10-K 1 cifc123115.htm 10-K 10-K
 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             
 
Commission file number: 1-37674 (CIFC LLC)
Commission file number: 1-32551 (CIFC Corp.)

CIFC LLC
CIFC CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)Delaware
(State or other jurisdiction of incorporation or organization)
 

36-4814372
 (I.R.S. Employer Identification No.)
 20-2008622
 (I.R.S. Employer Identification No.)

 
 
 
250 Park Avenue, 4th Floor, New York, NY
 (Address of principal executive offices)
 
10177
 (Zip code)
 
Registrant’s telephone number, including area code: 212-624-1200
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each class:
 
Name of Exchange on Which Registered:
Common Shares, representing limited liability company interests in CIFC LLC
 
NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
                           Large accelerated filer o
 
                               Accelerated filer o
 
 
 
                           Non-accelerated filer o
 
                               Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
This combined form 10-K is separately filed by (i) CIFC LLC and (ii) CIFC Corp. This combined Form 10-K meets the conditions set forth in general instruction I(1) (a) and (b) of Form 10-K and the registrants are, therefore, filing this form with the reduced disclosure format permitted by such instruction. The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price of the registrant’s common stock on June 30, 2015 as reported on NASDAQ was approximately $47.7 million
The number of CIFC LLC's voting Common Shares outstanding as of February 29, 2016 was approximately 25,414,757.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of CIFC LLC's definitive proxy statement for its 2016 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III. CIFC LLC’s definitive proxy statement will be filed with the U.S. Securities and Exchange Commission (the “SEC”) within 120 days of the registrant’s fiscal year ended December 31, 2015.
 

1


EXPLANATORY NOTE
 
On December 31, 2015, pursuant to the Agreement and Plan of Merger, dated November 11, 2015 (the “Merger Agreement”), by and among CIFC LLC, a Delaware limited liability company (“CIFC LLC”), CIFC Corp., a Delaware corporation, and CIFC Merger Corp., a Delaware corporation and wholly-owned subsidiary of CIFC LLC (“Merger Corp.”), Merger Corp. merged with and into CIFC Corp. with CIFC Corp. as the surviving entity (the “Merger”) and as a wholly-owned subsidiary of CIFC LLC (the Merger and related transactions, the “Reorganization Transaction”). Entry into the Merger Agreement was previously announced by CIFC Corp. on its quarterly report on Form 10-Q filed with the SEC on November 16, 2015. CIFC LLC had not commenced operations and had no assets or liabilities until the effective time of the Merger at 11:59pm on December 31, 2015.
     CIFC LLC filed a current report on Form 8-K on January 5, 2016 (the “January Form 8-K”) for the purpose of establishing CIFC LLC as the successor issuer pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and to disclose certain related matters, including the consummation of the Reorganization Transaction. Pursuant to Rule 12g-3(a) under the Exchange Act and in accordance with the filing of the January Form 8-K, the shares representing limited liability company interests in CIFC LLC, as the successor issuer to CIFC Corp., were deemed registered under Section 12(b) of the Exchange Act. References to CIFC Corp. in this Annual Report on Form 10-K that include any period at and after the effectiveness of the Reorganization Transaction shall be deemed to refer to CIFC LLC. For more information concerning the effects of the Reorganization Transaction and the succession of CIFC LLC to CIFC Corp. upon its effectiveness, please see the January 5, 2016 Form 8-K.


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CIFC LLC
CIFC Corp.

2015 ANNUAL REPORT ON FORM 10-K

INDEX

 
 
Page
 
 
 
 



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this annual report on Form 10-K (the "Annual Report"), and the information incorporated by reference into this Annual Report are forward-looking statements, as permitted by the Private Securities Litigation Reform Act of 1995. These include, but are not limited to, statements regarding future results or expectations. Forward-looking statements can be identified by forward-looking language, including words such as "believes," "anticipates," "expects," "estimates," "intends," "may," "plans," "projects," "will" and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made, various operating assumptions and predictions as to future facts and conditions, which may be difficult to accurately make and involve the assessment of events beyond our control. Caution must be exercised in relying on forward-looking statements. Our actual results may differ materially from the forward-looking statements contained in this Annual Report. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in this report, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission, which are accessible on the SEC’s website at www.sec.gov.

The forward-looking statements contained in this Annual Report are made as of the date hereof, and we do not undertake any obligation to update any forward-looking statement to reflect subsequent events, new information or circumstances arising after the date of this Annual Report. All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referenced above. In addition, it is our policy generally not to make any specific projections as to future earnings, and we do not endorse any projections regarding future performance that may be made by third parties.






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PART I. Financial Information
Item 1. Business
Overview
CIFC LLC (together with its subsidiaries, including CIFC Corp., "CIFC", the "Company," “we” or "us") is a Delaware limited liability company headquartered in New York City. We are a private debt manager specializing in secured U.S. corporate loan strategies. Our primary business is to provide investment management services for institutional investors, including pension funds, hedge funds, asset management firms, banks, insurance companies and other types of investors around the world.
Fee Earning Assets Under Management (“Fee Earning AUM” or “AUM”) refers to principal balance, net asset value or value of assets managed by us on which we earn management and/or incentive fees. Our AUM is primarily comprised of Collateralized Loan Obligations ("CLOs"). In addition, we manage credit funds and other loan-based products (together, "Non-CLO products" and together with CLOs, "Funds"). We manage these credit products through opportunistic investment strategies where we seek to generate current income and/or capital appreciation, primarily through senior secured corporate loan investments (“SSCLs”) and, to a lesser extent, other investments. We also manage Collateralized Debt Obligations (“CDOs”), which we do not expect to issue in the future.

We have three primary sources of revenue: management fees, incentive fees and investment income. Management fees are generally based on a percentage of AUM of the Funds. Incentive fees are earned based on the performance of the Funds. Investment income represents interest income and realized/unrealized gains and losses on investments in the products sponsored by us and third parties.

Recent Developments

Reorganization Transaction

On December 31, 2015, CIFC completed a series of transactions to change our top-level form of organization from a corporation to a limited liability company that is taxed as a partnership rather than a corporation for U.S. Federal income tax purposes and allows us to minimize entity-level taxation on investment income. These tax efficiencies may enable us to increase distributions to shareholders and/or investment in our business. As part of the Reorganization Transaction, CIFC Corp. distributed ownership of certain of its subsidiary entities holding certain investment assets to CIFC LLC and retained non-voting Series A Preferred Units ("Preferred Units") issued by certain wholly-owned subsidiaries of CIFC LLC ("Item 8—Financial Statements and Supplementary Data"—Note 16).

Each share of common stock of CIFC Corp. outstanding immediately prior to the Reorganization Transaction was converted into the right to receive one common share representing a limited liability company interest in CIFC LLC. Further, CIFC LLC assumed all obligations under the CIFC Corp. 2011 Stock Option and Incentive Plan (the "Stock Incentive Plan"). All the terms and conditions that were in effect immediately prior to the Reorganization Transaction under each outstanding equity award assumed by CIFC LLC will continue in full force and effect after the Reorganization Transaction, except that the interests issuable under each such award will be common shares of CIFC LLC instead of common stock of CIFC Corp.  
CIFC Corp. remains the issuer and primary obligor of our Junior Subordinated Notes and the Senior Notes (see below). Further, CIFC LLC and certain other subsidiaries of CIFC LLC have provided full and unconditional guarantees of the obligations of CIFC Corp. under the Junior Subordinated Notes and the Senior Notes.



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Historical Transactions
On November 2, 2015, CIFC Corp. issued $40.0 million aggregate principal amount of unsecured senior notes (the "Senior Notes") due October 30, 2025 and bearing interest at 8.5% per annum ("Item 8—Financial Statements and Supplementary Data"—Notes 11 and 18). We intend to use the proceeds from the offering, together with available cash and investments, to comply with new rules promulgated under the Dodd-Frank Act (requiring the “securitizer” of asset-backed securities to retain a portion of the credit risk of the assets collateralizing the asset-backed securities) ("Risk Retention") and for general corporate purposes, including possible acquisitions.
In 2013, DFR Holdings LLC ("DFR Holdings") purchased 10,090,909 shares of our outstanding common stock and 2,000,000 warrants. In 2014, DFR Holdings converted $25.0 million aggregate principal amount of convertible notes into 4,132,231 common shares. As of December 31, 2015, DFR Holdings owned approximately 18.8 million of our common shares, which is approximately 74% of our outstanding shares (approximately 70% on a fully diluted basis).
Core Asset Management Activities
We establish and manage investment products for various types of investors, including pension funds, hedge funds, other asset management firms, banks, insurance companies and other types of institutional investors located around the world. We earn management and incentive fees from our investment products as follows:

CLOs—For additional information on the structure of a CLO see below—Collateralized Loan Obligations for further details. The management fees and, in certain cases, incentive fees paid to us by these investment products are our primary sources of revenue. Management fees are generally paid on a quarterly basis for as long as we manage the products and typically consist of senior and subordinated management fees based on the principal balance or value of the assets held in the investment product. In certain cases, incentive fees may be paid to us based on the returns generated for certain investors.
 
In general, management and incentive fees paid from CLOs are as follows (before fee sharing arrangements, if any):
 
Senior management fees (payable before the interest payable on the debt securities issued by such CLOs) that generally range from 15 to 20 basis points annually on the principal balance of the underlying collateral of such CLOs.

Subordinated management fees (payable after the interest payable on the debt securities issued by such CLOs and certain other expenses) that generally range from 20 to 35 basis points annually on the principal balance of the underlying collateral of such CLOs.

Incentive fees varies based on the terms of each CLO and is generally paid after certain investors’ returns exceed an internal rate of return hurdle. Upon achievement of this hurdle, the manager is paid a percentage (generally 20%) of residual cash flows in excess of the hurdle.

Non-CLO products—We also earn management fees based on AUM and in certain cases incentive fees on our Non-CLO products, which differ from product to product.
 
CDOs—Management fees on the CDOs we manage also differ from product to product, but in general consist of a senior management fee (payable before the interest payable on the debt securities issued by such CDOs) that ranges from 5 to 25 basis points annually on the principal balance of the underlying collateral of such CDOs, and a subordinated management fee (payable after the interest payable on the debt securities issued by such CDOs and certain other expenses) that ranges from 5 to 35 basis points annually on the principal balance of the underlying collateral of such CDOs. Only a limited number of the CDOs we manage pay subordinated management fees. We do not expect to issue additional CDOs in the future.

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Collateralized Loan Obligations

The term CLO (which for purposes of this section also includes the term CDO unless otherwise noted) generally refers to a special purpose vehicle that owns a portfolio of investments (SSCLs in the case of CLOs and typically asset-backed or other similar securities in the case of CDOs) and issues various tranches of debt and subordinated note securities (further described below) to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s maximum exposure to any single industry or obligor and limit the ratings of the CLO’s assets. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available. As each CLO’s investments are pledged to the holder of the debt securities (further described below) in such CLO, the investments are also sometimes referred to herein as "collateral."
 
CLOs typically issue multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of investments. These securities receive interest and principal payments from the CLO in accordance with an agreed upon priority of payments, commonly referred to as a “waterfall.” While the CLOs themselves, not us, issue these securities, in accordance with standard practice in our industry, we sometimes refer to "CIFC" or "we" as issuing CLOs and/or CLO securities. The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO. This tranche of notes is generally issued at a specified spread over LIBOR and normally has the first claim on the earnings of the CLO’s investments after payment of certain senior fees and expenses. The mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and also are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLO’s investments if the required interest and principal payments have been made on the more senior tranches. The most junior tranche can take the form of either subordinated notes or preference shares and is commonly referred to as the CLO’s “subordinated notes," "equity" or "residual interests." The subordinated notes generally do not have a stated coupon but are entitled to residual cash flows from the CLO’s investments after all of the other tranches of notes and certain other fees and expenses are paid. While the majority of the subordinated notes of the CLOs we manage are owned by third parties, we do own a portion of the subordinated note tranches of certain of the CLOs we manage. Our investments and beneficial interests in the Consolidated CLOs we manage was $81.8 million and $25.5 million as of December 31, 2015 and 2014, respectively. See "Item 8—Financial Statements and Supplementary Data"—Note 4 for additional details on CLOs and other Consolidated Variable Interest Entities ("VIEs" or "VIE").
 
CLOs, which are designed to serve as investments for third-party investors, generally have an investment manager to select and actively manage the underlying assets to achieve target investment performance. In exchange for these services, CLO managers typically receive three types of management fees: senior management fees, subordinated management fees and incentive fees (described above). CLOs also generally appoint a custodian, trustee and collateral administrator, who are responsible for holding the CLO’s investments, collecting investment income and distributing that income in accordance with the CLO's indenture.

Fee Earning AUM

Fee Earning AUM or AUM refers to the assets managed by us on which we received management fees and/or incentive fees. Generally, with respect to CLOs, management fees are paid to us based on the aggregate collateral balance at par plus principal cash, and with respect to Non-CLO products, the value of the assets in such funds. The following table summarizes Fee Earning AUM:
 
 
December 31, 2015
 
December 31, 2014
(in thousands, except # of Accounts) (1)(2)
 
Number of Accounts
 
Fee Earning AUM
 
Number of Accounts
 
Fee Earning AUM
Post 2011 CLOs
 
18

 
$
9,860,519

 
13

 
$
7,402,986

Legacy CLOs (3)
 
10

 
2,559,066

 
19

 
4,960,877

     Total CLOs
 
28

 
12,419,585

 
32

 
12,363,863

Credit Funds (4)
 
12

 
1,062,712

 
8

 
593,456

Other Loan-Based Products (4)
 
2

 
573,190

 
2

 
719,170

Total Non-CLOs (4)
 
14

 
1,635,902

 
10

 
1,312,626

Total Loan-Based AUM
 
42

 
14,055,487

 
42

 
13,676,489

ABS and Corporate Bond CDOs
 
8

 
592,798

 
8

 
687,555

Total Fee Earning AUM
 
50

 
$
14,648,285

 
50

 
$
14,364,044


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Explanatory Notes:
_________________________________
(1)
Fee Earning AUM attributable to ABS and Corporate Bond CDO products is expected to continue to decline as these funds run-off per their contractual terms.
(2)
Fee Earning AUM is based on the latest available monthly report issued by the trustee or fund administrator prior to the end of the period, and may not tie back to the Consolidated GAAP financial statements.
(3)
Legacy CLOs represent all managed CLOs issued prior to 2011, including CLOs acquired since 2011 but issued prior to 2011.
(4)
Management fees for Non-CLO products vary by fund and may not be similar to a CLO.

