CONSOLIDATED INVESTMENT PRODUCTS

The company’s consolidated investment products consist of CLOs, private equity, real estate, fund-of-funds, and other investment products. The company’s risk with respect to each investment in consolidated investment products is limited to its equity ownership and any uncollected management fees. Therefore, the gains or losses of consolidated investment products have not had a significant impact on the company’s results of operations, liquidity or capital resources. The company has no right to the benefits from, nor does it bear the risks associated with, these investments, beyond the company’s minimal direct investments in, and management fees generated from, the investment products. If the company were to liquidate, these investments would not be available to the general creditors of the company, and as a result, the company does not consider investments held by consolidated investment products to be company assets. Conversely, if the consolidated investment products were to liquidate, their investors would have no recourse to the general credit of the company.

CLOs

A significant portion of consolidated investment products are CLOs. CLOs are investment vehicles created for the sole purpose of issuing collateralized loan instruments that offer investors the opportunity for returns that vary with the risk level of their investment. The notes issued by the CLOs are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. For managing the collateral for the CLO entities, the company earns investment management fees, including in some cases subordinated management fees, as well as contingent incentive fees. The company has invested in certain of the entities, generally taking a portion of the unrated, junior subordinated position. The company’s investments in CLOs are generally subordinated to other interests in the entities and entitle the company and other subordinated tranche investors to receive the residual cash flows, if any, from the entities. The company’s subordinated interest can take the form of (1) subordinated notes, (2) income notes or (3) preference/preferred shares. The company has determined that, although the junior tranches have certain characteristics of equity, they should be accounted for and disclosed as debt on the company’s Consolidated Balance Sheet, as the subordinated and income notes have a stated maturity indicating a date for which they are mandatorily redeemable. The preference shares are also classified as debt, as redemption is required only upon liquidation or termination of the CLO and not of the company.

Prior to the adoption of guidance now encompassed in ASC Topic 810 (discussed in Note 1, “Accounting Policies”), the company’s ownership interests, which were classified as available-for-sale investments on the company’s Consolidated Balance Sheets, combined with its other interests (management and incentive fees), were quantitatively assessed to determine if the company is the primary beneficiary of these entities. The company determined, for periods prior to the adoption of this guidance, that it did not absorb the majority of the expected gains or losses from the CLOs and therefore was not their primary beneficiary.

Upon adoption of additional guidance now encompassed in ASC Topic 810, the company determined that it was the primary beneficiary of certain CLOs, as it has the power to direct the activities of the CLOs that most significantly impact the CLOs’ economic performance, and the obligation to absorb losses/right to receive benefits from the CLOs that could potentially be significant to the CLOs. The primary beneficiary assessment includes an analysis of the rights of the company in its capacity as investment manager. In certain CLOs, the company’s role as investment manager provides that the company contractually has the power, as defined in ASC Topic 810, to direct the activities of the CLOs that most significantly impact the CLOs’ economic performance, such as managing the collateral portfolio and its credit risk. In other CLOs, the company determined that it does not have this power in its role as investment manager due to certain restrictions that limit its ability to manage the collateral portfolio and its credit risk. Additionally, the primary beneficiary assessment includes an analysis of the company’s rights to receive benefits and obligations to absorb losses associated with its first loss position and management/incentive fees. As part of this analysis, the company uses a quantitative model to corroborate its qualitative assessments. The quantitative model includes an analysis of the expected performance of the CLOs and a comparison of the company’s absorption of this performance relative to the other investors in the CLOs. The company has determined that it could receive significant benefits and/or absorb significant losses from certain CLOs in which it holds a first loss position and has the right to significant fees. It was determined that the company’s benefits and losses from certain other CLOs would not be significant, particularly in situations where the company does not hold a first loss position and where the fee interests are based upon a fixed percentage of collateral asset value.

