UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||||||||
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the quarterly period ended March 31, 2022 | ||||||||
| or | ||||||||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the transition period from to | ||||||||
Commission File Number: 001-34516
Cowen Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) | 27-0423711 (I.R.S. Employer Identification No.) | ||||
599 Lexington Avenue New York, New York (Address of Principal Executive Offices) | 10022 (Zip Code) | ||||
(646) 562-1010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Exchange on Which Registered | ||||||||||||
| Class A Common Stock, par value $0.01 per share | COWN | The Nasdaq Global Market | ||||||||||||
| 7.75% Senior Notes due 2033 | COWNL | The Nasdaq Global Market | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ | |||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of April 29, 2022, there were 27,494,230 shares of the registrant's common stock outstanding.
| Item No. | Page No. | |||||||||||||
2
Special Note Regarding Forward-Looking Statements
We have made statements in this Quarterly Report on Form 10-Q (including in "Management's Discussion and Analysis of Financial Condition and Results of Operations") that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking terms such as "may," "might," "will," "would," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "project," "possible," "potential," "intend," "seek" or "continue," the negative of these terms and other comparable terminology or similar expressions. In addition, our management may make forward-looking statements to analysts, representatives of the media and others. These forward-looking statements represent only the Company's beliefs regarding future events (many of which, by their nature, are inherently uncertain and beyond our control) and are predictions only, based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In particular, you should consider the risks contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and the risks contained in Item 1A of this periodic report on Form 10-Q for the three months ended March 31, 2022.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations.
Unaudited Condensed Consolidated Financial Statements are presented for the three months ended March 31, 2022 and 2021. The Consolidated Financial Statements as of December 31, 2021 were audited.
3
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
| Cowen Inc. Condensed Consolidated Statements of Financial Condition (dollars in thousands, except share and per share data) (unaudited) | |||||||||||
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 512,978 | $ | 914,343 | |||||||
| Cash collateral pledged | 52,865 | 47,494 | |||||||||
| Segregated cash | 220,882 | 194,701 | |||||||||
Securities owned, at fair value ($1,704,831 and $1,764,853 were pledged to various parties) | 2,763,514 | 2,660,742 | |||||||||
| Securities purchased under agreements to resell | 19,621 | — | |||||||||
| Receivable on derivative contracts, at fair value | 342,712 | 286,135 | |||||||||
| Securities borrowed | 1,761,146 | 1,704,603 | |||||||||
Other investments ($131,766 and $137,986 at fair value, respectively) | 237,628 | 274,111 | |||||||||
| Deposits with clearing organizations, brokers and banks | 105,854 | 111,857 | |||||||||
Receivable from brokers, dealers and clearing organizations, net of allowance of $616 and $636, respectively | 1,487,911 | 1,614,347 | |||||||||
Receivable from customers, net of allowance of $587 and $687, respectively | 159,625 | 159,418 | |||||||||
Fees receivable, net of allowance of $828 and $886, respectively | 128,136 | 145,809 | |||||||||
| Due from related parties | 21,666 | 31,449 | |||||||||
Fixed assets, net of accumulated depreciation and amortization of $52,254 and $50,017, respectively | 25,037 | 25,976 | |||||||||
| Operating lease right-of-use assets | 95,430 | 93,655 | |||||||||
| Goodwill | 234,005 | 234,005 | |||||||||
Intangible assets, net of accumulated amortization of $37,470 and $33,219, respectively | 40,731 | 44,167 | |||||||||
| Deferred tax asset, net | 19,608 | 21,765 | |||||||||
Other assets, net of allowance of $834 and $0 respectively | 99,427 | 84,828 | |||||||||
| Consolidated Funds | |||||||||||
| Cash and cash equivalents | 23 | 296 | |||||||||
| Other investments | 97,182 | 99,067 | |||||||||
| Other assets | 46 | 46 | |||||||||
| Total Assets | $ | 8,426,027 | $ | 8,748,814 | |||||||
| Liabilities, Temporary Equity and Permanent Equity | |||||||||||
| Liabilities | |||||||||||
| Securities sold, not yet purchased, at fair value | $ | 974,867 | $ | 1,201,448 | |||||||
| Securities sold under agreements to repurchase | 229,192 | 63,469 | |||||||||
| Payable for derivative contracts, at fair value | 46,814 | 60,163 | |||||||||
| Securities loaned | 1,735,852 | 1,586,572 | |||||||||
| Payable to brokers, dealers and clearing organizations | 587,540 | 586,553 | |||||||||
| Payable to customers | 2,243,654 | 2,432,612 | |||||||||
| Commission management payable | 126,968 | 102,990 | |||||||||
| Compensation payable | 176,210 | 443,580 | |||||||||
| Operating lease liabilities | 99,800 | 98,883 | |||||||||
| Notes payable and other debt | 625,766 | 623,371 | |||||||||
| Fees payable | 6,580 | 16,483 | |||||||||
| Due to related parties | 27 | — | |||||||||
| Accounts payable, accrued expenses and other liabilities | 241,110 | 236,088 | |||||||||
| Consolidated Funds | |||||||||||
| Due to related parties | — | 23 | |||||||||
| Accounts payable, accrued expenses and other liabilities | 174 | 225 | |||||||||
| Total Liabilities | $ | 7,094,554 | $ | 7,452,460 | |||||||
4
| Cowen Inc. Condensed Consolidated Statements of Financial Condition (dollars in thousands, except share and per share data) (unaudited) | |||||||||||
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (continued) | |||||||||||
| Commitments and Contingencies (Note 22) | |||||||||||
Redeemable Series A Convertible Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding as of March 31, 2022 (aggregate liquidation preference of $120,750) and 10,000,000 shares authorized, 120,750 shares issued and outstanding as of December 31, 2021 (aggregate liquidation preference of $120,750) | $ | 120,750 | $ | 120,750 | |||||||
| Permanent Equity | |||||||||||
Class A common stock, par value $0.01 per share: 62,500,000 shares authorized, 56,835,283 shares issued and 27,614,903 outstanding as of March 31, 2022 and 62,500,000 shares authorized, 55,826,893 shares issued and 27,778,964 outstanding as of December 31, 2021, respectively (including 901,374 and 901,374 restricted shares, respectively) | 334 | 334 | |||||||||
Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | — | — | |||||||||
| Additional paid-in capital | 1,127,160 | 1,100,667 | |||||||||
| Retained earnings | 491,189 | 461,982 | |||||||||
| Accumulated other comprehensive income (loss) | — | (2) | |||||||||
Less: Class A common stock held in treasury, at cost, 29,220,380 and 28,047,929 shares as of March 31, 2022 and December 31, 2021, respectively | (583,535) | (547,112) | |||||||||
| Total Cowen Inc. Stockholders' Equity | 1,035,148 | 1,015,869 | |||||||||
| Nonredeemable non-controlling interests | 175,575 | 159,735 | |||||||||
| Total Permanent Equity | $ | 1,210,723 | $ | 1,175,604 | |||||||
| Total Liabilities, Redeemable Preferred Stock and Permanent Equity | $ | 8,426,027 | $ | 8,748,814 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
| Cowen Inc. Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues | |||||||||||
| Investment banking | $ | 101,542 | $ | 304,834 | |||||||
| Brokerage | 168,738 | 173,737 | |||||||||
| Investment income (loss) | |||||||||||
| Securities principal transactions, net | 91,252 | 63,965 | |||||||||
| Portfolio fund principal transactions, net | (6,098) | 15,403 | |||||||||
| Carried interest allocations | (17,067) | 96,769 | |||||||||
| Total investment income (loss) | 68,087 | 176,137 | |||||||||
| Management fees | 16,769 | 25,742 | |||||||||
| Incentive income | 633 | 2,258 | |||||||||
| Interest and dividends | 46,335 | 59,388 | |||||||||
| Insurance and reinsurance premiums | 11,321 | 7,117 | |||||||||
| Other revenues, net | (949) | 1,660 | |||||||||
| Consolidated Funds | |||||||||||
| Principal transactions, net | (1,886) | (3,349) | |||||||||
| Interest and dividends | 2 | 2 | |||||||||
| Total revenues | 410,592 | 747,526 | |||||||||
| Interest and dividends expense | 46,524 | 57,641 | |||||||||
| Total net revenues | 364,068 | 689,885 | |||||||||
| Expenses | |||||||||||
| Employee compensation and benefits | 187,178 | 388,196 | |||||||||
| Brokerage and trade execution costs | 40,591 | 45,656 | |||||||||
| Underwriting expenses | 259 | 6,915 | |||||||||
| Professional, advisory and other fees | 13,682 | 15,460 | |||||||||
| Service fees | 7,150 | 5,731 | |||||||||
| Communications | 9,471 | 9,267 | |||||||||
| Occupancy and equipment | 10,316 | 9,540 | |||||||||
| Depreciation and amortization | 7,185 | 4,354 | |||||||||
| Client services and business development | 6,569 | 6,848 | |||||||||
| Insurance and reinsurance claims, commissions and amortization of deferred acquisition costs | 7,343 | 6,455 | |||||||||
| Other expenses | 12,763 | (3,340) | |||||||||
| Consolidated Funds | |||||||||||
| Professional, advisory and other fees | 42 | 110 | |||||||||
| Other expenses | 63 | 161 | |||||||||
| Total expenses | 302,612 | 495,353 | |||||||||
| Other income (loss) | |||||||||||
| Net gains (losses) on other investments | 5,580 | 12,645 | |||||||||
| Bargain purchase gain, net of tax | — | 3,855 | |||||||||
| Gain/(loss) on debt extinguishment | — | (4,538) | |||||||||
| Total other income (loss) | 5,580 | 11,962 | |||||||||
| Income (loss) before income taxes | 67,036 | 206,494 | |||||||||
| Income tax expense (benefit) | 11,889 | 54,428 | |||||||||
| Net income (loss) | 55,147 | 152,066 | |||||||||
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | 20,131 | 4,562 | |||||||||
| Net income (loss) attributable to Cowen Inc. | 35,016 | 147,504 | |||||||||
| Preferred stock dividends | 1,698 | 1,698 | |||||||||
| Net income (loss) attributable to Cowen Inc. common stockholders | $ | 33,318 | $ | 145,806 | |||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 28,386 | 27,359 | |||||||||
| Diluted (See Note 21) | 31,772 | 33,565 | |||||||||
| Earnings (loss) per share: | |||||||||||
| Basic | $ | 1.17 | $ | 5.33 | |||||||
| Diluted (See Note 21) | $ | 1.05 | $ | 4.34 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Cowen Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Net income (loss) | $ | 55,147 | $ | 152,066 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation | 2 | 4 | |||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 2 | 4 | |||||||||||||||||||||
| Comprehensive income (loss) | $ | 55,149 | $ | 152,070 | |||||||||||||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interests | 20,131 | 4,562 | |||||||||||||||||||||
| Comprehensive income (loss) attributable to Cowen Inc. | $ | 35,018 | $ | 147,508 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Cowen Inc.
