Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The three broad levels of fair value hierarchy are as follows:

• Level 1 – Quoted prices in active markets are available for identical assets or liabilities as of the reported date.


•	Level 2 – Quoted prices in markets that are not active or other pricing inputs that are either directly or indirectly observable as of the reported date.


•	Level 3 – Prices or valuation techniques that are both significant to the fair value measurement and unobservable as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Valuation of our financial instruments by pricing observability levels as of June 30, 2015 and December 31, 2014 was as follows (in thousands):



	Level 1		Level 2		Level 3		Total
June 30, 2015:
Money markets	$	254,133	$	—	$	—	$	254,133
U.S. Treasury Bills	—		459,007		—		459,007
Available-for-sale
Equity securities	5,527		—		—		5,527
Fixed income securities	298		—		—		298
Trading
Equity securities	331,417		22,703		124		354,244
Fixed income securities	178,203		2,721		—		180,924
Long exchange-traded options	7,935		—		—		7,935
Derivatives	2,347		12,222		—		14,569
Private equity	15,177		—		50,730		65,907
Total assets measured at fair value	$	795,037	$	496,653	$	50,854	$	1,342,544

Securities sold not yet purchased
Short equities – corporate	$	20,642	$	—	$	—	$	20,642
Short exchange-traded options	1,907		—		—		1,907
Derivatives	168		10,447		—		10,615
Contingent payment arrangements	—		—		42,032		42,032
Total liabilities measured at fair value	$	22,717	$	10,447	$	42,032	$	75,196

December 31, 2014:
Money markets	$	89,566	$	—	$	—	$	89,566
U.S. Treasury Bills	—		444,152		—		444,152
Available-for-sale
Equity securities	5,951		—		—		5,951
Fixed income securities	221		—		—		221
Trading
Equity securities	387,495		7		—		387,502
Fixed income securities	164,317		2,742		—		167,059
Long exchange-traded options	22,290		—		—		22,290
Derivatives	571		6,216		—		6,787
Private equity	12,162		—		58,926		71,088
Total assets measured at fair value	$	682,573	$	453,117	$	58,926	$	1,194,616

Securities sold not yet purchased
Short equities – corporate	$	81,784	$	—	$	—	$	81,784
Short exchange-traded options	7,118		—		—		7,118
Derivatives	2,438		6,954		—		9,392
Contingent payment arrangements	—		—		42,436		42,436
Total liabilities measured at fair value	$	91,340	$	6,954	$	42,436	$	140,730

We provide below a description of the fair value methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:


•	Money markets: We invest excess cash in various money market funds that are valued based on quoted prices in active markets; these are included in Level 1 of the valuation hierarchy.


•	Treasury Bills: We hold U.S. Treasury Bills, which are primarily segregated in a special reserve bank custody account as required by Rule 15c3-3 of the Exchange Act. These securities are valued based on quoted yields in secondary markets and are included in Level 2 of the valuation hierarchy.

•

Equity and fixed income securities: Our equity and fixed income securities consist principally of company-sponsored mutual funds with net asset values and various separately-managed portfolios consisting primarily of equity and fixed income securities with quoted prices in active markets, which are included in Level 1 of the valuation hierarchy. In addition, some securities are valued based on observable inputs from recognized pricing vendors, which are included in Level 2 of the valuation hierarchy.


•	Derivatives: We hold exchange-traded futures with counterparties that are included in Level 1 of the valuation hierarchy. In addition, we also hold currency forward contracts, interest rate swaps, credit default swaps, option swaps and total return swaps with counterparties that are included in Level 2 of the valuation hierarchy.

• Options: We hold long exchange-traded options that are included in Level 1 of the valuation hierarchy.

•

Private equity: Generally, the valuation of private equity investments owned by our consolidated venture capital fund or by us directly (regarding an investment in a private equity fund focused exclusively on the energy sector) requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. Private equity investments are valued initially at cost. The carrying values of private equity investments are adjusted either up or down from cost to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing review in accordance with our valuation policies and procedures. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation, including current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlooks, and the third party financing environment over time. In determining valuation adjustments resulting from the investment review process, particular emphasis is placed on current company performance and market conditions. For these reasons, which make the fair value of private equity investments unobservable, equity investments are included in Level 3 of the valuation hierarchy. We also invest in a third-party venture capital fund in which fair value is based on our capital account balance provided by the partnership and is included in Level 3 of the valuation hierarchy. If private equity investments owned by our consolidated venture capital fund become publicly traded, they are included in Level 1 of the valuation hierarchy. Also, if they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy until the trading restrictions expire. During the first quarter of 2015, $26,000 was transferred from a Level 3 classification to a Level 1 classification.