Private equity, real estate and fund-of-funds (partnerships)

For investment products that are structured as partnerships and are determined to be VIEs, including private equity funds, real estate funds and fund-of-funds products, the company evaluates the structure of the partnership to determine if it is the primary beneficiary of the investment product. This evaluation includes assessing the rights of the limited partners to transfer their economic interests in the investment product. If the limited partners’ rights are insufficient to manage their economic interests, they are considered to be de facto agents of the company, which may result in the company determining that it is the primary beneficiary of the investment product. The company generally takes less than a 1% investment in these entities as the general partner. Non-VIE general partnership investments are deemed to be controlled by the company and are consolidated under a voting interest entity (VOE) model, unless the limited partners have substantive kick-out or participating rights. Interests in unconsolidated private equity funds, real estate funds and fund-of-funds products are classified as equity method investments in the company’s Condensed Consolidated Balance Sheets.

Other investment products

As discussed in Note 10, “Commitments and Contingencies,” the company has entered into contingent support agreements for two of its investment trusts to enable them to sustain a stable pricing structure, creating variable interests in these VIEs. The company earns management fees from the trusts and has a small investment in one of these trusts. The company was not deemed to be the primary beneficiary of these trusts after considering any explicit and implicit variable interests in relation to the total expected gains and losses of the trusts.

At September 30, 2011, the company’s maximum risk of loss in significant VIEs in which the company is not the primary beneficiary is presented in the table below.



$ in millions	Footnote Reference	Carrying Value		Company's Maximum Risk of Loss
CLO investments	3	0.5		0.5
Partnership and trust investments	—	28.8		28.8
Investments in Invesco Mortgage Capital Inc.	—	26.1		26.1
Support agreements*	10	(1.0	)	36.0
Total				91.4


*	As of September 30, 2011, the committed support under these agreements was $36.0 million with an internal approval mechanism to increase the maximum possible support to $66.0 million at the option of the company.

During the nine months ended September 30, 2011, no additional entities were consolidated or deconsolidated. During the nine months ended September 30, 2010, entities were consolidated due to the adoption of guidance now encompassed in ASC Topic 810 as well as the initial consolidation of certain CLOs acquired in the June 1, 2010 acquisition. The table below illustrates the summary balance sheet amounts related to these entities consolidated during the nine months ended September 30, 2010. Balances are reflective of the amounts at the respective consolidation dates and are before consolidation into the company.

Balance Sheet



$ in millions	CLOs - VIEs
During the nine months ended September 30, 2010
Current assets	281.6
Non-current assets	6,188.1
Total assets	6,469.7
Current liabilities	162.6
Non-current liabilities	5,883.4
Total liabilities	6,046.0
Total equity	423.7
Total liabilities and equity	6,469.7

The following tables reflect the impact of consolidation of investment products into the Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, and the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010.

Condensed Consolidating Balance Sheets



$ in millions	Before Consolidation⁽¹⁾	CLOs-VIEs	Other VIEs	VOEs	Adjustments⁽²⁾		Total
As of September 30, 2011
Current assets	3,528.1	375.8	1.9	106.0	(29.4	)	3,982.4
Non-current assets	8,877.8	6,016.3	47.5	907.1	(93.3	)	15,755.4
Total assets	12,405.9	6,392.1	49.4	1,013.1	(122.7	)	19,737.8
Current liabilities	2,894.6	242.8	0.9	4.4	(29.5	)	3,113.2
Long-term debt of consolidated investment products	—	5,916.5	—	—	(50.2	)	5,866.3
Other non-current liabilities	1,790.8	—	—	—	—		1,790.8
Total liabilities	4,685.4	6,159.3	0.9	4.4	(79.7	)	10,770.3
Retained earnings appropriated for investors in consolidated investment products	—	232.8	—	—	—		232.8
Other equity attributable to common shareholders	7,715.9	—	0.1	43.3	(43.0	)	7,716.3
Equity attributable to noncontrolling interests in consolidated entities	4.6	—	48.4	965.4	—		1,018.4
Total liabilities and equity	12,405.9	6,392.1	49.4	1,013.1	(122.7	)	19,737.8



