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Cowen inc (NASDAQ:COWN)
Q2 2021 Earnings Call
Jul 28, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for joining us to discuss Cowen's Results for the Second Quarter of 2021. By now you should have received a copy of the earnings release, which can be accessed at investor.cowen.com. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

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

JT Farley -- Head of Investor Relations.

Thank you, operator. 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 financial 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 M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Thank you JT. Good morning everyone, and thank you for joining us on Cowen's second quarter 2021 earnings call. Today I'm happy to share details on our strong performance this quarter then Steve will review the financial results of the quarter. After that we'll be happy to answer your questions.

The second quarter of 2021 was a clear demonstration of Cowen's core earnings power and the growing breadth and depth of our capabilities across the platform. It was the third-best quarter ever for investment banking and markets and the fourth best quarter overall in terms of both revenues and profitability.

We delivered this standout performance despite the slowdown in capital markets issuances and the impact of negative mark-to-market changes in some of our funds, which impacted our incentive income. This quarter builds upon our record results over the past year. It also demonstrates the consistent earnings power we have established over the past several years through strategic investments in our capabilities and our team.

Over the past four quarters, we have generated nearly $1.9 billion in revenues and generated over $10 per share in economic operating income. While Cowen's stock is among the best performers in the financial sector this year, we believe that our valuation is still compelling, and there is opportunity for additional upside.

Operationally, we are returning to the office in greater numbers across the firm, and will continue to do so in the coming months. Mindful as always that safety and health of our team remains a priority. Our team continues to operate at a very high level to deliver results for our clients regardless of where we are located.

While we clearly see the benefits of beginning to gather again in the office, we knew our future will be filled with more workplace flexibility. At Cowen, we are proud to be in a position where we can rethink what the future of work will look like in order to address the needs of our clients, colleagues and communities.

Here are some of the operating highlights from the quarter. In investment banking, it was an impressive quarter even with the slowdown in healthcare capital markets activity and SPAC IPOs. Banking revenues were up 13% year-over-year, and it was the second strongest quarter on record for M&A revenues. It was also the first quarter ever in which advisory, which combines our M&A and capital markets advisory revenues comprised the majority of total banking revenues at nearly 60%.

This quarter was also a clear demonstration of our progress on sector diversification. Sectors outside of healthcare generated 55% of banking revenues with strong contributions from consumer and technology-enabled services. Our healthcare businesses also increasingly diversified, with 40% of our healthcare revenues coming from areas such as tools and diagnostics, med tech and healthcare IT. And M&A revenues were $85 million, nearly triple on the level of a year ago.

While SPAC IPO activity fell sharply compared to the first quarter, total second quarter SPAC-related revenue was just 10% of total banking revenues, including underwriting, PIPEs and merger fees. Demand for advisory and capital markets issuance remains strong looking out to the remainder of the year.

Our pipeline ended the quarter at a new record level and is up over 80% versus the level a year ago. It is worth noting that SPAC mandates make up just over one-third of our current deal backlog. We have added a number of hires at all levels to our banking team in recent months and Cowen has emerged as an employer of choice for professionals who want to accelerate their careers.

In markets, we had another strong quarter with $2.82 million in average daily revenues. That's a 5% year-over-year increase outperforming a 15% decline in US equity trading volumes. It is also an exceptional result given how much trading activity in recent months was driven by retail investors, who are not a part of our client base.

Highlights for the quarter included a 48% income increase in prime services revenues, cash trading was up 22% and non-US execution was up 32%. Securities finance and special situations both rebounded strongly compared to last year, with revenues in both groups up well over 200% versus the second quarter of 2020.

We have clearly gained share in our markets business and are seeing promising early growth in newer opportunities such as ADR trading and international prime brokerage. We are attracting new talent adding fixed income expertise to our outsourced trading offering, bolstering our capital introduction team and building out a leading event-driven trading desk in Europe.

We're also making progress on our digital assets initiative following on the $25 million investment in PolySign, which we announced in May. While there is still a lot of work to be done we are developing capabilities to meet emerging client demand for trading and custody of a range of digital assets.

Looking at the current quarter, although equity volumes have slowed modestly in July compared to the second quarter, we are off to a good start with average daily revenues in excess of $2.4 million. We are seeing both higher highs and lower lows in our markets business-sorry, let me repeat that. We are seeing both higher highs and higher lows in our markets business and believe that our competitive position has never been stronger.

In research, we added to our already formidable bench strength with plans to bring on additional analysts in the back half of this year. During the second quarter, we onboarded new senior analysts in life science and tools and diagnostics; managed care and facilities; and food and healthy living. We also launched coverage in the cybersecurity sector. Our focus on ESG, sustainability and energy transition also continues to flourish. We have one of the largest coverage footprints on the street in these areas.

We published 14 of our flagship Ahead of the Curve Series reports in the quarter and launched a new thematic library. Clients continue to value our thoughtful and differentiated research. And during the quarter, our team saw a meaningful gain in brokerage folds from our institutional clients.

In Investment Management, we had a negative mark-to-market charge in economic incentive fees totaling $31 million nearly all from positions in the Cowen Healthcare investment strategy, while we are still up for the year so first half 2021 economic incentive fees were almost $78 million. Just for perspective that number is over 90% of total economic incentive fee income for the entire year of 2020.

