Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
o
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 Group, 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) 562-1000
(Registrant's telephone number, including area code)
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 Q    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes  Q  No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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 o
 
Accelerated filer Q
 
Non-accelerated filer o
(Do not check if a smaller
reporting company)
 
Smaller reporting company o
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No Q
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 28, 2017, there were 27,332,651 shares of the registrant's common stock outstanding.
 


Table of Contents

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, 2016 as well as Item 1A of this periodic report on Form 10-Q for the quarterly period ended March 31, 2017.
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, 2017 and 2016. The Consolidated Financial Statements as of December 31, 2016 were audited.



3

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Cowen Group, Inc.
Condensed Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data)
(unaudited)
Assets
As of March 31, 2017
 
As of December 31, 2016
Cash and cash equivalents
$
78,959

 
$
112,014

Cash collateral pledged
14,696

 
13,342

Securities owned, at fair value
656,381

 
700,876

Receivable on derivative contracts, at fair value
18,137

 
22,901

Other investments
150,813

 
157,279

Receivable from brokers
163,622

 
87,837

Fees receivable, net of allowance
49,925

 
45,883

Due from related parties
42,792

 
39,629

Fixed assets, net of accumulated depreciation and amortization of $25,418 and $23,867, respectively
40,836

 
42,408

Goodwill
60,678

 
60,678

Intangible assets, net of accumulated amortization of $28,302 and $29,418, respectively
24,465

 
25,769

Deferred tax asset, net
163,873

 
165,656

Other assets
62,074

 
38,406

Consolidated Funds
 
 
 
Cash and cash equivalents
10,293

 
17,761

Securities owned, at fair value
91,759

 
79,237

Receivable on derivative contracts, at fair value
909

 
893

Other investments
401,528

 
401,465

Receivable from brokers
9,289

 
5,978

Other assets
518

 
511

Total Assets
$
2,041,547

 
$
2,018,523

Liabilities and Stockholders' Equity
 
 
 
Liabilities
 
 
 
Securities sold, not yet purchased, at fair value
$
335,676

 
$
266,090

Payable for derivative contracts, at fair value
14,143

 
20,762

Payable to brokers
124,451

 
210,309

Payable to customers
70,479

 

Compensation payable
31,794

 
98,084

Notes payable and other debt
77,890

 
77,030

Convertible debt
132,055

 
130,029

Fees payable
7,876

 
3,272

Due to related parties
573

 
573

Accounts payable, accrued expenses and other liabilities
66,833

 
51,115

Consolidated Funds
 
 
 
Securities sold, not yet purchased, at fair value

 
883

Payable for derivative contracts, at fair value
876

 
572

Payable to brokers
1,652

 
3,700

Due to related parties

 
189

Contributions received in advance
50

 
2,000

Capital withdrawals payable
4,368

 
1,408

Accounts payable, accrued expenses and other liabilities
441

 
652

Total Liabilities
869,157

 
866,668

Commitments and Contingencies (Note 12)

 

Redeemable non-controlling interests
394,132

 
379,205

Stockholders' equity
 
 
 
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding as of March 31, 2017 (aggregate liquidation preference of $120,750,000) and 120,750 shares issued and outstanding as of as of December 31, 2016 (aggregate liquidation preference of $120,750,000), respectively
1

 
1

Class A common stock, par value $0.01 per share: 62,500,000 shares authorized, 37,451,533 shares issued and 27,312,493 outstanding as of March 31, 2017 and 36,542,091 shares issued and 26,731,289 outstanding as of December 31, 2016, respectively (including 162,176 and 162,176 restricted shares, respectively)
292

 
292

Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding

 

Additional paid-in capital
937,425

 
928,646

(Accumulated deficit) retained earnings
(1,156
)
 
(2,442
)
Accumulated other comprehensive income (loss)
(4
)
 
(2
)
Less: Class A common stock held in treasury, at cost, 10,139,040 and 9,810,802 shares, respectively
(158,300
)
 
(153,845
)
Total Stockholders' Equity
778,258

 
772,650

Total Liabilities and Stockholders' Equity
$
2,041,547

 
$
2,018,523

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

Cowen Group, Inc.
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Revenues
 
 
 
Investment banking
$
36,553

 
$
26,147

Brokerage
50,534

 
50,935

Management fees
8,708

 
11,030

Incentive income
546

 
1,111

Interest and dividends
5,089

 
3,653

Reimbursement from affiliates
1,652

 
3,887

Aircraft lease revenue
1,059

 
394

Reinsurance premiums
7,089

 
1,010

Other revenues
1,400

 
1,321

Consolidated Funds
 
 
 
Interest and dividends
1,994

 
1,076

Other revenues
347

 
475

Total revenues
114,971

 
101,039

Expenses
 
 
 
Employee compensation and benefits
76,673

 
63,181

Floor brokerage and trade execution
8,323

 
7,791

Interest and dividends
9,930

 
7,310

Professional, advisory and other fees
5,816

 
5,594

Service fees
2,616

 
2,184

Communications
4,760

 
4,139

Occupancy and equipment
7,063

 
8,005

Depreciation and amortization
3,028

 
3,067

Client services and business development
7,762

 
7,040

Reinsurance claims, commissions and amortization of deferred acquisition costs
6,178

 
563

Other expenses
3,261

 
5,249

Consolidated Funds
 
 
 
Interest and dividends
3,983

 
1,120

Professional, advisory and other fees
392

 
302

Floor brokerage and trade execution
109

 
22

Other expenses
479

 
372

Total expenses
140,373

 
115,939

Other income (loss)
 
 
 
Net gains (losses) on securities, derivatives and other investments
26,056

 
3,188

Consolidated Funds
 
 
 
Net realized and unrealized gains (losses) on investments and other transactions
9,578

 
(2,692
)
Net realized and unrealized gains (losses) on derivatives
3,865

 
3,102

Net gains (losses) on foreign currency transactions
(97
)
 
(13
)
Total other income (loss)
39,402

 
3,585

Income (loss) before income taxes
14,000

 
(11,315
)
Income tax expense (benefit)
1,911

 
(3,320
)
Net income (loss)
12,089

 
(7,995
)
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds
9,105

 
(4,297
)
Net income (loss) attributable to Cowen Group, Inc.
2,984

 
(3,698
)
Preferred stock dividends
1,698

 
1,698

Net income (loss) attributable to Cowen Group, Inc. common stockholders
$
1,286

 
$
(5,396
)
Weighted average common shares outstanding:
 
 
 

Basic (a)
27,061

 
26,591

Diluted (a)
28,401

 
26,591

Earnings (loss) per share:
 
 
 
Basic (a)
$
0.05

 
$
(0.20
)
Diluted (a)
$
0.05

 
$
(0.20
)
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


Table of Contents


Cowen Group, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
(unaudited)