$ in millions	Before Consolidation⁽¹⁾	CLOs-VIEs	Other VIEs	VOEs	Adjustments⁽²⁾		Total
As of December 31, 2010
Current assets	3,480.0	679.3	3.7	133.8	(22.3	)	4,274.5
Non-current assets	9,025.1	6,204.6	59.6	941.3	(61.0	)	16,169.6
Total assets	12,505.1	6,883.9	63.3	1,075.1	(83.3	)	20,444.1
Current liabilities	2,777.9	500.2	0.9	7.8	(22.3	)	3,264.5
Long-term debt of consolidated investment products	—	5,888.2	—	—	(22.8	)	5,865.4
Other non-current liabilities	1,953.3	—	—	—	—		1,953.3
Total liabilities	4,731.2	6,388.4	0.9	7.8	(45.1	)	11,083.2
Retained earnings appropriated for investors in consolidated investment products	—	495.5	—	—	—		495.5
Other equity attributable to common shareholders	7,769.1	—	0.1	38.1	(38.2	)	7,769.1
Equity attributable to noncontrolling interests in consolidated entities	4.8	—	62.3	1,029.2	—		1,096.3
Total liabilities and equity	12,505.1	6,883.9	63.3	1,075.1	(83.3	)	20,444.1


(1)	The Before Consolidation column includes Invesco’s equity interest in the investment products subsequently consolidated, accounted for as equity method and available-for-sale investments.


(2)	Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products and the elimination of the company’s equity at risk recorded as investments by the company (before consolidation) against either the equity (private equity and real estate partnership funds) or debt (CLOs) of the consolidated investment products.

Condensed Consolidating Statements of Income



$ in millions	Before Consolidation⁽¹⁾		CLOs-VIEs		Other VIEs		VOEs		Adjustments⁽¹⁾⁽²⁾		Total
Three months ended September 30, 2011
Total operating revenues	1,010.1		—		—		—		(12.3	)	997.8
Total operating expenses	767.1		11.6		0.2		3.4		(12.3	)	770.0
Operating income	243.0		(11.6	)	(0.2	)	(3.4	)	—		227.8
Equity in earnings of unconsolidated affiliates	8.2		—		—		—		(0.1	)	8.1
Interest and dividend income	6.3		79.6		—		—		(2.5	)	83.4
Other investment income/(losses)	(19.7	)	(124.4	)	1.0		26.8		3.5		(112.8	)
Interest expense	(15.3	)	(51.2	)	—		—		2.5		(64.0	)
Income before income taxes	222.5		(107.6	)	0.8		23.4		3.4		142.5
Income tax provision	(59.1	)	—		—		—		—		(59.1	)
Net income	163.4		(107.6	)	0.8		23.4		3.4		83.4
(Gains)/losses attributable to noncontrolling interests in consolidated entities, net	—		107.6		(0.8	)	(23.3	)	—		83.5
Net income attributable to common shareholders	163.4		—		—		0.1		3.4		166.9



$ in millions	Before Consolidation⁽¹⁾		CLOs-VIEs		Other VIEs		VOEs		Adjustments⁽¹⁾⁽²⁾		Total
Three months ended September 30, 2010
Total operating revenues	963.5		—		—		0.1		(10.5	)	953.1
Total operating expenses	768.4		9.8		0.4		2.1		(10.5	)	770.2
Operating income	195.1		(9.8	)	(0.4	)	(2.0	)	—		182.9
Equity in earnings of unconsolidated affiliates	10.7		—		—		—		—		10.7
Interest and dividend income	3.4		71.8		—		—		(1.5	)	73.7
Other investment income/(losses)	14.6		(163.0	)	0.4		15.6		(1.3	)	(133.7	)
Interest expense	(16.2	)	(37.0	)	—		—		1.5		(51.7	)
Income before income taxes	207.6		(138.0	)	—		13.6		(1.3	)	81.9
Income tax provision	(54.5	)	—		—		—		—		(54.5	)
Net income	153.1		(138.0	)	—		13.6		(1.3	)	27.4
(Gains)/losses attributable to noncontrolling interests in consolidated entities, net	(0.2	)	138.0		—		(10.4	)	(0.1	)	127.3
Net income attributable to common shareholders	152.9		—		—		3.2		(1.4	)	154.7

(1)

The Before Consolidation column includes Invesco’s equity interest in the investment products accounted for as equity method (private equity and real estate partnership funds) and available-for-sale investments (CLOs). Upon consolidation of the CLOs, the company’s and the CLOs’ accounting policies were effectively aligned, resulting in the reclassification of the company’s gain for the three months ended September 30, 2011 of $3.5 million (representing the increase in the market value of the company’s holding in the consolidated CLOs) from other comprehensive income into other gains/losses (three months ended September 30, 2010: $1.3 million loss). The company’s gain on its investments in the CLOs (before consolidation) eliminates with the company’s share of the offsetting loss on the CLOs’ debt. The net income arising from consolidation of CLOs is therefore completely attributed to other investors in these CLOs, as the company’s share has been eliminated through consolidation.