Fee Earning AUM activity is as follows:
 
 
For the Years Ended December 31,
 
 
2015
 
2014
 
 
(In thousands)
Total loan-based AUM - Beginning Balance
 
$
13,676,489

 
$
12,045,859

CLO New Issuances
 
2,599,709

 
3,249,990

CLO Paydowns
 
(2,521,645
)
 
(1,847,855
)
Net Subscriptions to Credit Funds
 
450,070

 
206,918

Net Redemptions from Other Loan-Based Products
 
(145,980
)
 
(26,625
)
Other (1)
 
(3,156
)
 
48,202

Total loan-based AUM - Ending Balance
 
14,055,487

 
13,676,489

Total CDOs - Ending Balance
 
592,798

 
687,555

Total Fee Earning AUM - Ending Balance
 
$
14,648,285

 
$
14,364,044


Explanatory Note:
_________________________________
(1)     Includes changes in collateral balances of CLOs between periods and market value or portfolio value changes in certain Non-CLO products.

Investment Approach

CIFC's investment team is led by its Co-President and Chief Investment Officer, Steve Vaccaro, who has 37 years of relevant credit experience and has been with CIFC since inception. Our investment and portfolio teams include over 30 professionals. The 10 member Investment Committee averages 24 years of corporate credit experience investing through multiple economic cycles. We have robust credit analysis and portfolio management processes, which include:

fundamental credit analysis;
rigorous underwriting discipline;
continuous credit and relative value monitoring;
internally developed risk ratings and risk assessment models in addition to ratings from credit rating agencies;
diversified investment portfolios;
on-going active portfolio management by continuously re-assessing and adjusting portfolios; and
assessing suitability of an investment considering the account's overall objectives and parameters.

Competition
We compete for asset management clients and AUM with numerous other asset managers, including those affiliated with major commercial banks, broker-dealers, other financial institutions and larger, diversified alternative asset managers. The factors considered by clients in choosing us or a competitor include the past performance of the products we manage, historical lower default rate than the industry, the background and experience of our key portfolio management personnel, our experience in managing a particular product type, our reputation in the fixed income asset management industry, our management fees and the structural features of the investment products that we offer. Some of our competitors have greater portfolio management resources than us, have managed client accounts for longer periods of time, have experience over a wider range of products than us or have other competitive advantages over us.

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Operating and Regulatory Structure
Exclusion from Regulation under the 1940 Act—We have operated, and intend to continue to operate, in such a way as to be excluded from registration under the Investment Company Act of 1940, as amended (the "1940 Act"). We and our wholly-owned subsidiaries are primarily excluded from registration under the 1940 Act because we are not engaged, and do not propose to engage, in the business of investing, reinvesting, owning, holding or trading in securities and do not own or propose to acquire "investment securities" having an aggregate value exceeding 40% of our total assets, on an unconsolidated basis, excluding cash and government securities (the "40% Test"). "Investment securities" excludes, among other things, majority-owned subsidiaries that rely on the 40% Test. Certain of our subsidiaries rely on the 40% Test or on an exemption under Section 3(c)(7) of the 1940 Act, which is for entities owned by "qualified purchasers" under and as defined in the 1940 Act.
Governmental Regulations—Each of CIFC Asset Management LLC (“CIFCAM”), Deerfield Capital Management LLC ("DCM"), CypressTree Investment Management, LLC ("CypressTree") and Columbus Nova Credit Investments Management, LLC ("CNCIM"), each an indirect wholly-owned subsidiary of CIFC, as well as certain other relying advisers (together with CIFCAM, the "Advisers") are registered, either directly or as a relying adviser, with the U.S. Securities and Exchange Commission (the "SEC") as an investment adviser. In these capacities, the Advisers are subject to various regulatory requirements and restrictions with respect to our asset management activities, periodic regulatory examinations and other laws and regulations. In addition, investment vehicles managed by the Advisers are subject to various securities and other laws. Parts 1 and 2 of the Form ADV of the Advisers are publicly available on the SEC Investment Advisers Public Disclosure website (www.adviserinfo.sec.gov) or may be provided upon request to us using the contact information below.
Employees
As of December 31, 2015, we had 82 full-time employees.
Available Information
Our principal executive offices are located at 250 Park Avenue, 4th Floor, New York, New York 10177.

We file annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. Readers may read and copy any document that CIFC files at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov.

Our website is www.cifc.com. We make available free of charge, on or through the "Our Shareholders/SEC Filings" section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC. Also posted on our website, and available in print upon request to our Compliance Department, are the charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and our Code of Ethics, which governs our directors, officers and employees. Within the time period required by the SEC and the NASDAQ Stock Market LLC ("NASDAQ"), we will post on our website any amendment to our Code of Ethics and any waiver applicable to our senior financial officers, our executive officers or directors. In addition, information concerning purchases and sales of our equity securities by our directors and Section 16 reporting officers is posted on our website. Information on our website is not part of this Annual Report and is not deemed incorporated by reference into this Annual Report or any other public filing made with the SEC.



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Item 1A.    Risk Factors.

Our business, financial condition, operating results and cash flows may be impacted by a number of factors. The following sets forth the most significant factors that make an investment in our company speculative or risky. In addition to the following risk factors, please also refer to the section entitled "Special Note Regarding Forward-Looking Statements."

Our business and financial performance may be adversely affected by market, economic and other industry conditions.

Our business and financial performance may be adversely affected by market, economic and other industry conditions. While the adverse effects of the financial crisis of 2007 to 2010 have abated to a significant degree, global financial markets may continue to experience significant volatility. In addition, changes to geopolitical situations and fiscal or monetary policies could have unpredictable consequences for credit markets and negatively impact our business. 

Periods of difficult market conditions or slowdowns (which may be across one or more industries, sectors or geographies), would increase the risk of default and losses in our Funds. Difficult economic conditions could also adversely affect our operating results by causing (i) decreases in the market value of investments held by our Funds, (ii) a reduction in the size or volume of newly sponsored CLOs and other investment products, (iii) redemptions in our open ended Non-CLO products, (iv) decreases in our ability to obtain attractive financings and refinancings that could increase the cost of financing and lead to lower yielding funds which will decrease our net income and (v) a reduction in our AUM, lowering management fees earned on the Funds. 

Changes in CLO spreads and an adverse market environment could make it difficult for investment managers to launch new CLOs.

The ability to issue new CLOs is dependent, in part, on the amount of excess interest earned on a new CLO’s investments over interest payable on its debt obligations (also known as a CLO's “arbitrage”). If the CLO arbitrage is not attractive to potential CLO equity investors, we may not be able to sponsor the issuance of new CLOs, which could have a material adverse impact on our business. During the financial crisis of 2007 to 2010, there was a dislocation in the credit markets that significantly impeded CLO formation. Although market conditions have improved, renewed dislocation in credit markets could return and continue for a significant period of time. Renewed dislocation of these markets could adversely impact our results of operations and financial condition.

We operate in highly competitive markets, compete with larger institutions and may not be able to grow our AUM.

The alternative asset management industry is intensely competitive and subject to rapid change. Many firms offer similar and additional asset management products and services to the same types of investors that we target. We currently focus almost exclusively on managing SSCLs and related financial instruments, which is in contrast to numerous other asset managers with comparable AUM, which have significant background and experience in both the equity and debt markets. In addition, many of our competitors have or may in the future develop greater financial and other resources, more extensive distribution capabilities, more effective marketing strategies, more attractive investment vehicle structures and broader name recognition. Many of our competitors are substantially larger than us, have considerably more financial and other resources and may have investment objectives that overlap with ours, which may create competition for investment opportunities with limited supply. Some competitors may have a lower cost of funds and access to funding sources that are not available to us, and may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. The competitive pressures we face could adversely affect our business, financial condition and results of operations.

Additionally, if other asset managers offer services and products at more competitive prices than us, we may not be able to maintain our current fee structure. Investment strategies and products, including CLOs, that have historically been attractive to investors may lose their appeal for various reasons. In such case, we would have to develop new strategies and products in order to remain competitive. It could be both expensive and difficult for us to develop new strategies and products, and we may not be successful in this regard. Poor performance of our Funds could also make it more difficult for us to raise new AUM. These competitive and other pressures could adversely affect our business, financial condition and results of operations.

Currently, the substantial majority of our investment products are CLOs that cannot be redeemed or terminated by investors unless certain conditions are met or are not yet redeemable or terminable by investors at all. However, with the passage of time or upon the satisfaction of such conditions, these investment products will be redeemed, and we will no longer receive management fees related to these products. In addition, the prepayment of the assets contained in the CLOs we manage and our inability to reinvest the proceeds of such prepayments in accordance with the investment guidelines of the CLOs will reduce the asset base

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on which our management fees are earned. If we are unable to launch new products and grow AUM to sufficiently replace lost AUM, our revenues will decline.

We may not be able to replicate our historical results as we expand into new product lines.
 
Financial results and results of operations with respect to any new product lines we pursue, or may pursue at any time in the future, may differ from those of existing Funds, accounts or other investment vehicles that are or have been managed by CIFC or its subsidiaries. There can be no assurance to investors that we will replicate the historical results achieved by CIFC and its subsidiaries in expanding into new product lines, and we caution investors that our investment returns could be substantially lower than the returns achieved in prior periods in connection with any such expansion. Additionally, all or a portion of the prior results may have been achieved in particular market conditions which may not be repeated.

A reduction in AUM will significantly reduce our management and incentive fees and adversely affect our financial performance.

Our success depends on our ability to earn management and incentive-based revenue from the investment products we manage for third party investors. Management fees are predominately earned based on the AUM of the Funds we manage. In certain cases, incentive-based revenue is earned based on the performance of the Funds. If there is a reduction in AUM underlying a Fund, there will be a corresponding reduction in management fees and, if applicable, incentive fees that may be earned. Further, if we are unable to reinvest any proceeds received as a result of the prepayment of a loan held by a Fund we manage because the Fund is out of its reinvestment period, AUM would also decrease. Other factors that could decrease AUM include a forced liquidation, poor investment performance or a downgrade in ratings assigned to the assets and/or portfolios managed.

A reduction in AUM, a reduction in the fees earned or the failure of the Funds to perform well both on an absolute basis and in relation to competing funds may adversely affect our business and financial performance.

Our existing recourse indebtedness and inability to access capital markets could restrict our business activities or adversely affect our financial performance.

As of December 31, 2015, CIFC had $160.0 million of outstanding recourse indebtedness. Our Junior Subordinated Notes represent $120.0 million, which currently bears interest at variable interest rates which subjects us to interest rate risk and may increase our debt service obligations if such interest rates increase.

In addition, the debt instruments governing our indebtedness contain covenants that may restrict our business activities, and our failure to comply with these covenants could result in a default under our indebtedness. Furthermore, we are permitted by the terms of our Junior Subordinated Notes and Senior Notes to incur additional indebtedness, subject to limitations on certain restricted payments under the Junior Subordinated Notes and Senior Notes. Our inability to generate sufficient cash flow to satisfy our debt obligations, to refinance our debt obligations or to access capital markets or otherwise obtain additional financing on commercially reasonable terms could adversely affect our financial condition, operating results and cash flows. Additionally, our return on investments and available cash flow may be reduced to the extent that increases in interest rates or other changes in market conditions increase the cost of our financing relative to the income that can be derived from our operations and assets.
We are exploring and evaluating strategic alternatives for the Company and there can be no assurance that we will be successful in identifying, or completing any strategic alternative, that any such strategic alternative will yield additional value for shareholders or that the process will not have an adverse impact on our business.
In January 2016, we retained a financial adviser and our Board of Directors commenced a review of our strategic alternatives, which could result in, among other things, a sale of the Company, a merger, consolidation or business combination, asset divestiture, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, in addition to continuing to operate the Company in the ordinary course of business. However, there can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction. In addition, we expect to incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected.
No decision has been made with respect to any transaction, and we cannot assure you that we will be able to identify and undertake any transaction that allows our shareholders to realize an increase in the value of their shares or provide any guidance on the timing of such action, if any. We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current share price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other

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factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.

Our business could be impaired if we are unable to attract and retain qualified personnel.

We depend on the diligence, experience, skill and network of business contacts of our executive officers and employees for the evaluation, negotiation, structuring and monitoring of our investments and the operation of our business. Additionally, certain of our investment management contracts are tied to the retention of certain key employees. The management of our investment products is undertaken by our Investment Research and Portfolio Management & Trading teams, consisting of various investment research and portfolio management and trading personnel, none of whom are bound by employment agreements. The loss of a particular member or members of such teams could cause investors in the product to withdraw all or a portion of their investment in the product (in the case of open-end products) or adversely affect the product’s performance and the marketing of the product, as well as the marketing of new CLOs and other products, to new investors. In the case of certain Funds, we can be removed as investment adviser upon the loss of specified key employees. In addition to the loss of specific Investment Research and Portfolio Management & Trading team members, the loss of one or more members of our senior management involved in supervising the teams and operating our business could also have adverse effects on our investment products or our business. We have experienced turnover in certain members of our senior management over the past 18 months. If turnover continues, our business and financial performance could be adversely affected. Accordingly, the inability to attract and retain qualified personnel could affect our ability to provide an acceptable level of service to our clients and take advantage of new opportunities, which could adversely affect our business and financial performance.
The loss of our senior management team or key investment professionals could have a material adverse effect on our business.
Our management team is led by our Co-Presidents, Oliver Wriedt and Steve Vaccaro.  Mr. Vaccaro leads our investment teams and has 37 years of relevant credit experience. Our success depends on our ability to retain key members of our senior management and investment teams, who possess substantial experience in the management of the Company and investing and have been primarily responsible for the investment performance we have achieved. In particular, we depend on our portfolio managers. Because of the long tenure and stability of our portfolio managers, the clients of our investment vehicles generally attribute the investment performance we have achieved to these individuals. While we have generally experienced very few departures among our portfolio managers, there can be no assurance that this stability will continue in the future. The departure of a portfolio manager could cause clients to withdraw funds from the investment products he or she manages, which would reduce our AUM. In addition, the management agreements applicable to certain CLOs that we manage give investors in such CLOs a contractual right to terminate and replace the Adviser upon the departure of certain key individuals.
A reduction in AUM resulting from the loss of key investment professionals would result in a decline in investment advisory fees and, if we were not able to reduce our expenses sufficiently, our net income; these reductions could be material. The departure of an investment product's portfolio manager also could cause clients to refrain from allocating additional funds to such investment product or delay such additional funds until a sufficient track record under a new portfolio manager or managers has been established. This would have a negative effect on the future growth of our AUM.
The loss of any of these key professionals, including our Co-Presidents, senior credit analysts, senior portfolio managers, as well as other key members of our senior management and investment teams, could limit our ability to successfully execute our business strategy and may prevent us from sustaining the financial and operational performance we have achieved or adversely affect our ability to retain existing and attract new client assets and related revenues.
We may leverage our assets and a decline in the fair value of such assets may adversely affect our financial performance.

We may leverage the assets underlying our investment products through borrowings, generally through warehouse facilities, limited recourse secured loans, derivative instruments such as total return swaps, securitizations (including the issuance of CLOs) and other borrowings. Certain leverage we may employ may have market value-based lending triggers, such that lenders may require the posting of additional collateral to support the borrowing if asset prices decline. If additional collateral is not posted, we may have to rapidly liquidate assets underlying these investment products, which we may be unable to do on favorable terms or at all. Even after liquidating assets, we may still be unable to post the required collateral, further harming liquidity. A reduction in credit availability may reduce our earnings, liquidity and available cash.