Condensed Consolidated Statements of Changes in Equity
(dollars in thousands, except share data)
(unaudited)
| Three Months Ended March 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Permanent Equity Shares | (in shares) | ||||||||||||||||
| Common Shares Outstanding | |||||||||||||||||
| Beginning balance | 27,778,964 | 26,845,628 | |||||||||||||||
| Restricted stock awards issued | 949,803 | 705,512 | |||||||||||||||
| Common stock issuance for partial settlement of contingent liability from prior acquisition | 58,587 | 56,801 | |||||||||||||||
| Purchase of treasury stock, at cost | (1,172,451) | (755,610) | |||||||||||||||
| Ending balance | 27,614,903 | 26,852,331 | |||||||||||||||
| Series A Convertible Preferred Shares Outstanding | |||||||||||||||||
| Beginning balance | — | 120,750 | |||||||||||||||
| Ending balance | — | 120,750 | |||||||||||||||
| Permanent Equity | (in dollars) | ||||||||||||||||
| Total Cowen Inc. Stockholders' Equity (beginning of period) | $ | 1,015,869 | $ | 969,497 | |||||||||||||
| Class A Common stock | |||||||||||||||||
| Beginning balance | 334 | 334 | |||||||||||||||
| Ending balance | 334 | 334 | |||||||||||||||
| Series A Convertible Preferred stock | |||||||||||||||||
| Beginning balance | — | 1 | |||||||||||||||
| Ending balance | — | 1 | |||||||||||||||
| Treasury stock | |||||||||||||||||
| Beginning balance | (547,112) | (346,870) | |||||||||||||||
| Purchase of treasury stock, at cost | (36,423) | (26,904) | |||||||||||||||
| Ending balance | (583,535) | (373,774) | |||||||||||||||
| Additional Paid-in Capital | |||||||||||||||||
| Beginning balance | 1,100,667 | 1,130,138 | |||||||||||||||
| Common stock issuance for partial settlement of contingent liability from prior acquisition | 1,881 | 2,202 | |||||||||||||||
| Amortization of share based awards | 24,612 | 19,037 | |||||||||||||||
| Ending balance | $ | 1,127,160 | $ | 1,151,377 | |||||||||||||
| Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||
| Beginning balance | $ | (2) | $ | (7) | |||||||||||||
| Foreign currency translation | 2 | 4 | |||||||||||||||
| Ending balance | — | (3) | |||||||||||||||
8
| Three Months Ended March 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (in dollars) | |||||||||||||||||
| Retained Earnings/ (Accumulated deficit) | |||||||||||||||||
| Beginning balance | 461,982 | 185,901 | |||||||||||||||
| Net income (loss) attributable to Cowen Inc. | 35,016 | 147,504 | |||||||||||||||
Preferred stock dividends (See Note 13) | (1,698) | (1,698) | |||||||||||||||
Cash dividends to common stockholders (See Note 14) | (4,111) | (2,777) | |||||||||||||||
| Ending balance | 491,189 | 328,930 | |||||||||||||||
| Total Cowen Inc. Stockholders' Equity (end of period) | $ | 1,035,148 | $ | 1,106,865 | |||||||||||||
| Nonredeemable Non-controlling Interests | |||||||||||||||||
| Beginning balance | $ | 159,735 | $ | 199,624 | |||||||||||||
| Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds | 20,131 | 4,562 | |||||||||||||||
| Capital contributions | 1,610 | 22,515 | |||||||||||||||
| Capital distributions | (5,901) | (18,773) | |||||||||||||||
| Deconsolidation of entity | — | (74,813) | |||||||||||||||
| Ending balance | 175,575 | 133,115 | |||||||||||||||
| Total Permanent Equity | $ | 1,210,723 | $ | 1,239,980 | |||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
Cowen Inc. Condensed Consolidated Statements of Cash Flows (dollars in thousands) (unaudited) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 55,147 | $ | 152,066 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities: | |||||||||||
| Bargain purchase gain, net of tax | — | (3,855) | |||||||||
| Depreciation and amortization | 7,185 | 4,354 | |||||||||
| Amortization of debt issuance costs | 604 | 480 | |||||||||
| Amortization of debt discount (premium) | 77 | 776 | |||||||||
| Noncash lease expense | (858) | (362) | |||||||||
| (Gain) / loss on extinguishment of debt | — | 3,890 | |||||||||
| Share-based awards | 24,612 | 19,037 | |||||||||
| Change in deferred taxes | 2,157 | 5,913 | |||||||||
| Net loss (gain) on disposal of fixed assets | 101 | — | |||||||||
| Contingent liability adjustment | — | (614) | |||||||||
| Purchases of securities owned, at fair value | (269,037) | (269,073) | |||||||||
| Proceeds from sales of securities owned, at fair value | 243,634 | 271,314 | |||||||||
| Proceeds from sales of securities sold, not yet purchased, at fair value | 131,199 | 63,511 | |||||||||
| Payments to cover securities sold, not yet purchased, at fair value | (141,186) | (58,346) | |||||||||
| Proceeds from sales of other investments | 16,780 | 16,995 | |||||||||
| Investment Income (loss) principal transactions, net | (22,115) | (158,833) | |||||||||
| Consolidated Funds | |||||||||||
| Proceeds from sales of securities owned, at fair value | — | 2,687 | |||||||||
| Proceeds from other investments | — | 14,130 | |||||||||
| Investment Income (loss) principal transactions, net | 1,886 | 3,143 | |||||||||
| (Increase) decrease in operating assets: | |||||||||||
| Securities owned, at fair value, held at broker-dealer | (46,185) | (1,112,154) | |||||||||
| Receivable on derivative contracts, at fair value | (56,577) | (44,054) | |||||||||
| Securities borrowed | (56,543) | (88,570) | |||||||||
| Deposits with clearing organizations, brokers and banks | 6,003 | 22,874 | |||||||||
| Receivable from brokers, dealers and clearing organizations | 126,436 | (191,009) | |||||||||
| Receivable from customers, net of allowance | (207) | (95,705) | |||||||||
| Fees receivable, net of allowance | 17,673 | (46,170) | |||||||||
| Due from related parties | 9,783 | 440 | |||||||||
| Other assets | (14,597) | (9,344) | |||||||||
| Consolidated Funds | |||||||||||
| Receivable on derivative contracts, at fair value | — | (2,917) | |||||||||
| Other assets | — | 13 | |||||||||
| Increase (decrease) in operating liabilities: | |||||||||||
| Securities sold, not yet purchased, at fair value, held at broker-dealer | (208,080) | 187,749 | |||||||||
| Securities sold under agreement to repurchase | 165,723 | (2,490) | |||||||||
| Payable for derivative contracts, at fair value | (13,348) | (24,035) | |||||||||
| Securities loaned | 149,280 | 607,531 | |||||||||
| Payable to brokers, dealers and clearing organizations | 987 | 73,328 | |||||||||
| Payable to customers | (188,958) | 977,274 | |||||||||
| Commission management payable | 23,978 | 22,634 | |||||||||
| Compensation payable | (279,653) | (17,809) | |||||||||
| Fees payable | (9,903) | (918) | |||||||||
| Due to related parties | 27 | 48 | |||||||||
| Accounts payable, accrued expenses and other liabilities | 14,907 | 39,591 | |||||||||
| Consolidated Funds | |||||||||||
| Due to related parties | (23) | — | |||||||||
| Accounts payable, accrued expenses and other liabilities | (51) | (359) | |||||||||
| Net cash provided by / (used in) operating activities | (309,142) | 363,161 | |||||||||
10
Cowen Inc. Condensed Consolidated Statements of Cash Flows (dollars in thousands) (unaudited) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (continued) | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Securities purchased under agreement to resell | (19,621) | 191 | |||||||||
| Purchases of other investments | (7,662) | (29,117) | |||||||||
| Purchase of business | — | 2,109 | |||||||||
| Cash at deconsolidated entity | — | (5,620) | |||||||||
| Proceeds from sales of other investments | 9,780 | 31,267 | |||||||||
| Purchase of fixed assets and intangibles | (2,914) | (1,643) | |||||||||
| Net cash provided by / (used in) investing activities | (20,417) | (2,813) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Deferred debt issuance cost | (112) | (6,467) | |||||||||
| Borrowings on notes and other debt | 4,019 | 301,490 | |||||||||
| Repayments on notes and other debt | (2,193) | (139,737) | |||||||||
| Purchase of treasury stock | (24,140) | (20,629) | |||||||||
| Cash dividends paid | (3,917) | (2,313) | |||||||||
| Preferred stock dividends paid | (1,698) | (1,698) | |||||||||
| Contingent liability payment | (8,195) | (8,496) | |||||||||
| Capital contributions by non-controlling interests in operating entities | 1,610 | 3,498 | |||||||||
| Capital distributions to non-controlling interests in operating entities | (5,901) | (2,348) | |||||||||
| Consolidated Funds | |||||||||||
| Capital contributions by non-controlling interests in Consolidated Funds | — | 19,017 | |||||||||
| Capital distributions to non-controlling interests in Consolidated Funds | — | (16,424) | |||||||||
| Net cash provided by / (used in) financing activities | (40,527) | 125,893 | |||||||||
| Change in cash and cash equivalents | (370,086) | 486,241 | |||||||||
| Cash and cash equivalents, including cash collateral pledged and segregated cash, beginning of period | 1,156,834 | 941,470 | |||||||||
| Cash and equivalents at end of period: | |||||||||||
| Cash and cash equivalents | 512,978 | 1,147,531 | |||||||||
| Cash collateral pledged | 52,865 | 110,303 | |||||||||
| Segregated cash | 220,882 | 168,942 | |||||||||
| Cash and cash equivalents, Consolidated Funds | 23 | 935 | |||||||||
| Cash and cash equivalents, including cash collateral pledged and segregated cash, end of period | $ | 786,748 | $ | 1,427,711 | |||||||
| Supplemental information | |||||||||||
| Cash paid during the year for interest | $ | 40,538 | $ | 65,259 | |||||||
| Cash paid during the year for taxes | $ | 12,980 | $ | 8,087 | |||||||
| Supplemental non-cash information | |||||||||||
| Purchase of treasury stock, at cost, through net settlement (See Note 14) | $ | 12,283 | $ | 6,245 | |||||||
Preferred stock dividends declared (See Note 14) | 1,698 | 1,698 | |||||||||
Cash dividends declared (See Note 14) | 4,111 | 2,777 | |||||||||
| Net assets (liabilities) acquired upon acquisition (net of cash) | — | 3,107 | |||||||||
| Net decrease in non-controlling interests in Consolidated Fund due to deconsolidation of Consolidated Fund (See Note 2) | — | 74,813 | |||||||||
| Common stock issuance in relation to acquisitions | 1,881 | 2,202 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Notes to Unaudited Condensed Consolidated Financial Statements
Index
| Notes to Unaudited Condensed Consolidated Financial Statements | Page | ||||||||||
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Business
Cowen Inc., a Delaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment banking, research, sales and trading, prime brokerage, global clearing, securities financing, commission management services and investment management through its two business segments: the Operating Company ("Op Co") and the Asset Company ("Asset Co").
