |
| | (47,429 | ) | Net cash provided by / (used in) investing activities | 175,218 | | | (75,735) | | | (43,013) | |
| Cash flows from financing activities: | | | | | | Cash flows from financing activities: | | | | | |
| Proceeds from issuance of convertible debt | 135,000 |
| | — |
| | — |
| |
| | Repayments on convertible debt | (115,140 | ) | | — |
| | — |
| Repayments on convertible debt | — | | | (88,119) | | | (69,842) | |
| Proceeds from issuance of preferred stock, net of issuance costs | — |
| | — |
| | 117,194 |
| |
| Capped call option transaction | — |
| | — |
| | (15,878 | ) | |
| | Deferred debt issuance cost | (7,176 | ) | | — |
| | — |
| Deferred debt issuance cost | (72) | | | (9,312) | | | (1,700) | |
| Borrowings on notes and other debt | 171,148 |
| | 30,638 |
| | 7,140 |
| Borrowings on notes and other debt | 4,175 | | | 450,286 | | | 159,821 | |
| Repayments on notes and other debt | (72,757 | ) | | (29,800 | ) | | (3,299 | ) | Repayments on notes and other debt | (10,095) | | | (206,433) | | | (121,472) | |
| Income tax effect from share-based payment arrangements | — |
| | (822 | ) | | 3,806 |
| |
| Proceeds from stock options exercised | — |
| | — |
| | 394 |
| |
| | Purchase of treasury stock | (19,662 | ) | | (7,654 | ) | | (48,678 | ) | Purchase of treasury stock | (31,078) | | | (159,822) | | | (47,314) | |
| Cash paid to acquire net assets (contingent liability payment) | (393 | ) | | (2,358 | ) | | (1,725 | ) | |
| Capital contributions by redeemable non-controlling interests in operating entities | — |
| | 10 |
| | 5,644 |
| |
| Capital withdrawals to redeemable non-controlling interests in operating entities | (5,178 | ) | | (6,995 | ) | | (13,860 | ) | |
| Cash dividends paid | | Cash dividends paid | (15,152) | | | (11,373) | | | (5,710) | |
| Preferred stock dividends paid | | Preferred stock dividends paid | (6,792) | | | (6,792) | | | (6,792) | |
| Contingent liability payment | | Contingent liability payment | (10,076) | | | (10,698) | | | (5,653) | |
| Capital contributions by non-controlling interests in operating entities | | Capital contributions by non-controlling interests in operating entities | 24,311 | | | 36,539 | | | 9,730 | |
| Capital distributions to non-controlling interests in operating entities | | Capital distributions to non-controlling interests in operating entities | (10,626) | | | (7,601) | | | (5,605) | |
| Consolidated Funds | | | | | | Consolidated Funds | | | |
| Capital contributions by redeemable non-controlling interests in Consolidated Funds | 117,812 |
| | 276,914 |
| | 104,533 |
| |
| Capital withdrawals to redeemable non-controlling interests in Consolidated Funds | (65,803 | ) | | (10,144 | ) | | (11,514 | ) | |
| Capital contributions by non-controlling interests in Consolidated Funds | | Capital contributions by non-controlling interests in Consolidated Funds | — | | | 19,017 | | | 375,716 | |
| Capital distributions to non-controlling interests in Consolidated Funds | | Capital distributions to non-controlling interests in Consolidated Funds | — | | | (21,411) | | | (255,597) | |
| Net cash provided by / (used in) financing activities | 137,851 |
| | 249,789 |
| | 143,757 |
| Net cash provided by / (used in) financing activities | (55,405) | | | (15,719) | | | 25,582 | |
| Change in cash and cash equivalents | 19,062 |
| | (46,242 | ) | | 27,723 |
| Change in cash and cash equivalents | 291,407 | | | 215,364 | | | 495,582 | |
| Total cash beginning of period | 110,990 |
| | 157,232 |
| | 129,509 |
| |
| Total cash at end of period | $ | 130,052 |
| | $ | 110,990 |
| | $ | 157,232 |
| |
| | | | | | | |
| Cash and cash equivalents, including cash collateral pledged and segregated cash, beginning of period | | Cash and cash equivalents, including cash collateral pledged and segregated cash, beginning of period | 1,156,834 | | | 941,470 | | | 445,888 | |
| Cash and equivalents at end of period: | | Cash and equivalents at end of period: | |
| Cash and cash equivalents | | Cash and cash equivalents | 1,139,652 | | | 914,343 | | | 645,169 | |
| Cash collateral pledged | | Cash collateral pledged | 122,687 | | | 47,494 | | | 110,743 | |
| Segregated cash | | Segregated cash | 185,872 | | | 194,701 | | | 185,141 | |
| Cash and cash equivalents, Consolidated Funds | | Cash and cash equivalents, Consolidated Funds | 30 | | | 296 | | | 417 | |
| Cash and cash equivalents, including cash collateral pledged and segregated cash, end of period | | Cash and cash equivalents, including cash collateral pledged and segregated cash, end of period | $ | 1,448,241 | | | $ | 1,156,834 | | | $ | 941,470 | |
| Supplemental information | | | | | | Supplemental information | | | | | |
| Cash paid during the year for interest | $ | 26,632 |
| | $ | 17,540 |
| | $ | 17,525 |
| Cash paid during the year for interest | $ | 187,628 | | | $ | 214,909 | | | $ | 153,653 | |
| Cash paid during the year for taxes | $ | 2,172 |
| | $ | 5,085 |
| | $ | 4,161 |
| Cash paid during the year for taxes | $ | 50,988 | | | $ | 119,050 | | | $ | 4,783 | |
| Supplemental non-cash information | | Supplemental non-cash information | | | | |
| Purchase of treasury stock, at cost, through net settlement (See Note 18) | | Purchase of treasury stock, at cost, through net settlement (See Note 18) | $ | 36,082 | | | $ | 40,392 | | | $ | 15,147 | |
| Preferred stock dividends declared (See Note 18) | | Preferred stock dividends declared (See Note 18) | $ | 6,792 | | | $ | 6,792 | | | $ | 6,792 | |
| Cash dividends declared (See Note 18) | | Cash dividends declared (See Note 18) | $ | 16,253 | | | $ | 12,738 | | | $ | 6.851 | |
| Net assets (liabilities) acquired upon acquisition (net of cash) | | Net assets (liabilities) acquired upon acquisition (net of cash) | $ | (187,613) | | | $ | 23,128 | | | $ | 9,865 | |
| | | | | | | |
| Supplemental non-cash information | | | | | | |
| Conversion option value on 2022 Convertible Notes | $ | 23,387 |
| | $ | — |
| | $ | — |
| |
| Purchase of treasury stock, at cost, through net settlement (See Note 24) | $ | 11,889 |
| | $ | 8,835 |
| | $ | 8,907 |
| |
| Preferred stock dividends declared (See Note 24) | $ | 6,792 |
| | $ | 6,792 |
| | $ | 4,075 |
| |
| Net assets (liabilities) acquired upon acquisition (net of cash) (See Note 2) | $ | 77,790 |
| | $ | — |
| | $ | 22,468 |
| |
| Common stock issuance upon close of acquisition (see Note 2) | $ | 47,607 |
| | $ | — |
| | $ | 3,008 |
| |
| Notes payable increase through asset acquisition | $ | — |
| | $ | 7,164 |
| | $ | — |
| |
| Net assets of deconsolidated entities | $ | — |
| | $ | 73,042 |
| | $ | — |
| |
| Conversion of redeemable non-controlling interest to loan receivable | $ | 1,299 |
| | $ | — |
| | $ | — |
| |
| | Net increase in non-controlling interests due to consolidation of operating entity | | Net increase in non-controlling interests due to consolidation of operating entity | $ | — | | | $ | — | | | $ | 48,596 | |
| Net decrease in non-controlling interests in Consolidated Fund due to deconsolidation of Consolidated Fund (See Note 2) | | Net decrease in non-controlling interests in Consolidated Fund due to deconsolidation of Consolidated Fund (See Note 2) | $ | — | | | $ | 74,813 | | | $ | 450,600 | |
| Common stock issuance for purchase of investment | | Common stock issuance for purchase of investment | $ | — | | | $ | 2,500 | | | $ | — | |
| Common stock issuance in relation to acquisitions | | Common stock issuance in relation to acquisitions | $ | 1,881 | | | $ | 23,060 | | | $ | 926 | |
The accompanying notes are an integral part of these consolidated financial statements.
Cowen Inc.
Notes to Consolidated Financial Statements
1. Organization and Business
Cowen Inc. (formerly Cowen Group, Inc.), a Delaware corporation formed in 2009, is a diversified financial services firm which,that, together with its consolidated subsidiaries (collectively, “Cowen,”"Cowen" or the “Company”"Company"), operates through its two business segments: investment management and broker-dealer. The Company's investment management segment, includes private funds, managed accounts, commodity pools, real estate funds, private equity structures, registered investment companies and listed vehicles. The Company's broker-dealer segment offersprovides investment banking, research, sales and trading, prime brokerage, global clearing, andsecurities financing, commission management services and investment management through its two business segments: the Operating Company ("Op Co") and the Asset Company ("Asset Co").
The Op Co segment consists of four divisions: the Investment Banking division, the Markets division, the Research division and the Cowen Investment Management ("CIM") division. The Company refers to companiesthe Investment Banking division, the Markets division and primarilythe Research division combined as its investment banking businesses. Op Co's investment banking businesses offer advisory and global capital markets origination, domain knowledge-driven research, sales and trading platforms for institutional investor clients. The Company's primary target sectors areinvestors, global clearing, commission management services and also a comprehensive suite of prime brokerage service. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, informationconsumer, industrials, tech-enabled and technologybusiness services, consumer, aerospace and defense, industrials, energyenergy. Op Co’s CIM division includes advisers to investment funds (including private equity structures and transportation.privately placed hedge funds) and registered funds. The Company has also invested capital in its insurance and reinsurance businesses.
On December 5, 2016, the Company effected a one-for-four reverse stock splitThe Asset Co segment consists of certain of the Company's common stock. Except whereprivate investments, private real estate investments and other legacy investment strategies. The focus of Asset Co is to drive future monetization of the context indicates otherwise, all share and per share information has been retroactively adjusted to reflectinvested capital of the reverse stock split.
2. Acquisitions and Divestiture
Acquisitions
Convergex Groupsegment.
On April 2, 2017,August 1, 2022, the Company, through itsThe Toronto-Dominion Bank, a Canadian chartered bank (“TD”), and Crimson Holdings Acquisition Co., a Delaware corporation and an indirect wholly owned subsidiary Cowen CV Acquisition LLC,of TD (“Merger Sub”), entered into a securities purchase agreementan Agreement and Plan of Merger pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with among others, Convergex Holdings LLC to acquire alland into the outstanding interests in Convergex Group, LLC ("Convergex Group") (subsequently renamed to Cowen Execution Holdco LLC), a provider of agency based execution services and trading technology to middle market institutional investors and broker-dealers. Convergex Group's operations were primarily conducted through two U.S. Securities Exchange Commission ("SEC") registered broker-dealers, Convergex Execution Solutions LLC (subsequently renamed to Cowen Execution Services LLC) ("Cowen Execution") and Westminster Research Associates LLC ("Westminster") and also Convergex Limited (subsequently renamed to Cowen Execution Services Limited) ("Cowen Execution Ltd"Company (the “Merger”), which is based inwith the United Kingdom and regulated byCompany surviving the Financial Conduct Authority ("FCA"). The purchase price was paid approximately 50% in cash and 50% in Cowen Inc. Class A common stock.
The acquisition was consummated effective as of June 1, 2017. The adjusted aggregate estimated purchase price was $98.0 million, which was determined based on closing date tangible book value of Convergex Group, less certain closing adjustments. A portion of the preliminary purchase price was deposited into escrowMerger as a reserve for any future claims against the sellerswholly-owned subsidiary of Convergex Group. On closing, the Company paid cashTD.
2. Significant Accounting Policies
a. Basis of $48.6 million and issued 3,162,278 of the Company’s Class A common stock determined based on the 30-day volume-weighted average price per share of $15.05 as of May 30, 2017. Subsequent to the closing date, adjustments were identified and the sellers and the Company agreed to settle all of the outstanding closing date adjustments.presentation
The acquisition was accounted for under the acquisition method of accountingThese financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). As such, results of operations for Convergex Group are included in the accompanying consolidated statements of operations since the date of acquisition, and the assets acquired and liabilities assumed were recorded at their fair value as of the acquisition date. Subsequent to the acquisition, the operations of Convergex Group were integrated within the Company's existing businesses.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The table below summarizes the preliminary purchase price allocation of net tangible and intangible assets acquired and liabilities assumed as of June 1, 2017: |
| | | |
| | (dollars in thousands) |
| Cash and cash equivalents | $ | 30,562 |
|
| Segregated cash | 129,025 |
|
| Securities owned, at fair value | 3,417 |
|
| Securities borrowed | 258,321 |
|
| Deposits from clearing organizations | 52,596 |
|
| Receivable from brokers | 62,983 |
|
| Receivable from customers | 43,469 |
|
| Fees receivable | 36,232 |
|
| Fixed assets, net | 1,325 |
|
| Intangible assets | 10,270 |
|
| Other assets | 7,528 |
|
| Securities sold, not yet purchased, at fair value | (71 | ) |
| Securities loaned | (286,359 | ) |
| Payable to brokers | (74,284 | ) |
| Payable to customers | (11,801 | ) |
| Commission management payable | (82,718 | ) |
| Compensation payable | (31,083 | ) |
| Notes payable and other debt | (857 | ) |
| Fees payable | (5,414 | ) |
| Accounts payable, accrued expenses and other liabilities | (33,570 | ) |
| Total identifiable net assets acquired and liabilities assumed | 109,571 |
|
| Goodwill/(Bargain purchase gain) | (11,609 | ) |
| Total estimated purchase price | $ | 97,962 |
|
The Company believes that all of the acquired receivables and contractual amounts receivable as reflected above in the allocation of the purchase price are recorded at fair value. See Note 22 for further information on legal matters relating to the acquisition.
As of the acquisition date, the estimated fair value of the Company's intangible assets, as acquired through the acquisition, was $10.3 million. The allocation of the intangible assets is shown within the following table.
|
| | | | | |
| | Estimated intangible assets acquired | | Estimated average remaining useful lives |
| | (dollars in thousands) |
| | (in years) |
| Intangible asset class | | | |
| Trade name | $ | 760 |
| | 0.6 - 2.6 |
| Intellectual property | 1,790 |
| | 5 |
| Customer relationships | 7,720 |
| | 9 |
| Total intangible assets | $ | 10,270 |
| |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Amortization expense for the year ended December 31, 2017 is $1.4 million and is included in depreciation and amortization in the accompanying consolidated statements of operations. The estimated amortization expense related to these intangible assets in future periods is as follows:
|
| | | |
| | (dollars in thousands) |
| 2018 | $ | 1,258 |
|
| 2019 | 1,239 |
|
| 2020 | 1,216 |
|
| 2021 | 1,216 |
|
| 2022 | 1,007 |
|
| Thereafter | 2,931 |
|
| | $ | 8,867 |
|
Based on the June 1, 2017 estimated purchase price allocation, the fair value of the net identifiable assets acquired and liabilities assumed of $109.6 million exceeded the estimated purchase price of $98.0 million. As a result, the Company has recognized a bargain purchase gain of $11.6 million related to the acquisition. The bargain purchase gain is shown net of $4.7 million of associated tax in the accompanying consolidated statements of operations.
In addition to the purchase price consideration, for the year ended December 31, 2017, the Company has incurred acquisition related expenses of $6.0 million including financial advisory, legal and valuation services, which are included in professional, advisory and other fees in the consolidated statements of operations. Subsequent to the acquisition, certain of Convergex Group's businesses were integrated within the broker-dealer businesses of the Company and therefore they are included within their respective line items in the accompanying consolidated statements of operations from June 1, 2017 through December 31, 2017. The following table provides unaudited supplemental pro forma financial information for the years ended December 31, 2017 and 2016, as if the acquisition were completed as of January 1, 2016. This unaudited supplemental pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company's financial results would have been had the acquisition been completed on January 1, 2016, nor does it purport to be indicative of any future results. |
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands, except per share data) |
| | (unaudited) |
| Revenues | $ | 733,744 |
| | $ | 681,655 |
|
| Net income (loss) attributable to Cowen Inc. stockholders | (84,671 | ) | | (50,516 | ) |
| | | | |
| Net income (loss) per common share: | | | |
| Basic (a) | $ | (2.75 | ) | | $ | (1.68 | ) |
| Diluted (a) | (2.75 | ) | | (1.68 | ) |
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
In conjunction with the integration of the acquired businesses of Convergex Group, the Company evaluated the combined broker-dealer businesses and operations and incurred approximately $8.8 million of integration and restructuring costs which primarily related to exit and disposal costs, discontinuation of redundant technology services and severance costs. During the year ended December 31, 2017, the Company continued to integrate the businesses acquired through Convergex Group and consolidated certain similar businesses.
Low Country
On April 22, 2016, Cowen Aviation Finance Holdings Inc. ("Cowen Aviation Finance") entered into a transaction whereby Cowen Aviation Finance acquired Low Country III, LLC, which is comprised of a portfolio of four specialized aircraft currently on lease in exchange for an immaterial upfront payment and a non-controlling equity interest in Cowen Aviation Finance. As part of the transaction Cowen Aviation Finance also acquired the associated debt financing and lease contracts for each aircraft. Separate from the transaction, Cowen Aviation Finance entered into services agreements with Tempus Applied Solutions, Inc., a related party through common directors, which, among other services, will provide marketing, maintenance, and lease administration services for Cowen Aviation Finance's current aircraft fleet. This acquisition was accounted for as an asset
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
acquisition in accordance with US GAAP because, upon separation from the seller, the acquired assets do not meet the definition of a business.
CRT business
On May 6, 2016, the Company completed its previously announced acquisition of the credit products, credit research, special situations and emerging markets units from CRT Capital Group LLC (“CRT”). The acquisition was completed for a combination of cash of $6.3 million and contingent consideration payable annually based on future revenues exceeding specific targets. In the aggregate, the purchase price, assets acquired and liabilities assumed were not significant and the near term impact to the Company and its consolidated results of operations and cash flows is not expected to be significant. Following the acquisition, the businesses acquired from CRT are included in the broker-dealer segment.
In accordance with the terms of the purchase agreement, the Company is required to pay to the sellers a portion of future revenue of the business exceeding specified targets over the period from the acquisition date through June 2018. The Company estimated the contingent consideration using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows. Changes in these estimates and assumptions could have a significant impact on the amount recognized. On the acquisition date, the undiscounted amount ranged from zero to $8.0 million.
The acquisition was accounted for under the acquisition method of accounting in accordance with US GAAP. As such, the results of operations of the businesses acquired are included in the accompanying consolidated statements of operations since the date of the acquisition and the assets acquired, liabilities assumed and the resulting goodwill were recorded at their fair values within their respective line items on the accompanying consolidated statement of financial condition (see Note 12).
The Company recognized approximately $0.4 million of acquisition-related costs, including legal, accounting, and valuation services. These costs are included in professional, advisory and other fees in the accompanying consolidated statements of operations. The Company also assumed contractual obligations, of up to $6 million, toward certain employees which vested over a 12 month period. These obligations are recorded as compensation expenses on a straight line basis.
The results of operations of the businesses acquired from CRT for the period from May 6, 2016 through December 31, 2017 are integrated with the broker-dealer business and are included within their respective line items. Included in the accompanying consolidated statements of operations for the year ended December 31, 2017 are revenues of $33.2 million, respectively and net income of $9.3 million, respectively (excluding corporate allocated expenses) related to the businesses acquired from CRT.
Divestiture
On September 23, 2016, the Company and the portfolio managers of Ramius Alternative Solutions LLC ("RASL") completed the sale of their respective ownership interests in RASL, an investment advisor, and RASL was deconsolidated as of that date. RASL offered a range of customized private fund investment solutions with approximately $2.5 billion in client assets. In accordance with the terms of the agreement, the Company was only required to transfer an immaterial target working capital balance on the closing date. The net consideration received by the Company was approximately $17.3 million. Along with the target working capital transferred at closing, the Company also allocated a portion of goodwill associated with the investment management segment to the sale price which is shown net in other revenues in the accompanying consolidated statements of operations.
As the Company will continue to offer its investment management platform to institutional and retail investors, the sale was not presented as discontinued operations. The overall impact on the consolidated financial position, results of operations and cash flows was not significant.
3. Significant Accounting Policies
a. Basis of Presentation
These consolidated financial statements are prepared in accordance with US GAAP as promulgated by the Financial Accounting Standards Board ("FASB") through the Accounting Standards Codification (the "Accounting Standards" or "ASC") as the source of authoritative accounting principles in the preparation of financial statements, and include the accounts of the Company, its operating and other subsidiaries, and entities in which the Company has a controlling financial interest or a general partner interest. All material intercompany transactions and balances have been eliminated on consolidation. Certain fund entitiesinvestment funds that are consolidated in these accompanying consolidated financial statements, as further discussed below, are not subject to the consolidation provisions with respect to their own controlled investments pursuant to their specialized industry accounting.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entitiesinvestment funds which it sponsors and manages. FundsInvestment funds in which the Company has a controlling financial interest are consolidated with the Company pursuant to US GAAP as described below.Company. Consequently, the Company's consolidated financial statements reflect the assets, liabilities, income and expenses of these investment funds on a gross basis. The ownership interests in these investment funds that are not owned by the Company are reflected as redeemable or nonredeemable non-controlling interests, dependent on the non-controlling interest holder's redemption rights, in consolidated subsidiaries in the accompanying consolidated financial statements. The management fees and incentive income earned by the Company from these investment funds are eliminated in consolidation.
Certain reclassificationsWith respect to the Company's private equity investment management strategies, a portion of the Company's carried interest is granted to employees through profit-sharing awards designed to more closely align compensation with the overall realized performance of the Company. These arrangements enable certain employees to earn compensation based on performance revenue earned by the Company and are recorded within compensation payable in the accompanying consolidated statements of financial condition and employee compensation and benefits expense in the accompanying consolidated statements of operation based on the probable and estimable payments under the terms of the awards.
During the first quarter of 2021, the Company changed the presentation of certain income streams on its consolidated statements of operations by moving the income streams from Other income - net gains (losses) on securities, derivatives and other investments to Revenues. Additionally, the Company moved proprietary trading gains and losses generated by the Company’s broker-dealer entities from Brokerage revenue to Investment income (loss) – securities principal transactions, net. The specified
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
presentation changes included the following: | | | | | | | | | | | | | | |
| From | | To | | Income Streams |
| Other income - net gains (losses) on securities, derivatives and other investments | | Investment income (loss) – securities principal transactions, net | | proprietary trading gains and losses generated outside of the Company’s broker-dealer entities |
| Other income - net gains (losses) on securities, derivatives and other investments | | Investment income (loss) – portfolio fund principal transactions, net | | gains and losses from portfolio funds |
| Other income - net gains (losses) on securities, derivatives and other investments | | Investment income (loss) – carried interest allocations | | carried interest allocations |
| Other income - net gains (losses) on securities, derivatives and other investments | | Other revenue, net | | net gains and losses on foreign currency transactions |
| Brokerage revenue | | Investment income (loss) – securities principal transactions, net | | proprietary trading gains and losses generated by the Company’s broker-dealer entities |
| Other income – Consolidated Funds – net realized and unrealized gains (losses) on investments and other transactions and other income – Consolidated Funds – net realized and unrealized gains (losses) on derivatives | | Consolidated Funds – principal transactions, net | | proprietary trading gains and losses generated from the Consolidated Funds |
| Other income – Consolidated Funds – net gains (losses) on foreign currency transactions | | Consolidated Funds – other revenue | | net gains and losses on foreign currency transactions generated by the Consolidated Funds |
The Company believes that these presentation changes provide a better representation of the Company’s operating results as it is used by management to monitor the Company’s financial performance and is consistent with industry practice. The changes in presentation have been made tono impact on net income and prior period amounts have been recast to reflect such changes in order to conform to current period presentation.
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b. | Principles of consolidation |
b. Principles of consolidation
The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those investment funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary.
In accordance with these standards, during the twelve months ended December 31, 2017 the Company consolidated seven funds for which it acts (or acted) as the general partner and investment manager. As of December 31, 2017 the Company consolidated the following funds: Ramius Enterprise LP (“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), Cowen Healthcare Investments Fund II LP ("Cowen Healthcare II"), Caerus Select Fund LP ("Caerus LP") (between May 1, 2016 through March 1, 2017 when the fund was liquidated), Ramius Archview Credit and Distressed Master Fund ("Archview Master Fund") (from December 31, 2015 through July 31, 2017 when the fund was liquidated) and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (collectively the "Consolidated Funds").
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting operating entityVoting Operating Entity ("VOE") or a variable interest entityVariable Interest Entity ("VIE") under US GAAP.
Voting Operating Entities—VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently, and (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance.performance and (iii) voting rights of equity holders are proportionate to their obligation to absorb losses or the right to receive returns.
Under US GAAP consolidation requirements, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units.
Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate it.
The Company reconsidersdetermines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE by performing a periodic qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the design of the VIE. As
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The VIEs the total net assets of the consolidated VIEs were $482.8 million and $461.6 million, respectively. The VIEsCompany has invested in act as investment managers and/or investment companies that may be managed by the Company or the Company may have equity interest in those investment companies.Company. The VIEs are financed through their operations and/or loan agreements with the Company.
As of December 31, 2017 the Company holds variable interests in Ramius Enterprise Master Fund Ltd (“Enterprise Master”) and Ramius Merger Master Fund Ltd ("Merger Master") (collectively the “Unconsolidated Master Funds”) through the Consolidated Funds. Investment companies, which account for their investments under the specialized industry accounting guidance for investment companies prescribed under US GAAP, are not subject to the consolidation provisions for their investments. Therefore, the Company has not consolidated the Unconsolidated Master Funds.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily investment funds and real estate entities for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights.
The Company does not consolidateconsolidates these investment funds when its variable interest is potentially significant to the Unconsolidated Master Funds or real estate entities that are VIEs as it has concluded that it is not the primary beneficiary in each instance. Fund investors are entitled to all of their economics of these
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The Company's involvement with funds and real estate entities that are unconsolidated VIEs is limited to providing investment management services in exchange for management fees and incentive income. Although the Company may advance amounts and pay certain expenses on behalf of the funds and real estate entities that it considers to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these entities outside of regular investment management servicesentity (see Note 6 for additional disclosures on VIEs).
As of December 31, 2022 and 2021, the total assets of the consolidated VIEs were $289.3 million and $304.1 million, respectively, and total liabilities of the consolidated VIEs were $4.2 million and $9.8 million, respectively.
The Company consolidates investment funds for which it acts as the managing member/general partner and investment manager. At December 31, 2022, the Company consolidated Ramius Enterprise LP (“Enterprise LP”), an investment fund. At December 31, 2021, the Company consolidated the following investment funds: Enterprise LP and Cowen Private Investments LP ("Cowen Private").
During the first quarter of 2022, the Company deconsolidated Cowen Private as the fund was liquidated. During the first quarter of 2021, the Company deconsolidated Cowen Sustainable Investments I, LP ("CSI I LP") due to the Company's ownership being diluted through a capital equalization event.
Equity Method Investments—For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in netNet gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary.
Other—If the Company does not consolidate an entity or apply the equity method of accounting, or account for an investment under the cost method, the Company accounts for its investment in such entitiesentity (primarily allconsisting of securities of such entity which are boughtpurchased and held principally for the purpose of selling them in the near term and classified as trading securities) in accordance with US GAAP,, at fair value with unrealized gains (losses) resulting from changes in fair value reflected within Investment income (loss) - Securities principal transactions, net gains (losses) on securities, derivatives and other investmentsor Investment income (loss) - portfolio fund investment income (loss) in the accompanying consolidated statements of operations.
Retention of Specialized Accounting—The Consolidated Funds and certain other consolidated companies are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized accounting for these funds pursuant to US GAAP.accounting. The Company reports its investments on the consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within Consolidated Funds - Principal transactions, net realized and unrealized gains (losses) on investments and other transactions.in the accompanying consolidated statements of operations. Accordingly, the accompanying consolidated financial statements reflect different accounting policies for investments depending on whether or not they are held through a consolidated investment company.
Certain portfolio fund investments qualify as equity method investments and are investment companies that apply specialized industry accounting. In applying equity method accounting guidance, the Company retains the specialized accounting of the investees and reports its investments on the consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within Investment Income - portfolio fund principal transactions, net in the accompanying consolidated statements of operations.
In addition, the Company's broker-dealer subsidiaries, Cowen and Company, LLC ("Cowen and Company"), Westminster Research Associates LLC ("Westminster"), Cowen Execution Westminster, Services Limited ("Cowen Execution Ltd,Ltd"), ATM Execution LLC ("ATM Execution"), Cowen and Company (Asia) Limited ("Cowen Asia"), and Cowen International Limited ("Cowen International Ltd"), Ramius UK Ltd. ("Ramius UK") and Cowen Prime Services LLC ("Cowen Prime") apply the specialized industry accounting for brokers and dealers in securities, also prescribed under US GAAP. Thewhich the Company also retains specialized accounting upon consolidation.
c. Use of estimates
The preparation of the accompanying consolidated financial statements in conformity with US GAAP requires the management of the Company to make estimates and assumptions that affect the fair value of securities and other investments, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the accompanying consolidated financial statements, as well as the accounting for goodwill and identifiable intangible assets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
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d. | Cash and cash equivalents |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
d. Cash and cash equivalents
The Company considers investments in money market funds and other highly liquid investments with original maturities of three months or less which are deposited with a bank or prime broker to be cash equivalents. Cash and cash equivalents held at Consolidated Funds, although not legally restricted, are not available to fund the general liquidity needs of the Company. The Company may also be exposed to credit risk as a result of cash being held at several banks.
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e. | e. Allowance for doubtful accounts |
The allowance for doubtful accounts iscredit losses
ASC Topic 326, Financial Instruments – Credit Losses (“ASC 326”) prescribes the impairment model for certain financial assets measured at amortized cost by requiring a current expected credit loss ("CECL") methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. Under the accounting update guidance, the Company has the ability to determine there are no expected credit losses in certain circumstances (e.g., based on collateral arrangements or based on the Company’s assessmentcredit quality of the collectability ofborrower or issuer).
The Company applies the guidance in ASC 326 to securities borrowed and fees and other receivables carried at amortized cost (including, but not limited to, receivables related to securities transactions, prepaid researchunderwriting fees, strategic/financial advisory fees and placement and sales agent fees, management fees and incentive fees receivable).
The allowance for credit losses is based on the Company's expectation of the collectability of financial instruments, fees and other receivables.receivables utilizing the CECL framework. The Company considers factors such as historical experience, credit quality, age of balances and current and future economic conditions that may affect the Company’s expectation of the collectability in determining the allowance for doubtful accounts. Specifically for prepaid research,credit losses. The Company’s expectation is that the credit risk associated with fees and other receivables is not significant until they are 90 days past due based on the contractual arrangement and expectation of collection in accordance with industry standards.
For securities borrowed, the Company reviews clients' historical, current and forecasted trading activity in determiningapplies a practical expedient to measure the allowance for doubtful accounts. Expensecredit losses based on the fair value of the collateral. If the fair value of the collateral held exceeds the amortized cost of the borrowing and the borrower is expected to continue to replenish the collateral as needed, the Company will not recognize an allowance. If the fair value of collateral is less than amortized cost and the borrower is expected to continue to replenish the collateral as needed, the Company applies the CECL model, utilizing a probability and loss given default methodology, only to the extent of the shortfall between the fair value of the collateral and amortized cost.
The credit loss expense related to the allowance for doubtful accountscredit losses as well as any recoveries of amounts previously charged is reflected in other expenses in the accompanying consolidated statements of operations.
f. Valuation of investments and derivative contracts and other investments
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
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f. | Valuation of investments and derivative contracts |
US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has
the ability to access at the measurement date;
Level 2Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including
inputs in markets that are not considered to be active; and
Level 3Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little,
if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this
category requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's perceived risk of that instrument. Inputs reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
The Company and its operating subsidiaries act as the manager for the Consolidated Funds. Both the Company and the Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair value
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
of these investmentsinvestment is generally estimated based on proprietary models developed bytheir proportional rights of the Company, which include discounted cash flow analysis, publicunderlying portfolio company and are valued using market comparables,quotations when readily available. When market quotations are unavailable or deemed not representative, the level 3 investments are valued using a market approach, an income approach, or a combination of both approaches. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques and may be based, at least in part, on independently sourced market information. The material estimatesto convert future cash flows to a single present value. In following these approaches, the significant inputs and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, the premium ascribed to a controlling financial interest, selected equity volatilities and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation goes intoimpact the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly from the fair values that would have been used had a ready market for the investments existed and such differences could be material.
The Company primarily uses the “market approach”market approach to value its financial instruments measured at fair value. In determining an instrument's level within the hierarchy, the Company categorizes the Company's financial instruments into three categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further be divided between those held long or sold short.
The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected the fair value option for certain of its investments held by its operating companies. This option has been elected because the Company believes that it is consistent with the manner in which the business is managed, as well as the way that financial instruments in other parts of the business are recorded.
Securities—Securities with values based on quoted market prices in active markets for identical assets are classified within level 1 of the fair value hierarchy. These securities primarily include active listed equities, certain U.S. government and sovereign obligations, Exchange Traded Funds ("ETFs"), mutual funds and certain money market securities. The Company does not adjust the quoted price for such instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Certain positions for which trading activity may not be readily visible, consisting primarily of convertible debt, corporate debt and loans and restricted equities, are stated at fair value and classified within level 2 of the fair value hierarchy. The estimated fair values assigned by management are determined in good faith and are based on available information considering trading activity, broker quotes, quotations provided by published pricing services, counterparties and other market participants, and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. As level 2 investments include positions that are not always traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability.
Derivative contracts—Derivative contracts can be exchange-traded or privately negotiated over-the-counter (“OTC”). Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC derivatives, such as generic forwards, swaps and options, haveare classified as level 2 when their inputs which can generally be corroborated by market data and are therefore classified within level 2. data. OTC derivatives, such as swaps and options, where market data is notwith significant inputs that cannot be corroborated by readily available or observable market data are classified as level 3.
Other investments—Other investments consist primarily of portfolio funds, real estate investmentscarried interest and equity method investments, which are valued as follows:
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i. | Portfolio funds—Portfolio funds (“Portfolio Funds”) include interests in funds andi. Portfolio funds—Portfolio funds include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company applies the practical expedient provided by the Company or its affiliates. The Company follows US GAAP regarding fair value measurements and disclosures guidance relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The guidance permits, as a practical expedient, an entity holding investments in certain entities that either are investment companies as defined by the American Institute of Certified Public Accountants ("AICPA") Audit and Accounting Guide, Investment Companies, or have attributes similar to an investment company, and calculate net asset value per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. In accordance with US GAAP, investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The practical expedient permits an entity holding investments in certain entities that either are investment companies or have attributes similar to an investment company, and calculate NAV per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy. |
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ii. | Real estate investments—Real estate debt and equity investments are valued at fair value. The fair value of real estate investments are estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. Real estate investments without a public market are valued based on assumptions and valuation techniques used by the Company. Such valuation techniques may include discounted cash flow analysis, prevailing market capitalization rates or earnings multiples applied to earnings from the investment, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties, consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence, as well as independent external appraisals. In general, the Company considers several valuation techniques when measuring the fair value of a real estate investment. However, in certain circumstances, a single valuation technique may be appropriate. Real estate investments are reviewed on a quarterly basis by the Company for significant changes at the property level or a significant change in the overall market which would impact the value of the real estate investment resulting in unrealized appreciation or depreciation.
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Real estate and capital markets are cyclical in nature. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates and interest and inflation rates. In addition, the Company invests in real estate and real estate related investments for which no liquid market exists. The market prices for such investments may be volatile and may not be readily ascertainable. Amounts ultimately realized by the Company from investments sold may differ from the fair values presented, and the differences could be material.
The Company's real estate investments are typically categorized as level 3 investments within the fair value hierarchyhierarchy.
ii. Carried Interest—For the private equity and debt fund products the Company offers, the Company is allocated incentive income by the investment funds based on the extent by which the investment funds' performance exceeds predetermined thresholds. Carried interest allocations are generally structured from a legal standpoint as management usesan allocation of capital in the
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Company’s capital account. The Company accounts for carried interest allocations by applying an equity ownership model. Accordingly, the Company accrues performance allocations quarterly based on the fair value of the underlying investments assuming hypothetical liquidation at book value.
iii. Equity Method Investments—For operating entities over which the Company exercises significant unobservable inputsinfluence but which do not meet the requirements for consolidation as outlined above, the Company applies the equity method of accounting. The Company's investments in determining their estimated fair value.equity method investees are recorded in other investments in the accompanying consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in Net gains (losses) on other investments in the accompanying consolidated statements of operations.
See Notes 6 and 7 for further information regarding the Company's investments, including equity method investments and fair value measurements.
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g. | Due from/due to related parties |
Accounts payable, accrued expenses and other liabilities—Accounts payable, accrued expenses and other liabilities include contingent consideration liabilities related to terms of the purchase agreements of the Company's previous acquisitions. In each instance the Company is required to pay the sellers of such entities a portion of future net income and/or revenues of the acquired business if certain targets are met through December 24, 2024. For each acquisition the Company has estimated the contingent consideration liabilities using a combination of Monte Carlo and Discounted Cash Flow methods which require the Company to make estimates and assumptions regarding the future cash flows and profits related to the ongoing operations of these acquired businesses. The Company updates its estimates and assumptions each reporting period and the associated change in fair value is shown in the accompanying consolidated statements of operations.
g. Offsetting of derivative contracts
To reduce credit exposures on derivatives, the Company may enter into master netting agreements with counterparties that permit the Company the right, in the event of a default by a counterparty, to offset the counterparty’s rights and obligations under the agreement and to liquidate and offset any collateral against any net amount owed by the counterparty. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) in the consolidated statements of financial condition when a legal right of offset exists under an enforceable netting agreement. Additionally, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements in the consolidated statements of financial condition, provided a legal right of offset exists. See Note 6 for further information about offsetting of derivative financial instruments.
h. Due from related parties
The Company may advance amounts and pay certain expenses on behalf of employees of the Company or other affiliates of the Company. These amounts settle in the ordinary course of business. Such amounts are included in due from and due to related parties respectively, on the accompanying consolidated statements of financial condition.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
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h. | Receivable from and payable to brokers |
i. Receivable from and payable to brokers
Receivable from brokers, dealers, and clearing organizations includes cash held at clearing brokers, amounts receivable orfor securities failed to deliver by the Company to a purchaser by the settlement date, amounts receivable from broker-dealers and clearing organizations, commissions receivable from broker-dealers, and interest receivable from securities financing arrangements and are reported net of an allowance for credit losses.
Payable to brokers, dealers and clearing organizations includes amounts payable for securities failed to receive by the Company from a seller by the settlement date, amounts payable to broker-dealers and clearing organizations for unsettled transactions, monies borrowedtrades, interest payable for securities financing arrangements, and proceedspayables of deposits held in proprietary accounts of brokers and dealers.
Receivables and payables with brokers, dealers and clearing organizations arising from short sales equal to the fair value of securities sold, but not yet purchased. Pursuant to the Company's prime broker agreements, these balancesunsettled regular-way transactions are presented net (assets less liabilities) across balances with the same broker.counterparty. The Company's receivable from and payable to brokers, dealers and clearing organizations balances are held with multiple financial institutions.
j. Receivable from and payable to customers
Receivable from customers includes amounts owed by customers on cash and margin transactions, recorded on a settlement-date basis and prepaid research, net of allowance for credit losses. For prepaid research, a prepaid research asset is established for research and related services disbursed in advance of anticipated client commission volumes.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Payable to customers primarily consists of amounts owed to customers relating to securities transactions not completed on settlement date, recorded on a settlement-date basis on the statement of financial condition, and other miscellaneous customer payables.
Securities owned by customers, including those that collateralize margin, are not reflected as assets of the Company on the statement of financial condition. The Company holds these securities with the intention of settlement against customer orders and are held as collateral for customer receivables.
k. Fees receivable
Fees relatedreceivable primarily relate to securitysecurities transactions and are reported net of an allowance for doubtful debts. An allowance for doubtful debts is taken on any commission receivables aged over 180 days.
Corporate finance and syndicate receivables,credit losses. Fees receivable also include receivables relatingamounts due to the Company’s investment bankingCompany for underwriting fees, strategic/financial advisory fees and advisory engagements net of allowance for doubtful accounts. The Company records this allowance for doubtful accounts on these receivables on a specific identification basis. The future collectability of the receivables is reviewed on a monthly basis based on the following factors: aging (usually if outstanding greater than 90 days), known financial stability of the paying company as well as any other factors that might impact the collection of the outstandingplacement and sales agent fees.
Management Additionally, management and incentive fees due to the Company are earned as the managing member, general partner and/or investment manager to the Company's investment funds and are recognized on an accrual basis when earned.in accordance with appropriate revenue recognition guidance (see Note 2w).
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j. | Securities borrowed and securities loaned |
l. Securities financing arrangements
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced or received on a gross basis. The related rebates are recorded in the accompanying consolidated statements of operations as interest and dividends income and interest and dividends expense. Securities borrowed transactions require the Company to deposit cash collateral with the lender. With respect to securities loaned, the Company receives cash or securities as collateral from the borrower. When the Company receives securities as collateral, and has concluded it (i) is the transferor and (ii) can pledge the securities to third parties, the Company recognizes the securities received as collateral at fair value in Securities owned, at fair value with the corresponding obligation to return the securities received as collateral at fair value in Securities sold, not yet purchased, at fair value. Securities received as collateral are not recognized when the Company either (i) is not the transferor or (ii) cannot pledge the securities to third parties. The initial collateral advanced or received approximates or is greater than the market value of securities borrowed or loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or returned, as necessary. Securities borrowed and loaned may also result in credit exposures for the Company in an event that the counterparties are unable to fulfill their contractual obligations. The Company minimizes its credit risk by continuously monitoring its credit exposure and collateral values by demanding additional or returning excess collateral in accordance with the netting provisions available in the master securities lending contracts in place with the counterparties.See Note 2e for further information.
Fees and interest received or paid are recorded in interest and dividends income and interest and dividends expense, respectively, on an accrual basis in the accompanying consolidated statements of operations. In cases where the fair value basis of accounting is elected, any resulting change in fair value would be reported in net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations. Accrued interest income and expense are recorded in receivable from brokers, dealers and clearing organizations and payable to brokers, dealers and clearing organizations, respectively, on an accrual basis in the accompanying consolidated statements of financial condition. At December 31, 2017,
m. Securities purchased under agreement to resell and securities sold under agreements to repurchase
Securities purchased under agreement to resell and securities sold under agreements to repurchase ("repurchase agreements") are accounted for as collateralized financing transactions and are recorded at their contracted resale or repurchase amount plus accrued interest. A repo is a transaction in which a firm buys or sells financial instruments from/to a counterparty, typically in exchange for cash, and simultaneously enters into an agreement to resell or repurchase the same or substantially the same financial instruments to/from such counterparty at a stated price plus accrued interest at a future date. When the Company didreceives securities as collateral, and has concluded it (i) is the transferor and (ii) can pledge the securities to third parties, the Company recognizes the securities received as collateral at fair value in Securities owned, at fair value with the corresponding obligation to return the securities received as collateral at fair value in Securities sold, not have anyyet purchased, at fair value. Securities received as collateral are not recognized when the Company either (i) is not the transferor or (ii) cannot pledge the securities to third parties. The initial collateral advanced approximates or is greater than the market value of securities purchased or sold in the transaction. The Company typically enters into repurchase transactions with counterparties that prefer repurchase transactions to securities borrowed and securities loaned transactions. The Company has executed master repurchase agreements with such counterparties and utilizes such counterparties to finance its own positions, or replace a securities lending transaction with a repurchase for matched book purposes. The Company monitors the market value of repurchases on a daily basis, with additional collateral obtained or returned, as necessary. Repurchases may also result in credit exposures for the Company in an event that the counterparties are unable to fulfill their contractual obligations. The Company mitigates its credit risk by continuously monitoring its credit exposure and collateral values by demanding additional collateral or returning excess collateral in accordance with the netting provisions available in the master repurchase contracts in place with the counterparties.
Interest paid is recorded in interest and dividends expense in accordance with US GAAP on repurchase agreement transactions for which fair valueon an accrual basis in the accompanying consolidated statements of accounting was elected.operations.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
n. Fixed assets
Fixed assets are stated at cost less accumulated depreciation or amortization. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or lease term. When the Company commits to a plan to abandon fixed assets or leasehold improvements before the end of its original useful life, the estimated depreciation or amortization period is revised to reflect the shortened useful life of the asset. Other fixed assets are depreciated on a straight-line basis over their estimated useful lives.
Aircraft and related equipment, which are leased out under operating leases, are carried at cost less accumulated depreciation and are depreciated to estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Any assets received at the end of the lease are marked to the lower of cost or fair value with the adjustment recorded in other income.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
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| Asset | Depreciable Lives | | Depreciation and/or Amortization Method |
TelephoneTelecommunication and computer equipment | 3-53 - 5 years | | Straight-line |
| Computer software | 3-83 - 4 years | | Straight-line |
| Furniture and fixtures | 5 years | | Straight-line |
| Leasehold improvements | 2-15 yearsTerm of Lease | | Straight-line |
CapitalizedFinance lease right-of-use asset | 5 yearsTerm of Lease | | Straight-line |
Aircraft and related equipment | 10-20 years | | Straight-line |
Modifications to aircraft | 4-10 years | | Straight-line |
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l. | Goodwill and intangible assets |
o. Goodwill and intangible assets
Goodwill
Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.
In accordance with US GAAP requirements for testing for impairment of goodwill, the Company tests goodwill for impairment on an annual basis at December 31st each year, or at an interim period if events or changed circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Under US GAAP,In testing for goodwill impairment, the Company tests goodwill for impairment by assessinghas the option to first assess qualitative factors including, macroeconomic environment, industry and market specific conditions, financial performance and events specific to the reporting unit to determine whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of thea reporting unit is less than its carrying amount. Based onIf, after assessing the resultstotality of the qualitative assessmentevents and circumstances, the Company performsconcludes that fair value exceeds its carrying amount, then performing a quantitative impairment test is not necessary. If the two-step goodwillCompany concludes otherwise, the Company is required to perform a quantitative impairment test. The first steptest that requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds theits fair value, there isthen the Company recognizes an indication that the related goodwill might be impaired and the step two is performed to measureimpairment charge for the amount of impairment, if any.
The second stepby which the carrying amount exceeds the reporting unit’s fair value. See Note 12 for the impact of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of itstest.
Intangible assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess. Goodwill impairment tests involve significant judgment in determining the estimates of future cash flows, discount rates, economic forecast and other assumptions which are then used in acceptable valuation techniques, such as the market approach (earning and/or transactions multiples) and/or income approach (discounted cash flow method). Changes in these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill. See Note 12 for further discussion.
Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. Similar to goodwill impairment test, anAn impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the accompanying consolidated statements of operations if the sum of the estimated undiscounted cash flows relating tofrom the use or disposition of the asset or asset group is less than the corresponding carrying value. The Company continually monitors the estimated average useful lives of existing intangible assets.
p. Debt
Long-term debt is carried at the principal amount borrowed net of any unamortized discount/premium. The discount or premium is accreted to interest expense using the effective interest method over the remaining life of the underlying debt obligations. Accrued but unpaid coupon interest is included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated statements of financial condition.
n. Deferred rent
Deferred rent primarily consists of step rent, allowances from landlords and valuing the Company's lease properties acquired through business combinations in accordance with US GAAP. Step rent represents the difference between actual operating lease payments due and straight-line rent expense, which is recorded by the Company over the term of the lease,
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
including the build-out period. This amount is recorded as deferred rent in the early years of the lease, when cash payments are generally lower than straight-line rent expense, and reduced in the later years of the lease when payments begin to exceed the straight-line expense. Landlord allowances are generally comprised of amounts received and/or promised to the Company by landlords and may be received in the form of cash or free rent. These allowances are part of the negotiated terms of the lease. The Company records a receivable from the landlord and a deferred rent liability when the allowances are earned. This deferred rent is amortized into income (through lower rent expense) over the term (including the pre-opening build-out period) of the applicable lease, and the receivable is reduced as amounts are received from the landlord. Liabilities resulting from valuing the Company's leased properties acquired through business combinations are quantified by comparing the current fair value of the leased space to the current rental payments on the date of acquisition. Deferred rent, included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated statements of financial condition, as of December 31, 2017 and 2016 is $12.8 million and $10.3 million, respectively.
o.q. Legal reserves
In accordance with US GAAP, theThe Company establishes reserves for contingencies when the Company believes that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss because the conditions above are not met. The Company's disclosure includes an estimate of the reasonably possible loss or range of loss for those matters for which an estimate can be made. Neither reserve nor disclosure is required for losses that are deemed remote.
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p. | Capital withdrawals payable |
Capital withdrawals from the
Cowen Inc.
Notes to Consolidated Funds are recognized as liabilities, netFinancial Statements (Continued)
r. Temporary Equity
Temporary equity consists of Redeemable 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock"). The Company has irrevocably elected to cash settle $1,000.00 of each conversion of any incentive income, when the amount requested in the withdrawal notice represents an unconditional obligation at a specified or determined date (or dates) or upon an event certain to occur. This generally may occur either at the timeshare of the receiptSeries A Convertible Preferred Stock. As the holders can exercise the conversion option on their shares of Series A Convertible Preferred Stock at any time and require cash payment upon conversion, the notice, or onCompany has classified the last day of a reporting period, depending on the nature of the request. As a result, withdrawals paid after the end of the year, but based upon year-end capital balances are reflected as liabilities at the balance sheet date.Series A Convertible Preferred Stock preferred stock in temporary equity.
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q. | Redeemable non-controlling interests in consolidated subsidiaries |
Redeemable non-controllings. Non-controlling interests in consolidated subsidiaries
Non-controlling interests represent the pro rata share of the book valueincome or loss of the financial positions and results of operationsnon-wholly owned consolidated entities attributable to the other owners of the consolidated subsidiaries. Redeemablesuch entities. When non-controlling interests related to Consolidated Funds are generally subject to annual, semi-annual or quarterly withdrawals or redemptions by investors in these funds, sometimes following the expiration of a specified period of time (generally one year), or may onlyinterest holders do not have redemption features that can be withdrawn subject to a redemption fee (generally ranging from 1% to 5%). Likewise, non-controlling interests related to certain other consolidated entities are generally subject to withdrawal, redemption, transfer or put/call rights that permit such non-controlling investors to withdraw from the entities on varying terms and conditions. Because these non-controlling interests are redeemableexercised at the option of the non-controlling interests, they haveholder currently or contingent upon the occurrence of future events, their ownership has been classified as temporarya component of permanent equity. Ownership which has been classified in permanent equity inare non-controlling interests for which the accompanying consolidated statements of financial condition. When redeemed amounts become legally payableholder does not have the unilateral right to investors on a current basis, they are reclassified as a liability.redeem its ownership interests.
t. Treasury stock
In accordance with US GAAP relating to repurchases of an entity's own outstanding common stock, the Company records the purchases of stock held in treasury at cost and reports them separately as a deduction from total stockholders' equity on the accompanying consolidated statements of financial condition and changes in equity.
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s. | Comprehensive income (loss) |
u. Comprehensive income (loss)
Comprehensive income (loss) consists of net income and other comprehensive income (loss). The Company's other comprehensive income (loss) is comprised of foreign currency cumulative translation adjustments.
t.v. Right-of-use assets and lease liabilities
The Company accounts for leases in accordance with ASC Topic 842, Leases ("ASC 842"). The guidance requires the recognition of right-of-use assets and lease liabilities on the accompanying consolidated statements of financial condition.
In applying ASC 842, the Company made an accounting policy election not to recognize the right-of-use assets and lease liabilities relating to short-term leases. On an ongoing basis the Company performs an analysis of new/modified contracts, including real estate leases and service contracts to identify embedded leases, to determine the initial recognition of right-of-use assets and lease liabilities, which required subjective assessment over the determination of the associated discount rates. The Company's operating lease arrangements are primarily for real estate and facility leases as well as office equipment. The Company has applied an accounting policy election to combine its lease and non-lease components for its real estate and facility leases. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company's variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the right-of-use asset and lease liabilities to the extent they are not based on a consumer priced index or a market index and are recognized in the period in which the obligation for those payments is incurred. As most of the Company's leases do not provide an implicit rate and the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Right-of-use assets also include any lease payments made and exclude lease incentives. Many of the Company's operating lease agreements include options to extend the lease, which the Company does not include in the determination of the minimum lease term unless the options are reasonably certain to be exercised. Expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
The Company reconciles the operating lease expense with operating lease payments by presenting the amortization of the operating Right-of-use asset and change in the operating lease liability in a single line item within the adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities in the accompanying Consolidated Statements of Cash Flows.
Please refer to Note 16 for information on the Company's finance leases.
w. Revenue recognition
The Company's principle sourcesCompany recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), which requires that an entity recognize revenue to depict the transfer of revenue are derived from two segments:promised goods or services to customers in an investment management segmentamount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company follows a five-step model to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and a broker-dealer segment, as more fully described below.
Our investment management segment generates revenue through three principle sources: management fees, incentive income and investment income from the Company's own capital.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
(e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, the Company includes variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved. Significant judgments are required in the application of the five-step model including: when determining whether performance obligations are satisfied at a point in time or over time; how to allocate transaction prices where multiple performance obligations are identified; when to recognize revenue based on the appropriate measure of the Company's progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events.
