VIRTUS INVESTMENT PARTNERS, INC. 10-Q

Item 1. Financial Statements Virtus Investment Partners, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share data) September 30, 2020 December 31, 2019 Assets: Cash and cash equivalents $ 202,212 $ 221,781 Investments 54,446 83,206 Accounts receivable, net 76,616 74,132 Assets of consolidated investment products ("CIP") Cash and cash equivalents of CIP 48,228 99,691 Cash pledged or on deposit of CIP 6,007 467 Investments of CIP 2,333,685 2,030,110 Other assets of CIP 27,415 23,612 Furniture, equipment and leasehold improvements, net 15,287 18,150 Intangible assets, net 287,793 310,391 Goodwill 290,366 290,366 Deferred taxes, net 8,862 15,879 Other assets 39,807 36,849 Total assets $ 3,390,724 $ 3,204,634 Liabilities and Equity Liabilities: Accrued compensation and benefits $ 87,256 $ 101,377 Accounts payable and accrued liabilities 21,633 23,308 Dividends payable 8,742 8,915 Debt 218,014 277,839 Other liabilities 35,833 40,507 Liabilities of CIP Notes payable of CIP 2,190,937 1,834,535 Securities purchased payable and other liabilities of CIP 41,020 168,051 Total liabilities 2,603,435 2,454,532 Commitments and Contingencies (Note 13) Redeemable noncontrolling interests 99,277 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 September 30, 2020 and December 31, 2019, respectively — 110,843 Common stock, $ 0.01 par value, 1,000,000,000 shares authorized; 11,780,481 shares issued and 7,613,154 shares outstanding at September 30, 2020, respectively, and 10,736,887 shares issued and 6,809,280 shares outstanding at December 31, 2019, respectively 118 107 Additional paid-in capital 1,301,735 1,199,205 Retained earnings (accumulated deficit) ( 178,574 ) ( 215,216 ) Accumulated other comprehensive income (loss) — 9 Treasury stock, at cost, 4,167,327 and 3,927,607 shares at September 30, 2020 and December 31, 2019, respectively ( 444,249 ) ( 419,249 ) Total equity attributable to stockholders 679,030 675,699 Noncontrolling interests 8,982 10,558 Total equity 688,012 686,257 Total liabilities and equity $ 3,390,724 $ 3,204,634 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents Virtus Investment Partners, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share data) 2020 2019 2020 2019 Revenues Investment management fees $ 129,785 $ 120,023 $ 360,623 $ 340,532 Distribution and service fees 9,797 10,442 28,146 31,122 Administration and shareholder service fees 15,114 15,280 43,056 44,747 Other income and fees 94 210 425 761 Total revenues 154,790 145,955 432,250 417,162 Operating Expenses Employment expenses 67,479 61,282 193,772 180,256 Distribution and other asset-based expenses 19,570 20,927 56,324 62,013 Other operating expenses 16,343 18,228 52,664 56,125 Operating expenses of consolidated investment products ("CIP") 1,016 376 9,944 3,395 Restructuring and severance 735 523 1,155 2,019 Depreciation expense 1,106 1,245 3,560 3,729 Amortization expense 7,532 7,587 22,598 22,711 Total operating expenses 113,781 110,168 340,017 330,248 Operating Income (Loss) 41,009 35,787 92,233 86,914 Other Income (Expense) Realized and unrealized gain (loss) on investments, net 2,498 2 2,068 5,474 Realized and unrealized gain (loss) of CIP, net 2,680 ( 5,344 ) ( 12,733 ) 2,455 Other income (expense), net 999 746 806 1,892 Total other income (expense), net 6,177 ( 4,596 ) ( 9,859 ) 9,821 Interest Income (Expense) Interest expense ( 2,877 ) ( 4,889 ) ( 9,202 ) ( 15,205 ) Interest and dividend income 137 863 1,131 3,017 Interest and dividend income of investments of CIP 26,088 30,290 83,951 87,060 Interest expense of CIP ( 17,622 ) ( 21,252 ) ( 70,258 ) ( 72,030 ) Total interest income (expense), net 5,726 5,012 5,622 2,842 Income (Loss) Before Income Taxes 52,912 36,203 87,996 99,577 Income tax expense (benefit) 11,978 10,844 29,847 23,851 Net Income (Loss) 40,934 25,359 58,149 75,726 Noncontrolling interests ( 11,286 ) ( 1,274 ) ( 21,507 ) ( 2,969 ) Net Income (Loss) Attributable to Stockholders 29,648 24,085 36,642 72,757 Preferred stockholder dividends — ( 2,085 ) — ( 6,253 ) Net Income (Loss) Attributable to Common Stockholders $ 29,648 $ 22,000 $ 36,642 $ 66,504 Earnings (Loss) per Share—Basic $ 3.86 $ 3.17 $ 4.81 $ 9.51 Earnings (Loss) per Share—Diluted $ 3.71 $ 2.95 $ 4.60 $ 8.86 Weighted Average Shares Outstanding—Basic 7,684 6,947 7,611 6,990 Weighted Average Shares