(2)	Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company.



$ in millions	Before Consolidation⁽¹⁾		CLOs-VIEs		Other VIEs		VOEs		Adjustments⁽¹⁾⁽²⁾		Total
Nine months ended September 30, 2011
Total operating revenues	3,130.6		—		—		0.1		(35.6	)	3,095.1
Total operating expenses	2,398.4		35.9		0.7		9.2		(35.6	)	2,408.6
Operating income	732.2		(35.9	)	(0.7	)	(9.1	)	—		686.5
Equity in earnings of unconsolidated affiliates	26.6		—		—		—		(1.0	)	25.6
Interest and dividend income	13.6		233.6		—		—		(5.3	)	241.9
Other investment income/(losses)	(5.8	)	(335.0	)	1.9		71.3		18.5		(249.1	)
Interest expense	(47.5	)	(140.5	)	—		—		5.3		(182.7	)
Income before income taxes	719.1		(277.8	)	1.2		62.2		17.5		522.2
Income tax provision	(210.1	)	—		—		—		—		(210.1	)
Net income	509.0		(277.8	)	1.2		62.2		17.5		312.1
(Gains)/losses attributable to noncontrolling interests in consolidated entities, net	0.1		277.8		(1.2	)	(61.4	)	—		215.3
Net income attributable to common shareholders	509.1		—		—		0.8		17.5		527.4



$ in millions	Before Consolidation⁽¹⁾		CLOs-VIEs		Other VIEs		VOEs		Adjustments⁽¹⁾⁽²⁾		Total
Nine months ended September 30, 2010
Total operating revenues	2,492.3		—		—		0.3		(33.4	)	2,459.2
Total operating expenses	2,060.3		31.0		1.4		8.7		(33.4	)	2,068.0
Operating income	432.0		(31.0	)	(1.4	)	(8.4	)	—		391.2
Equity in earnings of unconsolidated affiliates	27.3		—		—		—		(0.4	)	26.9
Interest and dividend income	6.8		179.2		—		—		(3.3	)	182.7
Other investment income/(losses)	3.2		76.4		4.9		58.2		2.5		145.2
Interest expense	(42.7	)	(85.2	)	—		—		3.3		(124.6	)
Income before income taxes	426.6		139.4		3.5		49.8		2.1		621.4
Income tax provision	(141.3	)	—		—		—		—		(141.3	)
Net income	285.3		139.4		3.5		49.8		2.1		480.1
(Gains)/losses attributable to noncontrolling interests in consolidated entities, net	(0.4	)	(139.4	)	(3.5	)	(46.2	)	(0.1	)	(189.6	)
Net income attributable to common shareholders	284.9		—		—		3.6		2.0		290.5

(1)

The Before Consolidation column includes Invesco’s equity interest in the investment products accounted for as equity method (private equity and real estate partnership funds) and available-for-sale investments (CLOs). Upon consolidation of the CLOs, the company’s and the CLOs’ accounting policies were effectively aligned, resulting in the reclassification of the company’s gain for the nine months ended September 30, 2011 of $18.5 million (representing the increase in the market value of the company’s holding in the consolidated CLOs) from other comprehensive income into other gains/losses (nine months ended September 30, 2010: $2.5 million). The company’s gain on its investments in the CLOs (before consolidation) eliminates with the company’s share of the offsetting loss on the CLOs’ debt. The net income arising from consolidation of CLOs is therefore completely attributed to other investors in these CLOs, as the company’s share has been eliminated through consolidation.


(2)	Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company.