Economic management fees were up 26% year-over-year due largely to higher AUM and the sustainability and activist strategies. Total AUM was $14.4 billion which is up 25% year-over-year. Looking at our five investment strategies. Our sustainability strategy had just over $1.5 billion in AUM at quarter end. The strategy completed a follow-on investment in ecoATM and also saw the completion of Proterra's merger with the ArcLight SPAC.

Our healthcare investment strategy completed one new investment and two follow-on financings and ended the quarter with $833 million in AUM. Long-term performance remains strong despite the declines in value of several public positions during the second quarter. The activist strategy had positive performance in the second quarter and grew assets to $7.2 billion. The merger arbitrage strategy had $311 million in assets under management at quarter end. The strategy had positive performance for the quarter beating the HFRX Merger Arb Index.

The HealthCare Royalty strategy ended the quarter with $3.7 billion in total AUM, which is up $200 million year-over-year. Worth noting Healthcare Royalty has filed for an initial public offering and we intend to provide more details on our ownership stake and what it means for Cowen financially and economically when we are able to do so.

Turning to Asset Co, which as a reminder includes non-core investments that we intend to monetize. The value of our investment in the Italian wireless Internet company Linkem was $8.3 million, $7.7 million higher than in the second quarter of 2020. Year-over-year gain was due to a favorable foreign exchange adjustment and improved business metrics. The net asset value of our LP interest, investments in Formation8 and Eclipse rose $2.7 million to $41.6 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, Cowen Inc.

Thanks, Jeff. GAAP results for the second quarter of 2021 were as follows. Revenue was $458.8 million down 29% year-over-year from $646.2 million. Net income attributable to common stockholders was $43.6 million or $1.29 per diluted share down from net income of $112.1 million or $3.83 per share -- per diluted share in the prior year period.

Compensation and benefit expenses were $219.2 million a decrease of $86.1 million from the prior year period. Expenses excluding compensation and depreciation and amortization were $109.3 million for the second quarter. D&A expense was $4.6 million. Income tax expense was $10.2 million compared to $44.9 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 last quarter.

Now turning to our non-GAAP financial measures, which we refer to as pre-tax economic income, economic income and economic operating income. Please consult the earnings release and our quarterly filings for a definition of these terms as well as an explanation about how the company uses these non-GAAP measures and how investors find them useful.

Op Co had total economic income proceeds of $389.4 million. Op Co pre-tax economic income was $71.9 million. Economic income was $51.1 million and economic operating income was $54.5 million in the second quarter. Asset Co had economic income proceeds of $696,000, pre-tax economic income loss of $4.7 million and an economic income and economic operating income loss of $3.7 million. On an overall basis, we reported pre-tax economic income of $67.2 million, down from $163 million in the prior year period.

Economic income is presented net of dividends as well as associated taxes. The company has utilized all available federal operating losses not subject to limitation during 2020. Economic income tax expense for the second quarter of 2021 was $18 million. Economic income was $47.5 million for the second quarter of 2021, down from $161.3 million in the prior year period. The prior year period included an unrealized gain in Nikola.

Second quarter economic operating income was $50.8 million compared to $166.9 million in the prior year period. Total economic proceeds declined 30% year-over-year to $390.1 million. For the quarter, economic investment banking proceeds were up 13% year-over-year to $214.4 million. Economic brokerage proceeds were also very strong up 5% year-over-year to $175.8 million.

Economic management fees for the quarter were up 26% year-over-year to $18.1 million. Economic incentive income was a loss of $31.1 million in the second quarter versus income of $46.4 million in the second quarter of 2020. Most of the losses were due to negative mark-to-market adjustments on public positions in our healthcare strategy.

As a reminder incentive income may fluctuate from quarter-to-quarter based on the value of positions held in our various investment strategies. Economic investment income was $5.5 million versus $140.5 million in the prior year period. And the second quarter of 2020 results included almost $130 million in investment income from the unrealized gain on the Nikola position.

Turning now to our expenses. Compensation and benefit expense for the quarter was $220.4 million, compared to $305.1 million for the prior year period due to decreased revenues. Our comp to proceeds ratio increased year-over-year from 54.6% to 56.5% of economic income proceeds. For the full year 2021, we are targeting an annual compensation ratio between 56% and 57%, although it may vary from quarter-to-quarter.

Fixed non-comp expenses totaled $41.9 million in the first quarter, up from $34.9 million in the prior year period. The increase is due to return to office activity new hires and technology initiatives. Variable non-comp expenses in the second quarter of 2021 were $46 million versus $40.8 million year-over-year. The increase was due to higher brokerage and trade execution costs from increased volumes as well as higher travel, entertainment and business development expenses.

For the remainder of 2021, we would expect T&E and business development expenses to rise modestly from current levels as more in-person meetings are scheduled. Second quarter depreciation and amortization expenses were $4.6 million compared to $5.7 million in the second quarter of 2020. We generated economic operating income of $50.8 million or $1.50 per common share, which includes the impact of taxes at an effective rate of 26.8%.

