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Consolidation | 12 Months Ended
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Dec. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Consolidation | Consolidation The Company has two types of investment products that are consolidated: consolidated sponsored investment product and the consolidated investment product. Consolidated sponsored investment products are investment products in which the Company generally holds a majority of the beneficial interests. The consolidated investment product is a collateralized loan obligation ("CLO") in which the Company has less than the majority of the beneficial interests. The secured notes of the CLO have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. The consolidation and deconsolidation of these investment products have no impact on net income attributable to stockholders. The Company’s risk with respect to these investments is limited to its beneficial interests 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. Consolidated Sponsored Investment Products In the normal course of its business, the Company sponsors various investment products. The Company consolidates, as a consolidated sponsored investment product, 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. As of December 31, 2016 and December 31, 2015, the Company consolidated 19 and 12 sponsored investment products, respectively. During the year ended December 31, 2016, the Company consolidated 12 additional sponsored investment products and deconsolidated 5 sponsored investment products because the Company no longer has a majority voting interest. The following table presents the balances of the consolidated sponsored investment products that were reflected in the Consolidated Balance Sheets as of December 31, 2016 and 2015:
| As of December 31,
| 2016 |  | 2015
($ in thousands) | VOE's |  | VIE |  | VOE's |  | VIE
Total cash | $ | 1,859 |  |  | $ | 2,775 |  |  | $ | 11,408 |  |  | $ | 458 |
Total investments | 99,247 |  |  | 42,828 |  |  | 291,247 |  |  | 32,088 |
All other assets | 2,211 |  |  | 1,059 |  |  | 8,281 |  |  | 268 |
Total liabilities | (2,310 | ) |  | (1,799 | ) |  | (14,948 | ) |  | (439 | )
Redeemable noncontrolling interest | (12,505 | ) |  | (24,761 | ) |  | (61,236 | ) |  | (12,628 | )
The Company’s net interests in consolidated sponsored investment products | $ | 88,502 |  |  | $ | 20,102 |  |  | $ | 234,752 |  |  | $ | 19,747 |
Fair Value Measurements of Consolidated Sponsored Investment Products The assets and liabilities of the consolidated sponsored investment products measured at fair value on a recurring basis by fair value hierarchy level were as follows:
As of December 31, 2016 |  |  |  |  |  |  |
| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Debt securities | $ | — |  |  | $ | 101,510 |  |  | $ | 87 |  |  | $ | 101,597 |
Equity securities | 40,270 |  |  | 208 |  |  | — |  |  | 40,478 |
Derivatives | 4 |  |  | — |  |  | — |  |  | 4 |
Total assets measured at fair value | $ | 40,274 |  |  | $ | 101,718 |  |  | $ | 87 |  |  | $ | 142,079 |
Liabilities |  |  |  |  |  |  |
Derivatives | $ | 3 |  |  | $ | 235 |  |  | $ | 62 |  |  | $ | 300 |
Short sales | 649 |  |  | — |  |  | — |  |  | 649 |
Total liabilities measured at fair value | $ | 652 |  |  | $ | 235 |  |  | $ | 62 |  |  | $ | 949 |
As of December 31, 2015 |  |  |  |  |  |  |
| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Debt securities | $ | — |  |  | $ | 151,156 |  |  | $ | 1,397 |  |  | $ | 152,553 |
Equity securities | 162,986 |  |  | 7,796 |  |  | — |  |  | 170,782 |
Derivatives | 33 |  |  | 738 |  |  | — |  |  | 771 |
Total assets measured at fair value | $ | 163,019 |  |  | $ | 159,690 |  |  | $ | 1,397 |  |  | $ | 324,106 |
Liabilities |  |  |  |  |  |  |
Derivatives | $ | 128 |  |  | $ | 844 |  |  | $ | — |  |  | $ | 972 |
Short sales | 5,334 |  |  | 75 |  |  | — |  |  | 5,409 |
Total liabilities measured at fair value | $ | 5,462 |  |  | $ | 919 |  |  | $ | — |  |  | $ | 6,381 |
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 and liabilities of consolidated sponsored investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value.
| Year Ended December 31,
| 2016 |  | 2015
(in thousands) |  |  |
Level 3 Debt Securities (a) |  |  |
Balance at beginning of period | $ | 1,397 |  |  | $ | 1,065 |
Purchases | 174 |  |  | 913 |
Sales | (1,472 | ) |  | (370 | )
Paydowns | (5 | ) |  | (10 | )
Change in unrealized loss, net | 348 |  |  | (113 | )
Change in realized loss, net | (355 | ) |  | (141 | )
Transfers from Level 2 | (62 | ) |  | 151 |
Transfers to Level 2 | — |  |  | (98 | )
Balance at end of period | $ | 25 |  |  | $ | 1,397 |
(a) | None of the securities were internally fair valued at December 31, 2016 or December 31, 2015.