Outstanding—Diluted 7,997 8,157 7,958 8,215 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents Virtus Investment Partners, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Net Income (Loss) $ 40,934 $ 25,359 $ 58,149 $ 75,726 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment, net of tax of $( 6 ) and $ 4 for the three months ended September 30, 2020 and 2019, respectively, and $ 3 and $ 5 for the nine months ended September 30, 2020 and 2019, respectively 17 ( 12 ) ( 9 ) ( 14 ) Other comprehensive income (loss) 17 ( 12 ) ( 9 ) ( 14 ) Comprehensive income (loss) 40,951 25,347 58,140 75,712 Comprehensive (income) loss attributable to noncontrolling interests ( 11,286 ) ( 1,274 ) ( 21,507 ) ( 2,969 ) Comprehensive Income (Loss) Attributable to Stockholders $ 29,665 $ 24,073 $ 36,633 $ 72,743 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents Virtus Investment Partners, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (in thousands) 2020 2019 Cash Flows from Operating Activities: Net income (loss) $ 58,149 $ 75,726 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense, intangible asset and other amortization 32,153 29,766 Stock-based compensation 16,412 16,384 Amortization of deferred commissions 1,544 2,413 Payments of deferred commissions ( 1,475 ) ( 1,522 ) Equity in earnings of equity method investments ( 855 ) ( 2,001 ) (Gain) loss on extinguishment of debt ( 705 ) — Realized and unrealized (gains) losses on investments, net ( 2,069 ) ( 4,636 ) Distributions from equity method investments 921 828 Sales (purchases) of investments, net 15,586 8,784 Deferred taxes, net 7,020 3,392 Changes in operating assets and liabilities: Accounts receivable, net and other assets ( 7,989 ) ( 3,057 ) Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities ( 22,931 ) ( 24,211 ) Operating activities of consolidated investment products ("CIP"): Realized and unrealized (gains) losses on investments of CIP, net 6,739 ( 3,063 ) Purchases of investments by CIP ( 1,114,801 ) ( 805,599 ) Sales of investments by CIP 624,675 588,678 Net proceeds (purchases) of short term investments by CIP 1,434 2,294 (Purchases) sales of securities sold short by CIP, net 267 1,241 Change in other assets of CIP ( 2,039 ) ( 184 ) Change in liabilities of CIP ( 3,472 ) 7,247 Amortization of discount on notes payable of CIP 11,169 4,505 Net cash provided by (used in) operating activities ( 380,267 ) ( 103,015 ) Cash Flows from Investing Activities: Capital expenditures and other asset purchases ( 789 ) ( 6,961 ) Change in cash and cash equivalents of CIP due to consolidation (deconsolidation), net 9,724 18,408 Sale of available-for-sale securities — 2,023 Net cash provided by (used in) investing activities 8,935 13,470 Cash Flows from Financing Activities: Payment of long term debt ( 61,573 ) ( 39,839 ) Common stock dividends paid ( 16,460 ) ( 12,244 ) Preferred stock dividends paid ( 2,084 ) ( 6,253 ) Repurchases of common shares ( 25,000 ) ( 30,000 ) Taxes paid related to net share settlement of restricted stock units ( 5,530 ) ( 5,953 ) Net subscriptions received from (redemptions/distributions paid to) noncontrolling interests ( 5,935 ) 7,630 Financing activities of CIP: Payments on borrowings by CIP ( 358,725 ) ( 195,697 ) Borrowings by CIP 781,147 396,277 Net cash provided by (used in) financing activities 305,840 113,921 Net increase (decrease) in cash, cash equivalents and restricted cash ( 65,492 ) 24,376 Cash, cash equivalents and restricted cash, beginning of period 321,939 254,656 Cash, cash equivalents and restricted cash, end of period $ 256,447 $ 279,032 Non-Cash Investing Activities: Change in accrual for capital expenditures $ 8 $ ( 1,784 ) Non-Cash Financing Activities: Increase (decrease) to noncontrolling interests due to consolidation (deconsolidation) of CIP, net $ 17,137 $ 22,046 Common stock dividends payable $ 6,288 $ 4,608 Preferred stock dividends payable $ — $ 2,085 Conversion of preferred stock to common stock $ 115,000 $ — (in thousands) September 30, 2020 December 31, 2019 Reconciliation of cash, cash equivalents and restricted cash Cash and cash equivalents $ 202,212 $ 221,781 Cash of CIP 48,228 99,691 Cash pledged or on deposit of CIP 6,007 467 Cash, cash equivalents and restricted cash at end of period $ 256,447 $ 321,939 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 