19. Consolidated Sponsored Investment Products

Sponsored Investment Products

In the normal course of its business, the Company sponsors various types of investment products. The Company consolidates an investment product when it owns a majority of the voting interest in the entity or it is the primary beneficiary of an investment product that is a VIE. The consolidation and deconsolidation of these investment products has no impact on net income attributable to stockholders. The Company’s risk with respect to these investments is limited to its investment in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products, beyond the Company’s investments in, and fees generated from these products. If the Company were to liquidate, these investments would not be available to the general creditors of the Company. The Company does not consider cash and investments held by consolidated sponsored investment products to be assets of the Company other than its direct investment in these products.

As of December 31, 2014 and December 31, 2013, the Company consolidated twelve and eight sponsored investment products, respectively. During the year ended December 31, 2014, the Company consolidated six additional sponsored investment products and deconsolidated two sponsored investment product because it no longer had a majority voting interest.

The following table presents the balances of the consolidated sponsored investment products that were reflected in the Consolidated Balance Sheets as of December 31, 2014 and 2013:


	As of December 31,
	2014			2013
*($ in thousands)*
Total cash	$	8,687		$	531
Total investments		236,652			139,054
All other assets		6,960			9,595
Total liabilities		(12,556	)		(8,435	)
Redeemable noncontrolling interest		(23,071	)		(42,186	)

The Company’s net interests in consolidated sponsored investment products	$	216,672		$	98,559

Consolidation

The following tables reflect the impact of the consolidated sponsored investment products in the Consolidated Balance Sheets as of December 31, 2014 and 2013, respectively:


As of December 31, 2014
	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products		Eliminations and Adjustments (a)			Balances as Reported in Consolidated Balance Sheet
*($ in thousands)*
Total cash	$	202,847		$	8,687	$	—		$	211,534
Total investments		279,863			236,652		(216,415	)		300,100
All other assets		180,436			6,960		(257	)		187,139

Total assets	$	663,146		$	252,299	$	(216,672	)	$	698,773

Total liabilities	$	99,794		$	12,813	$	(257	)	$	112,350
Redeemable noncontrolling interest		—			—		23,071			23,071
Equity attributable to stockholders of the Company		563,542			239,486		(239,486	)		563,542
Non-redeemable noncontrolling interest		(190	)		—		—			(190	)

Total liabilities and equity	$	663,146		$	252,299	$	(216,672	)	$	698,773


As of December 31, 2013
	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products		Eliminations and Adjustments (a)			Balances as Reported in Consolidated Balance Sheet
*($ in thousands)*
Total cash	$	271,014		$	531	$	—		$	271,545
Total investments		135,692			139,054		(98,434	)		176,312
All other assets		187,627			9,595		(125	)		197,097

Total assets	$	594,333		$	149,180	$	(98,559	)	$	644,954

Total liabilities	$	101,465		$	8,560	$	(125	)	$	109,900
Redeemable noncontrolling interest		—			—		42,186			42,186
Equity attributable to stockholders of the Company		492,930			140,620		(140,620	)		492,930
Non-redeemable noncontrolling interest		(62	)		—		—			(62	)

Total liabilities and equity	$	594,333		$	149,180	$	(98,559	)	$	644,954

(a)

Adjustments include the elimination of intercompany transactions between the Company and its consolidated sponsored investment products, primarily the elimination of the investments and equity and recording of any noncontrolling interest.

The following table reflects the impact of the consolidated sponsored investment products in the Consolidated Statement of Operations for the years ended December 31 2014, 2013 and 2012, respectively:


For the Year Ended December 31, 2014
	Balance Before Consolidation of Investment Products		Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Consolidated Statement of Operations
*($ in thousands)*
Total operating revenues	$	451,259	$	—		$	(661	)	$	450,598
Total operating expenses		316,840		3,699			(661	)		319,878

Operating income (loss)		134,419		(3,699	)		—			130,720
Total other non-operating income (expense)		2,502		2,619			473			5,594

Income (loss) before income tax expense		136,921		(1,080	)		473			136,314
Income tax expense		39,349		—			—			39,349

Net income (loss)		97,572		(1,080	)		473			96,965
Noncontrolling interests		128		—			607			735

Net income (loss) attributable to the Company	$	97,700	$	(1,080	)	$	1,080		$	97,700


For the Year Ended December 31, 2013
	Balance Before Consolidation of Investment Products		Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Consolidated Statement of Operations
*($ in thousands)*
Total operating revenues	$	389,202	$	—		$	13		$	389,215
Total operating expenses		274,913		785			13			275,711

Operating income (loss)		114,289		(785	)		—			113,504
Total other non-operating income (expense)		5,620		6,098			(3,314	)		8,404

Income (loss) before income tax expense		119,909		5,313			(3,314	)		121,908
Income tax expense		44,778		—			—			44,778

Net income (loss)		75,131		5,313			(3,314	)		77,130
Noncontrolling interests		59		—			(1,999	)		(1,940	)

