Item 1. Financial Statements
Item 1. Financial Statements
Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
June 30,
2020
December 31,
2019
Assets:
Cash and cash equivalents
$
168,268
$
221,781
Investments
61,301
83,206
Accounts receivable, net
72,435
74,132
Assets of consolidated investment products ("CIP")
Cash and cash equivalents of CIP
77,321
99,691
Cash pledged or on deposit of CIP
6,464
467
Investments of CIP
2,273,820
2,030,110
Other assets of CIP
29,787
23,612
Furniture, equipment and leasehold improvements, net
16,068
18,150
Intangible assets, net
295,325
310,391
Goodwill
290,366
290,366
Deferred taxes, net
10,874
15,879
Other assets
38,058
36,849
Total assets
$
3,340,087
$
3,204,634
Liabilities and Equity
Liabilities:
Accrued compensation and benefits
$
56,228
$
101,377
Accounts payable and accrued liabilities
19,528
23,308
Dividends payable
7,196
8,915
Debt
234,765
277,839
Other liabilities
36,272
40,507
Liabilities of CIP
Notes payable of CIP
2,156,587
1,834,535
Securities purchased payable and other liabilities of CIP
72,313
168,051
Total liabilities
2,582,889
2,454,532
Commitments and Contingencies (Note 13)
Redeemable noncontrolling interests
90,687
63,845
Equity:
Equity attributable to stockholders:
Series D mandatory convertible preferred stock, $0.01 par value, 0 and 1,150,000 shares authorized, issued and outstanding at June 30, 2020 and December 31, 2019, respectively
—
110,843
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 11,777,732 shares issued and 7,664,272 shares outstanding at June 30, 2020 and 10,736,887 shares issued and 6,809,280 shares outstanding at December 31, 2019, respectively
118
107
Additional paid-in capital
1,303,036
1,199,205
Retained earnings (accumulated deficit)
( 208,222
)
( 215,216
)
Accumulated other comprehensive income (loss)
( 17
)
9
Treasury stock, at cost, 4,113,460 and 3,927,607 shares at June 30, 2020 and December 31, 2019, respectively
( 436,749
)
( 419,249
)
Total equity attributable to stockholders
658,166
675,699
Noncontrolling interests
8,345
10,558
Total equity
666,511
686,257
Total liabilities and equity
$
3,340,087
$
3,204,634
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands, except per share data)
2020
2019
2020
2019
Revenues
Investment management fees
$
110,550
$
114,591
$
230,838
$
220,509
Distribution and service fees
8,889
10,617
18,349
20,680
Administration and shareholder service fees
13,289
15,054
27,942
29,467
Other income and fees
166
227
331
551
Total revenues
132,894
140,489
277,460
271,207
Operating Expenses
Employment expenses
60,163
58,123
126,293
118,974
Distribution and other asset-based expenses
17,345
21,322
36,754
41,086
Other operating expenses
17,436
19,174
36,321
37,897
Operating expenses of consolidated investment products ("CIP")
2,179
2,568
8,928
3,019
Restructuring and severance
420
320
420
1,496
Depreciation expense
1,196
1,271
2,454
2,484
Amortization expense
7,533
7,583
15,066
15,124
Total operating expenses
106,272
110,361
226,236
220,080
Operating Income (Loss)
26,622
30,128
51,224
51,127
Other Income (Expense)
Realized and unrealized gain (loss) on investments, net
7,114
2,039
( 430
)
5,472
Realized and unrealized gain (loss) of CIP, net
( 6,744
)
9,720
( 15,413
)
7,799
Other income (expense), net
( 805
)
696
( 193
)
1,146
Total other income (expense), net
( 435
)
12,455
( 16,036
)
14,417
Interest Income (Expense)
Interest expense
( 3,126
)
( 5,151
)
( 6,325
)
( 10,316
)
Interest and dividend income
242
964
994
2,154
Interest and dividend income of investments of CIP
28,634
29,368
57,863
56,770
Interest expense of CIP
( 28,150
)
( 31,077
)
( 52,636
)
( 50,778
)
Total interest income (expense), net
( 2,400
)
( 5,896
)
( 104
)
( 2,170
)
Income (Loss) Before Income Taxes
23,787
36,687
35,084
63,374
Income tax expense (benefit)
7,578
8,788
17,869
13,007
Net Income (Loss)
16,209
27,899
17,215
50,367
Noncontrolling interests
( 4,930
)
( 973
)
( 10,221
)
( 1,695
)
Net Income (Loss) Attributable to Stockholders
11,279
26,926
6,994
48,672
Preferred stockholder dividends
—
( 2,084
)
—
( 4,168
)
Net Income (Loss) Attributable to Common Stockholders
$
11,279
$
24,842
$
6,994
$
44,504
Earnings (Loss) per Share—Basic
$
1.46
$
3.55
$
0.92
$
6.35
Earnings (Loss) per Share—Diluted
$
1.43
$
3.26
$
0.88
$
5.87
Weighted Average Shares Outstanding—Basic
7,720
6,999
7,572
7,010
Weighted Average Shares Outstanding—Diluted
7,895
8,252
7,936
8,290
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)
2020
2019
2020
2019
Net Income (Loss)
$
16,209
$
27,899
$
17,215
$
50,367