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 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 Net income (loss) — — — — — 24,085 — — — 24,085 ( 68 ) 24,017 1,342 Foreign currency translation adjustments — — — — — — ( 12 ) — — ( 12 ) — ( 12 ) — Net subscriptions (redemptions) and other — — — — 548 — — — — 548 ( 657 ) ( 109 ) 29,766 Cash dividends declared ($ 1.81 per preferred share) — — — — ( 2,085 ) — — — — ( 2,085 ) — ( 2,085 ) — Cash dividends declared ($ 0.67 per common share) — — — — ( 4,972 ) — — — — ( 4,972 ) — ( 4,972 ) — Repurchases of common shares ( 70,949 ) — — — — — — 70,949 ( 7,501 ) ( 7,501 ) — ( 7,501 ) — Issuance of common shares related to employee stock transactions 3,653 — — — 5 — — — — 5 — 5 — Taxes paid on stock-based compensation — — — — ( 93 ) — — — — ( 93 ) — ( 93 ) — Stock-based compensation — — — — 4,694 — — — — 4,694 — 4,694 — Balances at September 30, 2019 6,877,596 $ 107 1,150,000 $ 110,843 $ 1,202,130 $ ( 238,108 ) $ ( 19 ) 3,841,862 $ ( 409,249 ) $ 665,704 $ 11,912 $ 677,616 $ 91,610 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 Net income (loss) — — — — — 29,648 — — — 29,648 977 30,625 10,309 Foreign currency translation adjustments — — — — — — 17 — — 17 — 17 — Net subscriptions (redemptions) and other — — — — — — — — — — ( 340 ) ( 340 ) ( 1,719 ) Cash dividends declared ($ 0.82 per common share) — — — — ( 6,695 ) — — — — ( 6,695 ) — ( 6,695 ) — Repurchases of common shares ( 53,867 ) — — — — — — 53,867 ( 7,500 ) ( 7,500 ) — ( 7,500 ) — Issuance of common shares related to employee stock transactions 2,749 — — — 49 — — — — 49 — 49 — Taxes paid on stock-based compensation — — — — ( 124 ) — — — — ( 124 ) ( 124 ) — Stock-based compensation — — — — 5,469 — — — — 5,469 — 5,469 — Balances at September 30, 2020 7,613,154 $ 118 — $ — $ 1,301,735 $ ( 178,574 ) $ — 4,167,327 $ ( 444,249 ) $ 679,030 $ 8,982 $ 688,012 $ 99,277 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) — — — — — 72,757 — — — 72,757 ( 297 ) 72,460 3,266 Reclassification from other comprehensive (income) loss — — — — — — 726 — — 726 — 726 — Foreign currency translation adjustments — — — — — — ( 14 ) — — ( 14 ) — ( 14 ) — Net subscriptions (redemptions) and other — — — — 838 — — — — 838 ( 1,749 ) ( 911 ) 30,863 Cash dividends declared ($ 5.44 per preferred share) — — — — ( 6,253 ) — — — — ( 6,253 ) — ( 6,253 ) — Cash dividends declared ($ 1.77 per common share) — — — — ( 13,228 ) — — — — ( 13,228 ) — ( 13,228 ) — Repurchases of common shares ( 286,620 ) — — — — — — 286,620 ( 30,000 ) ( 30,000 ) — ( 30,000 ) — Issuance of common shares related to employee stock transactions 166,834 1 — — 1,429 — — — — 1,430 — 1,430 — Taxes paid on stock-based compensation — — — — ( 6,601 ) — — — — ( 6,601 ) — ( 6,601 ) — Stock-based compensation — — — — 16,140 — — — — 16,140 — 16,140 — Balances at September 30, 2019 6,877,596 $ 107 1,150,000 $ 110,843 $ 1,202,130 $ ( 238,108 ) $ ( 19 ) 3,841,862 $ ( 409,249 ) $ 665,704 $ 11,912 $ 677,616 $ 91,610 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) — — — — — 36,642 — — — 36,642 ( 146 ) 36,496 21,653 Foreign currency translation adjustments — — — — — — ( 9 ) — — ( 9 ) — ( 9 ) — Net subscriptions (redemptions) and other — — — — ( 167 ) — — — — ( 167 ) ( 1,430 ) ( 1,597 ) 13,779 Conversion of preferred stock 912,806 9 ( 1,150,000 ) ( 110,843 ) 110,834 — — — — — — — — Cash dividends declared ($ 2.16 per common share) — — — — ( 18,371 ) — — — — ( 18,371 ) — ( 18,371 ) — Repurchases of common shares ( 239,720 ) — — — — — — 239,720 ( 25,000 ) ( 25,000 ) — ( 25,000 ) — Issuance of common shares related to employee stock transactions 130,788 2 — — 161 — — — — 163 — 163 — Taxes paid on stock-based compensation — — — — ( 5,693 ) — — — — ( 5,693 ) ( 5,693 ) — Stock-based compensation — — — — 15,766 — — — — 15,766 — 15,766 — Balances at September 30, 2020 7,613,154 $ 118 — $ — $ 1,301,735 $ ( 178,574 ) $ — 4,167,327 $ ( 444,249 ) $ 679,030 $ 8,982 $ 688,012 $ 99,277 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 nine months ended September 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. 