 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
$
12,089

 
 
 
 
 
$
(7,995
)
   Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 
 
(2
)
 
 
 
 
 
(3
)
 
 
   Total other comprehensive income (loss), net of tax
 
 
 
 
(2
)
 
 
 
 
 
(3
)
Comprehensive income (loss)
 
 
 
 
$
12,087

 
 
 
 
 
$
(7,998
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

Cowen Group, Inc.
Condensed Consolidated Statements of Changes in Equity
(dollars in thousands, except share data)
(unaudited)
 
Common Shares Outstanding
 
Common Stock
 
Preferred Shares Outstanding
 
Preferred Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings/ (Accumulated deficit)
 
Total Stockholders' Equity
 
Redeemable Non-controlling Interest
Balance, December 31, 2016
26,731,289

 
$
292

 
120,750

 
$
1

 
$
(153,845
)
 
$
928,646

 
$
(2
)
 
$
(2,442
)
 
$
772,650

 
$
379,205

Net income (loss) attributable to Cowen Group, Inc.

 

 

 

 

 

 

 
2,984

 
2,984

 

Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds

 

 

 

 

 

 

 

 

 
9,105

Foreign currency translation

 

 

 

 

 

 
(2
)
 

 
(2
)
 

Capital contributions

 

 

 

 

 

 

 

 

 
16,099

Capital withdrawals

 

 

 

 

 

 

 

 

 
(10,277
)
Restricted stock awards issued
909,442

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(328,238
)
 

 

 

 
(4,455
)
 

 

 

 
(4,455
)
 

Preferred stock dividends (See Note 14)

 

 

 

 

 

 

 
(1,698
)
 
(1,698
)
 

Amortization of share based compensation

 

 

 

 

 
8,779

 

 

 
8,779

 

Balance, March 31, 2017
27,312,493

 
$
292

 
120,750

 
$
1

 
$
(158,300
)
 
$
937,425

 
$
(4
)
 
$
(1,156
)
 
$
778,258

 
$
394,132

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Shares Outstanding
 
Common Stock
 
Preferred Shares Outstanding
 
Preferred Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings/ (Accumulated deficit)
 
Total Stockholders' Equity
 
Redeemable Non-controlling Interest
Balance, December 31, 2015
26,401,163

 
$
292

 
120,750

 
$
1

 
$
(137,356
)
 
$
903,429

 
$

 
$
23,627

 
$
789,993

 
$
186,911

Net income (loss) attributable to Cowen Group, Inc.

 

 

 

 

 

 

 
(3,698
)
 
(3,698
)
 
 
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,297
)
Foreign currency translation

 

 

 

 

 

 
(3
)
 

 
(3
)
 

Capital contributions

 

 

 

 

 

 

 

 

 
217,633

Capital withdrawals

 

 

 

 

 

 

 

 

 
(2,267
)
Deconsolidation of entities

 

 

 

 

 

 

 

 

 
(73,042
)
Restricted stock awards issued
649,085

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(530,698
)
 

 

 

 
(7,582
)
 

 

 

 
(7,582
)
 

Preferred stock dividends (See Note 14)

 

 

 

 

 

 

 
(1,698
)
 
(1,698
)
 

Income tax effect from share based compensation

 

 

 

 

 
(515
)
 

 

 
(515
)
 

Amortization of share based compensation

 

 

 

 

 
6,423

 

 

 
6,423

 

Balance, March 31, 2016
26,519,550

 
$
292

 
120,750

 
$
1

 
$
(144,938
)

$
909,337


$
(3
)

$
18,231

 
$
782,920

 
$
324,938


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

Cowen Group, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
12,089

 
$
(7,995
)
Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities:
 
 
 
Depreciation and amortization
3,028

 
3,067

Amortization of debt issuance costs
304

 
291

Amortization of debt discount
1,840

 
1,665

Tax benefit (expense) from share-based payment arrangements

 
(515
)
Share-based compensation
8,779

 
6,423

Deferred tax benefit
1,782

 
(2,384
)
Deferred rent obligations
(225
)
 
107

Contingent liability adjustment

 
(2,135
)
Purchases of securities owned, at fair value
(1,215,330
)
 
(1,293,147
)
Proceeds from sales of securities owned, at fair value
1,324,115

 
1,263,611

Proceeds from sales of securities sold, not yet purchased, at fair value
710,012

 
1,068,580

Payments to cover securities sold, not yet purchased, at fair value
(673,243
)
 
(910,751
)
Net (gains) losses on securities, derivatives and other investments
(33,493
)
 
(2,836
)
Consolidated Funds
 
 
 
Purchases of securities owned, at fair value
(63,563
)
 
(7,355
)
Proceeds from sales of securities owned, at fair value
55,704

 
878

Proceeds from sales of securities sold, not yet purchased, at fair value
217

 
2,049

Payments to cover securities sold, not yet purchased, at fair value
(899
)
 
(855
)
Purchases of other investments
(8,578
)
 
(212,028
)
Proceeds from sales of other investments
14,788

 
855

Net realized and unrealized (gains) losses on investments and other transactions
(11,138
)
 
245

(Increase) decrease in operating assets:
 
 
 
Cash collateral pledged
(1,354
)
 
(72
)
Securities owned, at fair value, held at broker-dealer
(30,255
)
 
8,004

Receivable on derivative contracts, at fair value
4,764

 
(6,106
)
Receivable from brokers
(75,785
)
 
(4,785
)
Fees receivable, net of allowance
(4,042
)
 
(6,759
)
Due from related parties
(3,163
)
 
5,264

Other assets
(20,199
)
 
(11,257
)
Consolidated Funds
 
 
 
Cash and cash equivalents
7,468

 
1,586

Receivable on derivative contracts, at fair value
(16
)
 
(125
)
Receivable from brokers
(3,311
)
 

Other assets
(7
)
 
(738
)
Increase (decrease) in operating liabilities:
 
 
 
Securities sold, not yet purchased, at fair value, held at broker-dealer
22,772

 
(6,141
)
Payable for derivative contracts, at fair value
(6,619
)
 
3,951

Payable to brokers
(85,858
)
 
(107,952
)
Payable to customers
70,480

 

Compensation payable
(70,745
)
 
(128,152
)
Fees payable
4,604

 
(3,892
)
Due to related parties

 
(95
)
Accounts payable, accrued expenses and other liabilities
14,462

 
3,841

Consolidated Funds
 
 
 
Contributions received in advance
(2,048
)
 
1,750

Payable to brokers
(1,950
)
 
2,314

Payable for derivative contracts, at fair value
304

 
2

Due to related parties
(189
)
 
265

Accounts payable, accrued expenses and other liabilities
(211
)
 
707

Net cash provided by / (used in) operating activities
$
(54,709
)
 
