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Cowen Group Inc (NASDAQ:COWN)
Q4 2020 Earnings Call
Feb 11, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. And thank you for joining us to discuss Cowen’s results for the fourth quarter and full year 2020. By now, you should have received a copy of the earnings release, which can be accessed at investor.cowen.com. Before we begin, the company has asked me to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to risks and uncertainties described in the company’s earnings release and other filings with the SEC. Cowen has no obligation to update the information represented on today’s call. Also, on today’s call, our speakers will reference certain non-GAAP financial measures, which the company believes will provide useful information for investors. Reconciliation of these measures to GAAP is consistent with company’s reconciliation as presented in today’s earnings release.

Now I’d like to turn the call over to Mr. Jeffrey Solomon, Cowen’s Chair and Chief Executive Officer.

Jeffrey M. SolomonChair and Chief Executive Officer

Thank you, Operator. Good morning, everyone, and welcome to Cowen’s Fourth Quarter and Full Year 2020 Earnings Call. This is Jeff Solomon, and joining me on today’s call is our CFO, Steve Lasota. As a reminder, we make available a quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release. Today, I am happy to share the details on the record results that Cowen delivered in 2020 and why we believe our business momentum is sustainable. I would also like to share some thoughts on our culture at Cowen, which in addition to strong tailwinds we are experiencing in many of our businesses, is a driving force behind our success. Then Steve will review the financial results, and after that, we’d be pleased to answer your questions. First, to give you some perspective, in 2020, we set a new earnings record with GAAP net income of more than $7 per share and economic operating income of more than $11 per share. And many of the same dynamics that led to this result have remained in place so far in 2021. For this reason, among others, we continue to believe that Cowen’s valuation remains compelling, as we believe that the factors driving our performance are not fully recognized yet by the market. Our record earnings were years in the making. They are the result of our careful strategic planning and targeted investment in our team and our capabilities and of fostering a culture of collaboration. Cowen’s culture is a key to the outcomes we were able to deliver for our clients and the success we’ve achieved as a firm. As we conduct our business, we do so through the lens of empathy, one of our core values, by considering the impact we make on our colleagues, clients and communities. As we engage with clients, we are driven by the goal of helping companies who help others and are working to raise money for companies so they can hire more people.

The healthcare and sustainability sectors are two areas of focus for us in these efforts. For example, in healthcare, we have helped 165 companies go public over the past eight years, resulting in the development of hundreds of new or improved drugs and therapies across a range of diseases, improving or lengthening the lives of countless people. In 2020 alone, Cowen worked on 33 healthcare IPOs, 26 of them in biotechnology. The fast track research efforts that led to the breakthroughs in developing COVID-19 vaccines has highlighted to most people around the world, the importance of biotech innovation. We see investor focus on biotech continuing in 2021 and encompassing several exciting areas beyond vaccine development and antibody treatment. Today, there are thousands of investigational new drug applications now pending before the FDA. And even factoring in the challenges, which are part of drug discovery, we believe we are still in the early days of the golden age of biotechnology. We are also in the early innings of the growth of sustainability. There is increasing investor demand for companies which are playing a part in the global transition away from carbon-intensive assets. At Cowen, we are an active participant in sustainability using our capital raising expertise and our industry domain knowledge. In 2020, we executed 20 sustainability focused transactions, including eight transactions in the electrical vehicle space. One recent transaction worth noting is our advisory assignment for AppHarvest, a cutting-edge agricultural technology company, which is building some of the world’s largest indoor farms in Appalachia. In working on this transaction, which closed last month, we are not only helping AppHarvest to change the game as it relates to food sustainability, we are helping them to bring much needed investment dollars and jobs to a part of the country that is in need of positive economic development. AppHarvest is also working to eliminate so-called fresh food deserts across the eastern seaboard by increasing the availability of fresh, nutritious produce for millions of Americans.

Cowen is also supporting AppHarvest’s efforts to give back to the community by donating funds to expand their hands-on agricultural technology program to two additional high schools in the surrounding area in Eastern Kentucky. This is a big part of what we do at Cowen, partnering with clients who work to serve the greater good, while generating positive outcomes for investors and shareholders. And these are just a few examples of what makes our time — this time in our history so special. Now turning to our results. The fourth quarter was extremely strong across the board, capping our best year ever. In investment banking, it was a robust quarter, with revenues up 160% year-over-year. We had performance across our banking platform that was very strong with M&A and capital markets advisory contributing over 50% of our revenues. As a reminder, we now break out capital markets advisory revenues as distinct from equity underwriting as they have revenue and profitability characteristics similar to M&A advisory revenues, and most of our competitors present their businesses in this fashion. Highlights of the quarter included continued strength in biotech, tools and diagnostics and sustainability. Our banking revenue is growing more diversified. And in the fourth quarter, healthcare represented 56% of revenues, down from 78% in the prior quarter. We managed a total of 56 capital markets transactions during the quarter, including 17 IPOs and three debt transactions. It was our strongest quarter and year for debt capital markets revenues since 2014. Our M&A revenues were up 225% year-over-year in the fourth quarter and the momentum is continuing as our deal pipeline at the end of January was at a record high and the backlog is almost double the size it was a year ago. M&A fees were 34% of total investment banking revenues in the quarter and capital markets advisory fees, which includes private placements, PIPEs and private debt financings made up 20% of total banking revenue.