Our broker-dealerThe Company's principal sources of revenue are generated within two segments. The Op Co segment generates revenue through three principlefive principal sources: investment banking revenue, brokerage and investment income.
Management fees
The Company earnsrevenue, management fees, from affiliated private fundsinvestment income (loss) and certain managed accounts that it serves as the investment manager based on assets under management. The actual management fees received vary depending on distribution fees or fee splits paid to third parties either in connection with raising the assets or structuring the investment.
Several management companies of the private funds are owned jointly by the Company and third parties. Accordingly, the management fees generated by these funds are split between the Company and these third parties. Pursuant to US GAAP, these fees received by the management companies that are accounted for under the equity method of accounting and are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for capital inflows and redemptions. While some investors may have separately negotiated fees, in general the management fees are as follows:
Private Funds. Management fees for the Company's private funds, including the private healthcare fund, are generally charged at an annual rate of up to 2% of assets under management or notional trading level. Management fees are generally calculated monthly based on assets under management at the end of each month before incentive income.
Real Estate. Management fees Investment income is excluded from the Company's real estate business are generally charged at an annual rate from 0.25% to 1.50% of total capital commitments during theASC Topic 606. The Asset Co segment generates revenue through investment period and of invested capital or net asset value of the applicable fund after the investment period has ended. Management fees are typically paid to the general partners on a quarterly basis, at the beginning of the quarter in arrears, and are prorated for changes in capital commitments throughout the investment period and invested capital after the investment period.
HealthCare Royalty Partners. In HealthCare Royalty Partners main funds, during the investment period (as defined in the relevant partnership agreements)income (loss), management fees are generally charged at an annual rate of 1% to 2% of committed capital. After the investment period,and incentive income. Revenue from contracts with customers includes management fees, for these funds are generally charged at an annual rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the funds. For the other funds (and managed accounts) managed by Healthcare Royalty Partners, the management fee ranges from 0.2% to 1% and there is no adjustment based on an investment period. Management fees for the HealthCare Royalty Partners funds are calculated on a quarterly basis.
Cowen Trading Strategies. Advisory fees for the Company's collateral management advisory business are typically paid quarterly based on assets under management but generally subject to a minimum fee.
Incentive income
The Company earns incentive income, based on net profits (as defined in the respective investment management agreements)banking revenue and brokerage services revenue excluding principal transactions. ASC Topic 606 does not apply to revenue associated with respect to certainfinancial instruments, interest income and expense, leasing and insurance contracts. The following is a description of the Company's funds and managed accounts, allocable for each fiscal year that exceeds cumulative unrecovered net losses, if any, that have been carried forwardprincipal activities, from prior years. For the productswhich the Company offers, incentive income earned is typically up to 20% for private funds (in certain cases on performance in excess of a benchmark), of the net profits earned for the full year that are attributable to each fee-paying investor. Generally, incentive income on real estate funds is earned after the investor has received a full return of their invested capital, plus a preferred return. However, for certain real estate funds, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred return on a current basis or on an investor by investor basis. These funds are generally subject to a potential clawback of these incentive fees upon the liquidation of the fund if the investor has not received a full return ofgenerates its invested capital plus the preferred return thereon. Incentive income in the HealthCare Royalty Partners funds is generally earned only after investors receive a full return of their capital plus a preferred return. Several general partners of the Company's private funds are jointly owned by the Company and third parties. Accordingly, the incentive fees generated by these funds are split between the Company and these third parties. Pursuant to US GAAP, incentive income received by the general partners that are accounted for under the equity method of accounting are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a “high-water mark.” The Company has elected to record incentive income revenue in
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
accordance with “Method 2” of US GAAP. Under Method 2, the incentive income from the Company's investment management products for any period is based upon the net profits of those investment management products at the reporting date. Any incentive income recognized in the accompanying consolidated statement of operations may be subject to future reversal based on subsequent negative performance prior to the conclusion of the fiscal year, when all contingencies have been resolved.
Carried interest in the real estate funds and HealthCare Royalty Partners funds are subject to clawback to the extent that the carried interest actually distributed to date exceeds the amount due to the Company based on cumulative results. As such, the accrual for potential repayment of previously received carried interest, which is a component of accounts payable, accrued expenses and other liabilities, represents all amounts previously distributed to the Company, less an assumed tax liability, that would need to be repaid to certain funds if these funds were to be liquidated based on the current fair value of the underlying funds' investments as of the reporting date. The actual clawback liability does not become realized until the end of a fund's life.revenue. For more detailed information about reportable segments, see Note 28.
Investment Bankingbanking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from smallpublic and private small- and mid-capitalization companies within the Company's Target Sectors. sectors.
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees, expenses reimbursed from clients and placement and sales agent fees.
•Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible securitysecurities offerings. Fee revenue relating to underwriting commitments is recorded at the point in time when all significant items relating to the underwriting process have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment for the purchase of securities from the issuer; and (iii) the Company has been informed of the number of securities that it has been allotted.
allotted; and (iv) the issuer obtains control and benefits of the offering; which generally occurs on trade date.When the Company is not the lead manager for an underwriting transaction, management must estimate the Company's shareUnderwriting fees are recognized gross of transaction-related expenses, incurred by the lead manager in order to recognize revenue. Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company recognizes as co-manager. Suchsuch amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.
•Strategic/financial advisory fees.The Company's strategic advisory revenues includerevenue includes success fees earned in connection with advising companies, principally in mergers, acquisitions and restructuring transactions. The Company also earns fees for related advisory work such as providing fairness opinions. A significant portion of the Company's advisory revenue (i.e., success-related advisory fees) is considered variable consideration and recognized when it is probable that the variable consideration will not be reversed in a future period. The variable consideration is constrained until satisfaction of the performance obligation. The Company records strategic advisory revenues at the point in time, gross of related expenses, when the services for the transactions are completed or the contract is canceled under the terms of each assignment or engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.
engagement.•Placement and sales agent fees. The Company earns placement agency placement fees and sales agent commissions in non-underwritten transactions, such as private placements of loans and debt and equity securities, including private investment in public equity transactions (“PIPEs”("PIPEs"), and as sales agent in at-the-market offerings of equity securities. The Company records placement revenues (which may be in cash and/or securities) at the point in time when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured.engagement. The Company records sales agent commissions on a trade datetrade-date basis. Expenses
•Expense reimbursements from clients. Investment banking revenue includes expense reimbursements for transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with such transactionsthe transaction. Expense reimbursements associated with investment banking engagements are deferred untilrecognized in revenue at the related revenue is recognized orpoint in time when the engagement is otherwise concluded.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
BrokerageCompany is contractually entitled to reimbursement. The related expenses are presented gross within their respective expense category in the accompanyingconsolidated statements of operations.
Brokerage
Brokerage revenue consists of commissions, principal transactions, equity and credit research fees and trade conversion revenue.
•Commissions.Commission revenue includes fees from executing and clearing client transactions and commission sharing arrangements. These feesTrade execution and clearing services, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenues associated with combined trade execution and clearing services on a standalone basis, are recognized at a point in time on trade-date. Commission revenues are generally paid on settlement date and the Company records a trade date basis.receivable between trade-date and payment on settlement date. The Company permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as "soft dollar arrangements". The Company also offers institutional clients the ability to allocate a portion of their gross commissions incurred on trades executed with various brokers to pay for research products and other services provided by third parties by entering into commission sharing arrangements. The Company acts as an agent in the soft dollar arrangements.and commission sharing arrangements as the customer controls the use of the soft dollars and directs payments to third-party service providers on its behalf. Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues and recorded on trade date. Commissions on soft
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
dollar brokerage are recorded net of the related expenditures on an accrual basis.expenditures. The costs of commission recapturesharing arrangements are recorded on an accrual basis for each eligible trade and shown net of commission revenue. Commission revenues also
•Equity research fees. Equity research fees are paid to the Company for providing access to equity research. In the US, revenue is recognized once an arrangement exists, access to research has been provided and the customer has benefited from the research. As part of Markets in Financial Instruments Directive ("MiFID II"), the international customers of the Company's broker-dealers have executed equity research contracts with its clients. The contracts either contain a fixed price for providing access to research or a price at the discretion of the customer with a contract minimum. Fixed equity research fees are recognized over the contract period as the customer is benefiting from the research throughout the contract term. When the equity research fees are based on the customer’s discretion with a contract minimum, the Company recognizes the contract minimum over the life of the contract as the customer benefits from the research provided and adjusts the revenue when the Company can estimate the amount of equity research fees over the contract minimum. Additionally, the Company earns variable consideration for attending client conferences and events. Revenue is recognized when the Company attends a client conference or event.
•Trade conversion revenue. Trade conversion revenue includes fees earned from making algorithms available to clients.converting foreign securities into an American Depository Receipt ("ADR") and fees earned from converting an ADR into foreign securities on behalf of customers, and margins earned from facilitating customer foreign exchange transactions. Trade conversion revenue is recognized on a trade-date basis.
Investment Income
Principal transactions.•Securities principal transactions, net. Principal transactions, revenuenet includes realized gains and losses from transactions in financial instruments and unrealized gains and losses from ongoing changes in the fair value of the Company’s positions.
Principal transactions, net generated by the Company's broker-dealers include net trading gains and losses from the Company's market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and trading gains and losses on inventory and other Company positions, which include warrantssecurities previously received as part of investment banking transactions. In certain cases, the Company provides liquidity to clients by 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. These positions are typically held for a very short duration.
With respects to the Company's proprietary trading strategies, purchases and sales of securities, net of commissions, derivative contracts, and the related revenues and expenses are recorded on a trade-date basis with net trading gains and losses included as a component of Investment income - Securities principal transactions, net, in the accompanying consolidated statements of operations.
•Portfolio Fund principal transactions, net. Portfolio funds include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company applies the practical expedient provided by the US GAAP fair value measurements and disclosures
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Equityguidance relating to investments in certain entities that calculate NAV per share (or its equivalent). The practical expedient permits an entity holding certain investments that calculates NAV per share or its equivalent for which the fair value is not readily determinable and credit research fees.Equityis considered an investment company under ASC 946 to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy. Realized and credit research feesunrealized gains (losses) resulting from changes in NAV per share are paidreflected within Investment income – portfolio fund principal transactions, net in the accompanying consolidated statements of operations.
•Carried interest allocations. The Company is allocated carried interest based on net profits (as defined in the respective investment management or partnership agreement) related to certain of the Company's private equity investment funds. For the private equity fund products the Company offers, the carried interest earned is typically up to 30% of the distributions made to investors after return of their contributed capital and generally a preferred return. The Company recognizes carried interest allocated to the Company for providingunder an equity ownership model as investment income - carried interest allocations in the accompanying consolidated statements of operations accordance with ASC Topic 323, Investments - Equity Method and credit research. RevenueJoint Ventures. Under the equity method of accounting the Company recognizes its allocations of incentive income or carried interest within Investment Income - Carried interest allocations in the accompanying consolidated statements of operations along with the allocations proportionate to the Company's ownership interests in the investment funds. Generally, carried interest is recognized onceafter the investor has received a full return of its invested capital, plus a preferred return. However, for certain private equity structures, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred return on a current basis or on an investor by investor basis. These private equity structures are generally subject to a potential clawback of these incentive fees upon the liquidation of the private equity structure if the investor has not received a full return of its invested capital plus the preferred return thereon.
Managementfees
The Company earns management fees from investment funds and certain managed accounts for which it serves as the investment manager; such fees earned are typically based on committed or invested capital for private equity funds and net asset value for hedge funds. The Company has determined that the primary drivers of management fees are committed and invested capital relating to private equity funds and assets under management relating to hedge funds. The management fees are earned as the investment management services are provided and are not subject to reversals. The performance obligation related to the transfer of these services is satisfied over time because the customer is receiving and consuming the benefits as they are provided by the Company.
Management fees are generally paid on a quarterly basis and are prorated for capital inflows (or commitments) and redemptions (or distributions) and are recognized as revenue at that time as they relate specifically to the services provided in that period, which are distinct from the services provided in other periods. While some investors may have separately negotiated fees, in general the management fees are as follows:
•Private equity funds. Management fees for the Company's private equity funds are generally charged at an annual rate of1% to 2% of committed capital during the investment period (as defined in the relevant partnership agreement). After the investment period, management fees for these private equity funds are generally charged at an annual rate of 1% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the private equity funds. For certain other private equity funds (and managed accounts), the management fees range from 0.2% to 1% and there is no adjustment based on the investment period. Management fees for the Company's private equity funds are generally paid on a quarterly basis.
•Hedge funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of net asset value. Management fees are generally calculated monthly at the end of each month.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management or partnership agreement) related to certain of the Company's investment funds and managed accounts. The incentive income is charged to the investment funds in accordance with their corresponding investment management or partnership agreement. For the hedge funds the Company offers, incentive income earned is typically up to 20% (in certain cases on performance in excess of a benchmark) of the net profits earned for the full year that are attributable to each fee-paying investor.
The Company recognizes incentive income charged to the Company's hedge funds based on the net profits of the hedge funds. The Company recognizes such incentive income when the fees are no longer subject to reversal or are crystallized. For certain hedge funds, the incentive fee crystallizes annually when the high-water mark for such hedge funds is reset, which delays
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
recognition of the incentive fee until year end. In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to such investor until the accumulated net loss from prior periods is recovered, an arrangement exists, accesscommonly referred to researchas a "high-water mark." Generally, incentive income is earned after the investor has been provided, the fee amount is fixed or determinable, and collection is reasonably assured.
Trade conversion revenue. Trade conversion revenue includes the fee earned from converting foreign securities into an American Depository Receipt (“ADR”) and the fee earned from converting an ADR into foreign securities on behalfreceived a full return of customers, and margins earned from facilitating customer foreign exchange transactions. Trade conversion revenue is recognized onits invested capital, plus a trade date basis.
preferred return.
Interest and dividends
Interest and dividends are earned by the Company from various sources. The Company receives interest and dividends primarily from securities finance activities and securities held by the Company for purposes of investing capital, investments held by its Consolidated Funds and its brokerage balances. Interest is recognized on an accrual basisin accordance with US GAAP and market convention for the imputation of interest of the host financial instrument. Interest income is recognized on the debt of those issuers that is deemed collectible. Interest income and expense includes premiums and discounts amortized and accreted on debt investments based on criteria determined by the Company using the effective yield method, which assumes the reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.
Reimbursement from affiliatesInsurance and reinsurance
The Company allocates, at its discretion, certain expenses incurred on behalf of its private fund and real estate businesses. These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition, pursuant to the funds' offering documents, the Company charges certain allowable expenses to the funds, including charges and personnel costs for legal, compliance, accounting, tax compliance, risk and technology expenses that directly relate to administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the accompanying consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees, communications, occupancy and equipment, client services and business development and other.
Aircraft lease revenue
Aircraft lease revenue associated with the Company's aircraft leasing business is recorded on a straight-line basis over the term of the lease, net of deferred rent and/or prepaid initial direct costs.
Reinsurance-related contracts
Premiums for reinsurance-relatedinsurance and reinsurance contracts are earned over the coverage period. In most cases, premiums are recognized as revenues ratably over the term of the contract with unearned premiums computed on a monthly basis. For each of its contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with US GAAP. If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk, the Company records the contract under the deposit method of accounting with any net amount receivable reflected as an asset in other assets, and any net amount payable reflected as a liability within accounts payable, accrued expenses and other liabilities on the consolidated statements of financial condition.
The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, including reported losses. Estimated ultimate payment amounts are based upon (1) reports of losses from policyholders, (2) individual case estimates and (3) estimates of incurred but not reportedunreported losses.
Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and estimates of recoverable amounts and are included in other expenses on the consolidated statements of operations.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Costs of acquiring new policies, which vary with and are directly related to the production of new policies, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting and are included within other assets onin the consolidated statements of financial condition.
| |
u. | Investments transactions and related income/expenses |
Purchases and salesAll of securities,the items above are reported net of commissions,any Outward Reinsurance (see Note 22), which is determined as the portion of the Company’s premiums, liabilities for losses and derivative contracts,loss adjustment expenses, provisions for losses and loss adjustment expenses, and costs of acquiring new policies that are ceded to providers of such Outward Reinsurance pursuant to their terms and conditions. These ceded amounts are calculated based on the related revenuessame principles outlined above.
Interest and expenses are recorded on a trade date basis with netdividends expense
Interest and dividends expense relates primarily to securities finance activities, trading gains and losses included as a component of net gains (losses) on securities, derivatives and other investments, andactivity with respect to the Consolidated Funds and other real estate entities as a component of net realized and unrealized gains (losses) onCompany's investments and other transactions and net realized and unrealized gains (losses)interest expense on derivatives, respectively, in the accompanying consolidated statements of operations.debt.
| |
v. | Share-based compensation |
x. Share-based compensation
The Company accounts for its share-based awards granted to individuals as payment for employee services in accordance with US GAAP and values such awards based on grant date fair value. Unearned compensation associated with share-based awards is amortized over the vesting period of the option or award. The Company estimates forfeiture for equity-based awards that are not expected to vest. See Note 1923 for further information regarding the Company's share-based compensation plans.
The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in fixed assets. Operating lease expense is recorded on a straight-line basis over the lease term. Landlord incentives are recorded as deferred rent and amortized, as reductions to lease expense, on a straight-line basis over the life of the applicable lease.y. Income taxes
The Company accounts for income taxes in accordance with US GAAP which requires the recognition of tax benefits or expenses based on the estimated future tax effects of temporary differences between the financial statement and tax basis of its assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to an amount that is more likely than not to be realized. We evaluate ourThe Company evaluates its deferred tax assets for recoverability considering negative and positive evidence, including ourits historical financial performance, projections of future taxable income, future reversals of existing taxable
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
temporary differences, and tax planning strategies. We recordThe Company records a valuation allowance against ourits deferred tax assets to bring them to a level that it is more likely than not to be utilized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period. Because the recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income and the application of inherently complex tax laws, we have identified the assessment of deferred tax assets and the need for any related valuation allowance as a critical accounting estimate.realized.
US GAAP clarifies the accounting for uncertainty in income taxes recognized in an enterprise’senterprise's financial statements, requiring the Company to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company recognizes accrued interest and penalties related to its uncertain tax positions as a component of income tax expense.
In accordance with federal, state and statelocal tax laws, the Company and its subsidiaries file consolidated federal, state, and local income tax returns as well as stand-alone state and local tax returns. The Company also has subsidiaries that are residentresidents in foreign countries where tax filings have to be submitted on a stand-alone or combined basis. These foreign subsidiaries are subject to taxtaxation in their respective resident countries, and the Company is responsible for, and thus,therefore reports, all taxes incurred by these subsidiaries in the consolidated statementstatements of operations. The countriesforeign jurisdictions where the Company owns subsidiaries and has tax filing obligations are the United Kingdom, Luxembourg, Malta, Guernsey, Germany, Switzerland, Israel, South Africa, Canada and Hong Kong.
| |
y. | Foreign currency transactions |
z. Foreign currency transactions
The Company consolidates certain foreign subsidiaries that have designated a foreign currency as their functional currency. For entities that have designated a foreign currency as their functional currency, assets and liabilities are translated
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
into U.S. dollars based on current rates, which are the spot rates prevailing at the end of each statement of financial condition date, and revenues and expenses are translated at historical rates, which are the average rates for the relevant periods. The resulting translation gains and losses, and the tax effects of such gains and losses, are recorded in accumulated other comprehensive income (loss), a separate component of stockholders' equity.
For subsidiaries that have designated the U.S. Dollar as their functional currency, securities and other assets and liabilities denominated in foreign currencies are translated into U.S. Dollar amounts at the date of valuation. Purchases and sales of securities and other assets and liabilities and the related income and expenses denominated in foreign currencies are translated into U.S. Dollar amounts on the respective dates of the transactions. The Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on these balances from fluctuations arising from changes in market prices of securities and other assets/liabilities held or sold. Such fluctuations are included in the accompanying consolidated statements of operations as a component of net gains (losses) on securities, derivatives and other investments. Gains and losses primarily relating to foreign currency broker balances are included in Otherother income (loss) in the accompanying consolidated statements of operations.
z. aa. Recent pronouncements
Recently issued accounting pronouncements
In May 2014,August 2020, the FASB issued guidance which amends and supersedessimplifying an issuer’s accounting for convertible instruments by eliminating two of the revenue recognition requirements and most industry-specific guidance related to revenue recognition and creates a single source of guidance. The new guidance outlines the principles an entity must apply to measure and recognize revenue and related cash flows.three models in ASC 470-20 that require separate accounting for embedded conversion features; separate accounting is still required in certain cases. The guidance also providessimplifies the settlement assessment that entities are required to perform to determine whether a modelcontract qualifies for equity classification. The guidance requires entities to use the measurementif-converted method for all convertible instruments in the diluted earnings per share calculation and recognitioninclude the effect of gainspotential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. The guidance requires new disclosures about events that occur during the reporting period and losses oncause conversion contingencies to be met and about the salefair value of certain non-financial assets.a public business entity’s convertible debt at the instrument level. For public business entities, the guidance is effective for reporting periods beginning after December 15, 2017.
The Company has identified its revenues and costs that are within the scope of the new guidance and concluded that the guidance is not applicable to financial instruments, lease and insurance contracts and therefore, will not impact investment income, lease or reinsurance revenue. The Company continues to implement and evaluate the potential impact of the guidance on the consolidated results of operations, related disclosures and internal controls over financial reporting.
For its investment management businesses, the Company will recognize performance / incentive fees when such revenue is not subject to significant reversal in the future. For certain of the funds offered by the Company, primarily the closed ended funds, the Company will defer the recognition of performance fees until such fees are no longer subject to reversal or clawback, which will cause a delay in the recognition of these fees as revenue. Certain of the Company's funds qualify for the equity method of accounting treatment in line with the conclusions reached by AICPA’s Revenue Recognition Task Force. Therefore, the Company elected to account for the revenue as equity pick up under equity method of accounting. The placement fees paid to certain placement agents for its capital raising activities will qualify to be capitalized and amortized as part of contract acquisition costs.
The Company does not currently anticipate that its current methods of recognizing investment banking revenues will be materially impacted by the new guidance. The current broker-dealer industry treatment of netting deal expenses with investment banking revenues will change under the new guidance. As a result of adopting of the new guidance, deal expenses will generally be presented on a gross basis in the consolidated statements of operations, resulting in higher revenues and higher non-compensation expenses with no impact on net income.
The Company is closely monitoring the AICPA's industry task forces on broker-dealers and asset management, the AICPA’s Revenue Recognition Working Group and the AICPA’s Financial Reporting Executive Committee as they continue to issue interpretive guidance. The Company has adopted this guidance effective as of January 1, 2018 using the modified retrospective approach under which the cumulative effect of applying the standard would be recognized at the date of initial application.
In May 2017, the FASB issued guidance to clarify the application of modification accounting for stock compensation. The guidance was issued to reduce the diversity in practice under the current guidance. The new guidance requires an entity to apply modification accounting when there is a change in the fair value of the modified award and the original award, vesting conditions and the classification of the original awards. The amendments in this guidance are effective prospectively for fiscal years beginning after December 15, 20172021 and interim periods within those fiscal years.years with early adoption permitted. The Company will applyadopted the new guidance for any modifications on or afteras of January 1, 2022 under the modified retrospective method. With the adoption date.of this guidance, the Company is required to include the portion of the Series A Convertible Preferred Stock that can be settled in Class A common stock (the amount in excess of $1,000.00 per share of the Series A Convertible Preferred Stock) in the diluted earnings per share calculation. See Note 26 for the calculation of diluted earnings per share.
In March 2017,August 2018, the FASB issued guidance prescribing targeted improvements to amend the amortization periodfinancial services – insurance industry accounting guidance for certain purchased callable debt securities held at a premium. Under current guidance, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument.long-duration contracts. The new guidance shortened(i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization period for the premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this guidance are effective for public business entities for fiscal years beginning after December
of
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
deferred acquisition costs for virtually all long-duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. For all entities, the guidance is effective for reporting periods beginning after December 15, 20182022 and interim periods within those fiscal years.years with early adoption permitted. The Company is currently evaluating the impact of thisadopting the new guidance onand has determined that the Company’simpact is not expected to be material to the consolidated financial statements and does not expect this guidance to have a material impact on its statement of financial condition or its statement of operations as the Company does not hold any material callable debt securities.statements.
In January 2017,June 2022, the FASB issued guidance that simplifies the subsequent measurement of goodwill. The new guidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill. Instead, under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparingamends ASC 820 to clarify that when evaluating the fair value of an equity security a reporting unit with its carrying amount. An entity should recognizecontractual sale restriction prohibiting the sale of an impairment charge for the amount by which the carrying amount exceedsequity security is a characteristic of the reporting unit’s fair value, however,entity holding the loss recognized shouldequity security and is not exceedincluded in the total amountequity security's unit of goodwill allocated to that reporting unit. If applicable,account. Accordingly, an entity should not consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unitcontractual sale restriction when measuring the goodwill impairment loss.equity security’s fair value. The amendments in this guidance are effective for public business entities for annualfurther prohibits an entity from recognizing a contractual sale restriction as a separate unit of account and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. The Company is currently evaluatingrequires specific disclosures related to the impact of this guidance onfair value; the Company’s consolidated financial statements. The Company expects this guidance to simplify its goodwill impairment analysis.
In January 2017, the FASB issued guidance which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of a business-inputs, processes,nature and outputs. While an integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The new guidance provides a screen to determine when a set is not a business. The screen requires that when substantially allduration of the fair value ofrestrictions; and circumstances that could cause the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company will use the new definition of a business for its future business combination activities.
In November 2016, the FASB issued guidance which reduces the diversity in practice asrestrictions to how changes in restricted cash are presented and classified in the statement of cash flows. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shownlapse on the statement of cash flows. The guidance does not provide a definition of restricted cash or restricted cash equivalents. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company currently presents its restricted cash and changes in its restricted cash, separately on its consolidated statements of financial condition and consolidated statements of cash flows respectively. Since the guidance only affects the presentation of restricted cash on the statement of cash flows, the Company does not expect this guidance to have any impact on its consolidated financial statements and will present total cash and cash equivalents from the adoption date.
In August 2016, the FASB issued guidance which reduces the diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing and potential future diversity in practice. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s cash flows presentation. Since the guidance only affects the presentation of statement of cash flows, the Company does not expect this guidance to have any impact on consolidated financial statements. The Company notes that its current presentation is already in line with most of the specific cash flow issues identified in the guidance.
In February 2016, the FASB issued guidance which amends and supersedes its previous guidance regarding leases. The new guidance requires the lessee to recognize the right to use assets and lease liabilities that arise from leases and present them in its statement of financial condition. The recognition of these lease assets and lease liabilities represents a change from previous US GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous US GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial condition.such an equity security. For public business entities, the guidance is effective for reporting periods beginning after December 15, 2018.2023 and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of this guidancethe new guidance.
3. Acquisition
Kelvin Re Limited
On June 1, 2022 (the "Kelvin Acquisition Date"), the Company completed its acquisition of Kelvin Re Limited (“Kelvin”) by acquiring all of the issued and outstanding ordinary shares in Kelvin from CS IRIS A Fund Limited (the "Kelvin Acquisition"). Kelvin is a general reinsurance company incorporated and domiciled in Guernsey whose principal activity was the provision of property and natural catastrophe reinsurance business. In December 2020, Kelvin ceased underwriting new business and has been operating as a run-off entity. Cowen acquired Kelvin to manage the outstanding reinsurance claims arising from its existing portfolio. (See Note 22).
In accordance with US GAAP and SEC Regulation S-X Rule 11-01(d), the Kelvin Acquisition is accounted for as an asset acquisition because the assets and liabilities of Kelvin do not meet the definition of a business, and accordingly the assets and liabilities acquired as part of the Kelvin Acquisition were measured based on their cost allocated to assets on a relative fair value basis, which included transaction costs of $1.6 million.
The aggregate purchase price of the Kelvin Acquisition after transaction costs is $221.0 million. The purchase price was paid in cash by Kelvin on behalf of Cowen. The results of Kelvin are integrated within the Company's insurance business as of the Kelvin Acquisition Date, which is reported in the Company’s Operating Company segment.
The table below summarizes the net tangible and intangible assets acquired and liabilities assumed as of June 1, 2022: | | | | | | |
| (dollars in thousands) | |
| Cash and cash equivalents | $ | 92,589 | | |
| Cash collateral pledged | 316,049 | | |
| Premiums receivable from cedants | 58,904 | |
| Claims recoverable from reinsurers | 52,526 | |
| Insurance and reinsurance assets | 111,430 | | |
| Other assets | 94 | | |
| Premiums and other costs payable to reinsurers | (5,400) | |
| Claims liabilities | (292,026) | |
| Insurance and reinsurance liabilities | (297,426) | | |
| Accounts payable, accrued expenses and other liabilities | (1,711) | | |
| Total net assets acquired | $ | 221,025 | | |
Portico
On December 16, 2021 (the "Portico Acquisition Date"), the Company, through its indirect wholly owned subsidiary, Cowen PC Acquisition LLC, completed its previously announced acquisition (the "Portico Acquisition") of Portico Capital Advisors and certain assets and liabilities of its European operations (“Portico”). Portico was privately-held and was a leading mergers and acquisitions advisory firm focused on the Company’s financialverticalized software, data, and analytics sectors. The Portico Acquisition was completed for a combination of 75% cash and 25% stock. In the aggregate, the purchase price, specified assets acquired and liabilities assumed were not significant and the near-term impact to the Company and its consolidated results of operations and cash flows was not significant.
The Portico Acquisition was accounted for under the acquisition method of accounting in accordance with US GAAP. Accordingly, the Portico assets purchased and liabilities assumed were recorded on the Company's books at fair value as of the
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Portico Acquisition Date, and Portico's post-acquisition results were included in the Company's consolidated financial statements. Additionally, following the acquisition, the business acquired is included in the Investment Bank reporting unit within the Operating Company segment.
The aggregate estimated purchase price of the Portico Acquisition was $112.0 million. On the Portico Acquisition Date the Company paid upfront consideration of $91.3 million subject to certain net working capital and other customary adjustments, with additional maximum contingent consideration of $58.0 million that will become payable dependent on the achievement of certain milestones by Portico in each of the first three years (four years if certain conditions are met) following the Portico Acquisition Date subject to a $19.3 million maximum in each year and a $58.0 million cumulative maximum, with the opportunity for additional consideration payable in each of the fourth and fifth years following the Portico Acquisition Date upon the achievement of certain additional milestones. The Company estimated the contingent consideration at $20.7 million using a Monte Carlo valuation model which requires the Company to make estimates and assumptions regarding the future cash flows and profits. The contingent consideration liability is included within accounts payable, accrued expenses and other liabilities on the consolidated statements of financial condition. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. A portion of the preliminary purchase price was deposited into escrow, in the amount of $4.4 million, as a reserve for any future claims against the sellers of Portico. The upfront consideration and contingent consideration, consists of a combination of 75% cash and 25% shares of the Company's Class A common stock and the potential additional consideration payable in each of the fourth and fifth years following the Portico Acquisition Date would be paid in cash. Shares issued on the Portico Acquisition Date of 586,061 were valued based on the 20-trading day volume-weighted average price per share of $37.11 as of December 13, 2021. The fair value of the shares of Class A common stock issued was determined on the basis of the closing market price of the Company's shares on the Portico Acquisition Date. Any shares of Class A common stock issued in connection with any such contingent payments will be valued based on the 20-trading day volume-weighted average price per share as of the date that in two business days immediately prior to the date on which such shares are to be issued.
In addition, Portico and the Company have established a retention bonus pool, for Portico employees that remain employed at the end of each year there is a contingent payment which will be settled in a combination of 75% cash and 25% shares of the Company's Class A common stock based on Portico meeting certain economic performance hurdles. Part of the award is time based (60%) and part is performance and time based (40%). The time based portion of the award is accrued within compensation payable in the accompanying consolidated statements of financial condition utilizing a graded vesting attribution method over the three year vesting period. The total consideration payable under the time based portion of the award is $6 million in aggregate, and will not exceed $3.6 million in any annual period if all service conditions are met. The performance based portion of the award is accrued within compensation payable in the accompanying consolidated statements of financial condition based on a Monte Carlo simulation of the probability that the performance hurdles are met for each discrete year. Updates to the accrual will be made at each reporting period. The total consideration payable will not exceed $4 million if each of the economic performance hurdles are met. The Company is recognizing the retention bonus over each contingent payment period based upon the Company's revenue projections for Portico. The aggregate bonus pool has an aggregate maximum of $10.0 million over a four-year period.
The table below summarizes the purchase price allocation of net tangible and intangible assets acquired and liabilities assumed as of December 16, 2021: | | | | | | |
| (dollars in thousands) | |
| Cash | $ | 5,089 | | |
| Operating lease right-of-use assets | 2,707 | | |
| Fixed assets | 8 | | |
| Intangible assets | 19,900 | | |
| Other assets | 514 | | |
| Operating lease liabilities | (2,707) | | |
| Other liabilities | (401) | | |
| Total net identifiable assets acquired and liabilities assumed | 25,110 | | |
| Goodwill | 86,921 | | |
| Total estimated purchase price | $ | 112,031 | | |
As of the Portico Acquisition Date, the estimated fair value of the Company's intangible assets, as acquired through the Portico Acquisition, was $19.9 million and had a weighted average useful life of 3.02 years. The allocation of the intangible assets is shown within the following table:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | |
| | Estimated intangible assets acquired | | Estimated average remaining useful lives |
| (dollars in thousands) | | (in years) |
| Intangible asset class | | | |
| Trade name | $ | 400 | | | 1 |
| Customer relationships | 13,400 | | | 4 |
| Backlog | 6,100 | | | 1 |
| Total intangible assets | $ | 19,900 | | | |
Amortization expense for the year ended December 31, 2022 and 2021 was $9.5 million and $0.4 million, respectively, and is included in depreciation and amortization in the accompanying consolidated statements of operations. The estimated amortization expense related to these intangible assets in future periods is as follows:
| | | | | |
| | (dollars in thousands) |
| 2023 | $ | 3,376 | |
| 2024 | 3,376 | |
| 2025 | 3,235 | |
| 2026 | — | |
| 2027 | — | |
| Thereafter | — | |
| $ | 9,987 | |
In addition to the purchase price consideration, for the year ended December 31, 2021, the Company had incurred acquisition-related expenses of $4.2 million, including financial advisory, legal and valuation services, which are included in professional, advisory and other fees in the accompanying consolidated statements of operations.
Malta Holdings
On February 26, 2021 (the "Malta Holdings Acquisition Date"), the Company, through its indirect wholly owned subsidiary, Cowen Malta Holdings Ltd. (“Malta Holdings”), completed the acquisition of all of the outstanding equity interest of Axeria Insurance Limited (the “Acquisition”), an insurance company organized under the laws of Malta whose principal business activity is to provide insurance coverage to third parties (see Note 22). Axeria Insurance Limited was renamed Cowen Insurance Company Ltd (“Cowen Insurance Co”) upon acquisition. The Acquisition was completed for a combination of cash and deferred consideration. In the aggregate, the purchase price, assets acquired, and liabilities assumed were not significant and near-term impact to the Company and its disclosures. consolidated results of operations and cash flows was not significant.
The Company notes that a significant majorityaggregate estimated purchase price of the Company’s leases represent operating real estate leasesAcquisition was $12.7 million. On the Malta Holdings Acquisition Date, the Company paid upfront consideration of $12.5 million, with additional deferred consideration of $0.2 million which was paid during the second quarter of 2021.
The Acquisition was accounted for itsunder the acquisition method of accounting in accordance with US GAAP. As such, the results of operations of the business acquired is included in the accompanying consolidated statements of operations since the date of the Acquisition and the assets acquired, liabilities assumed recorded at their fair values within their respective offices and will requireline items on the gross up on itsaccompanying consolidated statement of financial condition. The Company has recognized a bargain purchase gain of $5.2 million related to the Acquisition and is shown net of associated tax of $1.3 million in the consolidated statement of operations. The bargain purchase gain is primarily driven by the recognition of the customer relationships intangible asset and a contractual discount on the closing equity balance at the Malta Holdings Acquisition Date. Additionally, following the Acquisition, the business acquired is included in the Cowen Investment Management reporting unit within the Operating Company segment.
4. Cash Collateral PledgedCowen Inc.
Notes to Consolidated Financial Statements (Continued)
The table below summarizes the purchase price allocation of net tangible and intangible assets acquired and liabilities assumed as of February 26, 2021: | | | | | | |
| (dollars in thousands) | |
| Cash | $ | 14,844 | | |
| Securities owned, at fair value | 1,571 | | |
| Fixed assets | 30 | | |
| Intangible assets | 4,794 | | |
| Other assets | 12,828 | | |
| Compensation payable | (17) | | |
| Other liabilities | (16,099) | | |
| Total net identifiable assets acquired and liabilities assumed | 17,951 | | |
| Bargain purchase gain | (5,216) | | |
| Total estimated purchase price | $ | 12,735 | | |
As of the Malta Holdings Acquisition Date, the estimated fair value of the Company's intangible assets, which are primarily broker relationships, was $4.6 million and had a weighted average useful life of 10 years. The licenses of $0.2 million have indefinite life. Amortization expense for the years ended December 31, 2022 and 2021, was $0.4 million, respectively.
As of December 31, 20172022, the estimated amortization expense related to these intangible assets in future periods is as follows: | | | | | |
| | (dollars in thousands) |
| 2023 | 466 | |
| 2024 | 466 | |
| 2025 | 466 | |
| 2026 | 466 | |
| 2027 | 466 | |
| Thereafter | 1,693 | |
| $ | 4,023 | |
In addition to the purchase price consideration, for the year ended December 31, 2022, the Company had incurred acquisition-related expenses of $0.2 million, including financial advisory, legal and 2016,valuation services, which are included in professional, advisory and other fees in the accompanying consolidated statements of operations.
MHT
On October 1, 2020 (the "MHT Acquisition Date"), the Company, through its indirect wholly owned subsidiary, Cowen and Company, completed its previously announced acquisition (the "MHT Acquisition") of certain assets and liabilities of MHT Partners, LP (“MHT Partners”). MHT Partners was an investment bank, based primarily in Dallas and San Francisco, focused on representing innovative companies in growing markets. The Acquisition was completed for a combination of cash and contingent consideration. In the aggregate, the purchase price, specified assets acquired and liabilities assumed were not significant and near-term impact to the Company and its consolidated results of operations and cash flows was not significant.
The MHT Acquisition was accounted for under the acquisition method of accounting in accordance with US GAAP. As such, results of operations for the MHT Acquisition are included in the accompanying consolidated statements of operations since the Acquisition Date, and the assets acquired and liabilities assumed were recorded at their fair value as of the Acquisition Date. Subsequent to the Acquisition, the operations of the MHT Acquisition were integrated within the Company's existing businesses. Additionally, following the acquisition, the business acquired from MHT Partners is included in the Investment Bank reporting unit within the Operating Company segment.
The aggregate estimated purchase price of the MHT Acquisition was $9.9 million. On the acquisition date, the Company paid an upfront consideration of $5.7 million, with additional contingent consideration to be paid after December 2023 valued based on a multiple of three-year average annual revenues of the acquired business less certain expenses. The Company estimated the fair value of the contingent consideration at $4.2 million using a combination of Monte Carlo and Discounted Cash Flow methods which require the Company to make estimates and assumptions regarding the future cash flows and profits. The contingent consideration liability is included within accounts payable, accrued expenses and other liabilities on the consolidated statements of financial condition. Changes in these estimates and assumptions could have a significant impact on the amounts
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
recognized. In addition, the Company has established deferred compensation for specified previous MHT Partners employees which will be settled in cash over a three-year period.
The table below summarizes the purchase price allocation of net tangible and intangible assets acquired and liabilities assumed as of October 1, 2020: | | | | | | |
| (dollars in thousands) | |
| Fixed assets | $ | 101 | | |
| Operating lease right-of-use assets | 1,120 | | |
| Intangible assets | 1,224 | | |
| Other assets | 43 | | |
| Compensation payable | (533) | | |
| Operating lease liabilities | (1,446) | | |
| Total net identifiable assets acquired and liabilities assumed | 509 | | |
| Goodwill | 9,356 | | |
| Total estimated purchase price | $ | 9,865 | | |
As of the MHT Acquisition Date, the estimated fair value of the Company's intangible assets, as acquired through the MHT Acquisition, was $1.2 million and had a weighted average useful life of 4.17 years . The allocation of the intangible assets is shown within the following table: | | | | | | | | | | | |
| | Estimated intangible assets acquired | | Estimated average remaining useful lives |
| (dollars in thousands) | | (in years) |
| Intangible asset class | | | |
| Trade name | $ | 131 | | | 3 |
| Customer relationships | 749 | | | 4 |
| Non-compete agreements | 344 | | | 5 |
| Total intangible assets | $ | 1,224 | | | |
| | | |
Amortization expense for the year ended December 31, 2022, 2021 and 2020 was $0.3 million, $0.3 million, and $0.1 million, respectively, and is included in depreciation and amortization in the accompanying consolidated statements of operations. The estimated amortization expense related to these intangible assets in future periods is as follows: | | | | | |
| | (dollars in thousands) |
| 2023 | $ | 289 | |
| 2024 | 209 | |
| 2025 | 52 | |
| 2026 | — | |
| 2027 | — | |
| Thereafter | — | |
| $ | 550 | |
In addition to the purchase price consideration, for the year ended December 31, 2020, the Company had incurred acquisition-related expenses of $0.8 million, including financial advisory, legal and valuation services, which are included in professional, advisory and other fees in the accompanying consolidated statements of operations.
4. Cash Collateral Pledged
As of December 31, 2022 and 2021, the Company pledged cash collateral in the amount of $6.1$3.1 million and $7.8$3.4 million respectively, which relates to letters of credit issued to the landlords of the Company's premises in New York City, Boston, Stamford and San Francisco.various locations. The Company also has pledged cash collateral for reinsurance agreements which amounted to $119.5 million (of which $24.4 million was in the form of letters of credit), as collateral, $11.8of December 31, 2022, and $44.1 million, as of December 31, 2017,2021, which are expected to be released periodically as per the terms of the reinsurance policy (see Notes 16 and $5.5 million, as22).
As of December 31, 2016,2022, the Company has the following irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | |
| Location | | Amount | | Maturity |
| | (dollars in thousands) | | |
| New York | | $ | 2,309 | | | December 2023 |
| | | | |
| | | | |
| Boston | | 382 | | | November 2023 |
| San Francisco | | 455 | | | November 2023 |
| | | | |
| | $ | 3,146 | | | |
To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of December 31, 2022 and 2021 there were no amounts due between March 2018 and March 2021, for reinsurance agreements (See Note 23).related to these letters of credit.
5. Segregated Cash
As of December 31, 20172022 and 2016,2021, cash segregated in compliance withunder federal regulations and other restricted deposits of $116.3$185.9 million and $1.0$194.7 million, respectively, consisted of cash deposited in special bank accountsSpecial Reserve Bank Accounts for the exclusive benefit of customers under SEC Rule 15c3-3 and cash helddeposited in accounts designated as Special Reserve Bank Accounts for the exclusive benefit of Proprietary Accounts of Broker-Dealers ("PAB") under SEC Rule 15c3-3 (see Note 29).
6. Investments of Operating Entities and Consolidated Funds
a. Operating entities
Securities owned, at fair value
Securities owned, at fair value are held by the Company and are considered held for trading. Substantially all equityCertain securities owned, at fair value, are pledged to theexternal clearing brokers under terms which permit the external clearing broker to sell or re-pledge the securities to others subject to certain limitations.
As of December 31, 20172022 and 2016,2021, securities owned, at fair value consisted of the following: | | | | | | | | | | | |
| | | |
| | | |
| As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| Common stock | $ | 1,802,082 | | | $ | 2,425,993 | |
| Preferred stock | 196,807 | | | 137,757 | |
| Warrants and rights | 59,051 | | | 46,459 | |
| Government bonds | 113,529 | | | 16,002 | |
| Corporate bonds | 219,316 | | | 21,468 | |
| Convertible bonds | 13,479 | | | 5,250 | |
| Term loan (*) | 12,468 | | | 4,121 | |
| Trade claims (*) | 5,440 | | | 2,988 | |
| Private investments | 2,022 | | | 704 | |
| $ | 2,424,194 | | | $ | 2,660,742 | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Common stocks (b) | $ | 640,065 |
| | $ | 669,655 |
|
| Preferred stock (b) | 9,604 |
| | 15,811 |
|
| Warrants and rights (b) | 9,604 |
| | 8,335 |
|
| U.S. Government securities (a) | 2,807 |
| | 3,780 |
|
| Corporate bonds (d) | 4,909 |
| | 2,477 |
|
| Convertible bonds (c) | 282 |
| | 250 |
|
| Trade claims | 5,950 |
| | 562 |
|
| Mutual funds (b) | — |
| | 6 |
|
| | $ | 673,221 |
| | $ | 700,876 |
|
| |
(a) | As of December 31, 2017, maturities ranged from February 2018 to June 2018 with an interest rate of 0%. As of December 31, 2016, maturities ranged from February 2017 to December 2017 with an interest rate of 0%. |
| |
(b) | The Company has elected the fair value option for investments in securities of preferred and common stocks with a fair value of $6.0 million and $5.2 million, respectively, at December 31, 2017 and $7.0 million and $5.2 million, respectively, at December 31, 2016. At December 31, 2017, the Company elected the fair value option for investments in warrants and rights with a fair value of $2.4 million. At December 31, 2016 the Company elected the fair value option for investments in mutual funds with a fair value of $0.1 million. |
| |
(c) | As of December 31, 2017, maturities ranged from February 2018 to March 2018 and interest rates ranged from 5% to 12%. As of December 31, 2016, the maturity was March 2018 with an interest rate of 8%. |
| |
(d) | As of December 31, 2017, maturities ranged from October 2018 to May 2040 and interest rates ranged from 0.00% to 10.75%. As of December 31, 2016, maturities ranged from January 2017 to January 2036 and interest rates ranged from 6.25% to 13.00%. |
Receivable on and Payable for derivative contracts, at fair value
The Company'sCompany predominantly enters into derivative transactions to satisfy client needs and to manage its own exposure to market and credit risks resulting from its trading activities. The Company’s direct involvement withexposure to derivative financial instruments includes total return swaps, futures, currency forwards, equity swaps, credit defaultinterest rate swaps and options. The Company's derivatives trading activities exposes the Company to
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
expose the Company to certain risks, such as price and interest rate fluctuations, volatility risk, credit risk, counterparty risk, foreign currency movements and changes in the liquidity of markets.
Upon issuance of the Company's 3% cash convertible senior notes due 2022 in December 2017 ("2022 Convertible Notes") (See Note 23), the Company recognized the embedded cash conversion option at fair value of $23.4 million which is valued as of December 31, 2017 at $22.1 million and is included in payable for derivative contracts in the accompanying consolidated statement of financial condition.
Upon issuance of the Company's 3% cash convertible senior notes due 2019 in March 2014 (the "2019 Convertible Notes") (See Note 23), the Company recognized the embedded cash conversion option at fair value of $35.7 million which is valued as of December 31, 2017 at $0.3 million and is included in payable for derivative contracts in the accompanying consolidated statement of financial condition. Also, on the date of issuance of the 2019 Convertible Notes, the Company entered into a separate cash convertible note economic hedge transaction (the "Hedge Transaction") with a counterparty (the “Option Counterparty”) whereby, the Company purchased a cash settled option contract with terms identical to the conversion option embedded in the 2019 Convertible Notes and simultaneously sold an equity settled warrant with a higher strike price. The Hedge Transaction is expected to reduce the Company’s exposure to potential cash payments in excess of the principal amount of converted notes that the Company may be required to make upon conversion of the 2019 Convertible Notes. The Company paid a premium of $35.7 million for the option under the Hedge Transaction and received a premium of $15.2 million for the equity settled warrant transaction, for a net cost of $20.5 million. The Hedge Transaction is valued at $1.5 million as of December 31, 2017 and is included in receivable on derivative contracts in the accompanying consolidated statement of financial condition. Aside from the initial premium paid, the Company will not be required to make any cash payments under the Hedge Transaction and could be entitled to receive an amount of cash from the Option Counterparty generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Hedge Transaction during the relevant valuation period. The warrants cover 7,012,196 shares of the Company's Class A common stock and have an initial exercise price of $28.72 per share (share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016). The warrants expire over a period of 80 trading days beginning on November 14, 2018. The warrant transaction could have a dilutive effect to the extent that the market value per share of the Company’s Class A common stock exceeds the applicable strike price of the warrants.
The Company's long and short exposure to derivatives is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| |
| Receivable on derivative contracts | As of December 31, |
| 2022 | | 2021 |
| | Number of contracts / Notional Value | | Fair value | | Number of contracts / Notional Value | | Fair value |
| | (dollars in thousands) |
| | | | | | | |
| Currency forwards | $ | 7,817 | | | $ | 44 | | | $ | 10,727 | | | $ | 80 | |
| Equity swaps | $ | 1,460,575 | | | 644,912 | | | $ | 1,950,181 | | | 305,370 | |
| Options (a) | 116,707 | | | 31,385 | | | 217,393 | | | 61,219 | |
| Interest rate swap (c) | $ | — | | | — | | | $ | 285,000 | | | 1,208 | |
| Netting - swaps (b) | | | (181,650) | | | | | (81,742) | |
| | | $ | 494,691 | | | | | $ | 286,135 | |
|
| | | | | | | | | | | | | | | |
| Receivable on derivative contracts | As of December 31, |
| | 2017 | | 2016 |
| | Number of contracts / Notional Value | | Fair value | | Number of contracts / Notional Value | | Fair value |
| | (dollars in thousands) |
| Futures | $ | 3,819 |
| | $ | 58 |
| | $ | 12,421 |
| | $ | 104 |
|
| Currency forwards | $ | 233 |
| | 5 |
| | $ | 80,608 |
| | 592 |
|
| Swaps | $ | 164,664 |
| | 10,942 |
| | $ | 46,462 |
| | 468 |
|
| Options other (a) | 283,112 |
| | 58,172 |
| | 256,097 |
| | 21,539 |
|
| Foreign currency options | $ | — |
| | — |
| | $ | 57,051 |
| | 198 |
|
| | | | $ | 69,177 |
| | | | $ | 22,901 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| |
| Payable for derivative contracts | As of December 31, |
| 2022 | | 2021 |
| | Number of contracts / Notional Value | | Fair value | | Number of contracts / Notional Value | | Fair value |
| | (dollars in thousands) |
| Futures | $ | — | | | $ | — | | | $ | 9,378 | | | $ | 266 | |
| Currency forwards | $ | 212,485 | | | 2,915 | | | $ | 149,575 | | | 1,346 | |
| Equity swaps | $ | 1,377,169 | | | 218,747 | | | $ | 988,329 | | | 114,689 | |
| Interest rate swaps (c) | $ | 400,000 | | | 218 | | | $ | — | | | — | |
| Options (a) | 98,069 | | | 9,466 | | | 182,440 | | | 36,192 | |
| Netting - swap (b) | | | (161,681) | | | | | (92,330) | |
| | | $ | 69,665 | | | | | $ | 60,163 | |
(a) Includes the volume of contracts for index, equity, commodity future and cash conversion options.
(b) Derivatives are reported on a net basis, by counterparty, when a legal right of offset exists under an enforceable netting agreement as well as net of cash collateral received or posted under enforceable credit support agreements. See Note 2f for further information on offsetting of derivative financial instruments. |
| | | | | | | | | | | | | | | |
| Payable for derivative contracts | As of December 31, |
| | 2017 | | 2016 |
| | Number of contracts / Notional Value | | Fair value | | Number of contracts / Notional Value | | Fair value |
| | (dollars in thousands) |
| Futures | $ | 16,796 |
| | $ | 242 |
| | $ | 38,345 |
| | $ | 642 |
|
| Currency forwards | $ | 62,439 |
| | 874 |
| | $ | — |
| | — |
|
| Swaps | $ | 11,595 |
| | 71 |
| | $ | 9,533 |
| | 181 |
|
| Options other (a) | 57,043 |
| | 41,563 |
| | 23,726 |
| | 19,939 |
|
| | | | $ | 42,750 |
| | | | $ | 20,762 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
(a) Includes index, equity, commodity future and cash conversion options.
The following tables present the gross and net derivative positions and the related offsetting amount, as of December 31, 20172022 and 2016.2021. This table does not include the impact of over collateralization.over-collateralization. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross amounts offset on the Consolidated Statements of Financial Condition (a) | | Net amounts included on the Consolidated Statements of Financial Condition | | Gross amounts not offset in the Consolidated Statements of Financial Condition | | |
| Gross amounts recognized | | | | Financial instruments (a) | | Cash Collateral pledged (a) | | Net amounts |
| (dollars in thousands) |
| As of December 31, 2022 | | | | | | | | | | | |
| Receivable on derivative contracts, at fair value | $ | 676,341 | | | $ | 181,650 | | | $ | 494,691 | | | $ | 8,227 | | | $ | 426,168 | | | $ | 60,296 | |
| Payable for derivative contracts, at fair value | 231,346 | | | 161,681 | | | 69,665 | | | 2,922 | | | — | | | 66,743 | |
| | | | | | | | | | | |
| As of December 31, 2021 | | | | | | | | | | | |
| Receivable on derivative contracts, at fair value | $ | 367,877 | | | $ | 81,742 | | | $ | 286,135 | | | $ | 1,421 | | | $ | 211,442 | | | $ | 73,272 | |
| Payable for derivative contracts, at fair value | 152,493 | | | 92,330 | | | 60,163 | | | 2,839 | | | — | | | 57,324 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Consolidated Statement of Financial Condition | | |
| | Gross amounts recognized | | Gross amounts offset on the Consolidated Statements of Financial Condition (a) | | Net amounts included on the Consolidated Statements of Financial Condition | | Financial instruments | | Cash Collateral pledged (b) | | Net amounts |
| | (dollars in thousands) |
| As of December 31, 2017 | | | | | | | | | | | |
| Receivable on derivative contracts, at fair value | $ | 69,177 |
| | $ | — |
| | $ | 69,177 |
| | $ | — |
| | $ | 10,948 |
| | $ | 58,229 |
|
| Payable for derivative contracts, at fair value | 42,750 |
| | — |
| | 42,750 |
| | — |
| | 1,031 |
| | 41,719 |
|
| | | | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | | | |
| Receivable on derivative contracts, at fair value | 22,901 |
| | — |
| | 22,901 |
| | — |
| | 1,382 |
| | 21,519 |
|
| Payable for derivative contracts, at fair value | 20,762 |
| | — |
| | 20,762 |
| | — |
| | 181 |
| | 20,581 |
|
| |
(a) | Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred. |
| |
(b) | Includes the amount of collateral held or posted. |
The realized and unrealized gains/(losses) related to derivatives trading activities were $3.9$(149.5) million, $(11.2)$(205.5) million and $(5.6)$(146.9) million for the years ended December 31, 2017, 2016,2022, 2021 and 2015,2020, respectively, and are included in other incomeInvestment income- Securities principal transactions, net in the accompanying consolidated statements of operations. The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising the Company's business activities and are calculated before consideration of economic hedging transactions, which generally offset the net gains (losses) included above.