We expect to enter into warehouse agreements in connection with our potential investment in and management of CLOs, which may expose us to substantial risks.

In connection with our potential investment in and management of new CLOs, we expect to enter into warehouse lending agreements with warehouse loan providers such as banks or other financial institutions, pursuant to which the warehouse provider will finance the purchase of investments that will be ultimately included in a CLO. For CLOs, these investments are primarily comprised of SSCLs rated below investment grade. Securities rated below investment grade are often referred to as “leveraged

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loans” or “high yield” securities, and may be considered “high risk” compared to debt instruments that are rated investment grade. We will typically select the investments in the warehouse subject to the approval of the warehouse provider. If the relevant CLO transaction is not issued or consummated, as applicable, the warehouse investments may be liquidated, and we may be required to pay any amount by which the purchase price of the investments exceeds its sale price and may be liable for certain of the expenses associated with the warehouse or planned CLO. In addition, regardless of whether the CLO is issued or consummated, if any of the warehoused investments are sold before such issuance or consummation, we may have to bear any resulting loss on the sale. The amount at risk in connection with a warehouse agreement will vary and may not be limited to the amount, if any, that we invest in the related CLO upon its issuance or consummation, as applicable. Although we would expect to complete the issuance of a particular CLO within six to nine months after establishing a related warehouse, we may not be able to complete the issuance within such expected time period or at all.

Our quarterly and annual results could fluctuate and may not be indicative of our future quarterly or annual performance.

Our quarterly and annual operating results could fluctuate; therefore investors should not rely on past quarterly or annual results to be indicative of our performance in future quarters or years. Factors that could cause our quarterly and annual operating results to fluctuate include, among other things, timing of the recognition of incentive fees, variations in fair value determinations of our assets and liabilities, impairments on our intangible assets (including goodwill), changes in interest rates affecting our interest income and interest expense, distributions from our investments in CLOs and private funds and provision for income taxes.

Because the values we record for certain investments and liabilities are based on estimates of fair value made by our management, we are exposed to substantial risks.

Some of our investments and liabilities are not publicly traded and the fair value of such investments and liabilities are not readily determinable. Each of these carrying values is based on an estimate of fair value by our management. Management reports the estimated fair value of these investments and liabilities quarterly, which may cause our quarterly operating results to fluctuate. Therefore, our past quarterly results may not be indicative of our performance in future quarters. In addition, because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments and liabilities existed and we may be unable to realize the carrying value upon a sale of these investments.

Loss of CIFC’s exclusion from registration under the Investment Company Act of 1940, as amended (the "1940 Act"), could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business and the price of our shares.

CIFC relies primarily on section 3(a)(1)(C) for its exclusion from the registration requirements of the 1940 Act. This provision requires that CIFC neither engage nor propose to engage in the business of investing, reinvesting, owning, holding or trading in securities nor own or propose to acquire "investment securities" having a value exceeding 40% of the value of our total assets on an unconsolidated basis (the “40% Test”). "Investment securities," as defined under the 1940 Act, excludes U.S. government securities and securities of majority-owned subsidiaries that rely on the 40% Test. If CIFC fails to meet its current exemption and another exemption is not available, CIFC may be required to register as an investment company. If CIFC was to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on its capital structure and ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and would have a material adverse effect on our business.

The accounting rules applicable to certain of our transactions are highly complex and require the application of significant judgment and assumptions by our management. In addition, changes in accounting interpretations or assumptions could impact our financial statements.

Accounting rules for consolidations, income taxes, business acquisitions, transfers of financial assets, securitization transactions and other aspects of our operations are highly complex and require the application of judgment and assumptions by our management. The consolidation of VIEs is subject to periodic reassessment which could lead to the deconsolidation of previously consolidated entities or the consolidation of entities that were previously not required to be consolidated. Deferred tax assets are subject to the establishment of a valuation allowance in the event management concludes that the tax benefits of certain timing differences may not be realized. Business acquisitions require the valuation of assets acquired and liabilities assumed. Assets acquired include intangible assets, including goodwill that will be subject to periodic testing and evaluation for impairment. These complexities could lead to a delay in the preparation of our financial information. In addition, changes in accounting rules, interpretations or assumptions could materially impact the presentation, disclosure and usability of our financial statements.


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Failure to develop effective business continuity plans could disrupt our operations and cause financial losses.

We operate in an industry that is highly dependent on information systems and technology. We face various security threats, including cyber security attacks on our information technology infrastructure that are intended to gain access to our proprietary information, destroy data or disable, degrade or sabotage our systems. These security threats could originate from a wide variety of sources, including unknown third parties outside CIFC. There can be no assurance that the various procedures and controls we utilize to mitigate these threats will be sufficient to prevent disruptions to our systems. If any of these systems do not operate properly or are disabled for an extended period of time or if there is any unauthorized disclosure of data, whether as a result of tampering, a breach of our network security systems, a cyber-incident or attack or otherwise, we could suffer substantial financial loss, increased costs, a disruption of our businesses, liability to our investors, regulatory intervention or reputational damage. In addition, our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth or an increase in costs related to such information systems, could have a material adverse effect on us.

We depend to a substantial degree on the availability of our office facilities and the proper functioning of our computer and telecommunications systems. Although we have established a significant disaster recovery program, including pursuant to which (i) we have a dedicated offsite location for certain key staff and (ii) data is backed up at a secured off-site location and is accessible remotely, a disaster, such as water damage to our office, an explosion or a prolonged loss of electrical power, could materially interrupt our business operations and cause material financial loss, regulatory actions, reputational harm or legal liability.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, which could harm our reputation, adversely impact the trading price of our common stock or cause current and potential shareholders to lose confidence in our financial reporting.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Failure to achieve and maintain an effective internal control environment could also cause investors to lose confidence in our reported financial information and could have a material adverse effect on our credit rating. Any failure to maintain such internal controls in the future could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and NASDAQ, we could face severe consequences from those authorities. In either case, it could result in a material adverse effect on our business.

There are inherent limitations in the effectiveness of any control system, including the potential for human error and the circumvention or overriding of the controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, we do not expect that our control system can prevent or detect all errors or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in our operating environment or deterioration in the degree of compliance with policies or procedures.

DFR Holdings exercises significant influence over us, including through the ability to elect six members of CIFC’s Board of Directors.

As of December 31, 2015, DFR Holdings held approximately 74% of CIFC’s outstanding common shares (excluding shares that may be purchased upon the exercise of warrants held by DFR). Our Third Amended and Restated Stockholders Agreement provides that DFR Holdings has the right to designate six directors to the Board. Other than requirements to support the nomination, election and removal of directors in accordance with our Third Amended and Restated Stockholders Agreement and to support maintaining our status as a "controlled company" under applicable NASDAQ rules, there are no restrictions on DFR Holdings' ability to vote the common stock owned by them unless there is a conflict of interest. As a result, DFR Holdings, acting alone, currently controls the outcome of any matter submitted for the vote of our shareholders, including the amendment of our organizational documents, acquisitions or other business combinations involving us and potentially the ability to prevent extraordinary transactions such as a takeover attempt. As a result, DFR Holdings indirectly exercises significant influence on matters considered by the Board. DFR Holdings may have interests that diverge from, or even conflict with, our interests and those of our other stakeholders.


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We have goodwill and other intangible assets that may become impaired, which could have a material adverse effect on our financial condition and results of operations.

We have goodwill and intangible assets that are tested for impairment on an annual basis or when facts and circumstances indicate that impairment may have occurred. If these tests indicate that an asset has been impaired, we will recognize a charge to results of operations, which may have a material adverse effect on our financial condition and results of operations.

We are subject to substantial risk from litigation and potential securities laws liability and may face significant damage to our professional reputation as a result of such allegations and negative publicity associated therewith.

Many aspects of our business involve substantial risks of litigation and/or arbitration and, from time to time, we are involved in various legal proceedings in the normal course of operating our business. From time to time, we and our Funds have been and may be subject to class action suits by shareholders. In addition, we may be exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC and other regulatory bodies.

An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against us could result in substantial costs or reputational harm to us and have a material adverse effect on our financial performance. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management's attention from operations. Asset managers such as the Advisers also are particularly vulnerable to losing investor interest because of adverse publicity. Accordingly, allegations or an adverse resolution of any lawsuit, legal or regulatory proceeding or claim against us, could materially harm our financial performance.

Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our business. Legislative or regulatory changes could adversely affect us.

The Advisers are heavily regulated as investment advisers, primarily at the federal level. Many of these regulators, including the SEC, as well as state securities commissions, are empowered to conduct examinations, investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of an investment adviser from registration. Even if an investigation or proceeding does not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing clients or fail to gain new clients.

Non-compliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market, or the revocation of licenses. Non-compliance with applicable laws or regulations could also adversely affect our reputation, prospects, revenues and earnings.

In addition, changes in current legal, regulatory, accounting, tax or compliance requirements or in governmental policies could adversely affect our operations, revenues and earnings by, among other things, increasing expenses and reducing investor interest in certain products we offer. Additionally, our profitability could be affected by rules and regulations that impact the business and financial communities generally, including changes to the laws governing state and federal taxation.  

In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which imposes a new regulatory framework over the U.S. financial services industry and the consumer credit markets in general. Section 619 of the Dodd-Frank Act (the “Volcker Rule”) imposes significant restrictions on the proprietary trading activities and other rules and regulations of certain banking entities and subjects other systemically significant organizations regulated by the U.S. Federal Reserve System (the “Federal Reserve”) to increased capital requirements and quantitative limits for engaging in such activities.

The Volcker Rule generally prohibits certain banking entities from engaging in proprietary trading or from acquiring or retaining an ownership interest in, or sponsoring or having certain relationships with, a hedge fund or private equity fund, subject to certain exemptions. Although not required by the final implementing regulations adopted December 10, 2013, an order issued by the Federal Reserve extending the conformance period to July 21, 2015 requires that banking entities develop and implement a conformance plan to terminate prohibited activities and divest impermissible investments by the end of the conformance period, subject to up to two one-year extensions at the discretion of any such banking entity’s appropriate U.S. federal banking regulator upon a determination that an extension would not be detrimental to the public interest.


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With respect to CLOs, the Board of Governors of the Federal Reserve has extended until July 21, 2016, and has announced its intention to extend until July 21, 2017 the conformance period for banking entities in connection with their retention of ownership interests in, or sponsorship of, CLOs that were in place as of December 31, 2013. Banks are expected to establish their compliance programs “as soon as practicable and in no case later than the end of the conformance period.” These rules could adversely affect the availability of warehouse financing, the attractiveness of investments in CLOs and Funds we manage and/or the loan market generally.

Section 941 of the Dodd-Frank Act also seeks to reform the asset-backed securitization market (including the CLO market) by requiring that the “securitizer” of asset-backed securities retain at least 5% of the credit risk to the assets collateralizing the asset-backed securities. A final rule has been adopted and will be effective beginning on December 24, 2016 (the “Risk Retention Rules”). While the impact of the Dodd-Frank Act and the Risk Retention Rules on the loan securitization market and the leveraged loan market generally are uncertain, it is possible that any negative impact on secondary market liquidity for CLOs may be experienced at any time, notwithstanding the effective date of the Risk Retention Rules as to new transactions, due to effects of the Risk Retention Rules and the Dodd-Frank Act generally on market expectations and the relative appeal of alternative investments not impacted by the Dodd-Frank Act, the Risk Retention Rules or other factors.

In addition, it is possible that the Risk Retention Rules or the Dodd-Frank Act generally may reduce the number of collateral managers active in the CLO market, which may result in fewer new issue CLOs and reduce the liquidity provided by CLOs to the leveraged loan market generally. A contraction or reduced liquidity in the loan market could reduce our ability to effectively manage CLOs, which in turn could negatively impact the return on the CLOs that we manage and reduce the market value or liquidity of the notes issued by such CLOs. Any reduction in the volume and liquidity provided by CLOs in the leveraged loan market could also reduce opportunities to refinance the notes of CLOs that we manage. Additionally, the Risk Retention Rules as applied to CLOs may result in us having to invest money in CLOs that we manage before or after the effective date of the Risk Retention Rules (including, potentially, in existing CLOs in the event of a refinancing, repricing, additional issuance, or as to which certain other material events occur after such effective date) that would otherwise be available for other uses. While the impact of the Risk Retention Rules on us, the loan securitization market and the leveraged loan market generally are uncertain, the Risk Retention Rules may have an adverse effect on our business.

In addition, we regularly rely on exemptions from various requirements of the U.S. Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act, the 1940 Act, and the U.S. Employee Retirement Income Security Act of 1974, as amended, in conducting our asset management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third party claims, and our business could be materially and adversely affected.

Lastly, the requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our investment products and are not designed to protect our common shareholders. Consequently, these regulations often serve to limit our activities and impose burdensome compliance requirements.

European legal investment considerations and retention requirements could adversely affect us.

Although we do not currently do so, we may in the future invest in or manage CLOs and other investment products in Europe, in which case we may become subject to risks related to the extensive regulation of such businesses within the European Union, and the possibility of further increased regulatory focus. Further, sales of US CLOs to European investors are generally subject to EU risk retention requirements.

On January 1, 2014, Regulation (EU) No 575/2013 (the "Capital Requirements Regulation" or the "CRR") on prudential requirements for credit institutions and investment firms became effective. Articles 404-410 (inclusive) ("Articles 404-410") of the CRR apply to new securitizations issued on or after January 1, 2011 and replace, and with certain amendments, re-enact what was previously Article 122a of European Union Directive 2006/48/EC. Articles 404-410 apply to credit institutions and investment firms established in a Member State of the European Economic Area ("EEA") and consolidated group affiliates thereof (including those that are based in the United States) (each an “Affected CRR Investor”) that invest in or have an exposure to credit risk in securitizations. Articles 404-410 of the CRR impose a severe capital charge on a securitization position acquired by an EEA-regulated institution unless, among other conditions, (a) the originator, sponsor or original lender for the securitization has explicitly disclosed that it will retain, on an ongoing basis, a material net economic interest of not less than 5% in respect of certain specified credit risk tranches or asset exposures, and (b) the acquiring institution is able to demonstrate that it has undertaken certain due diligence in respect of its securitization position and the underlying exposures and that procedures are established for such activities to be monitored on an on-going basis. For purposes of Articles 404-410, an EEA-regulated institution may be subject to the capital requirements as a result of activities of its overseas affiliates, including those that are based in the United States. The absence of

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a commitment by an originator, sponsor or original lender to retain, or commit to retain, a 5% net economic interest in a CLO that we manage, in accordance with Articles 404-410, would be expected to deter Affected CRR Investors from investing in such CLOs.

On June 13, 2014, Delegated Regulation (EU) No. 625/2014 of March 13, 2013 supplementing the CRR (the "Final RTS") was published in the Official Journal of the European Union. The Final RTS provides greater detail on the interpretation and implementation of Articles 404-410 of the CRR and came into force on July 3, 2014.