It was an exceptionally strong full year in investment banking with revenues up 107%. The surge in biotech equity capital markets and our excellence in that area has continued to benefit Cowen, and we don’t see that changing in the near future. We are also making solid progress on broadening our other product and industry offerings beyond our traditional strength in biopharma. Our healthcare banking revenues outside of biotech in areas like tools and diagnostics, med tech and digital health nearly tripled year-over-year in 2020 to $116 million. Our banking revenues outside of healthcare were about $225 million. That’s more than our total investment banking revenues across all sectors just three years ago. Our holistic cross-team, cross-product, cross-industry approach is gaining traction as clients realize that financing transactions are strategic decisions, and they seek to partner with us to find solutions which are right for them. This breadth of offerings and expertise is a key differentiator for Cowen. As we look ahead to 2021, we are making targeted additions to our banking team, building out our capabilities in areas that are largely adjacent to our existing footprint. In markets, we had our strongest quarter on record with daily revenues of $2.9 million per trading day, well above the $1.8 million per day level in the fourth quarter of 2019. Full year 2020 markets revenues were up 42%, driven by both increased market share and expanded capabilities. We saw particularly strong performance by special situations, which includes SPAC trading, electronic trading, cross-asset trading, securities finance, prime brokerage and outsourced trading. Non-U.S. execution has also outperformed, and we see opportunities to gain additional market share in 2021 by expanding our global offerings, including electronic trading. While overall U.S. market volumes could pull back from historically strong levels of 2020, this year has also gotten off to a strong start with Cowen’s average daily market revenues so far exceeding the fourth quarter of 2020’s average.

In research, 2020 was a very productive and engaging year for the team despite the COVID-19 and work-from-home environment. Our total conference attendance actually rose 25% year-over-year even as related expenses dropped significantly due to the shift to virtual events. During the year, Cowen held hundreds of virtual analyst marketing days and client conference calls, which drew tens of thousands of attendees. Our research team was prolific in 2020, publishing 60% more of our flagship Ahead Of The Curve Series reports than in 2019. We also continue to enjoy Street high readership levels, and this intense productivity drove another annual increase in the weighted institutional client boats that helped drive an increase in buy side commission wallet share. In investment management, management fees are at the highest annual run rate in over four years. While total assets under management are up $1.1 million — sorry, $1.1 billion year-over-year to $12.5 billion, quarterly incentive income was the second strongest on record behind only the second quarter of 2020. Looking at our five investment strategies. Our healthcare strategy ended the quarter with 896 assets under management, which is up over 30%. The strategy had very strong performance for both the quarter and the full year due in part to several recent IPOs in that strategy. Our sustainability strategy had $477 million in AUM at quarter end, more than double the amount at the start of 2020. During the fourth quarter, this strategy added $93 million in commitments from a major public pension fund, and we continue to see strong momentum coming into the first quarter. The merger arb strategy had $392 million in assets under management at quarter end, down from $590 million at the start of 2020. This strategy outperformed the benchmark HFRX Merger Arb Index for the quarter.

Healthcare royalty strategy ended the quarter with almost $3.6 billion in total assets under management, which is up about $300 million year-over-year. The strategy committed over $1 billion in investments in 2020, which is a record amount. HCR’s most recent main fund had a final closing in November of 2019 and is currently 55% committed. And finally, the activist strategy had $6.4 billion in assets at quarter end, up from $6 billion at the start of 2020. The strategy was positive in the fourth quarter and for the full year, even as it slightly lagged the benchmark Russell 2000 Index. Turning to our asset company, which, as a reminder, includes non-core investments that we intend to monetize, the value of our investment in the Italian wireless company Linkem was $82.7 million, which is $5.3 million higher than the prior quarter as the company experienced increased demand for its services and the net asset value of our LP investments in Formation8 and the Eclipse funds rose $100,000 to $39.2 million. As a reminder, the largest investment in Formation8 fund is a stake in wish.com, which had an initial public offering at the end of December.

And now I will turn the call over to Steve Lasota for a few brief — for a brief review of our financial results for the quarter. Steve?

Stephen A. LasotaManaging Director and Chief Financial Officer

Thanks, Jeff. For the fourth quarter of 2020, GAAP revenue was up 79% year-over-year to $502.9 million from $281.1 million. We reported GAAP net income attributable to common stockholders of $90.5 million or $2.98 per diluted share, up from GAAP net income of $3.5 million or $0.11 per diluted share in the prior year period. In the fourth quarter of 2020, GAAP compensation and benefit expenses were $277.4 million, an increase of $130.2 million from the prior year period. GAAP expenses, excluding compensation in D&A, were $117.7 million for the fourth quarter and D&A expense was $5.4 million. Fourth quarter income tax expense was $37.8 million, up from $5.2 million in the prior year period. Now turning to our non-GAAP financial measures, which we refer to as economic income and economic operating income. Please consult the earnings release and our quarterly filings for a definition of these terms as well as an explanation about how the company uses these non-GAAP measures and how investors find them useful. The remainder of my remarks will be based on these non-GAAP financial measures. As a reminder, Cowen has two reportable business segments, Op Co and Asset Co. The Op Co segment consists of Cowen Investment Management, investment banking, markets and research. The Asset Co segment consists of private investments and other legacy investment strategies. Op Co had total economic income proceeds, which we have previously called economic income revenues, of $505.6 million. Economic income was $128.6 million and economic operating income of $134.5 million in the fourth quarter of 2020. Asset Co had economic income proceeds of $7.2 million and economic operating income of $4.2 million in the fourth quarter. On an overall basis, we reported economic income of $132.8 million for the fourth quarter of 2020, up from $10.8 million in the prior year period. Fourth quarter economic operating income was $138.7 million compared to income of $16.3 million in the prior year period. Total economic proceeds increased 106% year-over-year to $512.7 million.