$
(340,620
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
 

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Table of Contents

Cowen Group, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
Three Months Ended March 31,
(continued)
2017
 
2016
Cash flows from investing activities:
 
 
 
Purchases of other investments
$
(4,934
)
 
$
(16,187
)
Proceeds from sales of other investments
16,180

 
5,937

Proceeds from loans held for investment
1,200

 
39,200

Purchase of fixed assets
(150
)
 
(12,383
)
Net cash provided by / (used in) investing activities
12,296

 
16,567

Cash flows from financing activities:
 
 
 
Borrowings on notes and other debt
2,247

 
22,072

Repayments on notes and other debt
(1,504
)
 
(660
)
Income tax effect from share-based payment arrangements

 
(515
)
Purchase of treasury stock

 
(3,571
)
Cash paid to acquire net assets (contingent liability payment)
(167
)
 

Capital withdrawals to redeemable non-controlling interests in operating entities
(2,059
)
 
(2,267
)
Consolidated Funds
 
 
 
Capital contributions by redeemable non-controlling interests in Consolidated Funds
23,198

 
217,633

Capital withdrawals to redeemable non-controlling interests in Consolidated Funds
(12,357
)
 
(78
)
Net cash provided by / (used in) financing activities
9,358

 
232,614

Change in cash and cash equivalents
(33,055
)
 
(91,439
)
Total cash beginning of period
112,014

 
158,485

Total cash at end of period
78,959

 
67,046

 
 
 
 
Supplemental non-cash information
 
 
 
Purchase of treasury stock, at cost, through net settlement (See Note 14)
$
4,455

 
$
4,012

Preferred stock dividends declared (See Note 14)
$
1,698

 
$
1,698

Net assets of deconsolidated entities
$

 
$
73,309

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Business
Cowen Group, Inc., a Delaware corporation formed in 2009, is a diversified financial services firm and, together with its consolidated subsidiaries (collectively, “Cowen,” “Cowen Group” or the “Company”), provides alternative investment management, investment banking, research, sales and trading and prime brokerage services through its two business segments: alternative investment and broker-dealer. The Company's alternative investment segment, includes hedge funds, private equity structures, registered investment companies and listed vehicles. The Company's broker-dealer segment offers research, sales and trading, prime brokerage and investment banking services to companies and primarily institutional investor clients. Our primary target sectors are healthcare, technology, media and telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and transportation sectors.
On December 5, 2016, the Company effected a one-for-four reverse stock split of the Company's common stock. Except where the context indicates otherwise, all share and per share information has been retroactively adjusted to reflect the reverse stock split.
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 Accounting Standards Codification 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 fund entities 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 their specialized accounting.
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Funds in which the Company has a controlling financial interest are consolidated with the Company pursuant to US GAAP as described below. Consequently, the Company's condensed consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds that are not owned by the Company are reflected as redeemable non-controlling interests in consolidated subsidiaries in the accompanying condensed consolidated financial statements. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.
Certain reclassifications have been made to prior period amounts in order to conform to current period presentation.
The year-end condensed balance sheet data was derived from the audited financial statements, but does not include all disclosures included in the audited financial statements.
b.
Principles of consolidation
The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those 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.
In accordance with these standards, the Company presently consolidates six funds for which it acts as the general partner and investment manager. As of March 31, 2017 the Company consolidated the following funds: Ramius Enterprise LP (“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), Caerus Select Fund LP ("Caerus LP") (between May 1, 2016 through March 1, 2017 when the fund was liquidated), Ramius Archview Credit and Distressed Master Fund ("Archview Master Fund") and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (collectively the "Consolidated Funds").
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 EntitiesVOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders at risk have the obligation to absorb losses, the right to

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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance.
Under US GAAP, 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.
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 reconsiders whether it is the primary beneficiary of a 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. As of March 31, 2017 and December 31, 2016, the total net assets of the consolidated VIEs were $468.7 million and $461.6 million, respectively. The VIEs act as investment managers and/or investment companies that may be managed by the Company or the Company may have equity interest in those investment companies. The VIEs are financed through their operations and/or loan agreements with the Company.
As of March 31, 2017 the Company holds variable interests in Ramius Enterprise Master Fund Ltd (“Enterprise Master”), Ramius Merger Master Fund Ltd ("Merger Master") and Caerus Select Master Fund Ltd ("Caerus Master") (between May 1, 2016 through March 1, 2017 when the fund was liquidated) (collectively the “Unconsolidated Master Funds”) through the Consolidated Funds. 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. Therefore, the Company has not consolidated the Unconsolidated Master Funds.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily funds and real estate entities for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights.
The Company does not consolidate the Unconsolidated Master Funds or real estate entities that are VIEs as it has concluded that it is not the primary beneficiary in each instance. Fund investors are entitled to all of their economics of these VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The Company's involvement with funds and real estate entities that are unconsolidated VIEs is limited to providing investment management services in exchange for management fees and incentive income. Although the Company may advance amounts and pay certain expenses on behalf of the funds and real estate entities that it considers to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these entities outside of regular investment management services (see Note 4 for additional disclosures on VIEs).
Equity Method InvestmentsFor 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 securities, derivatives and 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.
OtherIf the Company does not consolidate an entity, apply the equity method of accounting or account for an investment under the cost method, the Company accounts for such entities (primarily, all securities of such entity which are bought and held principally for the purpose of selling them in the near term as trading securities) in accordance with US GAAP, at fair value with unrealized gains (losses) resulting from changes in fair value reflected within net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.
Retention of Specialized AccountingThe Consolidated Funds and certain other consolidated companies are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized

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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

accounting for these funds pursuant to US GAAP. 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 net realized and unrealized gains (losses) on investments and other transactions. 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. In addition, the Company's broker-dealer subsidiaries, Cowen and Company, LLC ("Cowen and Company"), ATM Execution LLC ("ATM Execution"), Cowen International Limited ("CIL"), Ramius UK Ltd. ("Ramius UK") and Cowen Prime Services LLC ("Cowen Prime") apply the specialized industry accounting for brokers and dealers in securities also prescribed under US GAAP. The Company also retains specialized accounting 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, disclosure of contingent assets and liabilities at the date of the accompanying condensed consolidated financial statements, 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.
Valuation of investments and derivative contracts
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 1 Inputs 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 2     Inputs 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 3 Fair 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, 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. However, the determination of what constitutes “observable” requires significant judgment by the Company. 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.
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 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 goes into 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.

