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Cowen Group Inc (NASDAQ:COWN)
Q2 2020 Earnings Call
Jul 28, 2020, 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 Second Quarter of 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 the risks and uncertainties described in the company's 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, our speakers will reference certain non-GAAP financial measures, which the company believes will 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.

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

Jeffrey M. Solomon -- Chief Executive Officer

Thank you, operator. Good morning and welcome to Cowen second quarter 2020 earnings call. This is Jeff Solomon and joining me today on our call is our CFO, Steve Lasota. As a reminder, we make available quarterly financial supplement in the Investor Relations section of our website. We encourage you to review it in conjunction with our earnings release. This morning, I would like to take stock of where we stand after the tumble to the past few months and how we at Cowen have adapted to the evolving COVID-19 pandemic. Then Steve will review the financial results for the second quarter. And after that, we will be happy to answer your questions.

Overall, the outlook is a little clearer than when we spoke to you three months ago, but there is still a great deal of uncertainty. We've seen progress on both treatments and vaccines for COVID. And we have better data everyday on how to treat patients and reduce mortality. The vaccine development in particular has progressed at an unprecedented pace, which gives us cause for optimism that we will finish out 2021 in a lot better place than we are in 2020. That said, the economic challenges due to the pandemic are far from over, and the resurgence of cases in areas with less stringent public health measures are cause for concern. While we certainly expected a rise in infections as states reopen, we are concerned about the lack of a coordinated national response as we head into the Fall and Winter.

At Cowen, we remain cautious about returning to the office as we continue to prioritize the safety and well-being of our teams and their families. And it is clear from our quarterly results that we are operating quite efficiently. As such, the majority of our time -- teams continue to work remotely and with some staff returning to the office with appropriate safety measures in place if they choose to do so. Whether in the office or remote, we stand ready to help our clients to navigate the challenges that lie ahead. Our focus on drug discovery, tools and diagnostics, as well as digital healthcare puts us at the forefront of science and capital formation. Company [Technical Issues] those racing to find new therapies and vaccines rely on Cowen to access the capital necessary to find solutions in a compressed timeframe.

As the pandemic unfolds, social issues of race of equity and economics are also at the forefront of the national conversation, and so they are Cowen too. Not only are we actively listening to the conversations with intent, we are trying to create a more inclusive environment for all of our team members. Our view is that inclusion and diversity are not only moral imperatives, but they are business imperatives as well. Fostering inclusion and allowing for more diverse views will enable us to achieve better outcomes for our clients and for ourselves. That requires establishing processes with deliberate intent to achieve those outcomes in holding one another accountable for delivering on them. Earlier this month, we hired Ripa Rashid as Cowen's first Head of Inclusion and Diversity, the culmination of a six month search process. Ripa is a strong leader with real experience and expertise in our industry. In just a few weeks, she has also established herself as someone who can and well partner with all the stakeholders at Cowen as we continue on our inclusion journey. Even though our path toward increased inclusion and diversity began in earnest prior to recent events, the past few months have highlighted to us how far we all have to go in order to achieve racial equity in the workplace. We have challenges ahead of us, but we're excited to act together as we build a more diverse community.

So with the pandemic, the protests and the approach of the most polarized Presidential election in recent memory, they remain significant uncertainty for the remainder of 2020. But even in the face of that uncertainty, we're doing pretty well at Cowen. Indeed, we are humbled by the success that we are having in our mission to serve our clients. We must maintain this stability and be aware of our place in the world, even as we continue working to help our clients outperform.

While the month of March was the most challenging period for Cowen, in more than a decade, in the second quarter we had outstanding results setting new records for revenue and profitability, even before factoring the substantial gains from our investment in VectoIQ and Nikola Corporation. For perspective, our operating income for the second quarter of 2020 was greater than the full years of 2018 and 2019 combined. Even excluding Nikola, our economic operating income in the quarter was greater than the total of the previous seven quarters combined. What's behind these results? Well, a surge in capital markets activity in life sciences and healthcare tools and diagnostics, high value M&A assignments, continued market share gains in brokerage and a rebound in investment performance across all of our strategies in Cowen Investment Management. And above all else, countless hours of hard work and determination by our team here at Cowen.

Let's take a closer look at how our operating divisions performed. First off, our stake in Nikola, which was a small investment we made in VectoIQ stock, which acquired the electric truck maker Nikola Corporation last month. Our unrealized investment gains for the quarter were just under $130 million and our total banking fees related to that deal were over $20 million. While we intend to monetize the Nikola stake when we're able to do so, we are highlighting the impact of this win in our results because it is a demonstration of our strong and growing SPAC franchise, as well as our domain knowledge and sustainability.

We also don't want the Nikola gains to overshadow the incredibly strong results of the operating businesses, which were records in their own right. As for those results, in investment banking, we saw strong performance across the board. Capital Markets activity surged, while we managed 53 transactions including 10 IPOs, and two debt transactions during the quarter. Healthcare was the standout sector accounting for 72% of banking revenues in the second quarter. M&A fees were 16% of total banking revenues, including our highest ever single fee from VectoIQ for Nikola acquisition. Capital Markets Advisory, which includes private placements, PIPES and private debt financings, was 13% of banking revenue. Combined, our advisory businesses represented approximately 29% of investment banking revenues in the quarter.