For the quarter, economic investment banking proceeds were up 163% year-over-year to $254.4 million. Economic brokerage proceeds were also very strong, up 64% year-over-year to $185.8 million. Economic management fees for the quarter was $16.7 million compared to $10.5 million in the prior year period. Economic incentive income was $44.4 million for the fourth quarter, up from $11 million in the fourth quarter of 2019. And economic investment income was $10.3 million versus income of $16.6 million in the prior year period. Turning now to our expenses. Compensation and benefit expense for the quarter was $279.9 million compared to $146.6 million in the prior year period. Our comp-to-proceeds ratio previously referred to as comp-to-revenue ratio decreased — declined significantly year-over-year from 59% to 54.6% of economic income proceeds. For full year 2020, it was 55.6%, down from 57.7% for full year 2019. For full year 2021, we are again targeting an annual compensation ratio between 56% and 57%, although it could vary from quarter-to-quarter. Fixed non-comp expenses totaled $39.8 million in the fourth quarter, up from $36.3 million in the prior year period. The increase was due in part to higher professional and service fees, partially offset by lower occupancy and equipment costs. Variable non-comp expenses in the fourth quarter of 2020 were $44.1 million compared to $38 million in the fourth quarter of 2019. The increase was due to higher brokerage and trade execution costs from increased volumes, partially offset by lower travel, entertainment and business development expenses. For the first quarter of 2021, we would expect T&E and business development expenses to be significantly lower year-over-year, given the virtual work and conference environment. We’ll likely see an increase in those expenses starting in the third and fourth quarters. Fourth quarter depreciation and amortization expenses were $5.9 million compared to $5.5 million in the fourth quarter of 2019. Taking a look at our full year 2020 results, we generated record economic operating income of $335.9 million or $11.38 per common share.

Turning to the balance sheet. At quarter end, the company had invested capital in Op Co totaling $722.8 million. During the fourth quarter, we sold all of our common shares in Nikola Corporation, resulting in a negative quarterly mark of $6.3 million but realizing a total gain over the duration of the investment of $27.8 million. We continue to hold a small portion in Nikola warrants in our merchant banking portfolio. The merchant banking portfolio also contains approximately 600,000 shares of AppHarvest, which went public earlier this month. In Asset Co, we had invested capital totaling $131 million at the end of December, down from $136.9 million at the start of 2020 as the increase in value of our Linkem investment was offset by writedowns in our legacy real estate holdings. During the fourth quarter, we retired $47 million of our outstanding convertible notes. And in the coming months, we’ll be looking at additional options for optimizing our capital structure and reducing our overall interest expense. Turning to our equity. Common equity, which is stockholders’ equity less preferred equity, was $868.2 million compared to $708.5 million as of December 31, 2019. Common book value per share, which is common equity divided by total shares outstanding, rose 23% year-over-year to $32.34 as of December 31, 2020. Tangible book value per share was $25.95 at quarter end, up 39% from the end of 2019. Return on common equity was 43.4% for 2020, well above our target of generating mid-teens return on common equity. As we noted in the release this morning, our Board of Directors maintained our quarterly cash dividend of $0.08 per common share.

During the fourth quarter, we repurchased 165,000 shares for $3.9 million, including purchases executed according to our existing 10b5-1 plans. For full year 2020, we repurchased 3.1 million shares for $47.3 million. Given Cowen’s strong performance in 2020, we also expanded our stock compensation plan providing all of our employees with a share grant in order to further encourage long-term alignment of our team members and shareholders. Looking ahead, we intend to buy back shares in an amount sufficient to keep the share count at least flat on an annual basis. We may make additional share repurchases opportunistically, weighing the impact of buybacks on our overall available cash flow as well as prevailing market and business conditions. Also, please note that at the start of 2021, our net DTA was $9 million with virtually no NOLs remaining. As such, we expect that we will start paying cash taxes in 2021 on a consistent basis with an effective tax rate estimated in the range of 27% to 31%, depending on the nature and geographic sources of our income. Our cash tax payments will also depend on the timing of the realization of our deferred tax asset and liabilities. Once we become a cash taxpayer, our calculations of economic income and economic operating income will be made on an after-tax basis.

With that, I’ll turn the call back over to Jeff.

Jeffrey M. SolomonChair and Chief Executive Officer

Thanks, Steve. While 2020 was a record year for Cowen, we believe we are well positioned for continued momentum through 2021. We have made the investments necessary to succeed in our multiyear growth areas, and our collaborative approach is resonating with our clients, both existing ones and new ones. As I mentioned earlier, our deal pipeline is at record highs, and we expect that the record number of SPACs coming to market will provide meaningful opportunities for M&A mandates going forward, as more companies consider the structure as an alternative that is attractive to traditional IPOs. We believe the market has not yet fully caught up to the reality of our business momentum, given that Cowen stock is still trading below book value and at a very attractive earnings multiple. We will continue to repurchase shares opportunistically in 2021 to take advantage of this valuation gap, which we expect to disappear over time. While our fourth quarter and full year results are remarkable, they are even more so considering that over 90% of the Cowen team continues to operate via remote work, while maintaining high levels of productivity. We expect COVID vaccines to become widely available in the second half of 2021. And as chaotic as the rollout has been, we shouldn’t lose sight of the fact that it is nothing short of a scientific miracle that we have not one, but several effective vaccines being deployed just one year after the coronavirus was first sequenced. Once vaccine availability improves and we approach herd immunity, we expect that we will have significantly more of our team back in our offices. However, in making those determinations, we will continue to use the same guiding principle that has served us so well over the past year. The safety and health of our colleagues and their families come first. Longer term, we will continue to assess our future real estate needs based on a combination of remote, hybrid and fully on-site employees.

And with that, I will open it up for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Michael Brown from KBW. Your question please.

Michael BrownKBW — Analyst

Hey, good morning. Jeff, how are you?

Jeffrey M. SolomonChair and Chief Executive Officer

Good. How are you.

Michael BrownKBW — Analyst

Good. So a lot of commentary in your prepared remarks. I appreciate all of the color on the quarter and then the momentum you’re already seeing in 2021 here. Maybe if we could just start with the brokerage business, I guess, that was kind of a surprising update that revenues per day have actually exceeded the 2020 fourth quarter levels. Can you just help us parse through that? Is that really just — how much of that is kind of what the market is giving you versus how much is really some of the growth in, say, like the non-U.S. revenues or outsourced trading, some of the other ancillary products that you’ve kind of grown and developed recently? Just trying to understand how those dynamics are playing out here.