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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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. 
SecuritiesSecurities 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 include active listed equities, certain U.S. government and sovereign obligations, ETF's, mutual funds and certain money market securities. The Company does not adjust the quoted price for such instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
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 contractsDerivative 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, have inputs which can generally be corroborated by market data and are therefore classified within level 2. OTC derivatives, such as swaps and options where market data is not readily available or observable are classified as level 3.
Other investmentsOther investments consist primarily of portfolio funds, real estate investments and equity method investments, which are valued as follows:
i.
Portfolio funds—Portfolio funds (“Portfolio Funds”) include interests in funds and investment companies which may be managed by the Company or its affiliates. The Company follows US GAAP regarding fair value measurements and disclosures relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The guidance permits, as a practical expedient, an entity holding investments in certain entities that either are investment companies as defined by the AICPA Audit and Accounting Guide, Investment Companies, or have attributes similar to an investment company, and calculate net asset value 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. In accordance with US GAAP, investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy.
ii.
Real estate investments—Real estate debt and equity investments are valued at fair value. The fair value of real estate investments are estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. Real estate investments without a public market are valued based on assumptions and valuation techniques used by the Company. Such valuation techniques may include discounted cash flow analysis, prevailing market capitalization rates or earnings multiples applied to earnings from the investment, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties, consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence, as well as independent external appraisals. In general, the Company considers several valuation techniques when measuring the fair value of a real estate investment. However, in certain circumstances, a single valuation technique may be appropriate. Real estate investments are reviewed on a quarterly basis by the Company for significant changes at the property level or a significant change in the overall market which would impact the value of the real estate investment resulting in unrealized appreciation or depreciation.
Real estate and capital markets are cyclical in nature. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates and interest and inflation rates. In addition, the

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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Company invests in real estate and real estate related investments for which no liquid market exists. The market prices for such investments may be volatile and may not be readily ascertainable. Amounts ultimately realized by the Company from investments sold may differ from the fair values presented, and the differences could be material.
The Company's real estate investments are typically categorized as level 3 investments within the fair value hierarchy as management uses significant unobservable inputs in determining their estimated fair value.
See Notes 4 and 5 for further information regarding the Company's investments, including equity method investments, and fair value measurements.
e.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation or amortization. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or lease term. When the Company commits to a plan to abandon fixed assets or leasehold improvements before the end of its original useful life, the estimated depreciation or amortization period is revised to reflect the shortened useful life of the asset. Other fixed assets are depreciated on a straight-line basis over their estimated useful lives.
Aircraft and related equipment, which are leased out under operating leases, are carried at cost less accumulated depreciation and are depreciated to estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Any assets received at the end of the lease are marked to the lower of cost or fair value with the adjustment recorded in other income.
Asset
Depreciable Lives
 
Principal Method
Telephone and computer equipment
3-8 years
 
Straight-line
Computer software
3-7 years
 
Straight-line
Furniture and fixtures
5-8 years
 
Straight-line
Leasehold improvements
5-15 years
 
Straight-line
Capitalized lease asset
5 years
 
Straight-line
Aircraft and related equipment
10-20 years
 
Straight-line
Modifications to aircraft
4-10 years
 
Straight-line
f.
Debt
Long-term debt is carried at the principal amount borrowed net of any discount/premium. The discount is accreted to interest expense using the effective interest method over the remaining life of the underlying debt obligations. Accrued but unpaid coupon interest is included in accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition. The Company adopted a new accounting pronouncement, during the first quarter of 2016, which reclassified the unamortized debt issuance costs in the Company's previously reported condensed consolidated statements of financial condition from other assets to a direct reduction from the carrying amount of the debt.
g.    Deferred rent
Deferred rent primarily consists of step rent, allowances from landlords and valuing the Company's lease properties in accordance with US GAAP. Step rent represents the difference between actual operating lease payments due and straight-line rent expense, which is recorded by the Company over the term of the lease, including the build-out period. This amount is recorded as deferred rent in the early years of the lease, when cash payments are generally lower than straight-line rent expense, and reduced in the later years of the lease when payments begin to exceed the straight-line expense. Landlord allowances are generally comprised of amounts received and/or promised to the Company by landlords and may be received in the form of cash or free rent. These allowances are part of the negotiated terms of the lease. The Company records a receivable from the landlord and a deferred rent liability when the allowances are earned. This deferred rent is amortized into income (through lower rent expense) over the term (including the pre-opening build-out period) of the applicable lease, and the receivable is reduced as amounts are received from the landlord. Liabilities resulting from valuing the Company's leased properties acquired through business combinations are quantified by comparing the current fair value of the leased space to the current rental payments on the date of acquisition. Deferred rent, included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition, as of March 31, 2017 and December 31, 2016 is $10.0 million and $10.3 million, respectively.



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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

h.    Recently issued accounting pronouncements
In March 2017, the FASB issued guidance to amend the amortization period for certain purchased callable debt securities held at a premium. Under current guidance, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new guidance shortened the amortization period for the premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements and does not expect this guidance to have a material impact on its condensed statement of financial condition or its condensed statement of operations as the Company does not hold any material callable debt securities.
In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill. The new guidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill. Instead, under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. If applicable, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The amendments in this guidance are effective for public business entities for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements. The Company expects this guidance to simplify its goodwill impairment analysis.
In January 2017, the FASB issued guidance which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The new guidance provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.  The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements and may use the new definition for its future business combination activities.
In November 2016, the FASB issued guidance which reduces the diversity in practice as to how changes in restricted cash are presented and classified in the statement of cash flows. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance does not provide a definition of restricted cash or restricted cash equivalents. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company currently presents its restricted cash and changes in its restricted cash, separately on its condensed consolidated statement of financial condition and condensed consolidated statements of cash flows respectively. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements. Since the guidance only affects the presentation of restricted cash on the statement of cash flows, the Company does not expect this guidance to have any impact on its consolidated financial statements.
In August 2016, the FASB issued guidance which reduces the diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing and potential future diversity in practice. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s cash flows presentation. Since the guidance only affects the presentation of statement of cash flows, the Company does not expect this guidance to have any impact on consolidated financial statements. The Company notes that its current presentation is already in line with most of the specific cash flow issues identified in the guidance.

