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 June 30, 2019
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 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Exchange on Which Registered
Class A Common Stock, par value $0.01 per share
 
COWN
 
The Nasdaq Global Market
7.35% Senior Notes due 2027
 
COWNZ

 
The Nasdaq Global Market
7.75% Senior Notes due 2033
 
COWNL
 
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Q    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  Q  No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer Q
 
Non-accelerated filer o

 
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 July 31, 2019, there were 29,516,652 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 this periodic report on Form 10-Q for the quarterly period ended June 30, 2019.
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 and six months ended June 30, 2019 and 2018. The Consolidated Financial Statements as of December 31, 2018 were audited.



3

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Cowen Inc.
Condensed Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data)
(unaudited)
Assets
As of June 30, 2019
 
As of December 31, 2018
Cash and cash equivalents
$
182,400

 
$
259,148

Cash collateral pledged
7,097

 
6,318

Segregated cash
139,070

 
176,647

Securities owned, at fair value ($224,264 and $57,583 were pledged to various parties)
900,346

 
520,888

Receivable on derivative contracts, at fair value
32,220

 
25,125

Securities borrowed
1,390,366

 
407,795

Other investments ($146,133 and $141,236 at fair value, respectively)
200,297

 
181,407

Deposits with clearing organizations, brokers and banks
97,723

 
89,423

Receivable from brokers, dealers and clearing organizations, net of allowance of $780 and $472, respectively
617,368

 
786,113

Receivable from customers, net of allowance of $563 and $516, respectively
87,480

 
37,858

Fees receivable, net of allowance of $915 and $1,569, respectively
126,500

 
111,946

Due from related parties
29,007

 
33,870

Fixed assets, net of accumulated depreciation and amortization of $29,684 and $31,630, respectively
27,728

 
26,443

Operating lease right-of-use assets
101,628

 

Goodwill
137,728

 
60,678

Intangible assets, net of accumulated amortization of $44,633 and $38,093, respectively
40,604

 
24,943

Deferred tax asset, net
86,464

 
93,057

Other assets, net of allowance of $11 and $0, respectively
105,265

 
79,014

Consolidated Funds
 
 
 
Cash and cash equivalents
3,357

 
38,118

Securities owned, at fair value
345,292

 
187,633

Receivable on derivative contracts, at fair value
4,454

 
4,416

Other investments
177,828

 
186,395

Receivable from brokers
19,524

 
8,328

Other assets
2,436

 
740

Total Assets
$
4,862,182

 
$
3,346,303

Liabilities and Stockholders' Equity
 
 
 
Liabilities
 
 
 
Securities sold, not yet purchased, at fair value
$
438,584

 
$
195,307

Payable for derivative contracts, at fair value
22,445

 
16,082

Securities loaned
1,492,986

 
414,852

Payables to brokers, dealers and clearing organizations
241,012

 
228,731

Payable to customers
428,146

 
525,153

Commission management payable
96,731

 
95,270

Compensation payable
117,634

 
223,994

Operating lease liabilities
106,873

 

Notes payable and other debt
315,290

 
262,965

Convertible debt
116,273

 
134,489

Fees payable
45,881

 
22,565

Due to related parties
675

 
571

Accounts payable, accrued expenses and other liabilities
162,921

 
110,423

Consolidated Funds
 
 
 
Payable for derivative contracts, at fair value
2,616

 
1,663

Payable to brokers
11,126

 
23,521

Capital withdrawals payable
4,759

 
11,106

Accounts payable, accrued expenses and other liabilities
494

 
424

Total Liabilities
$
3,604,446

 
$
2,267,116


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Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data)
(unaudited)
 
As of June 30, 2019
 
As of December 31, 2018
(continued)
 
 
 
Commitments and Contingencies (Note 17)

 

Redeemable non-controlling interests
$
440,312

 
$
284,780

Stockholders' equity
 
 
 
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding as of June 30, 2019 (aggregate liquidation preference of $120,750,000) and 10,000,000 shares authorized, 120,750 shares issued and outstanding as of December 31, 2018 (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, 46,144,900 shares issued and 29,480,287 outstanding as of June 30, 2019 and 62,500,000 shares authorized, 43,774,731 shares issued and 28,437,860 outstanding as of December 31, 2018, respectively (including 174,285 and 253,772 restricted shares, respectively)
334

 
324

Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

Additional paid-in capital
1,093,898

 
1,062,877

(Accumulated deficit) retained earnings
(22,449
)
 
(34,648
)
Accumulated other comprehensive income (loss)
(3
)
 
(5
)
Less: Class A common stock held in treasury, at cost, 16,664,613 and 15,336,871 shares as of June 30, 2019 and December 31, 2018, respectively
(254,357
)
 
(234,142
)
Total Stockholders' Equity
$
817,424

 
$
794,407

Total Liabilities and Stockholders' Equity
$
4,862,182

 
$
3,346,303


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

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Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Investment banking
$
114,705

 
$
84,826

 
$
194,811

 
$
182,814

Brokerage
111,382

 
103,285

 
208,845

 
209,018

Management fees
7,039

 
7,373

 
14,180

 
14,790

Incentive income
8

 
48

 
23

 
64

Interest and dividends
40,047

 
25,109

 
69,139

 
51,063

Reimbursement from affiliates
254

 
336

 
542

 
713

Aircraft lease revenue

 
419

 

 
1,134

Reinsurance premiums
14,331

 
9,226

 
20,922

 
17,873

Other revenues
930

 
876

 
1,991

 
2,212

Consolidated Funds
 
 
 
 
 
 
 
Interest and dividends
3,449

 
3,075

 
5,774

 
6,271

Other revenues
19

 

 
34

 
5

Total revenues
292,164

 
234,573

 
516,261

 
485,957

Interest and dividends expense
39,528

 
24,306

 
68,612

 
48,846

Total net revenues
252,636

 
210,267

 
447,649

 
437,111

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Employee compensation and benefits
135,984