Pursuant to the various derivatives transactions discussed above, except for the cash convertible note hedge (see Note 23) and exchange traded derivatives and certain options, the Company is required to post/receive collateral. As of December 31, 2017 and 2016, collateral consisting of $13.5 million and $17.1 million of cash, respectively, is includedThese amounts are recognized in receivable from brokers, dealers and clearing organizations and payable to brokers, dealers and clearing organizations on the accompanying consolidated statements of financial condition.respectively. As of December 31, 20172022 and 20162021, all derivative contracts were with multiple major financial institutions.
Other investments
As of December 31, 20172022 and 2016,2021, other investments included the following: |
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Portfolio Funds, at fair value (1) | $ | 100,148 |
| | $ | 120,023 |
|
| Equity method investments (2) | 41,099 |
| | 36,991 |
|
| Lehman claims, at fair value | 301 |
| | 265 |
|
| | $ | 141,548 |
| | $ | 157,279 |
|
| | | | | | | | | | | |
| | | |
| | | |
| As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| Portfolio funds, at fair value (1) | $ | 132,285 | | | $ | 137,986 | |
| Carried interest (2) | 65,892 | | | 88,925 | |
| Equity method investments (3) | 27,006 | | | 47,200 | |
| | | |
| $ | 225,183 | | | $ | 274,111 | |
(1) Portfolio funds, at fair value
The portfolio funds, at fair value as of December 31, 2022 and 2021, included the following:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
(1) Portfolio Funds, at fair value
The Portfolio Funds, at fair value as of December 31, 2017 and 2016, included the following: |
| | | | | | | |
| | | | |
| | As of December 31, |
| 2017 | | 2016 |
| | (dollars in thousands) |
| Starboard Value and Opportunity Fund LP (c)(*) | $ | 32,079 |
| | $ | 27,424 |
|
| Formation8 Partners Fund I, L.P. (f) | 28,243 |
| | 22,234 |
|
| RCG Longview Debt Fund V, L.P. (i)(*) | 8,892 |
| | 16,187 |
|
| HealthCare Royalty Partners LP (a)(*) | 3,452 |
| | 7,147 |
|
| Eclipse Ventures Fund I, L.P. (g) | 3,428 |
| | 1,790 |
|
| Lagunita Biosciences, LLC (n) | 2,400 |
| | 1,698 |
|
| RCG LPP2 PNW5 Co-Invest, L.P. (j)(*) | 3,493 |
| | 3,152 |
|
| Starboard Leaders Fund LP (e)(*) | 1,276 |
| | 1,231 |
|
| HealthCare Royalty Partners II LP (a)(*) | 873 |
| | 2,091 |
|
| Quadratic Fund LLC (k) (*) | 906 |
| | 6,729 |
|
| RCGL 12E13th LLC (i)(*) | 237 |
| | 348 |
|
| RCG Park Liberty GP Member LLC (i) (*) | 750 |
| | 598 |
|
| RCG Longview Debt Fund VI, LP (i) (*) | 1,022 |
| | — |
|
| Green Energy Metals Fund, LP (h) | — |
| | 6,241 |
|
| Starboard Partners Fund LP (d)(*) | — |
| | 5,067 |
|
| Orchard Square Partners Credit Fund LP (b) | — |
| | 4,327 |
|
| Other private investment (l)(*) | 10,133 |
| | 8,548 |
|
| Other affiliated funds (m)(*) | 2,964 |
| | 5,211 |
|
| | $ | 100,148 |
| | $ | 120,023 |
|
| | | | | | | | | | | |
| | | |
| | | |
| As of December 31, |
| 2022 | | 2021 |
| (dollars in thousands) |
| HealthCare Royalty Partners LP (a)(*) | $ | 578 | | | $ | 832 | |
| HealthCare Royalty Partners II LP (a)(*) | 1,256 | | | 1,259 | |
| Eclipse Ventures Fund I, L.P. (b) | 5,361 | | | 5,829 | |
| Eclipse Ventures Fund II, L.P. (b) | 2,441 | | | 2,354 | |
| Eclipse Continuity Fund I, L.P. (b) | 1,587 | | | 1,641 | |
| Starboard Value and Opportunity Fund LP (c)(*) | 43,958 | | | 49,252 | |
| Starboard Value and Opportunity Fund Ltd (c) (*) | 2,434 | | | 2,732 | |
| Lagunita Biosciences, LLC (d) | 2,264 | | | 5,671 | |
| Starboard Leaders Fund LP (e)(*) | 2,882 | | | 2,823 | |
| Formation8 Partners Fund I, L.P. (f) | 16,379 | | | 20,992 | |
| | | |
| BDC Fund I Coinvest 1, L.P. (g) | 1,250 | | | 1,250 | |
| Difesa Partners, LP (h) | 919 | | | 1,017 | |
| Cowen Sustainable Investments I LP (i)(*) | 17,004 | | | 13,102 | |
| Cowen Healthcare Investments II LP (i) (*) | 11,645 | | | 13,055 | |
| Cowen Healthcare Investments III LP (i)(*) | 7,680 | | | 8,426 | |
| | | |
| Cowen Healthcare Investments IV LP (i)(*) | 3,397 | | | 1,071 | |
| Eclipse SPV I, LP (j)(*) | 1,445 | | | 1,445 | |
| TriArtisan ES Partners LLC (k)(*) | 2,083 | | | 1,805 | |
| TriArtisan PFC Partners LLC (l)(*) | 1,163 | | | 1,112 | |
| Ramius Merger Fund LLC (m)(*) | 1,711 | | | 1,692 | |
| Gaingels 10X Capital Diversity Fund I, LP (n)(*) | 600 | | | — | |
| | | |
| HCRX Holdings, L.P. (o)(*) | 3,829 | | | — | |
| Other private investment (p)(*) | 121 | | | 303 | |
| Other affiliated funds (q)(*) | 298 | | | 323 | |
| $ | 132,285 | | | $ | 137,986 | |
* These portfolio funds are affiliates of the Company.
The Company has no unfunded commitments regarding the portfolio funds held by the Company except as noted in Note 22.27.
| |
(a) | HealthCare Royalty Partners, L.P. and HealthCare Royalty Partners II, L.P. are private equity funds and therefore distributions will be made when cash flows are received from the underlying investments, typically on a quarterly basis. |
| |
(b) | Orchard Square Partners Credit Fund LP had a quarterly redemption policy with a 60 day notice period and a 4% penalty on redemptions of investments of less than a year in duration. |
| |
(c) | Starboard Value and Opportunity Fund LP permits quarterly withdrawals upon 90 days' notice. |
| |
(d) | Starboard Partners Fund LP permitted redemptions on a semi-annual basis on 180 days' prior written notice subsequent to an initial two year lock up. |
| |
(e) | Starboard Leaders Fund LP does not permit withdrawals, but instead allows terminations with respect to capital commitments upon 30 days' prior written notice at any time following the first anniversary of an investors' initial capital contribution. |
| |
(f) | Formation8 Partners Fund I, L.P. is a private equity fund which invests in early stage and growth transformational information and energy technology companies. Distributions will be made when the underlying investments are liquidated. |
| |
(g) | Eclipse Ventures Fund I, L.P. is a private equity fund which invests in early stage and growth hardware companies. Distributions will be made when the underlying investments are liquidated. |
| |
(h) | The Green Energy Metals Fund, LP invested the vast majority of its capital in physical off-exchange traded minor metals that are crucial to the production and sustainability of clean energy, emerging technology and energy efficiency. The Company was invested in a managed account specifically targeting cobalt. The Green Energy Metals Fund, LP is a private equity structure and therefore distributions were made when the underlying investments were liquidated. |
(a)HealthCare Royalty Partners, L.P. and HealthCare Royalty Partners II, L.P. are private equity funds and therefore distributions will be made when cash flows are received from the underlying investments, typically on a quarterly basis.
(b)Each of Eclipse Ventures Fund I, L.P., Eclipse Ventures Fund II, L.P. and Eclipse Continuity Fund I, L.P. are venture capital funds which invests in early stage and growth stage hardware companies. Distributions will be made when the underlying investments are liquidated.
(c)Starboard Value and Opportunity Fund LP and Starboard Value and Opportunity Fund Ltd are hedge funds with a focused and fundamental approach to investing in publicly traded US companies. Both funds permit quarterly withdrawals upon 90 days' notice.
(d)Lagunita Biosciences, LLC, is a healthcare investment company that creates and grows early stage companies to commercialize impactful translational science that addresses significant clinical needs, is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.
(e)Starboard Leaders Fund LP does not permit withdrawals, but instead allows terminations with respect to capital commitments upon 30 days' prior written notice at any time following the first anniversary of an investor's initial capital contribution.
(f)Formation8 Partners Fund I, L.P. is a private equity fund which invests in early stage and growth transformational information and energy technology companies. Distributions will be made when the underlying investments are liquidated.
(g)BDC Fund I Coinvest 1, L.P. is a private equity fund focused on investing in growth companies in industries disrupted by digitization. Distributions will be made when the underlying investments are liquidated.
(h)Difesa Partners, LP permits semi-annual withdrawals occurring on or after the anniversary of initial contribution upon 90 days written notice.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
(i)Cowen Sustainable Investments I LP, Cowen Healthcare Investments II LP, Cowen Healthcare Investments III LP and Cowen Healthcare Investments IV LP are private equity funds. Distributions are made from the fund when cash flows or securities are received from the underlying investments. Investors do not have redemption rights.
| |
(i) | RCGL 12E13th LLC, RCG Longview Debt Fund V, L.P., RCG Park Liberty GP Member LLC, and RCG Longview Debt Fund VI, LP are real estate private equity structures and therefore distributions will be made when the underlying investments are liquidated. |
| |
(j) | RCG LPP2 PNW5 Co-Invest, L.P. is a single purpose entity formed to participate in a joint venture which acquired five multi-unit residential rental properties located in the Pacific Northwest. RCG LPP2 PNW5 Co-Invest, L.P. is a private equity structure and therefore distributions will be made when the underlying investments are liquidated. |
| |
(k) | Quadratic Fund LLC permits redemptions 30 days prior written notice. |
| |
(l) | Other private investment represents the Company's closed end investment in a portfolio fund that invests in a wireless broadband communication provider in Italy. |
| |
(m) | The majority of these funds are affiliates of the Company or are managed by the Company and the investors can redeem from these funds as investments are liquidated. |
| |
(n) | Lagunita Biosciences, LLC, a healthcare investment company that creates and grows early stage companies to commercialize impactful translational science that addresses significant clinical needs, is a private equity structure and therefore distributions will be made when the underlying investments are liquidated. |
| |
(2) | Equity method investments |
(j)Eclipse SPV I, L.P. is a co-investment vehicle organized to invest in a private company focused on software-driven automation projects. Distributions will be made when the underlying investments are liquidated.
(k)TriArtisan ES Partners LLC is a co-investment vehicle organized to invest in a privately held nuclear services company. Distributions will be made when the underlying investment is liquidated.
(l)TriArtisan PFC Partners LLC is a co-investment vehicle organized to invest in a privately held casual dining restaurant chain. Distributions will be made when the underlying investment in liquidated.
(m)Ramius Merger Fund LLC permits monthly withdrawals on 45 days prior notice.
(n)Gaingels 10X Capital Diversity Fund I, LP is a venture capital fund that primarily invests in portfolio companies embracing diversity and inclusion. Distributions will be made when the underlying investments are liquidated.
(o)HCRX Holdings, L.P. is a private operating company focusing primarily on healthcare royalty investments. Distributions upon realization will be made upon an investor's election subsequent to January 1st, 2026.
(p)Other private investment represents the Company's closed end investment in a portfolio fund that invests in a wireless broadband communication provider in Italy.
(q)The majority of these investment funds are affiliates of the Company or are managed by the Company and the investors can redeem from these funds as investments are liquidated.
(2)Carried interest
The Company applies an accounting policy election to recognize incentive income allocated to the Company under an equity ownership model in other investments in the accompanying consolidated statements of financial condition (see Note 2w). Carried interest allocated to the Company from certain portfolio funds represents Cowen's general partner capital accounts from those funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds. All carried interest balances are earned from affiliates of the Company.
A portion of the Company's carried interest is granted to employees through profit sharing awards designed to more closely align compensation with the overall realized performance of the Company. These arrangements enable certain employees to earn compensation based on performance revenue earned by the Company and are recorded within compensation payable in the accompanying consolidated statements of financial condition and employee compensation and benefits expense in the accompanying consolidated statements of operation based on the probable and estimable payments under the terms of the awards.
The carried interest as of December 31, 2022 and 2021, included the following:
| | | | | | | | | | | |
| | | |
| | | |
| As of December 31, |
| 2022 | | 2021 |
| (dollars in thousands) |
| Cowen Healthcare Investments II LP | $ | 19,112 | | | $ | 23,327 | |
| Cowen Healthcare Investments III LP | 25,671 | | | 18,523 | |
| Cowen Sustainable Investments I LP | — | | | 7,436 | |
| Cowen Sustainable Investments Offshore I LP | — | | | 9,196 | |
| CSI I Prodigy Co-Investment LP | 1,000 | | | 2,436 | |
| CSI PRTA Co- Investment LP | 3,677 | | | 9,535 | |
| TriArtisan TGIF Partners LLC | 4,290 | | | 4,047 | |
| TriArtisan ES Partners LLC | 4,475 | | | 3,401 | |
| TriArtisan PFC Partners LLC | 7,277 | | | 9,394 | |
| TriArtisan SBE Partners LLC | 358 | | | — | |
| Ramius Multi-Strategy Fund LP | — | | | 587 | |
| Ramius Merger Fund LLC | 32 | | | 861 | |
| | | |
| RCG IO Renergys Sarl | — | | | 136 | |
| Other affiliated funds | — | | | 46 | |
| $ | 65,892 | | | $ | 88,925 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
(3) Equity method investments
Equity method investments include investments held by the Company in several operating companies whose operations primarily include the day to day management of a number of real estate funds, including the portfolio management and administrative services related to the acquisition, disposition, and active monitoring of the real estate funds' underlying debt and equity investments. The Company's ownership interests in these equity method investments range from 20% to 57%. The Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in RCG Longview Partners II, LLC and 43% in Surf House Ocean Views Holdings, LLC (which is a joint venture in a real estate development project).companies. The operating agreement that governs the management of day-to-day operations and affairs of these entities stipulates that certain decisions require support and approval from other members in addition to the support and approval of the Company. As a result, all operating decisions made in these entities requires the support of both the Company and an affirmative vote of a majority of the other managing members who are not affiliates of the Company. As the Company does not possess control over any of these entities, the presumption of consolidation has been overcome pursuant to current accounting standardsAccounting Standards and the Company accounts for these investments under the equity method of accounting. Also includedIncluded in equity method investments are the investments in (a) HealthCare Royalty Partners General Partners and (b) Starboard Value (and certain related parties) which serves as an operating company whose operations primarily include the day to dayday-to-day management (including portfolio management) of several activist privateinvestment funds and related managed accounts. As part of its equity method investment inaccounts and (c) operating companies whose operations primarily include the Company incurs certain expenses on behalfday-to-day management of its equity method investees. These expenses reflect direct and indirect costs associated with the respective business and are included in their respective line items in the accompanying consolidated statements of operations. For the years ended December 31, 2017, 2016, and 2015, the Company incurred $7.1 million, $8.5 million and $14.1 million of these costs, respectively.real estate entities. The Company recorded no impairment charges in relation to its equity method investments for the yearsyear ended December 31, 2017, 20162022, 2021 and 2015.2020.
The Company elected to use the cumulative earnings approach for the distributions it receives from its equity method investments. Under the cumulative earnings approach, any distributions received up to the amount of cumulative earnings are treated as return on investment and classified in operating activities within the cash flows. Any excess distributions would be considered as return of investments and classified in investing activities.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes equity method investments held by the Company: |
| | | | | | | |
| | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Surf House Ocean Views Holdings, LLC | $ | 14,179 |
| | $ | 13,522 |
|
| Starboard Value LP | 13,202 |
| | 12,501 |
|
| RCG Longview Debt Fund V Partners, LLC | 9,284 |
| | 7,256 |
|
| RCG Longview Management, LLC | 1,149 |
| | 656 |
|
| HealthCare Royalty GP, LLC | 281 |
| | 583 |
|
| HealthCare Royalty GP II, LLC | 148 |
| | 354 |
|
| RCG Longview Debt Fund IV Management, LLC | 331 |
| | 331 |
|
| HealthCare Royalty GP III, LLC | 764 |
| | 208 |
|
| RCG Kennedy House, LLC | 154 |
| | 183 |
|
| RCG Longview Equity Management, LLC | 114 |
| | 114 |
|
| RCG LPP II GP, LLC | 487 |
| | — |
|
| RCG Park Liberty GP Member Manager, LLC | 428 |
| | 141 |
|
| Other | 578 |
| | 1,142 |
|
| | $ | 41,099 |
| | $ | 36,991 |
|
For the period ended December 31, 2017, three equity method investments have met the significance criteria as defined under Regulation S-X Rule 4-08(g) of the SEC guidance. As such, the Company is presenting the following summarized financial information for the significant investees for the years ended December 31, 2017, 2016, and 2015, and such information is as follows: |
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Assets | | | |
| Cash | $ | 6,046 |
| | $ | 5,766 |
|
Performance & management fee receivable
| 110,064 |
| | 48,145 |
|
| Investments in Portfolio Funds, at fair value | 11,251 |
| | 7,493 |
|
| Other assets | 1,060 |
| | 1,122 |
|
| Liabilities | 74,256 |
| | 21,250 |
|
| Equity | $ | 54,165 |
| | $ | 41,276 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (dollars in thousands) |
Revenues
| $ | 132,862 |
| | $ | 87,371 |
| | $ | 35,268 |
|
| Expenses | (32,354 | ) | | (34,490 | ) | | (20,658 | ) |
| Net realized and unrealized gains (losses) | 9,264 |
| | 9,383 |
| | 4,259 |
|
| Net Income | $ | 109,772 |
| | $ | 62,264 |
| | $ | 18,869 |
|
For the period ended December 31, 2017, equity method investments held by the Company in aggregate have met the
significance criteria as defined under SEC guidance. As such, the Company is required to present summarized financial
information for these significant investees for the years ended December 31, 2017, 2016 and 2015, and such information is as follows: |
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Assets | $ | 155,936 |
| | $ | 88,965 |
|
| Liabilities | 74,316 |
| | 22,504 |
|
| Equity | $ | 81,620 |
| | $ | 66,461 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (dollars in thousands) |
Revenues
| $ | 137,052 |
| | $ | 90,337 |
| | $ | 38,571 |
|
| Expenses | (32,354 | ) | | (34,490 | ) | | (20,658 | ) |
| Net realized and unrealized gains (losses) | 10,149 |
| | (6,305 | ) | | 9,715 |
|
| Net Income | $ | 114,847 |
| | $ | 49,542 |
| | $ | 27,628 |
|
As of December 31, 2017 and 2016, the Company's share of losses in its equity method investment in RCG Longview Partners II, LLC has exceeded the carrying amount recorded in this investee. These amounts are included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated statements of financial condition. RCG Longview Partners II, LLC, as general partner to a real estate fund, has reversed previously recorded incentive income allocations and has recorded a current clawback obligation to the limited partners in the fund. This obligation is due to a change in unrealized value of the fund on which there have previously been distributed carried interest realizations; however, the settlement of a potential obligation is not due until the end of the life of the respective fund. As the Company is obligated to return previous distributions it received from RCG Longview Partners II, LLC, it has continued to record its share of gains/losses in the investee including reflecting its share of the clawback obligation in the amount of $6.2 million. | | | | | | | | | | | |
| | | |
| | | |
| As of December 31, |
| 2022 | | 2021 |
| (dollars in thousands) |
| Starboard Value LP | $ | 20,806 | | | $ | 36,889 | |
| | | |
| HealthCare Royalty GP III, LLC | 1,631 | | | 1,957 | |
| | | |
| | | |
| | | |
| HCR Canary Fund GP, LLC | 319 | | | 458 | |
| | | |
| HealthCare Royalty GP IV, LLC | 1,923 | | | 1,716 | |
| RCG Longview Debt Fund IV Management, LLC | 391 | | | 331 | |
| HCR Overflow Fund GP, LLC | 578 | | | 839 | |
| | | |
| HCRP MGS Account Management, LLC | 472 | | | 598 | |
| HCR Stafford Fund GP, LLC | — | | | 2,955 | |
| HCR Potomac Fund, L.P. | — | | | 925 | |
| | | |
| HCRX Master GP | 375 | | | — | |
| Other | 511 | | | 532 | |
| $ | 27,006 | | | $ | 47,200 | |
The Company's income (loss) from equity method investments was $21.3December 31, 2022, 2021 and 2020 and $9.6 million, $14.4$35.5 million and $3.4$18.9 million, for the years ended December 31, 2017, 2016, and 2015 respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying consolidated statements of operations.
Securities sold, not yet purchased, at fair value
Securities sold, not yet purchased, at fair value represent obligations of thethe Company to deliver a specified security at a contracted price and, thereby, create a liability to purchase that security at prevailing prices. The Company's liability for securities to be delivered is measured at their fair value as of the date of the consolidated financial statements. However, these transactions result in off-balance sheet risk, as the Company's ultimate cost to satisfy the delivery of securities sold, not yet purchased, at fair value may exceed the amount reflected in the accompanying consolidated statements of financial condition. Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations. As of December 31, 20172022 and 2016,2021, securities sold, not yet purchased, at fair value consisted of the following: | | | | | | | | | | | |
| | | |
| As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| | | |
| Common stock | $ | 910,458 | | | $ | 1,192,396 | |
| Corporate bonds | 31 | | | 37 | |
| | | |
| Preferred stock | 3,085 | | | 9,009 | |
| Warrants and rights | — | | | 6 | |
| $ | 913,574 | | | $ | 1,201,448 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Common stocks | $ | 342,328 |
| | $ | 263,460 |
|
| Corporate bonds (a) | 122 |
| | 2,591 |
|
| Preferred stock | 77 |
| | — |
|
| Warrants and rights | — |
| | 39 |
|
| | $ | 342,527 |
| | $ | 266,090 |
|
| |
(a) | As of December 31, 2017, the maturities ranged from July 2025 to January 2036 with interest rates ranged from 3.78% to 5.55%. As of December 31, 2016, the maturities ranged from April 2021 to January 2036 with interest rates ranged from 5.50% to 6.25%. |
Securities purchased under agreements to resell/securities sold under agreements to repurchase and securities lending and borrowing transactions
The following tables present the contractual gross and net securities borrowing and lending agreements and securities sold under agreements to repurchase and the related offsetting amount as of December 31, 2017.2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Gross amounts not offset on the Consolidated Statements of Financial Condition | | |
| Gross amounts recognized, net of allowance | | Gross amounts offset on the Consolidated Statements of Financial Condition (a) | | Net amounts included on the Consolidated Statements of Financial Condition | | Additional Amounts Available | | Financial instruments | | Cash Collateral pledged (b) | | Net amounts |
| (dollars in thousands) |
| As of December 31, 2022 | | | | | | | | | | | | | |
| Securities borrowed | $ | 1,298,056 | | | $ | — | | | $ | 1,298,056 | | | $ | — | | | $ | 1,244,834 | | | $ | — | | | $ | 53,222 | |
| Securities loaned | 1,199,838 | | | — | | | 1,199,838 | | | — | | | 1,199,838 | | | — | | | — | |
| Securities purchased under agreements to resell | 121,718 | | | — | | | 121,718 | | | — | | | 120,953 | | | — | | | 765 | |
| Securities sold under agreements to repurchase | 133,130 | | | — | | | 133,130 | | | — | | | 133,130 | | | — | | | — | |
| | | | | | | | | | | | | |
| As of December 31, 2021 | | | | | | | | | | | | | |
| Securities borrowed | 1,704,603 | | | — | | | 1,704,603 | | | — | | | 1,652,007 | | | — | | | 52,596 | |
| Securities loaned | 1,586,572 | | | — | | | 1,586,572 | | | — | | | 1,586,572 | | | — | | | — | |
| | | | | | | | | | | | | |
| Securities sold under agreements to repurchase | $ | 63,469 | | | $ | — | | | $ | 63,469 | | | $ | — | | | $ | 63,469 | | | $ | — | | | $ | — | |
F- 37(a)Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset on the Consolidated Statements of Financial Condition | | |
| | Gross amounts recognized | | Gross amounts offset on the Consolidated Statements of Financial Condition (a) | | Net amounts included on the Consolidated Statements of Financial Condition | | Additional Amounts Available | | Financial instruments | | Cash Collateral pledged (b) | | Net amounts |
| | (dollars in thousands) |
| As of December 31, 2017 | | | | | | | | | | | | | |
| Securities borrowed | $ | 443,148 |
| | $ | — |
| | $ | 443,148 |
| | $ | — |
| | $ | 414,778 |
| | $ | — |
| | $ | 28,370 |
|
| Securities loaned | 456,831 |
| | — |
| | 456,831 |
| | — |
| | 439,228 |
| | — |
| | 17,603 |
|
| |
(a) | Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred. |
| |
(b) | Includes the amount of cash collateral held/posted. |
The following tables present gross obligations for securities loaned transactionsand securities sold under agreements to repurchase by remaining contractual maturity and class of collateral pledged as of December 31, 2017:2022 and 2021:
|
| | | | | | | | | | | | | | | | | | | |
| | Open and Overnight | | Up to 30 days | | 31 - 90 days | | Greater than 90 days | | Total |
| | (dollars in thousands) |
| As of December 31, 2017 | | | | | | | | | |
| Equities | $ | 456,831 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 456,831 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Open and Overnight | | Up to 30 days | | 31 - 90 days | | Greater than 90 days | | Total |
| (dollars in thousands) |
| As of December 31, 2022 | | | | | | | | | |
| Securities loaned | | | | | | | | | |
| Common stock | $ | 992,173 | | | $ | — | | | $ | — | | | $ | — | | | $ | 992,173 | |
| Corporate bonds | 207,665 | | | — | | | — | | | — | | | 207,665 | |
| Securities purchased under agreements to resell | | | | | | | | | |
| | | | | | | | | |
| Corporate bonds | 121,718 | | | — | | | — | | | — | | | 121,718 | |
| Securities sold under agreements to repurchase | | | | | | | | | |
| | | | | | | | | |
| Corporate bonds | 72,474 | | | 60,656 | | | — | | | — | | | 133,130 | |
| | | | | | | | | |
| As of December 31, 2021 | | | | | | | | | |
| Securities loaned | | | | | | | | | |
| Common stock | 1,570,835 | | | — | | | — | | | — | | | 1,570,835 | |
| Corporate bonds | 15,737 | | | — | | | — | | | — | | | 15,737 | |
| Securities sold under agreements to repurchase | | | | | | | | | |
| Common stock | $ | — | | | $ | 20,906 | | | $ | 42,563 | | | $ | — | | | $ | 63,469 | |
| | | | | | | | | |
Variable Interest Entities
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The total assets and liabilities of the variable interest entities for which the Company has concluded that it holds a variable interest, but for which it is not the primary beneficiary, are $5.2$8.9 billion and $445.6$444.5 million as of December 31, 20172022 and $5.3$9.7 billion and $997.3$744.5 million as of December 31, 2016,2021, respectively. In addition,The carrying value of the maximumCompany's exposure relating to loss for these variable interest entities as of December 31, 20172022 was $471.3$137.0 million, and as of December 31, 20162021 was $508.1$165.5 million, all of which is included in other investments, at fair value in the accompanying consolidated statements of financial condition. TheAdditionally, the Company's maximum exposure to loss primarily relates tofor the Consolidated Feeder Funds' investment in their Unconsolidated Master Funds and the Company's investment in unconsolidated investment companies.
Securities owned, at fair value
Asvariable interest entities noted above as of December 31, 20172022 and 2016, securities owned, at fair2021, was $215.0 million and $233.6 million, respectively. The maximum exposure to loss often differs from the carrying value held by the Consolidated Funds consistedof exposure to loss of the following:variable interests. The maximum exposure to loss is dependent on the nature of the variable interests in the VIEs and is limited to the notional amounts of certain commitments and guarantees. |
| | | | | | | |
| | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Preferred stock | $ | 50,445 |
| | $ | 37,343 |
|
| Common stocks | 77,702 |
| | 28,474 |
|
| U.S. Government securities (a) | 34,201 |
| | 6,994 |
|
| Corporate bonds (b) | — |
| | 4,214 |
|
| Term Loan | — |
| | 2,209 |
|
| Warrants and rights | 3,568 |
| | 3 |
|
| | $ | 165,916 |
| | $ | 79,237 |
|
| |
(a) | As of December 31, 2017, maturities ranged from January 2018 2017 to April 2022 and interest rates ranged from 0% to 5.75%. As of December 31, 2016, the maturity was March 2017 with an interest rate of 0%. |
| |
(b) | As of December 31, 2016, maturities ranged from October 2017 to June 2038 and interest rates ranged from 0% and 14.37%. |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Securities sold, not yet purchased, at fair value
As of December 31, 2017, there were no securities sold, not yet purchased, at fair value. As of December 31, 2016, securities sold, not yet purchased, at fair value, held by theb. Consolidated Funds consisted of the following: |
| | | |
| | As of December 31, 2016 |
| | (dollars in thousands) |
| Corporate bonds (a) | $ | 672 |
|
| Common stocks | 211 |
|
| | $ | 883 |
|
| |
(a) | As of December 31, 2016, maturities ranged from September 2019 to September 2023 and interest rates ranged from 4.38% to 9.25%. |
Receivable on derivative contracts
As of December 31, 2017 and 2016, receivable on derivative contracts, at fair value, held by the Consolidated Funds are comprised of:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Currency forwards | $ | 524 |
| | $ | 18 |
|
| Equity swaps | 1,754 |
| | 731 |
|
| Options | 242 |
| | 144 |
|
| | $ | 2,520 |
| | $ | 893 |
|
Payable for derivative contracts
As of December 31, 2017 and 2016, payable for derivative contracts, at fair value, held by the Consolidated Funds are comprised of:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Currency forwards | $ | 11 |
| | $ | 10 |
|
| Equity swaps | 7,042 |
| | 495 |
|
| Options | 77 |
| | 67 |
|
| | $ | 7,130 |
| | $ | 572 |
|
Other investments, at fair value
Investments in Portfolio Funds,portfolio funds, at fair value
As of December 31, 20172022 and 2016,2021, investments in Portfolio Funds,portfolio funds, at fair value, included the following: |
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Investments of Enterprise LP | $ | 87,221 |
| | $ | 114,159 |
|
| Investments of Merger Fund | 286,890 |
| | 281,572 |
|
| Investments of Caerus LP | — |
| | 5,734 |
|
| | $ | 374,111 |
| | $ | 401,465 |
|
| | | | | | | | | | | |
| | | |
| As of December 31, |
| 2022 | | 2021 |
| (dollars in thousands) |
| Investments of Enterprise LP | $ | 49,832 | | | $ | 99,067 | |
| | | |
| | | |
| | | |
| $ | 49,832 | | | $ | 99,067 | |
Consolidated portfolio fund investments of Enterprise LP
Enterprise LP operates under a “master-feeder” structure, whereby Enterprise Master's shareholders are Enterprise LP and RCG II Intermediate Fund, L.P. The consolidated investments in Portfolio Funds include Enterprise LP's investment of $87.2 million and $114.2 million in Enterprise Master as of December 31, 2017 and 2016, respectively. On May 12, 2010, the
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Company announced its intention to close Enterprise Master. Prior to this announcement, strategies utilized byits master fund, Ramius Enterprise Master included merger arbitrage and activist investing, investments in distressed securities, convertible hedging, capitalFund Ltd ("Enterprise Master"). Enterprise LP operated under a "master-feeder" structure arbitrage, equity market neutral, investments in private placements of convertible securities, proprietary mortgages, structured credit investments, investments in mortgage backed securities and other structured finance products, investments in real estate and real property interests, structured private placements and other relative value strategies.up until January 1, 2019, when Enterprise Master had broad investment powers and maximum flexibility in seeking to achievedistributed its investment objective. Enterprise Master was permitted to invest in equity securities, debt instruments, options, futures, swaps, credit default swaps and other derivatives. As Enterprise Master winds down its positions, it will return capital to its investors. There are no unfunded commitments at Enterprise LP.
Consolidated portfolio fund investmentseach feeder and was liquidated. As of Merger Fund
The Merger Fund operates under a “master-feeder” structure, whereby Ramius Merger Master Ltd.'s ("Merger Master") shareholders are Merger FundDecember 31, 2022 and Ramius Merger Fund Ltd. The2021, the consolidated investments in Portfolio Fundsportfolio funds include Merger Fund'sEnterprise LP's investment of $286.9 million and $281.6 million in Merger Master as of December 31, 2017 and 2016, respectively. The Merger Master’s investment objectiveRCG Special Opportunities Fund, Ltd which is to achieve consistent absolute returns while emphasizing the preservation of investor capital. The Merger Master seeks to achieve these objectives by taking a fundamental, research-driven approach to investing, primarily in the securities of issuers engaged in, or subject to, announced (or unannounced but otherwise anticipated) extraordinary corporate transactions, which may include, but are not limited to, mergers, acquisitions, leveraged buyouts, tender offers, hostile takeover bids, sale processes, exchange offers, and recapitalizations. Merger Masterportfolio fund that invests in the securitiesa limited number of one or more issuers engaged in or subject to such extraordinary corporate transactions. Merger Master typically seeks to derive a profit by realizing the price differential, or “spread,” between the market price of securities purchased or sold short and the market price or value of securities realized in connection with the completion or termination of the extraordinary corporate transaction, or in connection with the adjustment of market prices in anticipation thereof, while seeking to minimize the market risk associated with the aforementioned investment activities. Merger Master will, depending on market conditions, generally focus the majority of its investment program on announced transactions. If the investment manager of Merger Master considers it necessary, it may either alone orprivate equity investments directly as part of a group, also initiate shareholder actions seeking to maximize value. Such shareholder actions may include, but are not limited to, re-orienting management’s focus or initiating the sale of the company (or one or more of its divisions) to a third party. There are no unfunded commitments at Merger Fund.
Consolidatedwell as through affiliated portfolio fund investments of Caerus LP
Prior to Caerus LP being liquidated on March 1, 2017, it operated under a “master-feeder” structure, whereby Caerus Select Master Fund Ltd.'s ("Caerus Master") shareholder was Caerus LP. The consolidated investments in Portfolio Funds included Caerus LP's investment of $5.7 million in Caerus Master as of December 31, 2016. Caerus Master’s investment objective was to achieve superior risk-adjusted rates of return that bear little correlation to the overall market. Caerus Master sought to achieve this objective by utilizing a long/short investment strategy, investing primarily in equities and options on equities that trade on major global market exchanges. Caerus Master focused on investments in the global consumer sector, including, but not limited to, securities in sub-sectors such as retail, apparel and footwear, restaurants, gaming and lodging, consumer products, food and beverage, consumer technology, media, transportation and homebuilding and building materials.funds.
Indirect Concentration of the Underlying Investments Held by Consolidated Funds
From time to time, either directly held by the Company, indirectly through the Company's consolidated entities or indirectly through its investments in the Consolidated Funds, the Company may maintain exposure to a particular issue or issuer (both long and/or short) which may account for 5% or more of the Company's equity. Based on information that is available to the Company as of December 31, 20172022 and 2016,2021, the Company assessed whether or not its interests in an issuer for which the Company's pro-rata share exceeds 5% of the Company's equity. There was onewere two indirect concentrationconcentrations that exceeded 5% of the Company's equity as of December 31, 20172022 and noneone that exceeded 5% of the Company's equity at December 31, 2016.2021.
Through its investments in a Consolidated Fund and combined with direct Company investments, the Company maintained exposure to a particular investmentLinkem S.p.A which accounted for 5% or more of the Company's equity as of both December 31, 2021 and December 31, 2022. As of December 31, 2022, through its investments in a consolidated special purpose vehicle, the Company maintained exposure to Polysign, Inc which accounted for 5% or more of the Company's equity. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment's percentage of the Company's stockholders' equity |
| Issuer | | Security Type | | Country | | Industry | | Percentage of Stockholders' Equity | | Market Value |
| | | | | | | | | | | (dollars in thousands) |
| | | | | | | | | | | |
| As of December 31, 2022 | Polysign, Inc | | Preferred - Series B and C | | United States of America | | Financial Technology | | 5.37 | % | | $ | 57,165 | |
| As of December 31, 2021 | Linkem S.p.A. | | Equity and warrants | | Italy | | Wireless Broadband | | 8.22 | % | | $ | 83,537 | |
|
| | | | | | | | | | | | | |
| Investment's percentage of the Company's equity at December 31, 2017 |
| Issuer | | Security Type | | Country | | Industry | | Percentage of Equity | | Market Value |
| | | | | | | | | | | (dollars in thousands) |
| Linkem | | Equity | | Italy | | Wireless Broadband | | 7.52 | % | | $ | 56,271 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Underlying Investments of Unconsolidated Funds Held by Consolidated Funds
Enterprise Master and Merger Master
Enterprise LP's investment in Enterprise Master represents Enterprise LP's proportionate share of Enterprise Master's net assets; as a result, the investment balances of Enterprise Master reflected below may exceed the net investment which Enterprise LP has recorded. Merger Fund's investment in Merger Master represents Merger Fund's proportionate share of Merger Master's net assets; as a result, the investment balances of Merger Master reflected below may exceed the net investment which Merger Fund has recorded. The following tables present summarized investment information for the underlying investments and derivatives held by Enterprise Master and Merger Master as of December 31, 2017 and 2016:
Securities owned by Enterprise Master, at fair value |
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Preferred stock | $ | — |
| | $ | 1,581 |
|
| Common stock | 608 |
| | 835 |
|
| | $ | 608 |
| | $ | 2,416 |
|
Portfolio Funds, owned by Enterprise Master, at fair value
|
| | | | | | | | | |
| | | | As of December 31, |
| | | | 2017 | | 2016 |
| | Strategy | | (dollars in thousands) |
| RCG Special Opportunities Fund, Ltd* | Multi-Strategy | | $ | 97,345 |
| | $ | 101,832 |
|
| RCG Longview Equity Fund, LP* | Real Estate | | 1,266 |
| | 4,744 |
|
| RCG Longview Debt Fund IV, LP* | Real Estate | | 99 |
| | 1,637 |
|
| RCG Longview II, LP* | Real Estate | | 229 |
| | 836 |
|
| RCG Renergys, LLC* | Energy | | — |
| | 1 |
|
| Other Private Investments | Various | | 937 |
| | 8,682 |
|
| Other Real Estate Investments * | Real Estate | | — |
| | 295 |
|
| | | | $ | 99,876 |
| | $ | 118,027 |
|
| |
* | Affiliates of the Company. |
Merger Master
As of December 31, 2017, Merger Master held common stock, securities owned, of $483.2 million and common stock, sold not yet purchased, of $171.2 million. As of December 31, 2016, Merger Master held common stock, securities owned, of $835.7 million and common stock, sold not yet purchased, of $395.5 million, respectively.
Receivable on derivative contracts, at fair value, owned by Merger Master |
| | | | | | | |
| | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| Description | (dollars in thousands) |
| Options | $ | 108,063 |
| | $ | 4,264 |
|
| Equity swaps | 14,488 |
| | 255 |
|
| | $ | 122,551 |
| | $ | 4,519 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Payable for derivative contracts, at fair value, owned by Merger Master
|
| | | | | | | |
| | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| Description | (dollars in thousands) |
| Options | $ | 1,256 |
| | $ | 2,285 |
|
| Currency forwards | 213 |
| | — |
|
| Equity swaps | 1,249 |
| | 123 |
|
| | $ | 2,718 |
| | $ | 2,408 |
|
Caerus Master
As of December 31, 2016, Caerus Master held common stock, of $3.2 million and common stock, sold not yet purchased, of $2.6 million.
7. Fair Value Measurements for Operating Entities and Consolidated Funds
The following table presents the assets and liabilities that are measured at fair value on a recurring basis on the accompanying consolidated statements of financial condition by caption and by level within the valuation hierarchy as of December 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets at Fair Value as of December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Netting (c) | | Total |
| | | | (dollars in thousands) | | | | |
| Operating Entities | | | | | | | | | |
| Securities owned, at fair value | | | | | | | | | |
| Government bonds | $ | 113,529 | | | $ | — | | | $ | — | | | $ | — | | | $ | 113,529 | |
| Preferred stock | 7 | | | 3,496 | | | 193,304 | | | — | | | 196,807 | |
| Common stock | 1,775,689 | | | 1,566 | | | 24,827 | | | — | | | 1,802,082 | |
| Convertible bonds | — | | | 1,511 | | | 11,968 | | | — | | | 13,479 | |
| Corporate bonds | — | | | 215,907 | | | 3,409 | | | — | | | 219,316 | |
| Trade claims | — | | | — | | | 5,440 | | | — | | | 5,440 | |
| Term loan | — | | | 2,502 | | | 9,966 | | | — | | | 12,468 | |
| Warrants and rights | 32,114 | | | — | | | 26,937 | | | — | | | 59,051 | |
| Private investments | — | | | 884 | | | 1,138 | | | — | | | 2,022 | |
| Receivable on derivative contracts, at fair value | | | | | | | | | |
| | | | | | | | | |
| Currency forwards | — | | | 44 | | | — | | | — | | | 44 | |
| Equity swaps | — | | | 644,033 | | | 879 | | | (181,650) | | | 463,262 | |
| Options | 30,781 | | | 461 | | | 143 | | | — | | | 31,385 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| $ | 1,952,120 | | | $ | 870,404 | | | $ | 278,011 | | | $ | (181,650) | | | $ | 2,918,885 | |
| Portfolio funds measured at net asset value (a) | | | | | | | | | 132,285 | |
| Consolidated Funds' portfolio funds measured at net asset value (a) | | | | | | | | | 49,832 | |
| Carried interest (a) | | | | | | | | | 65,892 | |
| Equity method investments (a) | | | | | | | | | 27,006 | |
| Total investments | | | | | | | | | $ | 3,193,900 | |
F- 42 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Liabilities at Fair Value as of December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Netting (c) | | Total |
| | (dollars in thousands) |
| Operating Entities | | | | | | | | | |
| Securities sold, not yet purchased, at fair value | | | | | | | | | |
| | | | | | | | | |
| Common stock | $ | 910,458 | | | $ | — | | | $ | — | | | $ | — | | | $ | 910,458 | |
| Corporate bonds | — | | | 31 | | | — | | | — | | | 31 | |
| Preferred stock | 4 | | | 3,081 | | | — | | | — | | | 3,085 | |
| Warrants and rights | — | | | — | | | — | | | — | | | — | |
| Payable for derivative contracts, at fair value | | | | | | | | | |
| | | | | | | | | |
| Currency forwards | — | | | 2,915 | | | — | | | — | | | 2,915 | |
| Equity swaps | — | | | 218,747 | | | — | | | (161,681) | | | 57,066 | |
| Interest rate swaps | — | | | 218 | | | — | | | — | | | 218 | |
| Options | 8,746 | | | — | | | 720 | | | — | | | 9,466 | |
| Accounts payable, accrued expenses and other liabilities | | | | | | | | | |
| Contingent consideration liability (b) | — | | | — | | | 38,648 | | | — | | | 38,648 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| $ | 919,208 | | | $ | 224,992 | | | $ | 39,368 | | | $ | (161,681) | | | $ | 1,021,887 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | |
| | Assets at Fair Value as of December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (dollars in thousands) | | |
| Operating Entities | | | | | | | |
| Securities owned | | | | | | | |
| US Government securities | $ | 2,807 |
| | $ | — |
| | $ | — |
| | $ | 2,807 |
|
| Preferred stock | 571 |
| | 918 |
| | 8,115 |
| | 9,604 |
|
| Common stocks | 627,011 |
| | 5,484 |
| | 7,570 |
| | 640,065 |
|
| Convertible bonds | — |
| | — |
| | 282 |
| | 282 |
|
| Corporate bonds | — |
| | 4,909 |
| | — |
| | 4,909 |
|
| Trade claims | — |
| | — |
| | 5,950 |
| | 5,950 |
|
| Warrants and rights | 7,087 |
| | — |
| | 2,517 |
| | 9,604 |
|
| Receivable on derivative contracts, at fair value | | | | | | |
|
|
| Futures | 58 |
| | — |
| | — |
| | 58 |
|
| Currency forwards | — |
| | 5 |
| | — |
| | 5 |
|
| Swaps | — |
| | 10,942 |
| | — |
| | 10,942 |
|
| Options | 56,717 |
| | — |
| | 1,455 |
| | 58,172 |
|
| Other investments | | | | | | | |
| Lehman claim | — |
| | — |
| | 301 |
| | 301 |
|
| Consolidated Funds | | | | | | | |
| Securities owned | | | | | | | |
| US Government securities | 30,552 |
| | 3,649 |
| | — |
| | 34,201 |
|
| Preferred stock | — |
| | — |
| | 50,445 |
| | 50,445 |
|
| Common stocks | 77,652 |
| | — |
| | 50 |
| | 77,702 |
|
| Warrants and rights | — |
| | — |
| | 3,568 |
| | 3,568 |
|
| Receivable on derivative contracts, at fair value | | | | | | | |
| Currency forwards | — |
| | 524 |
| | — |
| | 524 |
|
| Equity swaps | — |
| | 1,754 |
| | — |
| | 1,754 |
|
| Options | 242 |
| | — |
| | — |
| | 242 |
|
| | $ | 802,697 |
| | $ | 28,185 |
| | $ | 80,253 |
| | $ | 911,135 |
|
| Percentage of total assets measured at fair value on a recurring basis | 88.1 | % | | 3.1 | % | | 8.8 | % | | |
| Portfolio funds measured at net asset value (a) | | | | | | | 100,148 |
|
| Consolidated funds' portfolio funds measured at net asset value (a) | | | | | | | 374,111 |
|
| Equity method investments | | | | | | | 41,099 |
|
| Total investments | | | | | | | $ | 1,426,493 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | |
| | Liabilities at Fair Value as of December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (dollars in thousands) |
| Operating Entities | | | | | | | |
| Securities sold, not yet purchased | | | | | | | |
| Common stocks | $ | 342,328 |
| | $ | — |
| | $ | — |
| | $ | 342,328 |
|
| Corporate bonds | — |
| | 122 |
| | — |
| | 122 |
|
| Preferred stock | 77 |
| | — |
| | — |
| | 77 |
|
| Warrants and rights | — |
| | — |
| | — |
| | — |
|
| Payable for derivative contracts, at fair value | | | | | | | |
| Futures | 242 |
| | — |
| | — |
| | 242 |
|
| Currency forwards | — |
| | 874 |
| | — |
| | 874 |
|
| Swaps | — |
| | 71 |
| | — |
| | 71 |
|
| Options | 19,162 |
| | — |
| | 22,401 |
| | 41,563 |
|
| Accounts payable, accrued expenses and other liabilities |
|
| |
|
| |
|
| | |
| Contingent consideration liability (b) | — |
| | — |
| | 3,440 |
| | 3,440 |
|
| Consolidated Funds | | | | | | | |
| Payable for derivative contracts, at fair value | | | | | | | |
| Currency forwards | — |
| | 11 |
| | — |
| | 11 |
|
| Options | 77 |
| | — |
| | — |
| | 77 |
|
| Equity swaps | — |
| | 7,042 |
| | — |
| | 7,042 |
|
| | $ | 361,886 |
| | $ | 8,120 |
| | $ | 25,841 |
| | $ | 395,847 |
|
| Percentage of total liabilities measured at fair value | 91.4 | % | | 2.1 | % | | 6.5 | % | | |
(a) In accordance with US GAAP, certain investments thatportfolio funds are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient haveare not been classified in the fair value hierarchy. The fair value amountsCarried interest and equity method investments presented in thisthe table above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statement of financial condition.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
(b) In accordance with the terms of the purchase agreements for acquisitions that closed during the third andfirst quarter of 2019 (the acquisition of Quarton International AG "Quarton"), the fourth quarter of 20152020 (the acquisition of MHT Partners, LP "MHT") and the secondfourth quarter of 2016,2021 (the acquisition of Portico Capital Advisors "Portico"), the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended through December 2018, December 2020, and June 2018, respectively. The31, 2024. For all acquisitions the Company estimated the contingent consideration liabilityliabilities using the income approach (discounted cash flow method)a combination of Monte Carlo and Discounted Cash Flow methods which requiresrequire the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of December 31, 2017for the Quarton acquisition can range from $0.1$12.5 million to $15.0$14.9 million. The undiscounted amounts for the MHT acquisition have no minimum or maximum as it is calculated based on revenue. The undiscounted amounts for the Portico acquisition can range from zero to $58.0 million.
