13. Consolidated Sponsored Investment Products

In the normal course of its business, the Company sponsors various investment products. The Company consolidates an investment product when it owns a majority of the voting interest in the entity or it is the primary beneficiary of an investment product that is a VIE. The consolidation and deconsolidation of these investment products has no impact on net income attributable to stockholders. The Company’s risk with respect to these investments is limited to its investment in these products. The Company has no right to the benefits from, and does not bear the risks associated with these investment products, beyond the Company’s investments in, and fees generated from these products. The Company does not consider cash and investments held by consolidated sponsored investment products to be assets of the Company other than its direct investment in these products.

As of June 30, 2015 and December 31, 2014, the Company consolidated 12 sponsored investment products, respectively. During the six months ended June 30, 2015, the Company consolidated one additional sponsored investment product and deconsolidated one sponsored investment product because it no longer had a majority voting interest.

The following table presents the balances of the consolidated sponsored investment products that were reflected in the Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014:


	As of
	June 30, 2015			December 31, 2014
($ in thousands)
Total cash	$	12,260		$	8,687
Total investments		270,997			236,652
All other assets		8,960			6,960
Total liabilities		(19,455	)		(12,556	)
Redeemable noncontrolling interests		(55,557	)		(23,071	)

The Company’s net interests in consolidated sponsored investment products	$	217,205		$	216,672

Consolidation

The following tables reflect the impact of the consolidated sponsored investment products in the Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, respectively:

As of June 30, 2015


	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products		Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Balance Sheet
($ in thousands)
Total cash	$	194,334		$	12,260	$	—		$	206,594
Total investments		276,253			270,997		(216,952	)		330,298
All other assets		176,399			8,960		(253	)		185,106

Total assets	$	646,986		$	292,217	$	(217,205	)	$	721,998

Total liabilities	$	88,013		$	19,708	$	(253	)	$	107,468
Redeemable noncontrolling interest		—			—		55,557			55,557
Equity attributable to stockholders of the Company		559,363			272,509		(272,509	)		559,363
Non-redeemable noncontrolling interest		(390	)		—		—			(390	)

Total liabilities and equity	$	646,986		$	292,217	$	(217,205	)	$	721,998

As of December 31, 2014


	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products		Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Balance Sheet
($ in thousands)
Total cash	$	202,847		$	8,687	$	—		$	211,534
Total investments		279,863			236,652		(216,415	)		300,100
All other assets		180,436			6,960		(257	)		187,139

Total assets	$	663,146		$	252,299	$	(216,672	)	$	698,773

Total liabilities	$	99,794		$	12,813	$	(257	)	$	112,350
Redeemable noncontrolling interest		—			—		23,071			23,071
Equity attributable to stockholders of the Company		563,542			239,486		(239,486	)		563,542
Non-redeemable noncontrolling interest		(190	)		—		—			(190	)

Total liabilities and equity	$	663,146		$	252,299	$	(216,672	)	$	698,773

(a)	Adjustments include the elimination of intercompany transactions between the Company and its consolidated sponsored investment products, primarily the elimination of the investments and consolidated sponsored investment product equity and recording of any noncontrolling interest.

The following table reflects the impact of the consolidated sponsored investment products in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2015 and 2014:

For the Three Months Ended June 30, 2015


	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Statement of Operations
($ in thousands)
Total operating revenues	$	100,052		$	—		$	(396	)	$	99,656
Total operating expenses		82,491			1,353			(396	)		83,448

Operating income (loss)		17,561			(1,353	)		—			16,208
Total other non-operating income (expense)		(127	)		(144	)		898			627

Income (loss) before income tax expense		17,434			(1,497	)		898			16,835
Income tax expense		7,823			—			—			7,823

Net income (loss)		9,611			(1,497	)		898			9,012
Noncontrolling interests		166			—			599			765

Net income (loss) attributable to the Company	$	9,777		$	(1,497	)	$	1,497		$	9,777

For the Three Months Ended June 30, 2014


	Balance Before Consolidation of Investment Products		Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Statement of Operations
($ in thousands)
Total operating revenues	$	112,871	$	—		$	(122	)	$	112,749
Total operating expenses		89,450		919			(122	)		90,247

Operating income (loss)		23,421		(919	)		—			22,502

Total other non-operating income		8,198		8,082			(6,884	)		9,396
Income before income tax expense		31,619		7,163			(6,884	)		31,898
Income tax expense		12,106		—			—			12,106

Net income		19,513		7,163			(6,884	)		19,792
Noncontrolling interests		30		—			(279	)		(249	)

Net income attributable to the Company	$	19,543	$	7,163		$	(7,163	)	$	19,543

For the Six Months Ended June 30, 2015


	Balance Before Consolidation of Investment Products		Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Statement of Operations
($ in thousands)
Total operating revenues	$	204,284	$	—		$	(797	)	$	203,487
Total operating expenses		160,962		2,572			(797	)		162,737

Operating income (loss)		43,322		(2,572	)		—			40,750
Total other non-operating income (expense)		4,288		4,770			(2,380	)		6,678

Income before income tax expense		47,610		2,198			(2,380	)		47,428
Income tax expense		18,691		—			—			18,691

Net income		28,919		2,198			(2,380	)		28,737
Noncontrolling interests		200		—			182			382