Jeffrey M. SolomonChair and Chief Executive Officer

So it’s a good question. I mean, I think we’re certainly seeing the benefit of what we call our institutional services business, which is a little bit less volume dependent. Obviously, the growth in prime brokerage and outsourced trading, our securities lending businesses, these are businesses that really where we’re taking share by adding clients. Those clients have grown. Our debit balances have grown. We’ve started to offer, on a selected basis, a swap capability that allows us to open up another avenue of revenue for clients to pay us. So I think that’s part of what you’re seeing. But I also just — when you think the areas in which we have expertise continue to remain robust. Obviously, SPAC trading has been pretty robust. And for the foreseeable future, I think that makes a lot of sense when you think about how we’re doing. But honestly, every business is up. And our cash equities business, our electronics business, our European business, and I think that’s a function of our market position. And we’re super grateful for that. Obviously, I think it’s a reflection of a lot of hard work and a lot of years of planning to be able to be there for clients when they need us. And so what we’re experiencing, I think, is a function as much of our market position and our expertise as anything.

Michael BrownKBW — Analyst

Okay. Great. Maybe just a quick follow-up on your comment there. Obviously, the SPAC dynamic has been a very powerful one and you guys have certainly been well positioned to benefit from the uptick in activity there and you have great capabilities in the space. How do you — and when we think about your total revenues here from the capital raising side, the advisory side and the trading piece of the business, have you looked into kind of what proportion of your revenues are really coming from SPAC to take all of those pieces together to just become such an important dynamic that it would be helpful to know how you think that — how much of that contribution is coming through the revenue line?

Jeffrey M. SolomonChair and Chief Executive Officer

Yes. I think that’s something that we actually — we haven’t looked at it that way because I will say there’s different attributes of the SPAC business. So our SPAC trading business has increased in part because there’s just so many more SPACs. So we continue to be the leading trader of secondary — in the secondary market of SPACs. So the fact that there’s so many more of them is driving that part of our business, whether we’re underwriting them or not. And so that’s kind of what drives that aspect of the business. And when I look at the banking revenue, most of the banking revenue that we’re getting is from De-SPAC transactions and back-end transactions and capital raising associated with the De-SPAC transactions. A lot of people tend to focus on SPAC IPOs, that’s actually the — from a banking standpoint, not really the big revenue generator. So when we look at how much SPACs were as a percentage of our banking revenue last year, it wasn’t as much as I think everyone thinks it is. In fact, I would argue that the SPAC revenue this year stands to be a lot greater as we see more exits that are going to occur where we’re getting back-end fees as well as advisory fees and financing fees associated with the De-SPAC process. The two transactions that have already closed this year, Nuvation’s merger with Panacea, AppHarvest merger with Novus, these are pretty significant fee events for Cowen. And so I would expect that we’ll see more of those because every time you see a SPAC back-end where Cowen is an advisor in some capacity is meaningful.

Michael BrownKBW — Analyst

Okay. Great. And Steve, I appreciate the commentary on the DTA and the fact that you’ll be — economic income will be on an after-tax basis now going forward. Apologies if I missed it, but did you update the guidance now on the returns is — I think previously, you were targeting a mid-teens ROTCE, which was essentially a pre-tax basis since you weren’t paying cash taxes. Is it fair to assume that, that you could actually still do a mid-teens ROTCE? Is that a fair target going forward or is that something you guys are still kind of working through and may update at a later date?

Stephen A. LasotaManaging Director and Chief Financial Officer

Yes. I mean, we’re still talking about ROE on a pre-tax basis. But obviously, with our tax rate being roughly 27%, 28%, we can run the math. But — and then with 2020 being so good, we’re obviously well above that mid-teens target, but the target is still on a pre-tax basis.

Jeffrey M. SolomonChair and Chief Executive Officer

Yes, the mid-teens target was pre-tax. So I think we’re trying to be consistent, right? When we said that our overall a pre-tax rate years — in previous years, we’ve given that sort of as our target goal, those are pre-tax numbers because we weren’t a taxpayer and economic income is a pre-tax measure. So obviously, when you look at the delta between our economic income numbers and our GAAP net income numbers, the big delta there is taxes. And so certainly, in this year, obviously, we blew through that number. But we feel like our business has the ability to — much more sustainability on resilience going forward. So just based on the size and the scale of it, so I think we should be able to hit those targets at least for the foreseeable future.

Michael BrownKBW — Analyst

Okay. Great. I’ll leave it there and I’ll be back in the queue. Thanks.

Operator

Thank you. Our next question comes from the line of Steven Chubak from Wolfe Research. Your question please.

Steven ChubakWolfe Research — Analyst

Hey, good morning. Thanks for having me asking questions. So wanted to start off on the ECM backlog. You cited the record M&A backlog. Commentary there was quite encouraging. You’re coming off an incredibly strong year for ECM. Just wanted to get a sense as to how the backlog compares today versus pre-COVID levels? And what’s your expectation, Jeff, just in terms of the sustainability of some of the recent momentum, just given you have such tough comps you have to deal with in 2020?