In markets, we had another record quarter for revenues. Building on the market gains we made during the volatile first quarter. Our daily revenues were almost $2.7 million per trading day, breaking the record set in the prior quarter of $2.14 million per day. Highlights for the quarter included growth in options, electronic trading, non-US execution and prime brokerage as well as continued momentum in cash trading. Securities, finance in special situations including our SPAC trading book, all rebounded after a difficult first quarter. We've also added to our capabilities with senior hires in prime brokerage, swaps, portfolio trading, cross asset trading, cash in European trading. It remains an excellent environment to hire high quality talent. In research, with less travel we seized the opportunity to put out even more of our trademark collaborative and thematic pieces. The number of research reports we published grew 17% versus last year and client engagement also grew. With total reports read increasing 16% and an average readership of Cowen research remains at street high levels.

In terms of client engagement, we held sever seven major virtual conferences, hosting hundreds of companies and thousands of clients and set up a significant number of non-deal road shows as well. We also hosted 175 conference calls for clients, yielding nearly 19,000 participants. This incredible productivity yield market share gains and a double-digit percentage increase in institutional client votes. In our investment management division, we had record incentive income accruals, while management fees remained at the highest annual run rate in over four years. Our healthcare strategy ended the quarter with $819 million in assets under management. That strategy benefited from a surge in investor interest in the biotech sector and from five IPOs of portfolio companies during the quarter. Our sustainability strategy had $207 million in assets under management at quarter end. The first portfolio investment, the mobile phone recycling firm EcoATM, has proven to be resilient despite the economic shock of the past several months. The merger arbitrage strategy had $471 million in AUM at quarter end after a strong rebound from the volatile first quarter. The fund outperform the benchmark HFRX Merger Arb Index. Our healthcare royalty strategy ended the quarter with $3.5 billion in total AUM and HCR fund three is fully committed and fund four is 28% committed. And finally, our activist strategy closed the quarter with $5.8 billion in assets up from $5.4 billion in the prior quarter. This strategy performed well in the second quarter, and year-to-date it is strongly outperforming the benchmark Russell 2000 index.

Turning to our asset company. As a reminder, this segment includes non-core investments, which we intend to monetize. The value of our stake in the Italian wireless company, Linkem, which is assessed each quarter by a third-party valuation firm was marked up by $3.4 million to $73.6 million as the company experienced increased demand for its services. We wrote-down the remaining $4 million in the Surfside real estate investment. We do not expect renewed interest in the property in the current environment, although we continue to work with the lender to potentially restructure giving us more time to recover some of that investment. The net asset value of our LP investments in Formation8 and Eclipse declined by $0.5 million dollars to $38.9 million.

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

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

Thanks, Jeff.

For the second quarter of 2020, GAAP revenue was up 43% year-over-year to a record $418.8 million from $292.2 million. We reported GAAP net income attributable to common stockholders of $112.1 million or $3.83 per share versus GAAP net income of $4.1 million or $0.13 per share in the prior-year period. In the second quarter of 2020, GAAP compensation and benefit expenses were $305.3 million, an increase of $168.9 million from the prior-year period. GAAP expenses, excluding compensation and D&A, were $100 million for the second quarter. D&A expense was $6.2 million. Second quarter operating, general, administrative and other expenses were $92 million of that $100 million, an increase of $3 million from the prior-year period. And second quarter income tax expense was $44.9 million compared to $5.1 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. In general, economic income is a pre-tax measure that includes management reclassifications, which the company believes provides additional transparency of the performance of the company's core businesses and divisions, which may be otherwise difficult to pinpoint. It eliminates the impact of consolidation for consolidated funds, and excludes goodwill and intangible impairment, certain other transaction-related adjustments and/or reorganization expenses and certain costs associated with debt. Economic operating income is a similar measure but before depreciation and amortization expenses. The earnings release and our quarterly filings have additional information about how the company uses these non-GAAP measures and how investors find these measures useful.

We are now providing a reconciliation in our quarterly earnings release, showing the three categories of adjustments made to GAAP to arrive at economic income. The first two categories, management reclassifications and fund consolidation reclassifications, do not have any effect on economic income. The third category, income statement adjustments, does impact economic income, with most of the current impact coming from the exclusion of taxes. Full explanations of these adjustments are available in the earnings release and our 10-Q. The remainder of my remarks will be based on these non-GAAP financial measures.

We reported economic operating income of $166.9 million or $5.69 per share for the quarter. Looking at our business segments. As Jeff noted, we had a record quarter overall and in the Operating Company segment. Op Co had total revenues of $559.4 million, economic income of $164.3 million and economic operating income of $170 million in the second quarter of 2020. Asset Co had a loss in revenues of $0.7 million and an economic operating loss of $3.1 million in the second quarter. On an overall basis, we reported economic income of $161.3 million for the second quarter of 2020 compared to economic income of $15.5 million in the prior-year period.

Revenues increased 129% year-over-year to $558.7 million. For the quarter, investment banking revenue was up 83% year-over-year to $190.4 million, the best quarter on record. It was a record quarter for brokerage revenues as well, up 35% year-over-year to $167.1 million. Management fees for the quarter were $14.4 million compared to $10.5 million in the prior-year period. Incentive income was a record $46.4 million in the second quarter versus income of $4.2 million in the second quarter of 2019. Investment income for the quarter was $140.5 million versus a loss of $2.9 million in the prior-year period. Second quarter investment income includes an unrealized gain of $129.8 million related to our Nikola investment. Consistent with the first quarter, in our financial supplement, we now provide additional transparency into our investment banking revenues by breaking out our capital markets revenues into underwriting revenues and capital markets advisory revenues.

