Cowen inc (COWN) Q3 2021 Earnings Call Transcript

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Cowen inc (COWN)
Q3 2021 Earnings Call
Oct 29, 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 third quarter of 2021. By now, you should have received a copy of the earnings release, which can be accessed at investor.cowen.com. [Operator Instructions]

I would now like to hand the call over to Mr. JT Farley, Cowen's Head of Investor Relations.

James T. Farley -- Managing Director and Head of Investor Relations

Thank you, Carmen. Before we begin, I would like 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 the risks and uncertainties described in our earnings release and other filings with the SEC. Cowen has no obligation to update the information presented on today's call. Also on today's call, we will be referencing certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of those measures to GAAP is consistent with the company's reconciliation as presented in today's earnings release. As a reminder, we make available a quarterly denial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release. Joining us on today's call are Cowen's Chair and Chief Executive Officer, Mr. Jeffrey Solomon; and our Chief Financial Officer, Mr. Stephen Lasota. Now I would like to turn the call over to Jeff.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Thank you, JT. Good morning, everyone, and thank you for joining us for Cowen's Third Quarter 2021 Earnings Call. Today, I'm happy to provide highlights on our strong operating performance this quarter. I will also place this performance into the broader context of how the long-term strategy we laid out just three years ago has delivered these strong results. In that spirit, I will share some details about the durability of the business we've built as well as the steps we've taken, and continue to take, to generate strong profitability consistently in a variety of market conditions. Then Steve will review the financial results for the quarter. And after that, we will be happy to answer your questions. Over the past four quarters, we have generated more than $1.9 billion in revenues, including over $1 billion in investment banking revenues, and we have generated over $10 per share in after-tax economic operating income.

That is a 36% return on common equity. This quarter, we posted $359 million in total revenues and $43 million in after-tax economic operating income for a return on common equity of 17.5%. This is the 14th of the last 15 quarters of meaningful profitability, with the exception being the first quarter of 2020. While Cowen stock has risen considerably over the past year, we believe that our valuation remains attractive. That is part of the reason we have been more aggressive in returning capital to shareholders by repurchasing shares at a record pace. But that's not the only reason. We've also long said that we would be more aggressive with capital return as we demonstrated lasting improvement in our financial and operating performance. We remain true to our word, and we believe in our ability to continue returning capital to shareholders, commensurate with our continued performance. Now let me turn to our operating highlights. The third quarter of 2021 was the second best quarter on record for investment banking revenues surpassed only by the first quarter of this year. Banking revenues were up 43% year-over-year.

And importantly, M&A revenues set a new record above $100 million for the quarter, more than three times the level in the third quarter of 2020. It was a record quarter for both our M&A and capital markets advisory practices. It was the second quarter in a row that advisory, which combines M&A and capital markets advisory revenues, comprise the majority of banking revenues at 67%. Our results in these areas are a function of the intentional approach we've taken to diversifying our business by product and sector over the past few years. We were able to achieve this despite headwinds in the equity capital markets this quarter, particularly in biotech. The industry breadth of our banking franchise was clearly evident this quarter. Sectors outside of healthcare comprised 54% of total banking revenues. The strong results from industrials, technology and the consumer sectors. Within healthcare, we continue to grow our footprint in non-biotech areas, which include tools and diagnostics, med tech, healthcare services and healthcare IT accounted for the majority of our banking healthcare revenues in the quarter at 56%.

The growth in the number of publicly listed disruptive healthcare companies, coupled with the pace of private healthcare company formation will continue to be a tailwind for Cowen for the foreseeable future. Today, there are about 650 publicly traded companies in biotech, tools and diagnostics sectors in the United States. That's more than 10% of all publicly traded company -- operating companies listed on the New York Stock Exchange and NASDAQ and is up from only 200 companies a decade ago. Cowen has a leading market share of clients in this space. There will always be fluctuations in capital markets activity in this sector. However, given our market position, we remain confident that we will be able to capture a significant proportion of the IPOs, follow-ons and increasingly debt offerings when companies decide the time is right to tap the markets or when their financing needs compel them to do so. We also saw a rebound in SPAC deals during the quarter, particularly in advisory assignments. SPAC-related revenues accounted for 44% of banking revenues in the third quarter and about 1/3 of banking revenues in the first nine months of 2021. As a reminder, most of our SPAC revenues are on the back end. In other words, pipe financings, capital markets advisory and M&A advisory during the de-SPAC process.

We're not heavily dependent on the continued growth in the listings of SPACs in order for them to be a meaningful contributor to our future revenues, with approximately 500 SPACs looking to compete -- complete transactions over the next few years, we believe that a large percentage of them will ultimately find transactions and the talent will benefit even with a small percentage of the market share. That is why we are selective in partnering with SPAC management teams, choosing the ones we believe have clear vision and strong chances of success as public companies. This selectivity is evident in outcomes. Looking at SPACs, which have gone public since the start of 2020, nearly 2/3 of IPOs, which were book run by Cowen, already have deals pending or closed, which is almost double the average for all SPACs in that period. It is also worth noting that SPAC mandates make up under 30% of our current deal backlog. Demand for advisory and capital markets issuance remains strong into 2022 away from the SPAC market. While our pipeline ended the quarter slightly below the second quarter of 2021's record levels, it is still up 15% from the start of this year and up 20% since the third quarter of 2020. We remain quite confident that our current backlog will result in meaningful revenues for Cowen over the next several quarters. Over the past several years, we have broadened our banking franchise through the acquisitions such as Quarton, and MHT, after previously adding teams from Morgan Joseph and Dahlman Rose in prior years. In addition, we've become an employer of choice with lateral hiring from across the street in every one of our sectors.