Net income (loss) attributable to the Company	$	75,190	$	5,313		$	(5,313	)	$	75,190


For the Year Ended December 31, 2012
	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Consolidated Statement of Operations
*($ in thousands)*
Total operating revenues	$	279,919		$	—		$	167		$	280,086
Total operating expenses		219,326			148			167			219,641

Operating income (loss)		60,593			(148	)		—			60,445
Total other non-operating income (expense)		4,106			2,649			(2,397	)		4,358

Income (loss) before income tax expense		64,699			2,501			(2,397	)		64,803
Income tax expense		27,030			—			—			27,030

Net income (loss)		37,669			2,501			(2,397	)		37,773
Noncontrolling interests		3			—			(104	)		(101	)
Allocation of earnings to preferred stockholders		(64	)		—			—			(64	)

Net income (loss) attributable to the Company	$	37,608		$	2,501		$	(2,501	)	$	37,608

(a)	Adjustments include the elimination of intercompany transactions between the Company and its consolidated sponsored investment products, primarily the elimination of the investments and equity and recording of any noncontrolling interest.

Fair Value Measurements of Consolidated Sponsored Investment Products

The assets and liabilities of the consolidated sponsored investment products measured at fair value on a recurring by fair value hierarchy level were as follows:


As of December 31, 2014
	Level 1		Level 2		Level 3		Total
*($ in thousands)*
Assets
Debt securities	$	—	$	135,050	$	1,065	$	136,115
Equity securities		82,417		18,120		—		100,537
Derivatives		154		227		—		381

Total Assets Measured at Fair Value	$	82,571	$	153,397	$	1,065	$	237,033

Liabilities
Derivatives	$	191	$	—	$	—	$	191
Short sales		7,491		674		—		8,165

Total Liabilities Measured at Fair Value	$	7,682	$	674	$	—	$	8,356


As of December 31, 2013
	Level 1		Level 2		Level 3		Total
*($ in thousands)*
Assets
Debt securities	$	—	$	47,114	$	—	$	47,114
Equity securities		91,940		—		—		91,940

Total Assets Measured at Fair Value	$	91,940	$	47,114	$	—	$	139,054

The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated sponsored investment products measured at fair value.

Investments of consolidated sponsored investment products represent the underlying debt and equity securities held in sponsored products which are consolidated by the Company. Equity securities are valued at the official closing price on the exchange on which the securities are traded and are categorized within Level 1. Level 2 investments include certain equity securities, including non-US securities, for which closing prices are not readily available or are deemed to not reflect readily available market prices and are valued using an independent pricing service as well as most debt securities, which are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Pricing services do not provide pricing for all securities, and therefore indicative bids from dealers are utilized, which are based on pricing models used by market makers in the security and are also included within Level 2. Level 3 investments include debt securities that are not widely traded, are illiquid and are priced by dealers based on pricing models used by market makers in the security.

The following table is a reconciliation of assets of consolidated sponsored investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value.


	Level 3 Debt securities (a)
Balance at December 31, 2013	$	—
Purchases		1,119
Sales		—
Paydowns		(3	)
Change in unrealized gain/loss		(51	)

Balance at December 31, 2014	$	1,065

(a)

None of the securities were internally fair valued at December 31, 2014.

Securities with an end of period market value of $1.5 million were transferred from Level 1 to Level 2 during the year ended December 31, 2014 because certain non-US securities no longer had readily available closing prices or were deemed not reflective of readily available closing prices. There were no transfers between Level 1, Level 2 and Level 3 during the years ended December 31, 2013 and 2012, respectively.

Derivatives

Beginning in the second quarter of 2014, the Company consolidated investment products which include derivative instruments as part of their investment strategies. These derivatives may include futures contracts, options contracts and forward contracts. The fair value of such derivatives at December 31, 2014 was immaterial. The change in fair value of such derivatives, which is recorded in realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net, was immaterial for the year ended December 31, 2014. In connection with entering into these derivative contracts these funds may be required to pledge to the broker an amount of cash equal to the “initial margin” requirements that varies based on the type of derivative. The cash pledged or on deposit is recorded in the Consolidated Balance Sheet of the Company as Cash pledged or on deposit of consolidated sponsored investment products.

Short Sales

Some of the Company’s consolidated sponsored investment products may engage in short sales, which are transactions in which a fund sells a security that it does not own (or that it owns but does not intend to deliver) in anticipation that the price of the security will decline. Short sales are recorded in the Consolidated Balance Sheet within Other liabilities of consolidated sponsored investment products.

Borrowings

One of our consolidated sponsored investment products employs leverage in the form of using proceeds from shorts, which allows it to use its long positions as collateral in order to purchase additional securities. The use of these proceeds from shorts is secured by the assets of the consolidated sponsored investment product which are held with the custodian in a separate account. This consolidated sponsored investment product is permitted to borrow up to 33.33% of its total assets.