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax of $0 and $4 for the three months ended June 30, 2020 and 2019, respectively, and $9 and $1 for the six months ended June 30, 2020 and 2019, respectively
( 1
)
( 8
)
( 26
)
( 2
)
Other comprehensive income (loss)
( 1
)
( 8
)
( 26
)
( 2
)
Comprehensive income (loss)
16,208
27,891
17,189
50,365
Comprehensive (income) loss attributable to noncontrolling interests
( 4,930
)
( 973
)
( 10,221
)
( 1,695
)
Comprehensive Income (Loss) Attributable to Stockholders
$
11,278
$
26,918
$
6,968
$
48,670
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
(in thousands)
2020
2019
Cash Flows from Operating Activities:
Net income (loss)
$
17,215
$
50,367
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense, intangible asset and other amortization
21,557
19,810
Stock-based compensation
10,113
11,384
Amortization of deferred commissions
1,038
1,805
Payments of deferred commissions
( 974
)
( 973
)
Equity in earnings of equity method investments
93
( 1,209
)
(Gain) loss on extinguishment of debt
( 705
)
—
Realized and unrealized (gains) losses on investments, net
431
( 4,634
)
Distributions from equity method investments
726
675
Sales (purchases) of investments, net
4,703
13,767
Deferred taxes, net
5,014
252
Changes in operating assets and liabilities:
Accounts receivable, net and other assets
( 2,032
)
( 2,394
)
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities
( 52,788
)
( 44,325
)
Operating activities of consolidated investment products ("CIP"):
Realized and unrealized (gains) losses on investments of CIP, net
11,603
( 13,222
)
Purchases of investments by CIP
( 920,392
)
( 532,342
)
Sales of investments by CIP
442,859
348,771
Net proceeds (purchases) of short term investments by CIP
68
( 309
)
(Purchases) sales of securities sold short by CIP, net
250
1,193
Change in other assets of CIP
( 1,790
)
71
Change in liabilities of CIP
2,130
3,140
Amortization of discount on notes payable of CIP
11,169
4,505
Net cash provided by (used in) operating activities
( 449,712
)
( 143,668
)
Cash Flows from Investing Activities:
Capital expenditures and other asset purchases
( 475
)
( 6,111
)
Change in cash and cash equivalents of CIP due to consolidation (deconsolidation), net
9,724
( 1,571
)
Sale of available-for-sale securities
—
2,044
Net cash provided by (used in) investing activities
9,249
( 5,638
)
Cash Flows from Financing Activities:
Payment of long term debt
( 44,059
)
( 24,825
)
Common stock dividends paid
( 11,320
)
( 8,392
)
Preferred stock dividends paid
( 2,084
)
( 4,168
)
Repurchases of common shares
( 17,500
)
( 22,499
)
Proceeds from exercise of stock options
114
643
Taxes paid related to net share settlement of restricted stock units
( 5,569
)
( 6,509
)
Net subscriptions received from (redemptions/distributions paid to) noncontrolling interests
( 3,951
)
6,599
Financing activities of CIP:
Payments on borrowings by CIP
( 326,201
)
( 195,697
)
Borrowings by CIP
781,147
400,782
Net cash provided by (used in) financing activities
370,577
145,934
Net increase (decrease) in cash, cash equivalents and restricted cash
( 69,886
)
( 3,372
)
Cash, cash equivalents and restricted cash, beginning of period
321,939
254,656
Cash, cash equivalents and restricted cash, end of period
$
252,053
$
251,284
Non-Cash Investing Activities:
Change in accrual for capital expenditures
$
( 21
)
$
( 1,813
)
Non-Cash Financing Activities:
Increase (decrease) to noncontrolling interests due to consolidation (deconsolidation) of CIP, net
$
17,137
$
( 6,423
)
Common stock dividends payable
$
5,169
$
3,849
Preferred stock dividends payable
$
—
$
2,084
Conversion of preferred stock to common stock
$
115,000
$
—
(in thousands)
June 30,
2020
December 31, 2019
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents
$
168,268
$
221,781
Cash of CIP
77,321
99,691
Cash pledged or on deposit of CIP
6,464
467
Cash, cash equivalents and restricted cash at end of period
$
252,053
$
321,939
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
Permanent Equity
Temporary Equity
Common Stock
Preferred Stock
Additional
Paid-in
Capital
Retained Earnings (Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Total
Attributed To
Stockholders
Non-
controlling
Interests
Total
Equity
Redeemable
Non-
controlling
Interests
(in thousands, except per share data)
Shares
Par Value
Shares
Amount
Shares
Amount
Balances at March 31, 2019
6,978,925
$
107
1,150,000
$
110,843
$
1,205,926
$
( 289,119
)
$
1
3,703,204
$
( 394,248
)
$
633,510
$
12,948
$
646,458
$
59,003
Net income (loss)
—
—
—
—
—
26,926
—
—
—
26,926
224
27,150
749
Foreign currency translation adjustments
—
—
—
—
—
—
( 8
)
—
—
( 8
)
—
( 8
)
—
Net subscriptions (redemptions) and other