In future quarters, we expect our effective tax rate to be in the range of 26% to 31% depending on the nature and geographic sources of our income. Turning to the balance sheet. At quarter end, the company had invested capital in Op Co totaling $831.6 million, up from $722.8 million at the end of 2020. In Asset Co, we had invested capital totaling $126.2 million at the end of June, down modestly from $131 million at the end of 2020.

Turning to our equity. Common equity, which is stockholders' equity less preferred equity was $1 billion compared to $868.2 million as of the end of 2020. Common book value per share, which is common equity divided by total shares outstanding rose to $34.35 as of June 30, 2021, compared to $32.34 as of December 31, 2020. Tangible book value per share was $28.35 at quarter end, up from $25.95 at the end of 2020.

Return on common equity was 21.7% for the quarter of 2021, well above our target of generating mid-teens return on common equity on a consistent basis. As a reminder this ROCE target is now calculated on an after-tax basis. As we announced this morning, our Board of Directors maintained our quarterly cash dividend of $0.10 per common share. During the second quarter, we repurchased a record $49.9 million in stock, a total of 1.275 million shares including purchases executed according to our existing 10b5-1 plans.

Our fully diluted share count in the first quarter was a weighted average of 33.9 million shares, an increase of more than 300,000 shares over the previous quarter's weighted average. This increase was due to the timing of the conversion of Cowen's convertible notes in late June, as well as the vesting of restricted stock units and long-term incentive program shares.

During the quarter, we purchased shares equivalent to nearly 100% of our economic operating income. For the first half of 2021, we purchased shares at a value equivalent to 36% of our economic operating income, just above our target range of 25% to 35%. We may be more opportunistic in buybacks depending on market conditions and available cash flow and we'll prioritize additional capital returns when we're able to monetize assets such as Linkem.

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

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Thanks, Steve. By all accounts, this was a strong quarter, and a clear demonstration of the consistency of our earnings power. Without any extraordinary tailwinds and indeed in the face of tougher capital markets environment for healthcare, we generated over $50 million in economic operating income after taxes. That impressive result is even after factoring in the $31 million in negative mark-to-market and giving back some of the tremendous incentive income we generated earlier in the year.

We remain well-positioned to achieve or beat our targeted after-tax mid-teens return on common equity on a consistent basis going forward. Even as we are focused on building on the progress we've made across the Cowen platform, we are mindful that doing well enables us to do more good. And this means working to benefit the broader communities in which we live and work.

During the second quarter, Cowen was proud to be among the sponsors of the pledge to progress study, a national report about racial equity and inclusion across corporate America. This report found that there is heightened awareness about discrimination in the workplace and a willingness of the majority of workers to help tackle those problems.

This is not a simple matter, but we believe, acknowledging the issues and working to create a more inclusive and diverse workplace is an important responsibility. We've made progress in this area, but more work needs to be done and we're committed to this effort across the firm.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Steven Chubak with Wolfe Research.

Brendan O'Brien -- Wolfe Research -- Analyst

Good morning, guys.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Hey, Steven.

Brendan O'Brien -- Wolfe Research -- Analyst

This is Brendan O'Brien, actually filling in for Steven.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Hi, Brendan.

Brendan O'Brien -- Wolfe Research -- Analyst

Well, first off the non-comp expense and ratio was a bit higher than we were expecting, though obviously some of that was likely in part to the negative mark coming through on the incentive income line. But even adjusting that out, the non-comp ratio took a significant step up quarter-on-quarter. Just wanted to get a sense of what was driving that increase? And maybe how you're thinking about margins and non-comp ratios in a normalized earnings environment given the significant market share gains and scale generated over the last year?

Stephen A. Lasota -- Managing Director and Chief Financial Officer, Cowen Inc.

So, Brendan for the fixed non-comps, I would expect that the number for Q2 maybe a bit high, because some of that has to do with new hires and return to office activity we expect that to continue. But, we also have some technology initiatives that were in Q2 that are driving that number up a bit.

On the variable side, obviously a lot of it depends on floor brokerage and trade and execution, which is depends on how well we do that quarter in the markets business. But also, as I said T&E and client entertainment is picking up a bit and we do expect that to continue into Q3 and Q4. But again, the fixed non-comps so this quarter were probably a bit high, but variable will depend on the -- T&E side will pick up, but the trade and execution will be dependent on how much revenue we do in any particular quarter.

Brendan O'Brien -- Wolfe Research -- Analyst

Great. And on the share count, it sounded like a little bit as if there's a bit of a tone shift I guess in terms of being a bit more opportunistic and driving a bit more capital return depending on the monetization time lines. Just wanted to get an understanding of your willingness to continue to repurchase shares at current share price, and how should we be thinking about the share count from here. And in addition given the significant capital accretion over the last 12 months, what the appetite is to deploy that capital to growing the firm potentially inorganically? Thanks for taking my questions.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Sure. So, first of all there's no change in the tone on our commitment to buying back shares. But I think we gave the guidance that we would be in the range of 25% to 35% of our after-tax economic operating income that withstands. So, as we mentioned on the last call, the first quarter is a period, which is the shortened period in which we have to buy back stock.

