COWEN INC. The discussion contains forward-looking statements, which involve numerous risks and uncertainties, including, but not limited to, those described in the sections titled "Risk Factors" in Item 1A of our Annual Report on Form 10-K, many of which risks are currently elevated by, and may or will continue to be elevated by, the COVID-19 pandemic. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes ofCowen Inc. included elsewhere in this annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements.
Overview
Cowen Inc. , aDelaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment banking, research, sales and trading, prime brokerage, global clearing, securities financing, commission management services and investment management through its two business segments: theOperating Company ("Op Co") and theAsset Company ("Asset Co").
Operating Company
The Op Co segment consists of four divisions: theCowen 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 banking businesses. Op Co's CIM division includes advisers to investment funds (including private equity structures and privately placed hedge funds), and registered funds. Op Co's investment banking businesses offer industry focused investment banking for growth-oriented companies including advisory and global capital markets origination, domain knowledge-driven research, sales and trading platforms for institutional investors, global clearing, commission management services and also a comprehensive suite of prime brokerage services. The CIM division is the Company's investment management business, which operates primarily under theCowen Investment Management name. CIM offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been registered with theSEC 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 healthcare investing, sustainable investing, healthcare royalties, merger arbitrage and activism. A portion of the Company's capital is invested alongside the Company's investment management clients. The Company has also invested capital in its insurance and reinsurance businesses. Op Co's investment banking businesses include investment banking, research, sales and trading, prime brokerage, global clearing, securities financing and commission management services provided primarily to companies and institutional investor clients. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, consumer, industrials, tech-enabled and business services, and energy. We provide research and brokerage services to over 6,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our sectors. The investment banking businesses also offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. Historically, we have focused our investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time, the Company invests in private capital raising transactions of its investment banking clients.
The Asset Co segment consists of the Company's private investments, private real estate investments and other legacy investment strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment.
Certain Factors Impacting Our Business
Our Company's businesses and results of operations are impacted by the following 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 theU.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. 37
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•Equity research fees. Equity research fees are paid to the Company for providing access to equity research. The Company also permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. Our ability to generate revenues relating to our equity research depends on the quality of our research and its relevance to our institutional customers and other clients. •Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities and net trading gains and losses on inventory and other Company positions. In certain cases, the Company provides liquidity to clients buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk. •Commissions. Our commission revenues depend for the most part on our customers' trading volumes and on the notional value of the non-U.S. securities traded by our customers. •Investment performance. Our revenues from incentive income and carried 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 directly linked to assets under management. Positive performance in our legacy funds increases assets under management which results in higher management fees. •Investment performance of our own capital. We invest our own capital and the performance of such invested capital affects our revenues. Investment income in the investment bank business includes gains and losses generated by the capital the Company invests in private capital raising transactions of its investment banking clients. Our revenues from investment income are linked to the performance of the underlying investments.
External Factors Impacting Our Business
Our financial performance is highly dependent on the environment in which our businesses operate. We believe a favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, stable inflation, stable interest rates, 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 inUkraine , 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 investment bank business has been, and may continue to be, adversely affected by market conditions. Increased competition continues to affect our investment banking and capital markets businesses. The same factors also affect trading volumes in secondary financial markets, which affect our brokerage business. Commission rates, market volatility, increased competition from larger financial firms and other factors also affect our brokerage revenues and may cause these revenues to vary from period to period. •Our investment management business can be adversely affected by unanticipated levels of requested redemptions 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 38
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capital formation by smaller companies. Therefore, our investment bank business could be affected differently than overall market trends.
•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 could 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 an economic recession, our
overall our results of operation could be negatively affected during 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
OnAugust 1, 2022 , the Company, The Toronto-Dominion Bank, a Canadian chartered bank ("TD"), andCrimson Holdings Acquisition Co. , aDelaware 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 terms 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 TD. The Board of Directors of the Company determined that it is in the best interests of the Company and its stockholders to consummate the transactions provided for in the Merger Agreement and, in furtherance thereof, adopted the Merger Agreement and approved the transactions contemplated thereby (including the Merger), and resolved to submit the Merger Agreement to the holders of the Class A common stock of the Company for adoption and to recommend that the holders of Class A common stock of the Company adopt the Merger Agreement and approve the transactions contemplated thereby (including the Merger). Completion of the Merger is subject to customary 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 relevantU.S. , Canadian and foreign regulatory authorities. Upon completion of the Merger, TD will become the owner of all the Company's outstanding shares 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 "Effective Time") each share of Class A common stock of the Company and each share of Class B common stock of the Company issued and 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 theSecurities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 as amended (the "Exchange Act"), the Company prepared and filed with theSEC , and thereafter mailed to its stockholders, a Schedule 14A Proxy Statement where additional information about the Merger can be found. OnNovember 15, 2022 , the holders of a majority of the outstanding Class A common stock of the Company outstanding and entitled to vote on the matter approved the adoption of the Merger Agreement.
Basis of Presentation
The consolidated financial statements of the Company in this Form 10-K are prepared in accordance with Generally Accepted Accounting Principles inthe United States ("US GAAP") as promulgated by theFinancial 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. 39
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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. 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 inthe United States ("US GAAP") as promulgated by theFinancial 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
OnJune 1, 2022 , the Company completed its acquisition ofKelvin Re Limited ("Kelvin") by acquiring all of the issued and outstanding ordinary shares in Kelvin fromCS 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. InDecember 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. OnDecember 16, 2021 , the Company, through its indirect wholly owned subsidiary,Cowen PC Acquisition LLC , completed its previously announced acquisition ofPortico Capital Advisors and certain assets and liabilities of its European operations ("Portico"). Portico was a privately-held mergers and acquisitions advisory firm focused on the software, data, and analytics sectors. OnFebruary 26, 2021 , the Company, through its indirect wholly owned subsidiary,Cowen Malta Holdings Ltd. , completed the acquisition of all of the outstanding equity interests ofAxeria Insurance Limited , an insurance company organized under the laws ofMalta whose principal business activity is to provide insurance coverage to third parties.Axeria Insurance Limited was renamedCowen Insurance Company Ltd upon acquisition. OnOctober 1, 2020 , the Company, through its indirect wholly owned subsidiary,Cowen and Company LLC , completed its previously announced acquisition of certain assets and liabilities ofMHT Partners, LP ("MHT Partners ").MHT Partners is an investment bank, based primarily inDallas andSan Francisco , focused on representing innovative companies in growing markets.