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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

In May 2014, the FASB issued guidance which amends and supersedes the revenue recognition requirements and most industry-specific guidance and creates a single source of revenue guidance.  The new guidance outlines the principles an entity must apply to measure and recognize revenue and related cash flows.  The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets. The guidance is effective for reporting periods beginning after December 15, 2017.  In July 2015, the FASB confirmed a deferral of the effective date by one year, with early adoption on the original effective date permitted.  In 2016, the FASB issued various new guidance to clarify the implementation guidance on principal versus agent considerations, revenue from contracts with customers and identifying performance obligations and licensing implementation.  The Company is currently evaluating the impact of this guidance on the Company’s financial condition, results of operations and cash flows.
In February 2016, the FASB issued guidance which amends and supersedes its previous guidance regarding leases. The new guidance requires the lessee to recognize the right to use assets and lease liabilities that arise from leases and present them in its statement of financial condition. The recognition of these lease assets and lease liabilities represents a change from previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial condition. For public business entities the guidance is effective for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on the Company’s financial condition and its disclosures. The Company notes that a significant majority of the Company’s leases represent operating real estate leases for its respective offices and will require the gross up on its statement of financial conditions.
In January 2016, as a joint project with International Accounting Standards Board (IASB), the FASB issued a new accounting pronouncement to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments in the update made improvements to US GAAP for equity investments and investments carried at amortized cost. The guidance also simplifies the impairment assessment for equity investments and clarifies the need for valuation allowance on deferred tax asset related to available for sale securities. For public business entities the guidance is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of this guidance on the Company’s financial condition and its disclosure and does not expect the guidance to have a material impact as the Company does not own any significant investments carried at amortized cost.
3. Cash Collateral Pledged
As of March 31, 2017 and December 31, 2016, the Company pledged cash collateral in the amount of $9.2 million and $7.8 million, respectively, which relates to letters of credit issued to the landlords of the Company's premises in New York City, Boston, Stamford and San Francisco. The Company also has a letter of credit, in the amount of $5.5 million, due March 2018, for which cash is pledged as collateral under a reinsurance agreement. (See Note 13).
4. 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 are pledged to the clearing brokers under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations.

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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

As of March 31, 2017 and December 31, 2016, securities owned, at fair value consisted of the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Common stocks (b)
$
621,073

 
$
669,655

Preferred stock (b)
16,516

 
15,811

Warrants and rights
11,053

 
8,335

U.S. Government securities (a)
3,790

 
3,780

Corporate bonds (d)
2,990

 
2,477

Convertible bonds (c)
250

 
250

Trade claims
703

 
562

Mutual funds (b)
6

 
6

 
$
656,381

 
$
700,876

(a)
As of March 31, 2017, maturities ranged from June 2017 to February 2018 with an interest rate of 0%. As of December 31, 2016, maturities ranged from February 2017 to December 2017 with an interest rate of 0%.
(b)
The Company has elected the fair value option for investments in securities of preferred and common stocks and mutual funds with a fair value of $6.1 million, $4.9 million and $0.1 million, respectively, at March 31, 2017 and $7.0 million, $5.2 million and $0.1 million , respectively, at December 31, 2016.
(c)
As of March 31, 2017, the maturity was March 2018 with an interest rate of 8%. As of December 31, 2016, the maturity was March 2018 with an interest rate of 8%.
(d)
As of March 31, 2017, maturities ranged from March 2021 to January 2036 and interest rates ranged from 5.50% to 13.00%. As of December 31, 2016, maturities ranged from January 2017 to January 2036 and interest rates ranged from 6.25% to 13.00%.
Receivable on and Payable for derivative contracts, at fair value
The Company's direct involvement with derivative financial instruments includes total return swaps, futures, currency forwards, equity swaps, credit default swaps and options. The Company's derivatives trading activities exposes 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.
Upon issuance of the Company's cash convertible unsecured senior notes ("Convertible Notes") (See Note 13), the Company recognized the embedded cash conversion option at fair value of $35.7 million which is valued as of March 31, 2017 at $7.0 million and is included in payable for derivative contracts in the accompanying condensed consolidated statement of financial condition. Also, on the date of issuance of the Convertible Notes, the Company entered into a separate cash convertible note economic hedge transaction (the "Hedge Transaction") with a counterparty (the “Option Counterparty”) whereby, the Company purchased a cash settled option contract with terms identical to the conversion option embedded in the Convertible Notes and simultaneously sold an equity settled warrant with a higher strike price. The Hedge Transaction is expected to reduce the Company’s exposure to potential cash payments in excess of the principal amount of converted notes that the Company may be required to make upon conversion of the Convertible Notes. The Company paid a premium of $35.7 million for the option under the Hedge Transaction and received a premium of $15.2 million for the equity settled warrant transaction, for a net cost of $20.5 million. The Hedge Transaction is valued at $7.0 million as of March 31, 2017 and is included in receivable on derivative contracts in the accompanying condensed consolidated statement of financial condition. Aside from the initial premium paid, the Company will not be required to make any cash payments under the Hedge Transaction and could be entitled to receive an amount of cash from the Option Counterparty generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Hedge Transaction during the relevant valuation period. The warrants cover 7,012,196 shares of the Company's Class A common stock and have an initial exercise price of $28.72 per share (share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016). The warrants expire over a period of 80 trading days beginning on November 14, 2018. The warrant transaction could have a dilutive effect to the extent that the market value per share of the Company’s Class A common stock exceeds the applicable strike price of the warrants.

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Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Company's long and short exposure to derivatives is as follows:
Receivable on derivative contracts
As of March 31, 2017
 
As of December 31, 2016
 
Number of contracts / Notional Value
 
Fair value
 
Number of contracts / Notional Value
 
Fair value
 
(dollars in thousands)
Futures
$
10,771

 
$
32

 
$
12,421

 
$
104

Currency forwards
$
70,345

 
243

 
$
80,608

 
592

Swaps
$
150,451

 
2,283

 
$
46,462

 
468

Options other (a)
258,783

 
15,412

 
256,097

 
21,539

Foreign currency options
$
44,201

 
167

 
$
57,051

 
198

 
 
 
$
18,137

 
 
 
$
22,901

(a) Includes index, equity, commodity future and cash conversion options.
Payable for derivative contracts
As of March 31, 2017
 
As of December 31, 2016
 
Number of contracts / Notional Value
 
Fair value
 
Number of contracts / Notional Value
 
Fair value
 
(dollars in thousands)
Futures
$
27,783

 
$
72

 
$
38,345

 
$
642

Currency forwards
$
2,134

 
134

 
$

 

Swaps
$
56,613

 
3,075

 
$
9,533

 
181

Options other (a)
37,897

 
10,862

 
23,726

 
19,939

 
 
 
$
14,143

 
 
 
$
20,762

(a) Includes index, equity, commodity future and cash conversion options.
The following tables present the gross and net derivative positions and the related offsetting amount, as of March 31, 2017 and December 31, 2016. This table does not include the impact of over collateralization.
 
 
 
 
 
 
 
Gross amounts not offset in the Condensed Consolidated Statement of Financial Condition
 
 
 
Gross amounts recognized
 
Gross amounts offset on the Condensed Consolidated Statements of Financial Condition (a)
 
Net amounts included on the Condensed Consolidated Statements of Financial Condition
 
Financial instruments
 
Cash Collateral pledged (b)
 
Net amounts
 
(dollars in thousands)
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Receivable on derivative contracts, at fair value
$
18,137

 
$

 
$
18,137

 
$

 
$
2,693

 
$
15,444

Payable for derivative contracts, at fair value
14,143

 

 
14,143

 

 
3,209

 
10,934

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Receivable on derivative contracts, at fair value
22,901

 

 
22,901

 

 
1,382

 
21,519

Payable for derivative contracts, at fair value
20,762

 

 
20,762

 

 
181

 
20,581

(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 collateral held or posted.