So, we certainly made up for that in the second quarter and we now stand at well in excess of the high end of our target range and we're not changing that guidance. So as we continue to generate the kind of profitability we expect, on an after-tax basis you can expect us to continue to buy back stock and shrink the share count. No change at all in that.

We'll continue to look at inorganic opportunities. I think the bar is high, but we see them. And where there are opportunities for us to do things to grow our platform in the near-term or in the longer-term we'll do them. I mean a good case in point is the investment we made in PolySign, that's a longer-term play for us as we think institutions haven't really even begun to trade digital assets or crypto yet, just haven't done it. It's largely a retail game.

We're seeing a tremendous amount of pent-up demand, we think from our institutional clients to do that. We feel like we've got a product offering that we're going to be able to roll out here that will be world-class that enables our institutional clients to participate. So, there we took $25 million of capital and made a longer-term investment, because we think it's going to drive the top line.

We also continue to do things like hire people. And it's certainly easier to do, when you have numbers like this, from a profitability standpoint, but you should expect that, we'll continue to opportunistically hire people in areas where we see meaningful growth. And that has to do with again identifying things we've always identified, which are industry is undergoing rapid transformation places where we can both be a knowledge provider of intellectual capital, understanding where those changes are occurring.

And of course we like to play in places where there's transactional activity, they're capital raising or M&A advisory. So again, we'll continue to do those things. You can see the benefits in some of the investments we've made, frankly when we had a lot less cash flow. And so super proud of that and we'll continue down that path.

Brendan O'Brien -- Wolfe Research -- Analyst

Okay. Thanks for taking my questions.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Great. Thanks, Brendan.

Stephen A. Lasota -- Managing Director and Chief Financial Officer, Cowen Inc.

Thank you.

Operator

Your next question comes from the line of Sumeet Mody with Piper Sandler.

Sumeet Mody -- Piper Sandler -- Analyst

Thanks. Good morning guys. I heard the commentary around the pipeline being one-third SPAC related. I wanted to drill in a little bit more into the total banking pipeline today. Maybe give us an idea of what you're expecting to achieve over the next couple of years in terms of SPAC and non-SPAC-related deals?

And I guess sort of similarly on the healthcare versus nonhealthcare growth of the business. How does the environment set up your expectation for growth for total banking? Do you think you have the infrastructure and talent set up to scale in the areas you're focused on? Or maybe you can kind of talk about that.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

So let me address SPAC. So, I think we all knew that the SEC was looking closely at SPAC and de-SPAC transactions in the second quarter and that certainly put a chill on the market for SPAC exits and therefore put it -- it's on the market for SPAC IPOs. Obviously, the record issuance in the first quarter SPAC IPOs, no one thought was sustainable and I expected there would be a meaningful slowdown for the remainder of 2021. We're still seeing deals get done, but they're a little bit more pricey in terms of SPAC IPOs.

In terms of de-SPAC transactions, we've actually had a number of them closed in July, and we expect to continue to see those closing. So, as we said I think on the last call, we're not expecting there to be anything that changes in terms of these deals being able to close. It was simply a matter of timing as the SEC began to ask for more detail and more disclosure and change some of the accounting requirements for the de-SPAC transactions, but that's happening. And so when we look at our backlog, I think we'll continue to chop through it.

And certainly if July is any indication, we're very excited about being able to capitalize on that going forward. There's going to be a ton of SPAC activity, certainly de-SPAC activity over the next few years as we've said and we'll get our fair share. Currently, we are staffed well. Obviously, we're in the luxurious position of being able to pick and choose where we're going to lean in on SPAC transactions.

There's still too many of them for us to do and so, we're continuing to focus on the ones we think are the highest quality that line up really well with the capabilities that we have and the industries in which we operate. As far as healthcare is concerned, I think historically, our bread and butter, has been in the biopharma space. So for those that don't really understand the nuances around the biotech space, drug discovery has been the primary engine of economic activity which is actually fairly downstream, right? Discovering drugs is actually the primary engine.

A lot of these companies to have obviously raised significant amounts of money and they have to spend that money to build infrastructure. So you're seeing tools and diagnostics, which are the infrastructure necessary to continue to have drug discovery, tools and diagnostics companies have been developed. And those are really sit at the nexus of technology innovation and in life sciences innovation.

So, for example, our ability as an industry to map the coronavirus in less than two weeks is a function of the fact, there's a tremendous amount of technology and science in terms of mapping genomic and proteomic makeup of diseases and that has been a huge area over the last 12 months of growth. And it's -- for those that are in the industry know, it's actually very different than drug discovery.

Those companies have very different dynamics, different skill sets, different economics different valuation metrics. And so, the growth even in that sector as is sort of some of the biopharma IPO activity and follow-on activity has abated, the growth has come from tools and diagnostics, healthcare information technology and a bunch of other areas that we're also really good at and we've made investments in those areas to broaden our healthcare.

As we look forward, I think we could see -- continue to see a tough tape in drug discovery. Certainly, it's been a difficult run here over the last six months. But probably the most difficult period of time so the last four months really if you look at sort of March, April, May, June and July. It's been a very difficult time, probably the most difficult time in that sector since the end of 2015 and beginning of 2016.