For the year ended December 31, 2016 and December 31, 2015, respectively, securities held by consolidated sponsored investment products with an end of period value of $3.7 million and $8.4 million, respectively, 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. No securities were transferred from Level 1 to Level 2 during the year ended December 31, 2016. Securities with an end of period market value of $0.2 million were transferred from Level 1 to Level 2 during the year ended December 31, 2015 because certain non-US securities' quoted market prices were adjusted based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market or an exchange price for preferred shares was no longer available. Derivatives Certain consolidated sponsored investment products may employ derivative instruments as part of their investment strategies. These derivatives may include futures contracts, swaps contracts, options contracts and forward contracts. Derivative instruments in an asset position are classified as other assets of consolidated sponsored investment products in the Consolidated Balance Sheets. Derivative instruments in a liability position are classified as liabilities of consolidated sponsored investment products within the Consolidated Balance Sheets. The change in fair value of such derivatives is recorded in realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net, in the Consolidated Statements of Operations. In connection with entering into these derivative contracts, these consolidated sponsored investment products may be required to pledge an amount of cash equal to the appropriate “initial margin” requirements . The cash pledged or on deposit is recorded in the Consolidated Balance Sheets of the Company as Cash pledged or on deposit of consolidated sponsored investment products. The fair value of such derivatives at December 31, 2016 was immaterial. Short Sales Certain 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 Consolidated Balance Sheets within other liabilities of consolidated sponsored investment products. Borrowings One of the Company’s consolidated sponsored investment products may employ 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. Consolidated Investment Product Overview On June 9, 2016, the Company issued a collateralized loan obligation ("CLO") with a par value of $356.3 million consisting of six classes of senior secured floating rate notes payable with a par value of $320.0 million and subordinated notes with a par value of $36.3 million. Upon the launch of the CLO, the warehouse debt of $152.6 million was repaid, and the Company redeemed its preference shares while simultaneously making a $36.3 million investment in the CLO's subordinated notes. The CLO is a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of the CLO are governed by investment guidelines contained within the CLO’s governing documents. The CLO has a defined investment period during which it is permitted to make investments and reinvest capital as it becomes available. The CLO is a VIE, and the Company consolidates the CLO's assets and liabilities as a consolidated investment product within its financial statements as it is the primary beneficiary of the VIE. The Company has determined that it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact the economic performance of the entity and has the obligation to absorb losses, or the rights to receive benefits from, the VIE that could potentially be significant to the VIE. As discussed in Note 2, the Company adopted ASU 2014-13 effective January 1, 2016. This guidance requires reporting entities to use the more observable of the fair value of the financial assets or the financial liabilities to measure the financial assets and the financial liabilities of a CFE when a CFE is initially consolidated. The Company has elected the measurement alternative for its consolidated investment product and has determined that the fair value of the financial assets of the CFE is more observable than the fair value of the financial liabilities of the CFE. The Company's earnings from the consolidated investment product will reflect changes in value of the Company's beneficial interest in the consolidated investment product. The fair value of the Company’s beneficial interest, which is eliminated in consolidation, is determined primarily based on an income approach. The income approach is driven by current information such as market yields and projected cash flows expected to be received from the portfolio of collateral assets based on forecasted default and recovery rates that a market participant would use in determining the current fair value of the interest. The Company utilizes unadjusted third party pricing information in determining the fair value of its beneficial interest. The following table presents the balances of the consolidated investment product that, after intercompany eliminations, were reflected in the Condensed Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015:
| As of December 31,
| 2016 |  | 2015
($ in thousands) |  |  |
Total cash equivalents | $ | 14,449 |  |  | $ | 8,297 |
Total investments | 346,967 |  |  | 199,485 |
Other assets | 5,888 |  |  | 1,467 |
Debt | — |  |  | (152,597 | )
Notes payable | (328,761 | ) |  | — |
Securities purchased payable and other liabilities | (12,534 | ) |  | (18,487 | )
The Company’s net interests in the consolidated investment product | $ | 26,009 |  |  | $ | 38,165 |