Turning now to our expenses. Compensation and benefit expense for the quarter was $305.1 million compared to $136.4 million in the prior-year period. Our comp-to-revenue ratio declined year-over-year from 55.8% to 54.6% of economic income revenue. Our comp-to-revenue ratio is 56% year-to-date. We are targeting an annual comp-to-rev ratio of 56% to 57%, although it could fluctuate from quarter to quarter during the remainder of the year. In the second quarter of 2020, we accrued compensation expense in relation to the unrealized gains on the Nikola investment at a rate of 50%. Fixed non-comp expenses totaled $34.9 million in the second quarter, down from $38.4 million in the prior-year period. The decrease was due in part to decreased occupancy and equipment and other expenses.

Variable non-comp expenses in the second quarter of 2020 were $40.8 million compared to $39.5 million in the second quarter of 2019 due to higher brokerage and trade and execution costs from increased volumes, partially offset by lower travel, entertainment and business development expenses. Second quarter depreciation and amortization expenses were $5.7 million compared to $5 million in the second quarter of 2019.

Turning to the balance sheet. At quarter-end, the company had invested capital in Op Co totaling $711.8 million. That includes $387.3 million in broker-dealer regulatory capital. We had invested capital in asset company totaling $124.4 million. Turning to our equity. Common equity, which is stockholders' equity less preferred equity, was $800.4 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 almost 17% to $28.96 as of June 30, 2020, compared to $24.77 as of December 31, 2019. Tangible book value per share was $22.94 at quarter-end, up from $18.72 at the end of 2019. The deferred tax asset went from $79.2 million to $36 million in the first half of this year.

Return on common equity was 90% in the second quarter of 2020, up from 11.4% in the second quarter of '19. Excluding the impact of Nikola, return on common equity was 55% in the second quarter of 2020, well above our long-term target of mid-teens annual ROCE. As we noted in the release this morning, our Board of Directors maintained our quarterly cash dividend of $0.04 per share -- per common share. During the second quarter, we repurchased 447,000 shares for $6.6 million. For the remainder of 2020, we may opt to purchase additional shares in the open market on an opportunistic basis, weighing the impact of buybacks on our available cash flow as well as prevailing market and business conditions.

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

Jeffrey M. Solomon -- Chief Executive Officer

Thanks, Steve.

Before we take your questions, I'd like to give you a sense of how the rest of 2020 is shaping up for Cowen. As I noted earlier, there are a lot of questions around the progression of the COVID pandemic and the efforts to develop effective treatments and vaccines. There's also a great deal of uncertainty surrounding the US election in November. Overall, we have a solid competitive position and a robust pipeline of new business as we head into year-end, but we would expect the pace of capital markets activity to slow ahead of the election. We would also not be surprised to see a seasonal slowdown in business levels and in trading volumes in August, as has been the case in many previous years.

That said, we have started out the third quarter on a very strong note. Average daily market revenues in July are on par with the second quarter. And investment banking revenues for July are running well ahead of the monthly average for the second quarter. As Steve noted, we are required to mark our Nikola position, and this could weigh down our investment income in the third quarter as Nikola is down by about half since the close on June 30.

So to sum it up, the second quarter 2020 financial results were the strongest Cowen has ever had. And this was the culmination of years of planning, positioning and hard work by our team. It is important that we recognize our successes. But also equally important that we remain humble and aware of our environment and that we recommit ourselves every day to working hard as a team to help our clients and our communities.

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 Steven Chubak from Wolfe Research. Your question please.

Steven Chubak -- Wolfe Research -- Analyst

Hi, good morning.

Jeffrey M. Solomon -- Chief Executive Officer

Hi Steve. Good morning.

Steven Chubak -- Wolfe Research -- Analyst

Hey. So Jeff, I appreciate some of the commentary regarding really strong brokerage activity to start off July. I was hoping you could speak to what you believe is a sustainable run rate, especially given some of the factors that appear to have driven strength in the quarter, whether it's the non-US business, some improvement in SPAC trading, derivatives activity. It feels like these are still businesses that are in relatively nascent stages of growth on the Cowen platform and could potentially drive some sustained pickup in brokerage activity relative to what we saw maybe last year and some of the recent momentum continuing.

Jeffrey M. Solomon -- Chief Executive Officer

Yeah. I think you've hit on a few of the things that have made a difference. Certainly, our philosophy has always been that we can cross-sell, and we can bring to bear for our clients any one of a number of products and services to help them do better. And sometimes that's options trading, sometimes that's a research sale, sometimes that's outsourced trading in our prime brokerage business or obviously, our new European trading capability. That's all sort of wrapped around the fact that we have, I think, the preeminent electronic trading and low-touch platform on the Street that's independent and not affiliated with any dark pool.

So when you look at the collection of businesses that we have, what's really special is that they work together to try and figure out which are appropriate for which clients. And the way we set up our organization is really to make sure that we're introducing our product capabilities through our relationships and allowing clients to get the best of what they want from us. And that in and of itself is just a difference maker for a firm certainly our size. I would also just say, I think what's happening as a result of this pandemic and a lot of the market volatility is a lot of the buy side is picking and choosing who their strategic relationships are and making sure that those relationships take an increasing share of the wallet. And I've been describing it to people as sort of a divide [Technical Issues].