—
—
—
—
290
—
—
—
—
290
( 535
)
( 245
)
750
Cash dividends declared ($1.8125 per preferred share)
—
—
—
—
( 2,084
)
—
—
—
—
( 2,084
)
—
( 2,084
)
—
Cash dividends declared ($0.55 per common share)
—
—
—
—
( 4,104
)
—
—
—
—
( 4,104
)
—
( 4,104
)
—
Repurchases of common shares
( 67,709
)
—
—
—
—
—
—
67,709
( 7,500
)
( 7,500
)
—
( 7,500
)
—
Issuance of common shares related to employee stock transactions
33,676
—
—
—
565
—
—
—
—
565
—
565
—
Taxes paid on stock-based compensation
—
—
—
—
( 1,294
)
—
—
—
—
( 1,294
)
—
( 1,294
)
—
Stock-based compensation
—
—
—
—
4,734
—
—
—
—
4,734
—
4,734
—
Balances at June 30, 2019
6,944,892
$
107
1,150,000
$
110,843
$
1,204,033
$
( 262,193
)
$
( 7
)
3,770,913
$
( 401,748
)
$
651,035
$
12,637
$
663,672
$
60,502
Balances at March 31, 2020
7,695,413
$
117
—
$
—
$
1,304,868
$
( 219,501
)
$
( 16
)
4,038,563
$
( 429,249
)
$
656,219
$
10,247
$
666,466
$
87,115
Net income (loss)
—
—
—
—
—
11,279
—
—
—
11,279
( 1,378
)
9,901
6,308
Foreign currency translation adjustments
—
—
—
—
—
—
( 1
)
—
—
( 1
)
—
( 1
)
—
Net subscriptions (redemptions) and other
—
—
—
—
( 167
)
—
—
—
—
( 167
)
( 524
)
( 691
)
( 2,736
)
Cash dividends declared ($0.67 per common share)
—
—
—
—
( 5,496
)
—
—
—
—
( 5,496
)
—
( 5,496
)
—
Repurchases of common shares
( 74,897
)
—
—
—
—
—
—
74,897
( 7,500
)
( 7,500
)
—
( 7,500
)
—
Issuance of common shares related to employee stock transactions
43,756
1
—
—
12
—
—
—
—
13
—
13
—
Taxes paid on stock-based compensation
—
—
—
—
( 2,019
)
—
—
—
—
( 2,019
)
( 2,019
)
—
Stock-based compensation
—
—
—
—
5,838
—
—
—
—
5,838
—
5,838
—
Balances at June 30, 2020
7,664,272
$
118
—
$
—
$
1,303,036
$
( 208,222
)
$
( 17
)
4,113,460
$
( 436,749
)
$
658,166
$
8,345
$
666,511
$
90,687
Permanent Equity
Temporary Equity
Common Stock
Preferred Stock
Additional
Paid-in
Capital
Retained Earnings (Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Total
Attributed To
Stockholders
Non-
controlling
Interests
Total
Equity
Redeemable
Non-
controlling
Interests
(in thousands, except per share data)
Shares
Par Value
Shares
Amount
Shares
Amount
Balances at December 31, 2018
6,997,382
$
106
1,150,000
$
110,843
$
1,209,805
$
( 310,865
)
$
( 731
)
3,555,242
$
( 379,249
)
$
629,909
$
13,958
$
643,867
$
57,481
Net income (loss)
—
—
—
—
—
48,672
—
—
—
48,672
( 229
)
48,443
1,924
Reclassification from other comprehensive (income) loss
—
—
—
—
—
—
726
—
—
726
—
726
—
Foreign currency translation adjustments
—
—
—
—
—
—
( 2
)
—
—
( 2
)
—
( 2
)
—
Net subscriptions (redemptions) and other
—
—
—
—
290
—
—
—
—
290
( 1,092
)
( 802
)
1,097
Cash dividends declared ($3.625 per preferred share)
—
—
—
—
( 4,168
)
—
—
—
—
( 4,168
)
—
( 4,168
)
—
Cash dividends declared ($1.10 per common share)
—
—
—
—
( 8,256
)
—
—
—
—
( 8,256
)
—
( 8,256
)
—
Repurchases of common shares
( 215,671
)
—
—
—
—
—
—
215,671
( 22,499
)
( 22,499
)
—
( 22,499
)
—
Issuance of common shares related to employee stock transactions
163,181
1
—
—
1,013
—
—
—
—
1,014
—
1,014
—
Taxes paid on stock-based compensation
—
—
—
—
( 6,098
)
—
—
—
—
( 6,098
)
—
( 6,098
)
—
Stock-based compensation
—
—
—
—
11,447
—
—
—
—
11,447
—
11,447
—
Balances at June 30, 2019
6,944,892
$
107
1,150,000
$
110,843
$
1,204,033
$
( 262,193
)
$
( 7
)
3,770,913
$
( 401,748
)
$
651,035
$
12,637
$
663,672
$
60,502
Balances at December 31, 2019
6,809,280
$
107
1,150,000
$
110,843
$
1,199,205
$
( 215,216
)
$
9
3,927,607
$
( 419,249
)
$
675,699
$
10,558
$
686,257
$
63,845
Net income (loss)
—
—
—
—
—
6,994
—
—
—
6,994
( 1,123
)
5,871
11,344
Foreign currency translation adjustments
—
—
—
—
—
—
( 26
)
—
—
( 26
)
—
( 26
)
—
Net subscriptions (redemptions) and other
—
—
—
—
( 167
)
—
—
—
—
( 167
)
( 1,090
)
( 1,257
)
15,498
Conversion of preferred stock
912,806
9
( 1,150,000
)
( 110,843
)
110,834
—
—
—
—
—
—
—
—
Cash dividends declared ($1.34 per common share)
—
—
—
—
( 11,676
)
—
—
—
—
( 11,676
)
—
( 11,676
)
—
Repurchases of common shares
( 185,853
)
—
—
—
—
—
—
185,853
( 17,500
)
( 17,500
)
—
( 17,500
)
—
Issuance of common shares related to employee stock transactions
128,039
2
—
—
112
—
—
—
—
114
—
114
—
Taxes paid on stock-based compensation
—
—
—
—
( 5,569
)
—
—
—
—
( 5,569
)
( 5,569
)
—
Stock-based compensation
—
—
—
—
10,297
—
—
—
—
10,297
—
10,297
—
Balances at June 30, 2020
7,664,272
$
118
—
$
—
$
1,303,036
$
( 208,222
)
$
( 17
)
4,113,460
$
( 436,749
)
$
658,166
$
8,345
$
666,511
$
90,687
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Virtus Investment Partners, Inc. (the "Company," "we," "us," "our" or "Virtus"), a Delaware corporation, operates in the investment management industry through its subsidiaries.