6 Table of Contents 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 has evaluated the impact of adopting this standard and, at this time, does not anticipate it will have a material impact 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 September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Investment management fees Open-end funds $ 63,458 $ 59,060 $ 176,584 $ 169,326 Closed-end funds 8,959 10,846 27,695 31,485 Retail separate accounts 26,412 22,092 74,524 60,761 Institutional accounts 29,048 25,180 76,571 71,013 Structured products 1,297 1,725 3,288 4,957 Other products 611 1,120 1,961 2,990 Total investment management fees 129,785 120,023 360,623 340,532 Distribution and service fees 9,797 10,442 28,146 31,122 Administration and shareholder service fees 15,114 15,280 43,056 44,747 Other income and fees 94 210 425 761 Total revenues $ 154,790 $ 145,955 $ 432,250 $ 417,162 4. Intangible Assets, Net Below is a summary of intangible assets, net: (in thousands) September 30, 2020 December 31, 2019 Definite-lived intangible assets: Investment contracts and other $ 489,570 $ 489,570 Accumulated amortization ( 245,293 ) ( 222,695 ) Definite-lived intangible assets, net 244,277 266,875 Indefinite-lived intangible assets 43,516 43,516 Total intangible assets, net $ 287,793 $ 310,391 7 Table of Contents Activity in intangible assets, net was as follows: Nine Months Ended September 30, (in thousands) 2020 2019 Intangible assets, net Balance, beginning of period $ 310,391 $ 338,812 Additions — 1,823 Amortization ( 22,598 ) ( 22,711 ) Balance, end of period $ 287,793 $ 317,924 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 7,529 2021 30,116 2022 29,992 2023 29,330 2024 23,689 2025 and thereafter 123,621 $ 244,277 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 September 30, 2020 and December 31, 2019 were as follows: (in thousands) September 30, 2020 December 31, 2019 Investment securities - fair value $ 31,641 $ 60,990 Equity method investments (1) 12,039 12,030 Nonqualified retirement plan assets 9,302 8,724 Other investments 1,464 1,462 Total investments $ 54,446 $ 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: September 30, 2020 December 31, 2019 (in thousands) Cost Fair Value Cost Fair Value Investment Securities - fair value Sponsored funds $ 21,075 $ 22,043 $ 44,588 $ 47,654 Equity securities 7,105 9,594 11,250 13,320 Debt securities 7 4 44 16 Total investment securities - fair value $ 28,187 $ 31,641 $ 55,882 $ 60,990 For the three and nine months ended September 30, 2020, the Company recognized realized gains of $ 4.5 million and 8 Table of Contents $ 4.2 million, respectively, on the sale of its investment securities - fair value. For the three and nine months ended September 30, 2019, the Company recognized realized gains of $ 1.0 million and $ 0.4 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 September 30, 2020 and December 31, 2019 by fair value hierarchy level were as follows: September 30, 2020 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 170,763 $ — $ — $ 170,763 Investment securities - fair value Sponsored funds 22,043 — — 22,043 Equity securities 9,594 — — 9,594 Debt securities — 4 — 4 Nonqualified retirement plan assets 9,302 — — 9,302 Total assets measured at fair value $ 211,702 $ 4 $ — $ 211,706 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. 9 Table of Contents The Company had no Level 3 investments for the three- and nine-month periods ended September 30, 2020 and no Level 3 investments for the three months ended September 30, 2019. 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 nine months ended September 30, 2019: Nine Months Ended September 30, (in thousands) 2019 Level 3 Investments (1) Balance at beginning of period $ 4,122 Purchases (sales), net ( 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 August 19, 2020, the Company declared a quarterly cash dividend of $ 0.82 per common share to be paid on November 13, 2020 to stockholders of record at the close of business on October 30, 2020. Common Stock Repurchases In May 2020, the Company's Board of Directors authorized an additional 750,000 shares to be repurchased under the Company's share repurchase program, bringing the total number of shares authorized to be repurchased under the program since its inception to 4,930,045 shares. During the three and nine months ended September 30, 2020, the Company repurchased 53,867 and 239,720 common shares, respectively, at a weighted average price of $ 139.20 and $ 104.26 per share, respectively, for a total cost, including fees and expenses, of $ 7.5 million and $ 25.0 million, respectively, under its share repurchase program. As