On July 22, 2013, EU Directive 2011/61/EU on Alternative Investment Fund Managers ("AIFMD") became effective. Article 17 of the AIFMD ("Article 17") required the EU Commission to adopt level 2 measures similar to those in Articles 404-410, permitting EEA managers of alternative investment funds ("AIFMs") to invest in securitizations on behalf of the alternative investment funds ("AIFs") they manage only if the originator, sponsor or original lender has explicitly disclosed that it will retain on an ongoing basis, a material net economic interest of not less than 5% in respect of certain specified credit risk tranches or asset exposures and also to undertake certain due diligence requirements. Commission Delegated Regulation 231/2013 (the "AIFMD Level 2 Regulation") included those level 2 measures. Although the requirements in the AIFMD Level 2 Regulation are similar to those which apply under Articles 404-410, they are not identical. In particular, the AIFMD Level 2 Regulation requires AIFMs to ensure that the sponsor or originator of a securitization meets certain underwriting and originating criteria in granting credit, and imposes more extensive due diligence requirements on AIFMs investing in securitizations than are imposed on institutions under Articles 404-410. Furthermore, AIFMs who discover after the assumption of a securitization exposure that the retained interest does not meet the requirements, or subsequently falls below 5% of the economic risk, are required to take such corrective action as is in the best interests of investors. It is unclear how this last requirement is expected to be addressed by AIFMs should those circumstances arise. The requirements of the AIFMD Level 2 Regulation apply to new securitizations issued on or after January 1, 2011.

In addition, the AIFMD provides that AIFs must have a designated AIFM with responsibility for portfolio and risk management. Although the portfolio and risk management provisions of the AIFMD apply only to EEA AIFMs when managing any AIF, the disclosure and transparency requirements of the AIFMD will apply to any non-EEA AIFs which are to be marketed in the EEA after July 22, 2013 (subject to any applicable transitional period for AIFs which commenced marketing prior to July 22, 2013 and subject to the implementation of the AIFMD under national law). The Financial Conduct Authority (the "FCA") has issued a policy statement in relation to the implementation of AIFMD in the United Kingdom, which in effect confirms that the FCA regards any issue of debt securities which does not constitute a "collective investment scheme" (within the meaning of section 235 of the Financial Services and Markets Act 2000) as similarly falling outside the scope of the AIFMD. However, in providing such guidance, the FCA referred to the possibility that the European Securities and Markets Authority ("ESMA") will, in due course, provide guidance on the meaning of a "securitisation special purpose entity" under the AIFMD. ESMA has not yet given any formal guidance on the application of this exemption. If the AIFMD were to apply to issuers of CLOs as a non-EEA AIF and an issuer engaged in any marketing in the EEA, such issuer would be subject to the disclosure and transparency requirements of the AIFMD, which require, among other things, that investors in the European Union receive initial and periodic disclosures concerning any AIF which is marketed to them; that annual financial reports of the AIF must be prepared in compliance with the AIFMD and made available to investors; that periodic reports relating to the AIF must be filed with the competent regulatory authority in each EU member state in which the fund has been marketed. All or any of these regulatory requirements may adversely affect our ability to achieve our investment objectives with respect to CLOs, and may result in additional costs and expenses to the CLOs that we manage. In addition, it is unclear whether or not a particular issuer would be able to comply with such disclosure requirements. It is also unclear what position will be taken by regulators in other EEA Member States in their interpretation and implementation of the AIFMD.

Requirements similar to the retention requirement in Articles 404-410 and the AIFMD also apply to investments in securitizations by insurance and reinsurance undertakings (following the entry into force of Delegated Regulation (EU) No 2015/35 of 10 October 2014 supplementing the Solvency II Directive (2009/138/EC) ("Solvency II") on January 18, 2015 (such delegated regulation being the "Solvency II Level 2 Regulation")) and (once the level 2 measures are adopted under Article 50a (as inserted by Article 63 of the AIFMD) of Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (the "UCITS Directive")) will also apply to investments in securitizations by funds requiring authorization under the UCITS Directive (such requirements, together with the retention requirements set out in all or any of Articles 404-410, the CRR, Article 17, the AIFMD, the AIFMD Level 2 Regulation, the Final RTS, any further technical standards, any similar or successor laws, any guidelines or other materials published by the EBA in relation thereto and any delegated regulations of the European Commission (in each case including any amendments thereto), being each an "Applicable Regulation" and all of such investors (including, for the avoidance of doubt, AIFMs as referred to above and investors party to liquidity or credit support arrangements provided by a financial institution which is subject to any Applicable Regulation), each an "Affected Investor").


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On September 30, 2015, the European Commission published a draft regulation (the "Draft Regulation") intended to, among other things, consolidate and modify the risk retention provisions of the Applicable Regulations. The Draft Regulation will apply to securitizations issued after its entry into force (subject to certain grandfathering exceptions) and among other things applies the revised risk retention rules to originators, sponsors and original lenders as well as investors in securitizations.

Although many aspects of all of these requirements remain unclear, Articles 404-410 and any other changes to the regulation or regulatory treatment of CLOs for some or all Affected Investors may negatively impact the regulatory position of individual holders of notes of CLOs and the implementation of these regulatory requirements would be expected to deter Affected Investors from investing in CLOs which could have an adverse impact on the CLOs managed by us.

Actions by U.S. and foreign governments, central banks and other governmental and regulatory bodies attempting to stabilize and strengthen the financial market or their increased focus on the regulation of our industry could have an adverse impact on our business.

In recent years, U.S. and foreign governments, central banks and other governmental and regulatory bodies have taken a number of steps to attempt to stabilize and strengthen the U.S. and global financial markets and economies. In particular, in the U.S., these efforts have included direct government investments in, and guarantees of, troubled financial institutions as well as government-sponsored programs such as the Troubled Asset Relief Program in 2008 and the Emergency Economic Stabilization Act of 2008. In addition, the Dodd-Frank Act imposes new regulations and significant investment restrictions and capital requirements on banking entities and other organizations that are significant to the U.S. financial markets and could increase our costs of operating as a public company. Furthermore, many key aspects of the Dodd-Frank Act will continue to be established by various regulatory bodies and other groups over the next several years. We are not able to predict the impact on our business, results of operations and financial condition of these efforts by U.S. and foreign governments, central banks or other governmental and regulatory bodies or the impact of future regulation of our industry.

Foreign corporate entities in which we have invested could be subject to federal income tax at the entity level, which would greatly reduce the amounts those entities would have available to distribute to us.

From time to time, we invest in investment products managed by the Advisers for our own account. Those investments typically are in the form of interests in our investment vehicles that are structured as offshore entities. There is a specific exemption from federal income tax for non-U.S. corporations that restrict their activities in the United States to trading stock and securities (or any activity closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian or other agent. We expect that our foreign corporate investments will rely on that exemption or otherwise operate in a manner so that they will not be subject to federal income tax on their net income at the entity level. If the IRS successfully challenged the qualification of our foreign corporate investment for the exemption from federal income tax described above, that could greatly reduce the amount that our foreign corporate entities would have available to pay to their creditors and to distribute to us.

The Advisers' incentive fees may increase the volatility of our cash flows, which could adversely affect our financial performance.

Historically, a portion of our revenues have been derived from incentive fees on the various investment products that our Advisers manage. Incentive fees are generally based on the returns generated for certain investors in the investment product. With respect to certain Funds, the Advisers are entitled to incentive fees only if the returns on the related portfolios exceed agreed-upon return targets. Incentive fees, if any, may vary from period to period as a result of volatility in investment returns, causing the Advisers' cash flows to be more volatile than if they did not manage assets on an incentive fee basis. Adverse credit and capital markets conditions could significantly increase the volatility of the investment products managed by the Advisers and decrease the likelihood that they will earn incentive fees. Also, alternative asset managers typically derive a greater portion of their revenues from incentive fees than traditional asset managers, thus increasing the potential volatility in the Advisers' cash flows. The volatility in the Advisers' cash flows and decreases in incentive fees could harm our financial performance.

We derive much of our revenues from investment management agreements that may be terminated on short notice.

We derive a substantial portion of our revenues from investment management agreements that may be terminated on short notice. The “non-call” periods on a significant portion of the CLOs that we manage have elapsed, enabling investors to “call” (i.e., initiate liquidation of) such CLOs on relatively short notice. If a CLO is liquidated, we will cease to earn management fees in respect of such CLO. In addition, with respect to the Advisers' agreements with certain of the funds they manage, an Adviser can be removed without cause by investors that hold a specified amount of the interests issued by the applicable fund.


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Additionally, the Advisers' agreements with CLOs allow investors that hold a specified amount of securities issued by the CLO to remove the Adviser for "cause," which typically includes an Adviser's violation of the management agreement or the related indenture; an Adviser's breach of its representations and warranties under the agreement; an Adviser's bankruptcy or insolvency; fraud or the commitment of a criminal offense by an Adviser or its employees; the failure of certain of the CLOs' performance tests; and willful misconduct, bad faith or gross negligence by the Adviser. These "cause" provisions may be triggered from time to time, and as a result, investors could elect to remove the relevant Adviser as the investment manager of such fund. The termination of an Adviser's investment management agreements would adversely affect our financial performance.

We may be unable to maintain adequate liquidity to support our ongoing operations and planned growth as well as service our indebtedness.

Cash generated from operations may not provide sufficient liquidity to fund our operations and pay general corporate expenses. Declines in the fair value of our assets may also adversely affect our liquidity. If we are unable to maintain adequate liquidity, we may be unable to support our ongoing operations and planned growth, which would have a material adverse effect on our financial condition.

Further, our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay interest on and principal of our indebtedness or to fund our other liquidity needs, or at all.

Defaults, downgrades and depressed market values of the collateral underlying CLOs may cause a decline in AUM and deferral or reduction of management fees.

Under the collateral management agreements between the Advisers and the CLOs they manage, payment of an Adviser's management fees is generally subject to a "waterfall" structure. Pursuant to these "waterfalls," all or a portion of an Adviser's fees may be deferred if, among other things, the CLOs do not generate sufficient cash flows to pay the required interest on the notes they have issued to investors and certain expenses they have incurred.

Deferrals could occur if the issuers of the collateral underlying the CLOs default on or defer payments of principal or interest relating to such collateral. In the past, due to high levels of defaults and delinquencies on the assets underlying certain of the CLOs managed by the Advisers, we have both experienced declines in and deferrals of management fees with respect to such CLOs.

Further, during such periods and pursuant to the waterfalls, the CLOs may be required to repay certain of these liabilities, which repayment would permanently reduce our AUM pursuant to which we can recoup deferred subordinated fees. If similar levels of defaults and delinquencies occur in the future, the Advisers could experience additional declines in, and deferrals of, their management fees.

Additionally, all or a portion of an Adviser's management fees from the CLOs that it manages may be deferred if such CLOs fail to satisfy certain “over-collateralization” tests. Pursuant to the "waterfall" structure discussed above, such failures generally require cash flows to be diverted to prepay certain of the CLO's liabilities resulting in similar permanent reductions in AUM and management fees in respect of such CLOs.

Defaulted assets and assets that have been severely downgraded are generally carried at a reduced value for purposes of the over-collateralization tests. In some CLOs, these assets are required to be carried at their market values for purposes of the over-collateralization tests. Due to exceptionally high levels of defaults, severe downgrades and depressed market values of the collateral underlying certain CLOs, the management contracts for which were purchased by the Company, some CLOs had breached their over-collateralization tests at the date of purchase, and the Advisers have therefore experienced, and may again in the future experience, declines in and deferrals of their management fees with respect to such CLOs which could have a material and adverse effect on us.

The Advisers could lose management income or AUM from the CLOs they manage as a result of the triggering of certain structural protections built into such CLOs.

The CLOs managed by the Advisers generally contain structural provisions including, but not limited to, over-collateralization tests that are meant to protect investors from deterioration in the credit quality of the underlying collateral pool. In certain cases, non-compliance with these structural provisions can lead to events of default under the indenture governing a CLO followed by the acceleration of the CLO's obligation to repay the notes issued by the CLO and, ultimately, liquidation of the underlying collateral.


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In the event of a liquidation of the collateral underlying a CLO, the relevant Adviser will lose AUM and therefore management fees, which could have a material and adverse effect on us.

An Adviser's failure to comply with investment guidelines set by its clients or the provisions of the management agreements and other agreements to which it is a party could result in damage awards against such Adviser and a loss of AUM, either of which could have a material adverse effect on us.

As an investment adviser, each Adviser has a fiduciary duty to its clients. When clients retain an Adviser to manage assets on their behalf, they may specify certain guidelines regarding investment allocation and strategy that such Adviser is required to observe in the management of its portfolios. In addition, such Adviser is required to comply with the obligations set forth in the management agreements and other agreements to which it is a party. Although each Adviser utilizes procedures, processes and the services of experienced professionals to assist it in adhering to these guidelines and agreements, there can be no assurance that such precautions will protect us from potential liabilities. An Adviser's failure to comply with these guidelines or the terms of these agreements could have a material adverse effect on us.

We could incur losses due to trading errors by the Advisers or misconduct by employees.

The Advisers could make errors in placing transaction orders for investment products they manage, such as purchasing a security for a product whose investment guidelines prohibit the product from holding the security, purchasing an unintended amount of the security, or placing a buy order when an Adviser intended to place a sell order, or vice-versa. If the transaction resulted in a loss for the product, the relevant Adviser might be required to reimburse the product for the loss. Such reimbursements could be substantial. It is also possible that we could be subject to intentional misconduct by our employees or others that could result in severe negative consequences, including financial penalties and reputational harm. These errors and misconduct could affect trades on behalf of the Advisers, which could exacerbate the adverse financial impact on us.

The Advisers depend on third-party distribution channels to market their CLOs.

The Advisers' CLO management services are marketed by institutions that act as selling or placement agents for CLOs. The potential investor base for CLOs is limited, and the Advisers' ability to access investors is highly dependent on access to these selling and placement agents. These channels may not be accessible to the Advisers in the future, which could have a material and adverse effect on the Advisers' ability to launch new CLOs. In addition, the Advisers' existing relationships with third-party distributors and access to new distributors could be adversely impacted by recent consolidation in the financial services industry, which could result in increased distribution costs, a reduction in the number of third parties selling or placing the Advisers' CLOs or increased competition to access third-party distribution channels.

Our Funds are subject to various conflicts of interest involving the Advisers, our investment professionals and our other affiliates.

Various potential and actual conflicts of interest may arise from the overall investment activities of the Advisers, our investment professionals and our other affiliates. The following briefly summarizes some of these conflicts but is not intended to be an exhaustive list of all possible conflicts.