 
131,845

 
266,172

 
266,985

Brokerage and trade execution costs
27,124

 
28,902

 
52,770

 
59,100

Underwriting expenses
6,406

 
4,785

 
9,537

 
8,848

Professional, advisory and other fees
13,620

 
5,819

 
23,861

 
12,843

Service fees
5,659

 
4,852

 
11,323

 
10,047

Communications
8,278

 
7,106

 
16,359

 
14,672

Occupancy and equipment
10,454

 
10,384

 
20,376

 
20,245

Depreciation and amortization
4,952

 
3,194

 
9,908

 
6,419

Client services and business development
11,884

 
7,865

 
23,185

 
16,096

Goodwill impairment
4,100

 

 
4,100

 

Reinsurance claims, commissions and amortization of deferred acquisition costs
10,782

 
9,924

 
16,944

 
18,655

Other expenses
5,638

 
5,591

 
9,653

 
9,672

Consolidated Funds
 
 
 
 
 
 
 
Interest and dividends
1,356

 
2,479

 
2,223

 
4,390

Professional, advisory and other fees
373

 
345

 
518

 
557

Brokerage and trade execution costs
35

 
89

 
88

 
153

Other expenses
467

 
236

 
884

 
480

Total expenses
247,112

 
223,416

 
467,901

 
449,162

Other income (loss)
 
 
 
 
 
 
 
Net gains (losses) on securities, derivatives and other investments
3,910

 
16,719

 
42,994

 
32,688

Gain/(loss) on debt extinguishment

 
(556
)
 

 
(556
)
Consolidated Funds
 
 
 
 
 
 
 
Net realized and unrealized gains (losses) on investments and other transactions
6,536

 
28,268

 
9,180

 
44,004

Net realized and unrealized gains (losses) on derivatives
(719
)
 
2,119

 
(1,481
)
 
4,594

Net gains (losses) on foreign currency transactions
(35
)
 
598

 
(59
)
 
252

Total other income (loss)
9,692

 
47,148

 
50,634

 
80,982

Income (loss) before income taxes
15,216

 
33,999

 
30,382

 
68,931

Income tax expense (benefit)
5,073

 
3,993

 
8,250

 
10,916

Net income (loss)
10,143

 
30,006

 
22,132

 
58,015

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
(continued)
 
 
 
 
 
 
 
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and investment funds
4,331

 
24,607

 
6,537

 
35,763

Net income (loss) attributable to Cowen Inc.
5,812

 
5,399

 
15,595

 
22,252

Preferred stock dividends
1,698

 
1,698

 
3,396

 
3,396

Net income (loss) attributable to Cowen Inc. common stockholders
$
4,114

 
$
3,701

 
$
12,199

 
$
18,856

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 
 
 

Basic
29,769

 
29,769

 
29,766

 
29,688

Diluted
31,522

 
30,720

 
31,572

 
30,460

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.12

 
$
0.41

 
$
0.64

Diluted
$
0.13

 
$
0.12

 
$
0.39

 
$
0.62


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

7


Table of Contents


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




 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
 
 
$
10,143

 
 
 
$
30,006

 
 
 
$
22,132

 
 
 
$
58,015

   Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
2

 
 
 

 
 
 
2

 
 
 
1

 
 
   Total other comprehensive income (loss), net of tax
 
 
2

 
 
 

 
 
 
2

 
 
 
1

Comprehensive income (loss)
 
 
$
10,145

 
 
 
$
30,006

 
 
 
$
22,134

 
 
 
$
58,016


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

8


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Changes in Equity
(dollars in thousands, except share data)




 
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, March 31, 2019
29,580,687

 
$
334

 
120,750

 
$
1

 
$
(243,519
)
 
$
1,084,534

 
$
(5
)
 
$
(26,563
)
 
$
814,782

 
$
418,277

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
5,812

 
5,812

 

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

 

 

 

 

 

 

 

 

 
4,331

Foreign currency translation

 

 

 

 

 

 
2

 

 
2

 

Capital contributions

 

 

 

 

 

 

 

 

 
40,622

Capital withdrawals

 

 

 

 

 

 

 

 

 
(22,918
)
Restricted stock awards issued
585,383

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(685,783
)
 

 

 

 
(10,838
)
 

 

 

 
(10,838
)
 
 
Preferred stock dividends, $0.06/share (See Note 19)

 

 

 

 

 

 

 
(1,698
)
 
(1,698
)
 

Amortization of share-based compensation

 

 

 

 

 
9,364

 

 

 
9,364

 

Balance, June 30, 2019
29,480,287

 
$
334

 
120,750

 
$
1

 
$
(254,357
)
 
$
1,093,898

 
$
(3
)
 
$
(22,449
)
 
$
817,424

 
$
440,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, March 31, 2018
29,517,218

 
$
324

 
120,750

 
$
1

 
$
(200,915
)
 
$
1,014,904

 
$
(7
)
 
$
(55,520
)
 
$
758,787

 
$
392,326

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
5,399

 
5,399

 

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

 

 

 

 

 

 

 

 

 
24,607

Capital contributions

 

 

 

 

 

 

 

 

 
10,876

Capital withdrawals

 

 

 

 

 

 

 

 

 
(15,742
)
Restricted stock awards issued
558,723

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(466,469
)
 

 

 

 
(7,094
)
 

 

 

 
(7,094
)
 

Preferred stock dividends (See Note 19)

 

 

 

 

 

 

 
(1,698
)
 
(1,698
)
 

Embedded cash conversion option (See Note 19)

 

 

 

 

 
28,973

 

 

 
28,973

 

Amortization of share-based compensation

 

 

 

 

 
8,840

 

 

 
8,840

 