Net income attributable to the Company	$	29,119	$	2,198		$	(2,198	)	$	29,119

For the Six Months Ended June 30, 2014


	Balance Before Consolidation of Investment Products		Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Statement of Operations
($ in thousands)
Total operating revenues	$	220,726	$	—		$	(106	)	$	220,620
Total operating expenses		164,364		1,234			(106	)		165,492

Operating income (loss)		56,362		(1,234	)		—			55,128

Total other non-operating income		11,195		8,992			(7,640	)		12,547
Income before income tax expense		67,557		7,758			(7,640	)		67,675
Income tax expense		26,116		—			—			26,116

Net income		41,441		7,758			(7,640	)		41,559
Noncontrolling interests		40		—			(118	)		(78	)

Net income attributable to the Company	$	41,481	$	7,758		$	(7,758	)	$	41,481

(a)

Adjustments include the elimination of intercompany transactions between the Company and its consolidated sponsored investment products, primarily the elimination of the investments and consolidated sponsored investment product equity and recording of any noncontrolling interest.

Fair Value Measurements of Consolidated Sponsored Investment Products

The assets of the consolidated sponsored investment products measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 by fair value hierarchy level were as follows:

As of June 30, 2015


	Level 1		Level 2		Level 3		Total
($ in thousands)
Assets
Debt securities	$	—	$	147,282	$	852	$	148,134
Equity securities		122,443		420		—		122,863
Derivatives		105		28		—		133

Total Assets Measured at Fair Value	$	122,548	$	147,730	$	852	$	271,130

Liabilities
Derivatives	$	262	$	66	$	—	$	328
Short sales		9,573		228		—		9,801

Total Liabilities Measured at Fair Value	$	9,835	$	294	$	—	$	10,129

As of December 31, 2014


	Level 1		Level 2		Level 3		Total
($ in thousands)
Assets
Debt securities	$	—	$	135,050	$	1,065	$	136,115
Equity securities		82,417		18,120		—		100,537
Derivatives		154		227		—		381

Total Assets Measured at Fair Value	$	82,571	$	153,397	$	1,065	$	237,033

Liabilities
Derivatives	$	191	$	—	$	—	$	191
Short sales		7,491		674		—		8,165

Total Liabilities Measured at Fair Value	$	7,682	$	674	$	—	$	8,356

The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated sponsored investment products measured at fair value.

Investments of consolidated sponsored investment products represent the underlying debt, equity and other securities held in sponsored products which are consolidated by the Company. Equity securities are valued at the official closing price on the exchange on which the securities are traded and are categorized within Level 1. Level 2 investments include most debt securities, which are valued based on quotations received from independent pricing services or from dealers who make markets in such securities and certain equity securities, including non-US securities, for which closing prices are not readily available or are deemed to not reflect readily available market prices and are valued using an independent pricing service. Pricing services do not provide pricing for all securities, and therefore indicative bids from dealers are utilized, which are based on pricing models used by market makers in the security and are also included within Level 2. Level 3 investments include debt securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security.

The following table is a reconciliation of assets of consolidated sponsored investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value.


	Six Months Ended June 30,
	2015			2014
Level 3 Debt securities (a)
Balance at beginning of period	$	1,065		$	—
Purchases		—			450
Paydowns		(3	)		—
Transferred to Level 2		(162	)		—
Change in unrealized gain/(loss), net		(48	)		—

Balance at end of period	$	852		$	450

(a)	None of the securities reflected in the above table were internally fair valued at June 30, 2015.

For the six months ended June 30, 2015, securities held by consolidated sponsored investment products with an end of period value of $14.6 million were transferred from Level 2 to Level 1 because certain non-US securities’ quoted market prices were no longer adjusted based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. For the six months ended June 30, 2015, no securities were transferred from Level 1 to Level 2. There were no transfers between Level 1, Level 2, or Level 3 during the six months ended June 30, 2014.

Derivatives

The Company has certain consolidated investment products which include derivative instruments as part of their investment strategies. These derivatives may include futures contracts, options contracts and forward contracts. The fair value of such derivatives at June 30, 2015, December 31, 2014 and June 30, 2014 was immaterial. The change in fair value of such derivatives, which is recorded in realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net, in the Condensed Consolidated Statement of Operations was immaterial for the three and six months ended June 30, 2015 and 2014. In connection with entering into these derivative contracts, these funds may be required to pledge to the broker an amount of cash equal to the “initial margin” requirements that varies based on the type of derivative. The cash pledged or on deposit is recorded in the Condensed Consolidated Balance Sheet of the Company as Cash pledged or on deposit of consolidated sponsored investment products.

Short Sales

Some of the Company’s consolidated sponsored investment products may engage in short sales, which are transactions in which a security is sold which is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded in the Condensed Consolidated Balance Sheet within Other liabilities of consolidated sponsored investment products.

Borrowings

One of the Company’s consolidated sponsored investment products employs leverage in the form of using proceeds from short sales, which allows it to use its long positions as collateral in order to purchase additional securities. The use of these proceeds from short sales is secured by the assets of the consolidated sponsored investment product which are held with the custodian in a separate account. This consolidated sponsored investment product is permitted to borrow up to 33.33% of its total assets.