The Advisers currently manage, and expect in the future to continue to manage, multiple funds and private accounts with similar or identical investment objectives and policies, including Funds that may be sponsored by us or our affiliates. In addition, because such Funds invest principally in loans which are generally subject to early prepayment, such Funds and other accounts may during the applicable reinvestment period have significant amounts of cash that the Advisers will be seeking to invest in the same securities or other assets in which more than one of our other Funds or advisory clients may invest. If purchases or sales of any securities or other assets for the Funds or advisory clients for which the Advisers or their personnel and affiliates act as investment manager arise for consideration at or about the same time, transactions in such securities or other assets will be made for the respective Funds and advisory clients in a manner that the personnel of such Adviser deem appropriate, taking into account any fiduciary duties and the contractual obligations to such other Funds or advisory clients, given the investment objectives, liquidity, diversification and other limitations of the applicable Funds and advisory clients. To the extent the transactions on behalf of more than one client of the Adviser or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Further, an Adviser or its affiliates may own equity or other securities of issuers of or obligors on collateral obligations of a Fund or other collateral and may have provided and may provide in the future, advisory and other services to issuers of such collateral.


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The existence of any real or perceived conflicts of interest could have an adverse effect on our reputation or result in litigation, which may negatively impact future fundraising and business growth, and could adversely impact our results of operations and financial condition.

The Advisers or our other affiliates may, from time to time, possess material non-public information, limiting our investment discretion.

The Advisers’ investment professionals, investment committees or their respective affiliates may serve as directors of, or in a similar capacity with, companies in which we invest. In the event that material non-public information is obtained with respect to such companies, or we became subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us and, consequently, the interests of the common limited partner. Any such restrictions could adversely impact our results of operations and financial condition.

We may invest in the subordinated and mezzanine notes of CLOs, and such investments involve various risks, including that CLO subordinated notes receive distributions from the CLO only if the CLO generates enough income to first pay the holders of its debt securities and its expenses.

Our assets include investments in subordinated and mezzanine notes of certain CLOs we manage, and we may buy subordinated and mezzanine notes of, or other interests in, other CLOs managed by third parties. The subordinated notes are usually entitled to all of the income generated by the CLO after the CLO pays all of the interest due on the senior and mezzanine notes and its expenses. However, there will be little or no income available to the CLO subordinated notes if there are defaults on the underlying collateral in excess of certain amounts or if the recoveries on such defaulted collateral are less than certain amounts. In that event, the value of our investment in the CLO's subordinated notes could decrease substantially. In addition, the subordinated notes of CLOs are generally illiquid, and because they represent a leveraged investment in the CLO's assets, their value will generally fluctuate more than the values of the underlying collateral. We are required to consolidate certain CLOs we manage, however, we have no right to the benefits from, nor do we bear the risk associated with, the assets held by such CLOs, beyond our minimal direct investments and beneficial interests in, and management fees and potential incentive fees generated therefrom.

Our incentive fee structures may incentivize us to pursue speculative investments, use leverage when it may be unwise to do so, or refrain from de-levering when it would otherwise be appropriate to do so.

Our success depends on our ability to earn management fees from the investment products we manage for third party investors in investment vehicles. Such fees generally consist of payments based on the amount of assets in the investment product (known as management fees and/or advisory fees) and, in certain cases, on the returns generated for certain investors in the investment product (incentive fees). The incentive fees that we earn may create an incentive for us to pursue investments on behalf of third party investors that are riskier or more speculative than would be the case in the absence of such compensation arrangement. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. This may encourage us to use leverage within our investment vehicles to increase the return on the investments, even when it may not be appropriate to do so, and to refrain from de-levering when it would otherwise be appropriate to do so. Under certain circumstances, the use of leverage may increase the likelihood of default by the investment vehicles, which would impair the value of the investments in such vehicles and adversely affect our AUM as well as our management and incentive fees.

We may expose ourselves to risks if we engage in hedging transactions.
 
If we engage in hedging transactions we may expose ourselves to risks associated with such transactions. Such hedging may utilize instruments such as forward contract currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. We may also enter into “market-value” hedges which seek to mitigate market risk related to potential declines in the value of our Funds’ loan portfolios by establishing positions in inversely correlated market, sector or industry indices. Use of these hedging instruments may include counter-party credit risk.
 
Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate, interest rate or market fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

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The success of any hedging transactions we may enter into will depend on our ability to effectively hedge against unpredictable movements in currencies, interest rates and the markets in which we generally operate. For example, the cost of a hedging instrument intended to mitigate against a more narrow range of movement in interest rates will generally be less than that of an instrument designed to mitigate against a larger movement. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate, interest rate and market risks, unanticipated changes in currency exchange rates or interest rates and unanticipated market movements may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to (or be able to) establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations. It also may not be possible to fully or perfectly hedge against market-driven losses in our Funds’ loan portfolios, as the indices in which we establish market-value hedges are not perfectly correlated with the performance of the portfolios. Our ability to engage in hedging transactions may also be limited by rules adopted by the U.S. Commodity Futures Trading Commission or equivalent bodies in other jurisdictions.

We elected to become a "controlled company" within the meaning of the NASDAQ rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements intended to protect public stockholders' interests.

DFR Holdings controls a majority of the voting power of our outstanding common stock. As a result, we elected to qualify as a "controlled company" within the meaning of the corporate governance standards of the NASDAQ rules. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including:

the requirement that a majority of our Board consist of independent directors; 
the requirement that we have independent director oversight of executive officer compensation; and 
the requirement that we have independent director oversight of director nominations.

We have agreed pursuant to our Third Amended and Restated Stockholders Agreement to utilize these exemptions. As a result, our Board does not have a majority of independent directors, and its nominating and corporate governance committee and compensation committee do not consist entirely of independent directors. Accordingly, our shareholders do not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements under the NASDAQ rules.

We are a smaller reporting company and the reduced reporting requirements available to smaller reporting companies may make our securities less attractive to investors.  
 
We are a “smaller reporting company”, as defined in the Securities Act. For as long as we continue to be a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not smaller reporting companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding historical financial statements, reduced executive compensation disclosure requirements in  our periodic reports, registration statements, and proxy statements and exemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our securities less attractive because we may rely on these exemptions. We will remain a smaller reporting company until the beginning of a year in which we would have a public float of $75 million held by non-affiliates as of the last business day of the second quarter of the prior year.

If CIFC LLC fails to satisfy the "qualifying income exception," all of its income will be subject to an entity-level tax, which could cause cash available for distributions to holders of our shares to be substantially reduced, possibly causing a substantial reduction in the value of those shares.
     Under current law and assuming full compliance with the terms CIFC LLC's limited liability company agreement (and other relevant documents) and based upon factual representations that were made by us, we received an opinion of outside legal counsel, to the effect that CIFC LLC will be treated as a partnership, and not as an association or a publicly traded partnership taxable as a corporation, for U.S. federal income tax purposes. The factual representations made by us upon which our outside legal counsel relied relate to our organization, operation, assets, activities, income (including our ability to satisfy the qualifying income exception discussed below), and present and future conduct of our operations. Opinions of counsel, however, are not

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binding on the Internal Revenue Service ("IRS"), and no assurance can be given that the IRS would not assert, or that a court would not sustain, a contrary position.
In general, if a partnership is "publicly traded" (as defined in the U.S. Internal Revenue Code of 1986, as amended (the "Code")), it will be treated as a corporation for U.S. federal income purposes. A publicly traded partnership will, however, be taxed as a partnership and not as a corporation for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes "qualifying income" within the meaning of Section 7704(d) of the Code. We refer to this exception as the "Qualifying Income Exception." Qualifying income generally includes rents, dividends, interest (to the extent such interest is neither derived from the conduct of a financial or insurance business nor based, directly or indirectly, upon income or profits of any person), and capital gains from the sale or other disposition of stocks, bonds and real property. Qualifying income also includes other income derived from the business of investing in, among other things, stocks and securities.
        If CIFC LLC fails to satisfy the "qualifying income exception" described above, items of income, gain, loss, deduction and credit would not pass through to you and you would be treated for U.S. federal (and certain state and local) income tax purposes as a stockholder in a corporation. In such case, CIFC LLC would be required to pay U.S. federal income tax at regular corporate rates on all of its income. In addition, CIFC LLC would likely be liable for state and local income and/or franchise taxes on all of its income. Distributions to holders of shares would constitute ordinary income taxable to such holders to the extent of CIFC LLC's earnings and profits, and these distributions would not be deductible by CIFC LLC. Taxation of CIFC LLC as a corporation could result in a material reduction in cash flow and after-tax return for holders of shares and thus could result in a substantial reduction in the value of those shares.
We may not realize the anticipated benefits of the Reorganization Transaction because, among other reasons, our structure is subject to potential changes in law and differing interpretations, which may apply possibly on a retroactive basis.
        Many factors could affect some or all of the anticipated benefits of the Reorganization Transaction. The U.S. federal income tax treatment of holders of shares of CIFC LLC depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You also should be aware that the U.S. federal income tax rules are constantly under review by the IRS, resulting in revised interpretations of established concepts. The IRS pays close attention to the proper application of tax laws to partnerships and investments in non-U.S. entities. The present U.S. federal income tax treatment of an investment in shares of CIFC LLC may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made. We and holders of shares of CIFC LLC could be adversely affected by any such change, or by new tax law, regulation or interpretation.
        Our organizational documents and agreements permit our board of directors to modify our limited liability company agreement from time to time, without the consent of the holders of shares of CIFC LLC, in order to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have an adverse impact on some or all of the holders of shares.
Complying with certain tax-related requirements may cause us to invest through foreign or domestic corporations subject to corporate income tax or to forego otherwise attractive business or investment opportunities.
        For CIFC LLC to be treated as a partnership for U.S. federal income tax purposes, and not as an association or publicly traded partnership taxable as a corporation, it must satisfy the Qualifying Income Exception discussed above on a continuing basis and we must not be required to register as an investment company under the 1940 Act. To comply with these requirements, CIFC LLC (or its subsidiaries) may be required to invest through non-U.S. or domestic corporations subject to corporate income tax, or forego attractive business or investment opportunities. Thus, compliance with these requirements may adversely affect CIFC LLC's ability to maximize revenue or net income.
Shareholders will be subject to U.S. federal income tax on their share of CIFC LLC's taxable income, regardless of whether or when they receive any cash distributions from CIFC LLC.
        CIFC LLC intends to be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Provided that the Qualifying Income Exception is met, shareholders will be required to take into account their allocable share of CIFC LLC's items of income, gain, loss and deduction. Distributions to shareholders generally will be taxable for U.S. federal income tax purposes only to the extent the amount distributed exceeds their tax basis in the shares. This treatment contrasts with the treatment of a shareholder in a corporation. For example, a shareholder in a corporation who receives a distribution of earnings from the corporation generally will report the distribution as dividend income for U.S. federal income tax purposes. In contrast, a holder of shares of CIFC LLC who receives a distribution of earnings from CIFC LLC will not report the distribution as dividend income (and will treat the distribution as taxable only to the extent the amount distributed exceeds the holder's tax basis in the shares), but will instead report the holder's allocable share of items of CIFC LLC's income for U.S. federal income tax purposes. As a result, shareholders may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on their allocable share of CIFC LLC's items of income, gain, loss, deduction and credit (including CIFC LLC's allocable share of those items of any entity in which CIFC LLC invests that is treated as a partnership or is otherwise

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subject to tax on a flow through basis) for each of CIFC LLC's taxable years ending with or within their taxable years, regardless of whether or when they receive cash distributions.
        In addition, certain of our investments, including investments in non-U.S. CLO issuers and debt securities, may produce taxable income without corresponding distributions of cash to us or produce taxable income prior to or following the receipt of cash relating to such income. Shareholders will be required to take such income into account in determining your taxable income, and they may not receive cash distributions equal to their tax liability attributable to their allocation of CIFC LLC's taxable income.
Tax-exempt holders of shares of CIFC LLC may recognize "unrelated business taxable income" as a result of holding shares of CIFC LLC.
        An organization that is otherwise exempt from U.S. federal income tax is nonetheless subject to U.S. federal income taxation with respect to its "unrelated business taxable income," or "UBTI". To the extent we incur debt (including intercompany debt) that is allocated to the acquisition of certain equity and debt securities we intend to hold (either directly or indirectly through subsidiaries that are treated as partnerships or disregarded for U.S. federal income tax purposes), a proportionate share of your income from CIFC LLC with respect to such securities will be treated as UBTI. For certain types of tax-exempt entities, the receipt of any UBTI would have adverse consequences. Tax-exempt holders of CIFC Corp.'s common stock are strongly urged to consult their tax advisors regarding the tax consequences of owning common shares of CIFC LLC.
There can be no assurance that the IRS will not assert successfully that some portion of CIFC LLC's income is properly treated as effectively connected income with respect to non-U.S. holders.
        While it is expected that CIFC LLC's method of operation will not result in the generation of significant amounts of income treated as effectively connected with the conduct of a U.S. trade or business with respect to non-U.S. holders of our shares, there can be no assurance that the IRS will not assert successfully that some portion of CIFC LLC's income is properly treated as effectively connected income with respect to such non-U.S. holders. To the extent CIFC LLC's income is treated as effectively connected income, non-U.S. holders generally would be required to (i) file a U.S. federal income tax return reporting their allocable shares of CIFC LLC's taxable income or loss effectively connected with such trade or business and (ii) pay U.S. federal income tax at regular U.S. tax rates on any such taxable income. Non-U.S. holders that are corporations also would be required to pay a U.S. federal branch profits tax at a 30% rate (or lower rate provided by applicable treaty).
Dividends paid by, or certain income inclusions derived with respect to, CIFC LLC's potential future ownership of non-U.S. entities that are treated as corporations for U.S. federal income tax purposes may not qualify for the reduced tax rates generally applicable to corporate dividends paid to taxpayers taxed at individual rates.
        The maximum U.S. federal income tax rate on certain corporate dividends payable to non-corporate taxpayers currently is 20% (in addition to the 3.8% tax on "net investment income" as described below). Dividends payable by, or certain income inclusions derived with respect to the ownership of, passive foreign investment companies, or PFICs, certain controlled foreign corporations, or CFCs, however, generally are not eligible for the reduced rates. We may treat certain future non-U.S. CLO issuers taxed as corporations for U.S. federal income tax purposes as the type of CFCs whose income inclusions would not be eligible for such reduced rates on dividend income. The more favorable U.S. federal income tax rates applicable to regular corporate dividends could cause non-corporate U.S. investors to perceive investments in PFICs or CFCs to be relatively less attractive than holdings in the stocks of non-CFC and non-PFIC corporations that pay dividends, which could then adversely affect the value of our shares.  
The IRS may challenge certain income tax accounting positions
Because we cannot match transferors and transferees of common shares, we intend to apply certain assumptions and conventions and other accounting positions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to you in a manner that reflects your distributive share of CIFC LLC. However, these assumptions, conventions, and accounting positions may not be in compliance with all aspects of applicable Treasury regulations. It is possible that the IRS will assert successfully that the conventions and assumptions we use do not satisfy the technical requirements of the Code or Treasury Regulations and could require that items of income, gain, deduction, loss or credit be adjusted or reallocated in a manner that adversely affects holders of shares of CIFC LLC.
We may not be able to furnish to each holder of shares specific tax information within 90 days after the close of each calendar year, which means that holders who are U.S. taxpayers should anticipate the need to file annually a request for an extension of the due date of their income tax return. In addition, it is possible that holders may be required to file amended income tax returns.
        As a publicly traded partnership, our operating results, including distributions of income, dividends, gains, losses or deductions and adjustments to carrying basis, will be reported on Schedule K-1 and distributed to each holder annually. Although we currently intend to distribute Schedule K-1s on or around 90 days after the end of our fiscal year, it may require longer than 90 days after the end of our fiscal year to obtain the requisite information from all lower-tier entities so that K-1s may be prepared for us. For this reason, holders of shares of CIFC LLC who are U.S. taxpayers should anticipate that they may need to file annually with the