Expenses
The Company's expenses consist of compensation and benefits, insurance and reinsurance costs, general, administrative and other, and Consolidated Funds expenses.
•Compensation and Benefits. Compensation and benefits is comprised of salaries, benefits, discretionary cash bonuses and equity-based compensation. Annual incentive compensation is variable, and the amount paid is generally based on a combination of employees' performance, their contribution to their business segment, and the Company's performance. Generally, compensation and benefits comprise a significant portion of total expenses, with annual incentive compensation comprising a significant portion of total compensation and benefits expenses. •Insurance and Reinsurance claims, commissions and amortization of deferred acquisition costs. Insurance 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 and Administrative. General, administrative and other expenses are primarily related to professional services, occupancy and equipment, business development expenses, communications, expenses associated with our reinsurance business and other miscellaneous expenses. These expenses may also include certain one-time charges and non-cash expenses. •Depreciation and Amortization. Depreciation and amortization is comprised of depreciation expense for tangible assets and the amortization of intangible assets. The depreciation of assets capitalized under finance leases is included in depreciation and amortization expenses as well. •Consolidated Funds Expenses. The Company's consolidated financial statements reflect the expenses of the Consolidated Funds and the portion attributable to other investors is allocated to a non-controlling interest.
Income Taxes
The taxable results of the Company's
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
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management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. Deferred tax liabilities that cannot be realized in a similar future time period and thus that cannot offset the Company's deferred tax assets are not taken into account when calculating the Company's net deferred tax assets.
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 share of the Series 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 Company has
classified the Series A Convertible Preferred Stock preferred stock in temporary
equity.
Non-Redeemable Non-Controlling Interests
Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities. When non-controlling interest holders do not have redemption features that can be exercised at the option of the holder currently or contingent upon the occurrence of future events, their ownership has been classified as a 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.
Investment Fund Performance and Assets Under Management
For the year endedDecember 31, 2022 , the Company's activist and merger arbitrage strategies had positive results. The Company's healthcare 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 ofDecember 31, 2022 . The liquidation of certain multi-strategy hedge funds advised by the Company also continues.
As of
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 other private investment strategies.
The Company's
The Company invests a significant portion of its capital base to help drive results and facilitate the growth of the Op Co and Asset Co business segments. Within Op Co, management allocates capital to three primary investment categories: (i) broker-dealer capital and related trading strategies; (ii) liquid alternative trading strategies; and (iii) public and private healthcare strategies. Broker-dealer capital and related trading strategies include capital investments in the Company's broker-dealers as well as securities finance and special purpose acquisition company trading strategies to grow liquidity and returns within operating businesses. Much of the Company's public and private healthcare strategies and liquid alternative trading strategies portfolios are invested alongside the Company's investment management clients. The Company's liquid alternative trading strategies include merger arbitrage and activist fund strategies. In addition, from time to time, the Company makes investments in private capital raising transactions of its investment banking clients.
The Company allocates capital to Asset Co's private investments. Asset Co's
private investments include the Company's investment in Italian wireless
broadband provider
As ofDecember 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 US GAAP. The table below presents the Company's invested equity capital by strategy and as a percentage of Cowen's 41
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stockholders' equity as ofDecember 31, 2022 . The total net values presented in the table below do not tie to Cowen's consolidated statement of financial condition as ofDecember 31, 2022 because they represent only some of the line items in the accompanying consolidated statement of financial condition. 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 Op Co and Asset Co segments follows the discussion of our total
consolidated US GAAP results.
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Year Ended
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 toCowen Inc. common stockholders$ 69,666 $ 288,819 $ (219,153) (76) % Revenues Investment Banking Investment banking revenues decreased$572.4 million to$494.8 million for the year endedDecember 31, 2022 compared with$1,067.2 million in the prior year period. During the year endedDecember 31, 2022 , the Company completed 48 underwriting transactions and 138 strategic advisory transactions, including 23 debt capital markets transactions. During the year endedDecember 31, 2021 , the Company completed 190 underwriting transactions, 159 strategic advisory transactions and 20 debt capital markets transactions. 43
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Brokerage
Brokerage revenues increased$7.1 million to$592.3 million for the year endedDecember 31, 2022 compared with$585.2 million in the prior year period. This was attributable to increases in Options, Non-USD, and Prime Services commission offset by decreases in Special Situations commissions. Customer trading volumes across the industry (according to Bloomberg) increased 5% for the year endedDecember 31, 2022 compared to the prior year.
Investment Income (loss)
Securities principal transactions, net
Securities principal transactions, net decreased$9.3 million to$112.8 million for the year endedDecember 31, 2022 compared with$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 ourLinkem 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 endedDecember 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 endedDecember 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 endedDecember 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 Cowen Sustainable funds in the first quarter of 2021 when, during the quarter, the fund had multiple capital raises as well as a decrease in fees from theCowen Healthcare investments funds.
Incentive Income
Incentive income decreased$2.1 million to$0.6 million for the year endedDecember 31, 2022 compared with$2.7 million in the prior year period. This decrease was related to lower income earned in ourRamius Merger Fund LLC . Due to revenue recognition accounting standards 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$92.8 million to$312.1 million for the year endedDecember 31, 2022 compared with$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 endedDecember 31, 2022 compared with$39.6 million in the prior year period. This decrease is driven by a decrease in premiums (net of reinsurance) in Cowen Re. and run-off premium adjustments fromKelvin Re Limited offset by an increase in net premiums fromCowen Insurance Company .