The Op Co segment consists of four divisions: the Investment Banking division, the Markets division, the Research division and the Cowen Investment Management ("CIM") division. The Company refers to the Investment Banking division, the Markets division and the Research division combined as its investment banking businesses. Op Co's investment banking businesses offer advisory and global capital markets origination, domain knowledge-driven research, sales and trading platforms for institutional investors, global clearing, commission management services and also a comprehensive suite of prime brokerage service. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, consumer, industrials, tech-enabled and business services, and energy. Op Co’s CIM division includes advisers to investment funds (including private equity structures and privately placed hedge funds) and registered funds. The Company has also invested capital in its insurance and reinsurance businesses.
The Asset Co segment consists of certain of the Company's private investments, private real estate investments and other legacy investment strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment.
2. Significant Accounting Policies
a. Basis of presentation
These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") as promulgated by the Financial Accounting Standards Board ("FASB") through the Accounting Standards Codification (the "Accounting Standards" or "ASC") as the source of authoritative accounting principles in the preparation of financial statements, and include the accounts of the Company, its operating and other subsidiaries, and entities in which the Company has a controlling financial interest or a general partner interest. All material intercompany transactions and balances have been eliminated on consolidation. Certain investment funds that are consolidated in these accompanying condensed consolidated financial statements, as further discussed below, are not subject to the consolidation provisions with respect to their own controlled investments pursuant to specialized industry accounting.
The accompanying condensed financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K"). Certain footnote disclosures included in the 2021 Form 10-K have been condensed or omitted from the accompanying condensed financial statements as they are not required for interim reporting under US GAAP or are insignificant to the interim reporting period.
b. Principles of consolidation
The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those investment funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a Voting Operating Entity ("VOE") or a Variable Interest Entity ("VIE") under US GAAP.
Voting Operating Entities—VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently, (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance and (iii) voting rights of equity holders are proportionate to their obligation to absorb losses or the right to receive returns.
Under US GAAP consolidation requirements, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units.
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate it.
The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE by performing a periodic qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the design of the VIE.
The VIEs the Company has invested in act as investment managers and/or investment companies that may be managed by the Company. The VIEs are financed through their operations and/or loan agreements with the Company.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily investment funds for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights. The Company consolidates these investment funds when its variable interest is potentially significant to the entity. (see Note 6 for additional disclosures on VIEs).
Investment companies, which account for their investments under the specialized industry accounting guidance for investment companies prescribed under US GAAP, are not subject to the consolidation provisions for their investments. As of March 31, 2022 and December 31, 2021, the total assets of the consolidated VIEs were $332.4 million and $304.1 million, respectively, and total liabilities of the consolidated VIEs were $6.6 million and $9.8 million, respectively.
The Company consolidates investment funds for which it acts as the managing member/general partner and investment manager. At March 31, 2022, the Company consolidated Ramius Enterprise LP (“Enterprise LP”), an investment fund. At December 31, 2021, the Company consolidated the following investment funds: Enterprise LP and Cowen Private Investments LP ("Cowen Private").
During the first quarter of 2022, the Company deconsolidated Cowen Private as the fund was liquidated. During the first quarter of 2021, the Company deconsolidated Cowen Sustainable Investments I, LP ("CSI I LP") due to the Company's ownership being diluted through a capital equalization event.
Equity Method Investments—For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying condensed consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in Net gains (losses) on other investments in the accompanying condensed consolidated statements of operations.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary.
Other—If the Company does not consolidate an entity or apply the equity method of accounting, the Company accounts for its investment in such entity (primarily consisting of securities of such entity which are purchased and held principally for the purpose of selling them in the near term and classified as trading securities), at fair value with unrealized gains (losses) resulting from changes in fair value reflected within Investment income (loss) - Securities principal transactions, net or Investment income (loss) - portfolio fund investment income (loss) in the accompanying condensed consolidated statements of operations.
Retention of Specialized Accounting— The Consolidated Funds and certain other consolidated companies are investment companies and apply specialized industry accounting. The Company reports its investments on the condensed consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within Consolidated Funds - Principal transactions, net in the accompanying condensed consolidated statements of operations. Accordingly, the accompanying condensed consolidated financial statements reflect different accounting policies for investments depending on whether or not they are held through a consolidated investment company.
Certain portfolio fund investments qualify as equity method investments and are investment companies that apply specialized industry accounting. In applying equity method accounting guidance, the Company retains the specialized accounting of the investees and reports its investments on the condensed consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within Investment Income - portfolio fund principal transactions, net in the accompanying condensed consolidated statements of operations.
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
In addition, the Company's broker-dealer subsidiaries, Cowen and Company, LLC ("Cowen and Company"), Westminster Research Associates LLC ("Westminster"), Cowen Execution Services Limited ("Cowen Execution Ltd"), ATM Execution LLC ("ATM Execution"), Cowen and Company (Asia) Limited ("Cowen Asia"), and Cowen International Limited ("Cowen International Ltd"), apply the specialized industry accounting for brokers and dealers in securities, which the Company retains upon consolidation.
c. Use of estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with US GAAP requires the management of the Company to make estimates and assumptions that affect the fair value of securities and other investments, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the accompanying condensed consolidated financial statements, as well as the accounting for goodwill and identifiable intangible assets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
d. Allowance for credit losses
ASC Topic 326, Financial Instruments – Credit Losses (“ASC 326”) prescribed the impairment model for certain financial assets measured at amortized cost by requiring a current expected credit loss ("CECL") methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. Under the accounting update guidance, the Company has the ability to determine there are no expected credit losses in certain circumstances (e.g., based on collateral arrangements or based on the credit quality of the borrower or issuer).
The Company applies the guidance in ASC 326 to securities borrowed and fees and other receivables carried at amortized cost (including, but not limited to, receivables related to securities transactions, underwriting fees, strategic/financial advisory fees and placement and sales agent fees, management fees and incentive fees receivable).
The allowance for credit losses is based on the Company's expectation of the collectability of financial instruments, fees and other receivables utilizing the CECL framework. The Company considers factors such as historical experience, credit quality, age of balances and current and future economic conditions that may affect the Company’s expectation of the collectability in determining the allowance for credit losses. The Company’s expectation is that the credit risk associated with fees and other receivables is not significant until they are 90 days past due based on the contractual arrangement and expectation of collection in accordance with industry standards.
For securities borrowed, the Company applies a practical expedient to measure the allowance for credit losses based on the fair value of the collateral. If the fair value of the collateral held exceeds the amortized cost of the borrowing and the borrower is expected to continue to replenish the collateral as needed, the Company will not recognize an allowance. If the fair value of collateral is less than amortized cost and the borrower is expected to continue to replenish the collateral as needed, the Company applies the CECL model, utilizing a probability and loss given default methodology, only to the extent of the shortfall between the fair value of the collateral and amortized cost.
The credit loss expense related to the allowance for credit losses as well as any recoveries of amounts previously charged is reflected in other expenses in the accompanying condensed consolidated statements of operations.
e. Valuation of investments and derivative contracts and other investments
US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
Level 2Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and
Level 3Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little, if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this category requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics,
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's perceived risk of that instrument. Inputs reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
The Company and its operating subsidiaries act as the manager for the Consolidated Funds. Both the Company and the Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair value of these investments is based on their proportional rights of the underlying portfolio company, and is generally estimated based on proprietary models developed by the Company, which include discounted cash flow analysis, public market comparables, and other techniques and may be based, at least in part, on independently sourced market information. The material estimates and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation impact the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the condensed consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly from the fair values that would have been used had a ready market for the investments existed and such differences could be material.
The Company primarily uses the market approach to value its financial instruments measured at fair value. In determining an instrument's level within the hierarchy, the Company categorizes the Company's financial instruments into three categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further be divided between those held long or sold short.
The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected the fair value option for certain of its investments held by its operating companies. This option has been elected because the Company believes that it is consistent with the manner in which the business is managed, as well as the way that financial instruments in other parts of the business are recorded.
Securities—Securities with values based on quoted market prices in active markets for identical assets are classified within level 1 of the fair value hierarchy. These securities primarily include active listed equities, certain U.S. government and sovereign obligations, Exchange Traded Funds ("ETFs"), mutual funds and certain money market securities.
Certain positions for which trading activity may not be readily visible, consisting primarily of convertible debt, corporate debt and loans and restricted equities, are stated at fair value and classified within level 2 of the fair value hierarchy. The estimated fair values assigned by management are determined in good faith and are based on available information considering trading activity, broker quotes, quotations provided by published pricing services, counterparties and other market participants, and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. As level 2 investments include positions that are not always traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability.
Derivative Contracts—Derivative contracts can be exchange-traded or privately negotiated over-the-counter (“OTC”). Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC derivatives, such as generic forwards, swaps and options, are classified as level 2 when their inputs can be corroborated by market data. OTC derivatives, such as swaps and options, with significant inputs that cannot be corroborated by readily available or observable market data are classified as level 3.