(c) Derivatives are reported on a net basis, by counterparty, when a legal right of offset exists under an enforceable netting agreement as well as net of cash collateral received or posted under enforceable credit support agreements. See Note 2f for further information on offsetting of derivative financial instruments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets at Fair Value as of December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Netting (c) | | Total |
| | | | (dollars in thousands) | | | | |
| Operating Entities | | | | | | | | | |
| Securities owned, at fair value | | | | | | | | | |
| Government bonds | $ | 16,002 | | | $ | — | | | $ | — | | | $ | — | | | $ | 16,002 | |
| Preferred stock | 12,299 | | | — | | | 125,458 | | | — | | | 137,757 | |
| Common stock | 2,396,041 | | | 121 | | | 29,831 | | | — | | | 2,425,993 | |
| Convertible bonds | — | | | — | | | 5,250 | | | — | | | 5,250 | |
| Corporate bonds | — | | | 19,049 | | | 2,419 | | | — | | | 21,468 | |
| Trade claims | — | | | — | | | 2,988 | | | — | | | 2,988 | |
| Term loan | — | | | 4,121 | | | — | | | — | | | 4,121 | |
| Private investments | — | | | — | | | 704 | | | — | | | 704 | |
| Warrants and rights | 31,056 | | | — | | | 15,403 | | | — | | | 46,459 | |
| | | | | | | | | |
| Receivable on derivative contracts, at fair value | | | | | | | | | |
| | | | | | | | | |
| Currency forwards | — | | | 80 | | | — | | | — | | | 80 | |
| Equity swaps | — | | | 305,370 | | | — | | | (81,742) | | | 223,628 | |
| Options | 60,985 | | | — | | | 234 | | | — | | | 61,219 | |
| Interest rate swap | — | | | 1,208 | | | — | | | — | | | 1,208 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| $ | 2,516,383 | | | $ | 329,949 | | | $ | 182,287 | | | $ | (81,742) | | | $ | 2,946,877 | |
| Portfolio funds measured at net asset value (a) | | | | | | | | | 137,986 | |
| Consolidated Funds' portfolio funds measured at net asset value (a) | | | | | | | | | 99,067 | |
| Carried interest (a) | | | | | | | | | 88,925 | |
| Equity method investments (a) | | | | | | | | | 47,200 | |
| Total investments | | | | | | | | | $ | 3,320,055 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | |
| | Assets at Fair Value as of December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (dollars in thousands) | | |
| Operating Entities | | | | | | | |
| Securities owned | | | | | | | |
| US Government securities | $ | 3,780 |
| | $ | — |
| | $ | — |
| | $ | 3,780 |
|
| Preferred stock | — |
| | — |
| | 15,811 |
| | 15,811 |
|
| Common stocks | 658,179 |
| | 1,355 |
| | 10,121 |
| | 669,655 |
|
| Convertible bonds | — |
| | — |
| | 250 |
| | 250 |
|
| Corporate bonds | — |
| | 2,477 |
| | — |
| | 2,477 |
|
| Trade claims | — |
| | — |
| | 562 |
| | 562 |
|
| Warrants and rights | 4,616 |
| | — |
| | 3,719 |
| | 8,335 |
|
| Mutual funds | 6 |
| | — |
| | — |
| | 6 |
|
| Receivable on derivative contracts, at fair value | | | | | | | |
| Futures | 104 |
| | — |
| | — |
| | 104 |
|
| Currency forwards | — |
| | 592 |
| | — |
| | 592 |
|
| Swaps | — |
| | 468 |
| | — |
| | 468 |
|
| Options | 6,662 |
| | 322 |
| | 14,753 |
| | 21,737 |
|
| Other investments | | | | | | | |
| Lehman claim | — |
| | — |
| | 265 |
| | 265 |
|
| Consolidated Funds | | | | | | | |
| Securities owned | | | | | | | |
| US Government securities | 6,994 |
| | — |
| | — |
| | 6,994 |
|
| Preferred stock | — |
| | 415 |
| | 36,928 |
| | 37,343 |
|
| Common stocks | 19,467 |
| | 8,712 |
| | 295 |
| | 28,474 |
|
| Corporate bonds | — |
| | 4,214 |
| | — |
| | 4,214 |
|
| Warrants and rights | — |
| | — |
| | 3 |
| | 3 |
|
| Term loan | — |
| | 1,552 |
| | 657 |
| | 2,209 |
|
| Receivable on derivative contracts, at fair value | | | | | | | |
| Currency forwards | — |
| | 18 |
| | — |
| | 18 |
|
| Equity swaps | — |
| | 731 |
| | — |
| | 731 |
|
| Options | 132 |
| | 12 |
| | — |
| | 144 |
|
| | $ | 699,940 |
| | $ | 20,868 |
| | $ | 83,364 |
| | $ | 804,172 |
|
| Percentage of total assets measured at fair value on a recurring basis | 87.0 | % | | 2.6 | % | | 10.4 | % | | |
| Portfolio funds measured at net asset value (a) | | | | | | | 120,023 |
|
| Consolidated funds' portfolio funds measured at net asset value (a) | | | | | | | 401,465 |
|
| Equity method investments | | | | | | | 36,991 |
|
| Total investments | | | | | | | $ | 1,362,651 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | Liabilities at Fair Value as of December 31, 2021 |
| | | | Level 1 | | Level 2 | | Level 3 | | Netting (c) | | Total |
| | | | (dollars in thousands) |
| Operating Entities | | Operating Entities | |
| Securities sold, not yet purchased, at fair value | | Securities sold, not yet purchased, at fair value | | | | | | | |
| | Common stock | | Common stock | $ | 1,192,396 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,192,396 | |
| Corporate bonds | | Corporate bonds | — | | | 37 | | | — | | | — | | | 37 | |
| Preferred stock | | Preferred stock | 9,009 | | | — | | | — | | | — | | | 9,009 | |
| Warrants and rights | | Warrants and rights | 6 | | | — | | | — | | | — | | | 6 | |
| Payable for derivative contracts, at fair value | | Payable for derivative contracts, at fair value | |
| Futures | | Futures | 266 | | | — | | | — | | | — | | | 266 | |
| Currency forwards | | Currency forwards | — | | | 1,346 | | | — | | | — | | | 1,346 | |
| Equity swaps | | Equity swaps | — | | | 114,689 | | | — | | | (92,330) | | | 22,359 | |
| Options | | Options | 32,773 | | | — | | | 3,419 | | | — | | | 36,192 | |
| Accounts payable, accrued expenses and other liabilities | | Accounts payable, accrued expenses and other liabilities | |
| Contingent consideration liability (b) | | Contingent consideration liability (b) | — | | | — | | | 62,223 | | | — | | | 62,223 | |
| | | | Liabilities at Fair Value as of December 31, 2016 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (dollars in thousands) | |
| Operating Entities | | | | | | | | |
| Securities sold, not yet purchased | | | | | | | | |
| Common stocks | $ | 263,460 |
| | $ | — |
| | $ | — |
| | $ | 263,460 |
| |
| Corporate bonds | — |
| | 2,591 |
| | — |
| | 2,591 |
| |
| Warrants and rights | 39 |
| | — |
| | — |
| | 39 |
| |
| Payable for derivative contracts, at fair value | | | | | | | | |
| Futures | 642 |
| | — |
| | — |
| | 642 |
| |
| Swaps | — |
| | 181 |
| | — |
| | 181 |
| |
| Options | 5,186 |
| | — |
| | 14,753 |
| | 19,939 |
| |
| Accounts payable, accrued expenses and other liabilities | | | | | | | | |
| Contingent consideration liability (b) | — |
| | — |
| | 5,997 |
| | 5,997 |
| |
| Consolidated Funds | | | | | | | | |
| Securities sold, not yet purchased | | | | | | | | |
| Common stocks | 211 |
| | — |
| | — |
| | 211 |
| |
| Corporate bonds | — |
| | 672 |
| | — |
| | 672 |
| |
| Payable for derivative contracts, at fair value | | | | | | | | |
| Currency forwards | — |
| | 10 |
| | — |
| | 10 |
| |
| Options | 67 |
| | — |
| | — |
| | 67 |
| |
| Equity swaps | — |
| | 495 |
| | — |
| | 495 |
| |
| | $ | 269,605 |
| | $ | 3,949 |
| | $ | 20,750 |
| | $ | 294,304 |
| |
| Percentage of total liabilities measured at fair value | 91.6 | % | | 1.3 | % | | 7.1 | % | | | |
| | | | $ | 1,234,450 | | | $ | 116,072 | | | $ | 65,642 | | | $ | (92,330) | | | $ | 1,323,834 | |
|
(a) In accordance with US GAAP, certain investments thatportfolio funds are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient haveare not been classified in the fair value hierarchy. The fair value amountsCarried interest and equity method investments presented in thisthe table above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statement of financial condition.
(b) In accordance with the terms of the purchase agreements for acquisitions that closed during 2012 and the third andfirst quarter of 2019 (the Quarton acquisition), the fourth quarter of 2015,2020 (the MHT acquisition) and the fourth quarter of 2021 (the Portico acquisition), the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended through December 2018, and December 2020, respectively. The31, 2024. For all acquisitions the Company estimated the contingent consideration liabilityliabilities using the income approach (discounted cash flow method)a combination of Monte Carlo and Discounted Cash Flow methods which requiresrequire the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of December 31, 2016for the Quarton acquisition can range from $0.1$10.1 million to $15.1$25.0 million. The undiscounted amounts for the MHT acquisition have no minimum or maximum as it is calculated based on revenue. The undiscounted amounts for the Portico acquisition can range from zero to $58.0 million.
(c) Derivatives are reported on a net basis, by counterparty, when a legal right of offset exists under an enforceable netting agreement as well as net of cash collateral received or posted under enforceable credit support agreements. See Note 2f for further information on offsetting of derivative financial instruments.
The following table includes a roll forward of the amounts for the year ended December 31, 20172022 and 20162021 for financial instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | |
| Balance at December 31, 2021 | | Transfers in | | Transfers out | | Purchases/(covers) | | (Sales)/shorts | | Realized and Unrealized gains/losses | | Balance at December 31, 2022 | | Change in unrealized gains/losses relating to instruments still held (1) | |
| (dollars in thousands) | | | |
| Operating Entities | | | | | | | | | | | | | | | | |
| Preferred stock | $ | 125,458 | | | $ | — | | | $ | — | | | $ | 26,164 | | | $ | (1,347) | | | $ | 43,029 | | | $ | 193,304 | | | $ | 43,029 | | |
| Common stock | 29,831 | | | 893 | | (c) | — | | | 5,031 | | | (950) | | | (9,978) | | | 24,827 | | | (13,736) | | |
| Convertible bonds | 5,250 | | | — | | | — | | | 6,636 | | | — | | | 82 | | | 11,968 | | | — | | |
| Corporate bond | 2,419 | | | 1,082 | | (c) | — | | | 620 | | | (460) | | | (252) | | | 3,409 | | | 64 | | |
| Options, asset | 234 | | | — | | | — | | | — | | | — | | | (91) | | | 143 | | | (90) | | |
| Options, liability | 3,419 | | | — | | | — | | | — | | | — | | | (2,699) | | | 720 | | | (2,699) | | |
| Equity swap | — | | | — | | | — | | | — | | | — | | | 879 | | | 879 | | | 879 | | |
| Term loan | — | | | — | | | — | | | 9,700 | | | — | | | 266 | | | 9,966 | | | 267 | | |
| Warrants and rights | 15,403 | | | — | | | (719) | | (a)(c) | 2,274 | | | (1,212) | | | 11,191 | | | 26,937 | | | 14,614 | | |
| | | | | | | | | | | | | | | | |
| Trade claims | 2,988 | | | — | | | — | | | 4,304 | | | (647) | | | (1,205) | | | 5,440 | | | (1,561) | | |
| Private investments | 704 | | | — | | | — | | | 8,311 | | | (8,978) | | | 1,101 | | | 1,138 | | | 405 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Contingent consideration liability | 62,223 | | | — | | | — | | | — | | | (29,169) | | | 5,594 | | | 38,648 | | | 5,594 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Balance at December 31, 2016 | | Transfers in | | Transfers out | | Purchases/(covers) | | (Sales)/shorts | | Realized and Unrealized gains/losses | | Balance at December 31, 2017 | | Change in unrealized gains/losses relating to instruments still held (1) |
| | (dollars in thousands) | | |
| Operating Entities | | | | | | | | | | | | | | | |
| Preferred stock | $ | 15,811 |
| | $ | — |
| | $ | (25,098 | ) | (a) (f) | $ | 25,785 |
| | $ | (2,956 | ) | | $ | (5,427 | ) | | $ | 8,115 |
| | $ | 486 |
|
| Common stocks | 10,121 |
| | — |
| | — |
| | 2,670 |
| | (2,688 | ) | | (2,533 | ) | | 7,570 |
| | (412 | ) |
| Convertible bonds | 250 |
| | — |
| | — |
| | 282 |
| | — |
| | (250 | ) | | 282 |
| | — |
|
| Options, asset | 14,753 |
| | — |
| | — |
| | — |
| | — |
| | (13,298 | ) | | 1,455 |
| | (13,298 | ) |
| Options, liability | 14,753 |
| | — |
| | — |
| | — |
| | — |
| | 7,648 |
| | 22,401 |
| | 7,648 |
|
| Warrants and rights | 3,719 |
| | 2,173 |
| (b) (d) | — |
| | — |
| | (4,118 | ) | | 743 |
| | 2,517 |
| | 510 |
|
| Trade claims | 562 |
| | — |
| | — |
| | 5,865 |
| | (611 | ) | | 134 |
| | 5,950 |
| | 202 |
|
| Lehman claim | 265 |
| | — |
| | — |
| | — |
| | — |
| | 36 |
| | 301 |
| | 36 |
|
| Contingent consideration liability | 5,997 |
| | — |
| | — |
| | — |
| | (392 | ) | | (2,165 | ) | | 3,440 |
| | (2,165 | ) |
| Consolidated Funds | | | | | | | | | | | | | | | |
| Preferred stock | 36,928 |
| | 22,644 |
| (f) | (13,668 | ) | (a) | 8,437 |
| | (11,903 | ) | | 8,007 |
| | 50,445 |
| | 3,896 |
|
| Common stocks | 295 |
| | — |
| | — |
| | 526 |
| | (848 | ) | | 77 |
| | 50 |
| | — |
|
| Warrants and rights | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3,565 |
| | 3,568 |
| | 3,565 |
|
| Term Loan | 657 |
| | — |
| | — |
| | 202 |
| | (1,021 | ) | | 162 |
| | — |
| | — |
|
| | | | Year Ended December 31, 2016 | | Year Ended December 31, 2021 |
| | Balance at December 31, 2015 | | Transfers in | | Transfers out | | Purchases/(covers) | | (Sales)/shorts | | Realized and Unrealized gains/losses | | Balance at December 31, 2016 | | Change in unrealized gains/losses relating to instruments still held (1) | | Balance at December 31, 2020 | | Transfers in | | Transfers out | | Purchases/(covers) | | (Sales)/shorts | | Realized and Unrealized gains/losses | | Balance at December 31, 2021 | | Change in unrealized gains/losses relating to instruments still held (1) |
| | (dollars in thousands) | | (dollars in thousands) |
| Operating Entities | | | | | | | | | | | | | | | | Operating Entities | |
| Preferred stock | $ | 12,872 |
| | $ | — |
| | $ | (1,000 | ) | (a) | $ | 3,717 |
| | $ | (218 | ) | | $ | 440 |
| | $ | 15,811 |
| | $ | 34 |
| Preferred stock | $ | 59,967 | | | $ | — | | | $ | (1,531) | | (a) | $ | 78,389 | | | $ | (9,828) | | | $ | (1,539) | | | $ | 125,458 | | | $ | (2,570) | |
| Common stocks | 2,278 |
| | — |
| | — |
| | 7,099 |
| | (3,222 | ) | | 3,966 |
| | 10,121 |
| | 3,972 |
| |
| Common stock | | Common stock | 23,786 | | | 3,409 | | (b) | (7,357) | | (a)(d) | 16,245 | | | (13,582) | | | 7,330 | | | 29,831 | | | 5,517 | |
| Convertible bonds | 819 |
| | — |
| | — |
| | — |
| | (569 | ) | | — |
| | 250 |
| | — |
| Convertible bonds | 6,040 | | | — | | | (4,031) | | (d) | 11,802 | | | (11,159) | | | 2,598 | | | 5,250 | | | (975) | |
| | Corporate Bond, asset | | Corporate Bond, asset | 135 | | | — | | | — | | | 2,414 | | | (103) | | | (27) | | | 2,419 | | | 6 | |
| Options, asset | 18,194 |
| | — |
| | — |
| | — |
| | — |
| | (3,441 | ) | | 14,753 |
| | (3,441 | ) | Options, asset | 251 | | | — | | | — | | | — | | | — | | | (17) | | | 234 | | | (17) | |
| Options, liability | 18,194 |
| | — |
| | — |
| | — |
| | — |
| | (3,441 | ) | | 14,753 |
| | (3,441 | ) | Options, liability | 3,915 | | | — | | | — | | | — | | | — | | | (496) | | | 3,419 | | | (496) | |
| Warrants and rights | 2,572 |
| | — |
| | — |
| | 1,914 |
| | (817 | ) | | 50 |
| | 3,719 |
| | 79 |
| Warrants and rights | 6,547 | | | 3,806 | | (b) (c) | — | | | 10,706 | | | (1,610) | | | (4,046) | | | 15,403 | | | (2,812) | |
| Trade Claims | — |
| | 675 |
| (e) | — |
| | 289 |
| | (325 | ) | | (77 | ) | | 562 |
| | (111 | ) | |
| Lehman claim | 299 |
| | — |
| | — |
| | — |
| | — |
| | (34 | ) | | 265 |
| | (35 | ) | |
| | Term Loan | | Term Loan | 12,623 | | | — | | | — | | | 638 | | | (12,162) | | | (1,099) | | | — | | | — | |
| | Trade claim | | Trade claim | 8,713 | | | — | | | (2,145) | | (c) | 3,056 | | | (4,946) | | | (1,690) | | | 2,988 | | | (2,757) | |
| Private investments | | Private investments | 642 | | | 543 | | (c) | — | | | 707 | | | (1,462) | | | 274 | | | 704 | | | — | |
| Corporate bond, liability | | Corporate bond, liability | 704 | | | — | | | — | | | — | | | (399) | | | (305) | | | — | | | — | |
| Government bonds, liability | | Government bonds, liability | 1,500 | | | — | | | — | | | — | | | (1,569) | | | 69 | | | — | | | — | |
| Contingent consideration liability | 6,158 |
| | — |
| | — |
| | 2,397 |
| | (4,697 | ) | | 2,139 |
| | 5,997 |
| | — |
| Contingent consideration liability | 36,718 | | | — | | | — | | | 20,729 | | | (10,077) | | | 14,853 | | | 62,223 | | | 14,853 | |
| Consolidated Funds | | | | | | | | | | | | | | | | Consolidated Funds | |
| Preferred stock | 32,000 |
| | — |
| | (11,000 | ) | (a) | 13,483 |
| | — |
| | 2,445 |
| | 36,928 |
| | 2,445 |
| |
| Common Stock | — |
| | — |
| | — |
| | 314 |
| | — |
| | (19 | ) | | 295 |
| | (19 | ) | |
| | Common stock | | Common stock | 2,951 | | | (4,000) | | (b) | — | | | — | | | — | | | 1,049 | | | — | | | — | |
| Warrants and rights | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
| | 3 |
| Warrants and rights | 5,806 | | | — | | | — | | | — | | | (4,447) | | | (1,359) | | | — | | | — | |
| Term Loan | — |
| | — |
| | — |
| | 590 |
| | — |
| | 67 |
| | 657 |
| | 67 |
| |
|
(1) Unrealized gains/losses are reported in otherInvestment income (loss)- Securities principal transactions, net in the accompanying consolidated statements of operations.
(a) The investments were converted to common stock.
(b) The Company received warrants as part of a transaction.
(c) The entity in which the Company is invested completed an initial public offering.
(d) As part of(b) Fair market value derived using models and private transactions.
(c) The transfers between level 1, level 2 and level 3 are due to the preferred stock sale, the sellers received contingent value rights to be paidchange in the event certainavailability of observable inputs.
milestones are reached.
(e) The investment undertook a reorganization and subsequently is not traded in an active market.
(f)(d) The Company transferred investments to a consolidateddeconsolidated an investment fund.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying consolidated statements of operations.
Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above.
The Company recognizes all transfers and the related unrealized gain (loss) at the beginning of the reporting period.
Transfers between level 1 and 2 generally relate to whether the principal market for the security becomes active or inactive. Transfers between level 2 and 3 generally relate to whether significant relevant observable inputs are available for the fair value measurements or due to change in liquidity restrictions for the investments.
During the years ended December 31, 2017 and 2016, there were no transfers between level 1 and level 2 assets and liabilities.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The following table includes quantitative information as of December 31, 20172022 and 20162021 for financial instruments classified within level 3. The table below quantifies information about the significant unobservable inputs used in the fair value measurement of the Company's level 3 financial instruments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value December 31, 2022 | | Valuation Techniques | | Unobservable Inputs | | Range | | Weighted Average |
| Level 3 Assets | (dollars in thousands) | | | | | | | | |
| Common and preferred stocks | $ | 61,807 | | | Discounted cash flows Guideline companies | | Discount rate EBITDA Market Multiples | | 11.5% - 12.5% 3.7x - 9.5x | | 12% 7.55x |
| Options | 1,022 | | | Discounted cash flows Guideline companies Option pricing model | | Discount rate EBITDA Market Multiples Volatility | | 11.5% - 12.5% 7.25x - 7.75x 45% | | 12% 7.5x 45% |
| Trade claims | 1,876 | | | Discounted cash flows | | Discount rate | | 54% | | 54% |
| Warrants and rights | 10,351 | | | Discounted cash flows Guideline companies Option pricing model | | Discount rate EBITDA Market Multiples Volatility | | 11.5% - 12.5% 7.25x - 7.75x 45% - 170% | | 12.0% 7.5x 71.1% |
| Corporate, convertible bonds and term loan | 4,570 | | | Discounted cash flows Guideline companies | | Discount rate EBITDA Market Multiples | | 11.5% - 12.5% 7.25x - 7.75x | | 12% 7.5x |
| Other level 3 assets (a) | 198,385 | | | | | | | | | |
| Total level 3 assets | $ | 278,011 | | | | | | | | | |
| Level 3 Liabilities | | | | | | | | | |
| Options | 720 | | | Option pricing model | | Discount rate Volatility | | 4.01% 35% | | 4.01% 35% |
| Contingent consideration liability | 38,648 | | | Discounted cash flows Monte Carlo simulation | | Discount rate Volatility | | 6.8% - 18.5% 21% - 24% | | 11% 22% |
| | | | | | | | | |
| Total level 3 liabilities | $ | 39,368 | | | | | | | | | |
| | | | Quantitative Information about Level 3 Fair Value Measurements | | Quantitative Information about Level 3 Fair Value Measurements |
| | Fair Value at December 31, 2017 | | Valuation techniques | | Unobservable Inputs | | Range | | Fair Value at December 31, 2021 | | Valuation Techniques | | Unobservable Inputs | | Range | | Weighted Average |
| Level 3 Assets | (dollars in thousands) | | Level 3 Assets | (dollars in thousands) | | | | | | | | |
| Common and preferred stocks | $ | 5,642 |
| | Guideline companies/transaction price |
| Market multiples |
| 4.8x to 8.5x | Common and preferred stocks | $ | 76,491 | | | Discounted cash flows Guideline companies | | Discount rate EBITDA Market Multiples | | 12.5% - 20% 6.25x - 6.75x | | 13% 6.5x |
| Trade claims | 70 |
| | Discounted cash flows | | Discount rate | | 20% | Trade claims | 2,376 | | | Discounted cash flows | | Discount rate | | 40% | | 40% |
| Warrants and rights | 2,516 |
| | Model based Discounted cash flows | | Volatility Discount rate | | 61% 22% | Warrants and rights | 4,483 | | | Discounted cash flows Guideline companies Option pricing model | | Discount rate EBITDA Market Multiples Volatility | | 12.5% - 13.5% 6.25x - 6.75x 90% - 100% | | 13% 6.5x 95% |
| Options | 1,455 |
| | Option pricing models | | Volatility | | 28% | Options | 234 | | | Discounted cash flows Guideline companies | | Discount rate EBITDA Market Multiples | | 12.5% - 13.5% 6.25x - 6.75x | | 13% 6.5x |
| | Other level 3 assets (a) | 70,570 |
| | Other level 3 assets (a) | 98,703 | | |
| Total level 3 assets | 80,253 |
| | Total level 3 assets | $ | 182,287 | | |
| Level 3 Liabilities | | | Level 3 Liabilities | | |
| | Options | 22,401 |
| | Option pricing models | | Volatility | | 28% | Options | 3,419 | | | Option pricing model | | Volatility | | 35% | | 35% |
| Contingent consideration liability | 3,440 |
| | Discounted cash flows | | Projected cash flow and discount rate | | 8% - 23% (weighted average 22%) | Contingent consideration liability | 62,223 | | | Discounted cash flows Monte Carlo simulation | | Discount rate Volatility | | 7% - 15% 20% - 24% | | 12% 22% |
| | Total level 3 liabilities | $ | 25,841 |
| | Total level 3 liabilities | $ | 65,642 | | |
(a)The quantitative disclosures exclude financial instruments for which the determination of fair value is based on prices from recent transactions.
The Company has established valuation policies, procedures and internal control infrastructure over the fair value measurement of financial instruments. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approach utilized is applicable, reasonable and consistently applied. Where a pricing model is used to determine fair value, these control processes include reviews of the methodology and inputs for both reasonableness and applicability. Recently executed comparable transactions and other observable market data are used for the purposes of validating
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| | Fair Value at December 31, 2016 | | Valuation techniques | | Unobservable Inputs | | Range |
| Level 3 Assets | (dollars in thousands) |
| | | | | | |
| Common and preferred stocks | $ | 10,917 |
| | Guideline companies/transaction price Option pricing method, discounted cash flow | | Volatility Market multiples Discount rate | | 37% 0.8x to 9.3x 9.5% to 10% |
| Trade claims | 520 |
| | Discounted cash flows | | Market multiples Discount rate | | 6x 20% |
| Warrants and rights | 3,719 |
| | Model based | | Volatility | | 30% to 85% (weighted average 73%) |
| Options | 14,753 |
| | Option pricing models | | Volatility | | 40% |
| Other level 3 assets (a) | 53,455 |
| | | | | | |
| Total level 3 assets | 83,364 |
| | | | | | |
| Level 3 Liabilities | | | | | | | |
| Options | 14,753 |
| | Option pricing models | | Volatility | | 40% |
| Contingent consideration liability | 5,997 |
| | Discounted cash flows | | Projected cash flow and discount rate | | 8% - 25%
(weighted average 23%) |
| Total level 3 liabilities | $ | 20,750 |
| | | | | | |
| |
(a) | The quantitative disclosures exclude financial instruments for which the determination of fair value is based on prices from recent transactions. |
The Company has establishedboth the model and the assumptions used to calculate fair value. Independent of trading and valuation policiesfunctions, the Company’s valuation committee in conjunction with its price verification team, plays an important role in determining that financial instruments are appropriately valued and procedures and an internal control infrastructure over itsthat fair value measurement of financial instruments which includes ongoing oversight by the valuation committee as well as periodic audits performed by the Company's internal audit group.measurements are both reasonable and reliable. This is particularly important where prices or valuations that require inputs are less observable. The valuation committee is comprised of senior management, including non-investment professionals, who are responsible for overseeing and monitoring the pricing of the Company's investments, including the review of the results of the independent price verification process, approval of new trading asset classes and use of applicable pricing models and approaches.investments.
The US GAAP fair value leveling hierarchy is designated and monitored on an ongoing basis. In determining the designation, the Company takes into consideration a number of factors including the observability of inputs, liquidity of the investment and the significance of a particular input to the fair value measurement. Designations, models, pricing vendors, third party valuation providers and inputs used to derive fair market value are subject to review by the valuation committee and the internal audit group. The Company reviews its valuation policy guidelines on an ongoing basis and may adjust them in light of improved valuation metrics and models, the availability of reliable inputs and information, and prevailing market conditions. The Company regularly reviews a daily profit and loss report, as well as other periodic reports, and analyzes material changes from period-to-periodperiod to period in the valuation of its investments as part of its control procedures. The Company also performs back testing on a regular basis by comparing prices observed in executed transactions to previous valuations.
The fair market value for level 3 securities may be highly sensitive to the use of industry standardindustry-standard models, unobservable inputs and subjective assumptions. The degree of fair market value sensitivity is also contingent upon the subjective weight given to specific inputs and valuation metrics. The Company holds various equity and debt instruments where different weight may be applied to industry standardindustry-standard models representing standard valuation metrics such as: discounted cash flows, market multiples, comparative transactions, consideration for rounds of financing, capital rates, the premium ascribed to a controlling financial interest, selected equity volatilities, recovery rates and timing, and bid levels. Generally, changes in the weights ascribed to the various valuation metrics and the significant unobservable inputs in isolation may result in significantly lower or higher fair value measurements. Volatility levels for warrants and options are not readily observable and subject to interpretation. Changes in capital rates, discount rates and replacement costs could significantly increase or decrease the valuation of the real estate investments. The interrelationship between unobservable inputs may vary significantly amongst level 3 securities as they are generally highly idiosyncratic. Significant increases (decreases) in any of those inputs in isolation can result in a significantly lower (higher) fair value measurement.
Other financial assets and liabilities
The following table presents the carrying values and fair values, at December 31, 20172022 and 2016,2021, of financial assets and liabilities and information on their classification within the fair value hierarchy which are not measured at fair value on a recurring basis. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value see(see Note 3.2f). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 | | Fair Value Hierarchy |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | |
| | | | (dollars in thousands) | | | | |
| Financial Assets | | | | | | | | | |
| Operating companies | | | | | | | | | |
| Cash and cash equivalents | $ | 1,139,652 | | | $ | 1,139,652 | | | $ | 914,343 | | | $ | 914,343 | | | Level 1 |
| Cash collateral pledged | 122,687 | | | 122,687 | | | 47,494 | | | 47,494 | | | Level 2 |
| Segregated cash | 185,872 | | | 185,872 | | | 194,701 | | | 194,701 | | | Level 1 |
| Securities purchased under agreements to resell | 121,718 | | | 121,718 | | | — | | | — | | | Level 2 |
| Securities borrowed | 1,298,056 | | | 1,298,056 | | | 1,704,603 | | | 1,704,603 | | | Level 2 |
| Loans receivable | 5,254 | | | 5,254 | | (b) | 4,858 | | | 4,858 | | (b) | Level 3 |
| Consolidated Funds | | | | | | | | | |
| Cash and cash equivalents | 30 | | | 30 | | | 296 | | | 296 | | | Level 1 |
| Financial Liabilities | | | | | | | | | |
| Securities sold under agreements to repurchase | 133,130 | | | 133,130 | | | 63,469 | | | 63,469 | | | Level 2 |
| Securities loaned | 1,199,838 | | | 1,199,838 | | | 1,586,572 | | | 1,586,572 | | | Level 2 |
| | | | | | | | | |
| Notes payable and other debt | 620,161 | | (c) | 642,701 | | (a) | 623,371 | | (c) | 655,229 | | (a) | Level 2 |
(a)Notes payable and other debt are based on the last broker quote available.
(b)The fair market value of level 3 loans is calculated using discounted cash flows where applicable.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
(c)The carrying amount of the notes payable and other debt includes an unamortized discount and unamortized premium of $2.4 million and $0.2 million as of December 31, 2022, respectively, and unamortized discount and unamortized premium of $2.8 million and $0.3 million as of December 31, 2021, respectively.
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | Fair Value Hierarchy |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | |
| | | | (dollars in thousands) | | | | |
| Financial Assets | | | | | | | | | |
| Operating companies | | | | | | | | | |
| Cash and cash equivalents | $ | 130,052 |
| | $ | 130,052 |
| | $ | 110,990 |
| | $ | 110,990 |
| | Level 1 |
| Cash collateral pledged | 17,888 |
| | 17,888 |
| | 13,342 |
| | 13,342 |
| | Level 2 |
| Segregated cash | 116,268 |
| | 116,268 |
| | 1,024 |
| | 1,024 |
| | Level 1 |
| Securities borrowed | 443,148 |
| | 414,763 |
| | — |
| | — |
| | Level 2 |
| Loans receivable | 37,993 |
| | 37,993 |
| (d) | 31,088 |
| | 31,088 |
| (d) | Level 3 |
| Consolidated funds | | | | | | | | | |
| Cash and cash equivalents | 21,988 |
| | 21,988 |
| | 17,761 |
| | 17,761 |
| | Level 1 |
| Financial Liabilities | | |
|
| | | | | | |
| Securities loaned | 456,831 |
| | 440,162 |
| | — |
| | — |
| | Level 2 |
| Convertible debt | 141,502 |
| (a) | 172,709 |
| (b) | 130,029 |
| (a) | 149,545 |
| (b) | Level 2 |
| Notes payable and other debt | 173,458 |
| | 182,352 |
| (c) | 77,030 |
| | 80,817 |
| (c) | Level 2 |
| |
(a) | The carrying amount of the convertible debt includes an unamortized discount of $25.6 million and $17.8 million as of December 31, 2017 and 2016, respectively. |
| |
(b) | The convertible debt includes the conversion option and is based on the last broker quote available. |
| |
(c) | Notes payable and other debt are based on the last broker quote available. |
| |
(d) | The fair market value of level 3 loans is calculated using discounted cash flows. |
8. Deposits with Clearing Organizations, Brokers and Banks
Under the terms of agreements between the Company and some of its clearing organizations, brokers and banks, balances owed are collateralized by certain of the Company’sCompany's cash and securities balances. As of December 31, 20172022 and 2016,2021, the Company had a total of $94.0$87.9 million and $8.9$111.9 million, respectively, in deposit accounts with clearing organizations, brokers and banks that could be used as collateral to offset losses incurred by the clearing organizations, brokers and banks, on behalf of the Company’sCompany's activities, if such losses were to occur.
9. ReceivablesReceivable From and Payables toPayable To Brokers, Dealers and Clearing Organizations
ReceivablesReceivable from and payable to brokers, dealers and clearing organizations includes cash held at the clearing brokers, amounts receivable or payable for unsettled transactions, monies borrowed and proceeds from short sales equal to the fair value of securities sold, not yet purchased, at fair value, which are restricted until the Company purchases the securities sold short. Pursuant to the master netting agreements the Company entered into with its brokers, dealers and clearing organizations, these balances are presented net (assets less liabilities) across balances with the same counterparty. The Company's receivablesreceivable from and payablespayable to brokers, dealers and clearing organizations balances are held at multiple financial institutions.
As of December 31, 20172022 and 2016,2021, amounts receivable from brokers, dealers and clearing organizations include: | | | | | | | | | | | |
| | | |
| | | |
| As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| Broker-dealers | $ | 1,789,526 | | | $ | 1,533,713 | |
| Securities failed to deliver | 25,031 | | | 17,851 | |
| Clearing organizations | 43,915 | | | 56,075 | |
| Securities borrowed/loaned interest receivable | 6,353 | | | 6,708 | |
| $ | 1,864,825 | | | $ | 1,614,347 | |
|
| | | | | | | |
| | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Broker-dealers | $ | 409,499 |
| | $ | 78,898 |
|
| Securities failed to deliver | 87,820 |
| | — |
|
| Clearing organizations | 6,126 |
| | — |
|
| Stock borrow interest receivable | 4,733 |
| | — |
|
| | $ | 508,178 |
| | $ | 78,898 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
As of December 31, 20172022 and 2016,2021, amounts payable to brokers, dealers and clearing organizations include: | | | | | | | | | | | |
| | | |
| | | |
| As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| Broker-dealers | $ | 720,138 | | | $ | 483,112 | |
| Securities failed to receive | 26,984 | | | 57,894 | |
| Clearing organizations | 27,956 | | | 37,925 | |
| Securities borrowed/loaned interest payable | 8,831 | | | 7,622 | |
| $ | 783,909 | | | $ | 586,553 | |
|
| | | | | | | |
| | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
Broker-dealers
| $ | 145,860 |
| | $ | 210,309 |
|
| Securities failed to receive | 53,540 |
| | — |
|
Clearing organizations
| 48,257 |
| | — |
|
| Stock loan interest payable | 4,496 |
| | — |
|
| | $ | 252,153 |
| | $ | 210,309 |
|
10. Receivable From and Payable toTo Customers
As of December 31, 2017,2022 and 2021, receivable from customers of $49.9$41.7 million consistsand $159.4 million, respectively, consist of amounts owed by customers relating to securities transactions not completed on settlement date and receivables arising from the prepayment of a Commission Sharing Agreement (“CSA”), net of an allowance for doubtful accounts. A prepaid CSA is established for research-related disbursements in advance of anticipated customer commission volumes. Such receivables may not be evidenced by contractual obligations.research.
As of December 31, 2017,2022 and 2021, payable to customers of $352.5 million$2.7 billion and $2.4 billion, respectively, include amounts due on cash and margin transactions to the Company's clients, some of which have their assets held by a Company omnibus account, which are included within receivables from brokers, dealers and clearing organizations in the accompanying consolidated statements of financial condition. In the omnibus structure, positions that are owned by Cowen International Ltd are fully cross collateralized by client funds, meaning that the Company for all intents and purposes, has nodoes not have market risk. Additionally, Cowen International Ltd has no obligation to settle any trade that it deems inappropriate from a risk perspective, adding an important market and counterparty risk mitigating factor.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
11. Fixed Assets
As of December 31, 20172022 and 2016,2021, fixed assets consisted of the following: |
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Telephone and computer equipment | $ | 3,465 |
| | $ | 2,787 |
|
| Computer software | 2,914 |
| | 2,167 |
|
| Furniture and fixtures | 1,423 |
| | 1,204 |
|
| Leasehold improvements | 36,702 |
| | 35,092 |
|
| Assets acquired under capital leases—equipment | 6,920 |
| | 4,075 |
|
| Aircraft and related equipment | 17,369 |
| | 20,893 |
|
| Other | 58 |
| | 57 |
|
| | 68,851 |
| | 66,275 |
|
| Less: Accumulated depreciation and amortization | (28,355 | ) | | (23,867 | ) |
| | $ | 40,496 |
| | $ | 42,408 |
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| Telecommunication and computer equipment | $ | 10,545 | | | $ | 9,379 | |
| Computer software | 13,684 | | | 13,715 | |
| Furniture and fixtures | 4,026 | | | 3,607 | |
| Leasehold improvements | 44,193 | | | 42,749 | |
| Finance lease right-of-use asset (See Note 16) | 3,737 | | | 6,468 | |
| | | |
| Other | 38 | | | 75 | |
| 76,223 | | | 75,993 | |
| Less: Accumulated depreciation and amortization | (52,816) | | | (50,017) | |
| $ | 23,407 | | | $ | 25,976 | |
| | | |
| | | |
| | | |
| | | |
Depreciation and amortization expense related to fixed assets was $7.0$11.5 million, $7.7$11.0 million and $6.8$9.6 million for the years ended December 31, 2017, 2016,2022, 2021, and 2015,2020, respectively, and are included in depreciation and amortization expense in the accompanying consolidated statements of operations.
On April 22, 2016, the Company entered into a transaction whereby the Company acquired a portfolio of four specialized aircraft which were on lease (See Note 2). During the year ended December 31, 2016,fourth quarter of 2020 the Company purchased two aircraft and entered into two additional lease agreements. As of December 31, 2017 and 2016,an aircraft and related equipment of $17.4 million and $20.9 million, respectively, is held for leasing purposes. One of the planes were$4.5 million. This aircraft was subsequently sold during the thirdfourth quarter of 20172021 for a gain of $2.3 million. Depreciation expense related to leased assets was $1.5$0.3 million, and $1.7 million forwithin the year ended December 31, 2017 and 2016, respectively. Asaccompanying consolidated statement of December 31, 2017 and 2016, the accumulated depreciation related to leased assets was $1.8 million and $1.7 million, respectively.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
operations.
Assets acquired under capitalfinance leases were $6.9$3.7 million and $4.1$6.5 million as of December 31, 20172022 and 2016,2021, respectively. If the assets acquired under capitalfinance leases transfer title at the end of the lease term or contain a bargain purchase option, the assets are amortized over their estimated useful lives; otherwise, the assets are amortized over the respective lease term. The depreciation of assets capitalized under capitalfinance leases is included in depreciation and amortization expenses and was $1.0$1.1 million, $1.2$1.3 million, and $1.5$1.2 million for the years ended December 31, 2017, 2016,2022, 2021, and 2015,2020, respectively. As of December 31, 20172022 and 2016,2020, accumulated depreciation related to assets acquired under capitalfinance leases was $3.4$3.0 million and $2.4$4.7 million, respectively.
12. Goodwill and Intangible Assets
Goodwill
In accordance with US GAAP, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Under US GAAP, the Company first assesses the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amounts as a basis for determining if it is necessary to perform the two-step approach.a quantitative impairment test. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge.
Annual goodwill impairment test
During the third quarter of 2021, the Company changed the date of its annual goodwill impairment test from December 31 to July 1. The Company estimatedbelieves the fair value usingchange in goodwill impairment date does not result in a material change in the incomemethod of applying the accounting principle. This change provides the Company additional time to complete the annual impairment test of goodwill in advance of our year end reporting. This change does not result in a delay, acceleration, or avoidance of an impairment charge. This change has been applied prospectively as retrospective application is deemed impracticable due to the inability to objectively determine the assumptions and market approachsignificant estimates used in earlier periods without the benefit of hindsight.
The Company performed its annual impairment test at July 1, 2022 through a quantitative impairment test which involvesinvolved estimates of future cash flows, discount rates, economic forecast and other assumptionassumptions which are then used in the market approach (earning(earnings and / or transactions multiples) and / or income approach (discounted cash flow method).
In connection with the CRT transaction (See Note 2), in May 2016, the Company recognized goodwill of $3.5 million. Goodwill, which primarily relates to expected synergies from combining operations, is fully deductible for tax purposes and has been assigned to the broker-dealer segment of the Company.
On September 23, 2016, the Company and the portfolio managers of RASL completed the sale of their respective ownership interests in RASL, an investment advisor. In contemplation with the sale transaction, the Company allocated $1.2 million of goodwill to the RASL disposal group (See Note 2) which was included in the investment management reporting unit.
Based on the results of the annual impairment analysis as of December 31, 2017,at July 1, 2021, the Company did not recognize anya goodwill impairment relating to any of the investment management or broker-dealerCompany's reporting units. No impairment charges for goodwill were recognized during the years ended December 31, 2016 and 2015, respectively.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The following table presents the changes in the Company's goodwill balance, by reporting unit for the yearsperiods ended December 31, 2017, 2016,2022 and 2015:2021: | | | | | | | | | | | | | | | | | | | | | |
| | | | Investment Bank | | Cowen Investment Management | | | | Total |
| | | | (dollars in thousands) |
| Beginning balance - December 31, 2020 | | | | | | | | | |
| Goodwill | | | $ | 141,843 | | | $ | 22,705 | | | | | 164,548 | |
| Accumulated impairment charges | | | (9,485) | | | (7,979) | | | | | (17,464) | |
| Net | | | 132,358 | | | 14,726 | | | | | 147,084 | |
| | | | | | | | | |
| Activity: 2021 | | | | | | | | | |
| Recognized goodwill (See note 3) | | | 86,921 | | | — | | | | | 86,921 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Goodwill impairment charges | | | — | | | — | | | | | — | |
| | | | | | | | | |
| Beginning balance: December 31, 2021 | | | | | | | | | |
| Goodwill | | | 228,764 | | | 22,705 | | | | | 251,469 | |
| Accumulated impairment charges | | | (9,485) | | | (7,979) | | | | | (17,464) | |
| Net | | | 219,279 | | | 14,726 | | | | | 234,005 | |
| | | | | | | | | |
| Activity: 2022 | | | | | | | | | |
| Recognized goodwill (See note 3) | | | — | | | — | | | | | — | |
| Goodwill impairment charges | | | — | | | — | | | | | — | |
| | | | | | | | | |
| Ending balance: December 31, 2022 | | | | | | | | | |
| Goodwill | | | 228,764 | | | 22,705 | | | | | 251,469 | |
| Accumulated impairment charges | | | (9,485) | | | (7,979) | | | | | (17,464) | |
| Net | | | $ | 219,279 | | | $ | 14,726 | | | | | $ | 234,005 | |
In connection with the Portico transaction (see Note 3), in December 2021, the Company recognized goodwill of $86.9 million and intangible assets (including customer relationships, trade name, and backlog) with an estimated fair value of $19.9 million which are included within intangible assets in the consolidated statements of financial condition with the expected useful lives ranging from 1 to 4 years with a weighted average useful life of 3.02 years. Amortization expense related to intangibles from the Portico Acquisition for the year ended December 31, 2021 is $0.4 million. Goodwill, the excess of the purchase price over the fair value of net assets, primarily relates to expected synergies from combining operations and has been assigned to the Op Co segment of the Company. Tax deductible goodwill will differ from goodwill recognized by the Company in an amount equal to the difference between actual contingent consideration and estimated contingent consideration (see Note 3).
In connection with the MHT transaction (see Note 3), in October 2020, the Company recognized goodwill of $9.4 million and intangible assets (including customer relationships, trade name, and non-compete) with an estimated fair value of $1.2 million which are included within intangible assets, net in the consolidated statements of financial condition with the expected useful lives ranging from 3 to 5 years with a weighted average useful life of 4.17. Amortization expense related to intangibles from the MHT acquisition for the year ended December 31, 2022 totaled $0.3 million. Goodwill primarily relates to expected synergies from combining the acquired operations with our operations and has been assigned to the Op Co segment of the Company. Tax deductible goodwill will differ from goodwill recognized by the Company in an amount equal to the difference between actual contingent consideration and estimated contingent consideration (see Note 3).
|
| | | | | | | | | | | |
| | Investment Management | | Broker-
Dealer | | Total |
| | (dollars in thousands) |
| Beginning balance - December 31, 2015 | | | | | |
| Goodwill | $ | 30,228 |
| | $ | 47,818 |
| | $ | 78,046 |
|
| Accumulated impairment charges | (10,200 | ) | | (9,485 | ) | | (19,685 | ) |
| Net | 20,028 |
| | 38,333 |
| | 58,361 |
|
| | | | | | |
| Activity: 2016 | | | | | |
| Recognized goodwill | — |
| | 3,519 |
| | 3,519 |
|
| Goodwill allocated to disposal group | (1,202 | ) | | — |
| | (1,202 | ) |
| Goodwill impairment charges | — |
| | — |
| | — |
|
| | | | | | |
| Ending balance: December 31, 2016 | | | | | |
| Goodwill | 29,026 |
| | 51,337 |
| | 80,363 |
|
| Accumulated impairment charges | (10,200 | ) | | (9,485 | ) | | (19,685 | ) |
| Net | 18,826 |
| | 41,852 |
| | 60,678 |
|
| | | | | | |
| Activity: 2017 | | | | | |
| Recognized goodwill | — |
| | — |
| | — |
|
| Goodwill allocated to disposal group | — |
| | — |
| | — |
|
| Goodwill impairment charges | — |
| | — |
| | — |
|
| | | | | | |
| Ending balance: December 31, 2017 | | | | | |
| Goodwill | 29,026 |
| | 51,337 |
| | 80,363 |
|
| Accumulated impairment charges | (10,200 | ) | | (9,485 | ) | | (19,685 | ) |
| Net | $ | 18,826 |
| | $ | 41,852 |
| | $ | 60,678 |
|
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Intangible assets
Information for the Company's intangible assets that are subject to amortization is presented below as of December 31, 20172022 and 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2017 | | December 31, 2016 |
| | Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in years) | | (in thousands) | | (in thousands) |
| Trade names | 0.6 - 7.5 |
| | $ | 10,622 |
| | $ | (10,555 | ) | | $ | 67 |
| | $ | 9,962 |
| | $ | (9,689 | ) | | $ | 273 |
|
| Customer relationships | 3 - 14 |
| | 41,134 |
| | (15,733 | ) | | 25,401 |
| | 33,874 |
| | (12,948 | ) | | 20,926 |
|
| Customer contracts | 1.2 |
| | 800 |
| | (800 | ) | | — |
| | 800 |
| | (800 | ) | | — |
|
| Non compete agreements and covenants with limiting conditions acquired | 3 - 5 |
| | 2,237 |
| | (1,479 | ) | | 758 |
| | 2,268 |
| | (818 | ) | | 1,450 |
|
| Intellectual property | 3 - 10 |
| | 8,243 |
| | (4,514 | ) | | 3,729 |
| | 8,283 |
| | (5,163 | ) | | 3,120 |
|
| | |
| | $ | 63,036 |
| | $ | (33,081 | ) | | $ | 29,955 |
| | $ | 55,187 |
| | $ | (29,418 | ) | | $ | 25,769 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | December 31, 2021 |
| | Amortization
Period | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| | (in years) | | (in thousands) | | (in thousands) |
| | | | | | | | | | | | | |
| Trade names | 1 - 3 | | $ | 531 | | | $ | (491) | | | $ | 40 | | | $ | 1,431 | | | $ | (970) | | | $ | 461 | |
| Customer relationships | 4 - 14 | | 53,920 | | | (29,854) | | | 24,066 | | | 57,634 | | | (25,121) | | | 32,513 | |
| Backlog | 1 | | 6,100 | | | (6,100) | | | — | | | 6,100 | | | (254) | | | 5,846 | |
| Non-compete agreements and covenants with limiting conditions acquired | 5 | | 344 | | | (155) | | | 189 | | | 344 | | | (86) | | | 258 | |
| Intellectual property | 8 | | 9,368 | | | (2,326) | | | 7,042 | | | 6,020 | | | (1,061) | | | 4,959 | |
| Acquired software | 3 - 10 | | — | | | — | | | — | | | 5,857 | | | (5,727) | | | 130 | |
| | | $ | 70,263 | | | $ | (38,926) | | | $ | 31,337 | | | $ | 77,386 | | | $ | (33,219) | | | $ | 44,167 | |
The Company tests intangible assets for impairment if events or circumstances suggest that the asset groups carrying value may not be fully recoverable. For the years ended December 31, 20172022 and 2016,2021, no impairment charge for intangible assets was recognized.
In connection with the CRT transaction (See Note 2), in May 2016, the The Company recognized impairment charges of $2.4 million during the year ended December 31, 2020. The impairment charges primarily related the Company’s decision to limit the activities of its clearing business, resulting in a $1.9 million impairment of a) intangible assets (includingrelating to customer relationships, trade name, intellectual propertylists and non-compete arrangements) with an estimated fair value of $5.1b) capitalized internally developed software costs.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
million which are included within intangible assets, net in the consolidation statements of financial condition with the expected useful lives ranging from 1 to 9 years with a weighted average useful life of 8.1 years.
In connection with Convergex acquisition (See Note 2), in June 2017, the Company recognized intangible assets (including customer relationships, trade name, and intellectual property) with an estimated fair value of $10.3 million which are included within intangible assets, net in the consolidation statements of financial condition with the expected useful lives ranging from 0.6 years to 9.0 years with a weighted average useful life of 7.7 years.
Amortization expense related to intangible assets was $6.1$16.2 million, $5.0$8.0 million, and $2.7$13.0 million for the years ended December 31, 2017, 2016,2022, 2021 and 2015,2020 , respectively, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. All of the Company's intangible assets have finite lives.
The estimated future amortization expense for the Company's intangible assets placed in service as of December 31, 20172022 is as follows: | | | | | |
| | (dollars in thousands) |
| 2023 | $ | 8,368 | |
| 2024 | 8,114 | |
| 2025 | 6,953 | |
| 2026 | 3,017 | |
| 2027 | 1,705 | |
| Thereafter | 3,180 | |
| $ | 31,337 | |
|
| | | |
| | (dollars in thousands) |
| 2018 | $ | 4,946 |
|
| 2019 | 4,168 |
|
| 2020 | 3,950 |
|
| 2021 | 3,890 |
|
| 2022 | 3,108 |
|
| Thereafter | 9,893 |
|
| | $ | 29,955 |
|
13. Other Assets
Other assets in Operating Entities are as follows: | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| Prepaid expenses | $ | 28,305 | | | $ | 21,349 | |
| | | |
| | | |
| Tax receivables | 11,806 | | | 6,971 | |
| | | |
| | | |
| Interest and dividends receivable | 15,210 | | | 2,147 | |
| | | |
| | | |
| | | |
| | | |
| Receivable on sale of investment | 4,000 | | | — | |
| Other (b) | 25,642 | | | 24,288 | |
| $ | 84,963 | | | $ | 54,755 | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Prepaid expenses | $ | 13,267 |
| | $ | 10,669 |
|
| Deposits | 877 |
| | 5,322 |
|
| Reinsurance receivables, net (d) | 14,014 |
| | 5,187 |
|
| Loan receivable (a) | — |
| | 3,700 |
|
| Tax receivables | 1,457 |
| | 3,267 |
|
| Redemption Receivable | 19,565 |
| | — |
|
| Interest and dividends receivable | 1,021 |
| | 718 |
|
| Deferred acquisition costs (c) | 1,978 |
| | 677 |
|
| Deferred rent asset | — |
| | 52 |
|
| Military loan (b) | 19,851 |
| | 4,476 |
|
| Other | 16,238 |
| | 4,338 |
|
| | $ | 88,268 |
| | $ | 38,406 |
|
(a) As of December 31, 2016, the maturity was August 2017 with interest rate of 12%.
(b) As of December 31, 2017, the maturity is January 2024, with interest rate of 8% for the first five years and 8.5% for the remainder of the term, related to the Company's commercial reinsurance activities. As of December 31, 2016, the maturity is January 2024, with interest rate of 8% for the first five years and 8.5% for the remainder of the term, related to the Company's commercial reinsurance activities.
(c) Balances relate to the Company's reinsurance business entered into during 2016 (See Note 17).
14. Commission Management Payable
The Company receives a gross commission from various clearing brokers, which is then used to fund commission sharing and recapture arrangements, less the portion retained as income to the Company. Accrued commission sharing and commission
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
recapture payable of $70.5$115.9 million and $103.0 million, as of December 31, 20172022 and $3.6 million as of December 31, 20162021, respectively, are classified as commission management payable in the accompanying consolidated statements of financial condition.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
15. Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities in Operating Entities are as follows: | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| | | |
| Contingent consideration payable (see Note 3) | $ | 38,648 | | | $ | 62,223 | |
| | | |
| Interest and dividends payable | 34,224 | | | 28,948 | |
| | | |
| Professional fees payable | 21,394 | | | 11,229 | |
| | | |
| Fees payable | 1,577 | | | 7,740 | |
| Accrued tax liabilities | 18,426 | | | 20,540 | |
| Deferred income | 3,785 | | | 6,051 | |
| SEC fees payable | 14,850 | | | 10,804 | |
| Technology costs and software contracts payable | 8,583 | | | 6,263 | |
| Litigation reserve | — | | | 1,082 | |
| Accrued expenses and accounts payable | 12,428 | | | 9,939 | |
| $ | 153,915 | | | $ | 164,819 | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Deferred rent obligations (see Note 3(k)) | $ | 12,822 |
| | $ | 10,335 |
|
| Contingent consideration payable (see Note 2) | 3,440 |
| | 5,997 |
|
| Equity in RCG Longview Partners II, LLC (see Note 5a(3)) | 6,022 |
| | 5,948 |
|
| Interest and dividends payable | 2,891 |
| | 3,541 |
|
| Loss reserves and claims incurred but not reported (a) | 9,464 |
| | 3,455 |
|
| Professional fees payable | 5,008 |
| | 3,143 |
|
| Unearned premiums (a) | 6,116 |
| | 2,375 |
|
| Fees payable | 798 |
| | 1,093 |
|
| Accrued tax liabilities | 7,482 |
| | 456 |
|
| Litigation reserve | 3,000 |
| | — |
|
| Accrued expenses and accounts payable (b) | 39,490 |
| | 11,182 |
|
| | $ | 96,533 |
| | $ | 47,525 |
|
(a) Balances relate to the Company's reinsurance business entered into during 2016 (See Note 17).
(b) As of December 31, 2022 and 2021, the Company's outstanding debt was as follows: | | | | | | | | | | | | |
| | | | |
| | | | |
| As of December 31, | |
| | 2022 | | 2021 | |
| | (dollars in thousands) | |
| | | | |
| Notes payable | $ | 174,524 | | | $ | 174,015 | | |
| | | | |
| Term loan | 432,265 | | | 435,147 | | |
| | | | |
| | | | |
| Other notes payable | 12,699 | | | 12,537 | | |
| Finance lease obligations | 673 | | | 1,672 | | |
| $ | 620,161 | | | $ | 623,371 | | |
Convertible Debt
December 2022 Convertible Notes
The Company, on December 14, 2017, issued $135.0 million aggregate principal amount of 3.00% convertible senior notes due December 2022 (the “December 2022 Convertible Notes”). The December 2022 Convertible Notes have a final maturity date of December 15, 2022 unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such date. The interest on the December 2022 Convertible Notes is payable semi-annually on December 15 and June 15 of each year. The December 2022 Convertible Notes are senior unsecured obligations of Cowen. The December 2022 Convertible Notes were issued with an initial conversion price of $17.375 per share of Cowen's Class A common stock. Pursuant to the indenture governing the December 2022 Convertible Notes, conversions of the December 2022 Convertible Notes will be settled by the delivery and/or payment, as the case may be, of Cowen’s Class A Common Stock, cash, or a combination thereof, at the Company's election.
