Disruptive Change and Strategic Solutions
Insight by Larry Wieseneck
Cowen & Company Co-President Larry Wieseneck speaks with David Erickson, Senior Fellow at Wharton Business School, as he looks back on the four years since he joined Cowen. They discuss what stands out most from the last four years including disruptive change across the economy and a greater focus on sustainability, which has accelerated during the pandemic. Press play to listen to the podcast.
Transcript
Speaker 1:
Welcome To Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global Sectors.
Larry Wieseneck:
Hi everyone, I’m Larry Wieseneck, the co-president of Cowen and Company. And we’re recording this on the day before Thanksgiving 2021, but by the time you hear this let me wish you a very, very happy holiday, I hope you enjoyed with your family and friends, however you celebrate the holiday. I’m here today again with my dear friend, David Erickson, senior fellow at the Wharton Business School, and we’re going to be discussing one of my favorite subjects Cowen investment banking. There have been many changes over the past four years, and today we’d like to discuss everything happening now at Cowen and what we think will be happening next. So David, I’m going to turn it over to you. It’s been a bit of time since we last spoke, so I’m really excited to fill you on what’s been happening at Cowen over the last 12 to 18 months.
David Erickson:
Thanks Larry. First of all, congratulations. You’ve been in your role now for four years at Cowen, there’s been a lot of changes both in the market as well as at Cowen. I know you’ve made some recent announcements, we’re going to talk about those a little later, but let’s start by looking back quickly, what do you see as the most significant changes in the market?
Larry Wieseneck:
That’s a great question, David, and to select one in particular is always risky. But I think I’ll just start with the significant embrace of disruption that in really almost every sector of the economy. One of the things that’s changed and certainly the pandemic helped to accelerate this is that, whether we think about some of the themes around sustainability, whether it’s the role of AI and deep learning, whether it’s just technology in general and moving from kind of software to where now it’s about analytics and tools that are available, it’s impacting every single sector of the economy.
So when we talk about industrials, all of a sudden… For 30 years, people talk about industrial tech, now many of these tech companies are changing the entire space of the industrial landscape. Same thing’s happening in consumer, certainly in healthcare, everyday more and more healthcare solutions are being driven by technology. And we’re seeing that both in the economy itself, but also in the market. The market is pricing in these changes, sometimes pricing in changes three, five, seven years down the road in the way they’re valuing businesses today. And so, I would just say that the embrace of disruptive change is probably the biggest modification since say when I started in 2017.
David Erickson:
Obviously another piece of that, and you started to talk about when you talked about sustainability is the impact that ESG has had in the market over the last four years. Not to say it wasn’t important four years ago, but in the last couple of years specifically it’s gotten significant focus. And really, I think from both an investor’s perspective and the issuers perspective, it’s really, if not the top concern or top issue, one of the top two or three. How has Cowen helped some of your clients think through those changes?
Larry Wieseneck:
So I tend to separate out sustainability, which is one theme, it’s really the E, right? The environment part of ESG, and then the other elements which are the social and the governance. And the reason I say that is that, when you think about business plans in companies, their entire industry’s being changed or being created around solving climate change. And we’re finding ways just in general to make sure that we can do more with less resources. That is a huge investible theme, it’s also true that there are enormous business plans attacking those problems. So it’s not just an investment theme, it’s a reality in terms of how business are being built. When we deal with the broader ESG, we start getting into elements that are about every company. So, not every company is going to solve the carbon footprint, that they may improve their carbon footprint but they’re not business plans tied to sustainability, so to speak.
But every business does have to think about their E, their S and their G in some way. And that’s where the S and G come in, which is every business including Cowen is thinking about our social impact, what our governance looks to like, are we doing the right things for our people, are we doing the right things in our community. And what we’re finding now is that because they’re lumped together at times, there’s ESG ratings, what is a company’s impact, there’s internal focus on it, almost every company and I see them as somewhat, they’re certainly united, but they’re distinct. So when we talk sustainability, we generally are talking about businesses solving resource challenges. When we talk about ESG, we think about the movement towards all institutions understanding their responsibilities in society. And what I’m getting very excited about is, two or three years ago what ESG meant was, what are you going to stop doing?
And it was a real push for their ESG investors who would say, “Stop doing these bad things.” ESG’s now moved to, “Are you doing enough of better things?” And I think that’s a positive development. The one thing that we do focus on and make sure we keep our eyes out for is, companies or institutions that feel if they check the box by basically doing the things that a ready agency or others say makes you get the green thumb or the thumbs up on ESG that you’re making a difference. And I think that’s just the prerequisite, and the real opportunity is businesses solving real problems in society and getting a great return for investors while doing good things for the community, kind of the double bottom line or triple bottom line and we’re seeing more and more of that. And we’re very excited to be banking many of those companies that are double and triple bottom line type focus.
David Erickson:
I also wanted to speak about some of the developments account because you’ve made some significant developments in the last four years as well. And more recently you made some significant announcements in terms of investments in companies like PolySign, and I guess a week or so ago Home Capital, and then your announcement yesterday with the Portico Capital Advisors. Talk about those interesting commitments and talk about how those investments and acquisitions are strategic for Cowen and how that’ll help your relationships benefit with your clients.