Other Investments—Other investments consist primarily of portfolio funds, carried interest and equity method investments, which are valued as follows:
i. Portfolio Funds—Portfolio funds include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company applies the practical expedient provided by the US GAAP fair value measurements and disclosures guidance relating to investments
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The practical expedient permits an entity holding investments in certain entities that either are investment companies or have attributes similar to an investment company, and calculate NAV per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy.
ii. Carried Interest—For the private equity and debt fund products the Company offers, the Company is allocated incentive income by the investment funds based on the extent by which the investment funds performance exceeds predetermined thresholds. Carried interest allocations are generally structured from a legal standpoint as an allocation of capital in the Company’s capital account. The Company accounts for carried interest allocations by applying an equity ownership model. Accordingly, the Company accrues performance allocations quarterly based on the fair value of the underlying investments assuming hypothetical liquidation at book value.
iii. Equity Method Investments—For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company applies the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying condensed consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in Net gains (losses) on other investments in the accompanying condensed consolidated statements of operations.
See Notes 6 and 7 for further information regarding the Company's investments, including equity method investments and fair value measurements.
f. Offsetting of derivative contracts
To reduce credit exposures on derivatives, the Company may enter into master netting agreements with counterparties that permit the Company the right, in the event of a default by a counterparty, to offset the counterparty’s rights and obligations under the agreement and to liquidate and offset any collateral against any net amount owed by the counterparty. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) in the condensed consolidated statements of financial condition when a legal right of offset exists under an enforceable netting agreement. Additionally, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements in the condensed consolidated statements of financial position, provided a legal right of offset exists. See Note 6 for further information about offsetting of derivative financial instruments.
g. Receivable from and payable to brokers
Receivable from brokers, dealers, and clearing organizations includes amounts receivable for securities failed to deliver by the Company to a purchaser by the settlement date, amounts receivable from broker-dealers and clearing organizations, commissions receivable from broker-dealers, and interest receivable from securities financing arrangements and are reported net of an allowance for credit losses.
Payable to brokers, dealers and clearing organizations includes amounts payable for securities failed to receive by the Company from a seller by the settlement date, amounts payable to broker-dealers and clearing organizations for unsettled trades, interest payable for securities financing arrangements, and payables of deposits held in proprietary accounts of brokers and dealers.
Receivables and payables with brokers, dealers and clearing organizations arising from unsettled regular-way transactions are presented net (assets less liabilities) across balances with the same counterparty. The Company's receivable from and payable to brokers, dealers and clearing organizations balances are held with multiple financial institutions.
h. Receivable from and payable to customers
Receivable from customers includes amounts owed by customers on cash and margin transactions, recorded on a settlement-date basis and prepaid research, net of allowance for credit losses. For prepaid research, a prepaid research asset is established for research and related services disbursed in advance of anticipated client commission volumes.
Payable to customers primarily consists of amounts owed to customers relating to securities transactions not completed on settlement date, recorded on a settlement-date basis on the statement of financial condition, and other miscellaneous customer payables.
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Securities owned by customers, including those that collateralize margin, are not reflected as assets of the Company on the statement of financial condition. The Company holds these securities with the intention of settlement against customer orders and are held as collateral for customer receivables.
i. Fees receivable
Fees receivable primarily relate to securities transactions and are reported net of an allowance for credit losses. Fees receivable also include amounts due to the Company for underwriting fees, strategic/financial advisory fees and placement and sales agent fees. Additionally, management and incentive fees due to the Company are earned as the managing member, general partner and/or investment manager to the Company's investment funds and are recognized in accordance with appropriate revenue recognition guidance (see Note 2o for further reference).
j. Securities financing arrangements
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced or received on a gross basis. The related rebates are recorded in the accompanying condensed consolidated statements of operations as interest and dividends income and interest and dividends expense. Securities borrowed transactions require the Company to deposit cash collateral with the lender. With respect to securities loaned, the Company receives cash or securities as collateral from the borrower. When the Company receives securities as collateral, and has concluded it (i) is the transferor and (ii) can pledge the securities to third parties, the Company recognizes the securities received as collateral at fair value in Securities owned, at fair value with the corresponding obligation to return the securities received as collateral at fair value in Securities sold, not yet purchased, at fair value. Securities received as collateral are not recognized when the Company either (i) is not the transferor or (ii) cannot pledge the securities to third parties. The initial collateral advanced or received approximates or is greater than the market value of securities borrowed or loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or returned, as necessary. Securities borrowed and loaned may also result in credit exposures for the Company in an event that the counterparties are unable to fulfill their contractual obligations. See Note 2d for further information.
Fees and interest received or paid are recorded in interest and dividends income and interest and dividends expense, respectively, on an accrual basis in the accompanying condensed consolidated statements of operations. Accrued interest income and expense are recorded in receivable from brokers, dealers and clearing organizations and payable to brokers, dealers and clearing organizations, respectively, on an accrual basis in the accompanying condensed consolidated statements of financial condition.
k. Securities sold under agreements to repurchase
Securities purchased under agreement to resell and securities sold under agreements to repurchase ("repurchase agreements") are accounted for as collateralized financing transactions and are recorded at their contracted resale or repurchase amount plus accrued interest. A repo is a transaction in which a firm buys or sells financial instruments from/to a counterparty, typically in exchange for cash, and simultaneously enters into an agreement to resell or repurchase the same or substantially the same financial instruments to/from such counterparty at a stated price plus accrued interest at a future date. When the Company receives securities as collateral, and has concluded it (i) is the transferor and (ii) can pledge the securities to third parties, the Company recognizes the securities received as collateral at fair value in Securities owned, at fair value with the corresponding obligation to return the securities received as collateral at fair value in Securities sold, not yet purchased, at fair value. Securities received as collateral are not recognized when the Company either (i) is not the transferor or (ii) cannot pledge the securities to third parties. The initial collateral advanced approximates or is greater than the market value of securities purchased or sold in the transaction. The Company typically enters into repurchase transactions with counterparties that prefer repurchase transactions to securities borrowed and securities loaned transactions. The Company has executed master repurchase agreements with such counterparties and utilizes such counterparties to finance its own positions, or replace a securities lending transaction with a repurchase for matched book purposes. The Company monitors the market value of repurchases on a daily basis, with additional collateral obtained or returned, as necessary. Repurchases may also result in credit exposures for the Company in an event that the counterparties are unable to fulfill their contractual obligations. The Company mitigates its credit risk by continuously monitoring its credit exposure and collateral values by demanding additional collateral or returning excess collateral in accordance with the netting provisions available in the master repurchase contracts in place with the counterparties.
Interest paid is recorded in interest and dividends expense in accordance with US GAAP on repurchase agreement transactions on an accrual basis in the accompanying condensed consolidated statements of operations.
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
l. Goodwill and intangible assets
Goodwill
Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.
In accordance with US GAAP requirements for testing for impairment of goodwill, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that fair value exceeds its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test that requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds its fair value, then the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Intangible assets
Intangible assets with finite lives are amortized over their estimated average useful lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the accompanying condensed consolidated statements of operations if the sum of the estimated undiscounted cash flows from the use or disposition of the asset or asset group is less than the corresponding carrying value. The Company continually monitors the estimated average useful lives of existing intangible assets.
m. Temporary Equity
Temporary equity consists of Redeemable 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock"). The Company has irrevocably elected to cash settle $1,000.00 of each conversion of any share of the Series A Convertible Preferred Stock. As the holders can exercise the conversion option on their shares of Series A Convertible Preferred Stock at any time and require cash payment upon conversion, the Company has classified the Series A Convertible Preferred Stock preferred stock in temporary equity.
n. Non-controlling interests in consolidated subsidiaries
Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities. When non-controlling interest holders do not have redemption features that can be exercised at the option of the holder currently or contingent upon the occurrence of future events, their ownership has been classified as a component of permanent equity. Ownership which has been classified in permanent equity are non-controlling interests for which the holder does not have the unilateral right to redeem its ownership interests.
o. Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), which requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company follows a five-step model to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, the Company includes variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved. Significant judgments are required in the application of the five-step model including: when determining whether performance obligations are satisfied at a point in time or over time; how to allocate transaction prices where multiple performance obligations
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
are identified; when to recognize revenue based on the appropriate measure of the Company's progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events.
The Company's principal sources of revenue are generated within two segments. The Op Co segment generates revenue through five principal sources: investment banking revenue, brokerage revenue, management fees, investment income (loss) and incentive income. Investment income is excluded from ASC Topic 606. The Asset Co segment generates revenue through investment income (loss), management fees and incentive income. Revenue from contracts with customers includes management fees, incentive income, investment banking revenue and brokerage services revenue excluding principal transactions. ASC Topic 606 does not apply to revenue associated with financial instruments, interest income and expense, leasing and insurance contracts. The following is a description of principal activities, from which the Company generates its revenue. For more detailed information about reportable segments, see Note 23.
Investment banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from public and private small- and mid-capitalization companies within the Company's sectors.
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees, expenses reimbursed from clients and placement and sales agent fees.
•Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible securities offerings. Fee revenue relating to underwriting commitments is recorded at the point in time when all significant items relating to the underwriting process have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment for the purchase of securities from the issuer; (iii) the Company has been informed of the number of securities that it has been allotted; and (iv) the issuer obtains control and benefits of the offering; which generally occurs on trade date.
Underwriting fees are recognized gross of transaction-related expenses, and such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.
•Strategic/financial advisory fees. The Company's strategic advisory revenue includes success fees earned in connection with advising companies, principally in mergers, acquisitions and restructuring transactions. The Company also earns fees for related advisory work such as providing fairness opinions. A significant portion of the Company's advisory revenue (i.e., success-related advisory fees) is considered variable consideration and recognized when it is probable that the variable consideration will not be reversed in a future period. The variable consideration is constrained until satisfaction of the performance obligation. The Company records strategic advisory revenues at the point in time, gross of related expenses, when the services for the transactions are completed or the contract is canceled under the terms of each assignment or engagement.
•Placement and sales agent fees. The Company earns placement agency fees and sales agent commissions in non-underwritten transactions, such as private placements of loans and debt and equity securities, including private investment in public equity transactions ("PIPEs"), and as sales agent in at-the-market offerings of equity securities. The Company records placement revenues (which may be in cash and/or securities) at the point in time when the services for the transactions are completed under the terms of each assignment or engagement. The Company records sales agent commissions on a trade-date basis.
•Expense reimbursements from clients. Investment banking revenue includes expense reimbursements for transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction. Expense reimbursements associated with investment banking engagements are recognized in revenue at the point in time when the Company is contractually entitled to reimbursement. The related expenses are presented gross within their respective expense category in the accompanying condensed consolidated statements of operations.
Brokerage
Brokerage revenue consists of commissions, principal transactions, equity research fees and trade conversion revenue.