Balance, June 30, 2018
29,609,472

 
$
324

 
120,750

 
$
1

 
$
(208,009
)
 
$
1,052,717

 
$
(7
)
 
$
(51,819
)
 
$
793,207

 
$
412,067







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Table of Contents

 
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, 2018
28,437,860

 
$
324

 
120,750

 
$
1

 
$
(234,142
)
 
$
1,062,877

 
$
(5
)
 
$
(34,648
)
 
$
794,407

 
$
284,780

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
15,595

 
15,595

 

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

 

 

 

 

 

 

 

 

 
6,537

Foreign currency translation

 

 

 

 

 

 
2

 

 
2

 

Capital contributions

 

 

 

 

 

 

 

 

 
202,595

Capital withdrawals

 

 

 

 

 

 

 

 

 
(53,600
)
Restricted stock awards issued
1,336,819

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(1,327,742
)
 

 

 

 
(20,215
)
 

 

 

 
(20,215
)
 

Common stock issuance upon acquisition (See Note 3)
1,033,350

 
10

 

 

 

 
14,436

 

 

 
14,446

 

Preferred stock dividends, $0.06/share (See Note 19)

 

 

 

 

 

 

 
(3,396
)
 
(3,396
)
 

Embedded cash conversion option, net of tax (See Note 19)

 

 

 

 

 
(596
)
 

 

 
(596
)
 

Amortization of share-based compensation

 

 

 

 

 
17,181

 

 

 
17,181

 

Balance, June 30, 2019
29,480,287

 
$
334

 
120,750

 
$
1

 
$
(254,357
)
 
$
1,093,898

 
$
(3
)
 
$
(22,449
)
 
$
817,424

 
$
440,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2017
29,632,020

 
$
324

 
120,750

 
$
1

 
$
(186,846
)
 
$
1,004,664

 
$
(8
)
 
$
(70,116
)
 
$
748,019

 
$
440,604

Cumulative effect of the adoption of the new revenue recognition standard (See Note 2)

 

 

 

 

 

 

 
(559
)
 
(559
)
 

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
22,252

 
22,252

 

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

 

 

 

 

 

 

 

 

 
35,763

Foreign currency translation

 

 

 

 

 

 
1

 

 
1

 

Capital contributions

 

 

 

 

 

 

 

 

 
19,136

Capital withdrawals

 

 

 

 

 

 

 

 

 
(50,877
)
Deconsolidation of entity

 

 

 

 

 

 

 

 

 
(32,559
)
Restricted stock awards issued
1,439,755

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(1,462,303
)
 

 

 

 
(21,163
)
 

 

 

 
(21,163
)
 

Preferred stock dividends (See Note 19)

 

 

 

 

 

 

 
(3,396
)
 
(3,396
)
 

Embedded cash conversion option (See Note 19)

 

 

 

 

 
28,973

 

 

 
28,973

 

Amortization of share-based compensation

 

 

 

 

 
19,080

 

 

 
19,080

 

Balance, June 30, 2018
29,609,472

 
$
324

 
120,750

 
$
1

 
$
(208,009
)

$
1,052,717


$
(7
)

$
(51,819
)
 
$
793,207

 
$
412,067


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

10


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands
(unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
22,132

 
$
58,015

Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities:
 
 
 
Depreciation and amortization
9,908

 
6,419

Amortization of debt issuance costs
509

 
656

Amortization of debt discount
2,419

 
2,871

Noncash lease expense
(1,632
)
 

Gain / (loss) on extinguishment of debt

 
652

Share-based compensation
17,181

 
19,080

Change in deferred taxes
5,997

 
10,953

Deferred rent obligations

 
(939
)
Net loss (gain) on disposal of fixed assets
97

 
155

Goodwill impairment
4,100

 

Purchases of securities owned, at fair value
(900,815
)
 
(2,525,789
)
Proceeds from sales of securities owned, at fair value
751,611

 
2,779,569

Proceeds from sales of securities sold, not yet purchased, at fair value
639,630

 
1,789,059

Payments to cover securities sold, not yet purchased, at fair value
(590,363
)
 
(1,940,907
)
Proceeds from the sale of other investments
8,174

 
3,870

Net (gains) losses on securities, derivatives and other investments
(42,314
)
 
(28,237
)
Consolidated Funds
 
 
 
Purchases of securities owned, at fair value
(1,421,720
)
 
(306,995
)
Proceeds from sales of securities owned, at fair value
1,280,181

 
344,079

Purchases of other investments
(2,798
)
 
(1,414
)
Proceeds from sales of other investments
17,168

 
10,289

Net realized and unrealized (gains) losses on investments and other transactions
(22,496
)
 
(47,628
)
(Increase) decrease in operating assets:
 
 
 
Securities owned, at fair value, held at broker-dealer
(201,355
)
 
(89,077
)
Receivable on derivative contracts, at fair value
(7,095
)
 
43,982

Securities borrowed
(982,571
)
 
(104,973
)
Deposits with clearing organizations, brokers and banks
(8,300
)
 
(660
)
Receivable from brokers, dealers and clearing organizations
168,745

 
(159,702
)
Receivable from customers, net of allowance
(49,622
)
 
(5,321
)
Fees receivable, net of allowance
(7,285
)
 
(32,917
)
Due from related parties
4,862

 
2,448

Other assets
(27,269
)
 
13,027

Consolidated Funds
 
 
 
Cash and cash equivalents
34,816

 
5,590

Receivable on derivative contracts, at fair value
(38
)
 
882

Receivable from brokers
(11,196
)
 
(3,294
)
Other assets
(963
)
 
(91
)
Increase (decrease) in operating liabilities:
 
 
 
