Note 3 — Investments

Merchant Banking Funds

In June 2011, the Company sold substantially all of its capital interests in Greenhill Capital Partners II (“GCP II”) and its affiliated funds to certain unaffiliated third parties and certain principals of GCP Capital Partners Holdings LLC (‘GCP Capital”) for an aggregate purchase price of $44.8 million, which represented the Company’s carrying value of such capital interest as of March 31, 2011. The transaction agreement provided that the purchasers have the right, exercisable only in December 2012, to cause the Company to repurchase each of the capital account interests attributable to two specified portfolio companies of GCP II at a specified aggregate price of $14.3 million, subject to adjustments for distributions or capital calls (the “Put Options”). In June 2012 the purchasers funded a capital call of $1.3 million related to one of the specified portfolio companies, increasing in aggregate the Put Option to $15.6 million. The transfer of the GCP II capital interests, which were not associated with the Put Options, was accounted for as a sale in accordance with accounting guidance for financial asset transfers. The GCP II capital account interests associated with the Put Options did not meet the requirements of sale accounting and therefore have been accounted for as secured borrowings in accordance with accounting guidance for financial asset transfers. In accordance with that guidance, the Company continues to record these capital interests subject to the Put Options as a component of investments in merchant banking funds on the condensed consolidated statements of financial condition and will recognize its proportional share of earnings or loss related to the capital interests subject to the Put Options on the condensed consolidated statements of income. The Company also recorded a corresponding liability for the consideration received, which has been included as a financing liability on the condensed consolidated statements of financial condition. For the three and six months ended June 30, 2012 the Company recorded a $0.2 million gain and a $0.7 million loss, respectively related to the capital interests subject to the Put Options which is included in investment revenues on the condensed consolidated statements of income.

Additionally, in June 2011, the Company sold substantially all of its capital interests in Greenhill SAV Partners (“GSAVP”) and its affiliated funds to an unaffiliated third party for a purchase price of $3.7 million, which represented the Company’s carrying value of such capital interests as of March 31, 2011. The transfer of all the capital interests related to GSAVP has been accounted for as a sale in accordance with accounting guidance for financial asset transfers.

Prior to 2011, the Company was the general partner of certain merchant banking funds. In addition to recording its direct investments in the affiliated funds, the Company consolidated each general partner which it controlled. In conjunction with the sale of the merchant banking business effective in 2011, the Company transferred ownership of the general partner of Greenhill Capital Partners Europe (“GCP Europe”) to GCP Capital. Further, in conjunction with the sale of its capital interests in GSAVP and its affiliated funds in 2011, ownership of the general partner of GSAVP was transferred to an unaffiliated third party. As of June 30, 2012, the Company continues to retain control only of the general partner of Greenhill Capital Partners I and GCP II and consolidates the results of each such general partner.

Investment gains or losses from merchant banking and other investment activities are comprised of investment income, realized and unrealized gains or losses from the Company’s investment in merchant banking funds, Iridium and certain other investments, and the consolidated earnings of the general partner in which it has control, offset by allocated expenses of the funds. That portion of the earnings or losses of the general partner which is held by employees and former employees of the Company is recorded as net income allocated to noncontrolling interests.

The Company controls investment decisions for those merchant banking funds where it acts as general partner and is entitled to receive from those funds a portion of the override of the profits realized from investments. The Company recognizes profit overrides related to certain merchant banking funds at the time certain performance hurdles are achieved.

The carrying value of the Company’s investments in merchant banking funds are as follows:


	As of June 30,		As of December 31,
	2012		2011
	(in thousands, unaudited)		(in thousands, audited)
Investment in GCP Europe	$	32,022	$	23,951
Investment in GCP II		1,491		1,609
Investment in GCP II subject to Put Options		11,127		10,520
Investment in other merchant banking funds		3,616		3,455

Total investments in merchant banking funds	$	48,256	$	39,535

The Company’s investment in other merchant banking funds are principally comprised of investments in GCP I and Greenhill Capital Partners III.

The investment in GCP I included $0.3 million at both June 30, 2012 and December 31, 2011 related to the noncontrolling interests in the managing general partner of GCP I held directly by the limited partners of its general partner. The investment in GCP II included $1.1 million at both June 30, 2012 and December 31, 2011 related to the noncontrolling interests in the general partner of GCP II.

Approximately $0.3 million of the Company’s compensation payable related to profit overrides for unrealized gains of GCP I at both June 30, 2012 and December 31, 2011. This amount may increase or decrease depending on the change in the fair value of GCP I, and is payable, subject to clawback, at the time cash proceeds are realized.

At June 30, 2012, the Company had unfunded commitments to merchant banking funds of $9.5 million, which included unfunded commitments to GCP Europe of $6.4 million (or £4.1 million) and GCP III of $3.1 million, which may be drawn through December 2012 and November 2015, respectively. For each of the funds, up to 15% of the commitment amount may be drawn for follow-on investments over the two year period after the expiration of the commitment period. Effective June 2012, the commitment period for GCP II expired.