•	Securities sold not yet purchased: Securities sold not yet purchased, primarily reflecting short positions in equities and exchange-traded options, are included in Level 1 of the valuation hierarchy.

•

Contingent payment arrangements: Contingent payment arrangements relate to contingent payment liabilities associated with acquisitions in 2010, 2013 and 2014. At each reporting date, we estimate the fair values of the contingent consideration expected to be paid based upon probability-weighted AUM and revenue projections, using unobservable market data inputs, which are included in Level 3 of the valuation hierarchy.

The change in carrying value associated with private equity and trading equity securities Level 3 financial instruments carried at fair value is as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)

Balance as of beginning of period	$	58,841		$	50,744		$	58,926		$	52,081
Transfer out	—			—			(26		)	—
Purchases	76			2,320			198			2,821
Sales	(18,042		)	—			(18,042		)	(1,121		)
Realized gains (losses), net	10,114			(400		)	4,920			721
Unrealized (losses) gains, net	(135		)	342			4,878			(1,496		)
Balance as of end of period	$	50,854		$	53,006		$	50,854		$	53,006

Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. Realized and unrealized gains and losses on Level 3 financial instruments are recorded in investment gains and losses in the condensed consolidated statements of income. Approximately one-third of the Level 3 investments are private equity investments owned by our consolidated venture capital fund, of which we own 10% and non-controlling interests own 90%.

Quantitative information about private equity Level 3 fair value measurements as of June 30, 2015 and December 31, 2014 is as follows:



	Fair value as of June 30, 2015		Valuation Technique	Unobservable Input	Range
	(in thousands)
Private Equity:
Technology, Media and Telecommunications	$	12,447	Market comparable companies	Revenue multiple	1.8 - 2.7
			Pending acquisition	Marketability discount	30	%

Also, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $7.5 million) that is classified as Level 3. This investment’s valuation is based on a market approach, considering recent transactions of the fund and the industry.



	Fair value as of December 31, 2014		Valuation Technique	Unobservable Input	Range
	(in thousands)
Private Equity:
Technology, Media and Telecommunications	$	20,112	Market comparable companies	Revenue multiple	2.0 - 3.5
				Discount rate	18	%
				Discount years	2.0 years

In addition, as of December 31, 2014, there are two investments (with a combined fair value of $0.2 million) in the Healthcare and Clean-tech category that are classified as Level 3. The first investment is valued based on liquidation value and the second investment is a warrant valued using the Black-Scholes option valuation model. Also, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $7.5 million) that is classified as Level 3. This investment’s valuation is based on a market approach, considering recent transactions of the fund and the industry.

The significant unobservable inputs used in the fair value measurement of the reporting entities’ venture capital securities in the Technology, Media and Telecommunications areas are enterprise value to revenue multiples and a discount to account for liquidity and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount would result in a significantly lower (higher) fair value measurement.

One of our private equity investments is a venture capital fund (fair value of $30.6 million and unfunded commitment of $2.9 million as of June 30, 2015) that invests in communications, consumer, digital media, healthcare and information technology markets. In addition, one of the investments included in our consolidated private equity fund (fair value of $0.1 million and no unfunded commitment as of June 30, 2015) is a venture capital fund investing in clean energy, resource and energy efficiency and other sustainable industries. The fair value of each of these investments has been estimated using the capital account balances provided by the partnerships. The interests in these partnerships cannot be redeemed.

The change in carrying value associated with contingent payment arrangements Level 3 financial instruments carried at fair value is as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
	(in thousands)

Balance as of beginning of period	$	42,223		$	37,688	$	42,436		$	38,205
Addition	—			8,915		—			8,915
Accretion	442			321		885			642
Payments	(633		)	—		(1,289		)	(838		)
Balance as of end of period	$	42,032		$	46,924	$	42,032		$	46,924

Quantitative information about contingent payment arrangements Level 3 fair value measurements as of June 30, 2015 and December 31, 2014 is as follows:

Our three acquisition-related contingent consideration liabilities (with a combined fair value of $42.0 million as of June 30, 2015 and $42.4 million as of December 31, 2014) currently are valued using projected AUM growth rates with a weighted average of 46%, revenue growth rates with a weighted average of 71%, and discount rates ranging between 3% (when using a cost of debt assumption) and 18% (when using a cost of capital assumption).

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We did not have any material assets or liabilities that were measured at fair value for impairment on a nonrecurring basis during the six months ended June 30, 2015 or during the year ended December 31, 2014.