Securities sold, not yet purchased, at fair value, held at broker-dealer
177,006

 
30,292

Payable for derivative contracts, at fair value
6,363

 
10,097

Securities loaned
1,078,134

 
(22,365
)
Payable to brokers, dealers and clearing organizations
12,281

 
(11,510
)
Payable to customers
(97,007
)
 
168,099

Commission management payable
1,461

 
21,721

Compensation payable
(119,012
)
 
(28,644
)
Fees payable
23,316

 
15,562

Due to related parties
(4,646
)
 
4

Accounts payable, accrued expenses and other liabilities
18,221

 
6,747

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands
(unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
 
 
 
 
(continued)
 
 
 
Consolidated Funds
 
 
 
Payable to brokers
(12,395
)
 
1,241

Payable for derivative contracts, at fair value
953

 
(6,085
)
Accounts payable, accrued expenses and other liabilities
(144
)
 
225

Net cash provided by / (used in) operating activities
(225,771
)
 
29,036

Cash flows from investing activities:
 
 
 
Purchases of other investments
(9,513
)
 
(20,227
)
Purchase of business (See Note 3)
(48,581
)
 

Proceeds from sales of other investments
12,867

 
13,295

Proceeds from loans held for investment

 
13

Purchase of fixed assets
(3,666
)
 
(1,397
)
Net cash provided by / (used in) investing activities
(48,893
)
 
(8,316
)
Cash flows from financing activities:
 
 
 
Repayments on convertible debt
(20,860
)
 
(13,500
)
Deferred debt issuance cost
(1,480
)
 
(3,883
)
Borrowings on notes and other debt
55,175

 
105,516

Repayments on notes and other debt
(5,051
)
 
(2,987
)
Purchase of treasury stock
(8,079
)
 
(10,862
)
Contingent liability payment
(1,235
)
 
(570
)
Capital contributions by redeemable non-controlling interests in operating entities
11,110

 
200

Capital withdrawals to redeemable non-controlling interests in operating entities
(1,346
)
 
(1,113
)
Consolidated Funds
 
 
 
Capital contributions by redeemable non-controlling interests in Consolidated Funds
191,485

 
18,937

Capital withdrawals to redeemable non-controlling interests in Consolidated Funds
(58,601
)
 
(58,136
)
Net cash provided by / (used in) financing activities
161,118

 
33,602

Change in cash and cash equivalents
(113,546
)
 
54,322

Cash and cash equivalents, including cash collateral pledged and segregated cash, beginning of period
442,113

 
264,208

Cash and equivalents at end of period:
 
 
 
    Cash and cash equivalents
182,400

 
207,708

    Cash collateral pledged
7,097

 
15,513

    Segregated cash
139,070

 
95,309

Cash and cash equivalents, including cash collateral pledged and segregated cash, end of period
$
328,567

 
$
318,530

Supplemental information
 
 
 
Cash paid during the year for interest
$
52,260

 
$
39,061

Cash paid during the year for taxes
$
3,580

 
$
2,233

Supplemental non-cash information
 
 
 
Purchase of treasury stock, at cost, through net settlement (See Note 19)
$
12,015

 
$
8,376

Preferred stock dividends declared (See Note 19)
$
3,396

 
$
3,396

Net assets (liabilities) acquired upon acquisition (net of cash)
$
90,727

 
$

Transfer of investment from consolidated funds, securities owned, fair value to securities owned, fair value
$

 
$
8,820

Initial recognition of operating lease right-of-use assets
$
103,694

 
$

Initial recognition of operating lease liabilities
$
110,505

 
$

Noncash transfer of net assets from Unconsolidated Master Fund to Consolidated Fund
$
97,655

 
$

Net decrease in redeemable non-controlling interests in Consolidated Funds due to deconsolidation of consolidated fund (See Note 2)
$

 
$
32,559

Separately recognized conversion option reclassification from a derivative liability to equity (Note 19)
$

 
$
28,973

Common stock issuance upon close of acquisition (see Note 3)
$
14,446

 
$

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

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Table of Contents

Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Index
Notes to Condensed Consolidated Financial Statements
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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

1. Organization and Business
Cowen Inc., a Delaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment management, investment banking, research, sales and trading, prime brokerage, global clearing and commission management services through its two business segments: the Operating Company (“Op Co”) and the Asset Company (“Asset Co”).
The Op Co segment consists of four divisions: the Cowen Investment Management (“CIM”) division, the Investment Banking division, the Markets division and the Research division. The Company refers to the Investment Banking division, the Markets division and the Research division combined as its investment banking businesses. Op Co’s CIM division includes advisers to investment funds (including privately placed hedge funds and private equity structures) and registered funds. Op Co's investment banking businesses offer investment banking, research, sales and trading, prime brokerage, global clearing and commission management services to companies and primarily institutional investor clients. Op Co's investment banking businesses’ primary target sectors ("Target Sectors") are healthcare, technology, media and telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and transportation.
The Asset Co segment consists of certain of the Company’s private investments, private real estate business and other legacy multi-sector long/short equity strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment.
Change in Segments
As noted in the prior reporting period, the Company continually monitors and reviews its segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact its reportable segments. Because of the change in the Chief Operating Decision Maker (“CODM”) of the Company at the end of 2017, the Company experienced a strategic shift to refocus the Company’s businesses on a set of differentiated products which are aligned to the content and insight within the Company’s domain of expertise.
During the second quarter of 2019, the Company realigned the business and reportable segment information that the CODM regularly reviews to evaluate performance for operating decision-making purposes, including evaluation and allocation of resources.  As a result, the Company changed its segment reporting structure based on the Company's domain expertise as a driver of balance sheet harmonization and repeatable revenues for its operating business versus the Company’s long-term monetization strategies.
As a result of the change in segments, effective for the quarter ended June 30, 2019, the Company has the following business segments:
The Op Co segment consists of four divisions: Cowen Investment Management, Investment Banking, Markets, and Research. Each of Op Co’s four divisions leverage the Research division’s core domain expertise to drive harmonized repeatable revenue for the segment.
The CIM division offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. CIM offers investors access to a number of strategies to meet their specific needs including merger arbitrage, activism, healthcare royalties, private healthcare investing and private sustainable investing which leverage the content and domain expertise that are aligned with the Company's core areas of expertise ("Cowen DNA").
The Investment Banking division includes public and private capital raising transactions and providing strategic advisory services.
The Markets division includes trading equity and equity-linked securities on behalf of institutional investors as well as a full-service suite of prime brokerage services, cross-asset trading, securities finance, global execution, clearing and commission management businesses.
The Research division provides the thought leadership and domain expertise that drives Cowen DNA. The research content that is created helps to facilitate brokerage revenue in the Markets division, drive deal flow in the Investment Banking division and facilitate investor relationships and investing within CIM’s innovative investment products and solutions.
The Asset Co segment consists of certain of the Company’s private investments, private real estate business and other legacy multi-strategy funds. While the Asset Co segment is not a reportable segment, the Company will provide segment level information for Asset Co.