Jeffrey M. SolomonChair and Chief Executive Officer

Yes. So I think when we look at our equity capital markets business, so I just want to remind everybody that the biggest part of that business is follow-on offerings. And I always say, when we talk about our backlog numbers, particularly for biotechnology, those revenues rarely get into backlog because a company has positive clinical results, they decide to do a financing. It gets into backlog for maybe like a day, and then it gets out of backlog because we execute very quickly on them. So when we really talk about our backlog numbers, whether that’s in ECM, GCM or in — or our advisory business, we’re really talking about IPOs, debt advisory and debt financing businesses and our M&A backlog. And so that just gives you an indication primarily of the level of revenues outside of biotech follow-on offerings. And I think it’s really important to understand that dynamic. We see the driver of biotechnology continuing to be in place more so maybe than ever before. The capital flows suggest that there’s readily capital — sort of capital readily available to invest in new companies. New company formation is happening at an increasing pace. Some of the estimates I’ve seen or that there were 300 Series A financings done for biotechnology companies last year that those were all — some portion of those companies will be accessing the public markets.

They’re doing so at an increasing pace. And so when I look at the dynamics that sort of underpin our backlog, it continues to be pretty strong. As it relates to follow-on offerings, the more successful the companies are with clinical results, the more money they raise and that’s really been the highlight of it. We were involved earlier this month, with a company called Rgenix that did a $1 billion follow on. And that $1 billion follow-on is one of the largest equity financings in the history of biotechnology, and Cowen is the only investment bank that has been on every cover as a book runner since the IPO. And that’s really, I think, is critical to our success. It’s really servicing the clients that we have, making sure that we’re doing everything we can to continue to help them along their journey and then selecting new clients who we think can be really amazing over the next decade, but the dynamics that we’ve seen remain in place. And I’m not saying that it will be this way every quarter. But I do think that when you take a look at, over the next few years, I just — it’s hard to see the dynamic around this space changing meaningfully.

Steven ChubakWolfe Research — Analyst

Thanks for that, Jeff. And maybe just switching gears to capital management, the business has been performing well. You exited 2020 with a very strong liquidity and capital position. The buyback in 4Q was maybe a little bit lighter than we expected, especially given some of your comments around business momentum and how you’re thinking about valuation. I was hoping you can give us an update just in terms of capital management prioritization. And given some of the remarks alluding to capital structure optimization, in particular, what sort of quantum of interest expense savings should we be contemplating if you were to take action around — taking out some high-cost debt and refinancing?

Jeffrey M. SolomonChair and Chief Executive Officer

So let me start, and then I’ll turn it over to Steve. So I think we have to look at what we did with the convertibles as well as our stock buyback for the fourth quarter. We bought back a bunch of convertibles. So for us, that’s reducing future dilution. And we had an opportunity to do that, and we took advantage of that opportunity. So when you aggregate both the common stock buyback and the retirement of convertible debt, it’s pretty meaningful amount of money and it should give you an idea that we have multiple ways to think about optimizing our balance sheet. And obviously, I’m not going to comment on how things will look by the end of the first quarter. But some of those opportunities remain available to us, and we’ll continue to look at the way to return capital to shareholders. I mean, whether we’re buying back stock, paying dividends or retiring debt that’s expensive or retiring convertible debt that’s dilutive and deepen the money, all of those are really accretive to EPS and really accretive to our earnings going forward. And that’s — there are effective ways for us to continue to drive value for shareholders. Steve, I don’t know if you have anything you wanted to add to that.

Stephen A. LasotaManaging Director and Chief Financial Officer

No. We spent over $47 million of taking out converts. There’s $88 million left. And we’re looking at some of our debt is a bit expensive, and we’re looking at other opportunities to decrease that interest expense.

Steven ChubakWolfe Research — Analyst

Great. And just one final one for me on the corporate tax rate. You guided to 27% to 31%, that rate is a bit higher than where most of your peers are running. I was hoping to get some color as to what’s driving some of the upward pressure on your tax rate, recognizing there’s always idiosyncratic factors to consider and whether there’s any room to optimize the rate that you’re paying, now that you’re going to be a cash taxpayer and maybe there’s — that’s an increased area of scrutiny for your focus internally.

Stephen A. LasotaManaging Director and Chief Financial Officer

Sure. I mean we’ve been working toward this for a number of years. But from a tax rate perspective, it’s really state apportionment and even country apportionment that affects that rate. And it’s also when assets and liabilities from a tax perspective, when certain things like we don’t have much for NOLs left, but it depends when some of these deferred tax assets or deferred tax liabilities are going to turn, and we’re also looking at opportunities to decrease that effective tax rate. One thing research and development tax credits, there are credits available that we will pursue to decrease that tax rate.

Steven ChubakWolfe Research — Analyst

That’s great Steve and Jeff. Thanks for taking my question.

Jeffrey M. SolomonChair and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Sumeet Mody from Piper Sandler. Your question please.

Sumeet ModyPiper Sandler — Analyst

Hey, good morning guys. Wanted to get your opinion or if the cannabis team has put out any opinions on the new administration and maybe the effect that could have on accelerating the pace of legalization federally and what your thoughts about what that could mean across the business lines?

Jeffrey M. SolomonChair and Chief Executive Officer

So our current view is that that’s not necessarily a high priority for the administration, although this administration is more likely to consider cannabis legalization or at least relaxing some of their rules around allowing banks to finance cannabis, sort of the difference between the SAFE Act and the STATES Act or some version of that. It’s not something we think is a top priority. Obviously, the administration’s top priority they’ve already outlined are first, second and third COVID relief and vaccines. I think they could get to it. And I think there’s definitely a social justice aspect of it that needs to be addressed. And I think it’s unlikely, in our opinion, that you get cannabis legalization without meaningful mass incarceration reform and — or I would say that there has — that has to be addressed. And I happen to agree with that, by the way. I just don’t see how we have legalization of cannabis sales in this country without meaningful change in the laws and relating to mass incarceration of individuals, particularly individuals of color. And so we should have — we should be able to find a holistic solution here. I do believe that cannabis is a unifier in the sense that red states, blue states, people of all backgrounds do see the benevolent power of cannabis, if used appropriately. And so there is a groundswell of support for a federal legalization, but just a number of things have to be addressed. And so I don’t think it’s imminent, but I certainly think it’s more probable under a Biden Administration than it was under a Trump Administration.

