Investments

Merchant Banking Funds

In December 2009, the Company sold certain assets related to the merchant banking business, including the right to raise subsequent merchant banking funds and a 24% ownership interest in GCP II LLC, to GCP Capital Partners Holdings LLC (“GCP Capital”), an entity not controlled by the Company. The Company retained a 76% interest in GCP II LLC. Under the terms of the separation agreement, the general partners of the merchant banking funds delegated to GCP II LLC their obligation to manage and administer the affiliated funds during a transition period, which ended on December 31, 2010. Effective January 1, 2011, the Company no longer managed the merchant banking funds.

As consideration for the sale of the merchant banking business, the Company received 289,050 shares of its common stock with a value of $24.4 million. The Company recognized a gain of $21.8 million in 2009 and deferred $2.6 million of the gain on the sale related to non-compete and trademark licensing agreements, which is amortizing over a five year period ending in 2014. For the years ended December 31, 2012, 2011 and 2010, deferred gains of $0.3 million, $0.8 million and $1.1 million were recognized, respectively.

During 2010, the Company recorded the revenues and expenses related to management of the merchant banking funds in its consolidated results. However, during that period, GCP Capital had a preferred economic interest in the first $10.0 million of profits of GCP II LLC and accordingly, the excess of management fee revenue over amounts incurred for compensation and other operating expenses during 2010 that accrued to the benefit of GCP Capital is presented as noncontrolling interest expense, which reduced net income allocated to common stockholders.

Prior to 2011, the Company’s management fee income consisted of fees paid by the merchant banking funds and other transaction fees paid by the portfolio companies. Effective January 1, 2011, the Company no longer receives any management fees and it delegated the management of the merchant banking funds to GCP Capital.

In 2011, the Company sold substantially all of its capital interests in GCP II and its affiliated funds to certain unaffiliated third parties and certain principals of GCP Capital for an aggregate purchase price of $44.8 million, which represented the Company’s carrying value of such capital interests. The transaction agreement provided that the purchasers had the right, exercisable 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 Options 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 were accounted for as secured borrowings in accordance with accounting guidance for financial asset transfers.

At December 31, 2011, in accordance with that guidance, the Company recorded these capital interests subject to the Put Options as a component of investments in merchant banking funds on the consolidated statements of financial condition and recognized its proportional share of earnings or loss related to the capital interests subject to the Put Options on the consolidated statement of income. The Company also recorded a corresponding liability for the consideration received, which was included as a financing liability on the consolidated statement of financial condition. For the years ended December 31, 2012 and 2011, the Company recorded losses related to the capital interests subject to the Put Options of $2.0 million and $3.8 million, respectively, which has been included as a component of investment revenues on the consolidated statements of income. In December 2012, substantially all of the purchasers of the Put Options exercised their rights to have the Company repurchase their interests, which was paid prior to year end. No gain or loss was recognized upon exercise of the Put Options. At December 31, 2012, the investment in GCP II recorded on the consolidated statement of financial condition included the estimated fair value of the capital interests of $9.7 million acquired upon exercise of the Put Options.

Additionally, in 2011, the Company sold all of its capital interests in GSAVP and its affiliated funds to an unaffiliated third party for a purchase price of $4.6 million, which represented the Company’s carrying value of such capital interests. 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 GCP Europe to GCP Capital. Further, in conjunction with the sale of its capital interests in GSAVP and its affiliated funds, ownership of the general partner of GSAVP was transferred to an unaffiliated third party.

In 2012, the Company continued the liquidation of its previously sponsored merchant banking funds with the sale of our entire interest in GCP Europe for proceeds of $27.2 million, which represented approximately 90% of book value. The Company recognized a loss of $3.4 million as result of this sale.

As of December 31, 2012, the Company continues to retain control only of the general partner of GCP I and GCP II and consolidates the results of each such general partner.

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 the merchant banking funds at the time certain performance hurdles are achieved. The Company did not recognize any profit overrides for the years ended December 31, 2012 or 2011. For the year ended December 31, 2010, the Company recognized $0.2 million of profit overrides.

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



	As of December 31,
	2012		2011
	(in thousands)
Investment in GCP II	$	11,173	$	1,609
Investment in GCP II subject to Put Options	—		10,520
Investment in GCP III	1,367		903
Investment in GCP Europe	—		23,951
Investment in GCP I	2,247		2,552
Investment in other merchant banking funds	1,985		2,107
Total investments in merchant banking funds	$	16,772	$	41,642

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

Investments in other merchant banking funds includes the Company's investment in Barrow Street III, a real estate investment fund, which we committed $5.0 million to in 2005. At December 31, 2012, $0.1 million of the Company's commitment remains unfunded and may be drawn any time prior to the expiration of the fund in 2013.