Are you guys there? Can you hear me?

Steven Chubak -- Wolfe Research -- Analyst

Yeah, now I can hear you. Go ahead, Jeff.

Jeffrey M. Solomon -- Chief Executive Officer

Sorry. I think my phone cut out. Sorry about that. So I think, increasingly, we are certainly making a big difference in terms of being on the right side of that divide.

Steven Chubak -- Wolfe Research -- Analyst

Got it. And maybe just one question for me regarding the -- some of the mark-to-market considerations and recognizing that Nikola obviously provided a large game, there's going to be significant volatility with those marks quarter-to-quarter. But I just want to get a sense as to like updated plans regarding the timing of potential monetization of some of these large portfolio gains and just some of the parameters that exist that might prevent you from monetizing those gains as quickly as this year and may get pushed out into next year?

Jeffrey M. Solomon -- Chief Executive Officer

Well, certainly, in the case of the Nikola situation, we are subject to a lockup as are most of the investors and sponsor shares. And so we -- I think the earliest we can get out is within six months, not that we would do it on day one. That's for sure. I think we want to be very careful about how we exit that position. And we're working closely with our other sponsors and the company to make sure that we're not being disruptive. But we have the opportunity, certainly, within a year if the stock continues to trade at these levels, to monetize that position. If the stock doesn't trade at these levels, I think it would be beyond a year, but I'm reasonably comfortable that we should be in a position to monetize that within the year, beginning starting sometime in six months.

For the other investments, look, the -- we're continuing along the same path for some of the private investments we have. I think the business at Linkem has certainly gotten a lot better. And that's been great. And so it puts the company in a position where it can access the capital markets, and we're having those conversations. We'll see how that progresses. But I think we're on a similar time line that we have given people guidance toward, certainly, that would be a 2021 time line. And then certainly, if you look at the move toward e-commerce, totally helps our position in the Formation8 fund, which is largely made up of Wish.com. And so the push toward e-commerce across the board, and I would say that, that platform is effectively an online, I don't know, a dollar store, if you will. And certainly, in an economic time, people will be looking at how to be more judicious with their spending, and that probably plays very well for a company like Wish.com.

And we've seen some of those numbers, to the extent they've shared it, the business has actually improved over the course of the past quarter. So they've said, I think, publicly that they're looking to take that company public at some point in 2021. So I think we're still on the same track there, though I would caution everybody, as it relates to those two positions, we don't control the timing of that. I'm just relating to you things that we've either seen or that we've heard as -- over the course of the past three months.

Steven Chubak -- Wolfe Research -- Analyst

Thanks. And just one final one for me, Jeff, just regarding the philosophy around comp. So you had this 50% comp accrual on the Nikola gain. With some of the gain in 2Q expected to reverse in the coming quarter, is it reasonable to expect some reversal of that comp accrual commensurate with that? And I guess, just bigger picture, I was hoping you could speak to your philosophy around how you're going to comp against future portfolio gains, given that this is typically viewed as maybe a higher-margin or less compensable revenue source?

Jeffrey M. Solomon -- Chief Executive Officer

So the answer to your first question is yes. We will be reversing comp accruals against the same way we accrue comp against it. So the expectation is that we would reverse that 50% accrual to the extent that Nikola continues to trade at this level. And I think the philosophy around this is, we comp to a total comp-to-revenue ratio target. Certainly, we do -- as I think we're signaling here, we will accrue less for investment income, but we are targeting still the overall 56% -- in around 56% comp-to-revenue ratio. I think that reflects sort of how we see things progressing over the course of the rest of the year. And we will, obviously, look at each quarter because each quarter stands on its own. But we'll take a look at how we're doing as we head into year-end, we look at the overall comp numbers.

Steven Chubak -- Wolfe Research -- Analyst

That's great. Jeff, Steve, thanks so much for taking my questions.

Jeffrey M. Solomon -- Chief Executive Officer

Thank you, Steve.

Operator

Thank you. Our next question comes from the line of Michael Brown of KBW. Your question please.

Michael Brown -- KBW -- Analyst

Thank you, operator. Yeah, hi, good morning. Jeff and Steve, how are you guys?

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

Good morning.

Jeffrey M. Solomon -- Chief Executive Officer

Good. How are you?

Michael Brown -- KBW -- Analyst

Good. I want to stick with Nikola, to start. So longer term, as you exit Nikola and I guess also the other investments like Linkem and then Formation8, what is kind of your plan for that cash and capital as it gets freed up? I think, in the past, you talked about capital return, increasing the buybacks. Do you also look to deploy some of that into some acquisitions? And if so, where are you kind of looking to bolster your franchise the most? And any color there would be appreciated. Thanks.

Jeffrey M. Solomon -- Chief Executive Officer

So -- it's a great question, Mike. And I think we don't count our chickens before they hatch. So as we monetize that, we'll be making some decisions based on the state of play and the economy and the world as we see it. Obviously, if the stock continues to trade at a discount to book value, we understand how accretive it is for us to return capital to shareholders at cheaper than book value. Said another way, if we love what we own and we love what we do, why wouldn't we just buy more of that. And I think we've shown over time that we will do that. And if it turns out that when these are monetized, that there's still an opportunity for us to do that, we will. I can't really speak to the specifics of the size of that or the amount because it will depend on where the world is headed.