It's a good time to be at Cowen. Our diversified revenue stream in banking is a direct result of these efforts. We are always looking for great bankers that can help us to continue our momentum to deliver world-class outcomes for our clients. And we've been adding resources at the analyst -- from the analyst to the vice president levels so that we have the capacity needed for our higher level of revenue operating -- of revenue in operations. Our markets business has also remained incredibly resilient, averaging just over $2.5 million in daily revenue despite lower marketwide volumes. Again, our decision to invest in areas such as prime brokerage, securities finance and European trading are paying dividends as we continue to take meaningful share from much larger competitors. While revenues were down 4% year-over-year, most of the drop, about $4.7 million was due to the wind down of our most -- of our -- most of our clearing operations, which we decided to do to free up balance sheet capital for other opportunities, including stepping up the buyback. Highlights for the third quarter included year-over-year gains in cash and electronic trading, prime services revenues, non-U.S. execution and ADR trading. Prime services, in particular, is gaining momentum, adding nearly 40 new clients during the third quarter. Securities finance growth has also been strong this year, including our new swaps capability, which now has over 50 clients onboarded.

We continue to attract new talent, including the addition of the leading event-driven trading team in Europe during the quarter, and we're boosting our ETF trading capabilities as well. The value proposition offered by Cowen as an independent, nonconflicted partner with world-class execution and research capabilities is increasingly compelling to institutional shareholder -- institutional investors. That has translated into increased share of wall for us according to many third-party industry surveys. While we're making progress on the build-out of Cowen Digital, our digital assets initiative, we're still in the early stages. We are working on building out the legal, regulatory and technology framework to onboard clients and the engagement level among clients on the topic is very high. More to come on this front as we head into 2022. Looking at the current quarter, we are off to a good start with average daily revenue slightly above our third quarter average. In research, in the third quarter, we welcomed new senior analysts to our biotech and life sciences as well as our tools and diagnostics coverage teams. During the quarter, we had sector launches in healthcare facilities in managed care as well as sustainable food and healthy living. In total, we added coverage of nearly 90 new stocks in the quarter.

And today, we have almost 950 stocks under coverage, which is the highest it's ever been. In the third quarter, we published 13 of our flagship Ahead Of The Curve Series reports. Clients continue to value our differentiated research. And during the quarter, our team once again saw a significant gain in brokerage boats from our institutional clients. In investment management, even with the volatile environment for growth strategies, we added more than $400 million in assets under management compared to the second quarter of 2021, with most of that increase occurring in our healthcare strategy. Total AUM was $14.8 billion, which is up 25% year-over-year and up 3% quarter-over-quarter. We had a negative mark-to-market change in economic incentive fees totaling $58 million. And this is due to a drop in the value of Proterra, which is the largest investment in account sustainable investments, and we had declines in positions in the Cowen Healthcare investment strategy. Despite these marks, however, incentive fee income is still positive for the first nine months of 2021 and almost $20 million. Economic management fees were up 3% over the year to $15 million, largely due to higher AUM in the healthcare strategies as well as sustainability and activist. Those fees are net of a $3.8 million fund placement fee that we expensed in full during the quarter. Excluding those fees, our management fees would have been up more than 25% year-over-year.

Looking at our five strategies. The sustainability strategy had just over $1.3 billion in AUM at quarter end, and overall performance remains strong, even factoring in the drop in the price of Proterra. During the quarter, this strategy made its third investment in a sustainable dental products firm called quip. Our healthcare investment strategy completed two new investments and four follow-on financings and ended the quarter with just over $1.2 billion in AUM. Long-term performance remains quite strong despite the declines in public positions during the quarter. The activist strategy grew to almost $7.5 billion, even though the strategy was slightly down in the third quarter, and the merger arbitrage strategy had $321 million in AUM. The strategy did outperform the HFRX Merger Arb Index during the quarter. Healthcare royalty strategies ended the quarter with over $3.6 billion in total AUM, which is up $100 million year-over-year. Turning to our balance sheet. We had investment income losses of $20 million for this quarter, due primarily to the declines in the value in our sustainability and healthcare strategies as well as declines in some of our merchant banking portfolio. As is the case with our incentive income, our investment income is still positive on a year-to-date basis at $20.5 million.

To give you some perspective, Cowen has always had quarterly fluctuations in our incentive and investment income lines. And in every single year since the global financial crisis in 2008, we've had positive contributions on an annual basis from our combined incentive and investment income revenue line items. While noisy at time, incentive and investment income are additive to our bottom line when viewed over the longer term. These revenues benefit investors who are focused on the remarkable growth of our core business over the past few years as our investment banking and brokerage operations have increased in size and profitability and our management fee income has risen. As a result of this shift, incentive and investment income has become a much smaller part of our annual revenue mix, less than 10% of total revenues in each year since 2018. And in year-to-date 2021, it amounts to just about 3% of our revenues.

In the coming quarters, we will be providing details to give investors more insight into these revenue lines, so they prove to be less of a distraction. Before I hand it over to Steve, I'd like to share a few reasons why I continue to believe that we are well positioned to deliver consistent profitability in the years ahead. We have a proven track record of identifying opportunities in areas of the economy that are undergoing significant disruption, sectors that require capital and will have a lot of transaction activity. From our lead position in biotech, to long-standing growth sectors such as electronics and semiconductors in emerging areas such as sustainability, robotics, energy transformation and digital health, we have built deep experience in partnering with growth companies. Our research team is truly ahead of the curve in identifying these emerging trends and investment themes. We lead with research and then we bring all of Cowen's resources to bear to help companies in these ecosystems and investors in these ecosystems who are looking to understand and embrace these opportunities. Now I will turn the call over to Steve Lasota for a brief review of our quarterly financial results. Steve?

