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| COWN > SEC Filings for COWN > Form 10-K on 7-Mar-2013 | All Recent SEC Filings |
7-Mar-2013
Annual Report
• 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. As of
January 1, 2013, we had investments of approximately $118.2 million,
$159.8 million and $21.2 million in the Enterprise Fund (an entity which
invests its capital in Ramius Enterprise Master Fund Ltd), Cowen Overseas
Investment LP ("COIL") and Ramius Optimum Investments LLC ("ROIL"),
respectively. Enterprise Fund is a fund vehicle that currently has
external investors, is closed to new investors and is in liquidation. COIL
and ROIL are wholly owned entities managed by Ramius that the Company uses
solely for the firm's invested capital.
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 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.
• Commissions. Our commission revenues depend for the most part on our customer trading volumes.
• 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 firm 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 research fees. Equity research fees are paid to the Company for providing equity research. The Company also permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. Our ability to generate revenues relating to our equity research depends on the quality of our research and its relevance to our institutional customers and other clients.
External Factors Impacting Our Business
Our financial performance is highly dependent on the environment in which our
businesses operate. A favorable business environment is characterized by many
factors, including a stable geopolitical climate, transparent financial markets,
low inflation, low interest rates, low unemployment, strong business
profitability and high business and investor confidence. Unfavorable or
uncertain economic or market conditions can be caused by declines in economic
growth, business activity or investor or business confidence, limitations on the
availability (or increases in the cost of) credit and capital, increases in
inflation or interest rates, exchange rate volatility, unfavorable global asset
allocation trends, outbreaks of hostilities or other geopolitical instability,
corporate, political or other scandals that reduce investor confidence in the
capital markets, or a combination of these or other factors. Our businesses and
profitability have been and may continue to be adversely affected by market
conditions in many ways, including the following:
• Our alternative investment business was affected by the conditions
impacting the global financial markets and the hedge fund industry during
2008, which was characterized by substantial declines in investment
performance and unanticipated levels of requested redemptions. While the
environment for investing in alternative investment products has since
improved, the variability of redemptions could continue to affect our
alternative investment business, and it is possible that we could
intermittently experience redemptions above historical levels, regardless
of fund performance.
• Our broker-dealer 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-dealer 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-dealer business could be affected differently
than overall market trends.
Our businesses, by their nature, do not produce predictable earnings. Our
results in any period can be materially affected by conditions in global
financial markets and economic conditions generally. We are also subject to
various legal and regulatory actions that impact our business and financial
results.
Recent Developments
On February 1, 2013, the Company and Dahlman Rose & Company, LLC ("Dahlman
Rose") entered into a definitive agreement under which the Company will acquire
Dahlman Rose, a privately-held investment bank specializing in the energy,
metals and mining, transportation, chemicals and agriculture sectors. This
acquisition is an all-stock transaction and is not significant. The transaction,
which is expected to close by the end of the first quarter of 2013, is subject
to customary closing conditions and regulatory approval.
Basis of presentation
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP") as promulgated by the Financial Accounting Standards Board ("FASB")
through Accounting Standards Codification as the source of authoritative
accounting principles in the preparation of financial statements, of the Company
appearing in Part IV of this Form 10-K 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 non-controlling interests
in consolidated subsidiaries in the consolidated financial statements appearing
elsewhere in this Form 10-Q. The management fees and incentive income earned by
the Company from these funds are eliminated in consolidation.
Acquisitions
The June 2011 acquisition of Labranche was accounted for under the acquisition
method of accounting in accordance with US GAAP. In this case, the acquisition
was accounted for as an acquisition by Cowen of LaBranche. As such, results of
operations for LaBranche are included in the accompanying statements of
operations since the date of acquisition, and the assets acquired and
liabilities assumed were recorded at their estimated fair values. During the
fourth quarter of 2011, the Company decided to discontinue the market making
business operated by the subsidiaries acquired through the LaBranche
acquisition, as a result of the subsidiaries not meeting the Company's
expectations as to their results of operations and not generating positive cash
flows. In accordance with US GAAP, the Company reclassified and reported the
results of operations related to these subsidiaries in discontinued operations
for the year ended December 31, 2011.