Other Revenues, net
Other revenues increased
Consolidated Funds Revenues Consolidated Funds revenues decreased$43.0 million to a loss of$49.2 million for the year endedDecember 31, 2022 compared with a loss of$6.2 million in the prior year period. The decrease is due to the losses related theEnterprise LP fund primarily driven by unrealized losses of ourLinkem investment driven by lower projected future cash flows and a decline in market value of comparables. The amounts shown under Consolidated Funds reflect the consolidated total performance for such 44 -------------------------------------------------------------------------------- Table of Contents investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to non-controlling interests.
Interest and Dividends Expense
Interest and dividends expense increased$47.7 million to$259.1 million for the year endedDecember 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$771.4 million for the year endedDecember 31, 2022 compared with$1,046.4 million in the prior year period. The decrease is primarily due 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 year endedDecember 31, 2022 , compared with 48.7% in the prior year period.
Insurance and Reinsurance Claims and Commissions
Insurance and reinsurance-related expenses decreased
Operating, General, Administrative and Other Expenses
Operating, general, administrative and other expenses decreased$5.8 million to$424.5 million for the year endedDecember 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 endedDecember 31, 2022 compared with$19.0 million in the prior year period. The increase is 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 year endedDecember 31, 2022 compared with$0.6 million in the prior year period. During the first quarter of 2022, the Company deconsolidatedCowen Private Investments LP as the fund was liquidated. During the first quarter of 2021, the Company deconsolidatedCowen 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 endedDecember 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 endedDecember 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 endedDecember 31, 2022 compared with income of$8.4 million in the prior year period. The decrease is due to the losses related theEnterprise LP fund primarily driven by unrealized losses of ourLinkem 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. 45
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Preferred Stock Dividends
OnMay 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 endedDecember 31, 2022 , 2021 and 2020, respectively.
Year Ended
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 toCowen Inc. common stockholders$ 288,819 $ 209,571 $ 79,248 38 % Revenues Investment Banking
Investment banking revenues increased
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Brokerage
Brokerage revenues increased$60.8 million to$585.2 million for the year endedDecember 31, 2021 compared with$524.4 million in the prior year period. This was attributable to an increase in Institutional Brokerage, primarily Cash, Special Situations, and Non-Dollar commission revenue. Customer trading volumes across the industry (according to Bloomberg) increased 4% for the year endedDecember 31, 2021 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 endedDecember 31, 2021 compared with$124.7 million in the prior year period. The decrease in securities principal transactions, net was primarily attributable to a decrease in our merchant banking investments as prior period included a positive mark to market of our Nikola investment offset partially by an increase in our swaps business as the Company added both additional clients and increased activity with existing clients.
Portfolio fund principal transactions, net
Portfolio fund investment income (loss) decreased$20.1 million to$0.3 million for the year endedDecember 31, 2021 compared with$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 endedDecember 31, 2021 compared with$59.3 million in the prior year period. The primary driver of the decrease was a decrease in allocations from our healthcare funds offset only partially from an increase in allocations from our sustainable funds. Management Fees
Management fees increased
Incentive Income
Incentive income increased
Interest and Dividends
Interest and dividends increased$31.8 million to$219.3 million for the year endedDecember 31, 2021 compared with$187.5 million in the prior year period. Interest and dividends amounts are primarily attributable to 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 increased$9.5 million to$39.6 million for the year endedDecember 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 decreased$5.3 million to$5.2 million for the year endedDecember 31, 2021 compared with$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 endedDecember 31, 2021 compared with a loss of$18.5 million in the prior year period. The increase is due to the losses in the prior period related to the UCITS fund as the merger strategy experienced significant challenges in Q1 2020. The UCITS fund was deconsolidated during the second quarter of 2020. Losses remaining during the year ended 2021 are primarily related to theEnterprise LP fund primarily driven by foreign revaluation of ourLinkem investment. We have offset this revaluation risk outside the fund with 47 -------------------------------------------------------------------------------- Table of Contents foreign forwards. 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.
Interest and Dividends Expense
Interest and dividends expense increased$23.7 million to$211.4 million for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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$430.3 million for the year endedDecember 31, 2021 compared with$369.8 million in the prior year period. The increase is primarily related to higher brokerage and trade execution costs due to higher brokerage and investment banking revenues as well as an increase in professional, advisory and other fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased$3.7 million to$19.0 million for the year endedDecember 31, 2021 compared with$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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 2020 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 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. 48
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Preferred Stock Dividends
OnMay 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.
Segment Analysis, Economic Income (Loss) and related components
Economic Income (Loss) and related components
The Company presents 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 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 well as their related components.
These measures include management reclassifications and the 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 segment, investors and analysts typically
review and analyze the performance of investment banking revenues net of
underwriting expenses and excluding 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 and 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 Company's business activities and performance are reviewed
by analysts and investors in addition to providing simplification related to
legacy businesses and investments for which the Company maintains long-term
monetization strategies. Additionally, the Company manages its operating
businesses to an Economic Compensation-to-Proceeds ratio. Presentation of
Economic Compensation Expense and Economic Proceeds provides transparency in
addition to the Company's US GAAP Compensation Expense.
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 presented by other public
companies and are not identical to corresponding measures used in our various
agreements or public filings.
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These Non-GAAP measures should not be considered in isolation or as a substitute for revenue, 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 these Non-GAAP measures described below, these Non-GAAP measures have limitations in that they do not take into account certain items included or excluded under US GAAP, including its consolidated funds. For a reconciliation of 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 the following section "Reconciliation of US GAAP (Unaudited) to Non-GAAP Measures". The Company conducts its operations through two segments:Op Co andAsset Co. The Company's principle sources of revenues included in Economic Income (Loss) are derived from activities in the following business segments. The Op Co and Asset Co segments do not conduct inter-segment transactions.
The Op Co segment generates revenue through several principal sources: investment banking revenue, brokerage revenue, management fees, incentive income, and investment income earned from the Company's own capital.
The Asset Co segment generates revenue through management fees, incentive income and investment income from the Company's own capital.