And I think -- so a lot of people say well, what will happen to Cowen when the biotech sector rolls over. And we've said for over and over again that the diversification of our banking business, diversification of our pipeline, the diversification into M&A and capital markets advisory, all of which are nonbiotech or not most of which are nonbiotech will really be helpful to us.

And I think this quarter is proof positive that even when there's a slowdown in economic activity or financing activity in that space Cowen can do really well because we've got many other things going. And so, as I look at our pipeline going forward, I feel very confident. It's the highest it's been even with all that activity and the makeup of it is more diverse than it ever has been. So I hope that gives you some -- maybe a lot of color but I hope that's helpful to you Sumeet.

Sumeet Mody -- Piper Sandler -- Analyst

Yes. No for sure. Appreciate that. Second one, I wanted to kind of touch on hiring a bit. Wondering the work from home dynamic, its effect on employee retention that we're seeing that play across the economy. I saw a journal article this morning highlighting it in the tech sector, but it seems like it's increasing competition for employees maybe more on the junior side, but have you seen any impact on the talent base in recent months or due to the ability of your peers to hire remotely? Or have you been kind of in that gain or on that front? Maybe you can talk about that a little bit.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

So I think we've got a net gainer on that front. I think we've had -- we've been really good at onboarding during this period of time. I've been through a bunch of back to work or back to office, return to office events over the course of the past month and met a bunch of our colleagues who seem like they've been here for a long time and many of them were onboarded during the period of time of remote work.

And certainly when we're bringing people back together again a palpable excitement around being together again and I'm encouraged by that too. So whatever the future holds for us I think, there's a real strong desire on the part of our team to be together. And that really speaks well of our culture.

I think Cowen has been a net gainer in terms of talent. Certainly we're in a lot better position than we were a decade ago where it was a very different story. But even over the past few years leading up to the pandemic we were already exhibiting the kind of recruiting capability that we had always been desirous of. And so, if anything that's accelerated during the pandemic and we've been able to demonstrate that we can bring people on in a remote environment and still have them have the same kind of empathetic engagements that are so common in our organization is so foundational.

So I feel pretty good about it. The fact that Cowen is a place where people want to come work, I never take that for granted at all. Feel super special the best way it is. And I certainly think that whether we're working remotely or together or flexibly whatever that looks like the connectivity that we have as an organization is one of our core strengths and I think we're benefiting from our ability to extend that to new people as well.

Sumeet Mody -- Piper Sandler -- Analyst

All right. Great. And then one more if I could sneak in for Steve. Sorry if I missed this but what was the driver of the $7.3 million other revenue line in the quarter? It's just a little bit higher than kind of a normal run rate there.

Stephen A. Lasota -- Managing Director and Chief Financial Officer, Cowen Inc.

Yes. It's mostly our operations from insurance and things like that in overseas.

Sumeet Mody -- Piper Sandler -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Devin Ryan with JPM Securities.

Devin Ryan -- JPM Securities -- Analyst

It's JMP Securities. I guess first question here on the brokerage business just continued momentum there. And Jeff you've been talking about some of the growth initiatives in that business whether it's ADRs or international prime brokerage. I'm not sure if there's any way to give frameworks around how you would maybe size those or think about kind of some of these incremental areas you're extending into and how big they could become?

And then also just with the digital assets initiative kind of when we should expect that that could start to at least become revenue producing or productive? I appreciate we're kind of in the early days here. But any other color for that as well.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

So I'll just say, we have definitely been more acquisitive on talent than any of our peers I think in the brokerage business. I mean we're being selective, but we have a bunch of folks. If you're in the equities business US and increasingly in Europe and you've got a franchise this is a great place to come work. It really is. I mean because it's got tremendous forward momentum and you're plugging and playing.

And so as I think we mentioned we were able to hire this the team in Europe this event team, I think we think it's the best event team in Europe that bolts on to our already growing European business that we started to invest in toward the end of 2018. These are great opportunities for us to attract talent. And it's just -- when you 00 if you're in that business which I know you are, if you look around you make a short list of places where you want to go work.

We're at the top of that list because of the forward momentum. And honestly your ability to make an impact on this platform. I think it's a big thing. A lot of folks who work in that industry at much larger firms I think sometimes struggle with are they really making an impact? And what's the commitment to the equities business versus the other businesses?

Cowen it's a core competency for us the markets business. And you can see how the investments we made really played out. And I think certainly if you look at what we're doing we've seen the best market share gains, really anyone in the space except maybe Goldman Sachs. I mean it's a top 10 platform and so -- which is kind of the highest market share we've ever achieved. And so we'll continue to press our advantage there, because that is a game of share grabbing.

And when shares come in your way, you want to do things to make sure you continue to address the needs of those clients, which dovetails, I think into some of what we've done in the prime business. And while you're seeing some of our prime balances increase, you're seeing us take on more swap counterparties, and grow out our swaps business.

And I think that longer-term, Cowen Digital fits in. I don't expect it to be a revenue generator in the near-term, because we've got a lot of work to do to hone that product offering. And frankly, get regulatory approval which is challenging, regulatory approval in a bunch of the different jurisdictions where we want to trade assets. But we know that that demand is there. That's what's interesting. So in our conversations, we're having so much in-depth conversations or so many in-depth conversations with our institutional clients they would like to figure out how to get exposure.