I think we all are still very thankful that we're well capitalized. Certainly, during the month of March, it proved that capitalization added an extra layer of resiliency for us, I think, when a lot of our smaller competitors, there were some questions in the marketplace as to whether or not they would be around. There was never a question about that for Cowen. And that's a function of the fact that we have a significant equity base, and we are well capitalized with long-term debt and no near-term maturities. So we will be judicious as we think about how to return capital just because we want to make sure that we're not doing anything that puts us in harm's way if things turn against us in a rapid fashion.

As it relates to acquisitions, we'll be opportunistic. We get shown stuff all the time. And I would say at this point, it would be really interesting for us to maybe look at some tuck-ins and that we would keep it to a reasonable amount, just where we think we can do a buy versus build on something that we think can impact our profitability and our margins reasonably quickly. I don't -- we're not currently looking at new platform acquisitions or new businesses. I think we're just looking at things that we think can help us to accelerate in markets where we already play and with products that we already play, where we can scale that distribution or that capability. And those would include small advisory firm acquisitions or things like that, where, again, we can tuck them into what is already a pretty well-oiled machine and we can diversify our revenue streams from an industry standpoint.

Michael Brown -- KBW -- Analyst

Great. And just on the comp ratio. So last year, it came in at 56.5%. So right in the middle of your target of 56% to 57%. This year, obviously, the first quarter started off -- a challenging start, excellent second quarter. A little bit of certainly a headwind from the Nikola stake as we look to the third quarter and as that market continues to play out. But to me, it seems like you should be able to run kind of below that level as we think about the full year. And obviously, we don't have a crystal ball, so we don't know how the second half will ultimately shape up. But based on what you're saying, it does sound like it's a pretty good environment. So is it possible that if things don't take a turn for the worst, that you could actually be coming in a little bit lower because it seems like the Nikola stake, even if it does have to get marked down, could certainly help the comp ratio this year?

Jeffrey M. Solomon -- Chief Executive Officer

That is a possibility. I think so much of what we end up doing with compensation, whether it's at the lower end or the higher end of the range, depends on revenue mix. And I think if we see a rebound in M&A activity, the payouts on that activity tend to be higher, though the non-comps tend to be lower. If you continue to see real strong performance from our markets business, certainly, it's a flip of that. So I think the big driver certainly this quarter on the comp-to-revenue ratio coming down was the Nikola investment. And there could be more of those. I think that's -- there's a -- we own a number of small investments in SPAC-sponsor shares. And so I think depending on how that plays out over the course of the year, that could certainly be an impact as well.

But I think as we think about it, we're comfortable with the target ratings that we've outlined. And I would suspect that we'll be, if anywhere, at the lower end of that range, if things continue to be, but not much lower than that, just because I think we think it's in years like this year, this is when people get paid, and we can make sure that for all the hard work that everybody at Cowen is doing, that people get paid adequately, and that's sort of a top of our agenda for all of us, including shareholders.

Michael Brown -- KBW -- Analyst

Great. If I could just sneak in one more on SPACs. Obviously, we've seen just a prolific growth in SPAC activity. You guys have certainly gotten probably more than your fair share there. So just wanted to hear you kind of riff a little bit about the trends there. Do you see this trend as having a lot of persistence to continue? And do you feel as though you need to invest anymore at all in your franchise, whether it's on banking side or on the trading side at all?

Jeffrey M. Solomon -- Chief Executive Officer

It's been great. SPAC has been around for 30 years, and I was an investor in some of the first ones in the 1990s, and all of a sudden SPAC seems to be the flavor of the month for everybody. And we've known for a long time that SPACs present great alternatives to private companies to think about going public. That's not a new story. I think it's just other people have woken up to the idea that you can access the capital markets utilizing a SPAC structure, and there's many more efficiencies about doing so in a SPAC acquisition than simply taking the company public through an IPO.

I think SPACs provide an augmentation to the capital markets and augmentation to capital formation processes. Not every company will make a good SPAC acquisition and some companies require the IPO process for a whole host of reasons. But I think it's not going away. I think the -- I would expect the SPAC market to continue to grow. It's probably grown -- in terms of its aggregate size, it's probably grown 3x over the past three to four years. The SPAC market we estimate today is around $45 billion. So it's still relatively small compared to the rest of the market. And so I would expect that you'll see increased activity. We know we've got a number of mandates to take companies public or take SPAC teams public and go out and search for acquisitions.

And so I think it's going to be a mainstay of capital formation. Do I think it will replace the IPO? I don't. I think it's more likely to replace things like direct listings and things like that, where I think a lot of private companies will look to access the market using SPAC acquisitions because there's some real benefits to doing that. And we are fortunate to be in a position where we have a market-leading practice, not just on taking them public, but on the de-SPAC process. I don't think there's an organization that has more experience de-SPAC-ing companies than we do. And then the back end with the trading, we have the leading SPAC trading capability.

So this is something we've known for a while, and it's great to see the market wake up to this as a real process. But it makes sense for us in many ways to continue to do the things that we're doing because at the end of the day, we have a leading practice in this area. And so we feel very good about it. And we think this is -- we're nowhere close to the end of that trade.