Sumeet ModyPiper Sandler — Analyst

Okay. Great. Thanks. And then just shifting gears to the asset management business, I know you guys recently closed CHI3. Just as we think about 2021 kind of fundraising, are there any new strategies you guys are thinking about anything for CSI or CHI4? How should we think about that?

Jeffrey M. SolomonChair and Chief Executive Officer

So I think we’ll continue to focus on the areas where we have expertise. We’ve said pretty consistently that we might have room for one strategy a year, if we can find one. We continue to look at a bunch of them. It would have to be something where the bar is pretty high, and it will be more focused on private equity style investing than it would be on hedge fund investing, I think, is fair to say. We continue to see really strong momentum for account sustainable investments. Certainly, the end of the year last year as we had a closing, I think we continue to see strong momentum into the beginning of this year. That’s pretty remarkable. That strategy was launched initially three years ago, and it’s going to be a very meaningful part of our future provided that we can deploy capital of positive returns, which I think we can. And so we’re in the luxurious position of being selective. We don’t — we’re not really sort of gated by this idea that we have to be the biggest.

I just think we have to be profitable and smart and adding really, I would say, highly distinguished and distinguishable unique alpha product for investors. And the good news is, when you look at the caliber of the investors in our most recent funds, like who they are and the amount of capital that they have and the experience that they’re having, both in healthcare investments as well as in talent sustainable investments, if we’re developing new product, those doors will remain open to us. And I can’t think of a time in our history, at Cowen Investment Management, even dating back to the Ramius days when the caliber of LP in our funds has ever been higher, just in terms of the access to those flows. So the team has done a great job across the board, and we’re going to do everything we can to reinforce that by focusing on quality instead of quantity.

Sumeet ModyPiper Sandler — Analyst

Alright. Great. Thanks for taking my question.

Jeffrey M. SolomonChair and Chief Executive Officer

Thanks. Good to hear from you, Sumeet.

Operator

Thank you. Our next question comes from the line of Devin Ryan from JMP Securities. Your question please.

Devin RyanJMP Securities — Analyst

Hi. Great. Good morning Jeff and Steve, how are you guys?

Jeffrey M. SolomonChair and Chief Executive Officer

Good, Devin. How are you?

Devin RyanJMP Securities — Analyst

Great. Most questions have been asked. But maybe just to dive in here a little bit more on investment banking commentary. Clearly, just a terrific year, terrific quarter and we can see the data around this year starting on a very good note. As we think about Cowen’s market share and how that’s evolved over time here, I mean, clearly, you guys are gaining market share in the industries that you’re in, but then you’re also in areas — strong in areas like healthcare that have been very active. And so I guess I’m just trying to think about and maybe how you would frame how your market share has been evolving, kind of where you feel like you’ve really picked up share relative to maybe the competition? And then also, as you look forward, kind of the areas that you feel like maybe just based on where you’re making investments or where you’re seeing momentum where there’s the most incremental market share opportunities ahead? And I’m really thinking most about kind of the investment banking businesses.

Jeffrey M. SolomonChair and Chief Executive Officer

I think it’s interesting. We do look at share numbers, but only sort of as outputs, right? I think it’s good to look at the scoreboard and see us winning and certainly taking a bigger share in areas like advisory fees and certainly looking at our market share in areas like healthcare ECM and things like that. But I want to say, I think the secret behind our success is our ability to pick industries that are undergoing transformation and having a deep knowledge of those industries and an ability to build a product suite that addresses those industries. And that’s just not something — you can’t wake up tomorrow and decide you want to be in certain industries and then be able to develop product around those industries. So when you look at the success that we’re having, it’s about growing what the clients have as much as it is about taking on new clients. Our clients, as they get bigger and more mature, they’re looking for different products. Some of our clients, when we’re going in and providing strategic advice to them, it’s strategic advice blended with financing advice. There aren’t very many banks that can approach a client and say, listen, we can be holistic in the way we’re addressing your needs, and we can give you our best advice and figure out the best way to execute for you.

And once we decide on what that path is, there just aren’t very many that do it at scale like we do. And so it’s been about, I’d say, first and foremost, selecting the right industries. And then like biotechnology, like sustainability, like the transformation that’s going on in the industrial complex and energy transition and all of these things that we think are going to play out over the next decade. And then finding the companies that we think are the leaders in those areas and building meaningful and deep relationships with them so that we can address their needs and build our competencies and our product capability to address their needs as they evolve. That’s basic strategy. We’ve been fortunate that we’ve been right about that. And we’ve been saying it for years that if financial investors want to play growth that we have to build a mechanism for them to play growth, and this is what we aim to be one of the very few financial stocks where financials investors can find an opportunity to actually grow along with the economy. And so that’s why we don’t do a lot of lending. That’s why we don’t have a big net interest margin business. Those are not necessarily growth areas. That’s why we don’t really use a lot of balance sheet. It’s really about intellectual capital, and we think there’s a moat around that. It’s hard for somebody to wake up tomorrow and decide they want to be in that, not that people won’t over time, but we intend to be able to press our advantage in the areas where we have domain expertise so that people can’t catch up.

Devin RyanJMP Securities — Analyst

Got it. I appreciate the perspective there, Jeff. And then maybe a follow-up here on your outlook for operating margins, maybe a little bit of embedded revenue prediction in here as well. But the firm had a terrific year there, 20% — almost 25% on the operating margin. And just trying to think about how you guys are managing the business to a margin or if now that we’ve kind of hit these new levels kind of north of 20%, if you think about is 20% a good bar or higher to be at? Appreciating Steve’s commentary about expenses in the first half of the year remaining low and maybe creeping back up. Just how you guys are thinking about the operating margin going forward and managing the business?