And it's just -- it's hard for them, in part because of the custody challenges. And that's what we're solving. So when you think about the growth in some of the more -- the growth outward from cash equities which is where Cowen was to algorithmic trading, to prime brokerage, to event, to options and all of those businesses that sit around the traditional cash equities and research sales, thing that Cowen was really good at a decade ago.

When you build out from those cores, you find that you can just take a greater share of wallet from an existing client base. And so for us, this is identifying the clients we already have. And figuring out, how we're going to help them to continue to consolidate their wallets with us, as a core provider. And that's been the strategy. And will continue to be the strategy for us. And certainly it seems like, it's working. I mean, relative to just about every other firm on the Street. And relative to market volumes we continue to excel.

Devin Ryan -- JPM Securities -- Analyst

Okay. Terrific. Thanks, Jeff. Maybe a follow-up here just on, the investment banking backlog and outlook, but zeroing in on the M&A advisory business. Clearly, a lot of momentum there very strong second quarter results, but I believe, you have some large transactions in the backlog there. So, if you can maybe just give a little more flavor for how you guys are sizing that market? And where you want Cowen to be, whether it's the next revenue target $300 million $400 million of revenues for the business or any other frameworks.

And it also -- it seems like you guys are moving upstream in terms of size of deals, some of the fees we've had more recently are larger than historical advisory fees. So just maybe give a little more color if you can Jeff around, how you guys are thinking about kind of the next target of revenues for M&A advisory and some of the other aspects of the momentum?

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Yeah. I mean, I think, as we look at our backlog. And I think the guidance we gave in terms of the complexion of that backlog is pretty significantly weighted to M&A and capital markets advisory. And again, I want to reiterate that, M&A and capital markets advisory is pretty much everything, but equity underwritings.

So when you think about the metrics that we gave earlier in the call, anytime we have a significant amount of M&A and capital markets advisory the economics associated with those, looks very similar. So debt capital markets transaction or restructuring or anything like that looks in blocks and talks economically to us like an M&A transaction.

Certainly what we're seeing in terms of the activities in SPACs and certainly de-SPAC transactions has helped our average deal size metrics significantly. Those are large transactions. And when they close, oftentimes we're both a capital markets advisor we've raised some financing on the backend or we're representing either the target or the SPAC, there's just so many ways for us to win in that space. And we're good at it. So, we're winning not just because we took SPACs public.

But if you're a private company, and you're looking to access to market and you want to have the best firm on the Street to be a sponsor for you, and advise you, and raise capital for you, and support you in the aftermarket, Cowen is a logical choice, because of how we're set up. And how we can be integrated between M&A advice and financing.

And I continue to say like, that is a difficult thing. Wall Street is not setup actually in many instances certainly firms of our size are not setup necessarily to provide M&A advice and financing advice on an integrated basis. That's something we do. And we've obviously been set up to do that for a longtime. And so as we continue to expand, we're looking at how we take that -- those M&A prints and parlay them into other opportunity sets. And you can see it happening. As you can see some of our middle market activity has picked up dramatically.

And when you look at the numbers and how they've increased in the middle market, that's been a function of the fact that we're just -- we're more active. We have more prints. We're doing more with middle market sponsors. Many middle market sponsors are reaching out to us to ask us for financing advice or SPAC advice.

Oftentimes that translates into getting mandates that are traditional in nature. And we've seen that in some of the acquisitions we've made that the average ticket size for the people that used to work at those other firms has increased significantly. And that's a function of the fact that, the strategy that we laid out of being able to plug financing into M&A advisory is a critical component.

And especially as we focus on places that are less balance sheet intensive. So, again, we have a great I would call synthetic capability to get access to financing through the direct lending market, which is every bit as competitive as the bank market and is much more important I would argue in the middle market than it is in the big cap sponsor game.

And from our standpoint, that robust financing activity goes hand-in-hand with providing private companies with great advice to get good exits or cash out refi. And if you can't discuss those things in combination when you're talking to a client then you're stuck selling a single product.

And I think many of our competitors who lack the financing prowess are basically selling single product. They can only do one thing. And increasingly what we're seeing is we compete and win against firms that are our size or oftentimes firms bigger than us is that we have the ability to offer a full suite of services that enables our -- the private companies to feel very comfortable hiring us.

And that's just -- this is -- as things mature on our platform this is what we're seeing. And so I expect to continue to see growth in M&A. Our M&A business is going really well. I continue to see us continue to grow out in the sponsor space where we didn't have much of a footprint and we're growing in that space meaningfully. And those businesses have some very, very different dynamics than what people I think traditionally associated as the drivers for Cowen's investment banking business.

And so I look not only at the size of our backlog Devin, but I look at the diversification of the strength of that backlog. It gives me a lot of confidence as we head into the back half of the year and into 2022 that's a very, very different firm than it used to be. And it's much more resilient even if some of the traditional ways we made money might ebb or not. Like I feel like they could or they may not right? And I think we're in a great position when I think about the portfolio of businesses and industries and products we have in banking.