Year Ended
Total Economic Operating Income (Loss) was$80.5 million for the year endedDecember 31, 2022 , a decrease of$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 endedDecember 31, 2022 compared to Economic Income (Loss) of$312.2 million in the prior year period. Total Pre-tax Economic Income (Loss) was$90.3 million for the year endedDecember 31, 2022 , a decrease of$337.9 million compared to Pre-tax Economic Income (Loss) of$428.2 million in the prior year period. Economic Proceeds included in total Economic Income (Loss) were$1,312.8 million for the year endedDecember 31, 2022 , a decrease of$577.8 million compared to$1,890.6 million in the prior year period. This was primarily related to a decrease in investment banking and incentive fees. Operating Company Segment Economic Proceeds 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) %
Economic Proceeds The Op Co segment economic proceeds included in Economic
Income (Loss) were
Investment Banking Economic Proceeds decreased$547.5 million to$478.2 million for the year endedDecember 31, 2022 compared with$1,025.7 million in the prior year period. During the year endedDecember 31, 2022 , the Company completed 48 underwriting transactions and 138 strategic advisory transactions, including 23 debt capital markets transactions. During the year endedDecember 31, 2021 , the Company completed 190 underwriting transactions, 159 strategic advisory transactions and 20 debt capital markets transactions. Brokerage Economic Proceeds decreased$9.3 million to$719.2 million for the year endedDecember 31, 2022 , compared with$728.5 million in the prior year period. This was attributable to a decrease in Institutional Brokerage, primarily related to a decrease in Special Situations and Cross Asset Trading revenues offset by increases in Options, Non-US Dollar, and ADR revenues. Institutional Services revenues increased, primarilyPrime Services and Securities 50 -------------------------------------------------------------------------------- Table of Contents Finance. Customer trading volumes across the industry (according to Bloomberg) increased 5% for the year endedDecember 31, 2022 compared to the prior year. Management Fees Economic Proceeds for the segment increased$3.4 million to$82.7 million for the year endedDecember 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 theCowen 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 endedDecember 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 ourCowen Healthcare investment funds. Investment Income (Loss) Economic Proceeds for the segment increased$12.7 million to$21.2 million for the year endedDecember 31, 2022 compared with$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) Economic Proceeds for the segment increased$49.4 million to$57.3 million for the year endedDecember 31, 2022 compared with income of$7.9 million in the prior year period. The increase is primarily driven by an improved insurance result and foreign currency exchange rate gains from our Non-US Dollar transactions. Economic Interest Expenses / (Income) were$5.2 million for the year endedDecember 31, 2022 , a decrease of expenses of$18.7 million compared with$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 Proceeds were$1,340.7 million for the year endedDecember 31, 2022 , a decrease of$519.9 million compared with$1,860.6 million in the prior year period. Economic Expenses Year Ended December 31, Total Period-to-Period 2022 2021 $ Change % Change Economic Expenses (dollars in thousands) 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) %
Economic Expenses were
Economic Compensation Expenses were$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 Fixed non-compensation expense increased$11.7 million to$171.8 million for the year endedDecember 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 which primarily are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities, increased$40.9 million to$240.4 million for the year endedDecember 31, 2022 compared with$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 endedDecember 31, 2022 compared with$19.0 million in the prior year period. The increase is primarily related to two acquisitions which closed during 2021. Economic Non-controlling interests decreased by$3.0 million to$2.3 million for the year endedDecember 31, 2022 compared with$5.3 million in the prior year period. 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. 51
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Economic Income and Economic Operating Income
Year Ended December 31, Total Period-to-Period
2022 2021 $ Change % Change
(dollars in thousands)
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
Year Ended December 31, Total Period-to-Period
2022 2021 $ Change % Change
Economic Proceeds (dollars in thousands)
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) %
Economic Proceeds The Asset Co segment proceeds included in Economic Income
(Loss) were a loss of
Management Fees Economic Proceeds for the segment remained fairly flat for the
year ended
Incentive Income (Loss) Economic Proceeds for the segment increased the loss by$12.0 million to a loss of$13.1 million for the year endedDecember 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
Economic Interest Expenses / (Income) were
Net Economic Proceeds for the segment were a loss of$33.4 million for the year endedDecember 31, 2022 , compared with income of$2.3 million in the prior year period. 52
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Economic Expenses
Year Ended December 31, Total Period-to-Period
2022 2021 $ Change % Change
(dollars in thousands)
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 %
Total: Economic Expenses $ 2,585 $ 4,080 $ (1,495) (37) %
Economic Expenses were
Economic Compensation Expenses were
Economic Non-compensation Expenses Fixed non-compensation expense remained consistent for the year endedDecember 31, 2022 compared with the prior year period. Variable non-compensation expenses, which remained consistent for the year endedDecember 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 endedDecember 31, 2022 compared to the prior year period and relates to costs allocated from general company assets.
Economic Income and Economic Operating Income
Year Ended December 31, Total Period-to-Period
2022 2021 $ Change % Change
(dollars in thousands)
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
Total Economic Operating Income (Loss) was$326.4 million for the year endedDecember 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 endedDecember 31, 2021 compared to Economic Income (Loss) of$313.2 million in the prior year period. Total Pre-tax Economic Income (Loss) was$428.2 million for the year endedDecember 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 endedDecember 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 income (loss) and incentive income. 53
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Operating Company Segment
Economic Proceeds
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 %
Economic Proceeds The Op Co segment economic proceeds included in Economic
Income (Loss) were
Investment Banking Economic Proceeds increased$296.5 million to$1,025.7 million for the year endedDecember 31, 2021 compared with$729.2 million in the prior year period. During the year endedDecember 31, 2021 , the Company completed 190 underwriting transactions, 159 strategic advisory transactions and 20 debt capital markets transactions. During the year endedDecember 31, 2020 , the Company completed 165 underwriting transactions, 74 strategic advisory transactions and 12 debt capital markets transactions. Brokerage Economic Proceeds increased$75.9 million to$728.5 million for the year endedDecember 31, 2021 , compared with$652.6 million in the prior year period. This was attributable to an increase in Institutional Brokerage, primarily Cash, Special Situations, and Non-US Dollar commission revenue. Customer trading volumes across the industry (according to Bloomberg) increased 4% for the year endedDecember 31, 2021 compared to the prior year period. Management Fees Economic Proceeds for the segment increased$21.1 million to$79.3 million for the year endedDecember 31, 2021 compared with$58.2 million in the prior year period. This increase in management fees was primarily related to an increase in management fees from theCowen Healthcare investments and Cowen Sustainable funds.