Jeffrey M. SolomonChair and Chief Executive Officer

So I’ll start, then I’m happy to turn it over to Steve. We’re definitely benefiting from working from home, right? We’ve had meaningful cost savings from our noncomps for the lack of travel and an increase in kind of the — increase in margin because we’re not doing conferences in person. I think everybody has seen that. And I think as Steve mentioned on the call earlier, we’re going to be in a position where we have a great comp in the first quarter because first quarter of 2020 had a full suite of travel and also our most — it’s also our most expensive conference quarter. So we have at least one more quarter where we’re going to comp a reduction in non-comp expenses relating to travel and entertainment and conferences. Going forward, it’s hard to see how we return to the same level in the aggregate, I just think people are going to travel less. And I think we’re seeing tremendous connectivity in some of the virtual events we’re doing. And so we’re not going to stop doing them. I think clients really appreciate them. It’s an efficient way for them to glean and garner information. I still think we’ll do conferences in person, but I think they’ll be — we’ll have to reinvent how that happens and take a look to see, certainly, the networking part of that is going to be a big part of it, but it’s not going to be probably to the same extent.

And so going forward, our, I would say, non-trading non-comp expenses, right? You’ve got to break out our variable expenses into two buckets. The one is related to trading, which we expect to continue to increase as our numbers increase in revenues. And the one is not, I would say, as we hit to the back of the year, we’ll see a pickup in some expenses, and therefore, some margin shrinkage, but we’re not going to go back to the same level of non-comp expenses as a percentage of revenues. And the reason is because we’ll be traveling less, and we’ll be able to take advantage of the reduction in the overall spend, but also our revenues are so much higher than they used to be. And so we’re finally in that spot where we’re hitting non-comp expenses that are in and around the same as our peer group, and that feels pretty good. And so I would say as we manage our margins going forward, that’s our biggest — that has been our biggest differentiator between us and the other people who in our comp group is that we just have bigger non-comp expenses. And so I would expect us to see — we’re not going to be going back to the levels we had prior to 2020. Steve, do you have anything to add to that?

Stephen A. LasotaManaging Director and Chief Financial Officer

Yes. Just as we’ve talked about in the past a little bit, in the short term, the variable non-comps because of T&E and client development, as Jeff said, will remain low. The first half of the year will start to pick up a little bit. But we’ve obviously learned a lot from this, and they’re not going to go back to the levels of 2019. In the longer term, the fixed non comps, I think, our real estate footprint, especially in the expensive areas like New York and Boston and San Francisco will decrease and we may get space in some of the satellite areas, it’s going to take a little bit longer for that to happen because of the leases and things that we have. But for instance, we have a lease in a building that’s running off soon, we’re not going to renew that. So there’s things like that, that will take a little bit longer, but I think there’s definitely room in the fixed non-comps to come down as well.

Devin RyanJMP Securities — Analyst

Yeah. Okay. That’s terrific. I’ll leave it there guys. Thanks so much.

Jeffrey M. SolomonChair and Chief Executive Officer

Thanks, Devin.

Stephen A. LasotaManaging Director and Chief Financial Officer

Thanks, Dev.

Operator

Thank you. Our next question is a follow-up from the line of Steven Chubak from Wolfe Research. Your question please.

Steven ChubakWolfe Research — Analyst

Hi, thanks for taking the call. Jeff, just wanted to dig into some of your earlier comments around how well positioned you are for this SPAC opportunity. Certainly, there’s — we’ve seen record fundraising there. I would also note that that’s probably one of the stats that’s cited most often in terms of thinking about how bubblish the current market is at the moment. I was hoping you can give some perspective on how you’re thinking about SPAC fundraising over the long term. And more specifically, do you see us at least hitting an inflection point here just given the step-up that we’ve seen recently? And if you could just talk to the competitive landscape, how are the folks that don’t have a strong hold or a real foothold in this area looking to take some of that market share as that pie continues to grow?

Jeffrey M. SolomonChair and Chief Executive Officer

Well, I certainly can’t speak to the strategy of our competitors. I can speak to our strategy, which is we continue to focus on taking teams public that we think have access to unique deal flow. I’m not going to speak to the volume of SPACs. I just — I think there’s really not much to taking a SPAC public in the sense that there’s not a lot of heavy lifting that has to go on to get a SPAC public. And I think we were probably seeing some people get access to the market that maybe don’t have unique deal flow. I don’t know who those people are, but what we continue to do, at Cowen, is focus on the quality of the teams we’re backing so that we think we have a high probability of being — having successful outcomes on the back end. And I would say this is really no different than when you screen for IPOs. I think every time there’s a slew of IPOs, the media and the public gets concerned about volumes and invariably there are other banks who actually have taken companies public prior to their ability to be public. Our job is to find high-quality alpha generating management teams that can access companies that deserve to be public.

And I would say just — there’s still about 100 — it’s like $100 billion in trust, which probably means there’s $500 billion of potential buying power for private companies, that’s still pretty small. When you take a look at the overall market capitalization of the equity markets, public and private, it’s still pretty small. What I would say to everybody in the industry is just make sure you’re taking companies public that deserve to be public. It’s the same screen, and that’s what we do. And so it’s easy to get caught up in it because it’s the flavor of the month and — but I also happen to think it’s — when you look at a caliber of people, certainly the ones that we’re dealing with and the caliber of a number of folks who’ve taken SPACs public, they are incentivized to make sure they’re doing deals with good companies because that’s really where their alpha is. And so we’ll continue to do that same thing because at the end of the day, that’s how we will be held accountable. It will all be in the success of the outcomes at the back end, not in your take companies public at the front end. That’s not really a differentiator. Does that make sense, Steven?

Steven ChubakWolfe Research — Analyst

No, that makes perfect sense, Jeff. It’s really interesting color. I know you could provide some helpful context on the market. So I appreciate you taking the follow-up.

