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Consolidation | 3 Months Ended
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Mar. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Consolidation | Consolidation The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest which is typically present when the Company owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the entity. The Company evaluates any variable interest entities ("VIEs") in which the Company has a variable interest for consolidation. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) where as a group, the holders of the equity investment at risk do not possess: (i) the power through voting or similar rights to direct the activities that most significantly impact the entity’s economic performance; (ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity; or (iii) proportionate voting and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights. If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The Company has two types of investment products that are consolidated: consolidated sponsored investment products and a consolidated investment product. Consolidated sponsored investment products ("CSIPs") are investment products in which the Company generally holds a majority of the beneficial interests. The consolidated investment product ("CIP") is a collateralized loan obligation ("CLO") in which the Company has less than the majority of the beneficial interests. 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 CSIP, an investment product when it owns a majority of the voting interest in the entity as a VOE or it is the primary beneficiary of an investment product that is a VIE. As of March 31, 2017 and December 31, 2016, the Company consolidated 18 and 19 sponsored investment products, respectively, which includes one sponsored investment product that was considered a VIE for which the Company is the primary beneficiary. During the three months ended March 31, 2017, the Company deconsolidated one sponsored investment product. The following table presents the balances of the CSIPs that, after intercompany eliminations, were reflected in the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016:
| As of
| March 31, 2017 |  | December 31, 2016
| VOEs |  | VIE |  | VOEs |  | VIE
($ in thousands) |  |  |  |  |  |  |
Total cash and cash equivalents | $ | 2,044 |  |  | $ | 929 |  |  | $ | 1,859 |  |  | $ | 2,775 |
Investments | 61,028 |  |  | 51,902 |  |  | 99,247 |  |  | 42,828 |
All other assets | 38,603 |  |  | 1,099 |  |  | 2,211 |  |  | 1,059 |
Total liabilities | (2,033 | ) |  | (801 | ) |  | (2,310 | ) |  | (1,799 | )
Redeemable noncontrolling interests | (12,175 | ) |  | (32,801 | ) |  | (12,505 | ) |  | (24,761 | )
The Company’s net interests in consolidated sponsored investment products | $ | 87,467 |  |  | $ | 20,328 |  |  | $ | 88,502 |  |  | $ | 20,102 |
Fair Value Measurements of Consolidated Sponsored Investment Products The assets and liabilities of the CSIPs measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 by fair value hierarchy level were as follows: As of March 31, 2017
| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Debt securities | $ | — |  |  | $ | 71,932 |  |  | $ | 161 |  |  | $ | 72,093 |
Equity securities | 40,470 |  |  | 367 |  |  | — |  |  | 40,837 |
Total Assets Measured at Fair Value | $ | 40,470 |  |  | $ | 72,299 |  |  | $ | 161 |  |  | $ | 112,930 |
Liabilities |  |  |  |  |  |  |
Derivatives | $ | 1 |  |  | $ | 280 |  |  | $ | — |  |  | $ | 281 |
Short sales | 588 |  |  | — |  |  | — |  |  | 588 |
Total Liabilities Measured at Fair Value | $ | 589 |  |  | $ | 280 |  |  | $ | — |  |  | $ | 869 |
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 |
The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s CSIPs measured at fair value. Investments of CSIPs 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. For the three months ended March 31, 2017 and 2016, securities held by CSIPs with an end of period value of $0.3 million and $3.8 million, respectively, were transferred from Level 2 to Level 1 because an exchange price became available. For the three months ended March 31, 2017 and 2016, securities held by CSIPs with an end of period value of $0.4 million and $0.0 million, respectively, were transferred from Level 1 to Level 2 because an exchange price was no longer available. The following table is a reconciliation of assets of CSIPs for Level 3 investments for which significant unobservable inputs were used to determine fair value.
| Three Months Ended March 31,
($ in thousands) | 2017 |  | 2016
Level 3 Debt securities (a) |  |  |
Balance at beginning of period | $ | 25 |  |  | $ | 1,397 |
Realized losses, net | (65 | ) |  | (102 | )
Purchases | 100 |  |  | 19 |
Paydowns | (1 | ) |  | (1 | )
Sales | (36 | ) |  | (498 | )
Transferred to Level 2 | — |  |  | (618 | )
Transfers from Level 2 | 76 |  |  | 710 |
Change in unrealized gain, net | 62 |  |  | 89 |
Balance at end of period | $ | 161 |  |  | $ | 996 |
(a) | None of the securities reflected in the table were internally fair valued at March 31, 2017 or March 31, 2016. The investments that are categorized as Level 3 were valued utilizing third party pricing information without adjustment. All transfers are deemed to occur at the end of period. Transfers between Level 2 and Level 3 were due to a decrease in trading activities at period end.