Stephen A. Lasota -- Managing Director and Chief Financial Officer

Thanks, Jeff. GAAP results for the third quarter of 2021 were as follows: Total revenues were $412.2 million, up 28% year-over-year from $321.3 million. Net income attributable to common stockholders was $36.1 million or $1.10 per diluted share, up from net income of $18.6 million or $0.62 per diluted share in the prior year period. Compensation and benefit expenses were $201.7 million, an increase of $48.3 million from the prior year period. Expenses, excluding compensation and depreciation and amortization, were $121.9 million for the second quarter. D&A expense was $4.8 million. Income tax expense was $12.2 million, up from $8.8 million in the prior year period. Please note that we utilized all available net operating losses during 2020. Therefore, we have been a cash taxpayer since the beginning of 2021. Now turning to our non-GAAP financial measures, which we refer to as pre-tax economic income, economic income and economic operating income. Op Co had total economic income proceeds of $358.8 million. Op Co pre-tax economic income was $60.1 million, economic income was $43.5 million and economic operating income was $47 million in the third quarter.

Asset Co had economic income proceeds of $238,000, pre-tax economic income loss of $4.8 million, and an economic income and economic operating income loss of $3.8 million. On an overall basis, we reported pre-tax economic income of $55.3 million, up from $33.5 million in the prior year period. Economic income tax expense for the third quarter of 2021 was $13.9 million. Economic income which is presented net of preferred dividends as well as associated taxes, was $39.7 million for the third quarter of 2021, up from $31.8 million in the prior year period. Third quarter economic operating income, which is economic income excluding D&A, was $43.3 million, up from $37.4 million in the prior year period. Total economic proceeds rose 31% year-over-year to $359.1 million. For the quarter, economic investment banking proceeds were up 42% year-over-year to $262.6 million. Economic brokerage proceeds were down 4% year-over-year to $160.5 million. Economic management fees for the quarter were up 3% year-over-year to $15 million, and economic incentive income was a loss of $57.7 million in the third quarter versus a loss of $1.3 million in the third quarter of 2020. Economic investment income was a loss of $20 million versus a loss of $90.5 million in the prior year period.

Turning now to our expenses. Compensation benefit expense for the quarter was $202.9 million compared to $153.8 million in the prior year period due to increased revenues. Our comp to proceeds ratio increased year-over-year from 56.1% to 56.5% of economic income proceeds. For full year 2021, we are targeting an annual compensation ratio between 56% and 57%, although it may vary from quarter-to-quarter. Fixed noncomp expenses totaled $40.3 million in the first quarter, up from $33.1 million in the prior year period. Variable noncomp expenses in the third quarter of 2021 were $48.1 million versus $39 million year-over-year. The increase in noncomp expenses were due primarily to higher travel and entertainment expenses, business development expenses and professional service fees. Despite the increase, the noncompensation expense ratio declined to 24.7% of revenues, down from 26.3% in the third quarter of 2020. Third quarter depreciation and amortization expense -- expenses were $4.8 million compared to $5.7 million in the third quarter of 2020. We generated economic operating income of $43.3 million or $1.32 per common share, which includes the impact of taxes at an effective rate of 25.1%. In future quarters, we expect our effective tax rate to be in the range of 25% to 29%, depending on the nature and geographic sources of our income.

Urning to the balance sheet. At quarter end, the company had invested capital in Op Co totaling $677.7 million, down from $831.6 million at the end of June 2021. The change is due in part to the increased share buyback and quarterly mark-to-market of our balance sheet investments. In addition, we have moved excess operating cash out of Op Co to the holding company level. That operating cash was approximately $80 million as of June 30, 2021. In Asset Co, we had invested capital totaling $120.2 million at the end of September, down from $126.2 million at the end of June 2021. This change is due primarily to a reduction in the value of our investment in the Formation8 and Eclipse funds. Turning to our equity. Common equity, which is stockholders' equity, less preferred equity, was $1 billion, nearly unchanged from the end of June 2021. Common book value per share, which is common equity divided by total shares outstanding, rose to $35.40 as of September 30, 2021, up slightly from $34.35 as of June 30, 2021. Tangible book value per share was $29.17 at quarter end, up from $28.35 at the end of June 2021.

Return on common equity was 17.5% for the third quarter of 2021, well above our minimum target of generating mid-teens after-tax return on common equity on a consistent basis. Looking ahead to 2022, we are confident we can meet or exceed that target, absent any extraordinary changes in market conditions. As we announced this morning, our Board of Directors maintained our quarterly cash dividend at $0.10 per common share. During the third quarter, we repurchased a record $52.4 million in stock, a total of 1.46 million shares, including purchases executed according to our existing 10b5-1 plans. That is equivalent to over 120% of our economic operating income. For the nine months of 2021, we purchased shares at the value equivalent of 51% of our economic operating income, well above our minimum annual guidance range of 25% to 35%. Our fully diluted share count in the first quarter was weighted average of 32.7 million shares, a decrease of more than 1.1 million shares over the previous quarter's weighted average. Looking ahead, we'll continue to be opportunistic in buybacks depending on market conditions and available cash flow, while the amounts will vary from quarter-to-quarter. We'll also prioritize additional capital returns when we were able to monetize assets on the balance sheet. Starting with the fourth quarter of 2021, we plan to provide an estimate of our incentive and investment income quarterly marks shortly after each quarter end in order to provide more transparency into the quarterly impacts our investment management operations and balance sheet investments have on our overall earnings results. And with that, I'll turn the call back over to Jeff.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Thanks, Steve. This quarter's performance and our record performance year-to-date are the result of years of strategic planning and investments. They're also representative of what our core operating business can do even when historically strong markets for Cowen are challenging. While we have grown revenues faster than most of our peers at a 25% annual pace over the past five years, the mix of our revenues is just as important to maintaining the consistent profitability in our core business. Within investment banking, we've built out a substantial capital markets advisory business, which includes M&A advisory, and we also added debt capital markets capabilities, so we're able to provide a broader range of financing solutions for our clients. As I noted earlier, Capital Markets Advisory is additive to Cowen's traditional strength in equity markets underwriting and enables us to drive profitability even at times when issuance slows down as we've seen over the last two quarters. In markets, our revenues have more than tripled over the past three years as we've expanded from our core strength in U.S. cash equities into non-U.S. execution options, swaps and less volume-dependent areas such as prime services and securities finance.