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IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year.
        In addition, it is possible that a holder of shares will be required to file amended income tax returns as a result of adjustments to items on the corresponding income tax returns of CIFC LLC. Any obligation for a holder to file amended income tax returns for that or any other reason, including any costs incurred in the preparation or filing of such returns, is the responsibility of each holder.
CIFC LLC may be liable for adjustments to its tax returns as a result of recently enacted legislation.
        Legislation was recently enacted that significantly changes the rules for U.S. federal income tax audits of partnerships. Such audits will continue to be conducted at the partnership level, but with respect to tax returns for taxable years beginning after December 31, 2017, and, unless a partnership qualifies for and affirmatively elects an alternative procedure, any adjustments to the amount of tax due (including interest and penalties) will be payable by the partnership. Under the elective alternative procedure, a partnership would issue information returns to persons who were partners in the audited year, who would then be required to take the adjustments into account in calculating their own tax liability, and the partnership would not be liable for the adjustments. There can be no assurance that CIFC LLC will be eligible to make such an election or that it will, in fact, make such an election for any given adjustment. If CIFC LLC does not or is not able to make such an election, then (1) the then-current shareholders of CIFC LLC, in the aggregate, could indirectly bear income tax liabilities in excess of the aggregate amount of taxes that would have been due had CIFC LLC elected the alternative procedure, and (2) a given shareholder may indirectly bear taxes attributable to income allocable to other shareholders or former shareholders, including taxes (as well as interest and penalties) with respect to periods prior to such shareholder's ownership of shares of CIFC LLC. Amounts available for distribution to the shareholders of CIFC LLC may be reduced as a result of CIFC LLC's obligations to pay any taxes associated with an adjustment. Many issues and the overall effect of this new legislation on CIFC LLC are uncertain, and shareholders should consult their own tax advisors regarding all aspects of this legislation as it affects their particular circumstances.

Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
Our headquarters are located in New York, New York. We lease office space at 250 Park Avenue, 4th Floor, New York, New York 10177. We do not own any real property.

Item 3.    Legal Proceedings

In the ordinary course of business, the Company may be subject to legal and regulatory proceedings and examinations that are generally incidental to the Company's ongoing operations. While there can be no assurance of the ultimate disposition of any such proceedings or examinations, the Company does not believe their disposition will have a material adverse effect on the Company's Consolidated Financial Statements.

Item 4.    Mine Safety Disclosures
None.

25



PART II. Other Information

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
The common shares of CIFC LLC are traded on NASDAQ under the symbol "CIFC." Prior to the Reorganization Transaction, CIFC Corp. common stock was traded on NASDAQ under the symbol "CIFC." As of February 29, 2016, we had approximately 725 holders of record. This does not include shareholders that hold shares in “street name” through banks or broker-dealers.
The high and low sales prices per common share are set forth below for the periods indicated:
 
2015
 
2014
 
High
 
Low
 
High
 
Low
4th Quarter
$
7.36

 
$
5.41

 
$
10.09

 
$
7.66

3rd Quarter
$
8.55

 
$
6.48

 
$
10.16

 
$
8.14

2nd Quarter
$
8.35

 
$
7.00

 
$
9.97

 
$
7.30

1st Quarter
$
9.90

 
$
7.28

 
$
8.79

 
$
7.43

Dividends
Distributions per common share (declared):
 
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
2015
 
$0.10
 
$0.10
 
$0.10
 
$0.10
2014
 
$0.10
 
$0.10
 
$0.10
 
$0.10
For each of the years ended December 31, 2015 and 2014, total aggregated annual distributions declared were $0.40 per common share. Subsequent to year end, the Company's board of directors ("Board") declared an aggregate cash distribution of $0.34 per share; composed of a quarterly cash distribution of $0.10 per share and a special distribution of $0.24 per share in order to defray a portion of the U.S. Federal income tax liability of shareholders arising from the Reorganization Transaction. The distribution will be paid on April 15, 2016 to shareholders of record as of the close of business on April 1, 2016.
The payment of distributions is at the discretion of our Board after taking into account various factors, including our financial condition, earnings, cash flows, capital requirements, previous and anticipated amounts of distribution payments and share repurchases, level of indebtedness, statutory and contractual restrictions applicable to the payment of distributions, general economic, market and industry conditions, and other considerations that our Board deem relevant from time to time. The indentures governing our Junior Subordinated Notes and our Senior Notes contain, and any financing arrangement that we enter into in the future may contain, restrictive covenants that limit our ability to pay distributions ("Item 8—Financial Statements and Supplementary Data"—Note 11).

26


Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The number and average prices of shares repurchased in the fourth quarter of the year ended December 31, 2015 are set forth in the table below:
 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as part of
Publicly Announced
Program (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1)
October 1 - October 31, 2015
25,515

 
7.11

 
25,515

 
$
4,940,477

November 1 - November 30, 2015
29,823

 
6.84

 
29,823

 
$
4,736,488

December 1 - December 31, 2015
78,097

 
6.61

 
78,097

 
$
4,220,267

Total
133,435

 
$
6.76

 
133,435

 
 

Explanatory Note:
_________________________________
(1)
On March 29, 2012, we announced that our Board approved a $10.0 million share repurchase program. Shares may be repurchased from time to time and in such amounts as market conditions warrant, subject to price ranges set by management and regulatory considerations. The share repurchase program does not have an expiration date.

The indentures governing our Junior Subordinated Notes and Senior Notes contain limits on share repurchases, subject to a number of exceptions and conditions. The share repurchases allowed under the share repurchase program are within these limits.

Equity Compensation Plan Information
The following table sets forth certain information, as of December 31, 2015, regarding our equity compensation plans:
Plan Category
 
(a)
Number of securities to be issued upon exercise of
outstanding options,
warrants and rights
 
(b)
Weighted-average exercise price of outstanding options,
warrants and rights
 
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plan (excluding securities reflected in column (a))
 
Equity compensation plans approved by security holders
 
5,318,823

(1)
$
6.69

(2)
296,540

(3)
Equity compensation plans not approved by security holders
 

 
n/a

 
n/a

 
   Total (2)
 
5,318,823

(1)
 
 
296,540

(3)

Explanatory Notes:
_________________________________
(1)     This amount consists of options to purchase 3,285,313 common shares of CIFC LLC and restricted stock unit awards covering 2,033,510 common shares of CIFC LLC.  These awards were originally issued by CIFC Corp. under the Stock Incentive Plan, but were converted into awards covering the common shares of CIFC LLC in connection with the Reorganization Transaction. 
(2)    This amount relates only to the options to purchase common shares of CIFC LLC. 
(3)    This amount represents the number of common shares of CIFC LLC remaining available for issuance pursuant to awards under the Stock Incentive Plan, which was originally adopted by CIFC Corp. and was assumed, amended and renamed by CIFC LLC in connection with the Reorganization Transaction.  Equity-based awards under the Stock Incentive Plan may be in the form of options, share appreciation rights, restricted shares, unrestricted shares, restricted share units, performance share awards and dividend equivalent rights.

Item 6.    Selected Financial Data
As a smaller reporting company, we are not required to provide the information required by Item 6.


27


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations


The statements in this discussion regarding the industry outlook and our expectations regarding the future performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Special Note Regarding Forward-Looking Statements and Part I—Item 1A—"Risk Factors." You should read the following discussion together with our consolidated financial statements and notes thereto included in Part II—Item 8— "Financial Statements and Supplementary Data."

Overview
 
On December 31, 2015, CIFC Corp. entered into a series of transactions (the "Reorganization Transaction") to become a subsidiary of CIFC LLC, a publicly traded limited liability company. CIFC LLC (together with its subsidiaries, "CIFC," “we” or "us") is a Delaware limited liability company headquartered in New York City. We are a private debt manager specializing in secured U.S. corporate loan strategies. Our primary business is to provide investment management services for institutional investors, including pension funds, hedge funds, asset management firms, banks, insurance companies and other types of investors around the world.
Fee Earning Assets Under Management (“Fee Earning AUM” or “AUM”) refers to principal balance, net asset value or value of assets managed by us on which we earn management and/or incentive fees. Our AUM is primarily comprised of Collateralized Loan Obligations ("CLOs"). In addition, we manage credit funds and other loan-based products (together, "Non-CLO products" and together with CLOs, "Funds"). We manage these credit products through opportunistic investment strategies where we seek to generate current income and/or capital appreciation, primarily through senior secured corporate loan investments (“SSCLs”) and, to a lesser extent, other investments. We also manage Collateralized Debt Obligations (“CDOs”), which we do not expect to issue in the future.

We have three primary sources of revenue: management fees, incentive fees and investment income. Management fees are generally based on a percentage of AUM of the Funds. Incentive fees are earned based on the performance of the Funds. Investment income represents interest income and realized/unrealized gains and losses on investments in the products sponsored by us and third parties.

As of December 31, 2015, DFR Holdings LLC ("DFR Holdings") owned approximately 74% of the Company's outstanding shares (approximately 70% on a fully diluted basis).

Recent Developments

Reorganization Transaction

On December 31, 2015, CIFC completed a series of transactions to change our top-level form of organization from a corporation to a limited liability company that is taxed as a partnership rather than a corporation for U.S. Federal income tax purposes and allows us to minimize entity-level taxation on investment income. These tax efficiencies may enable us to increase distributions to shareholders and/or investment in our business. As part of the Reorganization Transaction, CIFC Corp. distributed ownership of certain of its subsidiary entities holding certain investment assets to CIFC LLC and retained non-voting Series A Preferred Units ("Preferred Units") issued by certain wholly-owned subsidiaries of CIFC LLC (see Related Party Transactions below).

Each share of common stock of CIFC Corp. outstanding immediately prior to the Reorganization Transaction was converted into the right to receive one common share representing a limited liability company interest in CIFC LLC. Further, CIFC LLC assumed all obligations under the CIFC Corp. 2011 Stock Option and Incentive Plan (the "Stock Incentive Plan"). All the terms and conditions that were in effect immediately prior to the Reorganization Transaction under each outstanding equity award assumed by CIFC LLC will continue in full force and effect after the Reorganization Transaction, except that the interests issuable under each such award will be common shares of CIFC LLC instead of common stock of CIFC Corp.      
CIFC Corp. remains the issuer and primary obligor of our Junior Subordinated Notes and the Senior Notes (see below). Further, CIFC LLC and certain other subsidiaries of CIFC LLC have provided full and unconditional guarantees of the obligations of CIFC Corp. under the Junior Subordinated Notes and the Senior Notes.

28


Executive Overview

The past year proved to be the most challenging for the leveraged credit market since the end of the financial crisis. Commodity prices came under pressure over the summer and risk assets sold off starting in August. The U.S. High Yield Market was down 5% and the U.S. Corporate Loan market recorded its first negative total return since 2008.
 
Our balance sheet investments in CIFC-managed funds outperformed their respective benchmarks. Both the Senior Secured Corporate Loan Fund and the Tactical Income Fund produced positive returns vis-à-vis losses in both the CS Loan Index and the LSTA Loan Index. The pronounced weakness in the CLO market led to a decline in mark-to-market valuation of our balance sheet CLO investments. Consequently, net investment income dropped to $1.9 million compared with $14.1 million in 2014. Excluding investment income, we increased ENI EBITDA by $7.2 million or 26% year-over-year.
 
In 2015, we were successful in sponsoring 5 new CLOs for a combined AUM of $2.6 billion. Strong equity sponsorship allowed us to issue all 5 transactions on a non-risk retention compliant basis. We are well capitalized to issue risk retention compliant CLOs. We successfully completed a 10-year $40 million senior unsecured bond offering in the fourth quarter to further bolster our capacity to invest in risk retention compliant CLOs. We have $210.4 million of cash and investments on our balance sheet, most of which will be available for risk retention compliance over the next 3 years.
 
Our total return corporate credit loan business has outperformed the various leveraged loan indices (S&P LSTA, CS LL & JPM LL) since inception, for three consecutive years. We successfully launched three new funds; including our first white-labeled loan funds in Korea and Switzerland. The AUM of our credit fund platform now exceeds $1.0 billion. Our loan portfolios continue to perform well and defaults continue to be substantially lower compared to the loan indices. We have maintained our rigorous underwriting process and actively managed risk across well-diversified portfolios. We first started to cut our energy exposure in late August and early September of 2014 and continue to be defensively positioned. We remain underweight the sector with current exposure below 3%.
 
CLO issuance has been slow during the course of the first two months of 2016. Forecasts from various banks expect market conditions to improve in the second half of the year. We are well positioned to access the market once conditions become more compelling. Loan prepayment rates have slowed significantly. We expect loan prepayment rates to remain lower until CLO new issuance volumes return, increasing the duration of our existing CLO AUM. We are taking advantage of lower loan prices to build par in our 2.0 CLOs. We expect the current investment opportunity to drive improved returns and with that, potentially higher incentive fees on our existing CLOs in the future.

Fee Earning AUM

Fee Earning AUM or AUM refers to the assets managed by the Company on which we receive management fees and/or incentive fees. Generally, with respect to CLOs, management fees are paid to the Company based on the aggregate collateral balance at par plus principal cash, and with respect to Non-CLO funds, the value of the assets in such funds. The following table summarizes Fee Earning AUM:
 
 
December 31, 2015
 
December 31, 2014
(in thousands, except # of Accounts) (1)(2)
 
Number of Accounts
 
Fee Earning AUM
 
Number of Accounts
 
Fee Earning AUM
Post 2011 CLOs
 
18

 
$
9,860,519

 
13

 
$
7,402,986

Legacy CLOs (3)
 
10

 
2,559,066

 
19

 
4,960,877

     Total CLOs
 
28

 
12,419,585

 
32

 
12,363,863

Credit Funds (4)
 
12

 
1,062,712

 
8

 
593,456

Other Loan-Based Products (4)
 
2

 
573,190

 
2

 
719,170

Total Non-CLOs (4)
 
14

 
1,635,902

 
10

 
1,312,626

Total Loan-Based AUM
 
42

 
14,055,487

 
42

 
13,676,489

ABS and Corporate Bond CDOs
 
8

 
592,798

 
8

 
687,555

Total Fee Earning AUM
 
50

 
$
14,648,285

 
50

 
$
14,364,044



29


Explanatory Notes:
_________________________________
(1)
Fee Earning AUM attributable to ABS and Corporate Bond CDO products is expected to continue to decline as these funds run-off per their contractual terms.
(2)
Fee Earning AUM is based on the latest available monthly report issued by the trustee or fund administrator prior to the end of the period, and may not tie back to the Consolidated GAAP financial statements.
(3)
Legacy CLOs represent all managed CLOs issued prior to 2011, including CLOs acquired since 2011 but issued prior to 2011.
(4)
Management fees for Non-CLO products vary by fund and may not be similar to a CLO.