20
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
•Commissions. Commission revenue includes fees from executing and clearing client transactions and commission sharing arrangements. Trade execution and clearing services, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenues associated with combined trade execution and clearing services on a standalone basis, are recognized at a point in time on trade-date. Commission revenues are generally paid on settlement date and the Company records a receivable between trade-date and payment on settlement date. The Company permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as "soft dollar arrangements". The Company also offers institutional clients the ability to allocate a portion of their gross commissions incurred on trades executed with various brokers to pay for research products and other services provided by third parties by entering into commission sharing arrangements. The Company acts as an agent in the soft dollar and commission sharing arrangements as the customer controls the use of the soft dollars and directs payments to third-party service providers on its behalf. Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues and recorded on trade date. Commissions on soft dollar brokerage are recorded net of the related expenditures. The costs of commission sharing arrangements are recorded for each eligible trade and shown net of commission revenue.
•Equity research fees. Equity research fees are paid to the Company for providing access to equity research. In the US, revenue is recognized once an arrangement exists, access to research has been provided and the customer has benefited from the research. As part of MiFID II, the international customers of the Company's broker-dealers have executed equity research contracts with its clients. The contracts either contain a fixed price for providing access to research or a price at the discretion of the customer with a contract minimum. Fixed equity research fees are recognized over the contract period as the customer is benefiting from the research throughout the contract term. When the equity research fees are based on the customer’s discretion with a contract minimum, the Company recognizes the contract minimum over the life of the contract as the customer benefits from the research provided and adjusts the revenue when the Company can estimate the amount of equity research fees over the contract minimum. Additionally, the Company earns variable consideration for attending client conferences and events. Revenue is recognized when the Company attends a client conference or event.
•Trade conversion revenue. Trade conversion revenue includes fees earned from converting foreign securities into an American Depository Receipt ("ADR") and fees earned from converting an ADR into foreign securities on behalf of customers, and margins earned from facilitating customer foreign exchange transactions. Trade conversion revenue is recognized on a trade-date basis.
Investment Income
Investment income (loss) consists of securities principal transactions, net, portfolio fund principal transactions, net and carried interest allocations. Investment income is excluded from ASC Topic 606.
• Securities principal transactions, net. Principal transactions, net includes realized gains and losses from transactions in financial instruments and unrealized gains and losses from ongoing changes in the fair value of the Company’s positions.
Principal transactions, net generated by the Company's broker-dealers include net trading gains and losses from the Company's market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and trading gains and losses on inventory and other Company positions, which include securities previously received as part of investment banking transactions. In certain cases, the Company provides liquidity to clients by buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk. These positions are typically held for a short duration.
With respects to the Company's proprietary trading strategies, purchases and sales of securities, net of commissions, derivative contracts, and the related revenues and expenses are recorded on a trade-date basis with net trading gains and losses included as a component of Investment income - Securities principal transactions, net, in the accompanying condensed consolidated statements of operations.
•Portfolio Fund principal transactions, net. Portfolio funds include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company applies the practical expedient provided by the US GAAP fair value measurements and disclosures guidance relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The practical expedient permits an entity holding certain investments that calculates NAV per share or its equivalent for which the fair value is not readily determinable and is considered an investment company under ASC 946 to measure the
21
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy. Realized and unrealized gains (losses) resulting from changes in NAV per share are reflected within Investment income – portfolio fund principal transactions, net in the accompanying condensed consolidated statements of operations.
•Carried interest allocations. The Company is allocated carried interest based on net profits (as defined in the respective investment management or partnership agreement) related to certain of the Company's private equity investment funds. For the private equity fund products the Company offers, the carried interest earned is typically up to 30% of the distributions made to investors after return of their contributed capital and generally a preferred return. The Company recognizes carried interest allocated to the Company under an equity ownership model as investment income - carried interest allocations in the accompanying condensed consolidated statements of operations accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures. Under the equity method of accounting the Company recognizes its allocations of incentive income or carried interest within Investment Income - Carried interest allocations in the accompanying condensed consolidated statements of operations along with the allocations proportionate to the Company's ownership interests in the investment funds. Generally, carried interest is recognized after the investor has received a full return of its invested capital, plus a preferred return. However, for certain private equity structures, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred return on a current basis or on an investor by investor basis. These private equity structures are generally subject to a potential clawback of these incentive fees upon the liquidation of the private equity structure if the investor has not received a full return of its invested capital plus the preferred return thereon.
Management fees
The Company earns management fees from investment funds and certain managed accounts for which it serves as the investment manager; such fees earned are typically based on committed and invested capital. The Company has determined that the primary drivers of management fees are committed and invested capital relating to private equity funds. The management fees are earned as the investment management services are provided and are not subject to reversals. The performance obligation related to the transfer of these services is satisfied over time because the customer is receiving and consuming the benefits as they are provided by the Company.
Management fees are generally paid on a quarterly basis and are prorated for capital inflows (or commitments) and redemptions (or distributions) and are recognized as revenue at that time as they relate specifically to the services provided in that period, which are distinct from the services provided in other periods. While some investors may have separately negotiated fees, in general the management fees are as follows:
•Private equity funds. Management fees for the Company's private equity funds are generally charged at an annual rate of 1% to 2% of committed capital during the investment period (as defined in the relevant partnership agreement). After the investment period, management fees for these private equity funds are generally charged at an annual rate of 1% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the private equity funds. For certain other private equity funds (and managed accounts), the management fees range from 0.2% to 1% and there is no adjustment based on the investment period. Management fees for the Company's private equity funds are generally paid on a quarterly basis.
•Hedge funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of net asset value. Management fees are generally calculated monthly at the end of each month.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management or partnership agreement) related to certain of the Company's investment funds and managed accounts. The incentive income is charged to the investment funds in accordance with their corresponding investment management or partnership agreement. For the hedge funds the Company offers, incentive income earned is typically up to 20% (in certain cases on performance in excess of a benchmark) of the net profits earned for the full year that are attributable to each fee-paying investor.
The Company recognizes incentive income charged to the Company's hedge funds based on the net profits of the hedge funds. The Company recognizes such incentive income when the fees are no longer subject to reversal or are crystallized. For certain hedge funds, the incentive fee crystallizes annually when the high-water mark for such hedge funds is reset, which delays recognition of the incentive fee until year end. In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to such investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a "high-water mark." Generally, incentive income is earned after the investor has received a full return of its invested capital, plus a preferred return.
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Consolidated Funds – principal transaction, net
Purchases and sales of securities, net of commissions, derivative contracts, and the related revenues and expenses are recorded on a trade-date basis with net trading gains and losses included as a component of Consolidated Funds - Principal transactions, net in the accompanying condensed consolidated statements of operations.
Certain of the Companies Consolidated Funds invest in other investment funds for which the Company applies the practical expedient provided by the US GAAP fair value measurements and disclosures guidance relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The practical expedient permits an entity holding investments in certain entities that either are investment companies or have attributes similar to an investment company, and calculate NAV per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy. Realized and unrealized gains (losses) resulting from changes in NAV per share are reflected within Consolidated Funds – Principal transaction, net.
Interest and dividends
Interest and dividends are earned by the Company from various sources. The Company receives interest and dividends primarily from securities finance activities and securities held by the Company for purposes of investing capital, investments held by its Consolidated Funds and its brokerage balances. Interest is recognized in accordance with US GAAP and market convention for the imputation of interest of the host financial instrument. Interest income is recognized on the debt of those issuers that is deemed collectible. Interest income and expense includes premiums and discounts amortized and accreted on debt investments based on criteria determined by the Company using the effective yield method, which assumes the reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.
Insurance and reinsurance
Premiums for insurance and reinsurance contracts are earned over the coverage period. In most cases, premiums are recognized as revenues ratably over the term of the contract with unearned premiums computed on a monthly basis. For each of its contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with US GAAP. If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk, the Company records the contract under the deposit method of accounting with any net amount receivable reflected as an asset in other assets, and any net amount payable reflected as a liability within accounts payable, accrued expenses and other liabilities on the condensed consolidated statements of financial condition.
The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, including reported losses. Estimated ultimate payment amounts are based upon (1) reports of losses from policyholders, (2) individual case estimates and (3) estimates of incurred but unreported losses.
Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and estimates of recoverable amounts and are included in other expenses on the condensed consolidated statements of operations.
Costs of acquiring new policies, which vary with and are directly related to the production of new policies, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting and are included within other assets in the condensed consolidated statements of financial condition.
All of the items above are reported net of any Outward Reinsurance (see Note 18), which is determined as the portion of the Company’s premiums, liabilities for losses and loss adjustment expenses, provisions for losses and loss adjustment expenses, and costs of acquiring new policies that are ceded to providers of such Outward Reinsurance pursuant to their terms and conditions. These ceded amounts are calculated based on the same principles outlined above.
Interest and dividends expense
Interest and dividends expense relates primarily to securities finance activities, trading activity with respect to the Company's investments and interest expense on debt.
p. Income taxes
The Company accounts for income taxes in accordance with US GAAP which requires the recognition of tax benefits or expenses based on the estimated future tax effects of temporary differences between the financial statement and tax basis of its assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to an amount that is more likely
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
than not to be realized. The Company evaluates its deferred tax assets for recoverability considering negative and positive evidence, including its historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, and tax planning strategies. The Company records a valuation allowance against its deferred tax assets to bring them to a level that it is more likely than not to be utilized.
US GAAP clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements, requiring the Company to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company recognizes accrued interest and penalties related to its uncertain tax positions as a component of income tax expense.
In accordance with federal and state tax laws, the Company and its subsidiaries file consolidated federal, state, and local income tax returns as well as stand-alone state and local tax returns. The Company also has subsidiaries that are residents in foreign countries where tax filings have to be submitted on a stand-alone or combined basis. These subsidiaries are subject to taxes in their respective countries and the Company is responsible for and therefore reports all taxes incurred by these subsidiaries in the condensed consolidated statements of operations. The foreign jurisdictions where the Company owns subsidiaries and has tax filing obligations are the United Kingdom, Luxembourg, Malta, Germany, Switzerland, Israel, South Africa, Canada and Hong Kong.
q. Recent pronouncements
In August 2020, the FASB issued guidance simplifying an issuer’s accounting for convertible instruments by eliminating two of the three models in ASC 470-20 that require separate accounting for embedded conversion features; separate accounting is still required in certain cases. The guidance also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. The guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. The guidance requires new disclosures about events that occur during the reporting period and cause conversion contingencies to be met and about the fair value of a public business entity’s convertible debt at the instrument level. For public business entities, the guidance is effective for reporting periods beginning after December 15, 2021 and interim periods within those fiscal years with early adoption permitted. The Company adopted the guidance as of January 1, 2022 under the modified retrospective method. With the adoption of this guidance, the Company is required to include the portion of the Series A Convertible Preferred Stock that can be settled in Class A common stock (the amount in excess of $1,000.00 per share of the Series A Convertible Preferred Stock) in the diluted earnings per share calculation. See Note 21 for the calculation of diluted earnings per share.