Michael Brown -- KBW -- Analyst

Great. Thank you for taking my questions.

Operator

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

Sumeet Mody -- Piper Sandler -- Analyst

Thanks, good morning, guys. I appreciate the color, Jeff, on kind of the outlook for this year. Just wanted to drill in a little more and kind of get your perspective on the sustainability of the biotech activity, maybe get some color around the relationship between the pandemic and the activity you're seeing, if we don't see maybe a vaccine until early next year? Or do you think we could see some elevated activity levels for the remainder of the year, even with the uncertainty of the election and other macro factors?

Jeffrey M. Solomon -- Chief Executive Officer

I think we're in a -- I think anyone who says they have a crystal ball or says they know, doesn't know. I just -- that's why we've said, while things are a little bit more clear, they are exactly as clear as maybe you would have thought. I would have -- on the first quarter call, we started to see activity picking up. When we did our first quarter call, I'm not sure I could have told you the amount of activity that would occur between April and July. And so I think all of us are pleasantly surprised. We positioned ourselves incredibly well for this. And I think as we've talked before, Sumeet, financing has become a very strategic conversation, and Cowen is one of the best financing banks in the world and so -- for the industries that we serve.

And so I think if there's uncertainty in the market and continued uncertainty in the market, particularly around a vaccine or the election, I think the only thing for companies to do is to look at making sure that they're well capitalized, enough to get to the other side of wherever that volatility is. And this is the advice that we're giving to our clients, and it's the right kind of advice. And certainly, I think those that are taking advantage are going to be in a much better position to withstand whatever that volatility looks like. So our base case is that there will be a vaccine. I'm not going to be -- I don't think I'm smart enough to know when that will be. All I know is that there's been more energy and more shots on goal to solve a singular medical problem in the history of mankind, and we know a lot about this industry. And this industry is amazing when it puts its mind to it and certainly, the access to capital -- private capital in this industry is at the back -- is really at the center, the foundation of drug discovery and vaccine discovery, and we're happy to be playing our role.

So our view is that it will happen. I'm not going to tell you that -- what the time frame is because I just don't think I'm smart enough to know that, but there will be a vaccine and things will return to some new degree of normal as people begin to recongregate that that's going to happen. And I think for clients who need to be financed, they just need to make sure that they're going to be here when that happens. And so getting yourself in a position where you can be well capitalized is a good idea.

Sumeet Mody -- Piper Sandler -- Analyst

Okay. Fair enough. Thank you. And then just kind of one follow-up on Nikola, just around the timing of monetization. If the window does open kind of early December and the stock, as you mentioned, kind of trading below that second quarter mark, is the priority liquidation? Or with kind of maybe improved fundamentals, you guys have some room to wait for a more attractive exit point, assuming the stock doesn't improve by then?

Jeffrey M. Solomon -- Chief Executive Officer

You know I think it's -- our job as capital allocators is to not look at quarterly swings and profitability. Our job is to make smart investments with the capital and take those gains when they present themselves. And then ultimately, at the end of the day, recycle that capital and redeploy that capital or return that capital to shareholders. We'll obviously, there's a number of factors that would weigh into that really depends on where the stock is trading and our view on the stock, but also on where we're trading and how we think we -- what are the other uses for that capital. And I think, given my background as a portfolio manager, I'm always looking to capital allocation and making determinations as to where the best places to deploy that capital. And so there's a number of factors that go into that.

What I will say is, we're not just looking to get long securities for the sake of getting long securities. And I think one of the things we've talked about is velocity of capital is really critical to us and making sure that we can redeploy or return that capital in order to continue to drive our own ROE is a central tenant right, balanced meant to be seen not heard. And so, I think you can expect us to be judicious and thoughtful about how we liquidate but you can also expect us to do the things we've said we would do, as we've done historically with some of the other investments two years ago, Tilray and last year Livongo. We're in the business of making sure that when we win that we don't give it all back.

Sumeet Mody -- Piper Sandler -- Analyst

Got it. All right, thanks for taking my questions.

Jeffrey M. Solomon -- Chief Executive Officer

Okay.

Operator

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

Devin Ryan -- JMP Securities -- Analyst

Great. Good morning, Jeff, Steve. How are you guys?

Jeffrey M. Solomon -- Chief Executive Officer

Good Devin, how are you?

Devin Ryan -- JMP Securities -- Analyst

Doing great. Most have been asked, but just want to dig in a little bit more on some of the things here that we've been going through. So what a difference a few months makes here, great capital raising quarter clearly. And we can see the third quarter starting strong as you noted. Also appreciate there's a lot of uncertainty in the backdrop. So the crystal ball questions are tough, but when you look at your business and think about kind of the economics per transaction or percentage of lead managed or book run roles, can you give us any more flavor for kind of the momentum there because I think that's maybe more important because it was obviously a rising tide this quarter where most firms in capital raising did very well, but it seems like Cowen is getting a higher percentage of larger roles and just wanted to get a little perspective around kind of what you guys are doing internally around that. And also just any data that kind of gives more evidence, I guess or validates that view to the extent it is right?