Fee Earning AUM activities are as follows:
 
 
For the Years Ended December 31,
 
 
2015
 
2014
 
 
(In thousands)
Total loan-based AUM - Beginning Balance
 
$
13,676,489

 
$
12,045,859

CLO New Issuances
 
2,599,709

 
3,249,990

CLO Paydowns
 
(2,521,645
)
 
(1,847,855
)
Net Subscriptions to Credit Funds
 
450,070

 
206,918

Net Redemptions from Other Loan-Based Products
 
(145,980
)
 
(26,625
)
Other (1)
 
(3,156
)
 
48,202

Total loan-based AUM - Ending Balance
 
14,055,487

 
13,676,489

Total CDOs - Ending Balance
 
592,798

 
687,555

Total Fee Earning AUM - Ending Balance
 
$
14,648,285

 
$
14,364,044


Explanatory Note:
_________________________________
(1)     Includes changes in collateral balances of CLOs between periods and market value or portfolio value changes in certain Non-CLO products.
    
During the year ended December 31, 2015, we sponsored the issuance of five new CLOs, launched four new funds and increased subscriptions to existing funds for an aggregate of $3.0 billion of new Fee Earning AUM. All CDOs and certain CLOs we manage have passed their reinvestment periods (see table below). Therefore, proceeds from paydowns are required to repay the CLO's or CDO's liabilities. As expected, AUM on these CLOs and CDOs continued to decline during the year ended December 31, 2015. In addition, 9 CLOs were called during 2015, which generated additional incentive fees. This, along with redemptions from other loan-based products, reduced AUM by $2.7 billion, resulting in an overall net increase in AUM of $0.3 billion.

Loan-based AUM
    
Since 2012, CIFC has raised $11.4 billion of new AUM through organic growth, which has more than offset the run-off from Legacy CLOs (including acquired CLOs). Our Legacy CLO AUM of $2.6 billion is less than a fifth of our total CLO AUM of $12.4 billion and we anticipate it will run off over the next three years.


                

30


The structure of the CLOs we manage affects the management fees paid to us. The following table summarizes select details of the structure of each of the CLOs we manage:
 
 
Issuance Date
 
December 31, 2015
Fee Earning AUM
 
First Optional
Call Date (1)
 
Termination of
Reinvestment
Period (2)
 
Maturity
Year (3)
 
 
Month/Year
 
(In thousands)
 
Month/Year
 
 
Post 2011 CLOs
 
 
 
 
 
 
 
 
 
 
CIFC Funding 2011-I, Ltd.
 
01/12
 
$
260,369

 
01/14
 
01/15
 
2023
CIFC Funding 2012-I, Ltd.
 
07/12
 
453,419

 
08/14
 
08/16
 
2024
CIFC Funding 2012-II, Ltd.
 
11/12
 
733,102

 
12/14
 
12/16
 
2024
CIFC Funding 2012-III, Ltd.
 
01/13
 
504,219

 
01/15
 
01/17
 
2025
CIFC Funding 2013-I, Ltd.
 
03/13
 
504,428

 
04/15
 
04/17
 
2025
CIFC Funding 2013-II, Ltd.
 
06/13
 
625,620

 
07/15
 
07/17
 
2025
   CIFC Funding 2013-III, Ltd.
 
09/13
 
401,404

 
10/15
 
10/17
 
2025
   CIFC Funding 2013-IV, Ltd.
 
11/13
 
505,347

 
11/15
 
11/17
 
2024
   CIFC Funding 2014, Ltd.
 
03/14
 
603,143

 
04/16
 
04/18
 
2025
CIFC Funding 2014-II, Ltd.
 
05/14
 
806,718

 
05/16
 
05/18
 
2026
CIFC Funding 2014-III, Ltd.
 
07/14
 
703,249

 
07/16
 
07/18
 
2026
CIFC Funding 2014-IV, Ltd.
 
09/14
 
602,337

 
10/16
 
10/18
 
2026
CIFC Funding 2014-V, Ltd.
 
12/14
 
553,542

 
10/16
 
01/19
 
2027
CIFC Funding 2015-I, Ltd.
 
03/15
 
601,110

 
09/16
 
04/19
 
2027
CIFC Funding 2015-II, Ltd.
 
05/15
 
500,808

 
10/16
 
04/19
 
2027
CIFC Funding 2015-III, Ltd.
 
07/15
 
501,229

 
10/17
 
10/19
 
2027
CIFC Funding 2015-IV, Ltd.
 
09/15
 
501,172

 
10/18
 
10/20
 
2027
CIFC Funding 2015-V, Ltd.
 
11/15
 
499,303

 
04/18
 
04/20
 
2027
Total Post 2011 CLOs
 
 
 
9,860,519

 
 
 
 
 
 
Legacy CLOs
 
 
 
 
 
 
 
 
 
 
Bridgeport CLO Ltd. 
 
06/06
 
254,273

 
10/09
 
07/13
 
2020
Burr Ridge CLO Plus Ltd. 
 
12/06
 
177,195

 
06/12
 
03/13
 
2023
CIFC Funding 2006-II, Ltd. 
 
12/06
 
172,383

 
03/11
 
03/13
 
2021
CIFC Funding 2007-I, Ltd. 
 
02/07
 
189,315

 
05/11
 
11/13
 
2021
CIFC Funding 2007-II, Ltd. 
 
03/07
 
335,308

 
04/11
 
04/14
 
2021
Schiller Park CLO Ltd. 
 
05/07
 
261,432

 
07/11
 
04/13
 
2021
Bridgeport CLO II Ltd. 
 
06/07
 
360,660

 
12/10
 
09/14
 
2021
CIFC Funding 2007-III, Ltd. 
 
07/07
 
270,228

 
07/10
 
07/14
 
2021
Primus CLO II, Ltd. 
 
07/07
 
232,930

 
10/11
 
07/14
 
2021
Columbus Nova 2007-II, Ltd.
 
11/07
 
305,342

 
10/10
 
10/14
 
2021
Total Legacy CLOs
 
 
 
2,559,066

 
 
 
 
 
 
Total CLOs
 
 
 
$
12,419,585

 
 
 
 
 
 
Explanatory Notes:
_________________________________
(1)
CLOs are generally callable by equity holders (or the subordinated note holders of the CLO) once per quarter beginning on the "first optional call date" and subject to satisfaction of certain conditions. 
(2)
Termination of reinvestment period refers to the date after which we can no longer use certain principal collections to purchase additional collateral, and such collections are instead used to repay the outstanding amounts of certain debt securities issued by the CLO. 
(3)
Represents the contractual maturity of the CLO. Generally, the actual maturity of the deal is expected to occur before the contractual maturity. 

31


Results of Consolidated Operations
 
The Consolidated Financial Statements include the financial statements of our wholly-owned subsidiaries, the entities in which we have a controlling interest ("Consolidated Funds") and variable interest entities ("VIEs" or "Consolidated VIEs") for which we are deemed to be the primary beneficiary (together with the Consolidated Funds, the "Consolidated Entities"). Consolidated VIEs includes certain CLOs and warehouses we manage. 

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update "ASU" 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis ("ASU 2015-02"). The amendments changed the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. We elected to early adopt this guidance on a modified retroactive basis (as of January 1, 2015) ("Item 8— Financial Statements and Supplementary Data"—Note 3). The adoption of ASU 2015-02 resulted in the deconsolidation of 30 CLOs and the Senior Secured Corporate Loan Fund on a modified retrospective basis on January 1, 2015. As of December 31, 2015 the Company consolidated 2 CLOs and 2 credit funds. Year over year, our Consolidated Statements of Operations will not be comparative for certain individual line items.

    

32


The following table presents our comparative Consolidated Statements of Operations for the years ended December 31, 2015 and 2014:

 
CIFC LLC
 
CIFC Corp.
 
For the Year Ended December 31,
 
2015 vs. 2014
 
For the Year Ended December 31,
 
2015 vs. 2014
 
2015
 
2014
 
Change
 
%
 
2015
 
2014
 
Change
 
%
 
(In thousands, except share and per share amounts)
Revenues
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Management and incentive fees
$
92,079

 
$
4,868

 
$
87,211

 
n/m

 
$
92,079

 
$
4,868

 
$
87,211

 
n/m

Interest income from investments
5,333

 
790

 
4,543

 
n/m

 
5,333

 
790

 
4,543

 
n/m

Interest income - Consolidated Entities
25,106

 
517,252

 
(492,146
)
 
n/m

 
25,106


517,252

 
(492,146
)
 
n/m

Total net revenues
122,518

 
522,910


(400,392
)
 
n/m

 
122,518


522,910


(400,392
)
 
n/m

Expenses
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 
Employee compensation and benefits
32,027

 
28,805

 
3,222

 
11
 %
 
32,027

 
28,805

 
3,222

 
11
 %
Share-based compensation
5,550

 
2,692

 
2,858

 
106
 %
 
5,550

 
2,692

 
2,858

 
106
 %
Professional services
9,935

 
7,259

 
2,676

 
37
 %
 
9,885

 
7,259

 
2,626

 
36
 %
General and administrative expenses
9,922

 
10,686

 
(764
)
 
(7
)%
 
9,922

 
10,686

 
(764
)
 
(7
)%
Depreciation and amortization
7,777

 
11,421

 
(3,644
)
 
(32
)%
 
7,777

 
11,421

 
(3,644
)
 
(32
)%
Impairment of intangible assets
1,828

 

 
1,828

 
100
 %
 
1,828

 

 
1,828

 
100
 %
Corporate interest expense
3,808

 
4,236

 
(428
)
 
(10
)%
 
3,808

 
4,236

 
(428
)
 
(10
)%
Expenses - Consolidated Entities
10,774

 
40,074

 
(29,300
)
 
n/m

 
10,774

 
40,074

 
(29,300
)
 
n/m

Interest expense - Consolidated Entities
9,904

 
171,931

 
(162,027
)
 
n/m

 
9,904

 
171,931

 
(162,027
)
 
n/m

Total expenses
91,525

 
277,104


(185,579
)
 
(67
)%
 
91,475


277,104


(185,629
)
 
(67
)%
Other Gain (Loss)
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 
Net gain (loss) on investments
(4,181
)
 
2,474

 
(6,655
)
 
n/m

 
(4,181
)
 
2,474

 
(6,655
)
 
n/m

Net gain (loss) on contingent liabilities
(2,210
)
 
(2,932
)
 
722

 
(25
)%
 
(2,210
)
 
(2,932
)
 
722

 
(25
)%
Net gain (loss) on investments - Consolidated Entities
(26,114
)

(228,777
)
 
202,663

 
n/m

 
(26,114
)

(228,777
)
 
202,663

 
n/m

Net gain (loss) on liabilities - Consolidated Entities
24,746

 
(8,996
)
 
33,742

 
n/m

 
24,746

 
(8,996
)
 
33,742

 
n/m

Net gain (loss) on other investments and derivatives - Consolidated Entities
2,970

 
2,031

 
939

 
n/m

 
2,970

 
2,031

 
939

 
n/m

Net gain on the sale of management contract

 
229

 
(229
)
 
(100
)%
 

 
229

 
(229
)
 
(100
)%
Net other gain (loss)
(4,789
)
 
(235,971
)
 
231,182

 
n/m

 
(4,789
)
 
(235,971
)
 
231,182

 
n/m

Income (loss) before income taxes
26,204


9,835


16,369


n/m


26,254

 
9,835


16,419


n/m

Income tax (expense) benefit
(25,239
)

(22,158
)

(3,081
)

14
 %

(25,239
)
 
(22,158
)

(3,081
)

14
 %
Net income (loss)
965

 
(12,323
)
 
13,288

 
n/m

 
1,015

 
(12,323
)
 
13,338

 
n/m

Net (income) loss attributable to noncontrolling interests in Consolidated Entities
(631
)
 
20,704

 
(21,335
)
 
n/m

 
(631
)
 
20,704

 
(21,335
)
 
n/m

Net income (loss) attributable to the Company
$
334

 
$
8,381

 
$
(8,047
)
 
n/m

 
$
384

 
$
8,381

 
$
(7,997
)
 
n/m

Earnings (loss) per share:
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Basic
$
0.01

 
$
0.37

 
$
(0.36
)
 
(97
)%
 
$
0.02

 
$
0.37

 
$
(0.35
)
 
(95
)%
Diluted
$
0.01

 
$
0.35

 
$
(0.34
)
 
(97
)%
 
$
0.01

 
$
0.35

 
$
(0.34
)
 
(97
)%
Weighted-average number of shares outstanding:
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 
Basic
25,314,696

 
22,908,846

 
2,405,850

 
11
 %
 
25,314,696

 
22,908,846

 
2,405,850

 
11
 %
Diluted
26,414,268

 
24,167,641

 
2,246,627

 
9
 %
 
26,414,268

 
24,167,641

 
2,246,627

 
9
 %
    
Total Net Revenues—GAAP net revenues include management and incentive fees from unconsolidated CLOs, CDOs and Non-CLO products and net investment income from investments in unconsolidated entities. Year-over-year total net revenues decreased significantly due to the deconsolidation of 30 CLOs and the Senior Secured Corporate Loan Fund as of January 1, 2015. Prior to the adoption of ASU 2015-02, revenues from these assets were eliminated in consolidation.


33


Total Expenses
Employee compensation and benefits—The increase primarily relates to contractual fee sharing arrangements which required the Company to pay certain former employees incentive fees collected on CLOs acquired from Columbus Nova Credit Investments Management, LLC ("CNCIM"). During 2015, we received higher incentive fees on such CLOs. The increase was partially offset by a reduction in incentive-based compensation compared to the prior year.

Share based compensation—During 2015, we expensed a full year of amortization on 1.3 million of RSUs and 0.4 million of stock options granted during 2014. In addition, in 2015, we recognized additional expenses from the acceleration of vesting terms on certain restricted stock unit awards granted to the Company's Co-Presidents ("Item 8—Financial Statements and Supplementary Data"—Note 12).

Professional fees—Year over year, professional fees increased primarily in relation to expenses incurred for the Reorganization Transaction and to support the growth and diversification of the business.

General and administrative expenses—In 2014, we recorded a $0.6 million expense for the settlement of litigation with a former employee.

Depreciation and amortization—In 2015, we had lower amortization expense for intangible assets since these management contracts were either impaired or written off in the prior year.
 
Impairments of intangible assets—During the year ended December 31, 2015, we received notice from holders of certain CLOs exercising their right to call those CLOs for redemption. As a result of these calls, we recorded impairment charges of $1.8 million to fully impair intangible assets associated with these management contracts.

Consolidated Entities - Expenses and Interest Expenses—Year-over-year total expenses from the Consolidated Entities decreased significantly primarily due to the deconsolidation of 30 CLOs and the Senior Secured Corporate Loan Fund as of January 1, 2015. As of December 31, 2015 the Company consolidated 2 CLOs and 2 credit funds and as of December 31, 2014, we consolidated 31 CLOs, 1 warehouse, and 2 credit funds. Prior to the adoption of ASU 2015-02, expenses from these entities were eliminated in consolidation.