18


Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The realized and unrealized gains/(losses) related to derivatives trading activities were $(8.6) million and $2.4 million for the three months ended March 31, 2017 and 2016, respectively, and are included in other income in the accompanying condensed consolidated statements of operations.
Pursuant to the various derivatives transactions discussed above, except for the cash convertible note hedge (see Note 13) and exchange traded derivatives, the Company is required to post/receive collateral. As of March 31, 2017 and December 31, 2016, collateral consisting of $36.6 million and $17.1 million of cash, respectively, is included in receivable from brokers and payable to brokers on the accompanying condensed consolidated statements of financial condition. As of March 31, 2017 and December 31, 2016 all derivative contracts were with multiple major financial institutions.
Other investments
As of March 31, 2017 and December 31, 2016, other investments included the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Portfolio Funds, at fair value (1)
$
112,425

 
$
120,023

Equity method investments (2)
38,091

 
36,991

Lehman claims, at fair value
297

 
265

 
$
150,813

 
$
157,279

(1) Portfolio Funds, at fair value
The Portfolio Funds, at fair value as of March 31, 2017 and December 31, 2016, included the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Starboard Value and Opportunity Fund LP (c)(*)
$
29,246

 
$
27,424

Formation8 Partners Fund I, L.P. (f)
21,143

 
22,234

RCG Longview Debt Fund V, L.P. (i) (*)
15,798

 
16,187

Green Energy Metals Fund, LP (h)
14,044

 
6,241

HealthCare Royalty Partners LP (a)(*)
6,990

 
7,147

RCG LPP2 PNW5 Co-Invest, L.P. (j) (*)
3,104

 
3,152

HealthCare Royalty Partners II LP (a)(*)
2,162

 
2,091

Eclipse Ventures Fund I, L.P. (g)
2,157

 
1,790

Lagunita Biosciences, LLC (n)
1,690

 
1,698

Starboard Leaders Fund LP (e)(*)
1,181

 
1,231

Quadratic Fund LLC (k) (*)
965

 
6,729

RCGL 12E13th LLC (i) (*)
348

 
348

Starboard Partners Fund LP (d)(*)

 
5,067

Orchard Square Partners Credit Fund LP (b)

 
4,327

Other private investment (l) (*)
8,927

 
8,548

Other affiliated funds (m)(*)
4,670

 
5,809

 
$
112,425

 
$
120,023

* 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 12.
(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.
(b)
Orchard Square Partners Credit Fund LP has a quarterly redemption policy with a 60 day notice period and a 4% penalty on redemptions of investments of less than a year in duration.
(c)
Starboard Value and Opportunity Fund LP permits quarterly withdrawals upon 90 days' notice.

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Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(d)
Starboard Partners Fund LP permits redemptions on a semi-annual basis on 180 days' prior written notice subsequent to an initial two year lock up.
(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 investors' 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)
Eclipse Ventures Fund I, L.P. is a private equity fund which invests in early stage and growth hardware companies. Distributions will be made when the underlying investments are liquidated.
(h)
The Green Energy Metals Fund, LP invests the vast majority of its capital in physical off-exchange traded minor metals that are crucial to the production and sustainability of clean energy, emerging technology and energy efficiency. The Company is invested in a managed account specifically targeting cobalt. The Green Energy Metals Fund, LP is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.
(i)
RCGL 12E13th LLC and RCG Longview Debt Fund V, L.P. are real estate private equity structures and therefore distributions will be made when the underlying investments are liquidated.
(j)
RCG LPP2 PNW5 Co-Invest, L.P. is a single purpose entity formed to participate in a joint venture which acquired five multi-unit residential rental properties located in the Pacific Northwest. RCG LPP2 PNW5 Co-Invest, L.P. is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.
(k)
Quadratic Fund LLC permits redemptions on a 30 day prior written notice.
(l)
Other private investment represents the Company's closed end investment in a portfolio fund that invests in a wireless broadband communication provider in Italy.
(m)
The majority of these funds are affiliates of the Company or are managed by the Company and the investors can redeem from these funds as investments are liquidated.
(n)
Lagunita Biosciences, LLC, 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.
(2)
Equity method investments
Equity method investments include investments held by the Company in several operating companies whose operations primarily include the day to day management of a number of real estate funds, including the portfolio management and administrative services related to the acquisition, disposition, and active monitoring of the real estate funds' underlying debt and equity investments. The Company's ownership interests in these equity method investments range from 20% to 57%. The Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in RCG Longview Partners II, LLC and in Surf House Ocean Views Holdings, LLC. 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. Also included in equity method investments are the investments in (a) HealthCare Royalty Partners General Partners and (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 hedge funds and related managed accounts and c) Surf House Ocean Views Holdings, LLC which is a joint venture in a real estate development project. The Company recorded no impairment charges in relation to its equity method investments for the three months ended March 31, 2017 and 2016.

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Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table summarizes equity method investments held by the Company:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Surf House Ocean Views Holdings, LLC
$
13,696

 
$
13,522

Starboard Value LP
12,817

 
12,501

RCG Longview Debt Fund V Partners, LLC
7,804

 
7,256

RCG Longview Management, LLC
758

 
656

HealthCare Royalty GP, LLC
570

 
583

HealthCare Royalty GP II, LLC
366

 
354

RCG Longview Debt Fund IV Management, LLC
331

 
331

HealthCare Royalty GP III, LLC
149

 
208

RCG Kennedy House, LLC
136

 
183

RCG Longview Equity Management, LLC
114

 
114

HealthCare Overflow Fund GP, LLC
75

 
68

Other
1,275

 
1,215

 
$
38,091

 
$
36,991

For the period ended March 31, 2017, none of the equity method investments held by the Company met the significance criteria as defined under SEC guidance.
As of March 31, 2017 and December 31, 2016, the Company's share of losses in its equity method investment in RCG Longview Partners II, LLC has exceeded the carrying amount recorded in this investee. These amounts are included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition. RCG Longview Partners II, LLC, as general partner to a real estate fund, has reversed previously recorded incentive income allocations and has recorded a current clawback obligation to the limited partners in the fund. This obligation is due to a change in unrealized value of the fund on which there have previously been distributed carried interest realizations; however, the settlement of a potential obligation is not due until the end of the life of the respective fund. As the Company is obligated to return previous distributions it received from RCG Longview Partners II, LLC, it has continued to record its share of gains/losses in the investee including reflecting its share of the clawback obligation in the amount of $6.2 million.
The Company's income (loss) from equity method investments was $3.1 million and $4.6 million, for the three months ended March 31, 2017 and 2016, respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying condensed consolidated statements of operations.
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. Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations. As of March 31, 2017 and December 31, 2016, securities sold, not yet purchased, at fair value consisted of the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Common stocks
$
329,477

 
$
263,460

Corporate bonds (a)
6,193

 
2,591

Warrants and rights
6

 
39

 
$
335,676

 
$
266,090

(a)
As of March 31, 2017, the maturities ranged from August 2020 to October 2042 with interest rates ranged from 3.63% to 8.88%. As of December 31, 2016, the maturities ranged from April 2021 to January 2036 with interest rates ranged from 5.50% to 6.25%.