Jeffrey M. Solomon -- Chief Executive Officer

Well, I certainly think that we are doing more lead less business and we are books to on more deals than we have been in a long time in healthcare and I think that just reflects the status of -- and the stature of our franchise. Certainly, we demonstrated in many instances that we can be as good if not better than most banks regardless of size when we lead less so we do recognize that some of our clients want to have other banks in there. And so our job is to at the end of the day deliver for our clients regardless of where we are in the syndicate. But there's no question that our -- we're being more choosy. And we're putting ourselves in a position where with the bandwidth that we have, we're focusing on opportunities where we can maximize our economics and maximize our partnership with our clients.

Our goal in this and I think we said this over Devin, is to be a persistent player for companies as they raise capital. So it's really about being able to deliver at the outset, but then deliver consistently in between deals so that you're always on the cover. And I think what you're seeing in certainly in a quarter like this is that Cowen's persistence in our client coverage model, the fact that we're servicing our clients 360. And doing things for them in between deals makes us the go to organization and it enables us to get rewarded adequately for delivering on that. And that's been a central part of what's made us successful. I also think you're seeing for the first time or we're extending that franchise into much more strategic conversations. We've done a few debt deals for some of our healthcare clients. We've done more M&A for healthcare clients in the past quarter, and that's a function of the consistency of developing the relationships that we have. And so it's not just about equities at all at Cowen, I think, well we're happy to do as many follow-ons and IPOs as we can, because it builds a great pipeline of future relationships, it's really about the quality of those relationships and our ability to extend our knowledge base and how to finance and provide strategic advice to those relationships. So that -- as you think about their business models going forward, we can help them along that journey. And so in many instances what we're seeing now is a little bit less dependence if you will on being lead left in IPO and a little bit more diversification.

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

And Devin, If you look at -- if you look on Page 4 of our supplement, it gives some of the details behind how many transactions in the average transaction value and you can see the significant increase there in Q2

Devin Ryan -- JMP Securities -- Analyst

Yep. Thanks, Steve. And this kind of pivots nicely to kind of your M&A franchise and kind of the momentum in strategic advice, and you've been on some nice deals recently, whether Gilead or Fisker and so clearly some momentum and some larger types of transactions and maybe historical. And so love to maybe get a little more perspective around what you're seeing across your M&A franchise because you have a part of the business that's very important focus on maybe some smaller transactions, so is there a differential among the different areas of the M&A business and just any other flavor for what you're seeing or what you're expecting in the near-term?

Jeffrey M. Solomon -- Chief Executive Officer

So I mean, there is -- I mean, I -- you certainly see that our median has increased. If you look at our in our supplemental information, you'll see the median M&A fee has increased even with the Nikola transaction it's been moving up higher over the course of the past four quarters and that's a function of the fact that we've been taking on larger M&A assignments for our corporate clients, as well as continuing to grow the business you know from the Quarton standpoint. Actually Quarton had a better first half this year than it did last year. And I think that's -- I think something that people didn't expect to see. So what we've seen is across the board whether it's in some of the lower middle market transactions were Quarton functions or some of the larger transactions where the historical Cowen franchise has played well, we've been successful. I also would say like, we're benefiting from the fact that the de-SPAC process is a unique process in M&A that that really blend -- is a blend of both financing and positioning companies to be public ready.

And so part of the drive that you're seeing in our M&A business is our ability to do back ends. It's not just SPAC that we've taken public that we're working on we're working on a number of situations where we've been called in by other SPAC sponsors that we didn't take public to assist on the back end. We've been called in by corporations who are looking to actually merge with SPAC because they recognize that at the end of the day there is actually limited knowledge on how to do this effectively. And so we've been pulled in by a number of companies that are considering SPAC back ends and getting retained by them in order to drive those outcomes. And I think at the end of the day, those are really powerful trends that we're seeing that give us a little bit more comfort with that our backlog, which continues to be at the highest level and I think it's, we didn't really delve into this, but our banking backlog is even after this quarter is higher than it was at the at the end of last quarter. So when you look at the replenishment and the ability to win mandates, that that is I think central to knowing to looking into the future and saying that even if the market kind of stays as it is and doesn't deteriorate in any meaningful way that we should be in a position or capitalizing on that as we head into the back half of the year.

Devin Ryan -- JMP Securities -- Analyst

Great color. Thanks, Jeff. Just last one here on the brokerage business. And thanks for some of the detail earlier in the call. You know trying to think about a range of this business, it's been obviously tracking higher the last couple quarters and it's been a very active backdrop and the same time you guys are taking share. So I'm trying to just kind of parse through that a bit $2.65 million per day in revenues this quarter, last year the firm was doing under two, so I'm trying to -- to the extent things slow, we have a kind of a normal summer slowdown, if you will, does it still feel like a sub $2 million a day is like the right way to think about a slower environment or is the bar higher because some of the newer capabilities, I'm just trying to kind of think about that range or at least how you guys are thinking about it actually, which has been some pretty large swings here over the past year. If you go back even over the past three quarters, that's their big difference?

Jeffrey M. Solomon -- Chief Executive Officer

So I would say a couple things. Let me just talk about the difference between first quarter and second quarter. So the revenue mix in that was a little bit different. In the first quarter we had, obviously, we had some challenges on inventory in the first quarter that impacted that number. And those reversed in the second quarter. So part of the gain in the second quarter and the daily average performance is simply the swing in the fact that we didn't have a drag for markdowns in inventory. And actually, most of those reversed. So if you were to normalize that you would see that we're normalizing somewhere in between those two numbers. But at a very consistently above in those numbers, it doesn't feel to me that we're going back to where we were last year, and that's partly because of some of the new capabilities we've added and the new talent that we've added. So European trading has picked up significantly. The fact that we have a presence in Europe all all is new, really for all intents and purposes. I mean, we had one that was staffed well and it wasn't positioned well. And certainly when we hired the team last year, they've come on Board and they've accelerated significantly. So those revenues put us in a different position on a heads up basis when you're comparing year-over-year second quarter, that really wasn't much of European presence last year now there is.