Incentive Income (Loss) Economic Proceeds for the segment decreased
Investment Income (Loss) Economic Proceeds for the segment decreased$29.3 million to$8.5 million for the year endedDecember 31, 2021 compared with$37.8 million in the prior year period. The decrease primarily relates to a decrease in performance investments across most of our strategies including healthcare, merchant banking and portfolio hedge. Other Income (Loss) Economic Proceeds for the segment increased$7.1 million to$7.9 million for the year endedDecember 31, 2021 compared with income 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 endedDecember 31, 2021 , a decrease of$0.6 million compared with$24.5 million in the prior year period.
Net Economic Proceeds were
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Economic Expenses
Year Ended December 31, Total Period-to-Period
2021 2020 $ Change % Change
(dollars in thousands)
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 %
Economic Expenses were
Economic Compensation Expenses were$1,046.7 million compared to$860.8 million in the prior year period. The increase was due to higher revenues. The economic compensation-to-proceeds ratio increased to 55.5% 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 endedDecember 31, 2021 compared with$141.7 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 which primarily are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities, increased$29.0 million to$199.5 million for the year endedDecember 31, 2021 compared with$170.5 million in the prior year period. The increase is related to increased brokerage and trade execution costs and increased variable professional and advisory fees, which includes employment agency fees and legal fees directly related to revenues. Economic Depreciation and Amortization Expenses decreased to$19.0 million for the year endedDecember 31, 2021 compared with$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. Economic Non-controlling interests decreased by$1.6 million to$5.3 million for the year endedDecember 31, 2021 compared with$6.9 million in the prior year period. 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
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. OnMay 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. 55
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Asset Co Segment
Economic Proceeds
Year Ended December 31, Total Period-to-Period
2021 2020 $ Change % Change
Economic Proceeds (dollars in thousands)
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) % Economic Proceeds The Asset Co segment proceeds included in Economic Income (Loss) were$6.1 million for the year endedDecember 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 Proceeds for the segment increased$0.3 million to$1.2 million for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 , a decrease of$1.3 million compared with$5.1 million in the prior year period. Net Economic Proceeds for the segment were proceeds of$2.3 million for the year endedDecember 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 Year Ended December 31, Total Period-to-Period 2021 2020 $ Change % Change (dollars in thousands) Economic Expenses Employee compensation and benefits$ 3,871 $ 3,767 $ 104 3 % Non-Compensation Expenses 187 350 (163) (47) % Depreciation & Amortization 22 22 - - % Total: Economic Expenses$ 4,080 $ 4,139 $ (59) (1) %
Economic Expenses remained fairly flat at
Economic Compensation Expenses were$3.9 million for the year endedDecember 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 endedDecember 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 endedDecember 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. 56
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Economic Depreciation and Amortization Expenses remained consistent for the year endedDecember 31, 2021 compared to the prior year period and relates to costs allocated from general company assets.
Economic Income and Economic Operating Income
(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. OnMay 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. 57
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Reconciliation of US GAAP to Non-GAAP Measures for the year ended
2022, 2021 and 2020
The following tables reconciles total US GAAP Revenues to total Economic
Proceeds for the year ended
(unaudited)
Year Ended December 31, 2022
(Dollar amounts in thousands) Investment Investment Incentive
Interest and Reinsurance Other Consolidated Other Income
Banking Brokerage Income Management Fees Income Dividends Premiums Revenues, net Funds Revenues (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
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 Investment Incentive Interest and Reinsurance Other Consolidated Funds Other Income
Banking Brokerage Income Management Fees Income Dividends Premiums Revenues, net Revenues (Loss) Total
Total US GAAP Revenues and Other
Income (Loss) $ 1,067,162 $
585,162
$ 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 59
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(unaudited)
Year Ended December 31, 2020
(Dollar amounts in thousands) Investment Incentive Investment Interest and Reinsurance Other Consolidated Other Income
Banking Brokerage Management Fees Income Income Dividends Premiums Revenues, net Funds Revenues Gain/Loss Total
Total US GAAP Revenues and Other Income
(Loss) $ 769,486 $ 524,361 $ 47,515
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 endedDecember 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 60
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The following tables reconcile total US GAAP Expenses and non-controlling interests to total Economic Expenses for the year endedDecember 31, 2022 , 2021 and 2020: (unaudited) Year EndedDecember 31, 2022 Year EndedDecember 31, 2021 Net income (loss) Net income (loss) attributable to attributable to non-controlling non-controlling interests in interests in Employee consolidated Employee consolidated Compensation and Non-compensation US subsidiaries and Compensation and Non-compensation US subsidiaries and (Dollar amounts in thousands) Benefits GAAP Expenses investment funds Total Benefits GAAP Expenses 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 61
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(unaudited)
Year Ended December 31, 2020
Net income (loss)
attributable to
non-controlling
interests in
Employee consolidated
Compensation and Non-compensation US subsidiaries and
(Dollar amounts in thousands) Benefits GAAP Expenses 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
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-------------------------------------------------------------------------------- Table of Contents The following table reconciles US GAAP Net Income (loss) Attributable toCowen Inc. Common Stockholders to Pre-tax Economic Income (Loss), Economic Income (loss), and Economic Operating Income (loss) for the year endedDecember 31, 2022 , 2021 and 2020: (unaudited) Year Ended December 31, (Dollar amounts in thousands) 2022 2021 2020
US GAAP Net income (loss) attributable to
$ 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 63
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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) ondebt extinguishment and
accelerated debt costs.
q Pre-tax Economic income (Loss) excludes preferred stock dividends.
r Economic Income (Loss) excludes goodwill and other impairments.