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

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 (the "Accounting Standards") 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 in 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.
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 investment funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary.
In accordance with these standards, the Company consolidates four investment funds for which it acts as the general partner and investment manager. As of June 30, 2019, the Company consolidated the following investment funds: Ramius Enterprise LP (“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (each a "Consolidated Fund" and 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, (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance and (iii) voting rights of equity holders are proportionate to their obligation to absorb losses or the right to receive returns.
Under US GAAP, 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 June 30, 2019, the total assets and total liabilities of the consolidated VIEs were $606.2 million and $11.2 million, respectively. As of December 31, 2018, the total assets and total liabilities of the consolidated VIEs were $468.0 million and $40.5 million, respectively. The increase is primarily related to other investors' subscriptions which increased overall VIEs net assets. The VIEs act as investment managers and/or investment companies that may be managed by the

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

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 June 30, 2019, the Company held a variable interest in Ramius Merger Master Fund Ltd ("Merger Master") (the “Unconsolidated Master Fund”) through the Consolidated Funds. As of December 31, 2018, the Company held variable interests in Ramius Enterprise Master Fund Ltd (“Enterprise Master”) and Ramius Merger Master Fund Ltd ("Merger Master") (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 investment funds for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights.
The reason that the Company does not consolidate the Unconsolidated Master Fund or real estate funds that are VIEs is due to the Company's conclusion that it is not the primary beneficiary in each instance. Investment fund investors are entitled to all of the economics of these VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The company has equity interests in the funds as both GP and Limited partner. In these instances the Company has concluded that the variable interests are not potentially significant to the VIE. Although the Company may advance amounts and pay certain expenses on behalf of the investment funds 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 6 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 or apply the equity method of accounting, 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 accounting for these investment 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"), Cowen Execution Services LLC ("Cowen Execution"), Westminster Research Associates LLC ("Westminster"), Cowen Execution Services Limited ("Cowen Execution Ltd"), ATM Execution LLC ("ATM Execution"), Cowen International Limited ("Cowen International Ltd"), 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

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

the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
d.
Allowance for credit losses
The allowance for credit losses is based on the Company’s assessment of the collectability of receivables related to securities transactions, prepaid research and other receivables. The Company considers factors such as historical experience, credit quality, age of balances and current economic conditions that may affect collectability in determining the allowance for credit losses. Specifically, for prepaid research, the Company reviews clients' historical, current and forecasted trading activity in determining the allowance for credit losses. The credit loss expense related to the allowance for credit losses as well as any recoveries of amounts previously charged is reflected in other expenses in the accompanying condensed consolidated statements of operations.
e.
Valuation of investments and derivative contracts
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 impact the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the condensed consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly from the fair values that would have been used had a ready market for the investments existed and such differences could be material.
The Company primarily uses the “market approach” to value its financial instruments measured at fair value. In determining an instrument's level within the hierarchy, the Company categorizes the Company's financial instruments into three categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further be divided between those held long or sold short.

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

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 primarily include active listed equities, certain U.S. government and sovereign obligations, Exchange Traded Funds ("ETFs"), 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 investment funds, real estate investments and equity method investments, which are valued as follows:
i.
Portfolio funds—Portfolio funds (“Portfolio Funds”) include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company 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 (a) do not have readily determinable fair values, (b) are investments in an investment company within the scope of ASC 946 Financial Services - Investment Companies (“ASC 946”) and (c) whose NAV is calculated in a manner consistent with the measurement principles of ASC 946 as of the reporting date, 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 is 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 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.