Devin Ryan -- JPM Securities -- Analyst

Okay, terrific. One last one here if I can squeeze in. Just on the HealthCare Royalty IPO we've received some investor questions just around that and potential impact. Obviously, that will create permanent capital vehicle and over time management fees move higher. I think there's also some incentive income crystallization. Is there anything you guys can share around that process or potential implications on Cowen?

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

So, I can't give any details now though I appreciate the question and I can't give any details now because that company is in registration. So, I've got to just tell you that we're going to be giving you a lot more information when we can. What I will say though is -- and I think you Devin, we've talked about this in the past the economic ownership of HealthCare Royalty Partners and management and the incentive fees to the extent there any or not anywhere on our balance sheet.

So, as we get more information and how that goes, if I were an investor I'd be looking at it. And we will be back to you and to investors when we can talk about it in more detail so that people can get a better sense for what it means for us economically. We just -- we can't say it right now because they're in registration. It's a great question though.

Devin Ryan -- JPM Securities -- Analyst

Yes. Understood. Okay, terrific. Well, thank you. I'll leave it there.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Great. Thanks Devin.

Operator

Your next question comes from line of Michael Brown with KBW.

Michael Brown -- KBW -- Analyst

Great. Thanks for taking my questions. Jeff maybe we could just follow-up on the M&A advisory comments that you made there. It's very comprehensive. You talked about financial sponsors as an area that you have been investing in activity there has been really robust real kind of leader of the M&A activity for the industry.

Can you just provide us a little bit more color there? What have you been doing to kind of grow out your coverage for sponsors? What's kind of needed? What do you need to address near-term? And what's kind of the top focus there? And then what is your outlook for that segment specifically?

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Yes. So, it's a great question and I appreciate that Mike because I think it was a lot less obvious. And this as I understand the dynamics of this business better, there's so much that goes on in terms of the construct of a proper M&A practice which Cowen did not have. Cowen had a -- to the extent that Cowen did M&A in a limited way historically it was really a public company and I would say corporate-to-corporate M&A, right?

We had great industry bankers who have great industry knowledge, but you're basically trying to get corporations to sell divisions to corporations because we just didn't have a sponsor footprint. A lot of our competitors made that shift to sponsor coverage in the early 2000s and Cowen was busy doing other things at the time.

And honestly, we didn't want to have a me too sponsor coverage business. I think for a lot of the big firms sponsor coverage often time starts with hey we lend to you. And so when you look at sponsor models for the big firms if they're lenders they expect to get business for the sponsors and there's a lot of rents repeat to sponsor coverage certainly big cap sponsors where as long as you're a consistent lender, your name comes up in a rotation.

And as long as you've got a heartbeat, you're going to get a fee. That's not the game that we're in. That's never been the game that we're in. We don't have a balance sheet to lend nor are we going to have a balance sheet that lend. So, we have to compete on intellectual capital. And that means going into markets where you have dominance because you've done all the transactions in the space or you've been able to uncover opportunities for consolidation that are just a lot less obvious.

So, when we acquired Quarton as our first foray into that space, it was a platform acquisition. And in retrospect, I should have articulated more as a platform acquisition. We needed to have a meaningful amount of engagement with sponsors because the way it works is, if you don't have enough exclusive sales and not enough sell sides then sponsors don't call you back. And in order to get those sell side you have to have great connectivity sponsors.

So it's a chicken and egg question if you're trying to do it organically, which we tried to do for a number of years. So the Quarton acquisition gave us this footprint that expanded on our corporate capability. So if you think about the cascade of big corporate transactions and what's happening at the top of the house in terms of big corporations there's a cascade down into-in the industries in which we cover to smaller companies that are building themselves up and consolidating themselves to ultimately have a takeout either in the public markets which we're really good at or to big corporate takeouts, which we have the relationships.

So for us this is about building out that pipeline, so that we could be a seller of businesses multiple times over a number of years from one sponsor to another, to another as it consolidates and ultimately to a corporate, if there's a corporate takeout. And I'd say we're in the middle innings there. But you can see with the-even with the interruption that happened as a result of the pandemic, the way to that business has come back, our middle market sponsor activity is up probably 40% year-over-year, which is-and it's stronger with bigger tickets, which means that we're cross-selling debt-debt financing capabilities.

We're also actually in some instances advising on equity raises and growth capital. That wasn't something that our platform acquisitions were doing. And then we bolted on the MHT acquisition. Again, this is getting a really high-quality group of bankers in segments we know well going deep, that exhibit the same kind of characteristics that we talk about.

Industry is undergoing massive disruption that either require significant capital or will have a lot of transaction activity. It's actually a fairly straightforward model. This is why we focus-this is-when we think about who we bring on organically or inorganically, it's got to be in industries that exhibit those characteristics because that's what gets Cowen paid. And so we don't spend time in industries that don't meet both of those, right?

There are industries undergoing great dynamics, a great change. If we don't have anything to say or anything to offer in that we just don't spend time on them, right? And then-and conversely, there are industries that may need to raise a lot of capital but maybe that capital is balance sheet capital. We don't spend a lot of time on those either.