We are confident that this business mix can generate at least $2 million a day and revenues on a consistent basis and likely higher, absent any huge market dislocations. In investment management, despite the quarterly volatility and incentive investment income, we focused on private equity style strategies with steady management fee streams. And we would expect our management fees to be in excess of $70 million on an annualized basis going forward with potential upside from additional increases in AUM. Overall, the revenue mix of Cowen is more balanced and more durable and it's built to perform in all manner of market conditions. But the most important reason we're outperforming here at Cowen is because of our team and because of the amazing clients we serve. Over the last three years, we've grown our team by 1/3 to 1,500 people, seeking out the best candidates who are eager to collaborate to help drive favorable outcomes for clients.

During that period, our revenue per employee has more than doubled to $1.3 million per employee over the last 12 months, well above most of the peers in our industry. As the saying goes, culture eats strategy for breakfast, and we are intently focused on building an inclusive, durable culture centered on our core values of vision, empathy, sustainability and tenacious teamwork. We are fortunate to be in a position where we are helping clients to achieve their financial and operating objectives every day. Our entire organization was purpose-built to help others to do what they do better. And our success is the result of our ability to partner with our clients in their successes. We are extremely grateful to those who continue to place their trust and faith in us. I'm personally grateful for all the hard work that goes into these impressive results. We really do have the best team on the street and I'm proud to be part of it every day. With that, I will turn the call over to the operator, and we'll open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Michael Brown with KBW.

Michael Brown -- KBW -- Analyst

Great thank you operator. Yes. So I wanted to ask about advisory, obviously, a record result this quarter. And I was hoping you could maybe break that down a little bit further for us and share some of the key strengths this quarter? And as you're answering that, what is the proportion of your business that's touching financial sponsors? I know that was a key strength of core end. So I'd love to just get a little bit of context there.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

So I'll answer -- first of all, I think when we've seen the advisory business, obviously kicked back on this year significantly. It was obviously post the financial crisis. I think everyone had a challenging time with their M&A advisory businesses. And so we're seeing some of that actually pick up a pace. Although I will also say the backlog continues to be strong. So I'm very confident in our ability to continue to have M&A revenues in the same area. A big chunk of that is sponsor business. We're continuing to build out our sponsor platform. I don't think we break out the specific amount of advisory business to sponsors because that's actually not how we think about it. I think we think about it more from an industrial coverage model, which includes sponsors. But I have -- and I think you're right to point out, I have said that a big part of the transaction volume that goes on in M&A is sponsor-driven.

And our growth in that area is a function of the fact that we are much more relevant to sponsors than we used to be. And so I would anticipate that we'll continue to make those kinds of inroads. And a big chunk of our revenues this quarter also had to do with the SPAC back ends, which, by the way, oftentimes cross over into the sponsor area. So when I look at our SPAC revenues, oftentimes, we're dual pathing. We're talking to private companies about private sales or public sales, sometimes they break more to private sales to sponsors, sometimes they break more to public sales or the opportunity to tap the markets using a SPAC back end. I can't understate the importance of having that capability because it drives our ability to do other parts of the business. And so we think about it more holistically when we think about our M&A advisory business as opposed to just -- are we just focused on sponsors? Are we just focused on corporates? We have to have that full mix in order to continue to drive our business.

Michael Brown -- KBW -- Analyst

That's helpful to get that insight into your thinking there. Just a quick clarification there, in your comment, I think you had mentioned that you expect advisory to stay around this level? Is that -- did I hear that correctly? So you produced about $100 million of revenues this quarter. Is that where you see the business operating over the coming quarters?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Yes, I actually think it -- I mean, I think it could move higher from here. When we look at the growth trajectory and our ability to win assignments, I actually think it could move higher. I think I was more reflecting the fact that we've reached a pretty significant milestone this quarter in terms of the size of our advisory business. So I'm more acknowledging that. Like, I believe that our ability to continue to produce. And when I look at the way the backlog is continuing to queue up, I'm very confident that, that will continue to grow. I'm just more -- I think the comment was more -- we've reached a new level. And I think we've said over and over again, our goal on many instances is to do higher highs and higher lows. And I feel pretty good about where we are in the advisory -- and the growth in the advisory business. And I'd also say it's taken us a while to get here, and I think there were a lot of people who felt like it would be really hard for us to build a meaningful advisory business. And I know a lot of our competitors actually have much more meaningful advisory businesses, and they started faster. I would just say when you take a look at the compound annual growth of our advisory business, I don't think there's a firm that's growing faster on the street, which suggest to me that we can continue to take share in a meaningful way. And so I would focus investors more on the growth rate of our advisory business because I think that's actually indicative of the share that we can take.

Michael Brown -- KBW -- Analyst

Certainly impressive to see when you were at, I think, $84 million in 2019. So that's great to hear. And maybe just one..