Larry Wieseneck:
David, it’s interesting that you connect the Portico acquisition with some of our investments in PolySign and Home Capital, because while they’re all investments of capital by the firm, they really fit under two different themes. And so the first theme would be our embrace of solutions outside of the walls of Cowen. As a roughly 1500 person firm, we don’t have the same scale as many of our competitors. And there are times when that might be viewed as a negative because we don’t have the same reach. On the other hand, I think it frees us up to think in a more open and collaborative way. We don’t view businesses that are outside our walls, that are solving core problems in the investment banking or in the markets as competitors, we view them as potential partners and collaborators, and sure both PolySign and [Hum 00:08:21].
Let me start with PolySign. We really about a year ago as a firm made the decision that the movement towards the use of crypto was about a lot more than cryptocurrencies and is really about a, digital asset and what’s going to happen over time with many assets becoming digitized, and then secondly, big changes coming to the way information’s shared on the internet. Where many of these companies, these tokens, these coins are actually fantastic sources or vessels for moving information and packages. And we see the future of the internet very much aligned with tokenization. And so when you take that view, again, it was about this time last year, we made the decision that as a firm that is always trying to make sure we’re ahead of the curve and that we’re working with businesses and ecosystems that evolve we had to significantly increase our energy around the crypto space in general.
And PolySign, after meeting with many companies and many different entrepreneurs, we became convinced that the core business of PolySign, which is their standard custody, which is the independent custodian that is registered with the DFS, that would be a big part of how institutions decide to play in the crypto markets. Because if you look at every other asset class in institutional investors demand independent custodians so that they feel comfortable when they’re dealing with a broker or an exchange that their securities are being stored somewhere separate from the parties they trade with. So that’s the reason we embrace PolySign, we’re thrilled to be significant investors there. And that really began in earnest the builder of Cowen Digital, and still in the early days of that, but certainly the custodian solution at PolySign, at Standard Custody will be a part of our institutional offering.
And we want to be the early side of working with the top institutions and helping them and really listening to them, that’s what we’ve been doing now for the last nine months, is listening to what they want out of a partner, a trading partner in the crypto space and then delivering that for them. And so that’s really exciting, a lot more to come over time on that front. At the same token, like everything we do at Cowen, we make sure we line up our businesses around the themes. So while we’re doing that in the markets business, we’ve been building out our banking effort in the digital asset space as well. We’ve already been a book runner on a number of bitcoin miners and we have a number of other interesting transactions coming down the backlog. And we see the opportunities within the digital asset and crypto arena as being very, very big opportunities over the next one, two, three, in following years. So that’s kind of the opportunity in the digital asset space.
Home Capital’s a little bit different. Really going back to the days that you and I were together at Lehman Brothers, I’ve struggled with the question of why it is that investment bankers, whether it be capital markets, whether it be coverage bankers, M&A, why the technology that we utilize to help us do business is basically just the 2020 version of what we were doing in 1995, spreadsheets, Word, and now the last 20 years email. And we’re very, very late adopters to the kinds of technology that have allowed the sales and training businesses, for example, to continue to innovate and do more every day. Every week that goes by, every year that goes by there’s an ability in trading side to do better straight through processing, batch processing, et cetera.
So I’ve been looking now for a while and we have here at Cowen at partners who can help us accelerate the workflow and allow us to get to smarter decisions in a quicker way. And Home Capital with a very, very smart AI and deep learning set of products is really a source both for generating private placement opportunities in a way that if you were relying on humans to do all of it, they might not make sense. So think of it as like we have done in the markets businesses, you can’t do low touch business unless you use technology, Home Cap allows to do low touch private placements, as example. It also though allows us to very quickly analyze companies and determine whether we think there are good candidates for our banking services. And so we’re using know machine learning, deep learning to help us with that as well and our partner for that is Hum.
And so we made that strategic investment with them so that we can be on the cutting edge of what they’re doing, but also be on the front lines with them in evolving the solution so that it fits our needs for both who we are today and who we want to be in the future.
David Erickson:
And how about Portico?
Larry Wieseneck:
So Portico is a little bit different. Portico is a investment or an acquisition that we announced that will close hopefully by the end of the year. It’s actually the third M&A boutique that we’ve acquired in the last four years. And if we think about the way we’ve grown our investment bank, what we’ve focused on is not exclusively, but significantly is on how best to serve the growth businesses across the middle market. And generally we’ve gotten there by trying to understand where the economy is going, the kind of business is solving the big problems, and then making sure that we’re lined up with that. And when we think about Portico, Portico is around what we think is one of the most deep trends in our economy, both here in the US and globally, which is the increased use of software and data. And when you combine software and data that turns into analytics to make better decisions.