The carrying value of investments held, derivative contracts, and notes issued by consolidated investment products is also their fair value. The following table presents the fair value hierarchy levels of investments held, derivative contracts, and notes issued by consolidated investment products, which are measured at fair value as of September 30, 2011:



	As of September 30, 2011
$ in millions	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
CLO collateral assets:
Bank loans	5,652.8		—	5,652.8		—
Bonds	323.9		323.9	—		—
Equity securities	39.6		39.6	—		—
CLO-related derivative assets	18.7		—	18.7		—
Private equity fund assets:
Equity securities	142.7		17.5	—		125.2
Investments in other private equity funds	583.2		—	—		583.2
Debt securities issued by the U.S. Treasury	6.0		6.0	—		—
Real estate investments	222.7		—	—		222.7
Total assets at fair value	6,989.6		387.0	5,671.5		931.1
Liabilities:
CLO notes	(5,866.3	)	—	—		(5,866.3	)
CLO-related derivative liabilities	(5.5	)	—	(5.5	)	—
Total liabilities at fair value	(5,871.8	)	—	(5.5	)	(5,866.3	)

The following table presents the fair value hierarchy levels of investments held, derivative contracts, and notes issued by consolidated investment products, which are measured at fair value as of December 31, 2010:



	As of December 31, 2010
$ in millions	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
CLO collateral assets:
Bank loans	5,910.6		—	5,910.6		—
Bonds	261.1		261.1	—		—
Equity securities	32.9		32.9	—		—
CLO-related derivative assets	20.2		—	20.2		—
Private equity fund assets:
Equity securities	114.4		17.6	—		96.8
Investments in other private equity funds	586.1		—	—		586.1
Debt securities issued by the U.S. Treasury	11.0		11.0	—		—
Real estate investments	289.9		—	—		289.9
Total assets at fair value	7,226.2		322.6	5,930.8		972.8
Liabilities:
CLO notes	(5,865.4	)	—	—		(5,865.4	)
CLO-related derivative liabilities	(6.6	)	—	(6.6	)	—
Total liabilities at fair value	(5,872.0	)	—	(6.6	)	(5,865.4	)

The following table shows a reconciliation of the beginning and ending fair value measurements for level 3 assets and liabilities using significant unobservable inputs:



	Three months ended September 30, 2011				Nine months ended September 30, 2011
$ in millions	Level 3 Assets		Level 3 Liabilities		Level 3 Assets		Level 3 Liabilities
Beginning balance	909.8		(6,292.7	)	972.8		(5,865.4	)
Purchases, sales, issuances, and settlements/prepayments, net*	(20.1	)	190.3		(124.7	)	450.3
Gains and losses included in the Condensed Consolidated Statements of Income**	35.1		249.0		82.5		(184.7	)
Foreign exchange	6.3		(12.9	)	0.5		(266.5	)
Ending balance	931.1		(5,866.3	)	931.1		(5,866.3	)



	Three months ended September 30, 2010				Nine months ended September 30, 2010
$ in millions	Level 3 Assets		Level 3 Liabilities		Level 3 Assets		Level 3 Liabilities
Beginning balance	662.7		(5,404.4	)	667.1		(5,234.9	)
Purchases, sales, issuances, and settlements/prepayments, net*	(8.4	)	64.0		(55.7	)	166.4
Acquisition of business	—		—		—		(630.2	)
Gains and losses included in the Condensed Consolidated Statements of Income**	14.3		(265.6	)	57.2		(209.7	)
Foreign exchange	—		(37.8	)	—		264.6
Ending balance	668.6		(5,643.8	)	668.6		(5,643.8	)

Prior to the adoption of guidance included in ASU 2010-06, discussed in Note 1, “Accounting Policies,” purchases, sales, issuances and settlements/prepayments were presented net. For the three and nine months ended September 30, 2011, the consolidated funds recorded $6.1 million and $33.0 million related to purchase activity and $26.2 million and $157.7 million of sale activity, respectively, of level 3 assets. For three and nine months ended September 30, 2011, the consolidated funds recorded $190.3 million and $450.3 million, respectively, related to the settlement of level 3 liabilities.