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

I got to give credit to the team here. I just -- that doesn't happen by accident. And I think we -- We talked about a few years ago, and you probably remember this, how we were investing through the cycle, and particularly in '18 and '19, we made significant investments in our compensation ratios reflected those investments and I think there were a lot of doubters out there that we could actually make meaningful progress. But you can see in the quarter like this quarter, where you have real significant slowdown in IPO activity and follow-on activity, particularly in the biotech sector, this is a real indication that the investments that we've made in '18 and '19 and the acquisitions that we've made, particularly Quarton and MHT, are -- really gained significant traction. And that gives us great confidence in our ability to operate in multiple market environments.

Michael Brown -- KBW -- Analyst

Appreciate that, Jeff. And maybe just a quick one on the capital returns, you ran through some of the thoughts there, and I appreciate that. I guess if you could maybe put a little finer point on that -- you did a record amount this quarter, you did about $50 million last quarter. Is that kind of -- is that the right way to think about the pace here near term? And can you maybe just give us a broad update on the capital allocation philosophy broadly?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Yes. So I think we're not changing our guidance in terms of the minimum amounts we're going to buy back. But as I said at the beginning of the year, we are -- we will be very active when we see opportunities to do this. And I think third quarter was a good example of -- we had some opportunities to buy stock cheap and I'm all for that, right? I look back to my days on the buy side, I know how to buy things when I think they're mispriced. So I'm happy that we were able to do it. We certainly have the financial wherewithal to do it. And we'll continue to be active. I think we also recognize that -- we took care of the convert, which I think when you look at fully diluted shares outstanding, that was a big objective of ours. And so we said we would continue to buy back aggressively and we have. And I think we'll continue to do so as our operating business continues to thrive.

Michael Brown -- KBW -- Analyst

Alright Jeff I appreciate that.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Alright. Thanks Mike

Operator

Thank you. Our next question comes from Sumeet Mody with Piper Sandler.

Sumeet Mody -- Piper Sandler -- Analyst

Thanks. Good morning guys. Just sticking on the M&A front, we've -- hearing the commentary around the strength of your sort of de-SPAC pipeline today, but kind of looking forward, kind of given the uncertain nature of the economy at this point, some maybe yellow flashing lights, how are you guys thinking about the effects that could have not just on the de-SPACs, but kind of M&A more generally in some of the core verticals like healthcare, consumer, industrials over the next year, do you think you can grow through any dislocations in industry trends given your smaller but sort of growing base that you're working off of?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

So great question, Sumeet. And that's obviously something we think about. I think -- I aspire to be big enough one day in M&A to actually have general market conditions impact our flows. That would be great. I think we have a lot of room to go before we get there. So I think from our standpoint, we're taking share. I can't stress this enough, like we didn't use to compete with a bunch of firms in this space at all. And now we're competing and winning in part because of the breadth of the product offering that we have. So I actually am not terribly concerned about economic headwinds and how that might impact our business specifically. I mean, obviously, if there's a huge economic downdraft, it could impact everybody's business. But I look at our business, and I'm like we just had a very significant dislocation, and not that long ago, in the first and second quarter of last year.

And now we're seeing a pickup in M&A activity across the board. And that M&A activity -- and also access to capital. So when you think about the number of SPACs that are public and the amount of business that has to get done because of the time constraints around SPACs over the next 12 to 18 months. It's hard to make the argument that the general economic conditions will impact our ability to continue to grow advisory business. I just think there's a lot of stuff right in front of us with a very significant installed base that gives me a higher degree of confidence in our -- what I can see into the future than maybe at any other time. And so listen, I don't -- I'm not smart enough to predict quarter-over-quarter. I think that you can always have those kinds of fluctuations. When I look out over the next year or two at the work that we have to do and the sectors that we have to do, there's a lot to get done. And so I remain -- continue -- very upbeat about it.

Sumeet Mody -- Piper Sandler -- Analyst

Great. That was really helpful. And then turning to brokerage. I appreciate the color around the progress of that brokerage growth and diversification. Just wondering if you could step back a little bit and kind of frame the shift in that business over the last few years. Maybe talk about what -- how the product offerings have changed in the business, how they've impacted your positioning moving forward to capture more of those revenues on both the kind of brokerage and services perspective?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Yes. So I think when -- there's actually not a lot of folks that understand the intricacies and dynamics of equity market structure and equity market trading in particular. I think what we recognize is the world really falls into two categories. There's the big players who use central risk books and ways to -- and their dark pools to really drive volumes. That's not our game, right? We don't have dark pools here, and we are not using risk capital to drive outcomes. We're much more agency focused. And I think there, you've got to be at the top of your game, both algorithmically as well as in research. So you have to excel at both of those. And I think what the gains, the share gains that we've shown and the continued share gains that put us well inside the top 10 in terms of our market share, that's bigger than at least half of the bulge in terms of our market position. That's because they've stumbled.

And I think it's hard to regain that momentum. It's not like you can all of a sudden wake up tomorrow and rebuild a world-class equity research franchise. That's a hard thing to do. We have that. I don't think you can wake up tomorrow and rebuild your algorithms and get them reinstalled on people's desks so people use them. That's a hard thing to do. So the very thing that we've done is positioned ourselves to have not just meaningful share gains, but meaningful like consistent share gains. So our gains over the course of the past year to 1.5 years are not eroding in terms of market share, and that's phenomenal. And so those are the strategies we pursue. We'll continue to do that. And when you think about adding on in places like, what I would call non-execution driven businesses like securities, finance and swaps. Like, when you -- that is an area that we just have a lot of ground to take. We can really penetrate the wallets from existing clients in a way that others can't. And then when you look at what we've done in Europe, I mean, again, we're much bigger than we used to be in Europe. We still don't actually move the needle when you look at market share. And so there's a real opportunity for us to continue to take share there. So I continue to remain bulled up on our ability to grow our business. I know some people think we -- it'll be harder to do in the future, I'm less concerned about that.