The Company provides investment management and related services to individuals and institutions. The Company’s retail investment management services are provided to individuals through products consisting of U.S. 1940 Act mutual funds and Undertaking for Collective Investment in Transferable Securities ("UCITS" or "offshore funds" and collectively, with U.S. 1940 Act mutual funds, "open-end funds"), exchange traded funds ("ETFs"), closed-end funds (collectively, with open-end funds and ETFs, "funds") and retail separate accounts. Institutional investment management services are offered through separate accounts and pooled or commingled structures to a variety of institutional clients. The Company also provides subadvisory services to other investment advisers and serves as the collateral manager for structured products.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 .
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Annual Report on Form 10-K") filed with the Securities and Exchange Commission (the "SEC"). The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2019 Annual Report on Form 10-K.
New Accounting Standards Implemented
In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) . This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, including an internal-use software license. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) . This standard modifies the disclosure requirements on fair value measurements. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
New Accounting Standards Not Yet Implemented
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) . This standard clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a prospective basis. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements.
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, Income Taxes, and also improves consistent application by clarifying and amending existing guidance. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements.
3. Revenues
The Company's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. Investment management fees, distribution and service fees, and administration and shareholder service fees are generally calculated as a percentage of average net assets of the investment portfolios managed. The net asset values from which investment management, distribution and service, and administration and shareholder service fees are calculated are variable in nature and subject to factors outside of the Company's control such as additional investments, withdrawals and market performance. Because of this, these fees are considered constrained until the end of the contractual measurement period (monthly or quarterly), which is when asset values are generally determinable.
Revenue Disaggregated by Source
The following table summarizes revenue by source:
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)
2020
2019
2020
2019
Investment management fees
Open-end funds
$
54,018
$
56,973
$
113,126
$
110,266
Closed-end funds
8,557
10,620
18,736
20,639
Retail separate accounts
22,398
20,664
48,112
38,669
Institutional accounts
24,606
23,656
47,523
45,833
Structured products
417
1,585
1,991
3,232
Other products
554
1,093
1,350
1,870
Total investment management fees
110,550
114,591
230,838
220,509
Distribution and service fees
8,889
10,617
18,349
20,680
Administration and shareholder service fees
13,289
15,054
27,942
29,467
Other income and fees
166
227
331
551
Total revenues
$
132,894
$
140,489
$
277,460
$
271,207
4. Intangible Assets, Net
Below is a summary of intangible assets, net:
(in thousands)
June 30, 2020
December 31, 2019
Definite-lived intangible assets:
Investment contracts and other
$
489,570
$
489,570
Accumulated amortization
( 237,761
)
( 222,695
)
Definite-lived intangible assets, net
251,809
266,875
Indefinite-lived intangible assets
43,516
43,516
Total intangible assets, net
$
295,325
$
310,391
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Activity in intangible assets, net was as follows:
Six Months Ended June 30,
(in thousands)
2020
2019
Intangible assets, net
Balance, beginning of period
$
310,391
$
338,812
Additions
—
1,696
Amortization
( 15,066
)
( 15,124
)
Balance, end of period
$
295,325
$
325,384
Definite-lived intangible asset amortization for the remainder of fiscal year 2020 and succeeding fiscal years is estimated as follows:
Fiscal Year
Amount
(in thousands)
Remainder of 2020
$
15,061
2021
30,116
2022
29,992
2023
29,330
2024
23,689
2025 and thereafter
123,621
$
251,809
5. Investments
Investments consist primarily of investments in the Company's sponsored products. The Company's investments, excluding the assets of consolidated investment products ("CIP") discussed in Note 15, at June 30, 2020 and December 31, 2019 were as follows:
(in thousands)
June 30, 2020
December 31, 2019
Investment securities - fair value
$
40,024
$
60,990
Equity method investments (1)
11,461
12,030
Nonqualified retirement plan assets
8,526
8,724
Other investments
1,290
1,462
Total investments
$
61,301
$
83,206
(1)
The Company's equity method investments are valued on a three-month lag based upon the availability of financial information.
Investment Securities - fair value
Investment securities - fair value consist of investments in the Company's sponsored funds, separately managed accounts and trading debt securities. The composition of the Company’s investment securities - fair value was as follows:
June 30, 2020
December 31, 2019
(in thousands)
Cost
Fair Value
Cost
Fair Value
Investment Securities - fair value
Sponsored funds
$
23,735
$
27,341
$
44,588
$
47,654
Equity securities
10,818
12,679
11,250
13,320
Debt securities
7
4
44
16
Total investment securities - fair value
$
34,560
$
40,024
$
55,882
$
60,990
For the three and six months ended June 30, 2020 , the Company recognized realized gains of less than $ 0.1 million
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and realized losses of $ 0.3 million , respectively, on the sale of its investment securities - fair value. For the three and six months ended June 30, 2019 , the Company recognized a realized gain of $ 0.2 million and a realized loss of $ 0.6 million , respectively, on the sale of its investment securities - fair value.