21


Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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 $5.1 billion and $0.9 billion as of March 31, 2017 and $5.3 billion and $1.0 billion as of December 31, 2016, respectively. In addition, the maximum exposure relating to these variable interest entities as of March 31, 2017 was $488.1 million, and as of December 31, 2016 was $508.1 million, all of which is included in other investments, at fair value in the accompanying condensed consolidated statements of financial condition. The exposure to loss primarily relates to the Consolidated Feeder Funds' investment in their Unconsolidated Master Funds and the Company's investment in unconsolidated investment companies.
b.
Consolidated Funds
Securities owned, at fair value
As of March 31, 2017 and December 31, 2016, securities owned, at fair value, held by the Consolidated Funds consisted of the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
     Preferred stock
$
40,716

 
$
37,343

     Common stocks
40,557

 
28,474

     U.S. Government securities (a)
3,495

 
6,994

     Corporate bonds (b)
3,781

 
4,214

     Term Loan
3,208

 
2,209

     Warrants and rights
2

 
3

 
$
91,759

 
$
79,237

(a) As of March 31, 2017, the maturity was June 2017 with an interest rate of 0%. As of December 31, 2016, the maturity was March 2017 with an interest rate of 0%.
(b) As of March 31, 2017, maturities ranged from October 2017 to June 2038 and interest rates ranged from 0% to 14.37%. As of December 31, 2016, maturities ranged from October 2017 to June 2038 and interest rates ranged from 0% and 14.37%.
Securities sold, not yet purchased, at fair value
As of March 31, 2017, there were no securities sold, not yet purchased, at fair value. As of December 31, 2016, securities sold, not yet purchased, at fair value, held by the Consolidated Funds consisted of the following:
 
As of December 31, 2016
 
(dollars in thousands)
     Corporate bonds (a)
$
672

     Common stocks
211

 
$
883

(a)
As of December 31, 2016, maturities ranged from September 2019 to September 2023 and interest rates ranged from 4.38% to 9.25%.
Receivable on derivative contracts
As of March 31, 2017 and December 31, 2016, receivable on derivative contracts, at fair value, held by the Consolidated Funds are comprised of:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Currency forwards
$
18

 
$
18

Equity swaps
812

 
731

Options
79

 
144

 
$
909

 
$
893


22


Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Payable for derivative contracts
As of March 31, 2017 and December 31, 2016, payable for derivative contracts, at fair value, held by the Consolidated Funds are comprised of:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Currency forwards
$
27

 
$
10

Equity swaps
804

 
495

Options
45

 
67

 
$
876

 
$
572

Other investments, at fair value
Investments in Portfolio Funds, at fair value
As of March 31, 2017 and December 31, 2016, investments in Portfolio Funds, at fair value, included the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Investments of Enterprise LP
$
107,454

 
$
114,159

Investments of Merger Fund
294,074

 
281,572

Investments of Caerus LP

 
5,734

 
$
401,528

 
$
401,465

Consolidated portfolio fund investments of Enterprise LP    
Enterprise LP operates under a “master-feeder” structure, whereby Enterprise Master's shareholders are Enterprise LP and RCG II Intermediate Fund, L.P. The consolidated investments in Portfolio Funds include Enterprise LP's investment of $107.5 million and $114.2 million in Enterprise Master as of March 31, 2017 and December 31, 2016, respectively. On May 12, 2010, the Company announced its intention to close Enterprise Master. Prior to this announcement, strategies utilized by Enterprise Master included merger arbitrage and activist investing, investments in distressed securities, convertible hedging, capital structure arbitrage, equity market neutral, investments in private placements of convertible securities, proprietary mortgages, structured credit investments, investments in mortgage backed securities and other structured finance products, investments in real estate and real property interests, structured private placements and other relative value strategies. Enterprise Master had broad investment powers and maximum flexibility in seeking to achieve its investment objective. Enterprise Master was permitted to invest in equity securities, debt instruments, options, futures, swaps, credit default swaps and other derivatives. As Enterprise Master winds down its positions, it will return capital to its investors. There are no unfunded commitments at Enterprise LP.
Consolidated portfolio fund investments of Merger Fund    
The Merger Fund operates under a “master-feeder” structure, whereby Ramius Merger Master Ltd's ("Merger Master") shareholders are Merger Fund and Ramius Merger Fund Ltd. The consolidated investments in Portfolio Funds include Merger Fund's investment of $294.1 million and $281.6 million in Merger Master as of March 31, 2017 and December 31, 2016, respectively. The Merger Master’s investment objective is to achieve consistent absolute returns while emphasizing the preservation of investor capital. The Merger Master seeks to achieve these objectives by taking a fundamental, research-driven approach to investing, primarily in the securities of issuers engaged in, or subject to, announced (or unannounced but otherwise anticipated) extraordinary corporate transactions, which may include, but are not limited to, mergers, acquisitions, leveraged buyouts, tender offers, hostile takeover bids, sale processes, exchange offers, and recapitalizations. Merger Master invests in the securities of one or more issuers engaged in or subject to such extraordinary corporate transactions. Merger Master typically seeks to derive a profit by realizing the price differential, or “spread,” between the market price of securities purchased or sold short and the market price or value of securities realized in connection with the completion or termination of the extraordinary corporate transaction, or in connection with the adjustment of market prices in anticipation thereof, while seeking to minimize the market risk associated with the aforementioned investment activities. Merger Master will, depending on market conditions, generally focus the majority of its investment program on announced transactions. If the investment manager of Merger Master considers it necessary, it may either alone or as part of a group, also initiate shareholder actions seeking to maximize value. Such shareholder actions may include, but are not limited to, re-orienting management’s focus or initiating the sale of the company (or one or more of its divisions) to a third party. There are no unfunded commitments at Merger Fund.