Short Sales Some of the Company’s CSIPs 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 Sheets within other liabilities of CSIPs. Consolidated Investment Product At March 31, 2017, the Company consolidated one 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 $36.3 million. The following table presents the balances of the CIP that, after intercompany eliminations, were reflected in the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016:
| As of
| March 31, 2017 |  | December 31, 2016
($ in thousands) |  |  |
Cash equivalents | $ | 13,957 |  |  | $ | 14,449 |
Investments | 354,002 |  |  | 346,967 |
Other assets | 6,152 |  |  | 5,888 |
Notes payable | (325,843 | ) |  | (328,761 | )
Securities purchased payable and other liabilities | (20,806 | ) |  | (12,534 | )
The Company’s net interests in the consolidated investment product | $ | 27,462 |  |  | $ | 26,009 |
Investments of Consolidated Investment Product Total investments of $354.0 million at March 31, 2017 represent bank loan investments, which comprise the majority of the CLO portfolio asset collateral and are senior secured corporate loans from a variety of industries. Bank loan investments mature at various dates between 2018 and 2025, pay interest at LIBOR plus a spread of up to 9.5% and typically range in S&P credit rating categories from BBB- to CCC-. At March 31, 2017, the unpaid principal balance of the senior bank loans exceeded the fair value by approximately $0.6 million. No collateral assets were in default as of March 31, 2017. Notes Payable of Consolidated Investment Product The CLO has note obligations that bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 1.0% to 8.75%. The principal amounts outstanding of the note obligations issued by the CLO mature in April 2028. The CLO may elect to reinvest any prepayments received on bank loan investments prior to April 2020. Any subsequent prepayments received must be used to pay down the note obligations. The Company’s beneficial interests and maximum exposure to loss related to the CIP is limited to (i) ownership in the subordinated notes and (ii) accrued management fees. The secured notes of the CLO have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative, as adopted on January 1, 2016, prescribed by ASU 2014-13, results in the net amount of the CIP shown above to be equivalent to the beneficial interests retained by the Company at March 31, 2017 as shown in the table below:
| As of
Beneficial Interests | March 31, 2017
($ in thousands) |
Subordinated notes | $ | 27,091 |
Accrued investment management fees | 371 |
Total Beneficial Interests | $ | 27,462 |
The following table represents revenue and expenses of the CIP included in the Company’s Condensed Consolidated Statements of Operations for the periods indicated:
| Three Months Ended March 31,
($ in thousands) | 2017
Income: |
Realized and unrealized gain, net | $ | 718 |
Interest Income | 4,161 |
Total Income | $ | 4,879 |
Expenses: |
Other operating expenses | 65 |
Interest expense | 2,857 |
Total Expense | $ | 2,922 |
Net Income (loss) attributable to consolidated investment product | $ | 1,957 |
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 CIP which are eliminated upon consolidation:
Economic Interests | Three Months Ended March 31,
($ in thousands) | 2017
Distributions received and unrealized gains on the subordinated notes held by the Company | $ | 1,477 |
Investment management fees | 480
Total Economic Interests | $ | 1,957 |
Fair Value Measurements of Consolidated Investment Product The assets and liabilities of the CIP measured at fair value on a recurring basis by fair value hierarchy level were as follows: As of March 31, 2017:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 13,957 |  |  | $ | — |  |  | $ | — |  |  | $ | 13,957 |
Bank loans | — |  |  | 352,440 |  |  | $ | 1,562 |  |  | $ | 354,002 |
Total Assets Measured at Fair Value | $ | 13,957 |  |  | $ | 352,440 |  |  | $ | 1,562 |  |  | $ | 367,959 |
Liabilities |  |  |  |  |  |  |
Notes payable | $ | — |  |  | $ | 325,843 |  |  | $ | — |  |  | $ | 325,843 |
Total Liabilities Measured at Fair Value | — |  |  | 325,843 |  |  | — |  |  | 325,843 |
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 |
The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s CIP 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 securities purchase payable at March 31, 2017 and December 31, 2016 approximated fair value due to the short-term nature of the instruments. The following table is a reconciliation of assets of CIPs for Level 3 investments for which significant unobservable inputs were used to determine fair value.
| Three Months Ended March 31,
($ in thousands) | 2017
Level 3 Debt securities (a) |
Balance at beginning of period | $ | — |
Purchases | — |
Sales | — |
Transferred from Level 2 | 1,562 |
Realized gains | — |
Balance at end of period | $ | 1,562 |
(a) | None of the securities reflected in the table were internally fair valued at March 31, 2017. The investments that are categorized as Level 3 were valued utilizing third party pricing information without adjustment. All transfers are deemed to occur at the end of period. Transfers between Level 2 and Level 3 were due to a decrease in trading activities at period end.
Nonconsolidated VIEs 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 has determined that the investment management fees it receives for serving 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 and amounts that are customarily present in arrangements for similar services negotiated at arm's length. The Company has interests in certain other 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 these entities does not provide the Company with the power to direct the activities that most significantly impact the entities economic performance. At March 31, 2017, the carrying value and maximum risk of loss related to the Company's interest in these VIEs was $9.6 million.

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