The Company recognized the embedded cash conversion option at issuance date fair value, which also represents the initial unamortized discount on the December 2022 Convertible Notes of $23.4 million and is shown net in convertible debt in the accompanying consolidated statements of financial condition. On June 26, 2018, the Company received shareholder approval for the Company to settle the December 2022 Convertible Notes entirely in Class A common stock. Upon receiving shareholder approval, the Company reclassified the separately recognized conversion option from a derivative liability to equity.
During December 2020, the Company repurchased and extinguished $46.9 million of the outstanding principal amount of the December 2022 Convertible Notes for cash consideration of $70.5 million. In conjunction with the partial extinguishment of the December 2022 Convertible Notes, the Company accelerated the pro rata unamortized discount of $3.6 million and capitalized debt issuance costs of $0.4 million. The Company allocated $29.6 million of the cash consideration paid to the extinguishment of
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
the equity component of the December 2022 Convertible Notes. The Company recognized $2.7 million of gain on debt extinguishment.
On March 24, 2021, the Company issued a redemption notice announcing that the Company would redeem all of the December 2022 Convertible Notes, and provided holders the option to elect to settle the as-converted value of the December 2022 Convertible Notes as allowed under the terms of the December 2022 Convertible Notes. As a result of the Company’s call for redemption of the December 2022 Convertible Notes, the December 2022 Convertible Notes were convertible, at the option of the holder at any time prior to June 22, 2021, the second business day prior to the December 2022 Convertible Notes' Redemption Date. On June 24, 2021 (the "Redemption Date"), the Company redeemed all of the outstanding principal amount of the December 2022 Convertible Notes. The redemption amount was determined based on the holders election to convert, which allowed for either 100.00% of the principal amount thereof plus accrued and unpaid interest on such principal amount up to June 15, 2021, to, but not including the Redemption Date of the December 2022 Convertible Notes, or the value of the Company's Class A common stock to be issued on conversion. The settlement method for the December 2022 Convertible Notes was $88.1 million in cash, (the outstanding principal amount of the December 2022 Convertible Notes) and 2,938,841 shares of the Company’s Class A common stock, (the remainder of the conversion obligation in excess of the principal amount). The conversion rate on the December 2022 Convertible Notes on the Redemption Date was 33.35 shares of the Company’s Class A common stock per $1,000.00 principal amount of December 2022 Convertible Notes converted. In conjunction with the redemption of the remaining December 2022 Convertible Notes, the Company accelerated the pro rata unamortized discount of $5.1 million and capitalized debt issuance costs of $0.5 million.
Amortization on the discount, included within interest and dividends expense in the accompanying consolidated statements of operations is $6.7 million and $4.6 million for the years ended December 31, 2021 and 2020, based on an effective interest rate of 7.13%. The Company capitalized the debt issuance costs in the amount of $2.2 million, which is a direct deduction from the carrying value of the debt and was amortized over the life of the December 2022 Convertible Notes in interest and dividends expense in the accompanying consolidated statements of operations. The Company recorded interest expense of $1.2 million and $4.0 million for the years ended December 31, 2021 and 2020, respectively.
Notes Payable
May 2024 Notes
On May 7, 2019, the Company completed its private placement of $53.0 million aggregate principal amount of 7.25% senior notes due May 2024 (the "May 2024 Notes") with certain institutional investors. On September 30, 2019, the Company issued an additional $25.0 million of the same series of notes. The additional May 2024 Notes were purchased at a premium of $0.5 million, which is shown net in notes payable in the accompanying consolidated statement of financial condition. To date the May 2024 Notes have maintained their initial private rating. Interest on the May 2024 Notes is payable semi-annually in arrears on May 6 and November 6. The Company recorded interest expense of $5.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company capitalized debt issuance costs of approximately $1.5 million in May 2019 and $0.6 million in September 2019, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the May 2024 Notes in interest and dividends expense in the accompanying consolidated statements of operations.
June 2033 Notes
On June 11, 2018, the Company completed its public offering of $90.0 million of 7.75% senior notes due June 2033 (the "June 2033 Notes") and subsequently the underwriters exercised in full their option to purchase an additional $10.0 million principal amount of the June 2033 Notes. Interest on the June 2033 Notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15. The Company recorded interest expense of $7.7 million, $7.7 million and $7.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company capitalized debt issuance costs of approximately $3.6 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the June 2033 Notes in interest and dividends expense in the accompanying consolidated statements of operations.
December 2027 Notes
On December 8, 2017, the balance includesCompany completed its public offering of $120.0 million of 7.35% senior notes due December 2027 (the "December 2027 Notes") and subsequently the underwriters exercised in full their option to purchase an additional $18.0 million principal amount of the December 2027 Notes. Interest on the December 2027 Notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15. The Company recorded interest expense of $2.5 million and $10.1 million for the years ended December 31, 2021 and 2020, respectively. The Company capitalized debt issuance costs of approximately $5.0 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the December 2027 Notes in interest and dividends expense in the accompanying consolidated statements of operations. The net
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
proceeds of the offering, after deducting the underwriting discount and estimated offering expenses payable by the Company were used to redeem all of its 8.25% senior notes due October 2021 and for general corporate purposes.
On March 24, 2021, the Company delivered payment of and discharged all $138.0 million outstanding aggregate principal of the December 2027 Notes plus accrued and unpaid interest through the effective redemption date of April 23, 2021. In conjunction with the extinguishment of the December 2027 Notes, the Company accelerated the pro-rata capitalized debt issuance costs. For the year ended December 31, 2021, the Company recognized $4.4 million of loss on debt extinguishment.
Term Loan
March 2028 Term Loan
On March 24, 2021, the Company borrowed $300 million of first lien term loan due March 24, 2028. On December 15, 2021, the Company borrowed an additional $150 million first lien termloan under the same terms and conditions as, and fungible with, the initial first lien term loan (collectively, the “March 2028 Term Loan”). The aggregate amount borrowed under the March 2028 Term Loan is $450 million. The March 2028 Term Loan bears interest at an annual rate equal to, at the option of the Company, either the (a) London Inter-bank Offered Rate ("LIBOR") (adjusted for reserves and subject to a floor of 0.75%) plus a margin of 3.25% or (b) an alternate base rate plus a margin of 2.25%. The Company is required to pay amortization of approximately 1.00% per annum of the original principal amount of the March 2028 Term Loan. Additionally, the Company has entered into an interest rate swap to offset the floating interest rate of the March 2028 Term Loan (See Note 6). The obligations of the Company for the March 2028 Term Loan are guaranteed by certain of the Company’s wholly-owned domestic subsidiaries (excluding its broker-dealer subsidiaries) (the “Guarantors”) and secured by substantially all of the assets of the Company and the Guarantors, subject in each case to certain customary exceptions. The terms of the March 2028 Term Loan contain customary affirmative and negative covenants, subject to certain customary exceptions, thresholds, qualifications and “baskets”. Proceeds from the March 2028 Term Loan were used to (i) satisfy and discharge and redeem the Company’s 2027 Senior Notes, (ii) redeem the Company’s December 2022 Convertible Notes that remained outstanding as of March 31, 2021 and pay the cash settlement amount in connection with the conversion of December 2022 Convertible Notes prior to that redemption date, and (iii) for the payment of fees, commissions, premiums, accrued but not yet paidexpenses and other transaction costs (including original issue discount or upfront fees) payable in connection with the transactions related thereto. As of $18.0December 31, 2022, the outstanding principal amount of the March 2028 Term Loan was $442.1 million.
Interest expense for the March 2028 Term Loan was $22.8 million and $9.7 million for the years ended December 31, 2022 and 2021, based on an effective interest rate of 4.46%. In March 2021, the Company capitalized debt issuance costs of approximately $6.6 million and initial unamortized discount of $1.5 million related to the March 2028 Term Loan which is a direct deduction from the carrying value of the debt and will be amortized over the life of the March 2028 Term loan in interest and dividends expense in the accompanying consolidated statements of operations. In December 2021, the Company capitalized debt issuance costs of approximately $2.7 million and unamortized discount of $1.5 million related to the additional borrowing of $150 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the March 2028 Term loan in interest and dividends expense in the accompanying consolidated statements of operations.
The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that all US Dollar LIBOR settings will either cease to be provided by any administrator or no longer be representative as of June 30, 2023. As the March 2028 Term Loan represents the Company’s only significant exposure to LIBOR, the transition to an alternative Inter-bank Offer Rate is not expected to have a material impact on Company's consolidated financial statements.
Other Notes Payable
During January 2022, the Company borrowed $4.0 million to fund insurance premium payments. This note had an effective interest rate of 2.01% and was due in December 2022, with monthly payment requirements of $0.4 million. As of December 31, 2022, the note was fully repaid. Interest expense for the year ended December 31, 2022 was insignificant.
On September 30, 2020, the Company borrowed $72.0 million from Purple Protected Asset S-81 ("PPA S-81"), a Luxembourg entity unrelated to Cowen. The Company repaid $60.0 million of the PPA S-81 loan in June 2021. The loan is payable on September 30, 2023, had an initial interest rate of 1.4 times the Secured Overnight Financing Rate ("SOFR") plus 6.07% until December 31, 2020 and 1.4 times the SOFR plus 5.8% until June 30, 2021 and 3.65 times the SOFR plus 4.0% thereafter with quarterly interest payments. The loan obligation, as well as a loan issued by Cowen to The Military Mutual Ltd (a United Kingdom company unrelated to Cowen) with principal of $28.4 million that was sold by Cowen Re to PPA S-81 at fair value for no gain or loss on September 30, 2020, are fully cash collateralized through a reinsurance business.policy provided by Cowen Re which is reflected in cash collateral pledged in the consolidated statements of financial condition as of December 31, 2020 (see Notes 4 and 22). The Company capitalized debt issuance costs of approximately $1.7 million which is a direct deduction from the carrying value of the loan and will be amortized over the life of the loan in interest and dividends expense shown in the
16.Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
accompanying consolidated statements of operations. The Company recorded interest expense of $2.5 million, $3.0 million and $1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, related to its loan payable to PPA S-81.
During November 2019, the Company borrowed $2.6 million to fund general corporate capital expenditures. This note had an effective interest rate of 6% and is due in November 2024, with monthly payment requirements of $0.1 million. As of December 31, 2022, the outstanding balance on this note was $1.1 million. Interest expense for the years ended December 31, 2022, 2021 and 2020 was $0.1 million, respectively.
Finance Lease Obligations
The Company has entered into various finance leases for computer equipment. These finance lease obligations are included in notes payable and other debt in the accompanying consolidated statements of financial condition.
For the years ended December 31, 2022, 2021 and 2020, quantitative information regarding the Company's finance lease obligations reflected in the accompanying consolidated statements of operations, the supplemental cash flow information and certain other information related to finance leases were as follows: | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Lease cost | | | | | | | | | |
| Finance lease cost: | | | | | | | | | |
| Amortization of finance lease right-of-use assets | | | | | $ | 1,109 | | | $ | 1,274 | | | $ | 1,232 | |
| Interest on lease liabilities | | | | | $ | 58 | | | $ | 116 | | | $ | 171 | |
| Other information | | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | |
| Operating cash flows from finance leases | | | | | $ | 58 | | | $ | 116 | | | $ | 171 | |
| Financing cash flows from finance leases | | | | | $ | 1,206 | | | $ | 1,532 | | | $ | 1,033 | |
| | | | | | | | | |
| Weighted average remaining lease term - operating leases (in years) | | | | | 2.05 | | 1.71 | | 2.24 |
| Weighted average discount rate - operating leases | | | | | 5.39 | % | | 4.70 | % | | 4.89 | % |
Annual scheduled maturities of debt and minimum payments (of principal and interest) for all debt outstanding as of December 31, 2022, are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Notes Payable | | | | Term Loan | | | | Other Notes Payable | | Finance Lease
Obligation |
| | | | (dollars in thousands) |
| 2023 | | | $ | 13,405 | | | | | $ | 37,700 | | | | | $ | 13,503 | | | $ | 458 | |
| 2024 | | | 88,578 | | | | | 37,451 | | | | | 543 | | | 104 | |
| 2025 | | | 7,750 | | | | | 37,020 | | | | | — | | | 81 | |
| 2026 | | | 7,750 | | | | | 36,680 | | | | | — | | | 50 | |
| 2027 | | | 7,750 | | | | | 36,340 | | | | | — | | | 28 | |
| Thereafter | | | 142,625 | | | | | 426,830 | | | | | — | | | — | |
| Subtotal | | | 267,858 | | | | | 612,021 | | | | | 14,046 | | | 721 | |
| Less (a) | | | (93,334) | | | | | (179,756) | | | | | (1,347) | | | (48) | |
| Total | | | $ | 174,524 | | | | | $ | 432,265 | | | | | $ | 12,699 | | | $ | 673 | |
(a)Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes capitalized debt costs and the unamortized discount on the Company's convertible debt.
Letters of Credit
As of December 31, 2022, the Company has four irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The Company also has pledged cash collateral for reinsurance agreements (See Note 4).
To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of December 31, 2022 and 2021, there were no amounts due related to these letters of credit.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
17. Redeemable Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. Subject to the rights of holders of any outstanding preferred stock, the number of authorized shares of preferred stock may be increased or decreased by the affirmative vote of the holders of a majority of the shares entitled to vote on such matters, but in no instance can the number of authorized shares be reduced below the number of shares then outstanding. The Company's amended and restated certificate of incorporation permits the Company to issue up to 10,000,000 shares of preferred stock in one or more series with such designations, titles, voting powers, preferences and rights and such qualifications, limitations and restrictions as may be fixed by the board of directors of the Company without any further action by the Company's stockholders. The Company's board of directors may increase or decrease the number of shares of any series of preferred stock following the issuance of that series of preferred stock, but in no instance can the number of shares of a series of preferred stock be reduced below the number of shares of the series then outstanding.
On May 19, 2015, the Company completed its offering of 120,750 shares of Series A Convertible Preferred Stock that provided $117.2 million of proceeds, net of underwriting fees and issuance costs of $3.6 million. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum, which will be payable, when and if declared by the board of directors of the Company, quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. The Company declared and paid a cash dividend in respect of the Series A Convertible Preferred Stock of $1.7 million and $6.8 million for the years ended December 31, 2022 and 2021. Each share of Series A Convertible Preferred Stock is non-voting and has a liquidity preference over the Company's Class A common stock and ranks senior to all classes or series of the Company's Class A common stock, but junior to all of the Company's existing and future indebtedness with respect to dividend rights and rights upon the Company's involuntary liquidation, dissolution or winding down.
Upon issuance, each share of Series A Convertible Preferred Stock was convertible, at the option of the holder, into a number of shares of the Company's Class A common stock equal to the liquidation preference of $1,000.00 divided by the conversion rate. The initial conversion rate (subsequent to the December 5, 2016 reverse stock split) is 38.0619 shares (which equates to $26.27 per share) of the Company's Class A common stock for each share of the Series A Convertible Preferred Stock. At any time on or after May 20, 2020, when the Company's capped call option expired, the Company was able to elect to convert all outstanding shares of the Series A Convertible Preferred Stock into shares of the Company's Class A common stock, cash or a combination thereof, at the Company's election, in each case, based on the then-applicable conversion rate, if the last reported sale price of the Company's Class A common stock equals or exceeds 150% of the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion, the conversion rate may be adjusted based on certain events, including but not limited to the issuance of cash dividends or Class A common stock as dividends to the Company's Class A common shareholders or a share split or combination.
On December 31, 2021, the Company irrevocably elected that, upon the conversion of any share of the outstanding Series A Convertible Preferred Stock, the Company will settle $1,000.00 of its conversion obligation in cash. With respect to each conversion, to the extent the conversion obligation per share of Series A Convertible Preferred Stock is greater than $1,000.00, the Company may satisfy its conversion obligation in respect of such excess using any settlement method permitted under the Certificate of Designations. As the holders can exercise the conversion option on their shares of Series A Convertible Preferred Stock at any time and require cash payment upon conversion, the Company reclassified the Series A Convertible Preferred Stock to temporary equity at December 31, 2021.
18. Stockholder's Equity
The Company is authorized to issue 125,000,000 shares of common stock, which shall consist of 62,500,000 shares of Class A common stock, par value $0.01 per share, and 62,500,000 shares of Class B common stock, par value $0.01 per share. Subject to the rights of holders of any outstanding preferred stock, the number of authorized shares of common stock may be increased or decreased by the affirmative vote of the holders of a majority of the shares entitled to vote on such matters, but in no instance can the number of authorized shares be reduced below the number of shares then outstanding.
The certificate of incorporation of the Company provides for two classes of common stock, and for the conversion of each class into the other, to provide a mechanism by which holders of Class A common stock of the Company who may be limited in the amount of voting common stock of the Company they can hold pursuant to federal, state or foreign bank laws, to convert their shares into non-voting Class B common stock to prevent being in violation of such laws. Each holder of Class A common stock is entitled to one vote per share in connection with the election of directors and on all other matters submitted to a stockholder vote, provided, however, that, except as otherwise required by law, holders of Class A common stock are not entitled to vote on any amendment to the Company's amended and restated certificate of incorporation that relates solely to the terms of one or more
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
outstanding series of the Company's preferred stock, if holders of the preferred stock series are entitled to vote on the amendment under the Company's certificate of incorporation or Delaware law. No holder of Class A common stock may accumulate votes in voting for directors of the Company.
No holder of Class B common stock is entitled to vote except as otherwise provided by law, provided however that the Company must obtain the consent of a majority of the holders of Class B common stock to effect any amendment, alteration or repeal of any provision of the Company's amended and restated certificate of incorporation or amended and restated by-laws that would adversely affect the voting powers, preferences or rights of holders of Class B common stock. Except as otherwise provided by law, Class B common stock shares will not be counted as shares held by stockholders for purposes of determining whether a vote or consent has been approved or given by the requisite percentage of shares.
Each share of Class A common stock is convertible at the option of the holder and at no cost into one share of Class B common stock, and each share of Class B common stock is convertible at the option of the holder and at no cost into one share of Class A common stock. The conversion ratios will be adjusted proportionally to reflect any stock split, stock dividend, merger, reorganization, recapitalization or other change in the Class A common stock and Class B common stock. Upon conversion, converted shares resume the status of authorized and unissued shares.
Subject to the preferences of the holders of any of the Company's preferred stock that may be outstanding from time to time, each share of Class A common stock and Class B common stock will have an equal and ratable right to receive dividends and other distributions in cash, property or shares of stock as may be declared by the Company's board of directors out of assets or funds legally available for the payment of dividends and other distributions.
In the event of the liquidation, dissolution or winding up of the Company, subject to the preferences of the holders of any preferred stock of the Company that may be outstanding from time to time, holders of Class A common stock and Class B common stock will be entitled to share equally and ratably in the assets available for distribution to the Company's stockholders. There are no redemption or sinking fund provisions applicable to the Class A or the Class B common stock.
Embedded Cash Conversion Option on the December 2022 Convertible Notes
Upon issuance of the December 2022 Convertible Notes (see Note 16), the Company recognized the embedded cash conversion option at fair value of $23.4 million which was valued as of June 26, 2018 at $29.0 million. On June 26, 2018, the Company received shareholder approval for the Company to settle the December 2022 Convertible Notes entirely in Class A common stock. Upon receiving shareholder approval, the Company reclassified the separately recognized conversion option from a derivative liability to equity. The Company allocated $29.6 million of the cash consideration paid on the December 2020 partial extinguishment of the Convertible Notes (see Note 16) to this equity component. The Company redeemed all of the remaining December 2022 Convertible Notes on June 24, 2021.
Cash Dividends to Common Stockholders
During the first quarter of 2020, the Company began the declaration of a quarterly cash dividend payable on its common stock. During February 2021, the Company's Board of Directors declared a cash dividend of $0.08 per share of Class A common stock. During April 2021, July 2021 and October 2021, the Company's Board of Directors declared a cash dividend of $0.10 per share of Class A common stock. During February 2022, April 2022, July 2022, and October 2022, the Company's Board of Directors declared a cash dividend of $0.12 per share of Class A common stock. Dividends are payable on all outstanding shares of Class A common stock and on granted but unvested shares of Class A common stock under the Equity Plans on the date of record (See Note 23). During the year ended December 31, 2022, the Company paid $15.2 million of cash dividends to its holders of Class A common stock.
Treasury Stock
Treasury stock of $614.3 million as of December 31, 2022, compared to $547.1 million as of December 31, 2021, resulted from $36.1 million acquired through repurchases of shares to cover employee minimum tax withholding obligations related to stock compensation vesting events under the Equity Plans or other similar transactions and $31.1 million purchased in connection with a share repurchase program.
The following represents the activity relating to the treasury stock held by the Company during the year ended December 31, 2022:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | |
| Treasury Stock Shares | | Cost
(dollars in thousands) | | Average Cost per Share |
| Balance outstanding at December 31, 2021 | 28,047,929 | | | $ | 547,112 | | | $ | 19.51 | |
| Shares purchased for minimum tax withholding under the 2010 and 2020 Equity Plans or other similar transactions | 1,058,933 | | | 36,082 | | | 34.07 | |
| | | | | |
| Purchase of treasury stock | 1,069,002 | | | 31,078 | | | 29.07 | |
| Balance outstanding at December 31, 2022 | 30,175,864 | | | $ | 614,272 | | | $ | 20.36 | |
19. Non-Controlling Interests in Consolidated Subsidiaries and Investment Funds
Redeemable and nonredeemable non-controlling interests in consolidated subsidiaries and investment funds and the related net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and investment funds are comprised as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| As of December 31, |
| | 2022 | | 2021 | | 2020 |
| | (dollars in thousands) |
| Redeemable non-controlling interests in consolidated subsidiaries and investment funds | | | | | |
| Consolidated Funds | | | | | |
| Beginning balance | $ | — | | | $ | — | | | $ | 391,275 | |
| Capital contributions | — | | | — | | | 184,223 | |
| Capital distributions | — | | | — | | | (181,863) | |
| | | | | |
| Deconsolidation of entity | — | | | — | | | (360,711) | |
| Income (loss) attributable to non-controlling interests | — | | | — | | | (32,924) | |
| Ending balance | — | | | — | | | — | |
| | | | | |
| Nonredeemable non-controlling interests in consolidated subsidiaries and investment funds | | | | | |
| Operating companies | | | | | |
| Beginning balance | $ | 126,105 | | | $ | 83,818 | | | 11,513 | |
| Capital contributions | 24,417 | | | 36,539 | | | 9,730 | |
| Capital distributions | (10,626) | | | (7,601) | | | (5,605) | |
| Consolidation of entity | | | — | | | 48,596 | |
| Income (loss) attributable to non-controlling interests | 6,540 | | | 13,349 | | | 19,584 | |
| Ending balance | 146,436 | | | 126,105 | | | 83,818 | |
| | | | | |
| Consolidated Funds | | | | | |
| Beginning balance | 33,630 | | | 115,806 | | | 82,807 | |
| Capital contributions | — | | | 19,017 | | | 191,493 | |
| Capital distributions | — | | | (21,411) | | | (72,646) | |
| | | | | |
| Deconsolidation of entity | — | | | (74,813) | | | (89,889) | |
| Income (loss) attributable to non-controlling interests | (17,143) | | | (4,969) | | | 4,041 | |
| Ending balance | 16,487 | | | 33,630 | | | 115,806 | |
| | | | | |
| Total Nonredeemable non-controlling interests in consolidated subsidiaries and investment funds | $ | 162,923 | | | $ | 159,735 | | | $ | 199,624 | |
| | | | | |
20. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income includes the after tax change in Other revenues in the accompanying consolidated statement of operations. During the periods presented, the Company did not have material reclassifications out of other comprehensive income.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
| | (dollars in thousands) |
| Redeemable non-controlling interests in consolidated subsidiaries and funds | | | |
| Operating companies | $ | 6,113 |
| | $ | 7,638 |
|
| Consolidated Funds | 434,491 |
| | 371,567 |
|
| | $ | 440,604 |
| | $ | 379,205 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Beginning balance | | | | | $ | (2) | | | $ | (7) | | | $ | (5) | |
| | | | | | | | | |
| Foreign currency translation | | | | | 3 | | | 5 | | | (2) | |
| Ending balance | | | | | $ | 1 | | | $ | (2) | | | $ | (7) | |
21. Revenue from Contracts with Customers
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (dollars in thousands) |
| Income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | | | | | |
| Operating companies | $ | 2,353 |
| | $ | 3,717 |
| | $ | 9,503 |
|
| Consolidated Funds | 21,438 |
| | 3,165 |
| | 5,743 |
|
| | $ | 23,791 |
| | $ | 6,882 |
| | $ | 15,246 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, | |
| | | | | | | | 2022 | | 2021 | | 2020 | | | |
| | | | | (dollars in thousands) |
| Revenue from contracts with customers | | | | | Operating Company |
| Investment banking | | | | | | | | | | | | |
| Underwriting fees | | | | | | $ | 114,201 | | | $ | 421,081 | | | $ | 427,670 | | | | |
| Strategic/financial advisory fees | | | | | 248,268 | | | 433,909 | | | 190,958 | | | | |
| Placement and sales agent fees | | | | | 120,629 | | | 195,676 | | | 133,171 | | | | |
| Expense reimbursements from clients | | | | | 11,744 | | | 16,496 | | | 17,687 | | | | |
| Total investment banking revenue | | | | | 494,842 | | | 1,067,162 | | | 769,486 | | | | |
| Brokerage | | | | | | | | | | | | | | |
| Commissions | | | | | | | 522,670 | | | 530,927 | | | 479,762 | | | | |
| Trade conversion revenue | | | | | | 30,233 | | | 24,098 | | | 21,389 | | | | |
| Equity research fees | | | | | 24,111 | | | 21,015 | | | 19,757 | | | | |
| Total brokerage revenue from customers | | | | | 577,014 | | | 576,040 | | | 520,908 | | | | |
| Management fees | | | | | 65,986 | | | 71,374 | | | 46,556 | | | | |
| Incentive income | | | | | 646 | | | 2,732 | | | 592 | | | | |
| Total revenue from contracts with customers - Op Co | | | | | $ | 1,138,488 | | | $ | 1,717,308 | | | $ | 1,337,542 | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | Asset Company |
| Management fees | | | | | 684 | | | 913 | | | 959 | | | | |
| | | | | | | | | | | | |
| Total revenue from contracts with customers - Asset Co | | | | | 684 | | | 913 | | | 959 | | | | |
| Total revenue from contracts with customers | | | | | $ | 1,139,172 | | | $ | 1,718,221 | | | $ | 1,338,501 | | | | |
17.
22. Insurance and reinsurance
Cowen Insurance Co is a wholly owned Malta-based insurance company that reinsures a significant proportion of its portfolio (“Outward Reinsurance”). The Company's wholly owned subsidiaries, Cowen Reinsurance
The Company’s wholly-owned Luxembourg subsidiary, Hollenfels Re SA S.A. (based in Luxembourg) (“Hollenfels”Cowen Re”) providesand Kelvin (based in Guernsey, see Note 3) provide reinsurance to third party insurance and reinsurance companies. As Hollenfels started its operations during 2016, all claims it experienced (reported or not reported) were from the 2016companies (“Inward Reinsurance”). Cowen Insurance Co's, Cowen Re's, and 2017 accident years. During the year ended December 31, 2017, Hollenfels’sKelvin's share of claims incurred and paid during the periods below, as well as the change in claims as reported to it by the underlying insuranceoutstanding and reinsurance companies, amounted to $15.3 million. During the same period, Hollenfels’s share of claims incurred but not reported plus expected development on reported("IBNR") during years ended December 31, 2022, 2021 and 2020, net of reinsurance, were as follows:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Paid claims | | | | | | | | | |
| Insurance (net of Outward Reinsurance) | | | | | $ | 4,496 | | | $ | 3,285 | | | $ | — | |
| Inward Reinsurance | | | | | 28,615 | | | 17,140 | | | 14,838 | |
| Total | | | | | $ | 33,111 | | | $ | 20,425 | | | $ | 14,838 | |
| Change in claims outstanding and claims IBNR | | | | | | | | | |
| Insurance (net of Outward Reinsurance) | | | | | $ | 533 | | | $ | 112 | | | $ | — | |
| Inward Reinsurance | | | | | (55,803) | | | 3,304 | | | 11,599 | |
| Total | | | | | $ | (55,270) | | | $ | 3,416 | | | $ | 11,599 | |
As of December 31, 2022 and 2021, insurance and reinsurance assets and liabilities consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| |
| Insurance and reinsurance assets | | | |
| Reinsurance recoverable on paid claims | $ | 66,303 | | | $ | 9,072 | |
| Deferred acquisition costs | 4,610 | | | 5,672 | |
| Cash advances held by cedants | 2,684 | | | 3,523 | |
| Reinsurance recoverable on claims reserves | 60,189 | | | 11,806 | |
| Total | $ | 133,786 | | | $ | 30,073 | |
| Insurance and reinsurance liabilities | | | |
| Reinsurance payables on paid claims | $ | 27,030 | | | $ | 3,837 | |
| Unearned Premium reserve | 27,294 | | | 23,241 | |
| Loss reserves (incurred claims and IBNR) | 263,223 | | | 44,191 | |
| Total | $ | 317,547 | | | $ | 71,269 | |
Cowen Insurance Co, Cowen Re, and Kelvin utilize several methods to determine their claims totaled $5.8 million. HollenfelsIBNR. Cowen Insurance Co and Cowen Re generally employsemploy an estimation methodology whereby historical average claims ratios over a period of 5 orup to 10 years are utilized, based on availability of data, are utilized.data. In cases where current claims development contradicts historical results, Cowen Insurance Co and Cowen Re employ a method to determine average claims ratios derived through different actuarial calculation methods. If an event may have occurredoccurs that couldmay give rise to significant future claims in excess of the amount calculated using the above-mentioned methodology, then actuarial methods are used to calculatemethodologies, the impact of such an event.event is calculated using existing claims data and actuarial estimation methods to adjust Cowen Insurance Co's and Cowen Re's IBNR provision. As Kelvin is in run-off Kelvin determines its IBNR liabilities based on figures provided by insurance companies that Kelvin reinsures as well as industry-wide information about claims development related to known events in the past, such as hurricanes, typhoons, earthquakes, etc. All entities utilize recognized actuarial methods and assumptions which are regularly reviewed through catastrophe models, own loss experience, historical industry loss experience, underwriter and originator experience, pricing adequacy trends and management’s professional judgement. During the year Hollenfels did not change its methodology for determining claimended December 31, 2022, claims liability orand claim adjustment expenses andwere calculated them using the above-mentioned methods.methods consistent with prior years.
Cowen Insurance Co, Cowen Re, and Kelvin typically settle their premiums and claim payments on a quarterly basis. Cowen Insurance Co, Cowen Re, and Kelvin write contracts on both a proportional and non-proportional basis. The contracts contain inspection rights to allow the companies to inspect the policy documents that provide the source for the underlying data provided by the cedant. This negates the need for them to collect and hold the documents themselves which would be impracticable. Cowen Insurance Co, Kelvin, and Cowen Re do not discount any of its reserves and manage their exposure to insurance risk from higher than expected claims via the purchase of outward reinsurance. Cowen Insurance Co purchases such reinsurance on a program by program basis while Cowen Re and Kelvin have purchased whole account reinsurance which extends to their entire business.
Cowen Insurance Co, Cowen Re and Kelvin have entered into insurance and reinsurance agreements that require them to post collateral of cash or U.S. government bonds to cover certain exposures as defined in the respective insurance and reinsurance agreements. As of December 31, 2022, Cowen Re had pledged $53.0 million of collateral towards such reinsurance obligations, of
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
While Hollenfels typically settleswhich $43.0 million was in cash and $10.1 million was in U.S. government bonds. As of December 31, 2021, total collateral pledged was $60.1 million, of which $44.1 million was cash and $16.0 million was U.S. government bonds. The collateral pledged as of December 31, 2022 was $7.1 million lower than the amounts pledged at December 31, 2021. This change is due to a release of collateral on three of its premiumscedant contracts. Cowen Re expects $40.5 million of the cash collateral pledged to be released on September 30, 2023. The remaining collateral of $12.5 million is expected to be released periodically between December 31, 2022 and claim payments on a quarterly basis,December 31, 2029 in accordance with the frequencyterms of claimsthe underlying insurance and reinsurance agreements. As of December 31, 2022, Kelvin had pledged $76.6 million of collateral towards its reinsurance obligations, of which $52.2 million was in cash and $24.4 million was in the underlying policies is impractical for Hollenfels to obtain. This is because certain contracts Hollenfels has written are on a quota-share basis while the other policies provide aggregate loss protection, rendering the collectionform of information for all underlying contracts impracticable. Hollenfels did not discount anyletters of its reserves and did not cede any portioncredit from major banks. As of its exposures during the year ended December 31, 2017.
18. Other Revenues2022 and Expenses
On September 23, 2016, the Company and the portfolio managers RASL completed the sale of their respective ownership interests in RASL (See Note 2). Along with the target working capital transferred at closing, the Company also allocated a portion of goodwill associated with the investment management segment to the sale price (See Note 12) which is shown net in other revenues in the accompanying consolidated statements of operations.
Other expenses, during the years ended December 31, 2017, 2016, and 2015, are primarily the general administrative expenses of the various operating company subsidiaries or the Consolidated Funds.2021, Cowen Insurance Co had no pledged collateral.
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| |
| Insurance and reinsurance assets | | | |
| Beginning balance at January 1 | $ | 44,191 | | | $ | 37,036 | |
| Increase/(Decreases) reinsurance recoverables | (11,806) | | | — | |
| Total | $ | 32,385 | | | $ | 37,036 | |
| | | |
| Incurred related to: | | | |
| Current Years | $ | 2,436 | | | $ | 13,262 | |
| Prior Years | (36,200) | | | 1,414 | |
| Total | $ | (33,764) | | | $ | 14,676 | |
| | | |
| Paid related to: | | | |
| Current Years | $ | 3,941 | | | $ | 6,874 | |
| Prior Years | 29,170 | | | 13,551 | |
| Total | $ | 33,111 | | | $ | 20,425 | |
| | | |
| Acquired insurance and reinsurance liabilities net of reinsurance assets and liabilities | $ | 237,524 | | | $ | 1,009 | |
| | | |
| Balance at December 31 | $ | 203,035 | | | $ | 32,385 | |
| Increase/(Decreases) reinsurance recoverables | 60,189 | | | $ | 11,806 | |
| Ending balance at December 31 | $ | 263,224 | | | $ | 44,191 | |
19.
23. Share-Based andPayments, Deferred Compensation and Employee Ownership Plans
On December 5, 2016, the Company effected a one-for-four reverse stock split of the Company's class A and class B common stock. All share and per share information has been retroactively adjusted to reflect the reverse stock split.
The Company issues share basedhas issued share-based compensation under the 20062010 and 2020 Equity and Incentive Plan the 2007 Equity and Incentive Plan (both established prior to the November 2009 transaction between Ramius Capital Group LLC and Cowen) and the Cowen Group, Inc. 2010 Equity and Incentive Plan (collectively, the “Equity Plans”(the "Equity Plans"). The Equity Plans permit the grant of options, restricted shares, restricted stock units, stock appreciation rights ("SAR's") and other equity basedequity-based awards to the Company's employees and directors. Stock options granted generally vest over two-to-five-yeartwo to five-year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued, both of which are eligible to accrue dividend equivalents, may be immediately vested or may generally vest over a two-to-five-yeartwo-to five-year period. SAR's vest and expire after five years from grant date. Awards are subject to the risk of forfeiture.forfeiture, inclusive of accrued dividend equivalents. As of December 31, 2017,2022, there were no3.7 million shares available for future issuance under only the 2020 Equity Plans.Incentive Plan.
Under the 2010 Equity Plan,Plans, the Company awarded $24.1$50.1 million of deferred cash awards to its employees during the year ended December 31, 2017.2022. These awards vest over a four yearfour-year period and accrue interest at 0.70% per year. As of December 31, 2017,2022, the Company had unrecognized compensation expense related to the 2010 Equity PlanPlans' deferred cash awards of $35.0$61.5 million.
Subsequent to the acquisition of Convergex Group (see Note 2) the Company maintained the Convergex Nonqualified Deferred Compensation Plan, which is a deferred cash award plan that is expensed over the 27 month service period requirement. As of December 31, 2017, the Company had unrecognized compensation expense related to former Convergex Group deferred cash awards of $2.4 million.
The Company measures compensation cost for share basedequity classified share-based awards according toon grant date and amortizes the equity method. In accordance with the expense recognition provisions of those standards, the Company amortizes unearned compensation associated with share basedsuch awards on a straight-line basis over the vesting period of the option or award, net of estimated forfeitures. In relation to awards under the Equity Plans,Plan, the Company recognized compensation expense of $28.4$66.7 million, $26.0$85.0 million and $21.7$48.1 million for the years ended December 31, 2017, 2016,2022, 2021 and 20152020, respectively. The income tax effect recognized for the Equity Plans was a benefit of $7.7of $24.3 million, $11.4$33.5 million and $5.0$13.8 million for the years ended December 31, 2017, 2016,2022, 2021 and 20152020, respectively.
Stock Options and Stock Appreciation Rights
The Company values options and SAR's on grant date using the Black-Scholes valuation model which requires the Company to make assumptions regarding the expected term, volatility, risk-free rate and dividend yield:
Expected term. Expected term represents the period of time that awards granted are expected to be outstanding. The Company elected to use the "simplified" calculation method, as applicable to companies that lack extensive historical data. The mid-point between the vesting date and the contractual expiration date is used as the expected term under this method.
Expected volatility. The Company bases its expected volatility on its own stock price history.
Risk free rate. The risk-free rate for periods within the expected term of the award is based on the interest rate of a traded zero-coupon U.S. Treasury bond with a term equal to the awards' expected term on the date of grant.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Dividend yield. The Company has not paid and does not expect to pay dividends in the foreseeable future. Accordingly, the assumed dividend yield is zero.
The following table summarizes the Company's stock option activity for the years ended December 31, 2017 and 2016: |
| | | | | | | | | | | | | |
| | Class A Common Shares Subject
to Option | | Weighted Average
Exercise Price/Share | | Weighted Average
Remaining Term | | Aggregate Intrinsic
Value(1) |
| | | | | | (in years) | | (dollars in thousands) |
| Balance outstanding at December 31, 2015 | 4,167 |
| | $ | 19.56 |
| | 1.6 |
| | $ | 87 |
|
| Options granted | — |
| | — |
|
| — |
| | — |
|
| Options exercised | — |
| | — |
| | — |
| | — |
|
| Options expired | — |
| | — |
| | — |
| | — |
|
| Balance outstanding at December 31, 2016 | 4,167 |
| | $ | 19.56 |
| | 0.10 |
| | $ | — |
|
| Options granted | — |
| | — |
| | — |
| | — |
|
| Options exercised | — |
| | — |
| | — |
| | — |
|
| Options expired | (4,167 | ) | | 19.56 |
| | — |
| | — |
|
| Balance outstanding at December 31, 2017 | — |
| | $ | — |
| | 0 |
| | $ | — |
|
| Options exercisable at December 31, 2016 | 4,167 |
| | $ | 19.56 |
| | 0.10 |
| | $ | — |
|
| Options exercisable at December 31, 2017 | — |
| | $ | — |
| | 0 |
| | $ | — |
|
| |
(1) | Based on the Company's closing stock price of $13.65 on December 31, 2017 and $15.50 on December 31, 2016. |
As of December 31, 2017, the Company's stock options were fully expensed.
The following table summarizes the Company's SAR's for the years ended December 31, 2017: |
| | | | | | | | | | | | | |
| | Class A Common Shares Subject
to Option | | Weighted Average
Exercise Price/Share | | Weighted Average
Remaining Term | | Aggregate Intrinsic
Value(1) |
| | | | | | (in years) | | (dollars in thousands) |
| Balance outstanding at December 31, 2015 | 100,000 |
| | $ | 11.60 |
| | 2.21 |
| | $ | 558 |
|
| SAR's granted | — |
| | — |
| | — |
| | — |
|
| SAR's acquired | — |
| | — |
| | — |
| | — |
|
| SAR's expired | — |
| | — |
| | — |
| | — |
|
| Balance outstanding at December 31, 2016 | 100,000 |
| | $ | 11.60 |
| | 1.21 |
| | $ | 435 |
|
| SAR's granted | — |
| | — |
| | — |
| | — |
|
| SAR's vested | (25,000 | ) | | 11.60 |
| | — |
| | — |
|
| SAR's expired | — |
| | — |
| | — |
| | — |
|
| Balance outstanding at December 31, 2017 | 75,000 |
| | $ | 11.60 |
| | 0.21 |
| | $ | 173 |
|
| SAR's exercisable at December 31, 2016 | — |
| | $ | — |
| | — |
| | $ | — |
|
| SAR's exercisable at December 31, 2017 | — |
| | $ | — |
| | 0 |
| | $ | — |
|
| |
(1) | Based on the Company's closing stock price of $13.65 on December 31, 2017 and $15.50 on December 31, 2016.
|
As of December 31, 2017 the unrecognized compensation expense related to the Company's grant of SAR's was an immaterial amount and at December 31, 2016 it was $0.1 million.
Restricted Shares and Restricted Stock Units Granted to Employees
Restricted shares and restricted stock units are referred to collectively as restricted stock. The following table summarizes the Company's restricted share and restricted stock unit activity for the years ended December 31, 20172022 and 2016:2021: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Nonvested Restricted Class A Common Shares and Class A Common Restricted Stock Units | | Weighted-Average
Grant Date
Fair Value | | Nonvested Restricted Class A Common Shares and Class A Common Restricted Stock Units | | Weighted-Average
Grant Date
Fair Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Beginning balance outstanding | 4,595,342 | | | $ | 24.33 | | | 5,450,191 | | | $ | 17.56 | |
| Granted | 2,054,563 | | | 31.62 | | | 2,092,904 | | | 35.31 | |
| Vested | (2,134,692) | | | 21.46 | | | (2,785,535) | | | 19.46 | |
| Canceled | — | | | — | | | — | | | — | |
| Forfeited | (71,717) | | | 21.96 | | | (162,218) | | | 22.23 | |
| Ending balance outstanding | 4,443,496 | | | $ | 29.12 | | | 4,595,342 | | | $ | 24.33 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | |
| | Nonvested Restricted Class A Common Shares and Class A Common Restricted Stock Units | | Weighted-Average
Grant Date
Fair Value |
| Balance outstanding at December 31, 2015 | 5,370,091 |
| | $ | 16.68 |
|
| Granted | 2,157,403 |
| | 14.02 |
|
| Vested | (1,487,092 | ) | | 14.95 |
|
| Canceled | — |
| | — |
|
| Forfeited | (322,470 | ) | | 14.89 |
|
| Balance outstanding at December 31, 2016 | 5,717,932 |
| | $ | 16.23 |
|
| Granted | 2,255,441 |
| | 14.98 |
|
| Vested | (2,036,366 | ) | | 14.64 |
|
| Canceled | — |
| | — |
|
| Forfeited | (357,714 | ) | | 15.77 |
|
| Balance outstanding at December 31, 2017 | 5,579,293 |
| | $ | 16.33 |
|
Included in the restricted share and restricted stock unit activity are performance linkedperformance-linked restricted stock units of 481,4381,974,217 which were awarded to employeesfrom March 2016 through March 2022. Certain of the Companyawards granted have the ability to be cash settled when the attained award exceeds a certain percentage of granted amount. The cash portion of the award has been bifurcated from the equity component and recorded as a compensation payable in December 2013 and January 2014. An additional 700,000 performance linked restricted stock units were awarded in March 2016.the accompanying consolidated statement of financial condition. Of the awards granted, 109,375712,652 have vested and 320,681 have been forfeitedcanceled, as they did not meet the performance criteria, through December 31, 2017.2022. Included in vested units are 233,333 units that had an attainable share value of 420,000, and were delivered in March 2021. Of this attainable share value 350,000 shares were settled in the issuance of the Company's Class A common stock and were delivered in March 2021 with the remaining 70,000 shares being settled in cash at the volume weighted average price on settlement date. Also included in vested units are 333,333 units that had an attainable share value of 666,666, due to reaching certain performance goals. Of this attainable value 528,800 shares were settled in the Company's Class A common stock and were delivered in March 2022 with the remaining 137,866 shares being settled in cash at the volume weighted average price of the Company's Class A common stock on settlement date. The remaining awards, included in the outstanding balance as of December 31, 2017, will2022, vest between March 2019December 2023 and December 20202024 and will be earned only to the extent that the Company attains specified market conditions relating to its volume-weighted average share price and total shareholder return in relation to certain benchmark indices and performance goals relating to aggregate net income and average return on shareholder equity. The actual number of RSUsattained shares ultimately earned could vary from zero, if performance goals are not met, to as much as 150%240% of the targeted award. Each RSU is equal to the one share of the Company’s Class A common stock. Compensation expense is recognized to the extent that it is probable that the Company will attain the performance goals.
The fair value of restricted stock (excluding performance linked units which are valued using the Monte Carlo valuation model) is determined based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.
As of December 31, 2017,2022, there was $56.4$77.9 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees. Unrecognized compensation expense related to nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 2.271.64 years.
Restricted Shares and Restricted Stock Units Granted to Non-employeeNon-Employee Board Members
There were 56,51964,370 and 28,463 restricted stock units awarded to non-employee board members during the year ended December 31, 2017. As of December 31, 2017 there were 191,9622022 and 2021. The Company delivered 4,156 and 41,667 restricted stock units outstanding. There were 56,100 restricted stock units awardedto non-employee board members during the year ended December 31, 2016.2022 and 2021. As of December 31, 20162022 and 2021, there were 162,176306,547 and 246,333 restricted stock units outstanding.outstanding for non-employee board members, respectively.
Other Share Based Payments and Awards 20.In certain circumstances, the Company grants carried interest in consolidated managing member/general partner subsidiaries to third parties through the grant of equity awards in exchange for professional, advisory and other services. The equity awards are recorded within additional paid in capital in the accompanying consolidated statements of financial condition and professional, advisory and other fees expense in the accompanying consolidated statements of operations based on the fair value of the award granted and expensed over the terms of the award. In addition, the equity awards provide the third parties profit points aligned to the allocated carried interest distributions. Upon vesting of the awards, the third parties' allocation of carried interest is determined by applying an equity ownership model. Accordingly, the Company accrues carried interest allocations based on the fair value of the underlying investments assuming hypothetical liquidation at book value upon vesting as nonredeemable non-controlling interest.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
On March 1, 2022, Cowen Digital Holdings LLC (“CDIG”) authorized 2,000,000 Class B Units, of which 1,487,500 Class B Units and an additional 29,250 on July 15, 2022, were issued to an affiliate, for which a subsidiary of the Company is the Managing Member, on behalf of the Company’s employees as incentive awards (the "Digital Awards") under the 2022 Equity Unit Incentive Plan. The Class B Units will, upon vesting, represent a 20% ownership of CDIG, a consolidated subsidiary of the Company upon vesting. Once the vesting conditions of the Digital Awards have been met, such awards will be presented as nonredeemable non-controlling interest in the accompanying consolidated statements of financial condition. Half of the Digital Awards vest over a period of time and are tied to service (time based) and the other half vest when a qualifying event as stipulated in the Digital Award documents occurs (performance based). Once vested, Class B units will not be entitled to distributions unless and until a profit distribution hurdle has been met. The Company recognized compensation expense of $0.8 million related to the time based Digital Awards for the year ended December 31, 2022. At December 31, 2022, there was $0.8 million of unrecognized compensation expense related to the time based Digital Awards which will be recognized over their five year vesting period. The fair value of time based Digital Awards is determined based on the fair market value of CDIG and its consolidated subsidiaries. The fair market value of CDIG and its consolidated subsidiaries is calculated utilizing recent transactions, discounted cash flows, and market multiples. The Digital Awards are then using a standard Black Scholes options pricing model. The primary input in determining the fair market value on grant date was recent/pending transactions in CDIG’s underlying investments. The expense related to the performance based component of the Digital Awards will be recognized when the qualifying event is considered to be probable. The income tax effect recognized for the Digital Awards was a benefit of $0.2 million for the year ended December 31, 2022.
24. Defined Contribution Plans
The Company sponsors a Retirement and Savings Plan which is a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code (the "401(k) Plans"). All full-time employees of the Company can contribute on a tax deferred basis and an after-tax basis to the 401(k) Plans up to federal contribution limits or up to 100% of their annual compensation, subject to certain limitations. The Company provides matching and profit sharing contributions for certainto employees that are equal to a specified percentage of the eligible participant's contribution as defined by the 401(k) Plans. For the years ended December 31, 2017, 20162022, 2021 and 2015,2020, the Company's contributions to the 401(k) Plans were $0.7$3.0 million, $0.5$3.9 million, and $0.5$2.9 million, respectively.
21.25. Income Taxes
The taxable results of the Company’s U.S. operations are included in the consolidated income tax returns of Cowen Inc. as well as stand‑alonestand-alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand‑alonestand-alone or combined basis. These subsidiaries are subject to tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries with tax filing obligations are the United Kingdom, Luxembourg, Malta, Guernsey, Germany, Switzerland, Israel, South Africa, Canada and Hong Kong.
The Company is subject to U.S. tax on its Global Intangible Low Taxed Income ("GILTI"). The Company elected to account for taxes on GILTI inclusions in U.S. taxable income as incurred on the current year basis and not included any related amounts in deferred taxes.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The components of the Company's income tax expense for the years ended December 31, 2017, 20162022, 2021 and 20152020 are as follows: | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
| |
| Current tax expense/(benefit) | | | | | |
| Federal | $ | 32,574 | | | $ | 92,390 | | | $ | 13,840 | |
| State and local | 2,799 | | | 21,842 | | | 5,060 | |
| Foreign | 4,358 | | | 1,867 | | | 1,355 | |
| Total | $ | 39,731 | | | $ | 116,099 | | | $ | 20,255 | |
| Deferred tax expense/(benefit) | | | | | |
| Federal | $ | (23,194) | | | $ | (9,860) | | | $ | 53,231 | |
| State and local | (5,705) | | | (4,861) | | | 17,337 | |
| Foreign | (46) | | | 661 | | | (450) | |
| Total | (28,945) | | | (14,060) | | | 70,118 | |
| Total tax expense/(benefit) | $ | 10,786 | | | $ | 102,039 | | | $ | 90,373 | |
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Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (dollars in thousands) |
| Current tax expense/(benefit) | | | | | |
| Federal | $ | 421 |
| | $ | 1,268 |
| | $ | (635 | ) |
| State and local | 2,034 |
| | 1,972 |
| | 313 |
|
| Foreign | 428 |
| | 262 |
| | 348 |
|
| Total | $ | 2,883 |
| | $ | 3,502 |
| | $ | 26 |
|
| Deferred tax expense/(benefit) | | | | | |
| Federal | $ | 44,071 |
| | $ | (22,834 | ) | | $ | (37,979 | ) |
| State and local | (2,938 | ) | | (1,900 | ) | | (7,420 | ) |
| Foreign | 37 |
| | 2,140 |
| | (2,123 | ) |
| Total | 41,170 |
| | (22,594 | ) | | (47,522 | ) |
| Total Tax expense/(benefit) | $ | 44,053 |
| | $ | (19,092 | ) | | $ | (47,496 | ) |
Consolidated U.S. income/(loss) before income taxes was $3.9$60.5 million in 2022, $385.1 million in 2017, $(29.5)2021, and $289.6 million in 2016, and $8.0 million in 2015.2020. The corresponding amounts for non-U.S.-based income/(loss) were $3.1$16.1 million in 2022, $20.9 million in 2017, $(2.0)2021, and $7.9 million in 2016, and $3.5 million in 2015.2020.