In August 2018, the FASB issued guidance prescribing targeted improvements to financial services – insurance industry accounting guidance for long-duration contracts. The new guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of deferred acquisition costs for virtually all long-duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. For all entities, the guidance is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of the new guidance.
3. Acquisition
Malta
On February 26, 2021 (the "Malta Acquisition Date"), the Company, through its indirect wholly owned subsidiary, Cowen Malta Holdings Ltd. (“Malta Holdings”), completed the acquisition of all of the outstanding equity interest of Axeria Insurance Limited (the “Malta Acquisition”), an insurance company organized under the laws of Malta whose principal business activity is to provide insurance coverage to third parties (see Note 18). Axeria Insurance Limited was renamed Cowen Insurance Company Ltd (“Cowen Insurance Co”) upon acquisition. The Malta Acquisition was completed for a combination of cash and deferred consideration. In the aggregate, the purchase price, assets acquired, and liabilities assumed were not significant and near-term impact to the Company and its consolidated results of operations and cash flows is not expected to be significant.
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The aggregate estimated purchase price of the Malta Acquisition was $12.7 million. On the Malta Acquisition Date, the Company paid upfront consideration of $12.5 million, with additional deferred consideration of $0.2 million which was paid during the second quarter of 2021.
The Malta Acquisition was accounted for under the acquisition method of accounting in accordance with US GAAP. As such, the results of operations of the business acquired is included in the accompanying condensed consolidated statements of operations since the date of the Malta Acquisition and the assets acquired, liabilities assumed recorded at their fair values within their respective line items on the accompanying condensed consolidated statement of financial condition. The Company has recognized a bargain purchase gain of $5.2 million related to the Malta Acquisition and is shown net of associated tax of $1.3 million in the condensed consolidated statement of operations. The bargain purchase gain is primarily driven by the recognition of the customer relationships intangible asset and a contractual discount on the closing equity balance at the Malta Acquisition Date. Additionally, following the Malta Acquisition, the business acquired is included in the Cowen Investment Management reporting unit within the Operating Company segment.
The table below summarizes the purchase price allocation of net tangible and intangible assets acquired and liabilities assumed as of February 26, 2021:
| (dollars in thousands) | |||||
| Cash | $ | 14,844 | |||
| Securities owned, at fair value | 1,571 | ||||
| Fixed assets | 30 | ||||
| Intangible assets | 4,794 | ||||
| Other assets | 12,828 | ||||
| Compensation payable | (17) | ||||
| Other liabilities | (16,099) | ||||
| Total net identifiable assets acquired and liabilities assumed | 17,951 | ||||
| Bargain purchase gain | (5,216) | ||||
| Total estimated purchase price | $ | 12,735 | |||
As of the Malta Acquisition Date, the estimated fair value of the Company's intangible assets, which are primarily broker relationships, was $4.6 million and had a weighted average useful life of 10 years. The licenses of $0.2 million has indefinite life. Amortization expense for the three months ended March 31, 2022 was $0.1 million and for the three months ended March 31, 2021 was insignificant.
As of March 31, 2022, the estimated amortization expense related to these intangible assets in future periods is as follows:
| (dollars in thousands) | |||||
| 2022 | 343 | ||||
| 2023 | 458 | ||||
| 2024 | 458 | ||||
| 2025 | 458 | ||||
| 2026 | 458 | ||||
| Thereafter | 2,124 | ||||
| $ | 4,299 | ||||
In addition to the purchase price consideration, for the three months ended March 31, 2021, the Company had incurred acquisition-related expenses of $0.2 million, including financial advisory, legal and valuation services, which are included in professional, advisory and other fees in the accompanying condensed consolidated statements of operations.
4. Cash Collateral Pledged
As of March 31, 2022 and December 31, 2021, the Company pledged cash collateral in the amount of $3.4 million and $3.4 million respectively, which relates to letters of credit issued to the landlords of the Company's premises in New York City, Boston and San Francisco. The Company also has pledged cash collateral for reinsurance agreements which amounted to $49.5 million, as of March 31, 2022, and $44.1 million, as of December 31, 2021, which are expected to be released periodically as per the terms of the reinsurance policy between March 31, 2022 and March 31, 2024 (see Notes 12 and 18).
As of March 31, 2022, the Company has the following irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit.
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| Location | Amount | Maturity | ||||||||||||
| (dollars in thousands) | ||||||||||||||
| New York | $ | 209 | April 2023 | |||||||||||
| New York | $ | 1,325 | October 2022 | |||||||||||
| New York | $ | 1,226 | August 2022 | |||||||||||
| Boston | $ | 188 | March 2023 | |||||||||||
| San Francisco | $ | 454 | October 2025 | |||||||||||
| $ | 3,402 | |||||||||||||
To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of March 31, 2022 and December 31, 2021 there were no amounts due related to these letters of credit.
5. Segregated Cash
As of March 31, 2022 and December 31, 2021, cash segregated under federal regulations and other restricted deposits of $220.9 million and $194.7 million, respectively, consisted of cash deposited in Special Reserve Bank Accounts for the exclusive benefit of customers under SEC Rule 15c3-3 and cash deposited in Special Reserve Bank Accounts for the exclusive benefit of Proprietary Accounts of Broker-Dealers ("PAB") under SEC Rule 15c3-3 (see Note 24).
6. Investments of Operating Entities and Consolidated Funds
a. Operating entities
Securities owned, at fair value
Securities owned, at fair value are held by the Company and are considered held for trading. Substantially all equity securities, which are not part of the Company's self-clearing securities finance activities, are pledged to external clearing brokers under terms which permit the external clearing broker to sell or re-pledge the securities to others subject to certain limitations.
As of March 31, 2022 and December 31, 2021, securities owned, at fair value consisted of the following:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Common stock | $ | 2,348,243 | $ | 2,428,820 | |||||||
| Preferred stock | 190,184 | 134,930 | |||||||||
| Warrants and rights | 53,082 | 46,459 | |||||||||
| Government bonds | 11,992 | 16,002 | |||||||||
| Corporate bonds | 146,998 | 21,468 | |||||||||
| Convertible bonds | 5,250 | 5,250 | |||||||||
| Term loan | 2,375 | 3,907 | |||||||||
| Trade claims (*) | 4,840 | 3,496 | |||||||||
| Private investments | 550 | 410 | |||||||||
| $ | 2,763,514 | $ | 2,660,742 | ||||||||
(*)The Company has elected the fair value option for securities owned, at fair value with a fair value of $4.8 million and $3.5 million of trade claims respectively, at March 31, 2022 and December 31, 2021.
Receivable on and Payable for derivative contracts, at fair value
The Company predominantly enters into derivative transactions to satisfy client needs and to manage its own exposure to market and credit risks resulting from its trading activities. The Company’s direct exposure to derivative financial instruments includes futures, currency forwards, equity swaps, interest rate swaps and options. The Company's derivatives trading activities
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
expose the Company to certain risks, such as price and interest rate fluctuations, volatility risk, credit risk, counterparty risk, foreign currency movements and changes in the liquidity of markets.
The Company's long and short exposure to derivatives is as follows:
| Receivable on derivative contracts | As of March 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||
| Number of contracts / Notional Value | Fair value | Number of contracts / Notional Value | Fair value | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Currency forwards | $ | 11,482 | $ | 109 | $ | 10,727 | $ | 80 | |||||||||||||||
| Equity swaps | $ | 2,077,076 | 388,875 | $ | 1,950,181 | 305,370 | |||||||||||||||||
| Options (a) | 120,847 | 49,801 | 217,393 | 61,219 | |||||||||||||||||||
| Interest rate swap (c) | $ | 427,000 | 19,839 | $ | 285,000 | 1,208 | |||||||||||||||||
| Netting - swaps (b) | (115,912) | (81,742) | |||||||||||||||||||||
| $ | 342,712 | $ | 286,135 | ||||||||||||||||||||
Payable for derivative contracts | As of March 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||
| Number of contracts / Notional Value | Fair value | Number of contracts / Notional Value | Fair value | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Futures | $ | 2,567 | $ | 53 | $ | 9,378 | $ | 266 | |||||||||||||||
| Currency forwards | $ | 138,530 | 1,084 | $ | 149,575 | 1,346 | |||||||||||||||||
| Equity swaps | $ | 825,229 | 152,265 | $ | 988,329 | 114,689 | |||||||||||||||||
| Options (a) | 117,871 | 25,214 | 182,440 | 36,192 | |||||||||||||||||||
| Netting - swap (b) | (131,802) | (92,330) | |||||||||||||||||||||
| $ | 46,814 | $ | 60,163 | ||||||||||||||||||||
(a) Includes the volume of contracts for index, equity, commodity future and cash conversion options.
(b) Derivatives are reported on a net basis, by counterparty, when a legal right of offset exists under an enforceable netting agreement as well as net of cash collateral received or posted under enforceable credit support agreements. See Note 2f for further information on offsetting of derivative financial instruments.
(c) Interest rate swap offsetting the Company's floating rate debt on the Company's term loan. See Note 12
The following tables present the gross and net derivative positions and the related offsetting amount, as of March 31, 2022 and December 31, 2021. This table does not include the impact of over-collateralization.
Gross amounts offset on the Condensed Consolidated Statements of Financial Condition (a) | Net amounts included on the Condensed Consolidated Statements of Financial Condition | Gross amounts not offset in the Condensed Consolidated Statements of Financial Condition | |||||||||||||||||||||||||||||||||
| Gross amounts recognized | Financial instruments (a) | Cash Collateral pledged (a) | Net amounts | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| As of March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Receivable on derivative contracts, at fair value | $ | 458,624 | $ | 115,912 | $ | 342,712 | $ | 1,431 | $ | 256,061 | $ | 85,220 | |||||||||||||||||||||||
| Payable for derivative contracts, at fair value | 178,616 | 131,802 | 46,814 | 2,840 | — | 43,974 | |||||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Receivable on derivative contracts, at fair value | $ | 367,877 | $ | 81,742 | $ | 286,135 | $ | 1,421 | $ | 211,442 | $ | 73,272 | |||||||||||||||||||||||
| Payable for derivative contracts, at fair value | 152,493 | 92,330 | 60,163 | 2,839 | — | 57,324 | |||||||||||||||||||||||||||||
(a)Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.