Net other income (expense) and gain (loss)—Subsequent to the adoption of ASU 2015-02, we deconsolidated 30 CLOs and the Senior Secured Corporate Loan Fund on a modified retrospective basis on January 1, 2015. As such, the balances are not comparable year over year.

Net gain (loss) on investment—Net gain (loss) on investment includes the unrealized appreciation or depreciation and realized gains and losses on the investments in CLOs, warehouses and credit funds which we are not required to consolidate. In general, the decrease primarily related to an increase in unrealized losses as a result of significant declines in the market value of loans and CLO securities compared to the prior year. See Non-GAAP Measures section for further discussion.

Net (income) loss attributable to noncontrolling interests in Consolidated Entities—Subsequent to the adoption of ASU 2015-02, we deconsolidated 30 CLOs and the Senior Secured Corporate Loan Fund on a modified retrospective basis on January 1, 2015. As such, the balances are not comparable year over year. As of December 31, 2015, we consolidated 2 CLOs and 2 credit funds, and as of December 31, 2014, we consolidated 31 CLOs, 1 warehouse, and 2 credit funds.

Income tax expense/benefit—CIFC’s Provision for Taxes for the years ended December 31, 2015 and 2014 was $25.2 million and $22.2 million, respectively. This resulted in an effective tax rate of 96.3% and 225.3%, respectively, based on our Income (loss) before income taxes of $26.2 million and $9.8 million, respectively.
The primary factor that contributed to the fluctuation in the effective tax rate is that pre-tax book income (loss) includes $0.6 million for 2015 and $(20.7) million for 2014 of income/(loss) from consolidated VIEs and VOEs. Income/(loss) from consolidated VIEs and VOEs is included in the pre-tax income/(loss) but is not included in the calculation of taxable income. The effective tax rate in 2015 and 2014 was impacted by the write-down of deferred tax assets of $6.3 million and $6.4 million, respectively, resulting from tax law changes enacted by New York City in 2015 and New York State in 2014. These tax law changes were effective for tax years beginning on or after January 1, 2015. The 2015 effective tax rate was further impacted by the reversal of the deferred tax assets in connection with the Reorganization Transaction (see "Item 8—Financial Statements and Supplementary Data"—Note 15).
We expect a reduction in our effective tax rate going forward as the result of the Reorganization Transaction. Inclusion of consolidated VIEs and VOEs in the pretax income/(loss) is expected to continue to impact the effective tax rate for future years.

34



ENI and Deconsolidated Non-GAAP Statements (Non-GAAP Measures)
 
ENI and ENI EBITDA
    
ENI is a non-GAAP financial measure of profitability which management uses in addition to GAAP Net income (loss) attributable to CIFC LLC to measure the performance of our core business (excluding non-core products). We believe ENI reflects the nature and substance of the business, the economic results driven by management and incentive fee revenues from the management of client funds and earnings on our investments. ENI represents GAAP Net income (loss) attributable to CIFC LLC excluding (i) income taxes, (ii) merger and acquisition related items including fee-sharing arrangements, amortization and impairments of intangible assets and gain (loss) on contingent consideration for earn-outs, (iii) non-cash compensation related to profits interests granted by CIFC Parent Holdings LLC ("CIFC Parent") in June 2011, (iv) revenues attributable to non-core investment products, (v) advances for fund organizational expenses, and (vi) certain other items as detailed.

ENI EBITDA is also a non-GAAP financial measure that management considers, in addition to GAAP Net income (loss) attributable to CIFC LLC, to evaluate our core performance. ENI EBITDA represents ENI before corporate interest expense and depreciation of fixed assets, a non-cash item.

ENI and ENI EBITDA may not be comparable to similar measures presented by other companies, as they are non-GAAP financial measures that are not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. In addition, ENI and ENI EBITDA should be considered an addition to, not as a substitute for, or superior to, financial measures determined in accordance with GAAP.

The following table presents our components of ENI for the years ended December 31, 2015 and 2014 (1):
 
For the Years Ended December 31,
 
2015 vs. 2014
 
2015
 
2014
 
Change
 
% Change
 
(in thousands, except per share amounts)
 
 
Adjusted revenues
 
 
 
 
 
 
 
Senior Fees from CLOs
$
24,224

 
$
21,709

 
$
2,515

 
12%
Subordinated Fees from CLOs
34,359

 
32,900

 
1,459

 
4%
Management Fees from Non-CLO products
3,933

 
2,705

 
1,228

 
45%
Total management Fees
62,516

 
57,314

 
5,202

 
9%
Incentive Fees
22,073

 
17,358

 
4,715

 
27%
Net investment income (2)
1,866

 
14,139

 
(12,273
)
 
(87)%
Total adjusted net revenues
86,455

 
88,811

 
(2,356
)
 
(3)%
 
 
 
 
 
 
 
 
Adjusted expenses
 
 
 
 
 

 
 
Employee compensation and benefits
26,902

 
27,308

 
(406
)
 
(1)%
Share-based compensation
5,348

 
2,579

 
2,769

 
107%
Professional services
7,846

 
7,259

 
587

 
8%
General and administrative expenses
9,807

 
10,062

 
(255
)
 
(3)%
Depreciation and amortization
1,387

 
1,272

 
115

 
9%
Corporate interest expense
3,808

 
4,236

 
(428
)
 
(10)%
Total adjusted expenses
55,098

 
52,716

 
2,382

 
5%
 
 
 
 
 
 
 
 
ENI
$
31,357

 
$
36,095

 
$
(4,738
)
 
(13)%
Add: Corporate interest expense
3,808

 
4,236

 
(428
)
 
(10)%
Add: Depreciation of fixed assets
1,387

 
1,272

 
115

 
9%
ENI EBITDA
$
36,552

 
$
41,603

 
$
(5,051
)
 
(12)%
 
 
 
 
 
 
 
 
ENI per share - basic (3)
$
1.24

 
$
1.58

 
$
(0.34
)
 
(22)%
ENI per share - diluted (3)
$
1.19

 
$
1.49

 
$
(0.30
)
 
(20)%


35


Explanatory Notes:
______________________________
(1)
Amounts in this table can be derived by taking the deconsolidated non-GAAP Statement of Operations and adjusting balances using the ENI reconciliation.
(2)Net investment income for the respective periods include:
 
For the Years Ended December 31,
 
2015 vs. 2014
 
2015
 
2014
 
Change
 
% Change
 
(in thousands)
 
 
Interest income
$
11,577

 
$
11,501

 
$
76

 
1%
Realized gains (losses)
7,489

 
6,305

 
1,184

 
19%
Unrealized gains (losses)
(17,200
)
 
(3,667
)
 
(13,533
)
 
369%
Net investment income
$
1,866

 
$
14,139

 
$
(12,273
)
 
(87)%
(3)
GAAP weighted average shares outstanding was used as ENI weighted average shares outstanding.

For the years ended December 31, 2015 and 2014:

Adjusted net revenues—Year over year incentive fees increased by $4.7 million or 27% as a result of increases in CLOs called during 2015. Further, since its launch in the fourth quarter of 2014, we recognized incentive fees for the first time from the Warehouse Fund. Management fees increased by $5.2 million or 9% as a result of increased AUM of credit funds year over year, and a full year of fees from CLOs issued in 2014. Net investment income decreased by $12.3 million or 87% related to an increase of $13.5 million in unrealized losses, as a result of significant declines in the market value of loans and CLO securities compared to the prior year.

Adjusted expenses—Total adjusted expenses increased by $2.4 million or 5% primarily due to increases in adjusted Share based compensation and adjusted Professional fees. These increases were offset by decreases in adjusted Corporate interest expense and adjusted Employee compensation and benefits.

Adjusted share based compensation increased as we recognized (i) a full year of amortization on equity awards granted during 2014 and (ii) additional expenses from the acceleration of vesting terms on certain restricted stock unit awards granted to the Company's Co-Presidents ("Item 8—Financial Statements and Supplementary Data"—Note 12). Further, adjusted Professional fees increased to support the growth and diversification of the business. These increases were partially offset by the reduction of adjusted Corporate interest expense primarily related to the conversion of the Company's Convertible Notes in July 2014 and adjusted Employee compensation and benefits from a reduction in incentive-based compensation compared to the prior year.

The following is a reconciliation of GAAP Net income (loss) attributable to CIFC LLC to ENI:
 
For the Year Ended December 31,
 
2015
 
2014
 
(in thousands)
GAAP Net income (loss) attributable to CIFC LLC
$
334

 
$
8,381

Reconciling and other items:
 
 
 
Income tax expense (benefit)
25,239

 
22,158

Amortization and impairment of intangibles
8,218

 
10,149

Management fee sharing arrangements (1)
(11,521
)
 
(8,716
)
Net (gain)/loss on contingent liabilities and other
2,210

 
2,932

Employee compensation costs (2)
5,327

 
1,610

Management fees attributable to non-core funds
(654
)
 
(814
)
Other (3)
2,204

 
395

Total reconciling items
31,023

 
27,714

ENI
$
31,357

 
$
36,095

Add: Corporate interest expense
3,808

 
4,236

Add: Depreciation of fixed assets
1,387

 
1,272

ENI EBITDA
$
36,552

 
$
41,603



36


Explanatory Notes:
______________________________
(1)
We share management fees on certain of the acquired CLOs we manage (shared with the party that sold the funds to CIFC, or an affiliate thereof). Management fees are presented on a gross basis for GAAP and on a net basis for ENI.
(2)
Employee compensation and benefits has been adjusted for non-cash compensation related to profits interests granted to CIFC employees by CIFC Parent and sharing of incentive fees with certain former employees established in connection with our acquisition of certain CLOs from CNCIM.
(3)
In 2015, Other predominately includes professional fees related to the Reorganization Transaction.

Deconsolidated Non-GAAP Statements
The Deconsolidated Non-GAAP Statements represent the Consolidated GAAP statements adjusted to eliminate the impact of the Consolidated Entities. On the Consolidated Statement of Operations, we have reclassified the sum of Net results of Consolidated Entities, Net (income) loss attributable to noncontrolling interests in Consolidated Entities and Net gain (loss) on investments to the Deconsolidated Non-GAAP line items that represent its characteristics: management fees and incentive fees, and interest income. On the Balance Sheets, we have excluded amounts related to all consolidated entities. Management uses these Non-GAAP statements in addition to Consolidated GAAP Statements to measure the performance of our core asset management business.         

37


The following table presents the reconciliation from CIFC LLC GAAP to Deconsolidated Non-GAAP Statement of Operations for the years ended December 31, 2015 and 2014:

 
 
For the Years Ended December 31,
 
 
2015
 
2014
(In thousands)
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Management and incentive fees
 
$
92,079

 
$
4,685

 
$
96,764

 
$
4,868

 
$
79,334

 
$
84,202

Interest income/Net investment income
 
5,333

 
(3,467
)
 
1,866

 
790

 
13,349

 
14,139

Interest income - Consolidated Entities
 
25,106

 
(25,106
)
 

 
517,252

 
(517,252
)
 

Total net revenues
 
122,518

 
(23,888
)
 
98,630

 
522,910

 
(424,569
)
 
98,341

Expenses
 
 
 
 
 

 
 
 
 
 
 
Employee compensation and benefits
 
32,027

 

 
32,027

 
28,805

 

 
28,805

Share-based compensation
 
5,550

 

 
5,550

 
2,692

 

 
2,692

Professional services
 
9,935

 

 
9,935

 
7,259

 

 
7,259

General and administrative expenses
 
9,922

 

 
9,922

 
10,686

 

 
10,686

Depreciation and amortization
 
7,777

 

 
7,777

 
11,421

 

 
11,421

Impairment of intangible assets
 
1,828

 

 
1,828

 

 

 

Corporate interest expense
 
3,808

 

 
3,808

 
4,236

 

 
4,236

Expenses - Consolidated Entities
 
10,774

 
(10,774
)
 

 
40,074

 
(40,074
)
 

Interest expense - Consolidated Entities
 
9,904

 
(9,904
)
 

 
171,931

 
(171,931
)
 

Total expenses
 
91,525

 
(20,678
)
 
70,847

 
277,104

 
(212,005
)
 
65,099

Other Gain (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) on investments
 
(4,181
)
 
4,181

 

 
2,474

 
(2,474
)
 

Net gain (loss) on contingent liabilities
 
(2,210
)
 

 
(2,210
)
 
(2,932
)
 

 
(2,932
)
Net gain (loss) on investments - Consolidated Entities
 
(26,114
)
 
26,114

 

 
(228,777
)
 
228,777

 

Net gain (loss) on liabilities - Consolidated Entities
 
24,746

 
(24,746
)
 

 
(8,996
)
 
8,996

 

Net gain (loss) on other investments and derivatives - Consolidated Entities
 
2,970

 
(2,970
)
 

 
2,031

 
(2,031
)
 

Net gain on the sale of management contracts
 

 

 

 
229

 

 
229

Net other gain (loss)
 
(4,789
)
 
2,579

 
(2,210
)
 
(235,971
)
 
233,268

 
(2,703
)
Income (loss) before income taxes
 
26,204

 
(631
)
 
25,573

 
9,835

 
20,704

 
30,539

Income tax (expense) benefit
 
(25,239
)
 

 
(25,239
)
 
(22,158
)
 

 
(22,158
)
Net income (loss)
 
965

 
(631
)
 
334

 
(12,323
)
 
20,704

 
8,381

Net (income) loss attributable to noncontrolling interests in Consolidated Entities
 
(631
)
 
631

 

 
20,704

 
(20,704
)
 

Net income (loss) attributable to the Company (1)
 
$
334

 
$

 
$
334

 
$
8,381

 
$

 
$
8,381

Explanatory Note:
______________________________
(1)
On December 31, 2015, we completed the Reorganization Transaction to become a publicly traded limited liability company. For the year ended December 31, 2015, total Net income (loss) was attributable to CIFC Corp., and effective December 31, 2015, Net income (loss) is attributable to CIFC LLC.

    

38


The following table presents the reconciliation from CIFC LLC GAAP to Deconsolidated Non-GAAP Balance Sheets as of December 31, 2015 and 2014:

 
 
December 31, 2015
 
December 31, 2014
(In thousands)
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
57,968

 
$

 
$
57,968

 
$
59,290

 
$

 
$
59,290

Restricted cash and cash equivalents
 
1,694

 

 
1,694

 
1,694

 

 
1,694

Investments
 
70,696

 
81,752

 
152,448

 
38,699

 
62,550

 
101,249

Receivables
 
7,075

 
(62
)
 
7,013

 
2,135

 
4,346

 
6,481

Prepaid and other assets
 
1,973

 
666

 
2,639

 
2,285

 

 
2,285

Deferred tax asset, net
 
44,425

 

 
44,425

 
55,475

 

 
55,475

Equipment and improvements, net
 
4,866

 

 
4,866

 
5,194