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

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 6 and 7 for further information regarding the Company's investments, including equity method investments and fair value measurements.
f.
Fees receivable
Fees related to security transactions are reported net of an allowance for credit losses.  An allowance for credit losses is assessed on any commission receivables aged over 180 days. 
Corporate finance and syndicate receivables, include receivables relating to the Company’s investment banking and advisory engagements net of allowance for credit losses. The Company records this allowance for credit losses on these receivables on a specific identification basis. The future collectability of the receivables is reviewed on a monthly basis based on the following factors: aging (usually if outstanding greater than 90 days), known financial stability of the paying company, as well as any other factors that might impact the collection of the outstanding fees.
Management and incentive fees are earned as the managing member, general partner and/or investment manager to the Company's investment funds and are recognized in accordance with appropriate revenue recognition guidance (see Note 2(l)).
g.
Securities financing arrangements    
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced or received on a gross basis. The related rebates are recorded in the accompanying condensed consolidated statements of operations as interest and dividends income and interest and dividends expense. Securities borrowed transactions require the Company to deposit cash collateral with the lender. With respect to securities loaned, the Company receives cash or securities as collateral from the borrower. When the Company receives securities as collateral, and has concluded it (i) is the transferor and (ii) can pledge the securities to third parties, the Company recognizes the securities received as collateral at fair value in Securities owned, at fair value with the corresponding obligation to return the securities received as collateral at fair value in Securities sold, not yet purchased, at fair value. Securities received as collateral are not recognized when the Company either (i) is not the transferor or (ii) cannot pledge the securities to third parties. The initial collateral advanced or received approximates or is greater than the market value of securities borrowed or loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or returned, as necessary. Securities borrowed and loaned may also result in credit exposures for the Company in an event that the counterparties are unable to fulfill their contractual obligations. The Company minimizes its credit risk by continuously monitoring its credit exposure and collateral values by demanding additional or returning excess collateral in accordance with the netting provisions available in the master securities lending contracts in place with the counterparties.
Fees and interest received or paid are recorded in interest and dividends income and interest and dividends expense, respectively, on an accrual basis in the accompanying condensed consolidated statements of operations. In cases where the fair value basis of accounting is elected, any resulting change in fair value would be reported in net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations. Accrued interest income and expense are recorded in receivable from brokers, dealers and clearing organizations and payable to brokers, dealers and clearing organizations, respectively, on an accrual basis in the accompanying condensed consolidated statements of financial condition. At June 30, 2019 and December 31, 2018, the Company did not have any securities lending transactions for which fair value basis of accounting was elected.
h.
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.

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

Asset
Depreciable Lives
 
Depreciation and/or Amortization Method
Telephone and computer equipment
3-5 years
 
Straight-line
Computer software
3-8 years
 
Straight-line
Furniture and fixtures
5 years
 
Straight-line
Leasehold improvements
Term of Lease
 
Straight-line
Finance lease right-of-use asset
5 years
 
Straight-line
i.
Goodwill and intangible assets
Goodwill
Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.
In 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. The Company early adopted these amendments during the second quarter of 2019 in conjunction with a quantitative goodwill test performed due to the Company’s change in operating segments and restructuring of reporting units. See Note 11 for the impact of the goodwill impairment test.
In accordance with US GAAP, inclusive of the newly adopted amendments, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that fair value exceeds its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test that requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds its fair value, then the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. See Note 11 for further discussion.
Intangible assets
Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the accompanying consolidated statements of operations if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.
j.
Debt
Long-term debt is carried at the principal amount borrowed net of any unamortized 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 accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition.
k.
Right-of-use assets and lease liabilities
Effective January 1, 2019, the Company adopted ASC Topic 842, Leases ("ASC 842"). The new guidance increases transparency and comparability by requiring the recognition of right-of-use assets and lease liabilities on the condensed consolidated statements of financial condition. The recognition of these lease assets and lease liabilities represents a change from previous US GAAP requirements, which did not require lease assets and lease liabilities to be recognized for most leases.

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

The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee, have not significantly changed from previous US GAAP requirements.
Under the effective date transition method selected by the Company, leases existing at, or entered into after January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical Accounting Standards. In applying ASC 842, the Company made an accounting policy election not to recognize the right-of-use assets and lease liabilities relating to short term leases. Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for discussions related to the Company's previous lease recognition policies. Implementation of ASC 842 included an analysis of contracts, including real estate leases and service contracts to identify embedded leases, to determine the initial recognition of right-of-use assets and lease liabilities, which required subjective assessment over the determination of the associated discount rates. ASC 842 also provided various practical expedients which were assessed to determine the ultimate impact of ASC 842 upon adoption. The standard includes a package of three practical expedients which permit the Company to not reassess (1) whether any expired or existing contracts are or contain a lease, (2) the lease classification for any expired or existing leases and (3) any initial direct costs for any existing leases as of the effective date. The Company has elected to apply the package of practical expedients, hindsight practical expedient, and land easement practical expedient.
The adoption of ASC 842 resulted in the recording of operating lease right-of-use assets of $103.7 million and operating lease liabilities of $110.5 million at January 1, 2019.
The Company determines if an arrangement is or contains a lease at inception. The Company’s operating lease arrangements are primarily for real estate and facility leases as well as office equipment. The Company has applied an accounting policy election to combine its lease and nonlease components for its real estate and facility leases. ROU assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company's variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the right-of-use asset and lease liabilities to the extent they are not based on consumer priced index or a market index and are recognized in the period in which the obligation for those payments is incurred. As most of the Company's leases do not provide an implicit rate and the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Right-of-use assets also include any lease payments made and exclude lease incentives. Many of the Company's operating lease agreements include options to extend the lease, which the Company does not include in the determination of the minimum lease term unless the options are reasonably certain to be exercised. Expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
The Company reconciles the operating lease expense with operating lease payments by presenting the amortization of the operating ROU asset and change in the operating lease liability in a single line item within the adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities in the accompanying Condensed Consolidated Statements of Cash Flows.
Please refer to Note 18 for information on the Company’s finance leases (formerly capital leases).
l.    Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), which requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company follows a five-step model to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, the Company includes variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved. Significant judgments are required in the application of the five-step model including; when determining whether performance obligations are satisfied at a point in time or over time; how to allocate transaction prices where multiple performance obligations are identified; when to recognize revenue based on the appropriate measure of the Company’s progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events.
The Company's principle sources of revenue are generated within two segments: Op Co and Asset Co as more fully described below. Revenue from contracts with customers includes management fees, incentive income, investment banking revenue and brokerage services revenue excluding principal transactions. ASC Topic 606 does not apply to revenue associated