The realized and unrealized gains/(losses) related to derivatives trading activities were $(37.8) million and $35.5 million for the three months ended March 31, 2022 and 2021, respectively, and are included in Investment income- Securities principal
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
transactions, net in the accompanying condensed consolidated statements of operations. The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising the Company's business activities and are calculated before consideration of economic hedging transactions, which generally offset the net gains (losses) included above.
Pursuant to the various derivatives transactions discussed above, except for exchange traded derivatives and certain options, the Company is required to post/receive collateral. These amounts are recognized in receivable from brokers, dealers and clearing organizations and payable to brokers, dealers and clearing organizations respectively. As of March 31, 2022 and December 31, 2021, all derivative contracts were with major financial institutions.
Other investments
As of March 31, 2022 and December 31, 2021, other investments included the following:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Portfolio funds, at fair value (1) | $ | 131,766 | $ | 137,986 | |||||||
| Carried interest (2) | 70,281 | 88,925 | |||||||||
| Equity method investments (3) | 35,581 | 47,200 | |||||||||
| $ | 237,628 | $ | 274,111 | ||||||||
(1) Portfolio funds, at fair value
The portfolio funds, at fair value as of March 31, 2022 and December 31, 2021, included the following:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| HealthCare Royalty Partners LP (a)(*) | $ | 791 | $ | 832 | |||||||
| HealthCare Royalty Partners II LP (a)(*) | 1,241 | 1,259 | |||||||||
| Eclipse Ventures Fund I, L.P. (b) | 6,348 | 5,829 | |||||||||
| Eclipse Ventures Fund II, L.P. (b) | 2,359 | 2,354 | |||||||||
| Eclipse Continuity Fund I, L.P. (b) | 1,827 | 1,641 | |||||||||
| Starboard Value and Opportunity Fund LP (c)(*) | 48,246 | 49,252 | |||||||||
| Starboard Value and Opportunity Fund Ltd (c) (*) | 2,675 | 2,732 | |||||||||
| Lagunita Biosciences, LLC (d) | 5,227 | 5,671 | |||||||||
| Starboard Leaders Fund LP (e)(*) | 2,826 | 2,823 | |||||||||
| Formation8 Partners Fund I, L.P. (f) | 19,949 | 20,992 | |||||||||
| BDC Fund I Coinvest 1, L.P. (g) | 1,250 | 1,250 | |||||||||
| Difesa Partners, LP (h) | 971 | 1,017 | |||||||||
| Cowen Sustainable Investments I LP (i)(*) | 12,879 | 13,102 | |||||||||
| Cowen Healthcare Investments II LP (i) (*) | 9,524 | 13,055 | |||||||||
| Cowen Healthcare Investments III LP (i)(*) | 6,847 | 8,426 | |||||||||
| Cowen Healthcare Investments IV LP (i)(*) | 1,987 | 1,071 | |||||||||
| Eclipse SPV I, LP (j)(*) | 1,445 | 1,445 | |||||||||
| TriArtisan ES Partners LLC (k)(*) | 1,805 | 1,805 | |||||||||
| TriArtisan PFC Partners LLC (l)(*) | 1,177 | 1,112 | |||||||||
| Ramius Merger Fund LLC (m)(*) | 1,760 | 1,692 | |||||||||
| Other private investment (n)(*) | 294 | 303 | |||||||||
| Other affiliated funds (o)(*) | 338 | 323 | |||||||||
| $ | 131,766 | $ | 137,986 | ||||||||
* These portfolio funds are affiliates of the Company.
The Company has no unfunded commitments regarding the portfolio funds held by the Company except as noted in Note 22.
(a)HealthCare Royalty Partners, L.P. and HealthCare Royalty Partners II, L.P. are private equity funds and therefore distributions will be made when cash flows are received from the underlying investments, typically on a quarterly basis.
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(b)Each of Eclipse Ventures Fund I, L.P., Eclipse Ventures Fund II, L.P. and Eclipse Continuity Fund I, L.P. are venture capital funds which invests in early stage and growth stage hardware companies. Distributions will be made when the underlying investments are liquidated.
(c)Starboard Value and Opportunity Fund LP and Starboard Value and Opportunity Fund Ltd permits quarterly withdrawals upon 90 days' notice.
(d)Lagunita Biosciences, LLC, is a healthcare investment company that creates and grows early stage companies to commercialize impactful translational science that addresses significant clinical needs, is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.
(e)Starboard Leaders Fund LP does not permit withdrawals, but instead allows terminations with respect to capital commitments upon 30 days' prior written notice at any time following the first anniversary of an investor's initial capital contribution.
(f)Formation8 Partners Fund I, L.P. is a private equity fund which invests in early stage and growth transformational information and energy technology companies. Distributions will be made when the underlying investments are liquidated.
(g)BDC Fund I Coinvest 1, L.P. is a private equity fund focused on investing in growth companies in industries disrupted by digitization. Distributions will be made when the underlying investments are liquidated.
(h)Difesa Partners, LP permits semi-annual withdrawals occurring on or after the anniversary of initial contribution upon 90 days written notice.
(i)Cowen Sustainable Investments I LP, Cowen Healthcare Investments II LP, Cowen Healthcare Investments III LP and Cowen Healthcare Investments IV LP are private equity funds. Distributions are made from the fund when cash flows or securities are received from the underlying investments. Investors do not have redemption rights.
(j)Eclipse SPV I, L.P. is a co-investment vehicle organized to invest in a private company focused on software-driven automation projects. Distributions will be made when the underlying investments are liquidated.
(k)TriArtisan ES Partners LLC is a co-investment vehicle organized to invest in a privately held nuclear services company. Distributions will be made when the underlying investment is liquidated.
(l)TriArtisan PFC Partners LLC is a co-investment vehicle organized to invest in a privately held casual dining restaurant chain. Distributions will be made when the underlying investment in liquidated.
(m)Ramius Merger Fund LLC permits monthly withdrawals on 45 days prior notice.
(n)Other private investment represents the Company's closed end investment in a portfolio fund that invests in a wireless broadband communication provider in Italy.
(o)The majority of these investment funds are affiliates of the Company or are managed by the Company and the investors can redeem from these funds as investments are liquidated.
(2)Carried interest
The Company applies an accounting policy election to recognize incentive income allocated to the Company under an equity ownership model in other investments in the accompanying condensed consolidated statements of financial condition (see Note 2o). Carried interest allocated to the Company from certain portfolio funds represents Cowen's general partner capital accounts from those funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds. All carried interest balances are earned from affiliates of the Company.
A portion of the Company's carried interest is granted to employees through profit sharing awards designed to more closely align compensation with the overall realized performance of the Company. These arrangements enable certain employees to earn compensation based on performance revenue earned by the Company and are recorded within compensation payable in the accompanying condensed consolidated statements of financial condition and employee compensation and benefits expense in the accompanying condensed consolidated statements of operation based on the probable and estimable payments under the terms of the awards.
29
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The carried interest as of March 31, 2022 and December 31, 2021, included the following:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Cowen Healthcare Investments II LP | $ | 13,886 | $ | 23,327 | |||||||
| Cowen Healthcare Investments III LP | 11,510 | 18,523 | |||||||||
| Cowen Sustainable Investments I LP | 6,725 | 7,436 | |||||||||
| Cowen Sustainable Investments Offshore I LP | 8,114 | 9,196 | |||||||||
| CSI I Prodigy Co-Investment LP | 2,241 | 2,436 | |||||||||
| CSI PRTA Co- Investment LP | 8,682 | 9,535 | |||||||||
| TriArtisan TGIF Partners LLC | 4,279 | 4,047 | |||||||||
| TriArtisan ES Partners LLC | 3,389 | 3,401 | |||||||||
| TriArtisan PFC Partners LLC | 10,408 | 9,394 | |||||||||
| Ramius Multi-Strategy Fund LP | 555 | 587 | |||||||||
| Ramius Merger Fund LLC | 368 | 861 | |||||||||
| RCG IO Renergys Sarl | 124 | 136 | |||||||||
| Other affiliated funds | — | 46 | |||||||||
| $ | 70,281 | $ | 88,925 | ||||||||
(3) Equity method investments
Equity method investments include investments held by the Company in several operating companies. The operating agreement that governs the management of day-to-day operations and affairs of these entities stipulates that certain decisions require support and approval from other members in addition to the support and approval of the Company. As a result, all operating decisions made in these entities requires the support of both the Company and an affirmative vote of a majority of the other managing members who are not affiliates of the Company. As the Company does not possess control over any of these entities, the presumption of consolidation has been overcome pursuant to current Accounting Standards and the Company accounts for these investments under the equity method of accounting. Included in equity method investments are the investments in (a) HealthCare Royalty Partners General Partners (b) Starboard Value (and certain related parties) which serves as an operating company whose operations primarily include the day-to-day management (including portfolio management) of several activist investment funds and related managed accounts and (c) operating companies whose operations primarily include the day-to-day management of real estate entities. The Company recorded no impairment charges in relation to its equity method investments for the three months ended March 31, 2022 and 2021.
The Company elected to use the cumulative earnings approach for the distributions it receives from its equity method investments. Under the cumulative earnings approach, any distributions received up to the amount of cumulative earnings are treated as return on investment and classified in operating activities within the cash flows. Any excess distributions would be considered as return of investments and classified in investing activities.
The following table summarizes equity method investments held by the Company:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Starboard Value LP | $ | 25,741 | $ | 36,889 | |||||||
| HealthCare Royalty GP III, LLC | 1,830 | 1,957 | |||||||||
| HealthCare Royalty GP, LLC | 1,595 | 1,451 | |||||||||
| HealthCare Royalty GP II, LLC | 210 | 213 | |||||||||
| HealthCare Royalty GP IV, LLC | 1,618 | 1,716 | |||||||||
| RCG Longview Debt Fund IV Management, LLC | 331 | 331 | |||||||||
| HCR Overflow Fund GP, LLC | 774 | 839 | |||||||||
| HCRP MGS Account Management, LLC | 114 | 598 | |||||||||
| HCR Stafford Fund GP, LLC | 3,119 | 2,955 | |||||||||
| Other | 249 | 251 | |||||||||
| $ | 35,581 | $ | 47,200 | ||||||||
The Company's income from equity method investments was $5.6 million and $12.6 million and for the three months ended March 31, 2022 and 2021, respectively, and is included in net gains (losses) on other investments on the accompanying condensed consolidated statements of operations.
