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Investments and Fair Value Disclosures

12 Months Ended

Dec. 31, 2019

INVESTMENTS AND FAIR VALUE DISCLOSURES

The following table presents the components of the Company’s investments as reported in the consolidated balance sheets:


	December 31, 2019		December 31, 2018

	(dollars in thousands)
United States government obligations, at fair value	$	146,565	$	179,510
CLOs, at fair value	182,870		181,868
Other investments, equity method	81,991		28,519
Total Investments	$	411,426	$	389,897

Fair Value Disclosures

Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date (i.e., an exit price). Due to the inherent uncertainty of valuations of investments that are determined to be illiquid or do not have readily ascertainable fair values, the estimates of fair value may differ from the values ultimately realized, and those differences can be material.

GAAP prioritizes the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of assets and liabilities and the specific characteristics of the assets and liabilities. Assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively-quoted prices generally will have a higher degree of market price observability and lesser degree of judgment used in measuring fair value.

Assets and liabilities measured at fair value are classified into one of the following categories:

•Level I – Fair value is determined using quoted prices that are available in active markets for identical assets or liabilities. The types of assets and liabilities that would generally be included in this category are certain listed equities, U.S. government obligations and certain listed derivatives.

•Level II – Fair value is determined using quotations received from dealers making a market for these assets or liabilities (“broker quotes”), valuations obtained from independent third-party pricing services, the use of models or other valuation methodologies based on pricing inputs that are either directly or indirectly market observable as of the measurement date. The types of assets and liabilities that would generally be included in this category are certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, less liquid equity securities, forward contracts and certain over the-counter (“OTC”) derivatives.

•Level III – Fair value is determined using pricing inputs that are unobservable in the market and includes situations where there is little, if any, market activity for the asset or liability. The fair value of assets and liabilities in this category may require significant judgment or estimation in determining fair value of the assets or liabilities. The fair value of these assets and liabilities may be estimated using a combination of observed transaction prices, independent pricing services, relevant broker quotes, models or other valuation methodologies based on pricing inputs that are neither directly or indirectly market observable. The types of assets and liabilities that would generally be included in this category include CLOs, real estate investments, equity and debt securities issued by private entities, limited partnerships, certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, certain OTC derivatives, residential and commercial mortgage-backed securities, asset-backed securities, collateralized debt obligations and investments in affiliated credit funds.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of an input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Fair Value Measurements Categorized within the Fair Value Hierarchy

The following table summarizes the Company’s investments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2019:


	As of December 31, 2019
	Level I		Level II		Level III		Total

	(dollars in thousands)
Assets, at Fair Value
Included within cash and cash equivalents:
United States government obligations	$	97,034	$	—	$	—	$	97,034

Included within investments:
United States government obligations	$	146,565	$	—	$	—	$	146,565
CLOs⁽¹⁾	$	—	$	—	$	182,870	$	182,870

_______________

(1) As of December 31, 2019, investments in CLOs had contractual principal amounts of $170.0 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.

The following table summarizes the Company’s investments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2018:


	As of December 31, 2018
	Level I		Level II		Level III		Total

	(dollars in thousands)
Assets, at Fair Value
Included within cash and cash equivalents:
United States government obligations	$	58,054	$	—	$	—	$	58,054

Included within investments:
United States government obligations	$	179,510	$	—	$	—	$	179,510
CLOs⁽¹⁾	$	—	$	—	$	181,868	$	181,868

Investments of consolidated funds:
Bank debt	$	—	$	91,345	$	75,613	$	166,958
Corporate bonds	$	—	$	4,537	$	—	$	4,537
Total Investments of Consolidated Funds	$	—	$	95,882	$	75,613	$	171,495

_______________

(1) As of December 31, 2018, investments in CLOs had contractual principal amounts of $171.5 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.

Reconciliation of Fair Value Measurements Categorized within Level III

Gains and losses, excluding those of the consolidated funds are recorded within net gains (losses) on investments in the consolidated statements of comprehensive income (loss), and gains and losses of the consolidated funds are recorded within net gains (losses) of consolidated funds. Certain funds were deconsolidated in the third quarter 2019; amounts related to these funds are included within investment sales. Amortization of premium, accretion of discount and foreign exchange gains and losses on non-U.S. Dollar investments are also included within gains and losses in the tables below.