Included in gains and losses of consolidated investment products in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2011 are $26.5 million in net unrealized gains and $37.5 million in net unrealized gains, respectively, attributable to investments still held at September 30, 2011 by consolidated investment products (three and nine months ended September 30, 2010: $2.1 million and $44.3 million, respectively, net unrealized gains attributable to investments still held at September 30, 2010).

Unforeseen events might occur that would subsequently change the fair values of investments of consolidated investment products, but such changes would be inconsequential to the company due to its minimal investments in these products (and the large offsetting appropriated retained earnings and noncontrolling interests resulting from their consolidation). Any gains or losses resulting from valuation changes in these investments are substantially offset by resulting changes in gains and losses attributable to noncontrolling interests in consolidated entities and therefore do not have a material effect on the financial condition, operating results (including earnings per share), liquidity or capital resources of the company’s common shareholders.

Fair value of consolidated CLOs

The company elected the fair value option for collateral assets held and notes issued by its consolidated CLOs to eliminate the measurement and recognition inconsistency that would otherwise arise from measuring assets and liabilities and recognizing the related gains and losses on different accounting bases.

The collateral assets held by consolidated CLOs are primarily invested in senior secured bank loans, bonds, and equity securities. Bank loan investments, which comprise the majority of consolidated CLO portfolio collateral, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. Bank loan investments mature at various dates between 2011 and 2019, pay interest at Libor or Euribor plus a spread of up to 13.0%, and typically range in S&P credit rating categories from BBB down to unrated. At September 30, 2011 the unpaid principal balance exceeded the fair value of the senior secured bank loans and bonds by approximately $709.0 million (December 31, 2010: $261.0 million excess). Less than 1% of the collateral assets are in default as of September 30, 2011 (December 31, 2010: less than 2% of the collateral assets were in default). CLO investments are valued based on price quotations provided by an independent third-party pricing source. For bank loan investments, in the event that the third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment and interest in similar investments and the market environment and investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including, for senior secured corporate loans, the cost, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the senior secured corporate loan and any related agreements, and the position of the senior secured corporate loan in the borrower’s debt structure; iii) the nature, adequacy and value of the senior secured corporate loan’s collateral, including the CLO’s rights, remedies and interests with respect to the collateral; iv) the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi) general economic and market conditions affecting the fair value of the senior secured corporate loan.

Notes issued by consolidated CLOs mature at various dates between 2014 and 2024 and have a weighted average maturity of 9.3 years. The notes are issued in various tranches with different risk profiles. The interest rates are generally variable rates based on Libor or Euribor plus a pre-defined spread, which varies from 0.21% for the more senior tranches to 7.50% for the more subordinated tranches. At September 30, 2011, the outstanding balance on the notes issued by consolidated CLOs exceeds their fair value by approximately $0.9 billion (December 31, 2010: $1.2 billion excess). The investors in this debt are not affiliated with the company and have no recourse to the general credit of the company. Notes issued by CLOs are recorded at fair value using an income approach. Fair value is determined using current information, notably market yields and projected cash flows of collateral assets, which are impacted by forecasted default and recovery rates. Market yields, default rates and recovery rates used in the company’s estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the notes may be adversely affected. The current liquidity constraints within the market for CLO products require the use of certain unobservable inputs for CLO valuation. Once the undiscounted cash flows of the collateral assets have been determined, the company applies market participant discount rates to determine the fair value of the notes.

The significant inputs used in the valuation of the notes issued by consolidated CLOs include a cumulative average default rate between 1% and 4% and discount rates derived by utilizing the applicable forward rate curves and appropriate spreads.

Certain consolidated CLOs with Euro-denominated debt have entered into swap agreements with various counterparties to hedge economically interest rate and foreign exchange risk related to CLO collateral assets with non-Euro interest rates and currencies. These swap agreements are not designated as qualifying as hedging instruments. The fair value of derivative contracts in an asset position is included in the company’s Condensed Consolidated Balance Sheet in other current assets, and the fair value of derivative contracts in a liability position is included in the company’s Condensed Consolidated Balance Sheet in other current liabilities. These derivative contracts are valued under an income approach using forecasted interest rates and are classified within level 2 of the valuation hierarchy. Changes in fair value of $4.2 million and $1.5 million are reflected in gains/(losses) of consolidated investment products, net on the company’s Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2011 (three and nine months ended September 30, 2010: $5.1 million and $5.3 million). As of September 30, 2011, there were 76 open swap agreements with a notional value of $145.8 million (December 31, 2010: 105 open swap agreements with a notional value of $168.4 million). Swap maturities are tied to the maturity of the underlying collateral assets.