So just like I was describing what we’re using Home Capital for, companies every day are thinking about solutions that bring together software and data for insights. And Portico has been the leading investment bank, boutique investment bank, focusing on that sub area where they work across a number of verticals where the analytical tools are critical to success and changing the industries themselves. So really excited, it’s roughly 25 person firm, they’ll fit really well within our existing TMT landscape. We have not been targeted, the vertical software arena and they’re going to get the benefit now of having a deep capital markets team, deeper M&A toolkit and also all the relationships we have with the financial sponsors and venture community, which will allow them to put more throughput into both their environment but of also solving some of their clients’ challenges with more solutions.
So real exciting there, and it fits into our broader strategy. We’ve grown very, very quickly over the last four years through this combination of organic growth. So where we’ve taken bankers who might be in industrials and said focus on the faster growing parts of industrials or consumer or whatever the group might be, but then also these acquisitions. And as I said, this is the third acquisition in the last four years of M&A boutiques.
David Erickson:
So I know this is always a time on Wall Street and elsewhere where you reflect on this past year’s market, but you’re also thinking about, “Well, we got to put together a budget for next year. And we got to think about our business plan, not only in just next year, not up to the next 12, 18, 24 months.” So as you are going through that process now and have been going through that process, what do you see as the big trends that you and Cowen will be focused on over the next 12 to 18 months? And then how should your company’s best prepare for these trends or how the companies that you help best prepare for these trends?
Larry Wieseneck:
Well, we’ve touched on a number of the trends already. So I’ll try and add some new ones to the discussion, but I think the move of sustainability, every company’s got to be thinking about that. Whether your business plan is to be someone who is driving it, or whether you’re just dealing with it for how do I make sure my business is sustainable? That’s not going away, it’s only going to increase. I think the role of AI machine learning, but I’ll add into that robotics, these tools that are changing the landscape, I think two or three years ago, people were saying they’re going to take jobs away, they’re going to eliminate humans. What we’re seeing is the businesses that are actually really taking off in that space, what they’re doing is, they’re finding ways to take the way that humans work, the way that companies do what they do and make those individuals more productive by taking away the mundane tasks or the tasks they quite honestly a machine’s better at than humans and freeing up the teams to focus on what they do best.
And I think that’s going to accelerate. I think that we’re seeing now everything from what’s happening in the consumer space and the way that… Take Amazon and think of the application of all the things they’re doing with robotics in AI and what that means for everyone in the retail, in consumer space. I think those are exciting themes, I think that we are very focused on it, even the Portico transaction is. One of the reasons we did that is if analytics become more important in our becoming more important, we want to make sure we can be banking companies that are in that space. But I think your question was how do companies prepare for it if they’re not in that business? And I view it very similar to, how do you prepare for the growth of software, right? Over the last 25 years, every company has not become a software company, they’ve not become “An internet company,” but they’ve figured out how to use those tools so that their business can be more efficient.
And I see the same thing around the movement towards AI machine learning, deep learning, you’ve got to be a beneficiary of that, because if you’re not a beneficiary of it, you’re not changing your business to adapt, you’re going to be on the other side and you’re going to be disrupted by those that embrace these trends. I think the other trend beyond the continued growth of technological solutions or maybe a more direct version of that is, I think the financial services industry is going to significantly change with FinTech. And we talked again before about a few areas there, but what’s happening in digital assets and crypto, everyone has to have a strategy on that, certainly financial services firms do, we’re working on ours, but we’re going to be spending more and more time with our clients across every industry talking about what those two themes mean, kind of AI and robotics on one hand and then on the other hand the movement towards digitalization, particularly cryptography and what that means is opportunities for their businesses. So we’re getting ready for those.
David Erickson:
Great. There’s a lot more ground I’d love to talk more, but unfortunately I think we’ve covered so much ground this far we’ve run out of time. So thanks again, look forward for our next conversation.
Larry Wieseneck:
Well, thanks David. And it’s interesting the decision to have this call on what’s roughly my fourth year anniversary at the firm and importantly also marks roughly 20 months since the pandemic. We’ve been unbelievably blessed in many ways that we were lucky enough to have prepared through technology and a number of other things that we did to be able to work from home at the beginning of the pandemic, and then the fact that we were lined up with sectors that really did benefit significantly from the embrace of the technologies that allowed us to all work from home and that’s everything from disruptive consumer, to what we do in alternative energy, to obviously electric vehicles, electrification, et cetera.
So we’ve had our most significant growth in the last two years and we’re extraordinarily thankful of that. And so we think about where we are and how we’re lined up for the future, which was really the premise, I guess, at the beginning of our conversation, I think it’s just appropriate that we’re doing at Thanksgiving, because certainly speaking for myself and all my other partners at the firm, we’re enormously thankful for the hard work of our people. This transition, it’s an ongoing transition, we’re not going back to the office, we’re actually creating a new office environment, a new relationship between home, office, flexibility, et cetera. So really thankful for what our people have been able to do, thankful for our clients for trusting us to help them navigate this difficult time, and really just want to wish everyone a happy Thanksgiving, and because they might be listening to this between Thanksgiving and the holidays, a wonderful holiday and New Year. And same to you, David, to your family and happy holidays.
Speaker 1:
Thanks for joining us, stay tuned for the next episode of Cowen Insights.