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

with financial instruments, interest income and expense, leasing and insurance contracts. The following is a description of principal activities, separated by business segments, from which the Company generates its revenue. For more detailed information about reportable segments, see Note 22.
Operating Company
The Op Co segment generates revenue through five principle sources: investment banking revenue, brokerage revenue, management fees, incentive income and investment income from the Company's own capital. Investment income is excluded from ASC Topic 606.
Investment Banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from public and private small- and mid-capitalization companies within the Company's Target Sectors.     
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees, expenses reimbursed from clients and placement and sales agent fees.    
Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible securities offerings. Fee revenue relating to underwriting commitments is recorded at the point in time when all significant items relating to the underwriting process have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment for the purchase of securities from the issuer; (iii) the Company has been informed of the number of securities that it has been allotted; and (iv) the issuer obtains control and benefits of the offering; which generally occurs on trade date.
Underwriting fees are recognized gross of transaction-related expenses, and such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.
Strategic/financial advisory fees. The Company's strategic advisory revenue includes success fees earned in connection with advising companies, principally in mergers, acquisitions and restructuring transactions. The Company also earns fees for related advisory work such as providing fairness opinions. A significant portion of the Company's advisory revenue (i.e., success related advisory fees) is considered variable consideration and recognized when it is probable that the variable consideration will not be reversed in a future period. The variable consideration is constrained until satisfaction of the performance obligation. The Company records strategic advisory revenues at the point in time, gross of related expenses, when the services for the transactions are completed or the contract is canceled under the terms of each assignment or engagement.
Placement and sales agent fees. The Company earns agency placement fees and sales agent commissions in non-underwritten transactions, such as private placements of loans and debt and equity securities, including, private investment in public equity transactions (“PIPEs”), and as sales agent in at-the-market offerings of equity securities. The Company records placement revenues (which may be in cash and/or securities) at the point in time when the services for the transactions are completed under the terms of each assignment or engagement. The Company records sales agent commissions on a trade-date basis.
Expense reimbursements from clients.  Investment banking revenue includes expense reimbursements for transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction.  Expense reimbursements associated with investment banking engagements are recognized in revenue at the point in time when the Company is contractually entitled to reimbursement. The related expenses are presented gross within their respective expense category in the accompanying condensed consolidated statements of operations.
Brokerage
Brokerage revenue consists of commissions, principal transactions, equity and credit research fees and trade conversion revenue.
Commissions. Commission revenue includes fees from executing and clearing client transactions and commission sharing arrangements. Trade execution and clearing services, when provided together, represent a single performance

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

obligation as the services are not separately identifiable in the context of the contract. Commission revenues associated with combined trade execution and clearing services on a standalone basis, are recognized at a point in time on trade-date. Commissions revenues are generally paid on settlement date and the Company records a receivable between trade-date and payment on settlement date. The Company permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as "soft dollar arrangements". The Company also offers institutional clients the ability to allocate a portion of their gross commissions incurred on trades executed with various brokers to pay for research products and other services provided by third parties by entering into commission sharing arrangements. The Company acts as an agent in the soft dollar and commission sharing arrangements as the customer controls the use of the soft dollars and directs payments to third-party service providers on its behalf. Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues and recorded on trade date. Commissions on soft dollar brokerage are recorded net of the related expenditures. The costs of commission sharing arrangements are recorded for each eligible trade and shown net of commission revenue.
Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and trading gains and losses on inventory and other Company positions, which include securities previously received as part of investment banking transactions. In certain cases, the Company provides liquidity to clients by buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk. These positions are typically held for a short duration.
Equity and credit research fees. Equity and credit research fees are paid to the Company for providing its equity and credit research. In the US, revenue is recognized once an arrangement exists, access to research has been provided and the customer has benefited from the research. As part of MiFID II, the Company’s international broker-dealers have executed equity and credit research contacts with its clients. The contracts either contain a fixed price for providing access to research or a price at the discretion of the customer with a contract minimum. Fixed equity and credit research fees are recognized over the contract period as the customer is benefiting from the research throughout the contracts term. When the equity and credit research fees are based on the customer’s discretion with a contract minimum, the Company recognizes the contract minimum over the life of the contract as the customer benefits from the research provided and adjusts the revenue when the Company can estimate the amount of equity and credit research fees over the contract minimum. Additionally, the Company earns variable consideration for attending client conferences and events. Revenue is recognized when the Company attends a client conference or event.
Trade conversion revenue. Trade conversion revenue includes fees earned from converting foreign securities into an American Depository Receipt (“ADR”) and fees earned from converting an ADR into foreign securities on behalf of customers, and margins earned from facilitating customer foreign exchange transactions. Trade conversion revenue is recognized on a trade-date basis.
Management fees
The Company earns management fees from investment funds and certain managed accounts for which it serves as the investment manager; such fees earned are typically based on committed and invested capital. The Company has determined that the primary drivers of management fees are committed and invested capital relating to private equity funds. The management fees are earned as the investment management services are provided and are not subject to reversals. The performance obligation related to the transfer of these services is satisfied over time because the customer is receiving and consuming the benefits as they are provided by the Company.
Several investment managers and/or general partners of the investment funds are owned jointly by the Company and third parties. Accordingly, the management fees generated by these funds are split between the Company and these third parties based on the proportionate ownership of the management company. Pursuant to US GAAP, these fees received by the management companies are accounted for under the equity method of accounting and are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.
Management fees are generally paid on a quarterly basis and are prorated for capital inflows (or commitments) and redemptions (or distributions) and are recognized as revenue at that time as they relate specifically to the services provided in that period, which are distinct from the services provided in other periods. While some investors may have separately negotiated fees, in general the management fees are as follows:

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

Hedge Funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of utilized invested capital, committed capital or notional trading level. Management fees are generally calculated monthly at the end of each month.
Private Equity Funds. Management fees for the Company's private equity or debt funds are generally charged at an annual rate of 1% to 2% of committed capital during the investment period (as defined in the relevant partnership agreement). After the investment period, management fees for these private equity funds are generally charged at an annual rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the private equity funds.  For certain other private equity funds (and managed accounts), the management fees range from 0.2% to 1% and there is no adjustment based on the investment period.  Management fees for the Company's private equity funds are generally paid on a quarterly basis.
Cowen Trading Strategies. Advisory fees for the Company's collateral management advisory business are typically paid quarterly based on utilized invested capital or committed capital, generally subject to a minimum fee.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management or partnership agreements) with respect to certain of the Company's investment funds and managed accounts.  The incentive income is either allocated to the Company or is charged to the investment funds in accordance with their respective investment management or partnership agreements. For the hedge funds the Company offers, incentive income earned is typically up to 20% (in certain cases on performance in excess of a benchmark) of the net profits earned for the full year that are attributable to each fee-paying investor. For the private equity and debt fund products the Company offers, the carried interest earned is typically up to 20% of the distributions made to investors after return of their contributed capital and generally a preferred return.
In relation to ASC Topic 606, the Company applies an accounting policy election to recognize incentive income allocated to the Company under an equity ownership model as net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations. The Company previously recognized these amounts as incentive income.  Under the equity method of accounting the Company recognizes its allocations of incentive income or carried interest within net gains (losses) along with the allocations proportionate to the Company’s ownership interests in the investment funds.
The Company recognizes incentive income charged to the Company's hedge funds based on the net profits of the hedge funds. The Company recognizes such incentive income when the fees are no longer subject to reversal or are crystalized. For a majority of the hedge funds, the incentive fee crystallizes annually when the high-water mark for such hedge funds is reset, which delays recognition of the incentive fee until year end.
In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to such investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a “high-water mark.”
Generally, incentive income or carried interest is earned after the investor has received a full return of their invested capital, plus a preferred return.
Several investment managers and/or general partners of the Company's investment funds are jointly owned by the Company and third parties. Accordingly, the incentive fees generated by these investment funds are split between the Company and these third parties.  Pursuant to US GAAP, incentive income received by the general partners that are accounted for under the equity method of accounting are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.
Investment Income
Investment income earned by the Op Co segment is earned from investing the Company's capital in various strategies which align to existing businesses within Op Co and from investments in private capital raising transactions of its investment banking clients.
Asset Company
The Asset Co segment generates revenue through three principle sources: management fees, incentive income and investment income from the Company's own capital. Investment income is excluded from ASC Topic 606.

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

Management fees
The Company earns management fees from investment funds and certain managed accounts for which it serves as the investment manager; such fees earned are typically based on committed and invested capital. The management fees are earned as the investment management services are provided and are not subject to reversals. The performance obligation related to the transfer of these services is satisfied over time because the customer is receiving and consuming the benefits as they are provided by the Company.
Several investment managers and/or general partners of the investment funds are owned jointly by the Company and third parties. Accordingly, the management fees generated by these funds are split between the Company and these third parties based on the proportionate ownership of the management company. Pursuant to US GAAP, these fees received by the management companies are accounted for under the equity method of accounting and are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.
Management fees are generally paid on a quarterly basis and are prorated for capital inflows (or commitments) and redemptions (or distributions) and are recognized as revenue at that time as they relate specifically to the services provided in that period, which are distinct from the services provided in other periods. While some investors may have separately negotiated fees, in general, the management fees are as follows:
Hedge Funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of utilized invested capital, committed capital or notional trading level. Management fees are generally calculated monthly at the end of each month.
Real Estate. Management fees from the Company's real estate business are generally charged at an annual rate from 0.25% to 1.50% of total capital commitments during the investment period and of invested capital or net asset value of the applicable real estate fund after the investment period has ended. Management fees are typically paid to the general partners on a quarterly basis, at the beginning of the quarter in arrears.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management or partnership agreement) related to certain of the Company's investment funds and managed accounts.  The incentive income is either allocated to the Company or is charged to the investment funds in accordance with their corresponding investment management or partnership agreement. For the hedge funds the Company offers, incentive income earned is typically up to 20% (in certain cases on performance in excess of a benchmark) of the net profits earned for the full year that are attributable to each fee-paying investor.  For the private equity and debt fund products the Company offers, the carried interest earned is typically up to 20% of the distributions made to investors after return of their contributed capital and generally a preferred return.
In relation to ASC Topic 606, the Company applies an accounting policy election to recognize incentive income allocated to the Company under an equity ownership model as net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations. The Company previously recognized these amounts as incentive income.  Under the equity method of accounting the Company recognizes its allocations of incentive income or carried interest within net gains (losses) along with the allocations proportionate to the Company’s ownership interests in the investment funds.

The Company recognizes incentive income charged to the Company's hedge funds based on the net profits of the hedge funds. The Company recognizes such incentive income when the fees are no longer subject to reversal or are crystalized. For certain  hedge funds, the incentive fee crystallizes annually when the high-water mark for such hedge funds is reset, which delays recognition of the incentive fee until year end. In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to such investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a “high-water mark.”
Generally, incentive income or carried interest is earned after the investor has received a full return of their invested capital, plus a preferred return. However, for certain private equity structures, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred return on a current basis or on an investor by investor basis. These private equity structures are generally subject to a potential clawback of these incentive fees upon the liquidation of the private equity structure if the investor has not received a full return of its invested capital plus the preferred return thereon.
Several investment managers and/or general partners of the Company's investment funds are jointly owned by the Company and third parties. Accordingly, the incentive fees generated by these investment funds are split between the Company and these third parties.  Pursuant to US GAAP, incentive income received by the general partners that are accounted for under

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

the equity method of accounting are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.   
Investment Income
Investment income earned by the Asset Co segment is earned from investing the Company's capital in various strategies.
Revenue from contracts with customers
For the three and six months ended June 30, 2019 and 2018, the following tables presents revenues from contracts with customers disaggregated by fee type and segment.
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2019
 
2018
 
2019