I would certainly say elevated volatility helps our options and derivatives business no question about it, that when you when you look at the health of that business it just does better when VIX is trading in the 20s and 30s than it does when VIX is trading in the 15s or 20s or low 20s. And so, to the extent that we continue to see volatility and I think we will for a whole host of reasons that business is going to do better. And then last, I would just say there's some businesses that we've continued to grow where we reach a tipping point and we're recognizing the industry is having expertise. Obviously our autos, electronics business has continued to gain momentum and the install base continues to be higher and grow high as we win more clients in that area. And once you get in as long as you don't screw it up, you're not getting removed. And, and from our standpoint, we're doing everything we can to continue to climb the ladder there. And I would say in our prime brokerage business, the growth and outsource trading is a real secular trend. It's a real secular tale. And we're seeing many smaller funds look at outsource trading as a viable way to scale their businesses. And we're taking share in that space. We're a really good outsourced trading capability platform. We think there's talent coming our way. We have a number of people who'd like to come in and do outsource trading at Cowen and so I view that as a pretty good secular tailwind as well.

So you look at all those things. It's hard to see, barring -- it's hard to see on a heads up basis assuming that we don't have a huge slowdown involved in volumes, how we return to the to the prior levels. I just think we will be more volume centric, but we'll probably make higher lows and higher highs depending on how volumes go.

Devin Ryan -- JMP Securities -- Analyst

Yes. Okay, that was exactly I was looking for. I appreciate you guys taking all my questions.

Jeffrey M. Solomon -- Chief Executive Officer

All right, Devin.

Operator

Thank you. And our final question today is a follow up in the line of Steven Chubak from Wolfe Research. Your question please.

Steven Chubak -- Wolfe Research -- Analyst

Hi. Thanks for accommodating the one quick follow-up. So it's relating to the discussion around Capital Management, appreciate the color on how you're thinking about Jeff, the prioritization of buyback versus inorganic growth opportunities. I didn't know whether you were strongly considering opportunities to maybe better optimize your liability stack, just giving some potential to refinance some high cost debt given you do have some elevated interest expense burden that continues to weigh on returns, whether you saw any opportunity to optimize that liability stack here?

Jeffrey M. Solomon -- Chief Executive Officer

We'll look at it again, we're very ROE centric and if it makes sense for us to refinance some of that debt at lower rates, as people have a better sense for our -- if our credit spreads come in and we can access the market more cheaply. We would look to do that. I think it just depends on how the market conditions are. I mean, what I love about our capital stack is that it's good long-term capital, and even at the rates it is as accretive to our targeted rates of return. So I think, we'll just -- we'll be in a position where if we have the cash we expect to be generating this year, we're going to look at a number of things and that would be one of them. If it makes sense to do that, then we'll do it just really depends on where the markets are and what's available to us when we have the cash, that's something that we again -- everything is on the table as it relates to thinking about how drive ROE that over achieving goal has to be able that to provide consistent returns on equity to the extent that we can and markets allow us to do that.

Again, I want to cautiously we look at that on an annual basis. So we are less about managing quarter-over-quarter ROE as much as we are looking at annualized ROE and ROE over an extended period of time, because at the end of the day we are financial services company and we need -- we are tethered to the performance of financial instruments. Having said that, obviously we are going to hit the mid-teens pre-tax ROE in a zero instrument environment that feels like a pretty good return on people's equity. Certainly for me as an investor it is something that I don't want to and if people can rely on talent to be able to generate those kinds of returns in their portfolios then that will be a great thing for us to do. And if part of that is refinancing our capital stack to insure that we can hit that with greater regulatory, we will look at that.

Steven Chubak -- Wolfe Research -- Analyst

That's great, Jeff. Thanks so much for commenting on the follow-up.

Jeffrey M. Solomon -- Chief Executive Officer

No problem.

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. Solomon -- Chief Executive Officer

Well, I appreciate everybody for taking the time to stay with us today. It has been really an incredible quarter and in so many ways we've so much to thank everybody for. I especially want to thank our team here at Cowen for your increased commitment to or continued commitment to our core values of vision, empathy, sustainability and tenacious teamwork. I think what we've been able to accomplish over the last three months as exhibited a tremendous adaptability and we've all had to create new ways to be effective for our clients and new ways to ensure that we can deliver at a high level. And you all have demonstrated your dedication on values to our clients and to each other during this difficult time. And I just want to say on behalf of everybody, you inspire us every day and I'm really proud to be part of this organization. Thank you everybody for joining us. We look forward to speaking to you on our next call. Talk you soon.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Jeffrey M. Solomon -- Chief Executive Officer

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

Steven Chubak -- Wolfe Research -- Analyst

Michael Brown -- KBW -- Analyst

Sumeet Mody -- Piper Sandler -- Analyst

Devin Ryan -- JMP Securities -- Analyst

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