It was recently announced that Cowen will be acquired by TD. Can you tell me a bit about the deal and what it may mean for the business?
TD made it clear in their press release and in the subsequent investor calls that what brought them to Cowen was our entrepreneurial, client-focused and values-based culture and our expertise in key growth areas.
The articulated goal is to create incremental opportunities to scale our respective client platforms collectively. The common values we share in appreciating our clients and our colleagues appear to have played a significant role in bringing the two firms together as well. In prime brokerage specifically, we believe becoming part of TD will bring benefits to clients and the teams of both firms as the complimentary capabilities should provide the opportunity to offer a wider range of solutions.
Looking at the prime brokerage landscape, how would you say it has changed since the Archegos fallout?
In the last 24 months, two of the largest European banks, who had been prime brokerage giants, are now essentially out of the business. Some pieces have been absorbed by other banks and I’m sure you can read as well as we can of the trials and tribulations that those integrations are causing.
It’s fair to say that the number of large players in the space has certainly shrunk over the last couple of years. It’s also fair to say that those who have been successful, the bulge bracket US banks, have probably gained from the dysfunction.
The big are getting bigger and the strong are getting stronger. The dislocations are creating some opportunities for mid-tier or boutique firms that have the capabilities comparable to the bulge bracket firms, but perhaps have not previously been considered credible alternate providers until fund managers needed to look for one alternative providers and have come to understand and appreciate that the capabilities available are suitable for their needs.
We are asserting ourselves in the marketplace in a thoughtful manner and have experienced some success in winning new clients that have been impacted by the industry shakeout.
What have been the key successes at Cowen over the past 12 months?
It’s really been doing more of the same. We tend not to make massive changes in our business model very frequently, but rather build orderly over time and to a large extent that’s what we’ve done over the past year. We did have an opportunity in the preceding year to absorb a significant piece of business in Europe when one of our former competitors decided to exit the market.
We were fortunate enough to be able to hire the team and bring over a very significant portion of the client base. As a result, we did experience a step function increase in the size of our business and worked diligently to make sure that we absorbed it appropriately and continued to provide the high level of service that we pride ourselves on.
We’ve also been focused on growing organically, but doing so in a thoughtful manner. Because there’s been so much displacement in the marketplace over the past 18 months, it could be easy to get caught up in the opportunities and wave every new piece of business in. The reality is that we see the opportunities perhaps a little differently than others, where, because of the dysfunction and the shrinking of the pool of providers, we can be a little bit more thoughtful and deliberate in selecting those clients that are more appropriate matches with our business. Making sure that their needs and our capabilities really line up, that the revenue opportunity from our perspective makes sense, that’s the way we’ve been going about it.
We also continue to focus on our outsourced trading business, where we’ve added personnel with fixed income expertise over the past year. That’s a relatively newer element of our outsourced trading service – one that we think ultimately has the potential to become larger than the equity and options outsourced trading business.
If for no other reason, based on the size of the fixed income market, the bespoke nature of how fixed income is transacted, there’s a lot more touch involved than clicking a button to buy a large number of shares in a liquid stock within a tight price range. There’s a lot more value that a team like ours can add in the process to portfolio managers when they’re trying to deploy capital in the fixed income markets.
The addition of personnel in that area, some very senior, is meant to extend our capabilities, but also to send a message in the marketplace that we’re capable of providing this solution, and asking firms to offer us an audience to have a discussion about how we will meet our clients’ needs.
We’ve also made a concerted effort over the past year to extend the reach of our capital introduction effort internationally. We hired our first team member in Asia, who works out of our Hong Kong office. We already had a senior person in London and we’ve since hired additional talent there.
So geographic expansion is on the radar for Cowen?
It definitely has been. If you dial the clock back to when Cowen first entered the prime brokerage and outsourced trading business seven years ago, we were purely a domestic solutions provider. A year later, we planted our flag in London and started building a business. Two years later, we laid the groundwork for a launch in Hong Kong and started building that business. Fast forward to today and we have an integrated global footprint.
We think, based on everything we see, that the growth opportunity for us over the next three to five years is potentially greater in Europe and Asia – in large part because of the very significant differences we see in the competitive landscape. Unlike the aggressive efforts by mid-tier or boutique prime brokers aimed at emerging fund managers we face in the US, we don’t see a similar market structure in Europe or Asia. The market in these regions seem to more defined by the bulge bracket firms and smaller regional players, with many not able to provide the global solutions a firm like Cowen can.
Much of that has to do with the broader range of services that we are able to provide to clients in addition to the traditional custody, clearing, financing and execution. Our team is very capable and very willing to do the operational support function, from as little to as much as the client would like.
We’ll do overnight portfolio reconciliation and portfolio reporting for clients. Essentially, providing them with a service that they would otherwise have to internalise and fund on their own. These are the kinds of things that, particularly in the international markets, we’re finding are attractive solutions, particularly for emerging managers.
As time has moved on, we seem to have found our way to more mature and more established fund managers. We take this as a positive development as I seems to validate the credibility and attraction of the solutions we’re providing to this different client set, thus expanding our market opportunities.
It’s good to know that when the TD deal closes, we’ll have a much larger balance sheet with good funding costs that can support this anticipated growth.
How have client needs evolved in the wake of Archegos and Covid?
The one overriding theme for us over the last couple of years has been the broadening of the acceptance and adoption of outsourced trading. Historically, it was more the provenance of emerging hedge fund managers.
Part of that might have been driven by Covid. Working from home validated the notion in the minds of many portfolio managers that they didn’t need everyone in their organisation sitting in their offices to function properly. It also raised the idea that they perhaps could rely on other traders sitting remotely, such as those provided by an outsourced provider.
Regardless of the reasoning, it’s very evident to us that the acceptance of outsourced trading as a solution has broadened out materially to include much larger, well established hedge fund managers, but perhaps even more importantly, even larger and more traditional investment management firms, including investment advisory firms, pension funds, large family offices, and other such firms that have a much broader range of investment activities.
The key element that’s driven our business is we’ve not just limited the solution to global equity executions, but rather have developed a comprehensive set of services that encompasses other asset classes including options and other derivatives, fixed income, FX and futures, as well as pre- and post-trade operational support that clients would otherwise have to perform themselves.
We’ve put together a team of traders that now numbers more than 40, including professionals with long tenures and a broad range of experiences – some 75% of the team have worked on the buy-side. They’re coming from firms where they worked alongside and reported directly into portfolio managers and understand the relationship that needs to evolve between a trader and a portfolio manager.
Our geographic reach has also played an important role in our growth as we can offer clients full trading and trade support solutions through our offices in the key global time zones with 24 by six access. We have teams operating in the US, as well as in Hong Kong and in London. So as they say, we can pass the book along for clients in a rather seamless manner. That’s something that’s not easily replicated inside, without an enormous effort and expenditure. And as we know, all firms don’t have the resources to do that.