Total Investments of Consolidated Investment Product Total investments represent bank loan investments of $347.0 million at December 31, 2016, primarily comprised of secured corporate loans from a variety of industries. These bank loan investments mature at various dates between 2018 and 2025, pay interest at LIBOR plus a spread of up to 8.25% and typically range in S&P credit rating categories from BBB- to B-. At December 31, 2016, the fair value of the senior bank loans exceeded the unpaid principal balance by approximately $1.3 million. No collateral assets were in default as of December 31, 2016. Notes Payable of Consolidated Investment Product The CLO has note obligations that bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 1.0% to 8.75%. The principal amounts outstanding of the note obligations issued by the CLO mature in April 2028. The CLO may elect to reinvest any prepayments received on bank loan investments prior to April 2020. Any subsequent prepayments received must be used to pay down the note obligations. The Company’s beneficial interests and maximum exposure to loss related to the consolidated investment product is limited to (i) ownership in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. The secured notes of the CLO have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative, prescribed by ASU 2014-13 and adopted on January 1, 2016, results in the net amount of the consolidated investment product shown above to be equivalent to the beneficial interests retained by the Company at December 31, 2016 as shown in the table below:
| As of
Beneficial Interests | December 31, 2016
($ in thousands) |
Subordinated notes | $ | 25,668 |
Accrued investment management fees | 341 |
Total Beneficial Interests | $ | 26,009 |
The following table represents revenue and expenses of the consolidated investment product included in the Company’s Consolidated Statements of Operations for the periods indicated:
| Year Ended December 31, 2016
($ in thousands) |
Income: |
Realized and unrealized loss, net | $ | (1,070 | )
Interest Income | 12,893 |
Total Revenue | $ | 11,823 |
Expenses: |
Other operating expenses | 3,944 |
Interest expense | 11,292 |
Total Expense | $ | 15,236 |
Net Loss attributable to consolidated investment product | $ | (3,413 | )
As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated investment product which are eliminated upon consolidation:
Economic Interests | Year Ended December 31, 2016
($ in thousands) |
Distributions received and unrealized losses on the subordinated notes held by the Company | (4,398 | )
Investment management fees | 985 |
Total Economic Interests | $ | (3,413 | )
Fair Value Measurements of Consolidated Investment Product The assets and liabilities of the consolidated investment product measured at fair value on a recurring basis by fair value hierarchy level were as follows: As of December 31, 2016:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 14,449 |  |  | $ | — |  |  | $ | — |  |  | $ | 14,449 |
Bank loans | — |  |  | 346,967 |  |  | — |  |  | 346,967 |
Total Assets Measured at Fair Value | $ | 14,449 |  |  | $ | 346,967 |  |  | $ | — |  |  | $ | 361,416 |
Liabilities |  |  |  |  |  |  |
Notes payable | $ | — |  |  | $ | 328,761 |  |  | $ | — |  |  | $ | 328,761 |
Total Liabilities Measured at Fair Value | $ | — |  |  | $ | 328,761 |  |  | $ | — |  |  | $ | 328,761 |
As of December 31, 2015:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 8,297 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,297 |
Bank loans | — |  |  | 199,485 |  |  | — |  |  | 199,485 |
Total Assets Measured at Fair Value | $ | 8,297 |  |  | $ | 199,485 |  |  | $ | — |  |  | $ | 207,782 |
The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment product measured at fair value: Cash equivalents represent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1. Bank loans represent the underlying debt securities held in the sponsored product which are consolidated by the Company. Bank loan investments include debt securities, which are generally at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the fair value measurement hierarchy. Notes payable represent notes issued by the CLO and are measured using the measurement alternative in ASU 2014-13. Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (a) the fair value of the beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services. The estimated fair value of debt at December 31, 2015, which had a variable interest rate, approximated its carrying value. The securities purchase payable at December 31, 2016 and December 31, 2015 approximated fair value due to the short-term nature of the instruments. Nonconsolidated VIEs The Company has interests in certain entities that are VIEs that the Company does not consolidate as it is not the primary beneficiary of those entities. The Company is not the primary beneficiary as its interest in the entities does not provide the Company with the power to direct the activities that most significantly impact the entities economic performance. At December 31, 2016, the carrying value and maximum risk of loss related to these VIEs was $9.0 million. Certain of the Company’s affiliates serve as the collateral manager for other collateralized loan and collateralized bond obligations (collectively, “CDOs”). The assets and liabilities of these CDOs reside in bankruptcy remote, special purpose entities in which the Company has no ownership in, nor holds any notes issued by, the CDOs and provides neither recourse nor guarantees. The Company determined that its investment management fees received as collateral manager for these CDOs did not represent a variable interest as: (1) the fees the Company earns are compensation for services provided and are commensurate with the level of effort required to provide the investment management services; (2) the Company does not hold other interests in the CDOs that individually, or in the aggregate, would absorb more than an insignificant amount of the CDO's expected losses or receive more than an insignificant amount of the CDO's expected residual return; and (3) the investment management arrangement only includes terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.

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