On November 1, 2012, the Company completed the acquisition of KDC Securities,
LP ("KDC"), a securities lending business. KDC was the broker-dealer subsidiary
of Kellner Capital, LLC, an alternative investment manager. KDC was renamed
Cowen Equity Finance LP ("Cowen Equity Finance") following the acquisition. On
April 5, 2012, the Company completed its acquisition of all the outstanding
interests in ATM USA, LLC ("ATM USA"), Algorithmic Trading Management, LLC ("ATM
LLC") and Algo Trading Management Inc. ("ATM INC"), a provider of global,
multi-asset class algorithmic execution trading models. The results of
operations for the ATM Group and Cowen Equity Finance LP are included in the
accompanying consolidated statements of operations since the dates of the
respective acquisitions, 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.
Revenue recognition
The Company's principal sources of revenue are derived from two segments: an
alternative investment segment and a broker-dealer segment, as more fully
described below.
Our alternative investment segment generates revenue through two principal
sources: management fees and incentive income.
Our broker-dealer segment generates revenue through two principal sources:
investment banking and brokerage.
Management fees
The Company earns management fees from affiliated 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.
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:
• Hedge Funds. Management fees for the Company's hedge funds are generally
charged at an annual rate of up to 2% of assets under management.
Management fees are generally calculated monthly based on assets under
management at the end of each month before incentive income.
• Alternative Solutions. Management fees for the Alternative Solutions business are generally charged at an annual rate of up to 2% of assets under management. Management fees are generally calculated monthly based on assets under management at the end of each month before incentive income or based on assets under management at the beginning of the month. Management fees earned from the Alternative Solutions business are based and initially calculated on estimated net asset values and actual fees ultimately earned could be impacted to the extent of any changes in these estimates.
• Real Estate Funds. Management fees from the Company's real estate funds are generally charged by their general partners at an annual rate from 1% to 1.5% 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. The general partners of the Company's real estate funds are owned jointly by the Company and third parties. Accordingly, the management fees (in addition to incentive income and investment income) generated by these real estate funds are split between the Company and the other general partners. Pursuant to US GAAP, these fees and other income received by the general partners 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 consolidated statements of operations.
• HealthCare Royalty Partners (formerly Cowen HealthCare Royalty Partners) Funds. During the investment period (as defined in the management agreement of the HealthCare Royalty Partners funds), management fees for the HealthCare Royalty Partners funds are generally charged at an annual rate of up to 2% of committed capital. After the investment period, management fees are generally charged at an annual rate of up to 2% of net asset value. Management fees for the HealthCare Royalty Partners funds are calculated on a quarterly basis.
• Ramius Trading Strategies. Management fees for Ramius Trading Strategies Managed Futures Fund, a mutual fund launched in September 2011, are 1.60% per annum (subject to an overall expense cap of 1.85%). Management fees and platform fees for the Company's private commodity trading advisory business are generally charged at an annual rate of up to 3% and 1.50%, respectively, for the levered vehicle and 1% and 0.50%, respectively, for the unlevered vehicle. Management and platform fees are generally calculated monthly based on assets under management at the end of each month.
• Other. The Company also provides other investment advisory services. Other management fees are primarily earned from the Company's cash management business and range from annual rates of up to 0.20% of assets, based on the average daily balances of the assets under management. In November 2012, we announced that the Company was no longer offering cash management services and was arranging for the transfer of the remaining cash management assets under management to another asset manager. That transfer was completed in December 2012.
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 funds and managed accounts, 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 20% for hedge funds and 10% for fund of funds and alternative
solutions products (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. These funds
are 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 earned only after investors receive a full return of
their capital plus a preferred return.
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
funds and managed accounts for any period is based upon the net profits of those
funds and managed accounts at the reporting date. Any incentive income
recognized in the 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 is 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 real estate 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 of healthcare,
technology, media and telecommunications, consumer, aerospace and defense,
industrials, REITs and clean technology. Investment banking revenue consists of
underwriting fees, strategic/financial advisory fees and private placement fees.
• Underwriting fees. The Company earns underwriting revenues 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. Underwriting revenues include management
fees, selling concessions and underwriting fees. 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 and acquisitions and liability
management 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.
• Private placement fees. The Company earns agency placement fees in non-underwritten transactions such as private placements of debt and equity securities, including, private investment in public equity transactions ("PIPEs") and registered direct offerings. The Company records private placement 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.
Brokerage
Brokerage revenue consists of commissions, principal transactions, net and
equity research fees.
• Commissions. Commission revenue includes fees from executing client transactions. 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. Commission revenues also includes fees from making algorithms available to client. During the years ended December, 2012, 2011 and 2010, the Company earned $63.0 million, $66.0 million and $69.3 million of revenues from commissions, respectively.
• Principal Transactions. Principal transaction, net revenue includes net trading gains and losses from the Company's market-making activities in . . .
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