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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 ofDecember 31, 2022 , we had cash and cash equivalents of$1,139.7 million and net liquid investment assets of$1.5 billion , which includes cash and cash equivalents and short-term investments held by foreign subsidiaries as ofDecember 31, 2022 of$258.8 million . The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in theUnited Kingdom ,Malta ,Germany ,Switzerland ,Israel ,Canada , andHong 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 byMarch 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' trading activity and market volatility. AtDecember 31, 2022 , the Company had security deposits totaling$87.9 million with clearing organizations in theU.S. for the settlement of equity trades. In the normal course of ourU.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
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 theHealthCare Royalty Partners funds (which are managed by Healthcare Royalty Management) and is a member ofHealthCare Royalty Partners General Partners . The Company will make its pro-rata investment in theHealthCare 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 clearinghouse 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. 65
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Preferred Stock and Purchase of Capped Call Option
OnMay 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, onFebruary 15 ,May 15 ,August 15 andNovember 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 endedDecember 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 divided by the conversion rate. The initial conversion rate (subsequent to theDecember 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 afterMay 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. OnDecember 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 atDecember 31, 2021 . RegulationRegulatory Capital As registered broker-dealers with theUnited States Securities and Exchange Commission ("SEC"),Cowen and Company , ATM Execution andWestminster are subject to the Uniform Net Capital Rule 15c3-1, "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 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 greater of$1.5 million or 2% of aggregate debits arising from customer transactions. ATM Execution, andWestminster are required to maintain minimum net capital, as defined in (a)(1)(ii) of SEA 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 provisions of SEA Rule 15c3-1 and other regulatory bodies.Cowen and Company is also subject to certain net capital rule requirements under the Regulation 1.17 of theCommodity Futures Trading Commission ("CFTC") under Commodities Exchange Act ("CEA") as an introducing broker. Under Regulation 1.17,Cowen and Company 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 theOptions Clearing Corporation ("OCC") under OCC Rule 302,Cowen and Company is required to maintain net capital equal to the greater of$2.0 million or 2% of aggregate debit items. AtDecember 31, 2022 ,Cowen and Company had$478.3 million of net capital in excess of its minimum requirements under SEA Rule 15c3-1.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act") was signed into law on
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Products") registered only with theSEC with an effective date ofNovember 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 theSEC 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 theSEC securities-based swaps dealer swaps dealer with respect to non-cleared securities-based swaps underSEC rules. AtDecember 31, 2022 , Cowen Financial Products had$44.7 million of net capital in excess of its minimum requirements under SEA Rule 18a-1.Cowen International Ltd andCowen Execution Ltd are subject to the capital requirements of theU.K. Financial Conduct Authority ("FCA"), as defined, and must exceed the minimum capital requirement set forth by theFCA . On1 January 2022 , theFCA adopted the Investment Firms Prudential Regime ("IFPR"). This is a new prudential regime which applies to MiFID investment firms authorized and regulated by theFCA in theUK . The IFPR refocuses prudential requirements and expectations away from the risks firms face, to also consider and look to manage the potential harm firms can pose to consumers and markets.Cowen International Ltd andCowen Execution Ltd will both be designated as Class 2 firms under the new regime and will have a minimum capital requirement equal to the higher of; the Permanent minimum capital requirement, their respective Fixed Overhead requirement, and their Risk Responsive Computation ("K-factors"). Cowen Asia, a previously established entity, was re-registered with regulatory approval onMay 17, 2019 . Cowen Asia is subject to the financial resources requirements of theSecurities and Futures Commission ("SFC") ofHong Kong . Financial Resources must exceed the Total Financial Resources requirement of the SFC. As ofDecember 31, 2022 , the regulatory net capital, minimum net capital requirement and excess net capital ofU.S. regulated broker dealers and swap dealer together with the equivalent of capital requirements and compliance information for foreign broker dealers registered with theFCA and the SFC are presented as follows: Net Capital Subsidiary Net Capital (a) Requirement (b) Excess Net Capital (dollars in thousands)
Cowen and Company$ 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 ofNet Capital underFCA rules is referred as "capital resources" and under SFC rules is referred as "net liquid capital." The equivalent of Minimum Net Capital Requirement underFCA rules is referred as "minimum capital resources requirement" and under SFC rules is referred as "net liquid capital requirement." Customer Protection The Company'sU.S. broker-dealers must also comply with the customer protection provisions under SEA Rule 15c3-3 which 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 (k)(2)(ii) exemption with regard to all of their customer accounts and transactions that are introduced on a fully-disclosed basis to their clearing agents for clearing, settlement and custody.Westminster claims the (k)(2)(i) exemption with regard to customer transactions and balances that are cleared, settled and custodied in bank accounts designated as Special Accounts for the Exclusive Benefit of 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 SEA Rule 15c3-3,Cowen and Company may be required to deposit in a Special Reserve Account cash or acceptable qualified securities for the exclusive benefit of customers. As ofDecember 31, 2022 ,Cowen and Company had segregated approximately$49.4 million of cash to satisfy the customer reserve provision of SEA Rule 15c3-3.
As a clearing and carrying broker-dealer,
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in order to determine the amount it is required to deposit in its PAB Reserve Bank Accounts pursuant to SEA Rule 15c3-3. This allows each correspondent firm that usesCowen and Company as its clearing broker-dealer to classify its PAB account assets held atCowen and Company as allowable assets in the correspondent's net capital calculation. AtDecember 31, 2022 ,Cowen and Company had$40.4 million of cash on deposit in PAB Reserve Bank Accounts.Cowen and Company and ATM Execution also maintain certain assets in PAB accounts held at their respective clearing brokers. Each treats its assets held in those PAB accounts at the respective clearing brokers as allowable assets for net capital 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 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 Insurance Co and Cowen Re and Kelvin are individually required to maintain a solvency capital ratio as calculated by relevantEuropean Commission directives and local regulatory rules inMalta , Luxembourg and Guernsey, respectively. Each company's individual solvency capital ratio calculated at the end of each regulatory determined period must exceed a minimum requirement. As ofDecember 31, 2021 , the last testing date for Cowen Re, the solvency capital ratio was in excess of the minimum regulatory requirement. As ofSeptember 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 ofNew York that apply to captive insurance companies,RCG Insurance Company , Cowen's captive insurance company incorporated and licensed in the state ofNew York , was required to maintain capital and surplus of approximately$0.3 million as ofDecember 31, 2022 .RCG Insurance Company's capital and surplus as ofDecember 31, 2022 totaled$4.6 million .