Fair value of consolidated private equity funds

Consolidated private equity funds are generally structured as partnerships. Generally, the investment strategy of underlying holdings in these partnerships is to seek capital appreciation through direct investments in public or private companies with compelling business models or ideas or through investments in partnership investments that also invest in similar private or public companies. Various strategies may be used. Companies targeted could be distressed organizations, targets of leveraged buyouts or fledgling companies in need of venture capital. Investees of these consolidated investment products may not redeem their investment until the partnership liquidates. Generally, the partnerships have a life that range from seven to twelve years unless dissolved earlier. The general partner may extend the partnership term up to a specified period of time as stated in the Partnership Agreement. Some partnerships allow the limited partners to cause an earlier termination upon the occurrence of certain events as specified in the Partnership Agreement.

For private equity partnerships, fair value is determined by reviewing each investment for the sale of additional securities of an issuer to sophisticated investors or for investee financial conditions and fundamentals. Publicly traded portfolio investments are carried at market value as determined by their most recent quoted sale, or if there is no recent sale, at their most recent bid price. For these investments held by consolidated investment products, level 1 classification indicates that fair values have been determined using unadjusted quoted prices in active markets for identical assets that the partnership has the ability to access. Level 2 classification may indicate that fair values have been determined using quoted prices in active markets but give effect to certain lock-up restrictions surrounding the holding period of the underlying investments.

The fair value of level 3 investments held by consolidated investment products are derived from inputs that are unobservable and which reflect the limited partnerships’ own determinations about the assumptions that market participants would use in pricing the investments, including assumptions about risk. These inputs are developed based on the partnership’s own data, which is adjusted if information indicates that market participants would use different assumptions. The partnerships which invest directly into private equity portfolio companies (direct private equity funds) take into account various market conditions, subsequent rounds of financing, liquidity, financial condition, purchase multiples paid in other comparable third-party transactions, the price of securities of other companies comparable to the portfolio company, and operating results and other financial data of the portfolio company, as applicable.

The partnerships which invest into other private equity funds (funds-of-funds) take into account information received from those underlying funds, including their reported net asset values and evidence as to their fair value approach, including consistency of their fair value application. These investments do not trade in active markets and represent illiquid long-term investments that generally require future capital commitments. While the partnerships’ reported share of the underlying net asset values of the underlying funds is usually the most significant input in arriving at fair value and is generally representative of fair value, other information may also be used to value such investments at a premium or discount to the net asset values as reported by the funds, including allocations of priority returns within the funds as well as any specific conditions and events affecting the funds.

Fair value of consolidated real estate funds

Consolidated real estate funds are structured as limited liability companies. These limited liability companies invest in other real estate investment vehicles, and these investments are carried at fair value and presented as investments in consolidated investment products. The net asset value of the underlying vehicles, which primarily consists of the real estate investment value and mortgage loans, is adjusted to fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Real estate assets are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Due to the illiquid nature of investments made in real estate companies, all of the real estate assets are classified as level 3. The real estate investment vehicles use one or more valuation techniques (e.g., the market approach, the income approach, or the cost approach) for which sufficient and reliable data is available to value investments classified within level 3. The income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

The inputs used in estimating the value of level 3 investments include the original transaction price, recent transactions in the same or similar instruments, as well as completed or pending third-party transactions in the underlying investment or comparable investments. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability. Other inputs used include discount rates, cap rates and income and expense assumptions. The fair value measurement of level 3 investments does not include transaction costs and acquisition fees that may have been capitalized as part of the investment’s cost basis. Due to the lack of observable inputs, the assumptions used may significantly impact the resulting fair value and therefore the consolidated real estate vehicles’ results of operations.