Operator

Thank you. Our next question comes from Devin Ryan with JMP Securities.

Devin Ryan -- JMP Securities -- Analyst

Great. Good morning guys.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

How are you doing Devin?

Devin Ryan -- JMP Securities -- Analyst

I'm doing terrific. Thank you.I guess first question here, just digging a little bit more on the outlook for the underwriting businesses. Clearly, coming off of a fantastic year and just a lot of things that are hitting -- and I just want to unpack a little bit as you guys are thinking about maybe budgeting for 2022, and I appreciate probably some of this is hard to share because you have to predict the future. But as you think about just the business and where -- maybe a micro level, where you're hitting on all cylinders or maybe even it feels like it's above normal versus kind of where there's still room for growth, how would you kind of break it down as we head into next year? Looking at your backlog, like where there could be upside in revenues and where maybe the bar is a bit high? And then just within that as well, I know you said 2/3 of the SPACs that you're working on to either close the deal or have a pending deal, but I suspect of that 2/3, there's still a number working through the process where there's somewhat predictable revenues and then the remaining 1/3, a lot of revenue still to come. So is that 4Q? Or is there still kind of this embedded kind of nice momentum of SPAC revenue that's going to come in, in 2022, just as those deals close and you get the majority of revenues on closing?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Okay. So -- well, a lot in there to unpack. So let me just make sure -- I want to make sure that I actually address it. Are you talking about banking backlog specifically?

Devin Ryan -- JMP Securities -- Analyst

Yes. I mean -- that's effectively what I'm getting at, like if you think about the backlog heading into 2022, just like where -- and where there's maybe some capacity in growth and then where the bar feels a little bit high, just given how well you did and have done in 2021?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Yes. So I actually feel like there's a lot of room to grow in advisory. That's for sure. But I also -- and as I mentioned earlier, that a lot of that has to do with the fact that I think a significant number of SPACs are going to get back-end deals done. They may not be done at the same valuation levels. There may be some fee compression. But we've just begun to think about the volume that has to get done as an industry. And it's going to be significant. I just have been around the SPAC space for a long time. I think that sponsors are highly motivated to get deals done. That -- I can't think of any other space where -- in M&A advisory, where there is a group of individuals who have to get something done in a time frame. And we can debate how much of them are going to get deals done and how much of them, I will just say my experience is, the vast majority of them will figure out ways to get deals done because the economic pain of not getting a deal done is too great. So it's going to be a really busy 2022 and -- for SPAC back ends, and it's going to be a really busy deal in 2020 for Cowen.

What I will also say is a bunch of companies are coming to us, and they're exploring SPACs, and we are the best at back-ends, hands down, bar none. So when you come to Cowen, you're coming to get advice maybe on whether or not that's a path for you. But while you're here, you're also hearing about the other opportunities for you to either monetize or capital raise if that's not the best path for you. And I think one of the things that's driving our advisory business is the inbound calls from people who want to understand the SPAC market better, that's both sponsors and companies. When they're here, we're walking them through their alternatives. And many cases, it's driving other outcomes in both capital markets advisory or what I would call, the debt advisory business or private placements that they're doing -- maybe it makes sense for them to do one more round of private financing. Those are calls we were not getting two years ago because they just -- there wasn't enough happening on that. So the knock-on effect of being the preeminent SPAC player has enabled us to continue to grow businesses in other places. That is part of the reason why I remain as bulled up as I am on our ability to drive advisory business going forward. Does that make sense?

Devin Ryan -- JMP Securities -- Analyst

It does, Jeff. And then, I mean, if you can also -- on the underwriting side of the business, just love to think about maybe at a more granular level where -- the bar is high into 2022, and I appreciate you continue to do better, but just where -- you just -- it was kind of a special year versus like where there's capacity and things could be better? I mean longer term, clearly, the underwriting business, you're expanding the footprint, you're increasing market share. But just trying to think about after what is a phenomenal year. We're getting questions around like does that imply for 2022? So I -- just like any more granularity around the individual sector, maybe from a sector perspective, like where the bar is?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Right. So let me try to give you a little bit of color on this. So if you look at our underwriting revenue over the course of the past two quarters, it's been about $86 million, right, each quarter. And if you think about the mix, right, we know if you just take a look at biotech, which has been the primary driver for talent is underwriting revenue historically. That has been -- last quarter was the worst quarter for -- in terms of volume, in terms of biotech performance, right? It's been the most horrendous six-month period in biotech stocks, honestly, since I can remember. And so many of those companies have chosen not to actually finance themselves. We were mandated and are mandated on a number of situations that just didn't go because of market conditions. So yet, Cowen's underwriting business has remained pretty consistent. Where did that come from? Well, we're much more relevant than we used to be in areas like AI, robotics. Our consumer business, if you look at the number of book-run transactions we've done in consumer alone in the last two quarters, that tells you something different is happening at Cowen.

We're finally beginning to monetize the investments we made in banking and also our research footprint. So again, you can't do IPOs and follow-ons unless you've got a really high-quality research footprint. We've made investments in that over the past few years as we've discussed. And when the inevitable biotech slowdown occurred, we picked up the slack in other areas that we're -- that wasn't happening. So I look at the next year, and I'm like -- I know all these -- a bunch of these biotech companies that were mandated on have to raise money. Like, it's not really an option for them. After a while, price just -- they can wait for a while to see if market conditions are better, but inevitably, they have to raise money. And when they do, we'll be there. And so I look at this and I say all this business that I thought we were going to do in biotech, if there'd been a halfway decent take over the last few quarters, that just got deferred. And that makes me feel really good. because actually, I look out at the back half of this quarter, maybe into the beginning half of next year. And I already know there's going to be a bunch of those companies that are probably going to have to finance. I will also remind people that is not in our backlog.

