Note 5. Investment Partnerships

6 Months Ended

Jun. 30, 2019

Note 5. Investment Partnerships

Note 5. Investment Partnerships

The Company reports on the limited partnership interests in investment partnerships under the equity method of accounting. We record our proportional share of equity in the investment partnerships but exclude Company common stock held by said partnerships. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though they are legally outstanding. The Company records gains/losses from investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statements of earnings based on our carrying value of these partnerships. The fair value is calculated net of the general partner’s accrued incentive fees. Gains and losses on Company common stock included in the earnings of these partnerships are eliminated because they are recorded as treasury stock. 

Biglari Capital Corp. is the general partner of the investment partnerships and is an entity solely owned by Mr. Biglari.

The fair value and adjustment for Company common stock held by the investment partnerships to determine the carrying value of our partnership interest is presented below. 

	Fair Value			Company Common Stock			Carrying Value
Partnership interest at December 31, 2018	$	715,102		$	157,622		$	557,480
Investment partnership gains		54,374			(13,978	)		68,352
Contributions (net of distributions) to investment partnerships		(2,490	)					(2,490	)
Increase in proportionate share of Company stock held					1,276			(1,276	)
Partnership interest at June 30, 2019	$	766,986		$	144,920		$	622,066

	Fair Value			Company Common Stock			Carrying Value
Partnership interest at December 31, 2017	$	925,279		$	359,258		$	566,021
Investment partnership gains (losses)		(128,725	)		(123,879	)		(4,846	)
Contributions (net of distributions) to investment partnerships		(7,700	)					(7,700	)
Increase in proportionate share of Company stock held					18,681			(18,681	)
Partnership interest at June 30, 2018	$	788,854		$	254,060		$	534,794

The carrying value of the investment partnerships net of deferred taxes is presented below. 

	June 30, 2019			December 31, 2018
Carrying value of investment partnerships	$	622,066		$	557,480
Deferred tax liability related to investment partnerships		(83,187	)		(92,703	)
Carrying value of investment partnerships net of deferred taxes	$	538,879		$	464,777

The Company’s proportionate share of Company stock held by investment partnerships at cost is $375,507 and $374,231 at June 30, 2019 and December 31, 2018, respectively, and is recorded as treasury stock.

The carrying value of the partnership interest approximates fair value adjusted by the value of held Company stock. Fair value is according to our proportional ownership interest of the fair value of investments held by the investment partnerships. The fair value measurement is classified as level 3 within the fair value hierarchy.

Gains (losses) from investment partnerships recorded in the Company’s consolidated statements of earnings are presented below. 

	Second Quarter					First Six Months
	2019		2018			2019		2018
Gains (losses) on investment partnership	$	34,198	$	(8,341	)	$	68,352	$	(4,846	)
Tax expense (benefit)		7,944		(2,464	)		15,861		(2,044	)
Net earnings (loss)	$	26,254	$	(5,877	)	$	52,491	$	(2,802	)

On December 31 of each year, the general partner of the investment partnerships will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above a hurdle rate of 6% over the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year. The Company did not accrue an incentive fee during the first six months of 2019 or 2018. Our investments in these partnerships are committed on a rolling 5-year basis. 

Summarized financial information for The Lion Fund, L.P. and The Lion Fund II, L.P. is presented below.

		Equity in Investment Partnerships
		Lion Fund			Lion Fund II
Total assets as of June 30, 2019	$	106,657		$	911,690
Total liabilities as of June 30, 2019	$	90		$	165,787
Revenue for the first six months of 2019	$	121		$	62,499
Earnings for the first six months of 2019	$	88		$	58,068
Biglari Holdings’ ownership interest as of June 30, 2019		66.1	%		93.4	%
Total assets as of December 31, 2018	$	107,207		$	901,750
Total liabilities as of December 31, 2018	$	447		$	202,770
Revenue for the first six months of 2018	$	(49,773	)	$	(99,751	)
Earnings (loss) for the first six months of 2018	$	(49,805	)	$	(104,290	)
Biglari Holdings’ ownership interest as of June 30, 2018		65.3	%		92.2	%

Revenue in the above summarized financial information of the investment partnerships includes investment income and unrealized gains and losses on investments. The investments held by the investment partnerships are largely concentrated in the common stock of one investee, Cracker Barrel Old Country Store, Inc.

Transactions with The Lion Fund II, L.P. were as follows. 

	Second Quarter						First Six Months
	2019			2018			2019			2018
Contributions	$	—		$	—		$	40,000		$	—
Distributions		(2,490	)		(2,500	)		(42,490	)		(7,700	)
	$	(2,490	)	$	(2,500	)	$	(2,490	)	$	(7,700	)