6. Fair Value Measurements
The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of CIP discussed in Note 15, as of June 30, 2020 and December 31, 2019 by fair value hierarchy level were as follows:
June 30, 2020
(in thousands)
Level 1
Level 2
Level 3
Total
Assets
Cash equivalents
$
138,847
$
—
$
—
$
138,847
Investment securities - fair value
Sponsored funds
27,341
—
—
27,341
Equity securities
12,679
—
—
12,679
Debt securities
—
4
—
4
Nonqualified retirement plan assets
8,526
—
—
8,526
Total assets measured at fair value
$
187,393
$
4
$
—
$
187,397
December 31, 2019
(in thousands)
Level 1
Level 2
Level 3
Total
Assets
Cash equivalents
$
187,255
$
—
$
—
$
187,255
Investment securities - fair value
Sponsored funds
47,654
—
—
47,654
Equity securities
13,320
—
—
13,320
Debt securities
—
16
—
16
Nonqualified retirement plan assets
8,724
—
—
8,724
Total assets measured at fair value
$
256,953
$
16
$
—
$
256,969
The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value:
Cash equivalents represent investments in money market funds. Cash investments in money market funds are valued using published net asset values and are classified as Level 1.
Sponsored funds represent investments in open-end funds, closed-end funds and ETFs for which the Company acts as the investment manager. The fair value of open-end funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds and ETFs is determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.
Equity securities represent securities traded on active markets and are valued at the official closing price (typically the last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.
Debt securities represent investments in senior secured bank loans and are based on evaluated quotations received from independent pricing services and are categorized as Level 2.
Nonqualified retirement plan assets represent mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.
Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.
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The Company had no Level 3 investments for the three and six-month periods ended June 30, 2020. The following table is a reconciliation of assets for Level 3 investments for which significant unobservable inputs were used to determine fair value for the three and six-months ended June 30, 2019:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2019
2019
Level 3 Investments (1)
Balance at beginning of period
$
4,417
$
4,122
Purchases (sales), net
( 4,417
)
( 4,185
)
Change in realized and unrealized gain (loss), net
—
63
Balance at end of period
$
—
$
—
(1)
The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment.
7. Equity Transactions
Preferred Stock Conversion
On February 3, 2020, 1,150,000 shares of mandatory convertible preferred stock ("MCPS") converted to 912,870 shares of the Company's common stock. Each share of MCPS converted to 0.7938 shares of common stock at a conversion price of $ 125.97 per share, subject to customary anti-dilution adjustments. The number of shares of common stock issued upon conversion was determined based on the volume-weighted average price per share of the Company's common stock over the 20 consecutive trading day period beginning on, and including, the 22nd scheduled trading day immediately preceding the mandatory conversion date.
Dividends Declared
On May 13, 2020, the Company declared a quarterly cash dividend of $ 0.67 per common share to be paid on August 14, 2020 to stockholders of record at the close of business on July 31, 2020.
Common Stock Repurchases
During the three and six months ended June 30, 2020 , the Company repurchased 74,897 and 185,853 common shares, respectively, at a weighted average price of $ 100.11 and $ 94.13 per share, respectively, for a total cost, including fees and expenses, of $ 7.5 million and $ 17.5 million , respectively, under its share repurchase program. In May 2020, the Company's Board of Directors authorized an additional 750,000 shares to be repurchased under the share repurchase program. As of June 30, 2020 , 816,585 shares remained available for repurchase. Under the terms of the program, the Company may repurchase shares of its common stock from time to time at its discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. The program, which has no specified term, may be suspended or terminated at any time.
8. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2020 and 2019 were as follows:
(in thousands)
Unrealized Gains (Losses) on
Securities
Available-for-Sale
Foreign
Currency
Translation
Adjustments
Balance at December 31, 2019
$
—
$
9
Foreign currency translation adjustments, net of tax of $9
—
( 26
)
Net current-period other comprehensive income (loss)
—
( 26
)
Balance at June 30, 2020
$
—
$
( 17
)
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(in thousands)
Unrealized Gains (Losses) on
Securities
Available-for-Sale
Foreign
Currency
Translation
Adjustments
Balance at December 31, 2018
$
( 726
)
$
( 5
)
Foreign currency translation adjustments, net of tax of $1
—
( 2
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of $(254)
726
—
Net current-period other comprehensive income (loss)
726
( 2
)
Balance at June 30, 2019
$
—
$
( 7
)
9. Stock-Based Compensation
Pursuant to the Company's Omnibus Incentive and Equity Plan (the "Plan"), officers, employees and directors may be granted equity-based awards, including restricted stock units ("RSUs"), performance stock units ("PSUs"), stock options and unrestricted shares of common stock. At June 30, 2020 , 337,091 shares of common stock remained available for issuance of the 2,820,000 shares that are authorized for issuance under the Plan.
Stock based compensation expense is summarized as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
(in thousands)
Stock-based compensation expense
$
6,492
$
5,755
$
10,113
$
11,384
Restricted Stock Units
Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs may be time-vested or performance-contingent (PSUs) and generally vest in one to three years . Shares that are issued upon vesting are newly issued shares from the Plan and are not issued from treasury stock.
RSU activity for the six months ended June 30, 2020 is summarized as follows:
Number
of Shares
Weighted Average
Grant Date
Fair Value
Outstanding at December 31, 2019
528,376
$
115.74
Granted
210,264
$
86.36
Forfeited
( 3,263
)
$
121.03
Settled
( 178,859
)
$
110.77
Outstanding at June 30, 2020
556,518
$
106.21
For the six months ended June 30, 2020 and 2019 , a total of 62,899 and 57,411 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $ 5.5 million and $ 5.8 million for the six months ended June 30, 2020 and 2019 , respectively, in minimum employee tax withholding obligations related to RSUs withheld for net share settlements. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have been otherwise issued as a result of the vesting.