So biotech follow-ons, which has been a huge driver of Cowen's revenue, they're rarely, if ever, are in backlog because by the time you actually become qualified for mandated backlog, you're actually in the market and you're pricing them overnight or in two days. So again, I'm looking at the shadow here and saying, we know all these companies are going to have to finance. The last thing on that front is, I think people are waiting to see what happens with drug pricing policy. It's been a big thing in biotech. Obviously, the -- we'll see what happens with the bipartisan infrastructure plan. There's likely to be some clarity around where drug pricing is going to fall in that plan. And once there is clarity, it will be safe for people to invest in biotech again, in pharma. And I want to say people have been on the sidelines for the last six months because of the uncertainty of where this is going to fall. I don't know that I'm smart enough to know where that is going to fall. But once it does, people will be able to readjust and they'll be back in the market. And I actually think there's a very significant probability that we'll catch a bid. Now I don't do market timing. I just -- I'm a student of that business because it's an important part of our business at Cowen. And that's what I think. We'll see how that plays out over the next few weeks.

Devin Ryan -- JMP Securities -- Analyst

Okay. Terrific. That's very helpful. And just a follow-up question here. You talked about expanding the footprint. I think sometimes not appreciated fully when people look at Cowen. I mean, headcount is up 16% over the last two years since the end of 2019, it's up 10% just even from the end of 2020. So you guys are growing the footprint pretty substantially. So what I want to connect this to is it feels like you're getting operating leverage off of that because you have infrastructure in place that's leverageable. And so over time, it doesn't happen necessarily overnight. But over time, that should drive operating margins higher as you grow the footprint. I guess two things. One, how are you thinking about growth into 2022, can you keep up kind of this type of pace where you're growing upper single digits, low double digits, the footprint annually? And then in terms of like the need to add more infrastructure underneath it, like where do you feel like you need to kind of add versus where can you really get some additional positive operating leverage? Because it does, as I said, feel like as you're adding more people, you're seeing positive operating leverage off of that as we've seen over the last couple of years.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Yes. So two things on that front. First, I think it's really important -- this is the first time we've actually articulated to people, our revenue per head. And we've done it on a rolling 12-month basis, so you can actually see how that operating leverage actually works at the top line. Naturally, our expenses are going to go up nominally, like in terms of aggregate dollars because we have more people. And we're bringing them back to office spaces. And we've got to make sure that we've invested in that infrastructure to bring them back in things like hoteling software. We actually need more space in some instances because we've done some acquisitions in areas geographically, particularly in San Francisco, where -- and in New York, we brought on so many teams, they need places to go. We just -- we increased the footprint primarily around revenue producers. And that's been a great thing for us. So part of what you're seeing is the infrastructure and market data services and telecommunications infrastructure.

We're also not asking people to bring their desktop home operating systems back to the office. So we've had to make some investments in fixed infrastructure to make sure that people have desks both at office and equipment at home. And we've regionalized. This is a big thing for us. We made a decision to -- in particular, in New York, we've regionalized our office footprint. So we've got new offices in Red Bank, Summit. We've built a much bigger space in Stanford, where we had extra space and we built that space out. It will be open, hopefully, in the next few weeks. Long Island. This is enabling our best talent to be able to work near where they live. So as we return to office, we're not necessarily returning to commuting because the efficiency gains we've seen from people not having to commute has been amazing. So what you're seeing part of our uptick in fixed costs is a function of the fact that we're more people, and we're redesigning the workplace of the future. Having said that, I expect we'll continue to drive those margins pretty hard because we're seeing -- we're just exiting this period of time at a much higher revenue run rate. And that's really what we expect to see going forward.

Devin Ryan -- JMP Securities -- Analyst

Okay. Great. Thank you very much. I leave it there.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Thanks Devin.

Operator

Thank you. Our next question is from Steven Chubak with Wolfe Research.

Steven Chubak -- Wolfe Research -- Analyst

Hi.Good morning Jeff, good morning Stephen..

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Hi, Steve.

Stephen A. Lasota -- Managing Director and Chief Financial Officer

Good morning.

Steven Chubak -- Wolfe Research -- Analyst

So wanted to just ask a question on the brokerage business. Now that we've entered a period of more normalized trading activity, I was hoping you could speak, Jeff, to the sustainability of this $2.5 million per day run rate. I was also hoping you can just unpack some of the factors that maybe drove some of the pressure in the services revenue line. have historically has been much less volatile and you cited some strong KPIs in terms of new client adds. So just trying to unpack some of the different puts and takes there.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Yes. So let me take the services line really quickly. That's -- we sold off a part of our clearing business and we reduced our clearing footprint there. So Again, everyone looks at top line numbers. We're actually, basically looking at capital utilization, which is another thing that I think people need to focus on, right? There's this perception that we have too much capital tied up in certain businesses. And we definitely had capital tied up in the clearing business last year and made a conscious choice to exit that business and move that off. That's part of what's enabled us to do more share buybacks. So -- but obviously, the revenue drop there is a function of the fact that clearing was in the service line, and we -- that was a conscious choice. So that's really the drive there. When you strip that out, we're continuing to see growth in our swaps business and our prime brokerage business, outsourced trading is a big part of that.