So we have to look for individuals and businesses that are transacting in those spaces that exhibit those two characteristics where they overlap. And the success of what we're seeing in the middle market, it's a function of the fact that we've got great domain expertise, married up with now that connectivity to sponsors, which is what they want and what they need. And so I would argue it's much more of a moat around that.

It's very difficult to build intellectual capital and knowledge base. I mean case in point and then I'll get off it. We're probably the dominant player in HVAC transactions. We've done more HVAC transactions in this country in the last year than any other bank, right? It isn't a business that people thought about but we saw it as a business that was undergoing significant consolidation got around it and we've got a great team that's doing just about every transaction in that space.

And that's a function of the fact that we have great access to the middle market, certainly through the Quarton acquisition but also that integration into industrial, the industrial complex that we have the historical strong suit of Cowen's industrials and aerospace and defense. Those are the things I think that really-we're starting to see that flourish in a meaningful way just as these-the integration of those acquisitions season on our platform. And that's why I give a lot of confidence, when I look at our backlog. I hope that's helpful to you.

Michael Brown -- KBW -- Analyst

Yes, that was great. I appreciate all the color there, Jeff. Your business model is clearly working on a lot of the ways that you just kind of touched on there. You did mention though that some of your peers have an advantage with their larger balance sheets and their ability to land and maybe sync their hooks in a different way than Cowen.

One of your peers announced a strategic alliance with the Japanese bank that may be kind of one of the elements there. I don't want to oversimplify the merits of the transaction. But I'd love to hear your thoughts on something similar to that announcing a strategic alliance with an ownership stake, if that's something that Cowen would eventually be interested at some point and if you see any value in a structure like that?

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Well, so I mean, I always like to say, I admire. I admire that firm and I admire what they do. They're different than we are. And they've had a very active honestly relationship and partnership on the lending side for a lot of years. So I think it's a transaction that makes a lot of sense for them, particularly as they think about how they monetize that region may be better. And I think that's important to them. I'm an observer of that the same way you are. I don't know that, I have any deeper insight there.

But I look at it, and I say, if we're going to make a big-if we were ever to think about making a big move into that region, yeah, we want to have a partner. I think we're a firm that looks for partnership all over the place, because we think we're good at what we do and we think we bring-we add a lot of value in the domains we have.

We also recognize that by definition that means, we can't be all things to all people. And so as we think about how we expand, if we were to expand into other geographies or other businesses we're always seeking out partnership. And I can give you multiple examples of how we would do that. If that partnership were to involve an investment in the firm, I'm open to that but it would have to be very, very meaningful in terms of changing the dynamic here.

So we're good and not active in those dialogues. But I think if there was an opportunity for us to do something and drive meaningful value for us by partnering with somebody, yeah, we would do that, because we're good at what we do and we recognize that in order for us to continue to grow there might be an opportunity for something like that.

But right now no, and I don't think-by the way I don't think we need to have a lending partner to answer your question more specifically. I don't think our business is currently constructed necessarily benefits from having a big lender there that's not under our control. And I think we tried that a few times having synthetic-to try to create synthetic lending relationships.

And honestly it's very difficult to do that when you're balancing fees from an investment bank and credit decisions. And I think it's hard to do what I would call synthetic lending partnership relationships unless everybody has got the same economics. And so we're not looking to do anything in that area yet, but I'm open to suggestions, and if folks want to talk about it with us, I'd be interested in hearing. Maybe there is an opportunity, just I'm not aware of it yet.

Michael Brown -- KBW -- Analyst

Yeah. Great. Thanks for all that, Jeff, thought that was an interesting overview. And I agree it's not that I'm necessarily implying to meet a balance sheet lending partner just kind of got my mind thinking about that a little bit. So I appreciate the thoughts there. Thanks for taking my questions.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Yeah. It's a good question. I appreciate that, Mike. All right. So if there's no further questions.

Operator

There are no further questions. I would now like to turn the call over to Mr. Jeffrey Solomon.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Okay. Well, thanks operator. I'd like to express my heartfelt thanks to the team at Cowen. You all have demonstrated your commitment to our core values. You know them well vision empathy, sustainability and tenacious teamwork. And I couldn't be more proud of the work that you do here every day. It's a real privilege for me to be the Chair and CEO of this company filled with amazing people that do amazing things for other people.

And I say that, with all humility, because I realized how lucky, I am to be in that position. And so I just didn't want to end this call without acknowledging all the hard work and everything that you do to overcome the challenges that we all face to deliver on a day in and day out basis. So thank you to all of our colleagues at Cowen. And thank all of you for joining us. We really do look forward to speaking to you on our next earnings call in October. And until then stay safe and stay healthy.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

JT Farley -- Head of Investor Relations.

Jeffrey M. Solomon -- Chair and Chief Executive Officer, Cowen Inc.

Stephen A. Lasota -- Managing Director and Chief Financial Officer, Cowen Inc.

Brendan O'Brien -- Wolfe Research -- Analyst

Sumeet Mody -- Piper Sandler -- Analyst

Devin Ryan -- JPM Securities -- Analyst

Michael Brown -- KBW -- Analyst

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