Cowen Inc. (NASDAQ:COWN) is a diversified financial services firm that provides investment banking, research, sales and trading, prime brokerage, global clearing, securities financing, commission management services, and investment management through its two business segments: the Operating Company ("Op Co") and the Asset Company ("Asset Co").
Business Overview
The Op Co segment consists of four divisions: Cowen Investment Management ("CIM"), Investment Banking, Markets, and Research. The CIM division includes advisers to investment funds, while the Investment Banking, Markets, and Research divisions collectively make up Cowen's investment banking businesses. These businesses offer industry-focused investment banking, domain knowledge-driven research, sales and trading platforms for institutional investors, global clearing, commission management services, and a comprehensive suite of prime brokerage services.
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 in this segment.
Cowen's principal sources of revenue are investment banking fees, brokerage revenues, management fees, incentive income, and investment income. The company's investment banking revenues are directly linked to underwriting fees, private placement fees, and success fees earned in mergers and acquisitions advisory. Brokerage revenues include commissions, principal transactions, equity research fees, and trade conversion revenue. Management fees are earned from the company's investment management business, while incentive income is generated based on the performance of certain investment funds and accounts. Investment income includes realized and unrealized gains and losses from the company's proprietary trading and investment activities.
Financials
For the full year 2022, Cowen reported annual net income of $76.5 million, annual revenue of $1.54 billion, annual operating cash flow of $171.6 million, and annual free cash flow of $159.1 million.
In the latest quarter (Q3 2022), the company generated revenue of $410.8 million, down slightly from $412.2 million in the prior-year quarter. Net income attributable to Cowen Inc. was $14.4 million, compared to $37.8 million in Q3 2021. Operating cash flow was $74.5 million, and free cash flow was $62.1 million.
The decrease in quarterly revenue was primarily due to a $119.1 million decline in investment banking revenue, partially offset by a $4.1 million increase in brokerage revenue and a $101.9 million increase in interest and dividends. The lower net income was driven by a $48.5 million decrease in securities principal transactions, net, and a $69.9 million decrease in carried interest allocations, partially offset by a $32.3 million increase in total investment income (loss).
Segmental Performance
The Op Co segment generated $963.6 million in economic proceeds for the first nine months of 2022, down from $1.43 billion in the prior-year period. This decrease was primarily attributable to a $424.7 million decline in investment banking economic proceeds and a $47.3 million decrease in incentive income economic proceeds, partially offset by a $10.9 million increase in other income (loss) economic proceeds.
The Asset Co segment reported economic proceeds of negative $22.5 million for the first nine months of 2022, compared to $3.1 million in the prior-year period. This decline was mainly due to a $14.9 million decrease in investment income (loss) economic proceeds and a $10.5 million increase in incentive income (loss) economic proceeds.
Liquidity
As of September 30, 2022, Cowen had cash and cash equivalents of $909.8 million and net liquid investment assets of $1.3 billion, which includes cash and cash equivalents and short-term investments held by foreign subsidiaries. The company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in the United Kingdom, Malta, Germany, Switzerland, Israel, Canada, and Hong Kong.
Cowen's primary sources of liquidity 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. As of September 30, 2022, the company had $840.7 million in total debt outstanding, including $621.9 million in notes payable and other debt.
Regulatory Capital
Cowen's broker-dealer subsidiaries are subject to various regulatory capital requirements. As of September 30, 2022, Cowen and Company had $408.8 million of net capital in excess of its minimum requirements under SEC Rule 15c3-1, Cowen Financial Products had $53.1 million of net capital in excess of its minimum requirements under SEC Rule 18a-1, and Cowen International Ltd and Cowen Execution Ltd exceeded the minimum capital requirements set forth by the U.K. Financial Conduct Authority.
Risks and Challenges
Cowen's business and financial performance are subject to various risks and uncertainties, including market conditions, competition, regulatory changes, and the ongoing COVID-19 pandemic. The company's investment banking and capital markets businesses could be adversely affected by market volatility and reduced client activity. The investment management business may experience redemptions or lower performance, impacting management fees and incentive income. Regulatory changes, such as the implementation of the Investment Firms Prudential Regime in the U.K., could also impact the company's operations.
Outlook
Cowen has not provided specific financial guidance for the full year 2023. However, the company's management has emphasized its focus on diversifying revenue streams, prudent risk management, and maintaining a strong balance sheet to navigate the current market environment.
Conclusion
Cowen Inc. is a diversified financial services firm that has demonstrated resilience in the face of market volatility. The company's two-pronged business model, with the Op Co segment providing investment banking and brokerage services and the Asset Co segment managing private investments, allows for diversification of revenue streams. While the company has faced some headwinds in its investment banking and investment management businesses, Cowen's strong liquidity position and regulatory capital levels provide a solid foundation for weathering the current market challenges. Investors will be closely watching the company's ability to adapt its strategies and capitalize on opportunities in the evolving financial services landscape.