The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2017, 2016,2022, 2021, and 20152020 are as follows: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| Pre-tax net income at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| | | | | |
| | | | | |
| | | | | |
| Nondeductible expenses | 11.3 | | | 2.6 | | | 1.5 | |
| | | | | |
| Change in valuation allowance | (3.2) | | | — | | | — | |
| Tax credits | (4.6) | | | — | | | — | |
| Stock compensation | (7.4) | | | (2.3) | | | (0.3) | |
| | | | | |
| State and foreign tax | (4.4) | | | 5.0 | | | 7.3 | |
| Reversal of income attributable to non-controlling interests | 2.9 | | | (0.4) | | | 0.7 | |
| Other, net | (1.5) | | | (0.8) | | | 0.2 | |
| Total | 14.1 | % | | 25.1 | % | | 30.4 | % |
|
| | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Pre-tax loss at U.S. statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Dividend received deduction | (25.9 | ) | | — |
| | — |
|
| Bargain purchase gain | (34.8 | ) | | — |
| | — |
|
| Basis adjustment on investments | 65.2 |
| | — |
| | — |
|
| Nondeductible expenses | 14.2 |
| | — |
| | — |
|
| Deferred asset recognition | — |
| | — |
| | (323.8 | ) |
| Unrecognized gains on foreign subsidiaries | — |
| | 38.7 |
| | — |
|
| Change in valuation allowance | — |
| | (6.7 | ) | | — |
|
| Impact of tax law change | 669.8 |
| | — |
| | (27.9 | ) |
| State and foreign tax | 25.3 |
| | 1.3 |
| | (39.6 | ) |
| Reversal of income attributable to redeemable non-controlling interests | (119.6 | ) | | 1.3 |
| | (46.5 | ) |
| Other, net | 3.7 |
| | (9.0 | ) | | (11.0 | ) |
| Total | 632.9 | % | | 60.6 | % | | (413.8 | )% |
As of December 31, 2017,2022, the Company has net income taxes receivable of approximately $0.1 $10.9 million representing federalstate tax overpayments, which is included in other assets on the accompanying consolidated statements of financial condition. The Company also has income taxes payable of $13.2 million representing federal, state and foreign income taxes payable of approximately $6.3 million,payables, which is included in other liabilities on the accompanyingaccompany consolidated statements of financial condition.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The components of the Company's deferred tax assets and liabilities as of December 31, 20172022 and 20162021 are as follows: |
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Deferred tax assets, net of valuation allowance | | | |
| Net operating loss | $ | 78,650 |
| | $ | 126,037 |
|
| Deferred compensation | 39,992 |
| | 44,966 |
|
| Goodwill | 1,042 |
| | 4,758 |
|
| Option liability | 5,776 |
| | — |
|
| Fixed assets | — |
| | 3,541 |
|
| Tax credits | 4,419 |
| | 2,898 |
|
| Acquired lease liability | 3,473 |
| | 4,111 |
|
| Other | 2,696 |
| | 2,238 |
|
| Total deferred tax assets | 136,048 |
| | 188,549 |
|
| Valuation allowance | (2,103 | ) | | (2,119 | ) |
| Deferred tax assets, net of valuation allowance | 133,945 |
| | 186,430 |
|
| Deferred tax liabilities | | | |
| Unrealized gains on investments | (7,523 | ) | | (20,774 | ) |
| Amortization of bond discount | (6,402 | ) | | — |
|
| Other | (3,697 | ) | | — |
|
| Total deferred tax liabilities | (17,622 | ) | | (20,774 | ) |
| Deferred tax assets/(liabilities), net | $ | 116,323 |
| | $ | 165,656 |
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| As of December 31, |
| 2022 | | 2021 |
| | (dollars in thousands) |
| Deferred tax assets, net of valuation allowance | | | |
| Net operating loss | $ | 12,061 | | | $ | 14,649 | |
| Deferred compensation | 29,967 | | | 34,342 | |
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| Intangible assets | 4,894 | | | 2,732 | |
| Bad debt reserves | 2,929 | | | 759 | |
| Section 174 capitalization | 9,460 | | | — | |
| Tax credits | 1,057 | | | 3,241 | |
| Lease liability | 17,871 | | | 24,373 | |
| Other | 5,926 | | | 3,643 | |
| Total deferred tax assets | 84,165 | | | 83,739 | |
| Valuation allowance | (1,932) | | | (4,226) | |
| Deferred tax assets, net of valuation allowance | 82,233 | | | 79,513 | |
| Deferred tax liabilities | | | |
| Right-of-use on certain assets | (16,498) | | | (22,568) | |
| Goodwill | (7,594) | | | (1,425) | |
| Unrealized gains on investments | (5,070) | | | (30,393) | |
| | | |
| Other | (2,261) | | | (3,362) | |
| Total deferred tax liabilities | (31,423) | | | (57,748) | |
| Deferred tax assets/(liabilities), net | $ | 50,810 | | | $ | 21,765 | |
Deferred tax assets, net of valuation allowance, are reported in the accompanying consolidated statements of financial condition. In addition to the deferred tax balances in the table above, the Company records balances related to its operating losses in Luxembourg, which are discussed below.
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
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
purposes in the foreseeable future. The Company recorded approximately $2.1$1.9 million valuation allowance against its deferred tax assets of $136.0$84.2 million as of December 31, 20172022 and recorded approximately $2.1$4.2 million valuation allowance against its deferred tax assets of $188.5$83.7 million as of December 31, 2016.2021. Separately, the Company has deferred tax liabilities of $17.6$31.4 million as of December 31, 2017,2022 and $20.8$57.7 million as of December 31, 2016.2021.
For tax year 2022, the year 2017, the Company’sCompany's total deferred tax expense is $41.2benefit of $28.9 million predominantly related towas derived by the impactrecognition of the Tax Cuts and Jobs Act, discussed in detail below,Section 174 expenses and the reversal of timing differences in the normal course of business. The deferred tax benefit of $22.6$14.1 million in 20162021 was derived by the release of deferred tax liabilities related to the previous acquisitions by a local subsidiary, and reversal of temporary items duringtiming differences in the normal course of normal operations.business. The deferred tax benefitexpense of $47.5$70.1 million in 2015 mainly represented2020 was derived by the deferredutilization of net operating losses and the reversal of timing differences in the normal course of business.
As of December 31, 2022, the Company has foreign tax benefits generated by an acquisitioncredit carryforwards of a local subsidiary.$1.1 million which expire between 2023 and 2030. Valuation allowance of $0.6 million was established against foreign tax credit carryforward as the Company determined that it is not more likely than not that the credits will be utilized.
The Company has the following net operating loss carryforwardscarryforwards at December 31, 2017: |
| | | | | | | | | | | | | | | |
| | Federal | | New York State | | New York City | | Hong Kong |
| Jurisdiction: | | | | | | | |
| Net operating loss (in millions) |
| $248.4 |
| |
| $93.4 |
| |
| $130.8 |
| |
| $12.8 |
|
| Year of expiration | 2036 |
| | 2036 |
| | 2036 |
| | Indefinite |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Jurisdiction: | Federal | | New York State | | New York City | | Hong Kong |
| Net operating loss (in millions) | $15.2 | | $16.0 | | $24.7 | | $11.7 |
| Year of expiration | 2030 | | 2034 | | 2034 | | Indefinite |
In addition to the net operating loss carryforwards in the table above, the Company also has net operating loss carryforwards in Luxembourg. These loss carryforwards are only accessible to the extent of taxable income generated by the Luxembourg reinsurance companies, including any deferred income that will be generated in the future. Consequently, the Company recorded a deferred tax asset of $146.0$176.7 million, net of deferred tax liabilities of $349.1$39.7 million in connection with future taxable income, and an offsetting valuation allowance of $146.0$176.7 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
TheIn June 2011, the Company acquired a subsidiary with net operating loss carryovers that underwent a change of control under Section 382 of the Internal Revenue Code (“Section 382”) on November 2, 2009.due to the acquisition. Accordingly, a portion of the Company’s deferred tax assets, in particular a portion of its net operating loss, are subject to an annual limitation. The deduction limitation is approximately $2.4 million annually and applies to approximately $1.8 million of pre-transaction losses. Further, as a result of an acquisition of a subsidiary with net operating loss carryovers in June 2011, a portion of the Company’s deferred tax assets, are subject to an annual limitation under Section 382. The deduction limitation is approximately $6.7 million annually and applies to approximately $50.1$10.2 million of net operating losses. The Company is not expected to lose any deferred tax assets asdue to these limitations.
As a result of these limitations.the enactment of the Inflation Reduction Act signed on August 16, 2022, the Company is required to assess the tax impact of the Act in the quarter the law was enacted. Based on management’s analysis, there was no material impact on the Company's financial statements as of December 31, 2022.
The components of unrecognized tax benefits are as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Beginning balance at January 1 | $ | — |
| | $ | — |
|
| Increases due to acquisition | 2,847 |
| | — |
|
| Increases due to current year positions | 1,100 |
| | — |
|
| Ending balance at December 31 | $ | 3,947 |
| | $ | — |
|
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | (dollars in thousands) |
| Beginning balance at January 1 | $ | — | | | $ | 299 | |
| | | |
| Settlement of positions | — | | | (64) | |
| Increases/(Decreases) due to prior year positions | — | | | (235) | |
| Ending balance at December 31 | $ | — | | | $ | — | |
The amount of theCompany did not record any additions to its unrecognized tax benefitsbenefit balances as a result of $3.9 million that would impact the effectivecurrent or prior year tax rate of the Company is $1.1 million. The total amount of income tax-related interest and penalties recognizedpositions in the consolidated statement of operations for the year ended December 31, 2017 is expense of $0.3 million. The total amount of income tax-related interest and penalties recognized2022. No unrecognized tax benefit was recorded in the consolidated statement of financial condition atas of December 31, 2017 is $1.5 million.2022.
The Company is subject to examination byfollowing are the United States Internal Revenue Service as well as state, local and foreign tax authoritiesmajor jurisdictions in jurisdictions wherewhich the Company has significant business operations such as New York, United Kingdom, and Luxembourg. Currently, the Company is under audit by the Internal Revenue Service for the 2014earliest open tax year and New York State for the 2010subject to 2012 tax years. Management is not expecting a material tax liability fromexamination in these audits.jurisdictions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Jurisdiction: | Federal | | New York State | | New York City | | United Kingdom | | Luxembourg | | Malta | | Germany | | Switzerland |
| Tax Year | 2018 | | 2019 | | 2019 | | 2019 | | 2018 | | 2017 | | 2018 | | 2018 |
The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in the United Kingdom, Malta, Germany, Switzerland, Israel, Canada, and Hong Kong subsidiaries.Kong.
Effects of the Tax Cuts and Job Act
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act, was enacted on December 22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
The SAB summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.
The new law includes a reduction in the U.S. corporate income tax rate from 35% to 21%. This change resulted in the Company reporting a deferred income tax expense of $46.6 million in 2017 due to the re-measurement of its deferred tax assets using the new 21% rate applicable upon reversal of these items. This accounting estimate for this matter is complete.
The new law includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries. The Company has performed an earnings and profits analysis of its foreign subsidiaries, and as a result of accumulated deficits, there is no current or deferred income tax effect in this period. Therefore, the accounting estimate for this matter is complete.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
26. Earnings Per Share
The new law includes commissionsBasic earnings per share is calculated by dividing net income attributable to the Company's common stockholders by the weighted average number of shares of Class A common stock outstanding for the period. As of December 31, 2022, there were 28,234,289 shares of Class A common stock outstanding. As of December 31, 2022, the Company has included 310,426 fully vested, unissued restricted stock units and performance based compensationrestricted shares in determiningits calculation of basic earnings per share. As of December 31, 2021, there were 27,778,964 shares of Class A common stock outstanding. As of December 31, 2021, the excessive compensation limitation. ThisCompany has included 972,732 fully vested, unissued restricted stock units and restricted shares in its calculation could impactof basic earnings per share.
Diluted earnings per common share are calculated by adjusting the deductibilityweighted average outstanding shares to assume conversion of certain compensation related deferred tax assets.all potentially dilutive items. The Company analyzeduses the deferred tax assets relatedtreasury stock method to commissionreflect the potential dilutive effect of the unvested restricted shares and performance basedrestricted stock units. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares and restricted stock units are assumed to have been delivered, for the entire period being presented. The number of performance-linked unvested restricted stock units that are included in the calculation are at the amount that could be earned using current payout rates. The assumed proceeds from the assumed vesting, delivery and exercising were calculated as the amount of compensation cost attributed to future services and concluded that no adjustments were required. Therefore, the accounting estimate for this matter is complete.not yet recognized.
The Company has evaluated other significant provisions ofpreviously concluded that it had the lawintent and hasability to settle the December 2022 Convertible Notes in cash and, as a result, the convertible notes did not identified any materialhave an impact these provisions may have on the Company's 2017 year-end financial statements. Management will continue to monitor the application of these provisions ondiluted earnings per share calculation. On March 24, 2021, the Company issued a redemption notice announcing that the Company would redeem all of the December 2022 Convertible Notes (See Note 16). On June 24, 2021, the Company cash settled the December 2022 Convertible Notes up to the principal amount of the December 2022 Convertible Notes and make necessary policy elections ifshare settled through the delivery of shares of the Company’s Class A common stock for the remainder of the conversion obligation in excess of the principal amount. The shares of the Company’s Class A common stock issued are within basic earnings per share subsequent to June 24, 2021. Prior to that date, the Company has applied the if-converted method to the portion of the December 2022 notes above the principal amount that settled in shares upon a conversion in dilutive earnings per share.
On December 31, 2021, the Company irrevocably elected to cash settle $1,000.00 of its obligation in respect of each conversion of any share of the Series A Convertible Preferred Stock. Prior to this date, the Company could elect to settle the Series A Convertible Preferred Stock in shares, cash, or a combination of both. Effective January 1, 2022, the Company adopted ASC 470-20, which requires the Company to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and when needed.include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. With the adoption of this guidance, the Company is required to include the portion of the Series A Convertible Preferred Stock that can be settled in Class A common stock (amount in excess of $1,000.00 per share of the Series A Convertible Preferred Stock) in the diluted earnings per share calculation. As a result, the Series A Convertible Preferred Stock impacts the Company’s diluted earnings per share calculation for the period ended December 31, 2022 (See Note 2).
22.Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The computation of earnings per share is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | (dollars and share data in thousands, except per share data) |
| Net income (loss) | | | | | $ | 65,855 | | | $ | 303,991 | | | $ | 207,064 | |
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | | | | (10,603) | | | 8,380 | | | (9,299) | |
| Net income (loss) attributable to Cowen Inc. | | | | | 76,458 | | | 295,611 | | | 216,363 | |
| Preferred stock dividends | | | | | 6,792 | | | 6,792 | | | 6,792 | |
| Net income (loss) attributable to Cowen Inc. common stockholders for basic earnings per share | | | | | 69,666 | | | 288,819 | | | $ | 209,571 | |
| Change in fair value of contingently issuable shares | | | | | 55 | | | — | | | — | |
| Net income (loss) attributable to Cowen Inc. common stockholders for diluted earnings per share | | | | | $ | 69,721 | | | $ | 288,819 | | | $ | 209,571 | |
| | | | | | | | | |
| Shares for basic and diluted calculations: | | | | | | | | | |
| Weighted average shares used in basic computation | | | | | 28,183 | | | 27,721 | | | 27,790 | |
| | | | | | | | | |
| Performance based restricted stock | | | | | 430 | | | 755 | | | — | |
| Contingently issuable common stock in connection with acquisitions | | | | | 50 | | | — | | | 85 | |
| December 2022 Convertible Notes | | | | | — | | | 1,404 | | | — | |
| Series A Convertible Preferred Stock | | | | | 949 | | | — | | | — | |
| Restricted stock | | | | | 1,932 | | | 2,748 | | | 1,644 | |
| Weighted average shares used in diluted computation | | | | | 31,544 | | | 32,628 | | | 29,519 | |
| Earnings (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 2.47 | | | $ | 10.42 | | | $ | 7.54 | |
| Diluted | | | | | $ | 2.21 | | | $ | 8.85 | | | $ | 7.10 | |
27. Commitments and Contingencies
Operating Lease Obligations
The Company has entered into leases for office spacereal estate and equipment.other facilities. These leases contain rent escalation clauses.clauses and options to extend the applicable lease term. The Company does not include renewal options in the lease term for calculating the Company's lease liability as the renewal options allow the Company operational flexibility and the Company is not reasonably certain to exercise these renewal options at this time. The Company records rent expensethe expenses related to occupancy and equipment on a straight-line basis over the lease term including any rent holiday periods. Rent expense was $22.6 million, $20.3 million and $18.5 million for the years ended December 31, 2017, 2016, and 2015, respectively andthese expenses are included in occupancy and equipment expense and client services and business development expense in the accompanying consolidated statements of operations.
For the year ended December 31, 2022 and 2021, quantitative information regarding the Company's operating lease obligations reflected in the accompanying consolidated statements of operations were as follows: | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Lease cost | | | | | | | | | |
| Operating lease cost | | | | | $ | 25,495 | | | $ | 25,268 | | | $ | 22,759 | |
| Short-term lease cost | | | | | 225 | | | 150 | | | 207 | |
| Variable lease cost | | | | | 2,527 | | | 3,526 | | | 3,550 | |
| Sublease income | | | | | (470) | | | (583) | | | (781) | |
| Total lease costs | | | | | $ | 27,777 | | | $ | 28,361 | | | $ | 25,735 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the supplemental cash flow information and certain other information related to operating leases for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
| (dollars in thousands) | |
| Other information | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 26,046 | | | $ | 27,429 | | | |
| | | | | |
| Weighted average remaining lease term - operating leases (in years) | 5.35 | | 5.27 | | |
| Weighted average discount rate - operating leases | 4.23 | % | | 4.06 | % | | |
As of December 31, 2017,2022, maturities of the outstanding operating lease liabilities for the Company were as follows: | | | | | | | | | | | |
| Equipment Leases (operating) | | Real Estate and Other Facility Rental (a) (b) (c) |
| | (dollars in thousands) |
| 2023 | $ | 523 | | | $ | 24,653 | |
| 2024 | 515 | | | 22,450 | |
| 2025 | 479 | | | 11,781 | |
| 2026 | 278 | | | 8,607 | |
| 2027 | — | | | 7,213 | |
| Thereafter | — | | | 18,998 | |
| Total operating leases | 1,795 | | | 93,702 | |
| Less discount | 41 | | | 10,097 | |
| Less short-term leases | — | | | 137 | |
| | | |
| Total lease liability | $ | 1,754 | | | $ | 83,468 | |
(a)The Company has entered into various agreements to sublease certain of its premises.
(b)During the year ended December 31, 2022, the Company recognized an increase of $12.3 million of operating right-of-use assets and leases liabilities related to facility leases.
(c)The Company has assigned a lease but has remained as the guarantor for performance of the assignee's rent payment obligations for the remainder of the term of the assigned lease at the maximum amount of $0.5 million.
Other Commitments
As of December 31, 2022, future minimum annual lease and service payments for the Company were as follows: | | | | | | | | |
| | Service Payments |
| | | (dollars in thousands) |
| 2023 | | $ | 32,919 | |
| 2024 | | 18,761 | |
| 2025 | | 6,169 | |
| 2026 | | 3,271 | |
| 2027 | | 3,257 | |
| Thereafter | | 4,100 | |
| Total service payment commitments | | $ | 68,477 | |
|
| | | | | | | | | | | |
| | Equipment Leases (a) | | Service Payments | | Facility Leases (b) |
| | (dollars in thousands) |
| 2018 | $ | 3,511 |
| | $ | 21,631 |
| | $ | 25,960 |
|
| 2019 | 1,599 |
| | 10,987 |
| | 21,453 |
|
| 2020 | 669 |
| | 1,539 |
| | 17,626 |
|
| 2021 | 639 |
| | 337 |
| | 17,592 |
|
| 2022 | 420 |
| | — |
| | 11,942 |
|
| Thereafter | — |
| | — |
| | 7,354 |
|
| | $ | 6,838 |
| | $ | 34,494 |
| | $ | 101,927 |
|
| |
(a) | Equipment Leases include the Company's commitments relating to operating and capital leases. See Note 23 for further information on the capital lease minimum payments which are included in the table.
|
| |
(b) | The Company has entered into various agreements to sublease certain of its premises. The Company recorded sublease income related to these leases of $1.1 million, $2.2 million, and $2.3 million and for the years ended December 31, 2017, 2016, and 2015 respectively. |
For financial reporting purposes, the general partners of a real estate fund have recorded a liability for potential clawback obligationsCowen Inc.
Notes to the limited partners, due to changes in the unrealized value of the fund's remaining investments and where the fund's general partner has previously received carried interest distributions. The clawback liability, however, is not realized until the end of the fund's life. The life of the real estate funds with a potential clawback obligation is currently in a winding-up phase whereby the remaining assets of the fund are being liquidated as promptly as possible so as to maximize value, however a final date for liquidation has not been set. The fund is currently winding-down and as of both December 31, 2017 and 2016, and the clawback obligation was $6.2 million.Consolidated Financial Statements (Continued)
The Company serves as the general partner/managing member and/or investment manager to various affiliated and sponsored funds. As such, the Company is contingently liable for obligations for those entities. These amounts are not included above as the Company believes that the assets in these funds are sufficient to discharge any liabilities.
Unfunded CommitmentsTreasury Stock
The following table summarizes unfunded commitmentsTreasury stock of $614.3 million as of December 31, 2017:2022, compared to $547.1 million as of December 31, 2021, resulted from $36.1 million acquired through repurchases of shares to cover employee minimum tax withholding obligations related to stock compensation vesting events under the Equity Plans or other similar transactions and $31.1 million purchased in connection with a share repurchase program.
The following represents the activity relating to the treasury stock held by the Company during the year ended December 31, 2022:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | |
| Treasury Stock Shares | | Cost
(dollars in thousands) | | Average Cost per Share |
| Balance outstanding at December 31, 2021 | 28,047,929 | | | $ | 547,112 | | | $ | 19.51 | |
| Shares purchased for minimum tax withholding under the 2010 and 2020 Equity Plans or other similar transactions | 1,058,933 | | | 36,082 | | | 34.07 | |
| | | | | |
| Purchase of treasury stock | 1,069,002 | | | 31,078 | | | 29.07 | |
| Balance outstanding at December 31, 2022 | 30,175,864 | | | $ | 614,272 | | | $ | 20.36 | |
19. Non-Controlling Interests in Consolidated Subsidiaries and Investment Funds
|
| | | | | | |
| Entity | | Unfunded Commitments | | Commitment term |
| | | (dollars in millions) | | |
| Real estate (a) | | $ | 19.5 |
| | (a) |
| HealthCare Royalty Partners funds (b) | | 6.2 |
| | 2 years |
| Eclipse Ventures Fund I, L.P. (formerly Formation8 Partners Hardware Fund I, L.P.) | | 0.4 |
| | 7 years |
| Lagunita Biosciences, LLC | | 2.0 |
| | 3 years |
| Eclipse Fund II, L.P. | | 0.9 |
| | 8 years |
| Eclipse Continuity Fund I, L.P. | | 0.6 |
| | 9 years |
(a) The Company had unfunded commitments pertaining to capital commitmentsRedeemable and nonredeemable non-controlling interests in six real estate investments held by the Company, all of which pertain to related party investments. Such commitments can be called at any time up to four years, subject to advance notice.
(b) The Company is a limited partner of the HealthCare Royalty Partners funds (which are managed by Healthcare Royalty Management) and is a member of HealthCare Royalty Partners General Partners. The Company will make its pro-rata investment in the HealthCare Royalty Partners funds along with the other limited partners.
Litigation
In the ordinary course of business, the Company and its affiliates andconsolidated subsidiaries and current and former officers, directors and employees (the "Company and Related Parties") are named as defendants in, or as parties to, various legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of securities, banking, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief.
In the ordinary course of business, the Company and Related Parties are also subject to governmental and regulatory examinations, information gathering requests (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Certain of our affiliates and subsidiaries are investment banks, registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, commodity futures and other regulators. In connection with formal and informal inquiries by these regulators, we receive requests, and orders seeking documents and other information in connection with various aspects of our regulated activities.
Due to the global scope of the Company's operations, and its presence in countries around the world, the Company and Related Parties may be subject to litigation, and governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and informal), in multiple jurisdictions with legal and regulatory regimes that may differ substantially, and present substantially different risks, from those the Company and Related Parties are subject to in the United States.
The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.
In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is probable that a loss has been incurredfunds and the amount of loss can be reasonably estimated. The Company discloses a contingency if there is at least a reasonable possibility that a loss may have been incurredrelated net income (loss) attributable to non-controlling interests in consolidated subsidiaries and there is no reserve forinvestment funds are comprised as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| As of December 31, |
| | 2022 | | 2021 | | 2020 |
| | (dollars in thousands) |
| Redeemable non-controlling interests in consolidated subsidiaries and investment funds | | | | | |
| Consolidated Funds | | | | | |
| Beginning balance | $ | — | | | $ | — | | | $ | 391,275 | |
| Capital contributions | — | | | — | | | 184,223 | |
| Capital distributions | — | | | — | | | (181,863) | |
| | | | | |
| Deconsolidation of entity | — | | | — | | | (360,711) | |
| Income (loss) attributable to non-controlling interests | — | | | — | | | (32,924) | |
| Ending balance | — | | | — | | | — | |
| | | | | |
| Nonredeemable non-controlling interests in consolidated subsidiaries and investment funds | | | | | |
| Operating companies | | | | | |
| Beginning balance | $ | 126,105 | | | $ | 83,818 | | | 11,513 | |
| Capital contributions | 24,417 | | | 36,539 | | | 9,730 | |
| Capital distributions | (10,626) | | | (7,601) | | | (5,605) | |
| Consolidation of entity | | | — | | | 48,596 | |
| Income (loss) attributable to non-controlling interests | 6,540 | | | 13,349 | | | 19,584 | |
| Ending balance | 146,436 | | | 126,105 | | | 83,818 | |
| | | | | |
| Consolidated Funds | | | | | |
| Beginning balance | 33,630 | | | 115,806 | | | 82,807 | |
| Capital contributions | — | | | 19,017 | | | 191,493 | |
| Capital distributions | — | | | (21,411) | | | (72,646) | |
| | | | | |
| Deconsolidation of entity | — | | | (74,813) | | | (89,889) | |
| Income (loss) attributable to non-controlling interests | (17,143) | | | (4,969) | | | 4,041 | |
| Ending balance | 16,487 | | | 33,630 | | | 115,806 | |
| | | | | |
| Total Nonredeemable non-controlling interests in consolidated subsidiaries and investment funds | $ | 162,923 | | | $ | 159,735 | | | $ | 199,624 | |
| | | | | |
20. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income includes the loss because the conditions above are not met. The Company's disclosure includes an estimate of the reasonably possible loss or range of loss for those matters, for which an estimate can be made. Neither a reserve nor disclosure is required for losses that are deemed remote.
The Company appropriately reserves for certain matters where,after tax change in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. Such amounts are included within accounts payable, accrued expenses and other liabilitiesOther revenues in the accompanying consolidated statements statement of financial condition. Estimates, by their nature, are based on judgment and currently available information and involve a varietyoperations. During the periods presented, the Company did not have material reclassifications out of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters. The Company accrues legal fees as incurred.
comprehensive income.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Beginning balance | | | | | $ | (2) | | | $ | (7) | | | $ | (5) | |
| | | | | | | | | |
| Foreign currency translation | | | | | 3 | | | 5 | | | (2) | |
| Ending balance | | | | | $ | 1 | | | $ | (2) | | | $ | (7) | |
The following information reflects developments
21. Revenue from Contracts with respect to the Company’s legal proceedings that occurred duringCustomers
For the year ended December 31, 2017.2022, 2021 and 2020, the following tables presents revenues from contracts with customers disaggregated by fee type and segment. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, | |
| | | | | | | | 2022 | | 2021 | | 2020 | | | |
| | | | | (dollars in thousands) |
| Revenue from contracts with customers | | | | | Operating Company |
| Investment banking | | | | | | | | | | | | |
| Underwriting fees | | | | | | $ | 114,201 | | | $ | 421,081 | | | $ | 427,670 | | | | |
| Strategic/financial advisory fees | | | | | 248,268 | | | 433,909 | | | 190,958 | | | | |
| Placement and sales agent fees | | | | | 120,629 | | | 195,676 | | | 133,171 | | | | |
| Expense reimbursements from clients | | | | | 11,744 | | | 16,496 | | | 17,687 | | | | |
| Total investment banking revenue | | | | | 494,842 | | | 1,067,162 | | | 769,486 | | | | |
| Brokerage | | | | | | | | | | | | | | |
| Commissions | | | | | | | 522,670 | | | 530,927 | | | 479,762 | | | | |
| Trade conversion revenue | | | | | | 30,233 | | | 24,098 | | | 21,389 | | | | |
| Equity research fees | | | | | 24,111 | | | 21,015 | | | 19,757 | | | | |
| Total brokerage revenue from customers | | | | | 577,014 | | | 576,040 | | | 520,908 | | | | |
| Management fees | | | | | 65,986 | | | 71,374 | | | 46,556 | | | | |
| Incentive income | | | | | 646 | | | 2,732 | | | 592 | | | | |
| Total revenue from contracts with customers - Op Co | | | | | $ | 1,138,488 | | | $ | 1,717,308 | | | $ | 1,337,542 | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | Asset Company |
| Management fees | | | | | 684 | | | 913 | | | 959 | | | | |
| | | | | | | | | | | | |
| Total revenue from contracts with customers - Asset Co | | | | | 684 | | | 913 | | | 959 | | | | |
| Total revenue from contracts with customers | | | | | $ | 1,139,172 | | | $ | 1,718,221 | | | $ | 1,338,501 | | | | |
On December 27, 2013, Landol Fletcher filed a putative class action lawsuit against Convergex Holdings, LLC, Convergex Group, LLC,
22. Insurance and reinsurance
Cowen Execution, Convergex Global Markets Limited and G-Trade Services LLC (collectively, “Convergex”) in the United States District Court for the Southern District of New York (Landol Fletcher and all others similarly situated v. Convergex Group LLC, Cowen Execution, Convergex Global Markets Ltd., Convergex Holdings LLC, G-Trade Services LLC, & Does 1-10, No. 1:13-CV-09150-LLS). The suit alleges breaches of fiduciary duty and prohibited transactions under ERISA and seeks to maintain a class action on behalf of all ERISA plan participants, beneficiaries and named fiduciaries whose plans were impacted by net trading by Convergex Global Markets Limited from October 2006 to December 2011. On April 11, 2014, Landol Fletcher and Frederick P. Potter Jr., filed an amended complaint raising materially similar allegations. This matter was assumed by the Company as a result of the Company’s previously announced acquisition of Convergex Group, which was completed on June 1, 2017. On February 17, 2016, the District Court granted Convergex’s motion to dismiss the amended complaint. Plaintiffs filed an appeal to the Second Circuit, and the AARP and Department of Labor filed amicus briefs on plaintiffs' behalf. The appeal was argued on December 12, 2016. On February 10, 2017, the Second Circuit Court of Appeals (1) reversed the District Court, finding that plaintiff has constitutional standing in a “representative” capacity to sue for damages to the ERISA defined benefit plan in which heInsurance Co is a participant, and (2) remanded to the District Court to reconsider, in light of the Circuit Court’s decision, the issue whether plaintiff has standing to pursue claims on behalf of ERISA plans in which plaintiff is notwholly owned Malta-based insurance company that reinsures a participant. Convergex filed a petition for rehearing, and the Court of Appeals denied the petition. On June 30, 2017, the Company filed a notice of motion and memorandum of law in support of a motion to stay the proceedings in the District Court pending resolutionsignificant proportion of its petition for writ of certiorari, which the Company intended to file with the U.S. Supreme Court. On August 16, 2017, the District Court granted the Company’s motion to stay the proceedings in the District Court pending resolution of the Company’s petition for writ of certiorari. On September 1, 2017, the Company filed a petition with the United States Supreme Court for a writ of certiorari requesting review of the decision of the Court of Appeals. On January 8, 2018, the U.S. Supreme Court denied the Company’s petition for a writ of certiorari. The previously granted stay of the proceedings in the District Court will now lift and the case will proceed in the District Court. We are indemnified against losses arising from this matter pursuant to, and subject to, the provisions of the purchase agreement relating to the acquisition of Convergex Group. Because the case is in its preliminary stages, the Company cannot predict the outcome at this time, but it does not currently expect this case to have a material effect on its financial position or its results of operations.
23. Convertible Debt and Notes Payable
As of December 31, 2017 and 2016, the Company's outstanding debt was as follows: |
| | | | | | | |
| | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (dollars in thousands) |
| Convertible debt | $ | 141,502 |
| | $ | 130,029 |
|
| Note payable | 132,970 |
| | 60,953 |
|
| Term loan | 28,121 |
| | — |
|
| Other notes payable | 8,247 |
| | 14,237 |
|
| Capital lease obligations | 4,120 |
| | 1,840 |
|
| | $ | 314,960 |
| | $ | 207,059 |
|
Convertible Debt
2022 Convertible Notes
The Company, on December 14, 2017, issued $135.0 million aggregate principal amount of 3.00% convertible senior notes due 2022 (the “2022 Convertible Notes”portfolio (“Outward Reinsurance”). The 2022 Convertible Notes are due on December 15, 2022 unless earlier repurchased by the Company or converted by the holderCompany's wholly owned subsidiaries, Cowen Reinsurance S.A. (based in accordance with their terms priorLuxembourg) (“Cowen Re”) and Kelvin (based in Guernsey, see Note 3) provide reinsurance to such date. The interest on the 2022 Convertible Notes is payable semi-annually on December 15third party insurance and June 15 of each year. The notes are senior unsecured obligations of Cowen. The 2022 Convertible Notes may be converted into cash or shares of Class A common stock at the Company's election based on the current conversion price. The 2022 Convertible Notes were issued with an initial conversion price of $17.375 perreinsurance companies (“Inward Reinsurance”). Cowen Insurance Co's, Cowen Re's, and Kelvin's share of Cowen’s Class A common stock.
The Company usedclaims incurred and paid during the periods below, as well as the change in claims outstanding and claims incurred but not reported ("IBNR") during years ended December 31, 2022, 2021 and 2020, net proceeds, together with cash on hand, from the offering for general corporate purposes, including the repurchase or repayment of $115.1 million of the Company’s outstanding 3.0% cash convertible senior notes due
reinsurance, were as follows:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Paid claims | | | | | | | | | |
| Insurance (net of Outward Reinsurance) | | | | | $ | 4,496 | | | $ | 3,285 | | | $ | — | |
| Inward Reinsurance | | | | | 28,615 | | | 17,140 | | | 14,838 | |
| Total | | | | | $ | 33,111 | | | $ | 20,425 | | | $ | 14,838 | |
| Change in claims outstanding and claims IBNR | | | | | | | | | |
| Insurance (net of Outward Reinsurance) | | | | | $ | 533 | | | $ | 112 | | | $ | — | |
| Inward Reinsurance | | | | | (55,803) | | | 3,304 | | | 11,599 | |
| Total | | | | | $ | (55,270) | | | $ | 3,416 | | | $ | 11,599 | |
2019 (the "2019 Convertible Notes")As of December 31, 2022 and the repurchase of approximately $19.5 million2021, insurance and reinsurance assets and liabilities consisted of the Company’s sharesfollowing:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| |
| Insurance and reinsurance assets | | | |
| Reinsurance recoverable on paid claims | $ | 66,303 | | | $ | 9,072 | |
| Deferred acquisition costs | 4,610 | | | 5,672 | |
| Cash advances held by cedants | 2,684 | | | 3,523 | |
| Reinsurance recoverable on claims reserves | 60,189 | | | 11,806 | |
| Total | $ | 133,786 | | | $ | 30,073 | |
| Insurance and reinsurance liabilities | | | |
| Reinsurance payables on paid claims | $ | 27,030 | | | $ | 3,837 | |
| Unearned Premium reserve | 27,294 | | | 23,241 | |
| Loss reserves (incurred claims and IBNR) | 263,223 | | | 44,191 | |
| Total | $ | 317,547 | | | $ | 71,269 | |
Cowen Insurance Co, Cowen Re, and Kelvin utilize several methods to determine their claims IBNR. Cowen Insurance Co and Cowen Re generally employ an estimation methodology whereby historical average claims ratios over a period of its Class A common stock, which were consummated substantially concurrently with the closingup to 10 years are utilized, based on availability of data. In cases where current claims development contradicts historical results, Cowen Insurance Co and Cowen Re employ a method to determine average claims ratios derived through different actuarial calculation methods. If an event occurs that may give rise to significant future claims in excess of the offering.
The Company recorded interest expenseamount calculated using the above-mentioned methodologies, the impact of $0.2 million forsuch an event is calculated using existing claims data and actuarial estimation methods to adjust Cowen Insurance Co's and Cowen Re's IBNR provision. As Kelvin is in run-off Kelvin determines its IBNR liabilities based on figures provided by insurance companies that Kelvin reinsures as well as industry-wide information about claims development related to known events in the past, such as hurricanes, typhoons, earthquakes, etc. All entities utilize recognized actuarial methods and assumptions which are regularly reviewed through catastrophe models, own loss experience, historical industry loss experience, underwriter and originator experience, pricing adequacy trends and management’s professional judgement. During the year ended December 31, 2017.2022, claims liability and claim adjustment expenses were calculated using the above-mentioned methods consistent with prior years.
Cowen Insurance Co, Cowen Re, and Kelvin typically settle their premiums and claim payments on a quarterly basis. Cowen Insurance Co, Cowen Re, and Kelvin write contracts on both a proportional and non-proportional basis. The Company recognizedcontracts contain inspection rights to allow the embeddedcompanies to inspect the policy documents that provide the source for the underlying data provided by the cedant. This negates the need for them to collect and hold the documents themselves which would be impracticable. Cowen Insurance Co, Kelvin, and Cowen Re do not discount any of its reserves and manage their exposure to insurance risk from higher than expected claims via the purchase of outward reinsurance. Cowen Insurance Co purchases such reinsurance on a program by program basis while Cowen Re and Kelvin have purchased whole account reinsurance which extends to their entire business.
Cowen Insurance Co, Cowen Re and Kelvin have entered into insurance and reinsurance agreements that require them to post collateral of cash conversion option at issuance date fair value, which also represents the initial unamortized discount on the 2022 Convertible Notes of $23.4 million and is shown net in convertible debtor U.S. government bonds to cover certain exposures as defined in the accompanying consolidated statementsrespective insurance and reinsurance agreements. As of financial condition. Amortization on the discount, included within interest expense in the accompanying consolidated statements of operations is $0.2 million for the year ended December 31, 2017, based on an effective interest rate of 7.13%. The Company capitalized the debt issuance costs in the amount of $2.1 million, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the 2022, Convertible Notes.
2019 Convertible Notes
On March 10, 2014, the Company issued $149.5Cowen Re had pledged $53.0 million of 3.0% cash convertible senior notes (the "2019 Convertible Notes"). The 2019 Convertible Notes are due on March 15, 2019 unless earlier repurchased by the Company or converted by the holder into cash in accordance with their terms prior tocollateral towards such date. The interest on the 2019 Convertible Notes is payable semi-annually on March 15 and September 15 of each year. The 2019 Convertible Notes are senior unsecuredreinsurance obligations, of the Company. The 2019 Convertible Notes may be converted into cash, upon the occurrence of certain events, whereby a holder will receive, per $1,000 principal amount of notes being converted, an amount equal to the sum of principal amount outstanding and the conversion amount based on the current conversion price (the "Conversion Option"). The 2019 Convertible Notes were issued with an initial conversion price of $21.32 per share (per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016). During December 2017, the Company repurchased and extinguished $115.1 million of the outstanding balance of the 2019 Convertible Notes.
The Company recorded interest expense of $4.3 million, $4.5 million and $4.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. The initial unamortized discount on the 2019 Convertible Notes was $35.7 million and is shown net in convertible debt in the accompanying consolidated statements of financial condition. Amortization on the discount, included within interest expense in the accompanying consolidated statements of operations is $7.3 million, $6.9 million and $6.3 million for the years ended December 31, 2017, 2016, and 2015, respectively, based on an effective interest rate of 8.89%. The Company capitalized the debt issuance costs in the amount of $0.9 million, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the 2019 Convertible Notes. In conjunction with the partial extinguishment of the 2019 Convertible Notes, the Company accelerated the pro-rata unamortized discount and capitalized debt issuance costs. The Company recognized $11.6 million of loss on debt extinguishment.
Of the net proceeds from the sale of the 2019 Convertible Notes, approximately $20.5 million was applied to pay the net cost of a cash convertible note economic hedge and warrant transaction, which increased the effective conversion price to $28.72 (see Note 6) (per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016), and approximately $0.3 million was applied to repurchase shares of Cowen Class A common stock. The remainder of the net proceeds is being used for general corporate purposes.
Note Payable
2027 Notes
On December 8, 2017, the Company completed its public offering of $120 million of 7.35% senior notes due 2027 (the “2027 Notes”) and subsequently the underwriters exercised in full their option to purchase an additional $18.0 million principal amount of the 2027 Notes. Interest on the 2027 Notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15. The Company recorded interest expense of $0.6 million for the year ended December 31, 2017. The Company capitalized debt issuance costs of approximately $5.1 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the 2027 Notes. The net proceeds of the offering, after deducting the underwriting discount and estimated offering expenses payable by the Company were used to redeem all of its 8.25% senior notes due 2021 (the "2021 Notes") and for general corporate purposes.
2021 Notes
The Company redeemed the Company's outstanding $63.25 million principal amount of the 2021 Notes, following which the 2021 Notes were delisted from NASDAQ. The redemption was made pursuant to the terms of the 2021 Notes and the indenture governing the 2021 Notes. The redemption price for the 2021 Notes was equal to 106.188% of the principal amount of the 2021 Notes plus accrued and unpaid interest. The Company recorded interest expense of $5.3 million, $5.2 million and $5.2 million for the years ended December 31, 2017, 2016, and 2015 respectively. In conjunction with the extinguishment of the 2021 Notes, the Company expensed the unamortized capitalized debt issuance costs. The Company recognized $5.6 million of loss on debt extinguishment.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Term Loan
On June 30, 2017,which $43.0 million was in cash and $10.1 million was in U.S. government bonds. As of December 31, 2021, total collateral pledged was $60.1 million, of which $44.1 million was cash and $16.0 million was U.S. government bonds. The collateral pledged as of December 31, 2022 was $7.1 million lower than the Company borrowed $28.2amounts pledged at December 31, 2021. This change is due to a release of collateral on three of its cedant contracts. Cowen Re expects $40.5 million to fund general corporate purposes. This term loan has an effective interest rate of LIBOR plus 3.75% with a lump sum payment of the entire principal amount duecash collateral pledged to be released on June 29, 2018.September 30, 2023. The loanremaining collateral of $12.5 million is secured byexpected to be released periodically between December 31, 2022 and December 31, 2029 in accordance with the valueterms of the Company's limited partnership interestsunderlying insurance and reinsurance agreements. As of December 31, 2022, Kelvin had pledged $76.6 million of collateral towards its reinsurance obligations, of which $52.2 million was in two affiliated funds. cash and $24.4 million was in the form of letters of credit from major banks. As of December 31, 2022 and December 31, 2021, Cowen Insurance Co had no pledged collateral.
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| |
| Insurance and reinsurance assets | | | |
| Beginning balance at January 1 | $ | 44,191 | | | $ | 37,036 | |
| Increase/(Decreases) reinsurance recoverables | (11,806) | | | — | |
| Total | $ | 32,385 | | | $ | 37,036 | |
| | | |
| Incurred related to: | | | |
| Current Years | $ | 2,436 | | | $ | 13,262 | |
| Prior Years | (36,200) | | | 1,414 | |
| Total | $ | (33,764) | | | $ | 14,676 | |
| | | |
| Paid related to: | | | |
| Current Years | $ | 3,941 | | | $ | 6,874 | |
| Prior Years | 29,170 | | | 13,551 | |
| Total | $ | 33,111 | | | $ | 20,425 | |
| | | |
| Acquired insurance and reinsurance liabilities net of reinsurance assets and liabilities | $ | 237,524 | | | $ | 1,009 | |
| | | |
| Balance at December 31 | $ | 203,035 | | | $ | 32,385 | |
| Increase/(Decreases) reinsurance recoverables | 60,189 | | | $ | 11,806 | |
| Ending balance at December 31 | $ | 263,224 | | | $ | 44,191 | |
23. Share-Based Payments, Deferred Compensation and Employee Ownership Plans
The Company has providedissued share-based compensation under the 2010 and 2020 Equity Incentive Plan (the "Equity Plans"). The Equity Plans permit the grant of options, restricted shares, restricted stock units, and other equity-based awards to the Company's employees and directors. Stock options granted generally vest over two to five-year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued, both of which are eligible to accrue dividend equivalents, may be immediately vested or may generally vest over a guaranteetwo-to five-year period. Awards are subject to the risk of forfeiture, inclusive of accrued dividend equivalents. As of December 31, 2022, there were 3.7 million shares available for this loan. Thefuture issuance under only the 2020 Equity Incentive Plan.
Under the Equity Plans, the Company recorded interest expenseawarded $50.1 million of $0.7 million fordeferred cash awards to its employees during the year ended December 31, 2017.
Other Notes Payable
During January 2017, the Company borrowed $2.1 million to fund insurance premium payments. This note has an effective2022. These awards vest over a four-year period and accrue interest rate of 1.50% and is due on December 31, 2017, with monthly payment requirements of $0.2 million.at 0.70% per year. As of December 31, 2017,2022, the note was fully repaid. InterestCompany had unrecognized compensation expense forrelated to the year ended December 31, 2017 was insignificant. Equity Plans' deferred cash awards of $61.5 million.
The Company has entered into various financingmeasures compensation cost for its aircraft. The aircraft financing,equity classified share-based awards on grant date and amortizes the unearned compensation associated with such awards on a straight-line basis over the vesting period of the option or award, net of debt costs, is recorded in notes payable and short-term borrowings inestimated forfeitures. In relation to awards under the accompanying consolidated statementsEquity Plan, the Company recognized compensation expense of financial condition. The debt maturities ranged from January 2019 to April 2021 and interest rates ranged from 4.21% to 7.25%. As of December 31, 2017 and 2016, the remaining balance on the aircraft financing agreements was $8.2$66.7 million, $85.0 million and $14.4 million, respectively. Interest expense was $0.7 million and $0.8$48.1 million for the years ended December 31, 20172022, 2021 and 2016,2020, respectively.
Capital Lease Obligations
The Company has entered intoincome tax effect recognized for the Equity Plans was a capital lease for computer equipment, which amounted to $6.9benefit of $24.3 million, $33.5 million and is recorded in fixed assets as capital lease obligations. In addition, as part of the Convergex Group acquisition, the Company holds two capital leases for computer equipment which amounted to $0.8 million and are recorded as capital lease obligations. These capital lease obligations are included in short-term borrowings and other debt in the accompanying consolidated statements of financial condition, and have lease terms that range from 48 to 60 months and interest rates that range from 3.70% to 5.69%. As of December 31, 2017, the remaining balance on these capital leases was $4.1 million. Interest expense was $0.1 million, $0.1 million, $0.2$13.8 million for the years ended December 31, 2017, 2016,2022, 2021 and 2015,2020, respectively.
Annual scheduled maturities of debt and minimum payments (of principle and interest) for all debt outstanding as of December 31, 2017, are as follows: |
| | | | | | | | | | | | | | | | | | | |
| | Convertible Debt | | Note Payable | | Term loan | | Other Note Payable | | Capital Lease
Obligation |
| | (dollars in thousands) |
| 2018 | $ | 4,840 |
| | $ | 10,340 |
| | $ | — |
| | $ | 2,032 |
| | $ | 2,059 |
|
| 2019 | 38,925 |
| | 10,143 |
| | 28,901 |
| | 3,410 |
| | 717 |
|
| 2020 | 4,050 |
| | 10,143 |
| | — |
| | 1,363 |
| | 639 |
|
| 2021 | 4,050 |
| | 10,143 |
| | — |
| | 2,512 |
| | 639 |
|
| 2022 | 139,050 |
| | 10,143 |
| | — |
| | — |
| | 420 |
|
| Thereafter | — |
| | 188,715 |
| | — |
| | — |
| | — |
|
| Subtotal | 190,915 |
| | 239,627 |
| | 28,901 |
| | 9,317 |
| | 4,474 |
|
| Less (a) | (49,413 | ) | | (106,657 | ) | | (780 | ) | | (1,070 | ) | | (354 | ) |
| Total | $ | 141,502 |
| | $ | 132,970 |
| | $ | 28,121 |
| | $ | 8,247 |
| | $ | 4,120 |
|
| |
(a) | Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes capitalized debt costs and the unamortized discount on the convertible debt.
|
Letters of Credit
As of December 31, 2017, the Company has eight irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged and the Company pays a fee on the stated amount of the letter of credit. The Company also has pledged as collateral, $11.8 million, as of December 31, 2017, and $5.5 million, as of December 31, 2016, due between March 2018 and March 2021, for reinsurance agreements.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Restricted Stock Units Granted to Employees
|
| | | | | | |
| Location | | Amount | | Maturity |
| | | (dollars in thousands) | | |
| Connecticut | | $ | 65 |
| | January 2018 |
| Boston | | $ | 382 |
| | March 2018 |
| New York | | $ | 355 |
| | April 2018 |
| New York | | $ | 70 |
| | May 2018 |
| New York | | $ | 596 |
| | October 2018 |
| New York | | $ | 2,250 |
| | October 2018 |
| New York | | $ | 1,600 |
| | November 2018 |
| San Francisco | | $ | 710 |
| | January 2019 |
ToRestricted shares and restricted stock units are referred to collectively as restricted stock. The following table summarizes the extent any letter of credit is drawn upon, interest will be assessed atCompany's restricted share and restricted stock unit activity for the prime commercial lending rate. As ofyears ended December 31, 20172022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Nonvested Restricted Class A Common Shares and Class A Common Restricted Stock Units | | Weighted-Average
Grant Date
Fair Value | | Nonvested Restricted Class A Common Shares and Class A Common Restricted Stock Units | | Weighted-Average
Grant Date
Fair Value |
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| Beginning balance outstanding | 4,595,342 | | | $ | 24.33 | | | 5,450,191 | | | $ | 17.56 | |
| Granted | 2,054,563 | | | 31.62 | | | 2,092,904 | | | 35.31 | |
| Vested | (2,134,692) | | | 21.46 | | | (2,785,535) | | | 19.46 | |
| Canceled | — | | | — | | | — | | | — | |
| Forfeited | (71,717) | | | 21.96 | | | (162,218) | | | 22.23 | |
| Ending balance outstanding | 4,443,496 | | | $ | 29.12 | | | 4,595,342 | | | $ | 24.33 | |
Included in the restricted share and restricted stock unit activity are performance-linked restricted stock units of 1,974,217 which were awarded from March 2016 there were no amounts due related to these letters of credit.
24. Stockholder's Equity
On December 5, 2016, the Company effected a one-for-four reverse stock splitthrough March 2022. Certain of the Company's class A and class B common stock. All share and per share informationawards granted have the ability to be cash settled when the attained award exceeds a certain percentage of granted amount. The cash portion of the award has been retroactively adjusted to reflect the reverse stock split. In addition, there was a reclassification of $0.9 millionbifurcated from the parequity component and recorded as a compensation payable in the accompanying consolidated statement of financial condition. Of the awards granted, 712,652 have vested and 320,681 have been canceled, as they did not meet the performance criteria, through December 31, 2022. Included in vested units are 233,333 units that had an attainable share value of our class A common stock to additional paid-in capital to reflect420,000, and were delivered in March 2021. Of this attainable share value 350,000 shares were settled in the impactissuance of the reverse stock split.
The Company is authorized to issue 125,000,000 shares of common stock, which shall consist of 62,500,000 shares of Class A common stock, par value $0.01 per share, and 62,500,000 shares of Class B common stock, par value $0.01 per share. The Company is also authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. Subject to the rights of holders of any outstanding preferred stock, the number of authorized shares of common stock or preferred stock may be increased or decreased by the affirmative vote of the holders of a majority of the shares entitled to vote on such matters, but in no instance can the number of authorized shares be reduced below the number of shares then outstanding.
Common stock
The certificate of incorporation of the Company provides for two classes of common stock, and for the conversion of each class into the other, to provide a mechanism by which holders of Class A common stock of the Company who may be limited in the amount of voting common stock of the Company they can hold pursuant to federal, state or foreign bank laws, to convert their shares into non-voting Class B common stock to prevent being in violation of such laws. Each holder of Class A common stock is entitled to one vote per share in connection with the election of directors and on all other matters submitted to a stockholder vote, provided, however, that, except as otherwise required by law, holders of Class A common stock are not entitled to vote on any amendment to the Company's amended and restated certificate of incorporation that relates solely to the terms of one or more outstanding series of the Company's preferred stock, if holders of the preferred stock series are entitled to vote on the amendment under the Company's certificate of incorporation or Delaware law. No holder of Class A common stock may accumulate votes in voting for directors of the Company.
Each holder of Class B common stock is not entitled to vote except as otherwise provided by law, provided however that the Company must obtain the consent of a majority of the holders of Class B common stock to effect any amendment, alteration or repeal of any provision of the Company's amended and restated certificate of incorporation or amended and restated by-laws that would adversely affect the voting powers, preferences or rights of holders of Class B common stock. Except as otherwise provided by law, Class B common stock shares will not be counted as shares held by stockholders for purposes of determining whether a vote or consent has been approved or given by the requisite percentage of shares.
Each share of Class A common stock is convertible at the option of the holder and at no cost into one share of Class B common stock, and each share of Class B common stock is convertible at the option of the holder and at no cost into one share of Class A common stock. The conversion ratios will be adjusted proportionally to reflect any stock split, stock dividend, merger, reorganization, recapitalization or other change in the Class A common stock and Class B common stock. Upon conversion, convertedwere delivered in March 2021 with the remaining 70,000 shares resumebeing settled in cash at the statusvolume weighted average price on settlement date. Also included in vested units are 333,333 units that had an attainable share value of authorized and unissued shares.
Subject666,666, due to the preferences of the holders of any ofreaching certain performance goals. Of this attainable value 528,800 shares were settled in the Company's preferred stock that may be outstanding from time to time, each share of Class A common stock and were delivered in March 2022 with the remaining 137,866 shares being settled in cash at the volume weighted average price of the Company's Class BA common stock on settlement date. The remaining awards, included in the outstanding balance as of December 31, 2022, vest December 2023 and December 2024 and will have an equalbe earned only to the extent that the Company attains specified market conditions relating to its volume-weighted average share price and ratable righttotal shareholder return in relation to receive dividendscertain benchmark indices and performance goals relating to aggregate net income and average return on shareholder equity. The actual number of attained shares ultimately earned could vary from zero, if performance goals are not met, to as much as 240% of the targeted award. Compensation expense is recognized to the extent that it is probable that the Company will attain the performance goals. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.
As of December 31, 2022, there was $77.9 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees. Unrecognized compensation expense related to nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 1.64 years.
Restricted Shares and Restricted Stock Units Granted to Non-Employee Board Members
There were 64,370 and 28,463 restricted stock units awarded to non-employee board members during the year ended December 31, 2022 and 2021. The Company delivered 4,156 and 41,667 restricted stock units to non-employee board members during the year ended December 31, 2022 and 2021. As of December 31, 2022 and 2021, there were 306,547 and 246,333 restricted stock units outstanding for non-employee board members, respectively.
Other Share Based Payments and Awards
In certain circumstances, the Company grants carried interest in consolidated managing member/general partner subsidiaries to third parties through the grant of equity awards in exchange for professional, advisory and other distributionsservices. The equity awards are recorded within additional paid in cash, property or sharescapital in the accompanying consolidated statements of stock as may be declared by the Company's board of directors out of assets or funds legally available for the payment of dividendsfinancial condition and professional, advisory and other fees expense in the accompanying consolidated statements of operations based on the fair value of the award granted and expensed over the terms of the award. In addition, the equity awards provide the third parties profit points aligned to the allocated carried interest distributions.