Other Investments

The Company has other investments including investments in Iridium, Barrow Street Capital III, LLC (“Barrow Street III”) and certain deferred compensation plan investments. The Company’s other investments are as follows:


	As of June 30,		As of December 31,
	2012		2011
	(in thousands, unaudited)		(in thousands, audited)
Iridium Common Stock	$	62,035	$	68,881
Barrow Street III		1,806		2,107
Deferred compensation plan investments		144		2,338

Total other investments	$	63,985	$	73,326

Iridium

At June 30, 2012, the Company owned 6,939,016 shares of Iridium Common Stock (NASDAQ:IRDM) and had a fully diluted share ownership in Iridium of approximately 9%. At December 31, 2011, the Company owned 8,934,016 shares of Iridium Common Stock and had fully diluted share ownership in Iridium of approximately 12%. The Company’s investment in Iridium is accounted for as a trading security as the Company does not maintain or exercise significant influence over Iridium. At June 30, 2012 and December 31, 2011 the Company’s investment in Iridium was valued at its closing quoted market price.

Barrow Street Capital III

In 2005, the Company committed $5.0 million to Barrow Street III, a real estate investment fund, of which $0.1 million remains unfunded at June 30, 2012. The unfunded amount may be called at any time prior to the expiration of the fund in 2013 to preserve or enhance the value of existing investments.

Other Investments

In connection with the acquisition of Greenhill Caliburn in April 2010 (the “Acquisition”), the Company assumed amounts due under Caliburn’s deferred compensation plan. Under this plan a portion of certain employees’ compensation was deferred and invested in cash, or at the election of each respective employee, in certain mutual fund investments. These investments will be distributed to those employees of Greenhill Caliburn over a period ending in 2016. The invested assets relating to this plan have been recorded on the condensed consolidated statement of financial condition as components of both cash and cash equivalents and other investments. The deferred compensation liability relating to the plan has been recorded on the condensed consolidated statement of financial condition as component of compensation payable. Subsequent to the Acquisition, the Company discontinued future participation in the plan.

Investment revenues

The Company’s investment revenues, by source, are as follows:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2012		2011		2012		2011
	(in thousands, unaudited)
Net realized and unrealized gains (losses) on investments in merchant banking funds	$	388	$	(887)	$	1,092	$	813
Net realized and unrealized gain on investment in Iridium		1,372		5,618		9,674		3,443
Deferred gain on sale of certain merchant banking assets		65		203		129		406
Interest income		345		254		709		385

Total investment revenues	$	2,170	$	5,188	$	11,604	$	5,047

Fair Value Hierarchy

The following tables set forth, by level, the assets and liabilities measured at fair value on a recurring basis. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Assets Measured at Fair Value on a Recurring Basis as of June 30, 2012


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of June 30, 2012
	(in thousands, unaudited)
Assets
Iridium Common Stock	$	62,035	$	—	$	—	$	62,035
Deferred compensation plan investments		—		144		—		144

Total investments	$	62,035	$	144	$	—	$	62,179

Assets Measured at Fair Value on a Recurring Basis as of December 31, 2011


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
	(in thousands, audited)
Assets
Iridium Common Stock	$	68,881	$	—	$	—	$	68,881
Deferred compensation plan investments		—		2,338		—		2,338

Total investments	$	68,881	$	2,338	$	—	$	71,219

Level 3 Gains and Losses

The Company did not hold any Level 3 investments during the six months ended June 30, 2012.

Prior to June 2011, in addition to shares of Iridium Common Stock, the Company also owned warrants to purchase 4,000,000 additional shares of Iridium Common Stock at $11.50 per share (“Iridium $11.50 Warrants”). Effective June 22, 2011, the Company participated in Iridium’s tender offer to exchange the Iridium $11.50 Warrants, which permitted any holder of such warrants to receive one common share of Iridium Common Stock for every 4.55 warrants tendered. The Company tendered 4,000,000 Iridium $11.50 Warrants in exchange for 880,000 shares of Iridium Common Stock. The Iridium $11.50 Warrants were historically valued using an internally developed model and classified as a Level 3 investment. Upon exchange, the shares were valued using quoted market prices and classified as a Level 1 investment.

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the three months ended June 30, 2011.


	Beginning Balance April 1, 2011		Realized Gains or (Losses)		Unrealized Gains or (Losses)		Purchases, Sales, Other Settlements and Issuances, net		Net Transfers in and/or out of Level 3		Ending Balance June 30, 2011
	(in thousands, unaudited)
Assets
Iridium $11.50 Warrants	$	7,960	$	–	$	–	$	–	$	(7,960)	$	–

Total Level 3 investments	$	7,960	$	–	$	–	$	–	$	(7,960)	$	–

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the six months ended June 30, 2011.


	Beginning Balance January 1, 2011		Realized Gains or (Losses)		Unrealized Gains or (Losses)		Purchases, Sales, Other Settlements and Issuances, net		Net Transfers in and/or out of Level 3		Ending Balance June 30, 2011
	(in thousands, unaudited)
Assets
Iridium $11.50 Warrants	$	7,280	$	–	$	680	$	–	$	(7,960)	$	–

Total Level 3 investments	$	7,280	$	–	$	680	$	–	$	(7,960)	$	–