The following table summarizes the changes in the Company’s Level III assets and liabilities for the year ended December 31, 2019:


	December 31, 2018		Transfers In		Transfers Out		Investment Purchases / Issuances		Investment Sales / Settlements		Gains / Losses		December 31, 2019

	(dollars in thousands)
Assets, at Fair Value
Included within investments:
CLOs	$	181,868	$	—	$	—	$	31,816	$	(27,778)	$	(3,036)	$	182,870

Investments of consolidated funds:
Bank debt	$	75,613	$	7,982	$	(40,272)	$	29,601	$	(73,772)	$	848	$	—
Corporate bonds	$	—	$	—	$	—	$	987	$	(981)	$	(6)	$	—

The following table summarizes the changes in the Company’s Level III assets and liabilities for the year ended December 31, 2018:


	December 31, 2017		Transfers In		Transfers Out		Investment Purchases		Investment Sales / Settlements		Gains / Losses		December 31, 2018

	(dollars in thousands)
Assets, at Fair Value
Included within investments:
CLOs	$	211,749	$	—	$	—	$	157,099	$	(175,272)	$	(11,708)	$	181,868

Investments of consolidated funds:
Bank debt	$	18,807	$	1,671	$	(1,244)	$	146,658	$	(88,600)	$	(1,679)	$	75,613

Transfers out of Level III presented in the tables above resulted from the fair values of certain securities becoming market observable, with fair value determined using independent pricing services. Transfers into Level III presented in the tables above resulted from the valuation of certain investments with decreased market observability, with fair values determined using independent pricing services.

The table below summarizes the net change in unrealized gains and losses on the Company’s Level III investments held as of the reporting date:


	Year Ended December 31,
	2019		2018

	(dollars in thousands)
Assets, at Fair Value
Included within investments:
CLOs	$	(2,877)	$	(9,998)

Investments of consolidated funds:
Bank debt	$	—	$	(2,160)

Valuation Methodologies for Fair Value Measurements Categorized within Levels II and III

Investments in CLOs, bank debt and corporate bonds are valued using independent pricing services, and therefore the Company does not have transparency into the significant inputs used by such services.

The Company elected to measure its investments in CLOs at fair value through consolidated net income (loss) in order to simplify its accounting for these instruments. Changes in fair value of these investments are included within net gains on investments in the consolidated statements of comprehensive income (loss). The Company accrues interest income on its investments in CLOs using the effective interest method.

Fair Value of Other Financial Instruments

Management estimates that the carrying value of the Company’s other financial instruments, including its debt obligations and repurchase agreements, approximated their fair values as of December 31, 2019. The fair value measurements for the Company’s debt obligations and repurchase agreements are categorized as Level III within the fair value hierarchy and were determined using independent pricing services.

Loans Sold to CLOs Managed by the Company

In the year ended December 31, 2018, the Company sold $29.8 million of loans to CLOs managed by the Company. No loans were sold in the year ended December 31, 2019. These loans were previously purchased by the Company in the open market, and were sold for cash at cost to the CLOs. The loans were accounted for as transfers of financial assets and met the criteria for derecognition under GAAP.

The Company invests in senior secured and subordinated notes issued by certain CLOs to which it sold the loans discussed above. These investments represent retained interests to the Company and are in the form of a 5% vertical strip (i.e., 5% of each of the senior and subordinated tranches of notes issued by each CLO). The retained interests are reported within investments on the Company’s consolidated balance sheet. In the year ended December 31, 2018, the Company made $24.9 million of investments related to these retained interests. No investments related to these retained interests were made in the year ended December 31, 2019. As of December 31, 2019 and 2018, the Company’s investments in these retained interests had a fair value of $88.2 million and $89.4 million, respectively.

The Company is subject to risks associated with the performance of the underlying collateral and the market yield of the assets. The Company’s risk of loss from retained interest is limited to its investments in these interests. The Company receives quarterly payments of interest and principal, as applicable, on these retained interests. In the years ended December 31, 2019 and 2018, the Company received $3.8 million and $6.4 million, respectively, of interest and principal payments related to the retained interests.

The Company uses independent pricing services to value its investments in the CLOs, including the retained interests, and therefore the only key assumption is the price provided by such service. A corresponding adverse change of 10% or 20% on price would have a corresponding impact on the fair value of the Company’s investments in CLOs.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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