During 2010, the excess of GCP II LLC and GCP Europe’s management fee revenue over the amounts incurred for compensation and other operating expenses, of $4.9 million, accrued to the benefit of GCP Capital, is presented as net income allocated to noncontrolling interest. During 2011 and 2010, the Company made distributions, inclusive of a working capital adjustment, of $1.0 million and $4.2 million, respectively, to GCP Capital. There were no distributions to GCP Capital during 2012.

Approximately $0.3 million of the Company’s compensation payable related to profit overrides for unrealized gains of the merchant banking funds at December 31, 2012 and 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.

The Company committed $5.0 million to GCP III, of which $3.4 million in total remains unfunded at December 31, 2012. The unfunded amount may be drawn through November 2016. Thereafter, up to 15% of the commitment amount, to the extent not yet funded, may be drawn for follow-on investments.

Other Investments

The Company has other investments including investments in Iridium and certain deferred compensation plan investments related to Greenhill Australia. The Company’s other investments are as follows:



	As of December 31,
	2012		2011
	(in thousands)
Iridium common stock	$	34,165	$	68,881
Deferred compensation plan investments	50		2,338
Total other investments	$	34,215	$	71,219

Iridium

At December 31, 2012, the Company owned 5,084,016 shares of Iridium common stock (NASDAQ:IRDM) with a quoted market price of $6.72 and had fully diluted share ownership in Iridium of approximately 7%. In 2011, the Company tendered 4,000,000 Iridium $11.50 Warrants in exchange for 880,000 shares of Iridium common stock. At December 31, 2011, the Company owned 8,934,016 shares of Iridium common stock and had a fully diluted ownership of approximately 12%.

In October 2011, the Company initiated a plan to sell its interest in Iridium over a period of approximately two years. In 2012, the Company sold 3,850,000 shares of Iridium pursuant to such plan at an average price per share of $7.91. In 2011, the Company sold 870,000 shares of Iridium at an average price per share of $6.72.

At December 31, 2012 and 2011, the carrying value of the investment in Iridium common stock was valued at its closing quoted market price. 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.

Deferred compensation plan investments

In connection with 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 Australia over a period ending in 2016. The invested assets relating to this plan have been recorded on the consolidated statements 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 consolidated statements of financial condition as a component of compensation payable. Subsequent to the Acquisition, the Company discontinued future participation in the plan. See “Note 3 — Acquisition”.

Investment revenues

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



	For the Years Ended December 31,
	2012			2011			2010
	(in thousands)
Management fees	$	—		$	—		$	12,857
Net realized and unrealized gains (losses) on investments in merchant banking funds	(3,422		)	(4,534		)	6,742
Net realized and unrealized gains (losses) on investment in Iridium	(4,980		)	(6,184		)	5,044
Net realized and unrealized merchant banking profit overrides	—			—			188
Other realized and unrealized investment income	—			—			(250		)
Sale of certain merchant banking assets	260			811			1,100
Interest income	1,676			1,067			447
Total investment revenues	$	(6,466	)	$	(8,840	)	$	26,128

Fair Value Hierarchy

The following tables set forth by level, 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. There were no transfers between Level 1 and Level 2 investments in the fair value measurement hierarchy during the years ended December 31, 2012 or 2011.

Assets Measured at Fair Value on a Recurring Basis as of December 31, 2012



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		December 31, 2012
	(in thousands)
Assets
Iridium common stock	$	34,165	$	—	$	—	$	34,165
Deferred compensation plan investments	—		50		—		50
Total investments	$	34,165	$	50	$	—	$	34,215

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)		December 31, 2011
	(in thousands)
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

There were no Level 3 investments during the year ended December 31, 2012.

In June 2011, the Company exchanged the Iridium $11.50 Warrants for shares of Iridium common stock. The Iridum $11.50 Warrants were classified as a Level 3 investments and valued under Black Scholes modeling. Selected inputs for the Company’s model include: (i) the terms of the warrants, including exercise price, exercisability threshold and expiration date; and (ii) externally observable factors including the trading price of Iridium shares, yields on U.S. Treasury obligation and various equity volatility measures, including historical volatility of broad market indices. Upon exchange, the shares are 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 year ended December 31, 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 December 31, 2011
	(in thousands)
Assets
Iridium $11.50 Warrants	$	7,280	$	—	$	680	$	—	$	(7,960	)	$	—
Total investments	$	7,280	$	—	$	680	$	—	$	(7,960	)	$	—