Jeffrey M. SolomonChair and Chief Executive Officer

No problem. Thank you for the question.

Operator

Thank you. Our next question is a follow-up from the line of Michael Brown from KBW. Your question please.

Michael BrownKBW — Analyst

Thank you for taking my follow-up as well. And it somewhat builds on your last point there, Jeff. You guys had some commentary on AppHarvest. Obviously, it’s a great story. It was a good transaction for you guys. Just wanted to double check a couple of things related to that, though. So when you think about AppHarvest is it similar to kind of Nikola in that you don’t necessarily plan to see this as some sort of long-term investment at some point, do you plan to exit that? And what are kind of the lockups associated with that position? And then two, do you — what is the cost basis there? Is it kind of like $1 a share? Is that the right way to think about it? And then I guess the last piece is, will you comp — accrue comp against the markup for AppHarvest? Thank you.

Jeffrey M. SolomonChair and Chief Executive Officer

Yes. So listen, not specific to AppHarvest, I mean, I think we’ll continue to follow the same strategy we’ve been following. Obviously, AppHarvest is a very special company, which is part of the reason why I highlighted it. At the beginning, we were involved with AppHarvest prior to the SPAC. So we advised them prior to doing a SPAC merger. We advised them on a capital raise. And so we have a reasonably low basis, but because we participated in that financing with our balance sheet. But our goal here, when I think about it is to — it’s a great example of a company that just would not have had access to the amount of capital to build out the kind of footprint that it intends to build out without access to the public markets. And I think when we look at — of the growth of AppHarvest, they’re really well set up, and we intend to be a long-term partner for them, which is why we made the decision to reinvest in the community and return some of the revenues we generated to the community by building it out. This is a long-term play for us. I think it fits very nicely into the theme that we articulated that we think is really important, which is there’s a lot of capital that sits at the coasts, and we know that’s the case. And it’s really hard for people in the middle of the country to access that capital.

And so when you find a really talented management team and a visionary like Jonathan Webb, and he — what we bring to the table is access to the public market capital and to some of the biggest and brightest public market investors, we want to be able to bring that skill set and the ability to articulate the AppHarvest business model to the public markets. And obviously, our research team has to feel constructive about that. I mean, because research independence at the end of the day is the only thing that matters in our business. So if Jeff Osborne and the team couldn’t really get comfortable with the business model then it would have been hard for us to be as proactive. But I think when you look at our interactions here, what we ultimately end up doing with our capital as it relates to this is not really relevant as much as it is, our ability to maintain our commitment to finding — to AppHarvest through its life cycle as it builds out a half a dozen to a dozen facilities and to really look for other companies like AppHarvest that have breakthrough technologies or the ability to build economic development zones, where we can bring to bear our capital and the capital from — that we have access to, to do economic development to the private sector. That’s got to be central to our theme, and AppHarvest is maybe the first and most visible example of that. But I think there’ll be more behind it.

Michael BrownKBW — Analyst

Okay. And just to clarify, any commentary on when you may look to exit that positioning? And then again, do you plan to accrue a comp against it?

Jeffrey M. SolomonChair and Chief Executive Officer

We’ll do the same thing that we’ve been doing all along whenever we’ve had — whether it’s Tilray or Nikola or any of the investments that we’ve had, we’ll follow the same path that we have. Again, I just think there’s a — again, this is not uncommon for us. We have small investments on a lot of our clients, certainly in the biotechnology space, too, like this happens pretty regularly for Cowen. It’s a stated objective for us to invest alongside of our clients and to put our own capital up in small increments to help companies we have a high degree of conviction in, and we’ll follow the same path around liquidity. We’ve said over and over again, that balance sheets are meant to be seen, not heard. But we think that our ability to invest in these businesses is part of why people like Cowen. It gives them an opportunity to participate in things that they wouldn’t otherwise be able to participate in. It’s really hard for public market investors, especially in the financial space, to get access to these companies. And we are really an access point for financials investors to get access to growth companies. We can do that, provided that we’re mindful of the fact that our goal is to return that capital to shareholders over time. And so there’s opportunities for us to monetize those assets in due course. We’ll follow that path and, of course, we will accrue compensation along the way because that’s what we do. So it won’t be any different than kind of what we did with Nikola or Tilray or any of the dozens of biotechnology companies that we’ve invested in over the last six or seven years.

Michael BrownKBW — Analyst

Okay. Great. I appreciate for taking the follow up. Thank you.

Jeffrey M. SolomonChair and Chief Executive Officer

Okay.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Jeffrey Solomon for any further remarks.

Jeffrey M. SolomonChair and Chief Executive Officer

Well, thank you so much, everybody, for taking the time. It’s a long call, and I hope that is indicative of sort of people’s patience. A lot of good questions and appreciate all the attention. I just — I’d like to thank — in closing, I’d like to thank the team here at Cowen for demonstrating your continued commitment to our core values of vision, empathy, sustainability and tenacious teamwork. Oftentimes, people give me the credit for those words. I will just say that is just a reflection of who we are. If we’ve done anything at Cowen from a senior management level, it’s just to identify the culture and be able to label it as such. The folks at Cowen, you know you live in the way and you walk in the way every day. And so I just want to thank you for your dedication to helping our clients continue to outperform. I’m grateful for all that you do, and I’m looking forward to seeing more of you in person later this year. It’s been an interesting year for sure and one that is for the record books. But I do miss you every day, and I can’t wait to be able to be back with you in person. Thank you all for joining us, and we look forward to speaking with you on our next call. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Jeffrey M. SolomonChair and Chief Executive Officer

Stephen A. LasotaManaging Director and Chief Financial Officer

Michael BrownKBW — Analyst

Steven ChubakWolfe Research — Analyst

Sumeet ModyPiper Sandler — Analyst

Devin RyanJMP Securities — Analyst

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