Cash Flows Analysis
The Company's primary sources of cash are derived from its operating activities, realized returns on its own invested capital and borrowings on debt. The Company's primary uses of cash include compensation and general and administrative expenses.
Operating Activities. Net cash provided by operating activities of$171.6 million for the year endedDecember 31, 2022 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 was primarily related to (i) purchases of other investments only partially offset with the proceeds from sales of other investments and (ii) purchases of assets through acquisition, net of cash acquired. Net cash used in investing activities of$43.0 million for the year endedDecember 31, 2020 was primarily related to the purchases of other investments only partially offset by the proceeds from sales of other investments. Financing Activities. Net cash used in financing activities for the year endedDecember 31, 2022 of$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 endedDecember 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 endedDecember 31, 2020 of$25.6 million was primarily related to (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 offset only partially by repayments on notes and other debt. 68
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Table of Contents Debt Convertible Debt
The Company, onDecember 14, 2017 , issued$135.0 million aggregate principal amount of 3.00% convertible senior notes dueDecember 2022 (the "December 2022 Convertible Notes"). TheDecember 2022 Convertible Notes have a final maturity date ofDecember 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 theDecember 2022 Convertible Notes is payable semi-annually onDecember 15 andJune 15 of each year. TheDecember 2022 Convertible Notes are senior unsecured obligations of Cowen. TheDecember 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 theDecember 2022 Convertible Notes, conversions of theDecember 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 theDecember 2022 Convertible Notes of$23.4 million and is shown net in convertible debt in the accompanying consolidated statements of financial condition. OnJune 26, 2018 , the Company received shareholder approval for the Company to settle theDecember 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. DuringDecember 2020 , the Company repurchased and extinguished$46.9 million of the outstanding principal amount of theDecember 2022 Convertible Notes for cash consideration of$70.5 million . In conjunction with the partial extinguishment of theDecember 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 theDecember 2022 Convertible Notes. The Company recognized$2.7 million of gain on debt extinguishment. OnMarch 24, 2021 , the Company issued a redemption notice announcing that the Company would redeem all of theDecember 2022 Convertible Notes, and provided holders the option to elect to settle the as-converted value of theDecember 2022 Convertible Notes as allowed under the terms of theDecember 2022 Convertible Notes. As a result of the Company's call for redemption of theDecember 2022 Convertible Notes, theDecember 2022 Convertible Notes were convertible, at the option of the holder at any time prior toJune 22, 2021 , the second business day prior to theDecember 2022 Convertible Notes' Redemption Date. OnJune 24, 2021 (the "Redemption Date"), the Company redeemed all of the outstanding principal amount of theDecember 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 toJune 15, 2021 , to, but not including the Redemption Date of theDecember 2022 Convertible Notes, or the value of the Company's Class A common stock to be issued on conversion. The settlement method for theDecember 2022 Convertible Notes was$88.1 million in cash, (the outstanding principal amount of theDecember 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 theDecember 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 ofDecember 2022 Convertible Notes converted. In conjunction with the redemption of the remainingDecember 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 endedDecember 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 theDecember 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 endedDecember 31, 2021 and 2020, respectively.
Notes Payable
OnMay 7, 2019 , the Company completed its private placement of$53.0 million aggregate principal amount of 7.25% senior notes dueMay 2024 (the "May 2024 Notes") with certain institutional investors. OnSeptember 30, 2019 , the Company issued an additional$25.0 million of the same series of notes. The additionalMay 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 theMay 2024 Notes have maintained their initial private rating. Interest on theMay 2024 Notes is payable semi-annually in arrears onMay 6 69
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andNovember 6 . The Company recorded interest expense of$5.7 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. The Company capitalized debt issuance costs of approximately$1.5 million inMay 2019 and$0.6 million inSeptember 2019 , which is a direct deduction from the carrying value of the debt and will be amortized over the life of theMay 2024 Notes in interest and dividends expense in the accompanying consolidated statements of operations.June 2033 Notes OnJune 11, 2018 , the Company completed its public offering of$90.0 million of 7.75% senior notes dueJune 2033 (the "June 2033 Notes") and subsequently the underwriters exercised in full their option to purchase an additional$10.0 million principal amount of theJune 2033 Notes. Interest on theJune 2033 Notes is payable quarterly in arrears onMarch 15 ,June 15 ,September 15 andDecember 15 . The Company recorded interest expense of$7.7 million ,$7.7 million and$7.7 million for the years endedDecember 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 theJune 2033 Notes in interest and dividends expense in the accompanying consolidated statements of operations.