23


Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Consolidated portfolio fund investments of Caerus LP    
Prior to Caerus LP being liquidated on March 1, 2017, it operated under a “master-feeder” structure, whereby Caerus Select Master Fund Ltd's ("Caerus Master") shareholder was Caerus LP. The consolidated investments in Portfolio Funds included Caerus LP's investment of $5.7 million in Caerus Master as of December 31, 2016. Caerus Master’s investment objective was to achieve superior risk-adjusted rates of return that bear little correlation to the overall market.  Caerus Master sought to achieve this objective by utilizing a long/short investment strategy, investing primarily in equities and options on equities that trade on major global market exchanges. Caerus Master focused on investments in the global consumer sector, including, but not limited to, securities in sub-sectors such as retail, apparel and footwear, restaurants, gaming and lodging, consumer products, food and beverage, consumer technology, media, transportation and homebuilding and building materials.
Indirect Concentration of the Underlying Investments Held by Consolidated Funds
From time to time, either directly 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, 2017 and December 31, 2016, the Company assessed whether or not its interests in an issuer for which the 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, 2017 and none at December 31, 2016.
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.
Investments percentage of the Company's equity at March 31, 2017
Issuer
 
Security Type
 
Country
 
Industry
 
Percentage of Equity
 
Market Value
Linkem
 
Equity
 
Italy
 
Wireless Broadband
 
6.2
%
 
$
48,346,757

Underlying Investments of Unconsolidated Funds Held by Consolidated Funds
Enterprise Master and Merger Master
Enterprise LP's investment in Enterprise Master represents Enterprise LP's proportionate share of Enterprise Master's net assets; as a result, the investment balances of Enterprise Master reflected below may exceed the net investment which Enterprise LP has recorded. Merger Fund's investment in Merger Master represents Merger Fund's proportionate share of Merger Master's net assets; as a result, the investment balances of Merger Master reflected below may exceed the net investment which Merger Fund has recorded. The following tables present summarized investment information for the underlying investments and derivatives held by Enterprise Master and Merger Master as of March 31, 2017 and December 31, 2016:
Securities owned by Enterprise Master, at fair value
 
As of March 31, 2017
 
As of December 31, 2016
 
(dollars in thousands)
Preferred stock
$
1,479

 
$
1,581

Common stock
803

 
835

 
$
2,282

 
$
2,416

Portfolio Funds, owned by Enterprise Master, at fair value
 
 
 
As of March 31, 2017
 
As of December 31, 2016
 
Strategy
 
(dollars in thousands)
RCG Special Opportunities Fund, Ltd*
Multi-Strategy
 
$
103,034

 
$
101,832

RCG Longview Equity Fund, LP*
Real Estate
 
4,492

 
4,744

RCG Longview Debt Fund IV, LP*
Real Estate
 
1,488

 
1,637

RCG Longview II, LP*
Real Estate
 
831

 
836

RCG Renergys, LLC*
Energy
 
1

 
1

Other Private Investments
Various
 
7,932

 
8,682

Other Real Estate Investments *
Real Estate
 

 
295

 
 
 
$
117,778

 
$
118,027

*
Affiliates of the Company.

24


Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Merger Master
As of March 31, 2017, Merger Master held common stock, securities owned, of $934.2 million and common stock, sold not yet purchased, of $343.6 million. As of December 31, 2016, Merger Master held common stock, securities owned, of $835.7 million and common stock, sold not yet purchased, of $395.5 million, respectively.
Receivable on derivative contracts, at fair value, owned by Merger Master
 
As of March 31, 2017
 
As of December 31, 2016
Description
(dollars in thousands)
Options
$
5,451

 
$
4,264

Equity swaps
3,984

 
255

 
$
9,435

 
$
4,519

Payable for derivative contracts, at fair value, owned by Merger Master
 
As of March 31, 2017
 
As of December 31, 2016
Description
(dollars in thousands)
Options
$
1,063

 
$
2,285

Equity swaps
1,079

 
123

 
$
2,142

 
$
2,408

Caerus Master
As of December 31, 2016, Caerus Master held common stock, of $3.2 million and common stock, sold not yet purchased, of $2.6 million.
5. 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, 2017 and December 31, 2016:

25


Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 
Assets at Fair Value as of March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(dollars in thousands)
 
 
Operating Entities
 
 
 
 
 
 
 
    Securities owned
 
 
 
 
 
 
 
US Government securities
$
3,790

 
$

 
$

 
$
3,790

Preferred stock

 

 
16,516

 
16,516

Common stocks
610,539

 
30

 
10,504

 
621,073

Convertible bonds

 

 
250

 
250

Corporate bonds

 
2,990

 

 
2,990

Trade claims

 

 
703

 
703

Warrants and rights
6,914

 

 
4,139

 
11,053

Mutual funds
6

 

 

 
6

    Receivable on derivative contracts, at fair value
 
 
 
 
 
 


Futures
32

 

 

 
32

Currency forwards

 
243

 

 
243

Swaps

 
2,283

 

 
2,283

Options
8,441

 
167

 
6,971

 
15,579

    Other investments
 
 
 
 
 
 
 
Lehman claim

 

 
297

 
297

Consolidated Funds
 
 
 
 
 
 
 
    Securities owned
 
 
 
 
 
 
 
US Government securities
3,495

 

 

 
3,495

Preferred stock

 
401

 
40,315

 
40,716

Common stocks
40,021

 
240

 
296

 
40,557

Corporate bonds

 
3,781

 

 
3,781

Warrants and rights

 

 
2

 
2

Term loan

 
2,497

 
711

 
3,208

   Receivable on derivative contracts, at fair value
 
 
 
 
 
 
 
Currency forwards

 
18

 

 
18

Equity swaps

 
812

 

 
812

Options
79

 

 

 
79

 
$
673,317

 
$
13,462

 
$
80,704

 
$
767,483

Percentage of total assets measured at fair value
87.7
%
 
1.8
%
 
10.5
%
 
 
Portfolio funds measured at net asset value (a)
 
 
 
 
 
 
112,425

Consolidated funds' portfolio funds measured at net asset value (a)
 
 
 
 
 
 
401,528

Equity method investments
 
 
 
 
 
 
38,091

Total investments
 
 
 
 
 
 
$
1,319,527


26


Table of Contents
Cowen Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 
Liabilities at Fair Value as of March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(dollars in thousands)
Operating Entities
 
 
 
 
 
 
 
     Securities sold, not yet purchased
 
 
 
 
 
 
 
Common stocks
$
329,477

 
$

 
$

 
$
329,477

Corporate bonds

 
6,193

 

 
6,193

Warrants and rights
6

 

 

 
6

    Payable for derivative contracts, at fair value
 
 
 
 
 
 
 
Futures
72

 

 

 
72

Currency forwards

 
134

 

 
134

Swaps

 
3,075

 

 
3,075

Options
3,891

 

 
6,971

 
10,862

Accounts payable, accrued expenses and other liabilities


 


 


 
 
          Contingent consideration liability (b)

 

 
5,274

 
5,274

Consolidated Funds
 
 
 
 
 
 
 
   Payable for derivative contracts, at fair value
 
 
 
 
 
 
 
Currency forwards

 
27

 

 
27