During the six months ended June 30, 2020 , the Company granted 68,371 PSUs, included in the table above, that contain performance-based metrics in addition to a service condition. Compensation expense for PSUs is generally recognized over a three -year service period based upon the value determined using a combination of (i) the intrinsic value method, for awards that contain a performance metric that represents a "performance condition" in accordance with ASC 718 and (ii) the Monte Carlo simulation valuation model for awards that contain a "market condition" performance metric under ASC 718. Compensation expense for PSU awards that contain a market condition is fixed at the date of grant and will not be adjusted in
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future periods based upon the achievement of the market condition. Compensation expense for PSU awards with a performance condition is recorded each period based upon a probability assessment of the expected outcome of the performance metric with a final adjustment upon measurement at the end of the performance period.
As of June 30, 2020 , unamortized stock-based compensation expense for unvested RSUs and PSUs was $ 30.0 million , with a weighted-average remaining amortization period of 1.6 years .
10. Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period, excluding dilution for potential common stock issuances. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, including: (i) shares issuable upon the vesting of RSUs and stock option exercises using the treasury stock method and (ii) shares issuable upon the conversion of the MCPS, as determined under the if-converted method. For purposes of calculating diluted EPS, preferred stock dividends have been subtracted from net income (loss) in periods in which utilizing the if-converted method would be anti-dilutive.
The computation of basic and diluted EPS is as follows:
Three Months Ended June 30,
Six Months Ended
June 30,
(in thousands, except per share amounts)
2020
2019
2020
2019
Net Income (Loss)
$
16,209
$
27,899
$
17,215
$
50,367
Noncontrolling interests
( 4,930
)
( 973
)
( 10,221
)
( 1,695
)
Net Income (Loss) Attributable to Stockholders
11,279
26,926
6,994
48,672
Preferred stock dividends
—
( 2,084
)
—
( 4,168
)
Net Income (Loss) Attributable to Common Stockholders
$
11,279
$
24,842
$
6,994
$
44,504
Shares:
Basic: Weighted-average number of shares outstanding
7,720
6,999
7,572
7,010
Plus: Incremental shares from assumed conversion of dilutive instruments
175
1,253
364
1,280
Diluted: Weighted-average number of shares outstanding
7,895
8,252
7,936
8,290
Earnings (Loss) per Share—Basic
$
1.46
$
3.55
$
0.92
$
6.35
Earnings (Loss) per Share—Diluted
$
1.43
$
3.26
$
0.88
$
5.87
The following table details the securities that have been excluded from the above computation of weighted-average number of shares for diluted EPS, because the effect would be anti-dilutive:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2020
2019
2020
2019
Restricted stock units and options
35
27
1
24
Total anti-dilutive securities
35
27
1
24
11. Income Taxes
In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances at each interim period. On a quarterly basis, the estimated annual effective tax rate is adjusted, as appropriate, based upon changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and at each interim period thereafter.
The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 50.9 % and 20.5 % for the six months ended June 30, 2020 and 2019 , respectively. The comparatively higher estimated effective tax rate for the six months ended June 30, 2020 was primarily due to unrealized losses on certain Company investments for which a valuation allowance was recorded.
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12. Debt
C redit Agreement
The Company's credit agreement, as amended (the "Credit Agreement"), is comprised of (i) $ 365.0 million of seven-year term debt (the "Term Loan") expiring in June 2024 and (ii) a $ 100.0 million five-year revolving credit facility (the "Credit Facility") expiring in June 2022. During the six months ended June 30, 2020 , the Company reduced its Term Loan by $ 45.0 million , including the retirement of $ 10.0 million of principal for $ 8.9 million from certain debt holders in accordance with the prepayment provisions in the Credit Agreement. At June 30, 2020 , $ 240.7 million was outstanding under the Term Loan, and the Company had no outstanding borrowings under its Credit Facility. In accordance with ASC 835, Interest, the amounts outstanding under the Company's Term Loan are presented on the Condensed Consolidated Balance Sheet net of related debt issuance costs, which were $ 5.9 million as of June 30, 2020 .
13. Commitments and Contingencies
Legal Matters
The Company is involved from time to time in litigation and arbitration, as well as examinations, inquiries and investigations by various regulatory bodies, including the SEC, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature involve or may involve but are not limited to the Company’s activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions.
The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Contingencies. The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Based on information currently available, available insurance coverage, indemnities and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome, and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
14. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests represent third-party investments in the Company's CIP and minority interests held in a consolidated affiliate. Minority interests held in an affiliate are subject to holder put rights and Company call rights at established multiples of earnings before interest, taxes, depreciation and amortization and, as such, are considered redeemable at other than fair value. The rights are exercisable at pre-established intervals (between four and seven years from their issuance) or upon certain conditions such as retirement. The put and call rights are not legally detachable or separately exercisable and are deemed to be embedded in the related noncontrolling interests. The Company, in purchasing affiliate equity, has the option to settle in cash or shares of the Company's common stock and is entitled to the cash flow associated with any purchased equity. Minority interests in an affiliate are recorded at estimated redemption value within redeemable noncontrolling interests on the Company's Condensed Consolidated Balance Sheets, and changes in estimated redemption value of these interests are recorded in the Company’s Condensed Consolidated Statements of Operations within noncontrolling interests.