OnDecember 8, 2017 , the Company completed its public offering of$120.0 million of 7.35% senior notes dueDecember 2027 (the "December 2027 Notes") and subsequently the underwriters exercised in full their option to purchase an additional$18.0 million principal amount of theDecember 2027 Notes. Interest on theDecember 2027 Notes is payable quarterly in arrears onMarch 15 ,June 15 ,September 15 andDecember 15 . The Company recorded interest expense of$2.5 million and$10.1 million for the years endedDecember 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 theDecember 2027 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 dueOctober 2021 and for general corporate purposes. OnMarch 24, 2021 , the Company delivered payment of and discharged all$138.0 million outstanding aggregate principal of theDecember 2027 Notes plus accrued and unpaid interest through the effective redemption date ofApril 23, 2021 . In conjunction with the extinguishment of theDecember 2027 Notes, the Company accelerated the pro-rata capitalized debt issuance costs. For the year endedDecember 31, 2021 , the Company recognized$4.4 million of loss on debt extinguishment. Term LoanMarch 2028 Term Loan OnMarch 24, 2021 , the Company borrowed$300 million of first lien term loan dueMarch 24, 2028 . OnDecember 15, 2021 , the Company borrowed an additional$150 million first lien term loan 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 theMarch 2028 Term Loan is$450 million . TheMarch 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 theMarch 2028 Term Loan. Additionally, the Company has entered into an interest rate swap to offset the floating interest rate of theMarch 2028 Term Loan (See Note 6). The obligations of the Company for theMarch 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 theMarch 2028 Term Loan contain customary affirmative and negative covenants, subject to certain customary exceptions, thresholds, qualifications and "baskets". Proceeds from theMarch 2028 Term Loan were used to (i) satisfy and discharge and redeem the Company's 2027 Senior Notes, (ii) redeem the Company'sDecember 2022 Convertible Notes that remained outstanding as ofMarch 31, 2021 and pay the cash settlement amount in connection with the conversion ofDecember 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 ofDecember 31, 2022 , the outstanding principal amount of theMarch 2028 Term Loan was$442.1 million . Interest expense for theMarch 2028 Term Loan was$22.8 million and$9.7 million for the years endedDecember 31, 2022 and 2021, based on an effective interest rate of 4.46%. InMarch 2021 , the Company capitalized debt issuance costs of approximately$6.6 million and initial unamortized discount of$1.5 million related to theMarch 2028 Term Loan which is a direct deduction from the carrying value of the debt and will be amortized over the life of theMarch 2028 Term loan in interest and dividends expense in the accompanying consolidated statements of operations. InDecember 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 70
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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 ofJune 30, 2023 . As theMarch 2028 Term Loan represents the Company's only significant exposure to LIBOR, the transition to an alternative Inter-bankOffer Rate is not expected to have a material impact on Company's consolidated financial statements.
Other Notes Payable
During
OnSeptember 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 inJune 2021 . The loan is payable onSeptember 30, 2023 , had an initial interest rate of 1.4 times the Secured Overnight Financing Rate ("SOFR") plus 6.07% untilDecember 31, 2020 and 1.4 times the SOFR plus 5.8% untilJune 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 toThe Military Mutual Ltd (aUnited 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 onSeptember 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 ofDecember 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 accompanying consolidated statements of operations. The Company recorded interest expense of$2.5 million ,$3.0 million and$1.2 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively, related to its loan payable to PPA S-81. DuringNovember 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 inNovember 2024 , with monthly payment requirements of$0.1 million . As ofDecember 31, 2022 , the outstanding balance on this note was$1.1 million . Interest expense for the years endedDecember 31, 2022 , 2021 and 2020 was$0.1 million , respectively.
Finance Lease Obligations
The Company has entered into various finance leases for computer equipment. These finance lease obligations are included in notes payable and other debt in the accompanying consolidated statements of financial condition.
For the years endedDecember 31, 2022 , 2021 and 2020, quantitative information regarding the Company's finance lease obligations reflected in the accompanying consolidated statements of operations, the supplemental cash flow information and certain other information related to finance leases were as follows: Year Ended December 31, 2022 2021 2020 (dollars in thousands) Lease cost Finance lease cost:
Amortization of finance lease right-of-use assets$ 1,109 $ 1,274 $ 1,232 Interest on lease liabilities 58 116 171 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 ofDecember 31, 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. The Company also has pledged cash collateral for reinsurance agreements which amounted to$119.5 million , as ofDecember 31, 2022 , and$44.1 million , as ofDecember 31, 2021 , which are expected to be released periodically as per the terms of the reinsurance policy. 71
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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 related to these letters of credit.
Contractual Obligations
The following tables summarize the Company's contractual cash obligations as ofDecember 31, 2022 : More Than Total < 1 Year 1-3 Years 3-5 Years 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
Finance Lease
Notes Payable Term Loan Other Notes Payable 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.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as ofDecember 31, 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 underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date. 72
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Cowen and Company 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 exchanges 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
The 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's investment funds are not subject to these consolidation provisions with respect to their investments pursuant to their specialized accounting. The Company'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'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'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.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a Voting Operating Entity ("VOE") or a Variable 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, (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 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
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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 determines 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 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 consolidates investment funds for which it acts as the managing
member/general partner and investment manager. At
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
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 Net gains (losses) on 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, the Company accounts for its investment in such entity (primarily consisting of securities of such entity which are purchased and held principally for the purpose of selling them in the near term and classified as trading securities), at fair value with unrealized gains (losses) resulting from changes in fair value reflected within Investment income (loss) - Securities principal transactions, net or 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. 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 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, which the Company retains 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
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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. 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 of these investment is based on their proportional rights of the underlying portfolio company and are valued using market 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 to convert future cash flows to a single present value. In following these approaches, the significant inputs and assumptions 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 impact 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 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, certainU.S. government and sovereign obligations, Exchange Traded Funds ("ETFs"), mutual funds and certain money market securities. 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 75
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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, are classified as level 2 when their inputs can be
corroborated by market data. OTC derivatives, such as swaps and options, with
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, carried interest and equity method investments, which are valued as follows:
i. 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 US GAAP fair value measurements
and disclosures guidance relating to 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.
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 an allocation of capital in the 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 influence 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 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.
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. In testing for goodwill impairment, the Company has the option to first assess 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 amount. If, after assessing the totality of events and circumstances, the Company concludes that fair value exceeds its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a 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 its fair value, then the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.
Intangible assets
Intangible assets with finite lives are amortized over their estimated average
useful 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
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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 undiscounted cash flows from 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.
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 27 in our accompanying consolidated financial statements for the quarter
ended December 31, 2022 for further discussion.
Recently adopted and future adoption of accounting pronouncements
For a detailed discussion, see Note 2aa "Recent pronouncements" in our
accompanying consolidated financial statements for the year ended
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