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Securities sold, not yet purchased, at fair value
Securities sold, not yet purchased, at fair value represent obligations of the Company to deliver a specified security at a contracted price and, thereby, create a liability to purchase that security at prevailing prices. The Company's liability for securities to be delivered is measured at their fair value as of the date of the condensed consolidated financial statements. However, these transactions result in off-balance sheet risk, as the Company's ultimate cost to satisfy the delivery of securities sold, not yet purchased, at fair value may exceed the amount reflected in the accompanying condensed consolidated statements of financial condition. As of March 31, 2022 and December 31, 2021, securities sold, not yet purchased, at fair value consisted of the following:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Common stock | $ | 956,228 | $ | 1,192,396 | |||||||
| Corporate bonds | 1,349 | 37 | |||||||||
| Preferred stock | 17,278 | 9,009 | |||||||||
| Warrants and rights | 12 | 6 | |||||||||
| $ | 974,867 | $ | 1,201,448 | ||||||||
Securities purchased under agreements to resell/securities sold under agreements to repurchase and securities lending and borrowing transactions
The following tables present the contractual gross and net securities borrowing and lending agreements and securities sold under agreements to repurchase and the related offsetting amount as of March 31, 2022 and December 31, 2021.
Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition | |||||||||||||||||||||||||||||||||||||||||
| Gross amounts recognized, net of allowance | Gross amounts offset on the Condensed Consolidated Statements of Financial Condition (a) | Net amounts included on the Condensed Consolidated Statements of Financial Condition | Additional Amounts Available | Financial instruments | Cash Collateral pledged (b) | Net amounts | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Securities borrowed | $ | 1,761,146 | $ | — | $ | 1,761,146 | $ | — | $ | 1,661,310 | $ | — | $ | 99,836 | |||||||||||||||||||||||||||
| Securities loaned | 1,735,852 | — | 1,735,852 | — | 1,706,171 | — | 29,681 | ||||||||||||||||||||||||||||||||||
| Securities purchased under agreements to resell | 19,621 | — | 19,621 | — | 21,035 | — | (1,414) | ||||||||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase | 229,192 | — | 229,192 | — | 249,116 | — | (19,924) | ||||||||||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Securities borrowed | 1,704,603 | — | 1,704,603 | — | 1,652,007 | — | 52,596 | ||||||||||||||||||||||||||||||||||
| Securities loaned | 1,586,572 | — | 1,586,572 | — | 1,592,140 | — | (5,568) | ||||||||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase | $ | 63,469 | $ | — | $ | 63,469 | $ | — | $ | 74,443 | $ | — | $ | (10,974) | |||||||||||||||||||||||||||
(a)Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.
(b)Includes the amount of cash collateral held/posted.
The following tables present gross obligations for securities loaned and securities sold under agreements to repurchase by remaining contractual maturity and class of collateral pledged as of March 31, 2022 and December 31, 2021:
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Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| Open and Overnight | Up to 30 days | 31 - 90 days | Greater than 90 days | Total | |||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
| As of March 31, 2022 | |||||||||||||||||||||||||||||
| Securities loaned | |||||||||||||||||||||||||||||
| Common stock | $ | 1,728,578 | $ | — | $ | — | $ | — | $ | 1,728,578 | |||||||||||||||||||
| Corporate bonds | 7,274 | — | — | — | 7,274 | ||||||||||||||||||||||||
| Securities purchased under agreements to resell | |||||||||||||||||||||||||||||
| Corporate bonds | 19,621 | — | — | — | 19,621 | ||||||||||||||||||||||||
| Securities sold under agreements to repurchase | |||||||||||||||||||||||||||||
| Common stock | — | 43,073 | — | — | 43,073 | ||||||||||||||||||||||||
| Corporate bonds | 186,119 | — | — | — | 186,119 | ||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||
| Securities loaned | |||||||||||||||||||||||||||||
| Common stock | $ | 1,570,835 | $ | — | $ | — | $ | — | 1,570,835 | ||||||||||||||||||||
| Corporate bonds | 15,737 | — | — | — | 15,737 | ||||||||||||||||||||||||
| Securities sold under agreements to repurchase | |||||||||||||||||||||||||||||
| Common stock | — | 20,906 | 42,563 | — | 63,469 | ||||||||||||||||||||||||
Variable Interest Entities
The total assets and liabilities of the variable interest entities for which the Company has concluded that it holds a variable interest, but for which it is not the primary beneficiary, are $9.1 billion and $692.4 million as of March 31, 2022 and $9.7 billion and $744.5 million as of December 31, 2021, respectively. The carrying value of the Company's exposure to loss for these variable interest entities as of March 31, 2022 was $155.1 million, and as of December 31, 2021 was $165.5 million, all of which is included in other investments, at fair value in the accompanying condensed consolidated statements of financial condition. Additionally, the Company's maximum exposure to loss for the variable interest entities noted above as of March 31, 2022 and December 31, 2021, was $224.7 million and $233.6 million, respectively. The maximum exposure to loss often differs from the carrying value of exposure to loss of the variable interests. The maximum exposure to loss is dependent on the nature of the variable interests in the VIEs and is limited to the notional amounts of certain commitments and guarantees.
b. Consolidated Funds
Other investments, at fair value
Investments in portfolio funds, at fair value
As of March 31, 2022 and December 31, 2021, investments in portfolio funds, at fair value, included the following:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Investments of Enterprise LP | $ | 97,182 | $ | 99,067 | |||||||
| $ | 97,182 | $ | 99,067 | ||||||||
Consolidated portfolio fund investments of Enterprise LP
On May 12, 2010, the Company announced its intention to close its master fund, Ramius Enterprise Master Fund Ltd ("Enterprise Master"). Enterprise LP operated under a "master-feeder" structure up until January 1, 2019, when Enterprise Master distributed its capital to each feeder and was liquidated. As of March 31, 2022 and December 31, 2021, the consolidated investments in portfolio funds include Enterprise LP's investment in RCG Special Opportunities Fund, Ltd which is a portfolio fund that invests in a limited number of private equity investments directly as well as through affiliated portfolio funds.
Indirect Concentration of the Underlying Investments Held by Consolidated Funds
From time to time, either directly held by the Company, indirectly through the Company's consolidated entities or indirectly through its investments in the Consolidated Funds, the Company may maintain exposure to a particular issue or issuer (both long and/or short) which may account for 5% or more of the Company's equity. Based on information that is available to the Company as of March 31, 2022 and December 31, 2021, the Company assessed whether or not its interests in an issuer for which the
32
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Company's pro-rata share exceeds 5% of the Company's equity. There was one indirect concentration that exceeded 5% of the Company's equity as of March 31, 2022 and December 31, 2021, respectively.
Through its investments in a Consolidated Fund and combined with direct Company investments, the Company maintained exposure to a particular investment which accounted for 5% or more of the Company's equity.
| Investment's percentage of the Company's stockholders' equity | |||||||||||||||||||||||||||||||||||
| Issuer | Security Type | Country | Industry | Percentage of Stockholders' Equity | Market Value | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| As of March 31, 2022 | Linkem S.p.A. | Equity and warrants | Italy | Wireless Broadband | 7.87 | % | $ | 81,498 | |||||||||||||||||||||||||||
| As of December 31, 2021 | Linkem S.p.A. | Equity and warrants | Italy | Wireless Broadband | 8.22 | % | $ | 83,537 | |||||||||||||||||||||||||||
7. Fair Value Measurements for Operating Entities and Consolidated Funds
The following table presents the assets and liabilities that are measured at fair value on a recurring basis on the accompanying condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of March 31, 2022 and December 31, 2021:
| Assets at Fair Value as of March 31, 2022 | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Netting (c) | Total | |||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
| Operating Entities | |||||||||||||||||||||||||||||
| Securities owned, at fair value | |||||||||||||||||||||||||||||
| Government bonds | $ | 11,992 | $ | — | $ | — | $ | — | $ | 11,992 | |||||||||||||||||||
| Preferred stock | 20,483 | — | 169,701 | — | 190,184 | ||||||||||||||||||||||||
| Common stock | 2,304,895 | 3,517 | 39,831 | — | 2,348,243 | ||||||||||||||||||||||||
| Convertible bonds | — | — | 5,250 | — | 5,250 | ||||||||||||||||||||||||
| Corporate bonds | 28,892 | 115,680 | 2,426 | — | 146,998 | ||||||||||||||||||||||||
| Trade claims | — | — | 4,840 | — | 4,840 | ||||||||||||||||||||||||
| Term loan | — | 2,375 | — | — | 2,375 | ||||||||||||||||||||||||
| Warrants and rights | 34,525 | — | 18,557 | — | 53,082 | ||||||||||||||||||||||||
| Private investments | — | — | 550 | — | 550 | ||||||||||||||||||||||||
| Receivable on derivative contracts, at fair value | |||||||||||||||||||||||||||||
| Currency forwards | — | 109 | — | — | 109 | ||||||||||||||||||||||||
| Equity swaps | — | 388,875 | — | (115,912) | 272,963 | ||||||||||||||||||||||||
| Options | 49,573 | — | 228 | — | 49,801 | ||||||||||||||||||||||||
| Interest rate swap | — | 19,839 | — | — | 19,839 | ||||||||||||||||||||||||
| $ | 2,450,360 | $ | 530,395 | $ | 241,383 | $ | (115,912) | $ | 3,106,226 | ||||||||||||||||||||
| Portfolio funds measured at net asset value (a) | 131,766 | ||||||||||||||||||||||||||||
| Consolidated Funds' portfolio funds measured at net asset value (a) | 97,182 | ||||||||||||||||||||||||||||
| Carried interest (a) | 70,281 | ||||||||||||||||||||||||||||
| Equity method investments (a) | 35,581 | ||||||||||||||||||||||||||||
| Total investments | $ | 3,441,036 | |||||||||||||||||||||||||||
33
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| Liabilities at Fair Value as of March 31, 2022 | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Netting (c) | Total | |||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
| Operating Entities | |||||||||||||||||||||||||||||
| Securities sold, not yet purchased, at fair value | |||||||||||||||||||||||||||||
| Common stock | $ | 858,685 | $ | 97,543 | $ | ||||||||||||||||||||||||