Upon vesting of the awards, the third parties' allocation of carried interest is determined by applying an equity ownership model. Accordingly, the Company accrues carried interest allocations based on the fair value of the underlying investments assuming hypothetical liquidation at book value upon vesting as nonredeemable non-controlling interest.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
In the eventOn March 1, 2022, Cowen Digital Holdings LLC (“CDIG”) authorized 2,000,000 Class B Units, of the liquidation, dissolution or winding upwhich 1,487,500 Class B Units and an additional 29,250 on July 15, 2022, were issued to an affiliate, for which a subsidiary of the Company subject tois the preferencesManaging Member, on behalf of the holdersCompany’s employees as incentive awards (the "Digital Awards") under the 2022 Equity Unit Incentive Plan. The Class B Units will, upon vesting, represent a 20% ownership of any preferred stockCDIG, a consolidated subsidiary of the Company that mayupon vesting. Once the vesting conditions of the Digital Awards have been met, such awards will be outstanding frompresented as nonredeemable non-controlling interest in the accompanying consolidated statements of financial condition. Half of the Digital Awards vest over a period of time and are tied to time, holders of Class A common stockservice (time based) and the other half vest when a qualifying event as stipulated in the Digital Award documents occurs (performance based). Once vested, Class B common stockunits will not be entitled to share equallydistributions unless and ratably in the assets available foruntil a profit distribution hurdle has been met. The Company recognized compensation expense of $0.8 million related to the Company's stockholders. There are no redemption or sinking fund provisions applicabletime based Digital Awards for the year ended December 31, 2022. At December 31, 2022, there was $0.8 million of unrecognized compensation expense related to the Class A ortime based Digital Awards which will be recognized over their five year vesting period. The fair value of time based Digital Awards is determined based on the Class B common stock.fair market value of CDIG and its consolidated subsidiaries. The fair market value of CDIG and its consolidated subsidiaries is calculated utilizing recent transactions, discounted cash flows, and market multiples. The Digital Awards are then using a standard Black Scholes options pricing model. The primary input in determining the fair market value on grant date was recent/pending transactions in CDIG’s underlying investments. The expense related to the performance based component of the Digital Awards will be recognized when the qualifying event is considered to be probable. The income tax effect recognized for the Digital Awards was a benefit of $0.2 million for the year ended December 31, 2022.
Preferred stock
24. Defined Contribution Plans
The Company's amendedCompany sponsors a Retirement and restated certificateSavings Plan which is a defined contribution plan pursuant to Section 401(k) of incorporation permits the Company to issue up to 10,000,000 shares of preferred stock in one or more series with such designations, titles, voting powers, preferences and rights and such qualifications, limitations and restrictions as may be fixed by the board of directorsInternal Revenue Code (the "401(k) Plans"). All full-time employees of the Company without any further actioncan contribute on a tax deferred basis and an after-tax basis to the 401(k) Plans up to federal contribution limits or up to 100% of their annual compensation, subject to certain limitations. The Company provides matching and profit sharing contributions to employees that are equal to a specified percentage of the eligible participant's contribution as defined by the 401(k) Plans. For the years ended December 31, 2022, 2021 and 2020, the Company's stockholders. contributions to the 401(k) Plans were $3.0 million, $3.9 million, and $2.9 million, respectively.
25. Income Taxes
The Company's board of directors may increase or decrease the number of shares of any series of preferred stock following the issuance of that series of preferred stock, but in no instance can the number of shares of a series of preferred stock be reduced below the number of sharestaxable results of the series then outstanding.
Preferred StockCompany’s U.S. operations are included in the consolidated income tax returns of Cowen Inc. as well as stand-alone state and Purchase of Capped Call Option
On May 19, 2015,local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand-alone or combined basis. These subsidiaries are subject to tax in their respective countries and the Company completedis responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries with tax filing obligations are the United Kingdom, Luxembourg, Malta, Guernsey, Germany, Switzerland, Israel, South Africa, Canada and Hong Kong.
The Company is subject to U.S. tax on its offering of 120,750 sharesGlobal Intangible Low Taxed Income ("GILTI"). The Company elected to account for taxes on GILTI inclusions in U.S. taxable income as incurred on the current year basis and not included any related amounts in deferred taxes.
The components of the Company's 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock") that provided $117.2 million of proceeds, net of underwriting fees and issuance costs of $3.6 million. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum which will be payable, when and if declared by the board of directors of the Company, quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. The Company declared and accrued a cash dividend of $6.8 million, $6.8 million and $4.1 millionincome tax expense for the years ended December 31, 2017, 2016,2022, 2021 and 2015 respectively.2020 are as follows: | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
| |
| Current tax expense/(benefit) | | | | | |
| Federal | $ | 32,574 | | | $ | 92,390 | | | $ | 13,840 | |
| State and local | 2,799 | | | 21,842 | | | 5,060 | |
| Foreign | 4,358 | | | 1,867 | | | 1,355 | |
| Total | $ | 39,731 | | | $ | 116,099 | | | $ | 20,255 | |
| Deferred tax expense/(benefit) | | | | | |
| Federal | $ | (23,194) | | | $ | (9,860) | | | $ | 53,231 | |
| State and local | (5,705) | | | (4,861) | | | 17,337 | |
| Foreign | (46) | | | 661 | | | (450) | |
| Total | (28,945) | | | (14,060) | | | 70,118 | |
| Total tax expense/(benefit) | $ | 10,786 | | | $ | 102,039 | | | $ | 90,373 | |
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Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Consolidated U.S. income/(loss) before income taxes was $60.5 million in 2022, $385.1 million in 2021, and has a liquidity preference over$289.6 million in 2020. The corresponding amounts for non-U.S.-based income/(loss) were $16.1 million in 2022, $20.9 million in 2021, and $7.9 million in 2020.
The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2022, 2021, and 2020 are as follows: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| Pre-tax net income at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| | | | | |
| | | | | |
| | | | | |
| Nondeductible expenses | 11.3 | | | 2.6 | | | 1.5 | |
| | | | | |
| Change in valuation allowance | (3.2) | | | — | | | — | |
| Tax credits | (4.6) | | | — | | | — | |
| Stock compensation | (7.4) | | | (2.3) | | | (0.3) | |
| | | | | |
| State and foreign tax | (4.4) | | | 5.0 | | | 7.3 | |
| Reversal of income attributable to non-controlling interests | 2.9 | | | (0.4) | | | 0.7 | |
| Other, net | (1.5) | | | (0.8) | | | 0.2 | |
| Total | 14.1 | % | | 25.1 | % | | 30.4 | % |
As of December 31, 2022, the Company has income taxes receivable of approximately $10.9 million representing state tax overpayments, which is included in other assets on the accompanying consolidated statements of financial condition. The Company also has income taxes payable of $13.2 million representing federal, state and foreign payables, which is included in other liabilities on the accompany consolidated statements of financial condition.
The components of the Company's deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows: | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | (dollars in thousands) |
| Deferred tax assets, net of valuation allowance | | | |
| Net operating loss | $ | 12,061 | | | $ | 14,649 | |
| Deferred compensation | 29,967 | | | 34,342 | |
| | | |
| | | |
| Intangible assets | 4,894 | | | 2,732 | |
| Bad debt reserves | 2,929 | | | 759 | |
| Section 174 capitalization | 9,460 | | | — | |
| Tax credits | 1,057 | | | 3,241 | |
| Lease liability | 17,871 | | | 24,373 | |
| Other | 5,926 | | | 3,643 | |
| Total deferred tax assets | 84,165 | | | 83,739 | |
| Valuation allowance | (1,932) | | | (4,226) | |
| Deferred tax assets, net of valuation allowance | 82,233 | | | 79,513 | |
| Deferred tax liabilities | | | |
| Right-of-use on certain assets | (16,498) | | | (22,568) | |
| Goodwill | (7,594) | | | (1,425) | |
| Unrealized gains on investments | (5,070) | | | (30,393) | |
| | | |
| Other | (2,261) | | | (3,362) | |
| Total deferred tax liabilities | (31,423) | | | (57,748) | |
| Deferred tax assets/(liabilities), net | $ | 50,810 | | | $ | 21,765 | |
Deferred tax assets, net of valuation allowance, are reported in the accompanying consolidated statements of financial condition. In addition to the deferred tax balances in the table above, the Company records balances related to its operating losses in Luxembourg, which are discussed below.
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
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
purposes in the foreseeable future. The Company recorded approximately $1.9 million valuation allowance against its deferred tax assets of $84.2 million as of December 31, 2022 and recorded approximately $4.2 million valuation allowance against its deferred tax assets of $83.7 million as of December 31, 2021. Separately, the Company has deferred tax liabilities of $31.4 million as of December 31, 2022 and $57.7 million as of December 31, 2021.
For tax year 2022, the Company's total deferred tax benefit of $28.9 million was derived by the recognition of Section 174 expenses and the reversal of timing differences in the normal course of business. The deferred tax benefit of $14.1 million in 2021 was derived by the reversal of timing differences in the normal course of business. The deferred tax expense of $70.1 million in 2020 was derived by the utilization of net operating losses and the reversal of timing differences in the normal course of business.
As of December 31, 2022, the Company has foreign tax credit carryforwards of $1.1 million which expire between 2023 and 2030. Valuation allowance of $0.6 million was established against foreign tax credit carryforward as the Company determined that it is not more likely than not that the credits will be utilized.
The Company has the following net operating loss carryforwards at December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Jurisdiction: | Federal | | New York State | | New York City | | Hong Kong |
| Net operating loss (in millions) | $15.2 | | $16.0 | | $24.7 | | $11.7 |
| Year of expiration | 2030 | | 2034 | | 2034 | | Indefinite |
In addition to the net operating loss carryforwards in the table above, the Company also has net operating loss carryforwards in Luxembourg. These loss carryforwards are only accessible to the extent of taxable income generated by the Luxembourg reinsurance companies, including any deferred income that will be generated in the future. Consequently, the Company recorded a deferred tax asset of $176.7 million, net of deferred tax liabilities of $39.7 million in connection with future taxable income, and an offsetting valuation allowance of $176.7 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.
In June 2011, the Company acquired a subsidiary with net operating loss carryovers that underwent a change of control under Section 382 of the Internal Revenue Code due to the acquisition. Accordingly, a portion of the Company’s deferred tax assets, are subject to an annual limitation under Section 382. The deduction limitation is approximately $6.7 million annually and applies to approximately $10.2 million of net operating losses. The Company is not expected to lose any deferred tax assets due to these limitations.
As a result of the enactment of the Inflation Reduction Act signed on August 16, 2022, the Company is required to assess the tax impact of the Act in the quarter the law was enacted. Based on management’s analysis, there was no material impact on the Company's financial statements as of December 31, 2022.
The components of unrecognized tax benefits are as follows: | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | (dollars in thousands) |
| Beginning balance at January 1 | $ | — | | | $ | 299 | |
| | | |
| Settlement of positions | — | | | (64) | |
| Increases/(Decreases) due to prior year positions | — | | | (235) | |
| Ending balance at December 31 | $ | — | | | $ | — | |
The Company did not record any additions to its unrecognized tax benefit balances as a result of current or prior year tax positions in the consolidated statement of operations for the year ended December 31, 2022. No unrecognized tax benefit was recorded in the consolidated statement of financial condition as of December 31, 2022.
The following are the major jurisdictions in which the Company has significant business operations and the earliest open tax year subject to examination in these jurisdictions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Jurisdiction: | Federal | | New York State | | New York City | | United Kingdom | | Luxembourg | | Malta | | Germany | | Switzerland |
| Tax Year | 2018 | | 2019 | | 2019 | | 2019 | | 2018 | | 2017 | | 2018 | | 2018 |
The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in the United Kingdom, Malta, Germany, Switzerland, Israel, Canada, and Hong Kong.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
26. Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to the Company's common stockholders by the weighted average number of shares of Class A common stock and ranks senior to all classes or seriesoutstanding for the period. As of the Company'sDecember 31, 2022, there were 28,234,289 shares of Class A common stock but junioroutstanding. As of December 31, 2022, the Company has included 310,426 fully vested, unissued restricted stock units and restricted shares in its calculation of basic earnings per share. As of December 31, 2021, there were 27,778,964 shares of Class A common stock outstanding. As of December 31, 2021, the Company has included 972,732 fully vested, unissued restricted stock units and restricted shares in its calculation of basic earnings per share.
Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive items. The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested restricted shares and restricted stock units. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares and restricted stock units are assumed to have been delivered, for the entire period being presented. The number of performance-linked unvested restricted stock units that are included in the calculation are at the amount that could be earned using current payout rates. The assumed proceeds from the assumed vesting, delivery and exercising were calculated as the amount of compensation cost attributed to future services and not yet recognized.
The Company previously concluded that it had the intent and ability to settle the December 2022 Convertible Notes in cash and, as a result, the convertible notes did not have an impact on the Company's diluted earnings per share calculation. On March 24, 2021, the Company issued a redemption notice announcing that the Company would redeem all of the Company's existing and future indebtedness with respectDecember 2022 Convertible Notes (See Note 16). On June 24, 2021, the Company cash settled the December 2022 Convertible Notes up to divided rights and rights upon the Company's involuntary liquidation, dissolution or winding down.
Each share of Series A Convertible Preferred Stock is convertible, at the optionprincipal amount of the holder, into a numberDecember 2022 Convertible Notes and share settled through the delivery of shares of our Class A common stock equal to the liquidation preference of $1,000 divided by the conversion rate. The initial conversion rate (subsequent to the December 5, 2016 reverse stock split) is 38.0619 shares (which equates to $26.27 per share) of the Company'sCompany’s Class A common stock for the remainder of the conversion obligation in excess of the principal amount. The shares of the Company’s Class A common stock issued are within basic earnings per share subsequent to June 24, 2021. Prior to that date, the Company has applied the if-converted method to the portion of the December 2022 notes above the principal amount that settled in shares upon a conversion in dilutive earnings per share.
On December 31, 2021, the Company irrevocably elected to cash settle $1,000.00 of its obligation in respect of each conversion of any share of the Series A Convertible Preferred Stock. At any time on or after May 20, 2020,Prior to this date, the Company maycould elect to convertsettle the Series A Convertible Preferred Stock in shares, cash, or a combination of both. Effective January 1, 2022, the Company adopted ASC 470-20, which requires the Company to use the if-converted method for all outstandingconvertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. With the adoption of this guidance, the Company is required to include the portion of the Series A Convertible Preferred Stock into shares of the Company’sthat can be settled in Class A common stock cash or a combination thereof, at the Company’s election,(amount in each case, based on the then-applicable conversion rate, if the last reported sale priceexcess of the Company’s Class A common stock equals or exceeds 150% of the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion, the conversion rate may be adjusted based on certain events including but not limited to the issuance of cash dividends or Class A common stock as a dividends to the Company's Class A common shareholders or a$1,000.00 per share split or combination.
In connection with the issuance and sale of the Series A Convertible Preferred Stock,Stock) in the Company entered into a capped call option transaction (the “Capped Call Option Transaction”) with Nomura Global Financial Products Inc. (the “option counterparty”) for $15.9 million. The Capped Call Option Transaction is expected generally to reduce the potential dilution to the Company’s Class A common stock (if the Company elects to convert to common shares) and/or offset any cash payments that the Company is required to make upon conversion of any Series A Convertible Preferred Stock. The Capped Call Option Transaction has an initial effective strike price of $26.27diluted earnings per share which matches the initial conversion price ofcalculation. As a result, the Series A Convertible Preferred Stock impacts the Company’s diluted earnings per share calculation for the period ended December 31, 2022 (See Note 2).
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The computation of earnings per share is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | (dollars and share data in thousands, except per share data) |
| Net income (loss) | | | | | $ | 65,855 | | | $ | 303,991 | | | $ | 207,064 | |
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | | | | (10,603) | | | 8,380 | | | (9,299) | |
| Net income (loss) attributable to Cowen Inc. | | | | | 76,458 | | | 295,611 | | | 216,363 | |
| Preferred stock dividends | | | | | 6,792 | | | 6,792 | | | 6,792 | |
| Net income (loss) attributable to Cowen Inc. common stockholders for basic earnings per share | | | | | 69,666 | | | 288,819 | | | $ | 209,571 | |
| Change in fair value of contingently issuable shares | | | | | 55 | | | — | | | — | |
| Net income (loss) attributable to Cowen Inc. common stockholders for diluted earnings per share | | | | | $ | 69,721 | | | $ | 288,819 | | | $ | 209,571 | |
| | | | | | | | | |
| Shares for basic and diluted calculations: | | | | | | | | | |
| Weighted average shares used in basic computation | | | | | 28,183 | | | 27,721 | | | 27,790 | |
| | | | | | | | | |
| Performance based restricted stock | | | | | 430 | | | 755 | | | — | |
| Contingently issuable common stock in connection with acquisitions | | | | | 50 | | | — | | | 85 | |
| December 2022 Convertible Notes | | | | | — | | | 1,404 | | | — | |
| Series A Convertible Preferred Stock | | | | | 949 | | | — | | | — | |
| Restricted stock | | | | | 1,932 | | | 2,748 | | | 1,644 | |
| Weighted average shares used in diluted computation | | | | | 31,544 | | | 32,628 | | | 29,519 | |
| Earnings (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 2.47 | | | $ | 10.42 | | | $ | 7.54 | |
| Diluted | | | | | $ | 2.21 | | | $ | 8.85 | | | $ | 7.10 | |
27. Commitments and a cap price of $33.54 per share. However,Contingencies
Operating Lease Obligations
The Company has entered into leases for real estate and other facilities. These leases contain rent escalation clauses and options to extend the extent thatapplicable lease term. The Company does not include renewal options in the market price of Class A common stock, as measured under the terms of the Capped Call Option Transaction, exceeds the cap price thereof, there would nevertheless be dilution and/or such cash payments would not be offset. As the Capped Call Option Transaction is a free standing derivative that is indexed tolease term for calculating the Company's own stock pricelease liability as the renewal options allow the Company operational flexibility and the Company controls if it is settlednot reasonably certain to exercise these renewal options at this time. The Company records the expenses related to occupancy and equipment on a straight-line basis over the lease term and these expenses are included in occupancy and equipment expense and client services and business development expense in the accompanying consolidated statements of operations.
For the year ended December 31, 2022 and 2021, quantitative information regarding the Company's operating lease obligations reflected in the accompanying consolidated statements of operations were as follows: | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Lease cost | | | | | | | | | |
| Operating lease cost | | | | | $ | 25,495 | | | $ | 25,268 | | | $ | 22,759 | |
| Short-term lease cost | | | | | 225 | | | 150 | | | 207 | |
| Variable lease cost | | | | | 2,527 | | | 3,526 | | | 3,550 | |
| Sublease income | | | | | (470) | | | (583) | | | (781) | |
| Total lease costs | | | | | $ | 27,777 | | | $ | 28,361 | | | $ | 25,735 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the supplemental cash or stock it qualifiesflow information and certain other information related to operating leases for equity classificationthe years ended December 31, 2022 and 2021: | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
| (dollars in thousands) | |
| Other information | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 26,046 | | | $ | 27,429 | | | |
| | | | | |
| Weighted average remaining lease term - operating leases (in years) | 5.35 | | 5.27 | | |
| Weighted average discount rate - operating leases | 4.23 | % | | 4.06 | % | | |
As of December 31, 2022, maturities of the outstanding operating lease liabilities for the Company were as follows: | | | | | | | | | | | |
| Equipment Leases (operating) | | Real Estate and Other Facility Rental (a) (b) (c) |
| | (dollars in thousands) |
| 2023 | $ | 523 | | | $ | 24,653 | |
| 2024 | 515 | | | 22,450 | |
| 2025 | 479 | | | 11,781 | |
| 2026 | 278 | | | 8,607 | |
| 2027 | — | | | 7,213 | |
| Thereafter | — | | | 18,998 | |
| Total operating leases | 1,795 | | | 93,702 | |
| Less discount | 41 | | | 10,097 | |
| Less short-term leases | — | | | 137 | |
| | | |
| Total lease liability | $ | 1,754 | | | $ | 83,468 | |
(a)The Company has entered into various agreements to sublease certain of its premises.
(b)During the year ended December 31, 2022, the Company recognized an increase of $12.3 million of operating right-of-use assets and leases liabilities related to facility leases.
(c)The Company has assigned a reductionlease but has remained as the guarantor for performance of the assignee's rent payment obligations for the remainder of the term of the assigned lease at the maximum amount of $0.5 million.
Other Commitments
As of December 31, 2022, future minimum annual service payments for the Company were as follows: | | | | | | | | |
| | Service Payments |
| | | (dollars in thousands) |
| 2023 | | $ | 32,919 | |
| 2024 | | 18,761 | |
| 2025 | | 6,169 | |
| 2026 | | 3,271 | |
| 2027 | | 3,257 | |
| Thereafter | | 4,100 | |
| Total service payment commitments | | $ | 68,477 | |
Cowen Inc.
Notes to additional paid in capital.Consolidated Financial Statements (Continued)
Treasury Stock
Treasury stock of $186.8$614.3 million as of December 31, 2017,2022, compared to $153.8$547.1 million as of December 31, 2016,2021, resulted from $11.9$36.1 million acquired through repurchases of shares to cover employee minimum tax withholding obligations related to stock compensation vesting events under the Company's Equity PlanPlans or other similar transactions $1.6 million received from an escrow account established to satisfy the Company’s indemnification claims arising under the terms of the purchase agreement entered into in connection with the Company’s acquisition of Convergex Group, LLC and $19.5$31.1 million purchased in connection with a share repurchase program.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The following represents the activity relating to the treasury stock held by the Company during the year ended December 31, 2017:2022:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | |
| | Treasury stock shares | | Cost
(dollars in thousands) | | Average cost per share |
| Balance outstanding at December 31, 2016 | 9,810,802 |
| | $ | 153,845 |
| | $ | 15.68 |
|
| Shares purchased for minimum tax withholding under the Equity Plan or other similar transactions | 822,996 |
| | 11,889 |
| | 14.45 |
|
Shares of stock received in respect of indemnification claims
| 97,612 |
| | 1,626 |
| | 16.66 |
|
| Purchase of treasury stock | 1,401,866 |
| | 19,486 |
| | 13.90 |
|
| Balance outstanding at December 31, 2017 | 12,133,276 |
| | $ | 186,846 |
| | $ | 15.40 |
|
| | | | | | | | | | | | | | | | | |
| Treasury Stock Shares | | Cost
(dollars in thousands) | | Average Cost per Share |
| Balance outstanding at December 31, 2021 | 28,047,929 | | | $ | 547,112 | | | $ | 19.51 | |
| Shares purchased for minimum tax withholding under the 2010 and 2020 Equity Plans or other similar transactions | 1,058,933 | | | 36,082 | | | 34.07 | |
| | | | | |
| Purchase of treasury stock | 1,069,002 | | | 31,078 | | | 29.07 | |
| Balance outstanding at December 31, 2022 | 30,175,864 | | | $ | 614,272 | | | $ | 20.36 | |
25.
19. Non-Controlling Interests in Consolidated Subsidiaries and Investment Funds
Redeemable and nonredeemable non-controlling interests in consolidated subsidiaries and investment funds and the related net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds are comprised as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| As of December 31, |
| | 2022 | | 2021 | | 2020 |
| | (dollars in thousands) |
| Redeemable non-controlling interests in consolidated subsidiaries and investment funds | | | | | |
| Consolidated Funds | | | | | |
| Beginning balance | $ | — | | | $ | — | | | $ | 391,275 | |
| Capital contributions | — | | | — | | | 184,223 | |
| Capital distributions | — | | | — | | | (181,863) | |
| | | | | |
| Deconsolidation of entity | — | | | — | | | (360,711) | |
| Income (loss) attributable to non-controlling interests | — | | | — | | | (32,924) | |
| Ending balance | — | | | — | | | — | |
| | | | | |
| Nonredeemable non-controlling interests in consolidated subsidiaries and investment funds | | | | | |
| Operating companies | | | | | |
| Beginning balance | $ | 126,105 | | | $ | 83,818 | | | 11,513 | |
| Capital contributions | 24,417 | | | 36,539 | | | 9,730 | |
| Capital distributions | (10,626) | | | (7,601) | | | (5,605) | |
| Consolidation of entity | | | — | | | 48,596 | |
| Income (loss) attributable to non-controlling interests | 6,540 | | | 13,349 | | | 19,584 | |
| Ending balance | 146,436 | | | 126,105 | | | 83,818 | |
| | | | | |
| Consolidated Funds | | | | | |
| Beginning balance | 33,630 | | | 115,806 | | | 82,807 | |
| Capital contributions | — | | | 19,017 | | | 191,493 | |
| Capital distributions | — | | | (21,411) | | | (72,646) | |
| | | | | |
| Deconsolidation of entity | — | | | (74,813) | | | (89,889) | |
| Income (loss) attributable to non-controlling interests | (17,143) | | | (4,969) | | | 4,041 | |
| Ending balance | 16,487 | | | 33,630 | | | 115,806 | |
| | | | | |
| Total Nonredeemable non-controlling interests in consolidated subsidiaries and investment funds | $ | 162,923 | | | $ | 159,735 | | | $ | 199,624 | |
| | | | | |
20. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income includes the after tax change in unrealized gains and losses on foreign currency translation adjustments.Other revenues in the accompanying consolidated statement of operations. During the periods presented, the Company did not have material reclassifications out of other comprehensive income.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (dollars in thousands) | | |
| Beginning Balance | $ | (2 | ) | | $ | — |
| | $ | 17 |
|
| Foreign currency translation | (6 | ) | | (2 | ) | | (17 | ) |
| Ending Balance | $ | (8 | ) | | $ | (2 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Beginning balance | | | | | $ | (2) | | | $ | (7) | | | $ | (5) | |
| | | | | | | | | |
| Foreign currency translation | | | | | 3 | | | 5 | | | (2) | |
| Ending balance | | | | | $ | 1 | | | $ | (2) | | | $ | (7) | |
21. Revenue from Contracts with Customers
For the year ended December 31, 2022, 2021 and 2020, the following tables presents revenues from contracts with customers disaggregated by fee type and segment. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, | |
| | | | | | | | 2022 | | 2021 | | 2020 | | | |
| | | | | (dollars in thousands) |
| Revenue from contracts with customers | | | | | Operating Company |
| Investment banking | | | | | | | | | | | | |
| Underwriting fees | | | | | | $ | 114,201 | | | $ | 421,081 | | | $ | 427,670 | | | | |
| Strategic/financial advisory fees | | | | | 248,268 | | | 433,909 | | | 190,958 | | | | |
| Placement and sales agent fees | | | | | 120,629 | | | 195,676 | | | 133,171 | | | | |
| Expense reimbursements from clients | | | | | 11,744 | | | 16,496 | | | 17,687 | | | | |
| Total investment banking revenue | | | | | 494,842 | | | 1,067,162 | | | 769,486 | | | | |
| Brokerage | | | | | | | | | | | | | | |
| Commissions | | | | | | | 522,670 | | | 530,927 | | | 479,762 | | | | |
| Trade conversion revenue | | | | | | 30,233 | | | 24,098 | | | 21,389 | | | | |
| Equity research fees | | | | | 24,111 | | | 21,015 | | | 19,757 | | | | |
| Total brokerage revenue from customers | | | | | 577,014 | | | 576,040 | | | 520,908 | | | | |
| Management fees | | | | | 65,986 | | | 71,374 | | | 46,556 | | | | |
| Incentive income | | | | | 646 | | | 2,732 | | | 592 | | | | |
| Total revenue from contracts with customers - Op Co | | | | | $ | 1,138,488 | | | $ | 1,717,308 | | | $ | 1,337,542 | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | Asset Company |
| Management fees | | | | | 684 | | | 913 | | | 959 | | | | |
| | | | | | | | | | | | |
| Total revenue from contracts with customers - Asset Co | | | | | 684 | | | 913 | | | 959 | | | | |
| Total revenue from contracts with customers | | | | | $ | 1,139,172 | | | $ | 1,718,221 | | | $ | 1,338,501 | | | | |
22. Insurance and reinsurance
Cowen Insurance Co is a wholly owned Malta-based insurance company that reinsures a significant proportion of its portfolio (“Outward Reinsurance”). The Company's wholly owned subsidiaries, Cowen Reinsurance S.A. (based in Luxembourg) (“Cowen Re”) and Kelvin (based in Guernsey, see Note 3) provide reinsurance to third party insurance and reinsurance companies (“Inward Reinsurance”). Cowen Insurance Co's, Cowen Re's, and Kelvin's share of claims incurred and paid during the periods below, as well as the change in claims outstanding and claims incurred but not reported ("IBNR") during years ended December 31, 2022, 2021 and 2020, net of reinsurance, were as follows:
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Paid claims | | | | | | | | | |
| Insurance (net of Outward Reinsurance) | | | | | $ | 4,496 | | | $ | 3,285 | | | $ | — | |
| Inward Reinsurance | | | | | 28,615 | | | 17,140 | | | 14,838 | |
| Total | | | | | $ | 33,111 | | | $ | 20,425 | | | $ | 14,838 | |
| Change in claims outstanding and claims IBNR | | | | | | | | | |
| Insurance (net of Outward Reinsurance) | | | | | $ | 533 | | | $ | 112 | | | $ | — | |
| Inward Reinsurance | | | | | (55,803) | | | 3,304 | | | 11,599 | |
| Total | | | | | $ | (55,270) | | | $ | 3,416 | | | $ | 11,599 | |
As of December 31, 2022 and 2021, insurance and reinsurance assets and liabilities consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| |
| Insurance and reinsurance assets | | | |
| Reinsurance recoverable on paid claims | $ | 66,303 | | | $ | 9,072 | |
| Deferred acquisition costs | 4,610 | | | 5,672 | |
| Cash advances held by cedants | 2,684 | | | 3,523 | |
| Reinsurance recoverable on claims reserves | 60,189 | | | 11,806 | |
| Total | $ | 133,786 | | | $ | 30,073 | |
| Insurance and reinsurance liabilities | | | |
| Reinsurance payables on paid claims | $ | 27,030 | | | $ | 3,837 | |
| Unearned Premium reserve | 27,294 | | | 23,241 | |
| Loss reserves (incurred claims and IBNR) | 263,223 | | | 44,191 | |
| Total | $ | 317,547 | | | $ | 71,269 | |
Cowen Insurance Co, Cowen Re, and Kelvin utilize several methods to determine their claims IBNR. Cowen Insurance Co and Cowen Re generally employ an estimation methodology whereby historical average claims ratios over a period of up to 10 years are utilized, based on availability of data. In cases where current claims development contradicts historical results, Cowen Insurance Co and Cowen Re employ a method to determine average claims ratios derived through different actuarial calculation methods. If an event occurs that may give rise to significant future claims in excess of the amount calculated using the above-mentioned methodologies, the impact of such an event is calculated using existing claims data and actuarial estimation methods to adjust Cowen Insurance Co's and Cowen Re's IBNR provision. As Kelvin is in run-off Kelvin determines its IBNR liabilities based on figures provided by insurance companies that Kelvin reinsures as well as industry-wide information about claims development related to known events in the past, such as hurricanes, typhoons, earthquakes, etc. All entities utilize recognized actuarial methods and assumptions which are regularly reviewed through catastrophe models, own loss experience, historical industry loss experience, underwriter and originator experience, pricing adequacy trends and management’s professional judgement. During the year ended December 31, 2022, claims liability and claim adjustment expenses were calculated using the above-mentioned methods consistent with prior years.
Cowen Insurance Co, Cowen Re, and Kelvin typically settle their premiums and claim payments on a quarterly basis. Cowen Insurance Co, Cowen Re, and Kelvin write contracts on both a proportional and non-proportional basis. The contracts contain inspection rights to allow the companies to inspect the policy documents that provide the source for the underlying data provided by the cedant. This negates the need for them to collect and hold the documents themselves which would be impracticable. Cowen Insurance Co, Kelvin, and Cowen Re do not discount any of its reserves and manage their exposure to insurance risk from higher than expected claims via the purchase of outward reinsurance. Cowen Insurance Co purchases such reinsurance on a program by program basis while Cowen Re and Kelvin have purchased whole account reinsurance which extends to their entire business.
Cowen Insurance Co, Cowen Re and Kelvin have entered into insurance and reinsurance agreements that require them to post collateral of cash or U.S. government bonds to cover certain exposures as defined in the respective insurance and reinsurance agreements. As of December 31, 2022, Cowen Re had pledged $53.0 million of collateral towards such reinsurance obligations, of
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
which $43.0 million was in cash and $10.1 million was in U.S. government bonds. As of December 31, 2021, total collateral pledged was $60.1 million, of which $44.1 million was cash and $16.0 million was U.S. government bonds. The collateral pledged as of December 31, 2022 was $7.1 million lower than the amounts pledged at December 31, 2021. This change is due to a release of collateral on three of its cedant contracts. Cowen Re expects $40.5 million of the cash collateral pledged to be released on September 30, 2023. The remaining collateral of $12.5 million is expected to be released periodically between December 31, 2022 and December 31, 2029 in accordance with the terms of the underlying insurance and reinsurance agreements. As of December 31, 2022, Kelvin had pledged $76.6 million of collateral towards its reinsurance obligations, of which $52.2 million was in cash and $24.4 million was in the form of letters of credit from major banks. As of December 31, 2022 and December 31, 2021, Cowen Insurance Co had no pledged collateral.
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| |
| Insurance and reinsurance assets | | | |
| Beginning balance at January 1 | $ | 44,191 | | | $ | 37,036 | |
| Increase/(Decreases) reinsurance recoverables | (11,806) | | | — | |
| Total | $ | 32,385 | | | $ | 37,036 | |
| | | |
| Incurred related to: | | | |
| Current Years | $ | 2,436 | | | $ | 13,262 | |
| Prior Years | (36,200) | | | 1,414 | |
| Total | $ | (33,764) | | | $ | 14,676 | |
| | | |
| Paid related to: | | | |
| Current Years | $ | 3,941 | | | $ | 6,874 | |
| Prior Years | 29,170 | | | 13,551 | |
| Total | $ | 33,111 | | | $ | 20,425 | |
| | | |
| Acquired insurance and reinsurance liabilities net of reinsurance assets and liabilities | $ | 237,524 | | | $ | 1,009 | |
| | | |
| Balance at December 31 | $ | 203,035 | | | $ | 32,385 | |
| Increase/(Decreases) reinsurance recoverables | 60,189 | | | $ | 11,806 | |
| Ending balance at December 31 | $ | 263,224 | | | $ | 44,191 | |
23. Share-Based Payments, Deferred Compensation and Employee Ownership Plans
The Company has issued share-based compensation under the 2010 and 2020 Equity Incentive Plan (the "Equity Plans"). The Equity Plans permit the grant of options, restricted shares, restricted stock units, and other equity-based awards to the Company's employees and directors. Stock options granted generally vest over two to five-year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued, both of which are eligible to accrue dividend equivalents, may be immediately vested or may generally vest over a two-to five-year period. Awards are subject to the risk of forfeiture, inclusive of accrued dividend equivalents. As of December 31, 2022, there were 3.7 million shares available for future issuance under only the 2020 Equity Incentive Plan.
Under the Equity Plans, the Company awarded $50.1 million of deferred cash awards to its employees during the year ended December 31, 2022. These awards vest over a four-year period and accrue interest at 0.70% per year. As of December 31, 2022, the Company had unrecognized compensation expense related to the Equity Plans' deferred cash awards of $61.5 million.
The Company measures compensation cost for equity classified share-based awards on grant date and amortizes the unearned compensation associated with such awards on a straight-line basis over the vesting period of the option or award, net of estimated forfeitures. In relation to awards under the Equity Plan, the Company recognized compensation expense of $66.7 million, $85.0 million and $48.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. The income tax effect recognized for the Equity Plans was a benefit of $24.3 million, $33.5 million and $13.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Restricted Stock Units Granted to Employees
Restricted shares and restricted stock units are referred to collectively as restricted stock. The following table summarizes the Company's restricted share and restricted stock unit activity for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Nonvested Restricted Class A Common Shares and Class A Common Restricted Stock Units | | Weighted-Average
Grant Date
Fair Value | | Nonvested Restricted Class A Common Shares and Class A Common Restricted Stock Units | | Weighted-Average
Grant Date
Fair Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Beginning balance outstanding | 4,595,342 | | | $ | 24.33 | | | 5,450,191 | | | $ | 17.56 | |
| Granted | 2,054,563 | | | 31.62 | | | 2,092,904 | | | 35.31 | |
| Vested | (2,134,692) | | | 21.46 | | | (2,785,535) | | | 19.46 | |
| Canceled | — | | | — | | | — | | | — | |
| Forfeited | (71,717) | | | 21.96 | | | (162,218) | | | 22.23 | |
| Ending balance outstanding | 4,443,496 | | | $ | 29.12 | | | 4,595,342 | | | $ | 24.33 | |
Included in the restricted share and restricted stock unit activity are performance-linked restricted stock units of 1,974,217 which were awarded from March 2016 through March 2022. Certain of the awards granted have the ability to be cash settled when the attained award exceeds a certain percentage of granted amount. The cash portion of the award has been bifurcated from the equity component and recorded as a compensation payable in the accompanying consolidated statement of financial condition. Of the awards granted, 712,652 have vested and 320,681 have been canceled, as they did not meet the performance criteria, through December 31, 2022. Included in vested units are 233,333 units that had an attainable share value of 420,000, and were delivered in March 2021. Of this attainable share value 350,000 shares were settled in the issuance of the Company's Class A common stock and were delivered in March 2021 with the remaining 70,000 shares being settled in cash at the volume weighted average price on settlement date. Also included in vested units are 333,333 units that had an attainable share value of 666,666, due to reaching certain performance goals. Of this attainable value 528,800 shares were settled in the Company's Class A common stock and were delivered in March 2022 with the remaining 137,866 shares being settled in cash at the volume weighted average price of the Company's Class A common stock on settlement date. The remaining awards, included in the outstanding balance as of December 31, 2022, vest December 2023 and December 2024 and will be earned only to the extent that the Company attains specified market conditions relating to its volume-weighted average share price and total shareholder return in relation to certain benchmark indices and performance goals relating to aggregate net income and average return on shareholder equity. The actual number of attained shares ultimately earned could vary from zero, if performance goals are not met, to as much as 240% of the targeted award. Compensation expense is recognized to the extent that it is probable that the Company will attain the performance goals. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.
As of December 31, 2022, there was $77.9 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees. Unrecognized compensation expense related to nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 1.64 years.
Restricted Shares and Restricted Stock Units Granted to Non-Employee Board Members
There were 64,370 and 28,463 restricted stock units awarded to non-employee board members during the year ended December 31, 2022 and 2021. The Company delivered 4,156 and 41,667 restricted stock units to non-employee board members during the year ended December 31, 2022 and 2021. As of December 31, 2022 and 2021, there were 306,547 and 246,333 restricted stock units outstanding for non-employee board members, respectively.
Other Share Based Payments and Awards
In certain circumstances, the Company grants carried interest in consolidated managing member/general partner subsidiaries to third parties through the grant of equity awards in exchange for professional, advisory and other services. The equity awards are recorded within additional paid in capital in the accompanying consolidated statements of financial condition and professional, advisory and other fees expense in the accompanying consolidated statements of operations based on the fair value of the award granted and expensed over the terms of the award. In addition, the equity awards provide the third parties profit points aligned to the allocated carried interest distributions. Upon vesting of the awards, the third parties' allocation of carried interest is determined by applying an equity ownership model. Accordingly, the Company accrues carried interest allocations based on the fair value of the underlying investments assuming hypothetical liquidation at book value upon vesting as nonredeemable non-controlling interest.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
On March 1, 2022, Cowen Digital Holdings LLC (“CDIG”) authorized 2,000,000 Class B Units, of which 1,487,500 Class B Units and an additional 29,250 on July 15, 2022, were issued to an affiliate, for which a subsidiary of the Company is the Managing Member, on behalf of the Company’s employees as incentive awards (the "Digital Awards") under the 2022 Equity Unit Incentive Plan. The Class B Units will, upon vesting, represent a 20% ownership of CDIG, a consolidated subsidiary of the Company upon vesting. Once the vesting conditions of the Digital Awards have been met, such awards will be presented as nonredeemable non-controlling interest in the accompanying consolidated statements of financial condition. Half of the Digital Awards vest over a period of time and are tied to service (time based) and the other half vest when a qualifying event as stipulated in the Digital Award documents occurs (performance based). Once vested, Class B units will not be entitled to distributions unless and until a profit distribution hurdle has been met. The Company recognized compensation expense of $0.8 million related to the time based Digital Awards for the year ended December 31, 2022. At December 31, 2022, there was $0.8 million of unrecognized compensation expense related to the time based Digital Awards which will be recognized over their five year vesting period. The fair value of time based Digital Awards is determined based on the fair market value of CDIG and its consolidated subsidiaries. The fair market value of CDIG and its consolidated subsidiaries is calculated utilizing recent transactions, discounted cash flows, and market multiples. The Digital Awards are then using a standard Black Scholes options pricing model. The primary input in determining the fair market value on grant date was recent/pending transactions in CDIG’s underlying investments. The expense related to the performance based component of the Digital Awards will be recognized when the qualifying event is considered to be probable. The income tax effect recognized for the Digital Awards was a benefit of $0.2 million for the year ended December 31, 2022.
24. Defined Contribution Plans
The Company sponsors a Retirement and Savings Plan which is a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code (the "401(k) Plans"). All full-time employees of the Company can contribute on a tax deferred basis and an after-tax basis to the 401(k) Plans up to federal contribution limits or up to 100% of their annual compensation, subject to certain limitations. The Company provides matching and profit sharing contributions to employees that are equal to a specified percentage of the eligible participant's contribution as defined by the 401(k) Plans. For the years ended December 31, 2022, 2021 and 2020, the Company's contributions to the 401(k) Plans were $3.0 million, $3.9 million, and $2.9 million, respectively.
25. Income Taxes
The taxable results of the Company’s U.S. operations are included in the consolidated income tax returns of Cowen Inc. as well as stand-alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand-alone or combined basis. These subsidiaries are subject to tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries with tax filing obligations are the United Kingdom, Luxembourg, Malta, Guernsey, Germany, Switzerland, Israel, South Africa, Canada and Hong Kong.
The Company is subject to U.S. tax on its Global Intangible Low Taxed Income ("GILTI"). The Company elected to account for taxes on GILTI inclusions in U.S. taxable income as incurred on the current year basis and not included any related amounts in deferred taxes.
The components of the Company's income tax expense for the years ended December 31, 2022, 2021 and 2020 are as follows: | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
| |
| Current tax expense/(benefit) | | | | | |
| Federal | $ | 32,574 | | | $ | 92,390 | | | $ | 13,840 | |
| State and local | 2,799 | | | 21,842 | | | 5,060 | |
| Foreign | 4,358 | | | 1,867 | | | 1,355 | |
| Total | $ | 39,731 | | | $ | 116,099 | | | $ | 20,255 | |
| Deferred tax expense/(benefit) | | | | | |
| Federal | $ | (23,194) | | | $ | (9,860) | | | $ | 53,231 | |
| State and local | (5,705) | | | (4,861) | | | 17,337 | |
| Foreign | (46) | | | 661 | | | (450) | |
| Total | (28,945) | | | (14,060) | | | 70,118 | |
| Total tax expense/(benefit) | $ | 10,786 | | | $ | 102,039 | | | $ | 90,373 | |
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Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Consolidated U.S. income/(loss) before income taxes was $60.5 million in 2022, $385.1 million in 2021, and $289.6 million in 2020. The corresponding amounts for non-U.S.-based income/(loss) were $16.1 million in 2022, $20.9 million in 2021, and $7.9 million in 2020.
The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2022, 2021, and 2020 are as follows: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| Pre-tax net income at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| | | | | |
| | | | | |
| | | | | |
| Nondeductible expenses | 11.3 | | | 2.6 | | | 1.5 | |
| | | | | |
| Change in valuation allowance | (3.2) | | | — | | | — | |
| Tax credits | (4.6) | | | — | | | — | |
| Stock compensation | (7.4) | | | (2.3) | | | (0.3) | |
| | | | | |
| State and foreign tax | (4.4) | | | 5.0 | | | 7.3 | |
| Reversal of income attributable to non-controlling interests | 2.9 | | | (0.4) | | | 0.7 | |
| Other, net | (1.5) | | | (0.8) | | | 0.2 | |
| Total | 14.1 | % | | 25.1 | % | | 30.4 | % |
As of December 31, 2022, the Company has income taxes receivable of approximately $10.9 million representing state tax overpayments, which is included in other assets on the accompanying consolidated statements of financial condition. The Company also has income taxes payable of $13.2 million representing federal, state and foreign payables, which is included in other liabilities on the accompany consolidated statements of financial condition.
The components of the Company's deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows: | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | (dollars in thousands) |
| Deferred tax assets, net of valuation allowance | | | |
| Net operating loss | $ | 12,061 | | | $ | 14,649 | |
| Deferred compensation | 29,967 | | | 34,342 | |
| | | |
| | | |
| Intangible assets | 4,894 | | | 2,732 | |
| Bad debt reserves | 2,929 | | | 759 | |
| Section 174 capitalization | 9,460 | | | — | |
| Tax credits | 1,057 | | | 3,241 | |
| Lease liability | 17,871 | | | 24,373 | |
| Other | 5,926 | | | 3,643 | |
| Total deferred tax assets | 84,165 | | | 83,739 | |
| Valuation allowance | (1,932) | | | (4,226) | |
| Deferred tax assets, net of valuation allowance | 82,233 | | | 79,513 | |
| Deferred tax liabilities | | | |
| Right-of-use on certain assets | (16,498) | | | (22,568) | |
| Goodwill | (7,594) | | | (1,425) | |
| Unrealized gains on investments | (5,070) | | | (30,393) | |
| | | |
| Other | (2,261) | | | (3,362) | |
| Total deferred tax liabilities | (31,423) | | | (57,748) | |
| Deferred tax assets/(liabilities), net | $ | 50,810 | | | $ | 21,765 | |
Deferred tax assets, net of valuation allowance, are reported in the accompanying consolidated statements of financial condition. In addition to the deferred tax balances in the table above, the Company records balances related to its operating losses in Luxembourg, which are discussed below.
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
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
purposes in the foreseeable future. The Company recorded approximately $1.9 million valuation allowance against its deferred tax assets of $84.2 million as of December 31, 2022 and recorded approximately $4.2 million valuation allowance against its deferred tax assets of $83.7 million as of December 31, 2021. Separately, the Company has deferred tax liabilities of $31.4 million as of December 31, 2022 and $57.7 million as of December 31, 2021.
For tax year 2022, the Company's total deferred tax benefit of $28.9 million was derived by the recognition of Section 174 expenses and the reversal of timing differences in the normal course of business. The deferred tax benefit of $14.1 million in 2021 was derived by the reversal of timing differences in the normal course of business. The deferred tax expense of $70.1 million in 2020 was derived by the utilization of net operating losses and the reversal of timing differences in the normal course of business.
As of December 31, 2022, the Company has foreign tax credit carryforwards of $1.1 million which expire between 2023 and 2030. Valuation allowance of $0.6 million was established against foreign tax credit carryforward as the Company determined that it is not more likely than not that the credits will be utilized.
The Company has the following net operating loss carryforwards at December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Jurisdiction: | Federal | | New York State | | New York City | | Hong Kong |
| Net operating loss (in millions) | $15.2 | | $16.0 | | $24.7 | | $11.7 |
| Year of expiration | 2030 | | 2034 | | 2034 | | Indefinite |
In addition to the net operating loss carryforwards in the table above, the Company also has net operating loss carryforwards in Luxembourg. These loss carryforwards are only accessible to the extent of taxable income generated by the Luxembourg reinsurance companies, including any deferred income that will be generated in the future. Consequently, the Company recorded a deferred tax asset of $176.7 million, net of deferred tax liabilities of $39.7 million in connection with future taxable income, and an offsetting valuation allowance of $176.7 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.
In June 2011, the Company acquired a subsidiary with net operating loss carryovers that underwent a change of control under Section 382 of the Internal Revenue Code due to the acquisition. Accordingly, a portion of the Company’s deferred tax assets, are subject to an annual limitation under Section 382. The deduction limitation is approximately $6.7 million annually and applies to approximately $10.2 million of net operating losses. The Company is not expected to lose any deferred tax assets due to these limitations.
As a result of the enactment of the Inflation Reduction Act signed on August 16, 2022, the Company is required to assess the tax impact of the Act in the quarter the law was enacted. Based on management’s analysis, there was no material impact on the Company's financial statements as of December 31, 2022.
The components of unrecognized tax benefits are as follows: | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | (dollars in thousands) |
| Beginning balance at January 1 | $ | — | | | $ | 299 | |
| | | |
| Settlement of positions | — | | | (64) | |
| Increases/(Decreases) due to prior year positions | — | | | (235) | |
| Ending balance at December 31 | $ | — | | | $ | — | |
The Company did not record any additions to its unrecognized tax benefit balances as a result of current or prior year tax positions in the consolidated statement of operations for the year ended December 31, 2022. No unrecognized tax benefit was recorded in the consolidated statement of financial condition as of December 31, 2022.
The following are the major jurisdictions in which the Company has significant business operations and the earliest open tax year subject to examination in these jurisdictions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Jurisdiction: | Federal | | New York State | | New York City | | United Kingdom | | Luxembourg | | Malta | | Germany | | Switzerland |
| Tax Year | 2018 | | 2019 | | 2019 | | 2019 | | 2018 | | 2017 | | 2018 | | 2018 |
The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in the United Kingdom, Malta, Germany, Switzerland, Israel, Canada, and Hong Kong.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
26. Earnings Per Share
The Company calculates its basic and diluted earnings per share in accordance with US GAAP. Basic earnings per share is calculated by dividing net income attributable to the Company's common stockholders by the weighted average number of shares of Class A common sharesstock outstanding for the period. As of December 31, 2017,2022, there were 29,632,02028,234,289 shares of Class A common sharesstock outstanding. TheAs of December 31, 2022, the Company has included 191,962310,426 fully vested, unissued restricted stock units and restricted shares in its calculation of basic earnings per share. As of December 5, 2016, share31, 2021, there were 27,778,964 shares of Class A common stock outstanding. As of December 31, 2021, the Company has included 972,732 fully vested, unissued restricted stock units and restricted shares in its calculation of basic earnings per share amounts have been retroactively updated to reflect the one-for-four reverse stock split.share.
Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive items. The Company uses the treasury stock method to reflect the potential dilutive effect of the warrants (see Note 6(a)), unexercised stock options, unvested restricted shares and restricted stock units, and SAR's.units. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares and restricted stock units are assumed to have been delivered, and options and warrants are assumed to have been exercised, for the entire period being presented. The number of performance-linked unvested restricted stock units that are included in the calculation are at the amount that could be earned using current payout rates. The assumed proceeds from the assumed vesting, delivery and exercising were calculated as the amount of compensation cost attributed to future services and not yet recognized.
The Company canpreviously concluded that it had the intent and ability to settle the December 2022 Convertible Notes in cash and, as a result, the convertible notes did not have an impact on the Company's diluted earnings per share calculation. On March 24, 2021, the Company issued a redemption notice announcing that the Company would redeem all of the December 2022 Convertible Notes (See Note 16). On June 24, 2021, the Company cash settled the December 2022 Convertible Notes up to the principal amount of the December 2022 Convertible Notes and share settled through the delivery of shares of the Company’s Class A common stock for the remainder of the conversion obligation in excess of the principal amount. The shares of the Company’s Class A common stock issued are within basic earnings per share subsequent to June 24, 2021. Prior to that date, the Company has applied the if-converted method to the portion of the December 2022 notes above the principal amount that settled in shares upon a conversion in dilutive earnings per share.
On December 31, 2021, the Company irrevocably elected to cash settle $1,000.00 of its obligation in respect of each conversion of any share of the Series A Convertible Preferred Stock. Prior to this date, the Company could elect to settle the Series A Convertible Preferred Stock in shares, cash, or a combination of both. The Company's intentEffective January 1, 2022, the Company adopted ASC 470-20, which requires the Company to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement (if the effect is to settlemore dilutive) for instruments that may be settled in cash and, based on current and projected liquidity needs,or shares, except for certain liability-classified share-based payment awards. With the adoption of this guidance, the Company hasis required to include the ability to do so.
portion of the Series A Convertible Preferred Stock that can be settled in Class A common stock (amount in excess of $1,000.00 per share of the Series A Convertible Preferred Stock) in the diluted earnings per share calculation. As a result, the Series A Convertible Preferred Stock impacts the Company’s diluted earnings per share calculation for the period ended December 31, 2022 (See Note 2).