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Redeemable noncontrolling interests for the six months ended June 30, 2020 included the following amounts:
(in thousands)
CIP
Affiliate Noncontrolling Interests
Total
Balances at December 31, 2019
$
5,429
$
58,416
$
63,845
Net income (loss) attributable to noncontrolling interests
( 780
)
1,885
1,105
Changes in redemption value (1)
—
10,239
10,239
Total net income (loss) attributable to noncontrolling interests
( 780
)
12,124
11,344
Net subscriptions (redemptions) and other
19,696
( 4,198
)
15,498
Balances at June 30, 2020
$
24,345
$
66,342
$
90,687
(1) Relates to noncontrolling interests redeemable at other than fair value.
15. Consolidation
The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest, which is typically present when the Company owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the entity.
The Company evaluates any variable interest entities ("VIEs") in which the Company has a variable interest for consolidation. A VIE is an entity in which either (i) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (ii) where as a group, the holders of the equity investment at risk do not possess (x) the power through voting or similar rights to direct the activities that most significantly impact the entity’s economic performance; (y) the obligation to absorb expected losses or the right to receive expected residual returns of the entity; or (z) proportionate voting and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights. If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.
In the normal course of its business, the Company sponsors various investment products, some of which are consolidated by the Company. CIP includes both VOEs, made up primarily of open-end funds in which the Company holds a controlling financial interest, and VIEs, which primarily consist of CLOs of which the Company is considered the primary beneficiary. The consolidation and deconsolidation of these investment products have no impact on net income (loss) attributable to stockholders. The Company’s risk with respect to these investment products is limited to its beneficial interests 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.
The following table presents the balances of CIP that, after intercompany eliminations, were reflected in the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 :
As of
June 30, 2020
December 31, 2019
VIEs
VIEs
(in thousands)
VOEs
CLOs
Other
VOEs
CLOs
Other
Cash and cash equivalents
$
9,966
$
72,721
$
1,098
$
2,665
$
97,130
$
363
Investments
45,560
2,194,211
34,049
22,223
1,976,148
31,739
Other assets
5,328
23,894
565
1,563
21,450
599
Notes payable
—
( 2,156,587
)
—
—
( 1,834,535
)
—
Securities purchased payable and other liabilities
( 5,250
)
( 66,707
)
( 356
)
( 2,964
)
( 164,887
)
( 200
)
Noncontrolling interests
( 22,304
)
( 8,345
)
( 2,041
)
( 3,865
)
( 10,558
)
( 1,564
)
Net interests in CIP
$
33,300
$
59,187
$
33,315
$
19,622
$
84,748
$
30,937
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Consolidated CLOs
The majority of the Company's CIP that are VIEs are CLOs. At June 30, 2020 , the Company consolidated six CLOs. The financial information of certain CLOs is included in the Company's condensed consolidated financial statements on a one-month lag based upon the availability of the fund financial information. A majority-owned consolidated private fund, whose primary purpose is to invest in CLOs for which the Company serves as the collateral manager, is also included.
Investments of CLOs
The CLOs held investments of $ 2.2 billion at June 30, 2020 consisting of bank loan investments, which comprise the majority of the CLOs' portfolio asset collateral and are senior secured corporate loans across a variety of industries. These bank loan investments mature at various dates between 2020 and 2028 and pay interest at LIBOR plus a spread of up to 8.50 % . The CLOs may elect to reinvest any prepayments received on bank loan investments up until the periods between October 2019 and March 2025, depending on the CLO. Generally, subsequent prepayments received after the reinvestment period must be used to pay down the note obligations. At June 30, 2020 , the fair value of the senior bank loans was less than the unpaid principal balance by $ 219.3 million . At June 30, 2020 , there were no material collateral assets in default.
Notes Payable of CLOs
The CLOs held notes payable with a total value, at par, of $ 2.5 billion at March 31, 2020, consisting of senior secured floating rate notes payable with a par value of $ 2.3 billion and subordinated notes with a par value of $ 225.9 million . These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 0.8 % to 8.7 % . The principal amounts outstanding of these note obligations mature on dates ranging from October 2027 to January 2033.
The Company’s beneficial interests and maximum exposure to loss related to these consolidated CLOs is limited to (i) ownership in the subordinated notes and (ii) accrued management fees. The secured notes of the consolidated CLOs have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative prescribed by ASU 2014-13, Consolidation (Topic 810) ("ASU 2014-13") results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at June 30, 2020 , as shown in the table below:
(in thousands)
Subordinated notes
$
57,524
Accrued investment management fees
1,663
Total beneficial interests
$
59,187
The following table represents income and expenses of the consolidated CLOs included in the Company’s Condensed Consolidated Statements of Operations for the period indicated:
(in thousands)
Six Months Ended June 30, 2020
Income:
Realized and unrealized gain (loss), net
$
( 11,516
)
Interest income
56,942
Total income
45,426
Expenses:
Other operating expenses
8,676
Interest expense
52,636
Total expense
61,312
Noncontrolling interests
1,123
Net Income (loss) attributable to CIP
$
( 14,763
)
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As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation:
(in thousands)
Six Months Ended June 30, 2020
Distributions received and unrealized gains (losses) on the subordinated notes held by the Company
$
( 19,376
)
Investment management fees
4,613
Total economic interests
$
( 14,763
)
Fair Value Measurements of CIP
The assets and liabilities of CIP measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 by fair value hierarchy level were as follows:
As of June 30, 2020
(in thousands)
Level 1
Level 2
Level 3
Total
Assets
Cash equivalents
$
72,721
$
—
$
—
$
72,721
Debt investments
16,040
2,220,486
11,552
2,248,078
Equity investments
24,202
1,220
320
25,742
Derivatives
295
511
—
806
Total assets measured at fair value
$
113,258
$
2,222,217
$
11,872
$
2,347,347
Liabilities
Notes payable
$
—
$
2,156,587
$
—
$
2,156,587
Derivatives
495
311
—
806
Short sales
421
—
—
421
Total liabilities measured at fair value
$
916
$
2,156,898
$
—
$
2,157,814
As of December 31, 2019
(in thousands)
Level 1
Level 2
Level 3
Total
Assets
Cash equivalents
$
97,130
$
—
$
—
$
97,130
Debt investments
218
1,973,427
39,389
2,013,034
Equity investments
15,872
171
1,033
17,076
Total assets measured at fair value
$
113,220
$
1,973,598
$
40,422
$
2,127,240
Liabilities
Notes payable
$
—
$
1,834,535
$
—
$
1,834,535
Short sales
430
—
—
430
Total liabilities measured at fair value
$
430
$
1,834,535
$
—
$
1,834,965
The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s CIP measured at fair value:
Cash equivalents represent investments in money ma rket funds. Cash investments in money market funds are valued using published net asset values and are classified as Level 1.