These are the things that are driving our performance there. And I don't see that abating anytime soon. Again, when investors -- and I think you probably see this a little bit in your business, they have a finite amount of wallet, they want to aggregate that wallet with people who are able to provide them services. And so what we've done is now that we're onboard in so many clients, and we're so relevant to them in cash equities and algorithmic execution, we're just -- we're opening up other pockets for them to pay us because they may choose -- we want to make it easy for them to pay us in a broad variety of ways so that they can continue to consume what they consume on the research front or in the MDRs or whatever it happens to be. So our view is we'll see quarter-over-quarter moves between cash execution, algorithmic execution and services. But over time, our expectation is that services business will be a much more stable part because once you open up prime brokerage accounts and swap accounts, like people don't move them around as much, at least not from where we are. If you're running a really big prime brokerage business like some of our larger competitors, people move balances between those folks all the time. When people are moving their balances to Cowen, they're doing it with intentionality to get Cowen paid. And so not likely to move it away. And that's what we've seen is the stickiness of our prime business and our securities finance business and our swaps business is actually really helping us to maintain that $2.5 million a day.

Steven Chubak -- Wolfe Research -- Analyst

Jeff, and just a follow-up, just switching gears a bit, I wanted [Indecipherable] Healthcare Royalty Partners. And I know there are some limitations in terms of what you can share, but I was hoping you can provide some sort of update on when that IPO is expected to relaunch? And if you can give any sort of context around what your ownership is today how much of it's reflected on the balance sheet? And how would you deploy such proceeds once there is some sort of monetization event?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

So obviously, yes, we're disappointed with market conditions. It was probably emblematic of -- they launched the deal, and it was probably the worst time that we've seen in sort of the biotech and healthcare business to try to get a deal done. So -- They pulled that deal. We'll refigure that out. I expect it -- what we saw is actually interesting is meaningful demand. I just don't think it was the valuation level that we that we had hoped. And so it makes sense for us to sort of rethink about that when market conditions are better. the value is still there. So I want to be clear but we don't show it. I think you put out a research report that rightly points out that we don't carry any of our stakes on -- at any value on the balance sheet, and they're meaningful. I mean, obviously, they're -- those are -- if we were to mark them to market, they're meaningful pickups in book value. And so -- What I would say is on healthcare royalties, we'll continue to monitor market conditions. And I don't think it will happen in the fourth quarter. But as we head into next year, what's been validated for us is the ability to do a permanent capital vehicle in that space is hugely valuable, and we'll continue to pursue that. And the market won't always be this way.

Steven Chubak -- Wolfe Research -- Analyst

Got it. And just one final question for me. Jeff, you had noted that you would provide some additional context or some incremental disclosures on some of your investments. I think you had touched on that a little bit in your prepared remarks. So hoping you can provide some additional color on what incremental disclosures you plan on providing since that business and your investment portfolio just generally remains [Indecipherable] OK?

Stephen A. Lasota -- Managing Director and Chief Financial Officer

Steven, so what we've seen others do is disclosed at the end of the quarter some realized events around our incentive fees, so that people will have an earlier view into what's going on in that line. So we plan on doing that in the future.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

We're just trying to take away the guessing game there. We -- Obviously, we had an incredible incentive income in the first quarter of this year. And I think when you look at those numbers, nobody here and nobody on the phone probably thought that was sustainable. And so when you look at the main reversion, people are just always trying to guess coming into the quarter, and I think we should just probably tell you what it is earlier so that people can drop it in their models.

Operator

Thank you. Our next question comes from James Yaro with Goldman Sachs.

James Yaro -- Goldman Sachs -- Analyst

Hi, good morning. I just wanted to ask about your ability to generate comp leverage from here?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

How's -- go ahead. Specifically?

James Yaro -- Goldman Sachs -- Analyst

Sorry, I -- sorry about that. So you've had tremendous success in growing the top line in the past few years. So I just want to touch on your ability to generate comp leverage from here as you generate the -- as you continue to grow the franchise?

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Listen, I think we've actually generated a significant amount of comp leverage so far. When you look at a lot of our competitors, they skew much higher in terms of comp to revenue ratio than we do. We've got businesses here that are lower comp to revenue ratio. And I think when you look at our business, I think we -- I wouldn't expect it to move too much off of this. I would say, longer term, as we grow our advisory business, that will be higher-margin business, lower actually fixed cost. So actually, you can make the argument that if we see higher in advisory business, the comp level might actually -- comp percentages might go up, but margins will also go up. And I think that's really what we focus on, James, is margin and comp levels really fall out of business mix and things like that.

Operator

All right. And I'm not showing any further questions in the queue. I will turn the call back to Jeffrey Solomon for final remarks.

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Well, thanks, operator, and thanks, everybody, for listening in this morning. As I often do, I think it's important to highlight just the amazing team that we have here. I mentioned it earlier. I also should just say, it feels amazing that when great people from all across the street want to come work at Cowen. Part of what we're seeing here and the explosive growth that we've been able to experience, particularly during the pandemic is that there are some really talented people working in other places that want to come work at Cowen. And no one really ever asks me this question, but the single greatest metric that I use as a measure for how we're doing is whether or not the people who are at other firms want to come here and do what they do and whether or not they're able to do it better here than anywhere else. And whether or not the people that are already here are staying here and delivering on the promise that -- and whether or not we're able to deliver on the promise that we give them. That's happening at Cowen. And we have a bunch of use cases on things that validate our strategy around recruiting and retention and it makes me really feel good about where we are. So more to come, and I look forward to catching up with you on the next quarterly call. Have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

James T. Farley -- Managing Director and Head of Investor Relations

Jeffrey Marc Solomon -- Chair and Chief Executive Officer

Stephen A. Lasota -- Managing Director and Chief Financial Officer

Michael Brown -- KBW -- Analyst

Sumeet Mody -- Piper Sandler -- Analyst

Devin Ryan -- JMP Securities -- Analyst

Steven Chubak -- Wolfe Research -- Analyst

James Yaro -- Goldman Sachs -- Analyst

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