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The computation of earnings per share is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | (dollars and share data in thousands, except per share data) |
| Net income (loss) | | | | | $ | 65,855 | | | $ | 303,991 | | | $ | 207,064 | |
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | | | | | (10,603) | | | 8,380 | | | (9,299) | |
| Net income (loss) attributable to Cowen Inc. | | | | | 76,458 | | | 295,611 | | | 216,363 | |
| Preferred stock dividends | | | | | 6,792 | | | 6,792 | | | 6,792 | |
| Net income (loss) attributable to Cowen Inc. common stockholders for basic earnings per share | | | | | 69,666 | | | 288,819 | | | $ | 209,571 | |
| Change in fair value of contingently issuable shares | | | | | 55 | | | — | | | — | |
| Net income (loss) attributable to Cowen Inc. common stockholders for diluted earnings per share | | | | | $ | 69,721 | | | $ | 288,819 | | | $ | 209,571 | |
| | | | | | | | | |
| Shares for basic and diluted calculations: | | | | | | | | | |
| Weighted average shares used in basic computation | | | | | 28,183 | | | 27,721 | | | 27,790 | |
| | | | | | | | | |
| Performance based restricted stock | | | | | 430 | | | 755 | | | — | |
| Contingently issuable common stock in connection with acquisitions | | | | | 50 | | | — | | | 85 | |
| December 2022 Convertible Notes | | | | | — | | | 1,404 | | | — | |
| Series A Convertible Preferred Stock | | | | | 949 | | | — | | | — | |
| Restricted stock | | | | | 1,932 | | | 2,748 | | | 1,644 | |
| Weighted average shares used in diluted computation | | | | | 31,544 | | | 32,628 | | | 29,519 | |
| Earnings (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 2.47 | | | $ | 10.42 | | | $ | 7.54 | |
| Diluted | | | | | $ | 2.21 | | | $ | 8.85 | | | $ | 7.10 | |
27. Commitments and Contingencies
Operating Lease Obligations
The Company has entered into leases for real estate and other facilities. These leases contain rent escalation clauses and options to extend the applicable lease term. The Company does not include renewal options in the lease term for calculating the Company's lease liability as the renewal options allow the Company operational flexibility and the Company is not reasonably certain to exercise these renewal options at this time. The Company records the expenses related to occupancy and equipment on a straight-line basis over the lease term and these expenses are included in occupancy and equipment expense and client services and business development expense in the accompanying consolidated statements of operations.
For the year ended December 31, 2022 and 2021, quantitative information regarding the Company's operating lease obligations reflected in the accompanying consolidated statements of operations were as follows: | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | (dollars in thousands) | | |
| Lease cost | | | | | | | | | |
| Operating lease cost | | | | | $ | 25,495 | | | $ | 25,268 | | | $ | 22,759 | |
| Short-term lease cost | | | | | 225 | | | 150 | | | 207 | |
| Variable lease cost | | | | | 2,527 | | | 3,526 | | | 3,550 | |
| Sublease income | | | | | (470) | | | (583) | | | (781) | |
| Total lease costs | | | | | $ | 27,777 | | | $ | 28,361 | | | $ | 25,735 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (dollars in thousands, except share and per share data) |
| Net income (loss) | $ | (37,091 | ) | | $ | (12,395 | ) | | $ | 58,975 |
|
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | 23,791 |
| | 6,882 |
| | 15,246 |
|
| Net income (loss) attributable to Cowen Inc. | (60,882 | ) | | (19,277 | ) | | 43,729 |
|
| Preferred stock dividends | 6,792 |
| | 6,792 |
| | 4,075 |
|
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | (67,674 | ) | | $ | (26,069 | ) | | $ | 39,654 |
|
| | | | | | |
| Shares for basic and diluted calculations: | | | | | |
| Weighted average shares used in basic computation | 29,492 |
| | 26,857 |
| | 27,522 |
|
| Stock options | — |
| | — |
| | 3 |
|
| Performance based restricted stock | — |
| | — |
| | 65 |
|
| Stock appreciation rights | — |
| | — |
| | 35 |
|
| Restricted stock | — |
| | — |
| | 1,418 |
|
| Weighted average shares used in diluted computation | 29,492 |
| | 26,857 |
| | 29,043 |
|
| Earnings (loss) per share: | | | | | |
| Basic | $ | (2.29 | ) | | $ | (0.97 | ) | | $ | 1.44 |
|
| Diluted | $ | (2.29 | ) | | $ | (0.97 | ) | | $ | 1.37 |
|
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
| (dollars in thousands) | |
| Other information | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 26,046 | | | $ | 27,429 | | | |
| | | | | |
| Weighted average remaining lease term - operating leases (in years) | 5.35 | | 5.27 | | |
| Weighted average discount rate - operating leases | 4.23 | % | | 4.06 | % | | |
As of December 31, 2022, maturities of the outstanding operating lease liabilities for the Company were as follows: | | | | | | | | | | | |
| Equipment Leases (operating) | | Real Estate and Other Facility Rental (a) (b) (c) |
| | (dollars in thousands) |
| 2023 | $ | 523 | | | $ | 24,653 | |
| 2024 | 515 | | | 22,450 | |
| 2025 | 479 | | | 11,781 | |
| 2026 | 278 | | | 8,607 | |
| 2027 | — | | | 7,213 | |
| Thereafter | — | | | 18,998 | |
| Total operating leases | 1,795 | | | 93,702 | |
| Less discount | 41 | | | 10,097 | |
| Less short-term leases | — | | | 137 | |
| | | |
| Total lease liability | $ | 1,754 | | | $ | 83,468 | |
27.(a)The Company has entered into various agreements to sublease certain of its premises.
(b)During the year ended December 31, 2022, the Company recognized an increase of $12.3 million of operating right-of-use assets and leases liabilities related to facility leases.
(c)The Company has assigned a lease but has remained as the guarantor for performance of the assignee's rent payment obligations for the remainder of the term of the assigned lease at the maximum amount of $0.5 million.
Other Commitments
As of December 31, 2022, future minimum annual service payments for the Company were as follows: | | | | | | | | |
| | Service Payments |
| | | (dollars in thousands) |
| 2023 | | $ | 32,919 | |
| 2024 | | 18,761 | |
| 2025 | | 6,169 | |
| 2026 | | 3,271 | |
| 2027 | | 3,257 | |
| Thereafter | | 4,100 | |
| Total service payment commitments | | $ | 68,477 | |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Unfunded Commitments
The following table summarizes unfunded commitments as of December 31, 2022: | | | | | | | | | | | | | | |
| Entity | | Unfunded Commitments | | Commitment Term |
| | (dollars in thousands) | | |
| HealthCare Royalty Partners funds (a) | | $ | 6,064 | | | 2.0 years |
| Eclipse Ventures Fund I, L.P. | | $ | 28 | | | 2.0 years |
| Eclipse Fund II, L.P. | | $ | 12 | | | 3.0 years |
| Eclipse Continuity Fund I, L.P. | | $ | 10 | | | 4.0 years |
| Cowen Healthcare Investments III LP | | $ | 1,552 | | | 4.0 years |
| Cowen Healthcare Investments IV LP | | $ | 4,758 | | | 5.0 years |
| Cowen Sustainable Investments I LP | | $ | 8,729 | | | 7.0 years |
(a) The Company is a limited partner of the HealthCare Royalty Partners funds (which are managed by Healthcare Royalty Management) and is a member of HealthCare Royalty Partners General Partners. The Company will make its pro-rata investment in the HealthCare Royalty Partners funds along with the other limited partners.
Litigation
In the ordinary course of business, the Company and its affiliates, subsidiaries and current and former officers, directors and employees (the "Company and Related Parties") are named as defendants in, or as parties to, various legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of securities, banking, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief.
In the ordinary course of business, the Company and Related Parties are also subject to governmental and regulatory examinations, information gathering requests (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Certain of the Company's affiliates and subsidiaries are registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, commodity futures and other regulators. In connection with formal and informal inquiries by these regulators, the Company receives requests and orders seeking documents and other information in connection with various aspects of the Company's regulated activities.The Company is currently cooperating with the SEC in connection with an investigation of the Company’s business’ compliance with record preservation requirements relating to business communications and/or electronic messaging channels. The SEC is reportedly conducting similar investigations of record preservation practices at other broker-dealers and investment advisors.
Due to the global scope of the Company's operations, and its presence in countries around the world, the Company and Related Parties may be subject to litigation, governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and informal), in multiple jurisdictions with legal and regulatory regimes that may differ substantially, and present substantially different risks, from those to which the Company and Related Parties are subject in the United States.
The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. For many legal and regulatory matters, we are unable to estimate a range of reasonably possible loss.
In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss because the conditions above are not met. The Company's disclosure would include an estimate of the reasonably possible loss or range of loss for those matters, for which an estimate can be made. Neither a reserve nor disclosure is required for losses that are deemed remote.
The Company appropriately reserves for certain matters where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. Such amounts are included within accounts payable, accrued expenses and other liabilities in the accompanying consolidated statements of financial condition. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters. The Company accrues legal fees as incurred.
28. Segment Reporting
The Company conducts its operations throughhas two reportable business segments: Op Co and Asset Co. The Op Co segment consists of Cowen Investment Management ("CIM"), Investment Banking, Markets and Research. The Asset Co segment consists of the Company's private investments, private real estate investments and other legacy investment management segment and the broker‑dealer segment. These activities are conducted primarily in the United States and substantially allstrategies.
Segment Measures
The measure of its revenues are generated domestically. The performance measureprofit or loss for these segments is Economic Income (Loss), which management uses to evaluate the financial performance of and make operating decisions for the segments including determining appropriate compensation levels. Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable, including headcount, square footage and other factors.
In general, Economic Income (Loss) is a pre-taxan after tax measure that(which represents the Company’s income tax expense or benefit calculated on Pre-tax Economic Income (Loss) once all currently available net operating losses have been utilized) and is presented after preferred stock dividends. Economic Income (Loss) (i) includes management reclassifications which the Company believes provides additional insight into the performance of the Company’s core businesses and divisions (ii) eliminates the impact of consolidation for consolidated fundsConsolidated Funds and (iii) excludes (ii) goodwill and intangible impairment (iii)certain other impairments, certain other transaction-related adjustments and/or reorganization expenses (iv) the bargain purchase gain which resulted from the Convergex Group acquisition (v)and certain costs associated with debt and (vi) preferred stock dividends. In addition, Economic Income (Loss) revenues include investment income that representsdebt.
The Company does not disclose total asset information for its business segments as the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes, these items are included in each of their respective line items. Economic Income (Loss) revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities and the Company's investment in the activist business. For US GAAP purposes, all of these items are recorded in other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for US GAAP purposes is presented gross as part of revenue.
As further stated below, one major difference between Economic Income (Loss) and US GAAP net income (loss) is that Economic Income (Loss) presents the segments' results of operations without the impact resulting from the full consolidation of any of the Consolidated Funds. The consolidation of these funds results include the pro rata share of the income or loss attributable to other owners of such entities which is reflected in net income (loss) attributable to redeemable non-controlling interest in consolidated subsidiaries in the accompanying consolidated statements of operations. This pro rata share has no effect on the overall financial performance for the investment management segment, as ultimately, this income or lossinformation is not income or loss forreviewed by the investment management segment itself. Included in Economic Income (Loss) is the actual pro rata share of the income or loss attributable to the Company as an investor in such entities, which is relevant in management making operating decisionsChief Operating Decision Maker ("CODM"). The Op Co and evaluating financial performance.Asset Co segments do not conduct inter-segment transactions.
The following tables settable sets forth operating results for the Company's investment management and broker-dealer segments and related adjustments necessary to reconcile the Company's Economic Income (Loss) measure to arrive at the Company's consolidated US GAAP net income (loss): and related reclassifications and adjustments necessary to reconcile to the Company's Economic Income (Loss) measure which represents the Company's Op Co and Asset Co segments' results:
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | (dollars in thousands) |
| Economic Income | | | | | | | | | |
| Op Co | | | | | $ | 87,502 | | | $ | 314,519 | | | $ | 329,381 | |
| Asset Co | | | | | (27,482) | | | (2,291) | | | (16,136) | |
| Adjustments applied to arrive at Net Income (loss) | | | | | | | | | |
| Income attributable to non-controlling interest | | | | | (10,603) | | | 8,380 | | | (9,299) | |
| Preferred stock dividends | | | | | 6,792 | | | 6,792 | | | 6,792 | |
| Amortization of (discount)/premium on convertible debt | | | | | (309) | | | (1,604) | | | (4,499) | |
| Acquisition related amounts | | | | | (16,293) | | | (6,593) | | | (606) | |
| Contingent liability adjustments | | | | | 13,560 | | | (15,118) | | | (8,492) | |
| | | | | | | | | |
| Debt extinguishment gain (loss) and accelerated debt costs | | | | | — | | | (10,095) | | | 2,719 | |
| Bargain purchase gain | | | | | — | | | 3,855 | | | — | |
| Goodwill and other impairment | | | | | — | | | (1,009) | | | (2,423) | |
| US GAAP Income tax expense | | | | | (10,786) | | | (102,039) | | | (90,373) | |
| Economic income tax expense | | | | | 23,474 | | | 109,194 | | | — | |
| Net income (loss) | | | | | $ | 65,855 | | | $ | 303,991 | | | $ | 207,064 | |
Economic Income (Loss) information provided and reviewed by the CODM includes (i) non-interest revenue, (ii) interest revenue, (iii) interest expense, (iv) depreciation and amortization expense and (v) income taxes presented on an Economic Income (Loss) basis by Segment. The following table sets forth the included segment information on a US GAAP basis with reconciliations to consolidated amounts.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | (dollars in thousands) |
| Op Co | | | | | | | | | |
| Non-Interest Revenue | | | | | $ | 1,442,022 | | | $ | 1,917,406 | | | 1,564,710 | |
| Interest Revenue | | | | | 153,050 | | | 192,756 | | | 169,358 | |
| Interest Revenue, Consolidated funds | | | | | — | | | — | | | 2,683 | |
| Total Revenues | | | | | 1,595,072 | | | 2,110,162 | | | 1,736,751 | |
| Interest Expense | | | | | 180,983 | | | 199,570 | | | 173,537 | |
| Interest Expense, Consolidated funds | | | | | — | | | — | | | 1,376 | |
| Depreciation and Amortization | | | | | 27,700 | | | 18,982 | | | 22,655 | |
| Income Taxes | | | | | 21,635 | | | 103,149 | | | 90,373 | |
| Asset Co | | | | | | | | | |
| Non-Interest Revenue | | | | | (57,756) | | | 2,163 | | | 18,396 | |
| Interest Revenue | | | | | 407 | | | 465 | | | 770 | |
| Interest Revenue, Consolidated funds | | | | | — | | | 9 | | | 9 | |
| Total Revenues | | | | | (57,349) | | | 2,637 | | | 19,175 | |
| Interest Expense | | | | | 5,100 | | | 5,035 | | | 6,120 | |
| Interest Expense, Consolidated funds | | | | | — | | | — | | | — | |
| Depreciation and Amortization | | | | | 25 | | | 22 | | | 22 | |
| Income Taxes | | | | | (10,849) | | | (1,110) | | | — | |
| Total Segment | | | | | | | | | |
| Non-Interest Revenue * | | | | | 1,384,266 | | | 1,919,569 | | | 1,583,106 | |
| Interest Revenue | | | | | 153,457 | | | 193,221 | | | 170,128 | |
| Interest Revenue, Consolidated funds | | | | | — | | | 9 | | | 2,692 | |
| Total Revenues | | | | | $ | 1,537,723 | | | $ | 2,112,799 | | | 1,755,926 | |
| Interest and Dividend Expense (includes dividend expense of $73.0 million, $6.8 million, and $8.1 million for the years ended December 31, 2022, 2021 and 2020, respectively) | | | | | 259,126 | | | 211,387 | | | 187,725 | |
| Interest and Dividend Expense, Consolidated funds (includes dividend expense of $0 million, $— million and $0.7 million for the years ended December 31, 2022, 2021 and 2020, respectively) | | | | | — | | | — | | | 2,064 | |
| Depreciation and Amortization | | | | | 27,725 | | | 19,004 | | | 22,677 | |
| Income Taxes | | | | | 10,786 | | | 102,039 | | | 90,373 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | | | | | | | Adjustments | | | | |
| | Investment
Management | | Broker-Dealer | | Total Economic Income/(Loss) | | Funds Consolidation | | Other Adjustments | | | | US GAAP |
| | (dollars in thousands) |
| Revenues | | | | | | | | | | | | | |
| Investment banking | $ | — |
| | $ | 223,614 |
| | $ | 223,614 |
| | $ | — |
| | $ | — |
| | | | $ | 223,614 |
|
| Brokerage | 38 |
| | 312,742 |
| | 312,780 |
| | — |
| | (19,170 | ) | | (i) | | 293,610 |
|
| Management fees | 52,239 |
| | 3,148 |
| | 55,387 |
| | (2,593 | ) | | (19,549 | ) | | (a) | | 33,245 |
|
| Incentive income (loss) | 26,028 |
| | — |
| | 26,028 |
| | (1,739 | ) | | (18,906 | ) | | (a) | | 5,383 |
|
| Investment income (loss) | 31,447 |
| | 13,695 |
| | 45,142 |
| | — |
| | (45,142 | ) | | (c)(f) | | — |
|
| Interest and dividends | — |
| | — |
| | — |
| | — |
| | 49,440 |
| | (c) | | 49,440 |
|
| Reimbursement from affiliates | — |
| | — |
| | — |
| | (297 | ) | | 3,157 |
| | (e) | | 2,860 |
|
| Aircraft lease revenue | — |
| | — |
| | — |
| | — |
| | 3,751 |
| | (f) | | 3,751 |
|
| Reinsurance premiums | — |
| | — |
| | — |
| | — |
| | 30,996 |
| | (g) | | 30,996 |
|
| Other revenue | 1,575 |
| | 1,656 |
| | 3,231 |
| | — |
| | 5,330 |
| | (g) | | 8,561 |
|
| Consolidated Funds revenues | — |
| | — |
| | — |
| | 7,321 |
| | — |
| | | | 7,321 |
|
| Total revenues | 111,327 |
| | 554,855 |
| | 666,182 |
| | 2,692 |
| | (10,093 | ) | | | | 658,781 |
|
| Expenses | | | | | | | | | | | | | |
| Non interest expense | 92,567 |
| | 532,820 |
| | 625,387 |
| | (199 | ) | | 58,935 |
| | (b)(d) | | 684,123 |
|
| Interest and dividends | 14,268 |
| | 4,620 |
| | 18,888 |
| | — |
| | 42,061 |
| | (c) | | 60,949 |
|
| Consolidated Funds expenses | — |
| | — |
| | — |
| | 12,526 |
| | — |
| | | | 12,526 |
|
| Total expenses | 106,835 |
| | 537,440 |
| | 644,275 |
| | 12,327 |
| | 100,996 |
| | | | 757,598 |
|
| Total other income (loss) | — |
| | — |
| | — |
| | 31,073 |
| | 74,706 |
| | (c) (h) (j) | | 105,779 |
|
| Income taxes expense / (benefit) | — |
| | — |
| | — |
| | — |
| | 44,053 |
| | (b) | | 44,053 |
|
| (Income) loss attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | (6,072 | ) | | — |
| | (6,072 | ) | | (21,438 | ) | | 3,719 |
| | | | (23,791 | ) |
| Economic Income (Loss) / Net Income (loss) attributable to Cowen Inc. | $ | (1,580 | ) | | $ | 17,415 |
| | $ | 15,835 |
| | $ | — |
| | $ | (76,717 | ) | | | | $ | (60,882 | ) |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | | | | | | | Adjustments | | | | |
| | Investment
Management | | Broker-Dealer | | Total Economic Income/(Loss) | | Funds Consolidation | | Other Adjustments | | | | US GAAP |
| | (dollars in thousands) |
| Revenues | | | | | | | | | | | | | |
| Investment banking | $ | — |
| | $ | 133,279 |
| | $ | 133,279 |
| | $ | — |
| | $ | — |
| | | | $ | 133,279 |
|
| Brokerage | — |
| | 207,040 |
| | 207,040 |
| | — |
| | (7,860 | ) | | (i) | | 199,180 |
|
| Management fees | 64,086 |
| | 3,162 |
| | 67,248 |
| | (1,665 | ) | | (24,971 | ) | | (a) | | 40,612 |
|
| Incentive income (loss) | 26,274 |
| | — |
| | 26,274 |
| | (714 | ) | | (17,226 | ) | | (a) | | 8,334 |
|
| Investment income (loss) | 3,015 |
| | 1,008 |
| | 4,023 |
| | — |
| | (4,023 | ) | | (c)(f) | | — |
|
| Interest and dividends | — |
| | — |
| | — |
| | — |
| | 14,732 |
| | (c) | | 14,732 |
|
| Reimbursement from affiliates | — |
| | — |
| | — |
| | (303 | ) | | 10,807 |
| | (e) | | 10,504 |
|
| Aircraft lease revenue | — |
| | — |
| | — |
| | — |
| | 4,161 |
| | (f) | | 4,161 |
|
| Reinsurance premiums | — |
| | — |
| | — |
| | — |
| | 32,459 |
| | (g) | | 32,459 |
|
| Other revenue | 29,202 |
| | 565 |
| | 29,767 |
| | — |
| | (7,412 | ) | | (g) | | 22,355 |
|
| Consolidated Funds revenues | — |
| | — |
| | — |
| | 5,949 |
| | — |
| | | | 5,949 |
|
| Total revenues | 122,577 |
| | 345,054 |
| | 467,631 |
| | 3,267 |
| | 667 |
| | | | 471,565 |
|
| Expenses | | | | | | | | | | | | | |
| Non interest expense | 102,163 |
| | 369,188 |
| | 471,351 |
| | (429 | ) | | 37,824 |
| | (b)(d) | | 508,746 |
|
| Interest and dividends | 12,827 |
| | 4,363 |
| | 17,190 |
| | — |
| | 12,118 |
| | (c) | | 29,308 |
|
| Consolidated Funds expenses | — |
| | — |
| | — |
| | 9,064 |
| | — |
| | | | 9,064 |
|
| Total expenses | 114,990 |
| | 373,551 |
| | 488,541 |
| | 8,635 |
| | 49,942 |
| | | | 547,118 |
|
| Total other income (loss) | — |
| | — |
| | — |
| | 8,532 |
| | 35,534 |
| | (c) | | 44,066 |
|
| Income taxes expense / (benefit) | — |
| | — |
| | — |
| | — |
| | (19,092 | ) | | (b) | | (19,092 | ) |
| (Income) loss attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | (7,821 | ) | | — |
| | (7,821 | ) | | (3,164 | ) | | 4,103 |
| | | | (6,882 | ) |
| Economic Income (Loss) / Net Income (loss) attributable to Cowen Inc. | $ | (234 | ) | | $ | (28,497 | ) | | $ | (28,731 | ) | | $ | — |
| | $ | 9,454 |
| | | | $ | (19,277 | ) |
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | | | | | | | Adjustments | | | | |
| | Alternative Investment | | Broker-Dealer | | Total Economic Income/(Loss) | | Funds Consolidation | | Other Adjustments | | | | US GAAP |
| | (dollars in thousands) |
| Revenues | | | | | | | | | | | | | |
| Investment banking | $ | — |
| | $ | 222,781 |
| | $ | 222,781 |
| | $ | — |
| | $ | — |
| | | | $ | 222,781 |
|
| Brokerage | — |
| | 160,436 |
| | 160,436 |
| | — |
| | (2,714 | ) | | | | 157,722 |
|
| Management fees | 68,989 |
| | 1,026 |
| | 70,015 |
| | (1,307 | ) | | (26,802 | ) | | (a) | | 41,906 |
|
| Incentive income (loss) | (1,544 | ) | | — |
| | (1,544 | ) | | (736 | ) | | 3,746 |
| | (a) | | 1,466 |
|
| Investment income (loss) | 49,244 |
| | 13,352 |
| | 62,596 |
| | — |
| | (62,596 | ) | | (c) | | — |
|
| Interest and dividends | — |
| | — |
| | — |
| | — |
| | 13,796 |
| | (c) | | 13,796 |
|
| Reimbursement from affiliates | — |
| | — |
| | — |
| | (190 | ) | | 21,747 |
| | (e) | | 21,557 |
|
| Other revenue | 14,492 |
| | 890 |
| | 15,382 |
| | — |
| | (11,656 | ) | | (c) | | 3,726 |
|
| Consolidated Funds revenues | — |
| | — |
| | — |
| | 1,613 |
| | — |
| | | | 1,613 |
|
| Total revenues | 131,181 |
| | 398,485 |
| | 529,666 |
| | (620 | ) | | (64,479 | ) | | | | 464,567 |
|
| Expenses | | | | | | | | | | | | | |
| Non interest expense | 107,291 |
| | 362,463 |
| | 469,754 |
| | — |
| | 6,090 |
| | (b)(c)(d) | | 475,844 |
|
| Interest and dividends | 11,839 |
| | 4,745 |
| | 16,584 |
| | — |
| | 9,636 |
| | (c) | | 26,220 |
|
| Consolidated Funds expenses | — |
| | — |
| | — |
| | 2,310 |
| | — |
| | | | 2,310 |
|
| Total expenses | 119,130 |
| | 367,208 |
| | 486,338 |
| | 2,310 |
| | 15,726 |
| | | | 504,374 |
|
| Total other income (loss) | — |
| | — |
| | — |
| | 8,781 |
| | 42,505 |
| | (c) | | 51,286 |
|
| Income taxes expense / (benefit) | — |
| | — |
| | — |
| | — |
| | (47,496 | ) | | (b) | | (47,496 | ) |
| (Income) loss attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | (8,796 | ) | | — |
| | (8,796 | ) | | (5,851 | ) | | (599 | ) | | | | (15,246 | ) |
| Economic Income (Loss) / Net Income (loss) attributable to Cowen Inc. | $ | 3,255 |
| | $ | 31,277 |
| | $ | 34,532 |
| | $ | — |
| | $ | 9,197 |
| | | | $ | 43,729 |
|
The following is a summary of the adjustments made to US GAAP net income (loss)$158.7 million, $26.0 million and $17.3 million for the segment to arrive at
Economic Income (Loss):
Funds Consolidation: The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income (Loss). Adjustments to reconcile to US GAAP net income (loss) included elimination of incentive income and management fees earned from the Consolidated Funds and addition of fund expenses excluding management fees paid, fund revenues and investment income (loss).
Other Adjustments:
(a) Economic Income (Loss) recognizes revenues (i) net of distribution fees paid to agents and (ii) our proportionate share
of management and incentive fees of certain real estate operating entities, the healthcare royalty business and the activist business.
(b) Economic Income (Loss) excludes income taxes and acquisition related adjustments as management does not consider
these items when evaluating the performance of the segment.
(c) Economic Income (Loss) recognizes Company income from proprietary trading (including interest and dividends).
(d) Economic Income (Loss) recognizes the Company's proportionate share of expenses, for certain real estate
operating entities and the activist business, for which the investments are recorded under the equity method of accounting for investments.
(e) Reimbursement from affiliates is shown as a reduction of Economic Income expenses, but is included as a part of
revenues under US GAAP.
(f) Aircraft lease revenue is shown net of expenses in investment income for Economic Income (Loss).
(g) Economic Income (Loss) recognizes underwriting income from the Company's insurance related activities, net of
expenses, within other revenue.
(h) Economic Income (Loss) excludes the bargain purchase gain which resulted from the Convergex Group acquisition.
(i) Economic Income (Loss) brokerage revenues included net securities borrowed and securities loaned activities.
(j) Economic Income (Loss) excludes gain / (loss) on debt extinguishment.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
For the year ended December 31, 20172022, 2021 and 2016, there2020, respectively. Dividend revenue, consolidated funds, was no one fund or other customer which represented more than 10% of$0.0 million, $0.0 million and $2.5 million for the Company's total revenues.year ended December 31, 2022, 2021 and 2020, respectively.
28.29. Regulatory Requirements
Regulatory Capital
As registered broker-dealers with the United States Securities and Exchange Commission ("SEC"), Cowen and Company, Cowen Execution, ATM Execution Cowen Prime and Westminster are subject to the SEC's Uniform Net Capital Rule 15c3-1, (the “Rule”"SEA Rule 15c3-1," under the Securities Exchange Act ("SEA"), of 1934, which requires the maintenance of minimum net capital. Each registered broker-dealer has elected to compute net capital under the alternative method permitted by the Rule. that rule.
Under the alternative method, Cowen and Company's minimum net capital requirement, as defined in (a)(4) of SEA Rule 15c3-1, is equal to the Rule, is $1.0 million. Cowen Execution,greater of $1.5 million or 2% of aggregate debits arising from customer transactions. ATM Execution, Cowen Prime and Westminster are required to maintain minimum net capital, as defined in (a)(1)(ii) of theSEA Rule 15c3-1, equal to the greater of $250,000 or 2% of aggregate debits arising from customer transactions. Advances to affiliates, repayment of borrowings, distributions, dividend payments, and other equity withdrawals are subject to certain notification and other requirementsprovisions of theSEA Rule 15c3-1 and other regulatory bodies.
Cowen Executionand Company is also subject to certain net capital rule requirements under the Regulation 1.17 of the Commodity Futures Trading Commission ("CFTC") under Commodities Exchange Act (“CEA”) as an introducing broker. Under Regulation 1.17, (“Regulation 1.17”)Cowen and Options Clearing Corporation (“OCC”) Rule 302. Regulation 1.17 requires Cowen ExecutionCompany is required to maintain net capital equal to or in excess of $45,000 or the amount of net capital
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
required by SEA Rule 15c3-1, whichever is greater. Additionally, as an options clearing member of the Options Clearing Corporation ("OCC") under OCC Rule 302, requires maintenance ofCowen and Company is required to maintain net capital equal to the greater of $2,000,000$2.0 million or 2% of aggregate debit items. At December 31, 2017, the2022, Cowen and Company had $108.7$478.3 million of net capital in excess of thisits minimum requirement.requirements under SEA Rule 15c3-1.
Ramius UK, The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010. The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. Cowen Financial Products, LLC ("Cowen Financial Products") registered only with the SEC with an effective date of November 1, 2021 as a securities-based swap dealer and is not using models to compute its net capital. Under the rules there is a minimum net capital requirement for, among others, an entity that acts as a dealer in security-based swaps, which is the greater of $20 million or 2% of risk margin amount. The risk margin amount means the sum of (i) the total initial margin required to be maintained by the SEC securities-based swaps dealer at each clearing agency with respect to securities-based swaps transactions cleared for securities-based swap customers and (ii) the total initial margin amount calculated by the SEC securities-based swaps dealer swaps dealer with respect to non-cleared securities-based swaps under SEC rules. At December 31, 2022, Cowen Financial Products had $44.7 million of net capital in excess of its minimum requirements under SEA Rule 18a-1.
Cowen International Ltd and Cowen Execution Ltd are subject to the capital requirements of the FCA of the U.K. Financial Resources,Conduct Authority ("FCA"), as defined, and must exceed the minimum capital requirement set forth by the FCA. On 1 January 2022, the FCA adopted the Investment Firms Prudential Regime ("IFPR"). This is a new prudential regime which applies to MiFID investment firms authorized and regulated by the FCA in the UK. The IFPR refocuses prudential requirements and expectations away from the risks firms face, to also consider and look to manage the potential harm firms can pose to consumers and markets. Cowen International Ltd and Cowen Execution Ltd will both be designated as Class 2 firms under the new regime and will have a minimum capital requirement equal to the higher of; the Permanent minimum capital requirement, their respective Fixed Overhead requirement, and their Risk Responsive Computation ("K-factors").
Cowen Asia, a previously established entity, was re-registered with regulatory approval on May 17, 2019. Cowen Asia is subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong. Financial Resources must exceed the Total Financial Resources requirement of the FCA.SFC.
As of December 31, 2017, these regulated broker-dealers had2022, the regulatory net capital, or financial resources, regulatoryminimum net capital requirements or minimum FCA requirement and excess net capital of U.S. regulated broker dealers and swap dealer together with the equivalent of capital requirements and compliance information for foreign broker dealers registered with the FCA and the SFC are presented as follows: | | | | | | | | | | | | | | | | | | | | |
| Subsidiary | | Net Capital | | Minimum Net Capital Requirement | | Excess Net Capital |
| | | (dollars in thousands) |
| Cowen and Company | | $ | 482,309 | | | $ | 4,052 | | | $ | 478,257 | |
| ATM Execution | | $ | 5,775 | | | $ | 250 | | | $ | 5,525 | |
| Westminster | | $ | 21,440 | | | $ | 250 | | | $ | 21,190 | |
| Cowen Financial Products | | $ | 64,670 | | | $ | 20,000 | | | $ | 44,670 | |
| Cowen International Ltd (a) | | $ | 48,554 | | | $ | 13,592 | | | $ | 34,962 | |
| Cowen Execution Ltd (a) | | $ | 17,358 | | | $ | 7,022 | | | $ | 10,336 | |
| Cowen Asia (a) | | $ | 2,710 | | | $ | 384 | | | $ | 2,326 | |
(a)The equivalent of Net Capital under FCA rules is referred as “capital resources” and under SFC rules is referred as “net liquid capital.” The equivalent of Minimum Net Capital Requirement under FCA rules is referred as “minimum capital resources requirement" and under SFC rules is referred as “net liquid capital requirement." |
| | | | | | | | | | | | |
| Subsidiary | | Net Capital | | Minimum Net Capital Requirement | | Excess Net Capital |
| | | (dollars in millions) |
| Cowen and Company | | $ | 40.2 |
| | $ | 1.0 |
| | $ | 39.2 |
|
| Cowen Execution | | $ | 111.4 |
| | $ | 2.7 |
| | $ | 108.7 |
|
| ATM Execution | | $ | 1.0 |
| | $ | 0.3 |
| | $ | 0.7 |
|
| Cowen Prime | | $ | 12.3 |
| | $ | 0.3 |
| | $ | 12.0 |
|
| Westminster | | $ | 7.6 |
| | $ | 0.3 |
| | $ | 7.3 |
|
| Ramius UK | | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.1 |
|
| Cowen International Ltd | | $ | 11.5 |
| | $ | 7.1 |
| | $ | 4.4 |
|
| Cowen Execution Ltd | | $ | 3.8 |
| | $ | 2.6 |
| | $ | 1.2 |
|
Cowen and Company, Cowen Prime and ATM Execution claim exemption from SECThe Company's U.S. broker-dealers must also comply with the customer protection provisions under SEA Rule 15c3-3 subparagraphwhich requires a computation of a reserve requirement for customer and maintenance of a deposit of cash or securities into a special reserve bank account for the exclusive benefit of customers; or claim an exemption pursuant to subparagraphs (k)(2)(i) or (k)(2)(ii) of that rule. Firms can rely on more than one exemption.
ATM Execution claims the Securities Exchange Act(k)(2)(ii) exemption with regard to all of 1934 since they clear their securitiescustomer accounts and transactions that are introduced on a fully disclosedfully-disclosed basis to their clearing agents for clearing, settlement and promptly transmits all customer funds and securities tocustody. Westminster claims the clearing broker-dealer that carries the accounts. Cowen and Company, Cowen Prime and Westminster claim exemption from SEC Rule 15c3-3 subparagraph (k)(2)(i) of the Securities Exchange Act of 1934 since they conduct primarily all financialexemption with regard to customer transactions with their customers through aand balances that are cleared, settled and custodied in bank accountaccounts designated as Special AccountAccounts for the Exclusive Benefit of Customers.Customers ("Special Bank Accounts"). Westminster also claims exemption for other business activities that are not covered under (k)(2)(i) contemplated by Footnote 74 of the SEC Release No. 34-70073 adopting amendments to 17 C.F.R. § 240.17a-5 for receiving transaction-based compensation in return for providing commission management services.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
In accordance with the requirements of SECSEA Rule 15c3-3, Cowen Executionand Company may be required to deposit in a Special Reserve Account cash or acceptable qualified securities for the exclusive benefit of customers. As of December 31, 2017,2022, Cowen Executionand Company had segregated approximately $20.3$49.4 million of cash while its required deposit was $10.5 million.to satisfy the customer reserve provision of SEA Rule 15c3-3.
As a clearing and carrying broker-dealer, Cowen Executionand Company is required to compute a reserve requirement for proprietary accounts of broker-dealers (“PAB”("PAB"), as defined in SECSEA Rule 15c3-3. Cowen and Company performs a PAB calculationreserve computation in order to determine the amount it is completedrequired to allowdeposit in its PAB Reserve Bank Accounts pursuant to SEA Rule 15c3-3. This allows each correspondent firm that uses Cowen Executionand Company as its clearing broker-dealer to classify its PAB account assets held byat Cowen Executionand Company as allowable assets in the correspondent's net capital calculation. At December 31, 2017,2022, Cowen Executionand Company had $29.7$40.4 million of cash on deposit in special reserve bankPAB Reserve Bank Accounts. Cowen and Company and ATM Execution also maintain certain assets in PAB accounts for PAB, which was in excess of its required deposit of $17.1 million.
PAB held at externaltheir respective clearing brokers. Each treats its assets held in those PAB accounts at the respective clearing brokers are consideredas allowable assets for net capital purposes,purposes.
Cowen Financial Products, as a registered securities based swap dealer, claims Rule 18a-4(f) exemption under the Securities Exchange Act of 1934 (the “Act”) with regard to its swap counterparties on the basis that it has provided sufficient notice to its swap counterparties of their respective rights to require segregation of funds or other property used to secure uncleared security based swaps pursuant to agreements between section 3E(f)(1)(A)-(B) of the Act (15 U.S.C. 78c-5(f)(1)(A)). Any margin collateral received and held by the security-based swap dealer with respect to uncleared security-based swaps will not be subject to a segregation requirement. The notice outlines how a claim of those swap counterparties for the collateral would be treated in a bankruptcy or other formal liquidation proceeding of the security-based swap dealer.
Other Regulatory Requirements
Cowen and Company, ATM Execution, Cowen Prime, and their clearing brokers, which require, among other things, that those clearing brokers perform computations for PAB and segregate certain balances on behalf of Cowen and Company, ATM ExecutionInsurance Co and Cowen Prime, if applicable.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Cowen’s Luxembourg reinsurance companies, Vianden RCG Re SCA (“Vianden”) and Hollenfels,Kelvin are individually required to maintain a solvency capital ratio as calculated by relevant European Commission directives and local regulatory rules in Luxembourg.Malta, Luxembourg and Guernsey, respectively. Each company’scompany's individual solvency capital ratio ascalculated at the end of each regulatory determined period must exceed a minimum requirement. As of December 31, 20172021, the last testing date for Cowen Re, the solvency capital ratio was in excess of thisthe minimum regulatory requirement. As of September 30, 2022, the last testing date for Cowen Insurance Co and Kelvin, the solvency capital ratios were in excess of the minimum regulatory requirement.
Based on minimum capital and surplus requirements pursuant to the laws of the state of New York that apply to captive insurance companies, RCG Insurance Company, Cowen’sCowen's captive insurance company incorporated and licensed in the state of New York, was required to maintain capital and surplus of approximately $0.3 million as of December 31, 2017.2022. RCG Insurance Company’s capital and surplus as of December 31, 20172022 totaled approximately $28.7 million.$4.6 million.
29.30. Related Party Transactions
The Company and its affiliated entities are the managing member, general partner and/or investment manager to the Company's investment management productsfunds and certain managed accounts. Management fees and incentive income are primarily earned from affiliated entities. As of December 31, 20172022 and 2016, $13.52021, $15.8 million and $12.6$16.6 million, respectively, included in fees receivable, are earned from related parties. The Company may, at its discretion, reimburse certain fees charged to the investment funds that it manages to avoid duplication of fees when such funds have an underlying investment in another affiliated investment fund. For the years ended December 31, 20172022 and 2016,2021, the amounts which the Company reimbursed the investment funds it manages $0.1 million and $0.2 million, respectively, which were recorded net in management fees and incentive income in the accompanying consolidated statements of operation. For the year ended December 31, 2015, these amounts were immaterial. As of December 31, 2017, related amounts still payable were immaterial. As of December 31, 2016, related amounts still payable were $0.3 million and were reflected in fees payable in the accompanying consolidated statements of financial condition. Fees receivable and fees payable are recorded at carrying value, which approximates fair value.
The Company may also make loans to employees or other affiliates, excluding executive officers of the Company. These loans are interest bearing and settle pursuant to the agreed-upon terms with such employees or affiliates, and are included in due from related parties in the accompanying consolidated statements of financial condition. As of December 31, 20172022 and 2016,2021, loans to employees of $11.1$11.8 million and $9.2$8.8 million, respectively, were included in due from related parties on the accompanying consolidated statements of financial condition. Of these amounts $4.8$6.1 million and $3.3$3.8 million, respectively, are related to forgivable loans. These forgivable loans provide for a cash payment up-front to employees, with the amount due back to the Company forgiven over a vesting period. An employee that voluntarily ceases employment, or is terminated with cause, is generally required to pay back to the Company any unvested forgivable loans granted to them. The forgivable loans are recorded as an asset to the Company on the date of grant and payment, and then amortized to compensation expense on a straight-line basis over the vesting period. The vesting period on forgivable loans is generally one to three years. The Company recorded compensation expense of $2.1$4.5 million, $1.2$5.7 million and $3.2$3.7 million for the years ended December 31, 2017, 2016,2022, 2021 and 20152020, respectively. This expense is included in employee compensation and benefits in the accompanying consolidated statementstatements of operations. For the yearyears ended December 31, 2017,2022, 2021 and 2020 the interest income was $0.1 million, and for the years ended December 2016 and 2015, the interest income was insignificant for these related party loans and advances. This income isadvances, and are included in the interest and dividends in the accompanying consolidated statementstatements of operations.
Cowen Inc.
Notes to related parties is approximately $0.6 million and $0.7 million as of December 31, 2017 and 2016, respectively, related to a subordination agreement with an investor in certain real estate funds. This total is based on a hypothetical liquidation of the real estate funds as of the balance sheet date.Consolidated Financial Statements (Continued)
As of December 31, 2017 and 2016, included in due from related parties is $14.0 million and $18.7 million, respectively, related to the sales of portions of the Company's ownership interest in the activist business of Starboard Value to the Starboard principals. It is being financed through the profits of the relevant Starboard entities over a 5 year period and earns interest at 5% per annum. The interest income for the years ended December 31, 2017 and 2016, was $0.8 million and $0.6 million, respectively. The interest income for the year ended December 31, 2015 was immaterial.
The remaining balance included in due from related parties of $9.7$10.4 million and $11.8$22.6 million as of December 31, 20172022 and 2016,2021, respectively, relates to amounts due to the Company from affiliated investment funds and real estate entities due to expenses paid on their behalf.
Employees and certain other related parties invest on a discretionary basis within consolidated entities. These investments generally are subject to preferential management fee and performance fee arrangements. As of December 31, 20172022 and 2016,2021, such investments aggregated $28.2$53.5 million and $32.9$53.9 million, respectively, were included in redeemable non-controlling interests on the accompanying consolidated statements of financial condition. Their share of the net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and investment funds aggregated $7.2$24.7 million, $5.7$14.9 million and $10.4$21.2 million for the years ended December 31, 2017, 2016,2022, 2021 and 2015,2020, respectively.
The Company may, at times, have unfunded commitment amounts pertaining to related parties. See Note 27 for amounts committed as of December 31, 2022.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
30.31. Guarantees and Off-Balance Sheet Arrangements
Guarantees
US GAAP requires the Company to disclose information about its obligations under certain guarantee arrangements. Those standards define guarantees as contracts and indemnification agreements that contingently require a guarantor to make payments to the guaranteed party based on changes in an underlying security (such as an interest or foreign exchange rate, security or commodity price, an index or the occurrence or nonoccurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Those standards also define guarantees as contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an agreement as well as indirect guarantees of the indebtedness of others.
In the normal course of its operations, the Company enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Company's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss to be remote.
The Company indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the Company or its affiliates. The Company also indemnifies some clients against potential losses incurred in the event specified third-party service providers, including sub-custodians and third-party brokers, improperly execute transactions. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make significant payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.
The Company also provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the accompanying consolidated financial statements for these indemnifications.
The Company may maintain cash and cash equivalents at financial institutions in excess of federally insured limits. The Company has not experienced any material losses in such accounts and does not believe it is exposed to significant credit risks in relation to such accounts.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements, which have not been disclosed, as of December 31, 20172022 and 2016.December 31, 2021. Through indemnification provisions in the clearing agreement,agreements with clients, customer activities may expose the Company to off-balance-sheet credit risk. Pursuant to the clearing agreement, the Company is required to reimburse the Company's clearing broker, without limit, for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
The Company’sCompany's customer securities activities are transacted on a delivery versus payment, cash or margin basis. In delivery versus payment transactions, the Company is exposed to risk of loss in the event of the customers’customers' or brokers’brokers' inability to meet the terms of their contracts.
In margin transactions, the Company extends credit to clients collateralized by cash and securities in their account. In the event the customers or brokers fail to satisfy their obligations, the Company may be required to purchase or sell securities at prevailing market prices in order to fulfill the obligations.
The Company’sCompany's exposure to credit risk can be directly impacted by volatile securities markets, which may impair the ability of counterparties to satisfy their contractual obligations. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit limits based upon a review of the customers’customers' financial condition and credit ratings. The Company seeks to controlmanage the risk associated with its customer margin transactions by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
also monitors required margin levels daily and, pursuant to its guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary.
In addition, during the normal course of business, the Company has exposure to a number of risks including market risk, currency risk, credit risk, operational risk, liquidity risk and legal risk. As part of the Company's risk management process, these risks are monitored on a regular basis throughout the course of the year.
The Company enters into secured and unsecured borrowing agreements to obtain funding necessary to cover daily securities settlements with clearing corporations. FundingAt times, funding is required for unsettled customer delivery versus payment and riskless principal transaction,transactions, as well as to meet deposit requirements with clearing organizations. Secured arrangements are collateralized by the unsettled customer securities. The Company maintains uncommitted financing arrangements with large financial institutions, the details of which are summarized below as of December 31, 2017.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lender | | Contractual Amount | | Available Amount | | Maturity Date | | Description |
| Pledge Lines | | (dollars in thousands) | | | | |
| BMO Harris Bank | | $ | 25,000 | | | $ | 25,000 | | | None | | Unsecured Broker Loan |
| BMO Harris Bank | | 75,000 | | | 75,000 | | | None | | Secured Tri-Party Pledge Facility |
| BMO Harris Bank | | 150,000 | | | 150,000 | | | None | | Secured Depository Trust Company Pledge Line |
| Total | | 250,000 | | | 250,000 | | | | | |
| | | | | | | | |
| Spike Line | | | | | | | | |
BMO Harris Bank
Canadian Imperial Bank
of Commerce, in syndication | | 150,000 | | | 150,000 | | | May 19, 2023 | | Unsecured committed spike line facility to cover short term increases in National Securities Clearing Corporation margin deposit requirements |
| | | | | | | | |
| Revolving Credit Facility | | | | | | | | |
| Morgan Stanley | | 25,000 | | | 25,000 | | | March 24, 2026 | | Unsecured Corporate Revolver |
| | | | | | | | |
| Total Credit Lines | | $ | 425,000 | | | $ | 425,000 | | | | | |
|
| | | | | | | | | | | | |
| Lender | | Contractual Amount | | Available Amount | | Maturity Date | | Description |
| Pledge Lines | | (dollars in thousands) | | | | |
| BMO Harris Bank | | $ | 150,000 |
| | $ | 150,000 |
| | None | | Secured DTC Pledge Line |
| Total | | 150,000 |
| | 150,000 |
| | | | |
| | | | | | | | | |
| Revolving Credit Facility | | | | | | | | |
| BMO Harris Bank | | 30,000 |
| | 30,000 |
| | August 2, 2018 | | Unsecured liquidity facility to cover increases in NSCC margin deposit requirements |
| | | | | | | | | |
| Total Credit Lines | | $ | 180,000 |
| | $ | 180,000 |
| | | | |
31.32. Subsequent Events
On February 13, 2018,14, 2023, the Company's Board of Directors approveddeclared a $23.6 million increase incash dividend of $0.12 per common share. The dividend will be payable on March 15, 2023, to stockholders of record as of the Company's share repurchase program (seeclose of trading on March 1, 2023. If the TD Merger is consummated prior to the close of trading on March 1, 2023, no dividend will be paid to stockholders of Cowen who hold common shares prior to the closing of the TD Merger (See Note 24) bringing the total remaining shares available for repurchase to $25.0 million.1).
The Company has evaluated events that have occurred after the balance sheet date but before the financial statements are issued and has determined that there were no other subsequent events requiring adjustment or disclosure in the consolidated financial statements.
Cowen Inc.
Notes to Consolidated Financial Statements (Continued)
Supplemental Financial Information
The following table presents unaudited quarterly results of operations for 2017 and 2016. These quarterly results reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results. Revenues and net income (loss) can vary significantly from quarter to quarter due to the nature of the Company's business activities.
Cowen Inc.
Quarterly Financial Information (Unaudited) |
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| | (dollars in thousands, except per share data) |
| Total revenues | $ | 114,971 |
| | $ | 160,530 |
| | $ | 178,830 |
| | $ | 204,450 |
|
| Income (loss) before income taxes | 14,000 |
| | 27,800 |
| | 12,109 |
| | (46,947 | ) |
| Income tax expense (benefit) | 1,911 |
| | (785 | ) | | 2,281 |
| | 40,646 |
|
| Net income (loss) from continuing operations | 12,089 |
| | 28,585 |
| | 9,828 |
| | (87,593 | ) |
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | 9,105 |
| | 21,145 |
| | 5,162 |
| | (11,621 | ) |
| Net income (loss) attributable to Cowen Inc. | 2,984 |
| | 7,440 |
| | 4,666 |
| | (75,972 | ) |
| Preferred stock dividends | 1,698 |
| | 1,698 |
| | 1,698 |
| | 1,698 |
|
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | 1,286 |
| | $ | 5,742 |
| | $ | 2,968 |
| | $ | (77,670 | ) |
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.05 |
| | $ | 0.20 |
| | $ | 0.09 |
| | $ | (2.51 | ) |
| Diluted | $ | 0.05 |
| | $ | 0.19 |
| | $ | 0.09 |
| | $ | (2.51 | ) |
| Weighted average number of common shares: | | | | | | | |
| Basic | 27,061 |
| | 28,634 |
| | 31,271 |
| | 30,934 |
|
| Diluted | 28,401 |
| | 29,474 |
| | 32,246 |
| | 30,934 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 |
| | (dollars in thousands, except per share data) |
| Total revenues | $ | 101,039 |
| | $ | 117,231 |
| | $ | 131,027 |
| | $ | 122,268 |
|
| Income (loss) before income taxes | (11,315 | ) | | (39,153 | ) | | 24,018 |
| | (5,037 | ) |
| Income tax expense (benefit) | (3,320 | ) | | (11,992 | ) | | 8,759 |
| | (12,539 | ) |
| Net income (loss) from continuing operations | (7,995 | ) | | (27,161 | ) | | 15,259 |
| | 7,502 |
|
| Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds | (4,297 | ) | | (16,705 | ) | | 18,478 |
| | 9,406 |
|
| Net income (loss) attributable to Cowen Inc. | (3,698 | ) | | (10,456 | ) | | (3,219 | ) | | (1,904 | ) |
| Preferred stock dividends | 1,698 |
| | 1,698 |
| | 1,698 |
| | 1,698 |
|
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | (5,396 | ) | | $ | (12,154 | ) | | $ | (4,917 | ) | | $ | (3,602 | ) |
| Earnings (loss) per share: | | | | | | | |
| Basic (a) | $ | (0.20 | ) | | $ | (0.45 | ) | | $ | (0.18 | ) | | $ | (0.13 | ) |
| Diluted (a) | $ | (0.20 | ) | | $ | (0.45 | ) | | $ | (0.18 | ) | | $ | (0.13 | ) |
| Weighted average number of common shares: | | | | | | | |
| Basic (a) | 26,591 |
| | 26,867 |
| | 26,993 |
| | 26,973 |
|
| Diluted (a) | 26,591 |
| | 26,867 |
| | 26,993 |
| | 26,973 |
|
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | COWEN INC. | |
| | | | | |
| | | | By: | | /s/ JEFFREY M. SOLOMON | |
| | | | Name: | | Jeffrey M. Solomon | |
| Date: | March 6, 2018February 28, 2023 | | Title: | | Chair and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
| | | | | | | | | | | | | | |
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| Signature | | Title | | Date |
Signature | | Title | | Date |
| | | | |
/s/ PETER A. COHEN | | Chairman of the Board of Directors | | |
Peter A. Cohen | | | March 6, 2018 |
| | | | |
| /s/ JEFFREY M. SOLOMON | | Chair and Chief Executive Officer (Principal Executive Officer) | | |
| Jeffrey M. Solomon | | | March 6, 2018February 28, 2023 |
| | | | |
| /s/ STEPHEN A. LASOTA | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | |
| Stephen A. Lasota | | | March 6, 2018February 28, 2023 |
| | | | |
| /s/ BRETT H. BARTH | | | | |
| Brett H. Barth | | Director | | February 28, 2023 |
| | | | |
| /s/ KATHERINE E. DIETZE | | | | |
Katherine E. Dietze
| | Director | | March 6, 2018February 28, 2023 |
| | | | |
| /s/ GREGG A. GONSALVES | | | | |
| Gregg A. Gonsalves | | Director | | February 28, 2023 |
| | | | |
| /s/ LORENCE KIM | | | | |
| Lorence Kim | | Director | | February 28, 2023 |
| | | | |
| /s/ STEVEN KOTLER | | | | |
| Steven Kotler | | Director | | March 6, 2018February 28, 2023 |
| | | | |
/s/ JEROME S. MARKOWITZLAWRENCE E. LEIBOWITZ | | | | |
Jerome S. MarkowitzLawrence E. Leibowitz | | Director | | March 6, 2018February 28, 2023 |
| | | | |
/s/ JACK H. NUSBAUM | | | | |
Jack H. Nusbaum | | Director | | March 6, 2018 |
| | | | |
/s/ DOUGLAS A. REDIKER | | | | |
Douglas A. Rediker | | Director | | March 6, 2018 |
| | | | |
/s/ JOSEPH R. WRIGHT | | | | |
Joseph R. Wright | | Director | | March 6, 2018 |
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101.INS | | XBRL INSTANCE DOCUMENT |
101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT |
101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT |
101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT |
101.LAB | | XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT |
101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
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* | Signifies management contract or compensatory plan or arrangement. | | | |
| /s/ MARGARET L. POSTER | | | | |
| Margaret L. Poster | | Director | | February 28, 2023 |
| | | | |
| /s/ DOUGLAS A. REDIKER | | | | |
| Douglas A. Rediker | | Director | | February 28, 2023 |