Debt and equity investments represent the underlying debt, equity and other securities held in CIP. Equity investments are valued at the official closing price on the exchange on which the securities are traded and are generally categorized within Level 1. Level 2 investments represent most debt securities, including bank loans and certain equity securities (including non-U.S. securities), for which closing prices are not readily available or are deemed to not reflect readily available market prices,
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and are valued using an independent pricing service. Debt investments are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Bank loan investments, which are included as debt investments, are generally priced at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the fair value measurement hierarchy. Level 3 investments include debt and equity securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security.
Derivative assets and liabilities represent futures contracts, swaps contracts, option contracts and forward contracts held in CIP. Derivative instruments in an asset position are classified as other assets of CIP in the Condensed Consolidated Balance Sheets. Derivative instruments in a liability position are classified as liabilities of CIP within the Condensed Consolidated Balance Sheets. The change in fair value of such derivatives is recorded in realized and unrealized gain (loss) on investments of CIP, net, in the Condensed Consolidated Statements of Operations. Depending on the nature of the inputs, these derivative assets and liabilities are classified as Level 1, 2 or 3 within the fair value measurement hierarchy. In connection with entering into these derivative contracts, these CIP may be required to pledge an amount of cash equal to the appropriate “initial margin” requirements. The cash pledged or on deposit is recorded in the Condensed Consolidated Balance Sheets of the Company as Cash pledged or on deposit of CIP. The fair value of such derivatives at June 30, 2020 was immaterial.
Notes payable represent notes issued by CIP CLOs and are measured using the measurement alternative in ASU 2014-13. Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (i) the fair value of the beneficial interests held by the Company, and (ii) the carrying value of any beneficial interests that represent compensation for services. The fair value of the beneficial interests held by the Company is based on third-party pricing information without adjustment.
Short sales are transactions in which a security is sold that is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded in the Condensed Consolidated Balance Sheets within other liabilities of CIP and are classified as Level 1 based on the underlying equity security.
The securities purchase payable at June 30, 2020 and December 31, 2019 approximated fair value due to the short-term nature of the instruments.
The following table is a reconciliation of assets of CIP for Level 3 investments for which significant unobservable inputs were used to determine fair value:
Six Months Ended June 30,
(in thousands)
2020
2019
Level 3 Investments of CIP (1)
Balance at beginning of period
$
40,422
$
6,848
Realized gains (losses), net
4
( 114
)
Change in unrealized gains (losses), net
( 920
)
563
Purchases
56
2,157
Amortization
6
—
Sales
( 1,195
)
( 2,457
)
Transfers to Level 2
( 38,607
)
( 21,891
)
Transfers from Level 2
12,106
40,032
Balance at end of period
$
11,872
$
25,138
(1)
The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment. Transfers between Level 2 and Level 3 were due to trading activities at period end.
Nonconsolidated VIEs
The Company serves as the collateral manager for other collateralized loan and collateralized bond obligations (collectively, "CDOs") that are not consolidated. The assets and liabilities of these CDOs reside in bankruptcy remote, special
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purpose entities in which the Company has no ownership of, nor holds any notes issued by, the CDOs, and provides neither recourse nor guarantees. The Company has determined that the investment management fees it receives for serving as collateral manager for these CDOs did not represent a variable interest since (i) the fees the Company earns are compensation for services provided and are commensurate with the level of effort required to provide the investment management services, (ii) the Company does not hold other interests in the CDOs that individually, or in the aggregate, would absorb more than an insignificant amount of the CDOs' expected losses or receive more than an insignificant amount of the CDOs' expected residual return, and (iii) the investment management arrangement only includes terms, conditions and amounts that are customarily present in arrangements for similar services negotiated at arm's length.
The Company has interests in certain other entities that are VIEs that the Company does not consolidate as it is not the primary beneficiary of those entities. The Company is not the primary beneficiary as its interest in these entities does not provide the Company with the power to direct the activities that most significantly impact the entities' economic performance.
At June 30, 2020 , the carrying value and maximum risk of loss related to the Company's interest in these VIEs was $ 14.6 million .
16. Subsequent Events
On July 4, 2020, two wholly-owned subsidiaries of the Company entered into an agreement with Allianz Global Investors U.S. LLC and Allianz Global Investors Distributors LLC (collectively, "AllianzGI") allowing the Company to be the investment adviser, distributor and/or administrator of certain AllianzGI's open-end, closed-end and retail separate account assets. The agreement is subject to the approval of the AllianceGI U.S. Funds Board and fund shareholders and is expected to close near year-end 2020.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.