of September 30, 2020, 762,718 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 nine months ended September 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 $ 3 — ( 9 ) Net current-period other comprehensive income (loss) — ( 9 ) Balance at September 30, 2020 $ — $ — 10 Table of Contents (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 $ 5 — ( 14 ) Amounts reclassified from accumulated other comprehensive income (loss), net of tax of $( 254 ) 726 — Net current-period other comprehensive income (loss) 726 ( 14 ) Balance at September 30, 2019 $ — $ ( 19 ) 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 September 30, 2020, 336,276 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Stock-based compensation expense $ 6,299 $ 5,000 $ 16,412 $ 16,384 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) that convert into RSUs after performance measurement is complete 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, inclusive of PSUs, for the nine months ended September 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 211,660 $ 86.73 Forfeited ( 3,844 ) $ 118.95 Settled ( 181,091 ) $ 110.79 Outstanding at September 30, 2020 555,101 $ 106.27 For the nine months ended September 30, 2020 and 2019, a total of 63,566 and 58,487 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $ 5.6 million and $ 5.9 million for the nine months ended September 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 nine months ended September 30, 2020, the Company granted 68,371 PSUs 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 11 Table of Contents PSU awards that contain a market condition is fixed at the date of grant and will not be adjusted in 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 September 30, 2020, unamortized stock-based compensation expense for unvested RSUs and PSUs was $ 27.2 million, with a weighted-average remaining amortization period of 1.4 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 September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2020 2019 2020 2019 Net Income (Loss) $ 40,934 $ 25,359 $ 58,149 $ 75,726 Noncontrolling interests ( 11,286 ) ( 1,274 ) ( 21,507 ) ( 2,969 ) Net Income (Loss) Attributable to Stockholders 29,648 24,085 36,642 72,757 Preferred stock dividends — ( 2,085 ) — ( 6,253 ) Net Income (Loss) Attributable to Common Stockholders $ 29,648 $ 22,000 $ 36,642 $ 66,504 Shares: Basic: Weighted-average number of shares outstanding 7,684 6,947 7,611 6,990 Plus: Incremental shares from assumed conversion of dilutive instruments 313 1,210 347 1,225 Diluted: Weighted-average number of shares outstanding 7,997 8,157 7,958 8,215 Earnings (Loss) per Share—Basic $ 3.86 $ 3.17 $ 4.81 $ 9.51 Earnings (Loss) per Share—Diluted $ 3.71 $ 2.95 $ 4.60 $ 8.86 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 September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Restricted stock units and options 1 32 — 29 Total anti-dilutive securities 1 32 — 29 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 33.9 % and 24.0 % for the nine months ended September 30, 2020 and 2019, respectively. The comparatively higher estimated effective tax rate for the nine months ended September 30, 2020 was primarily due to valuation allowances recorded for the tax effects of unrealized losses on certain Company investments. 12 Table of Contents 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 nine months ended September 30, 2020, the Company reduced its Term Loan by $ 62.5 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 September 30, 2020, $ 223.2 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 $ 5.2 million as of September 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 records 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 majority-owned affiliate. Minority interests held in the 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 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 on the Company’s Condensed Consolidated Statements of Operations within noncontrolling interests. 13 Table of Contents Redeemable noncontrolling interests for the nine months ended September 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 ( 852 ) 3,474 2,622 Changes in redemption value (1) — 19,031 19,031 Total net income (loss) attributable to noncontrolling interests ( 852 ) 22,505 21,653 Net subscriptions (redemptions) and other 20,074 ( 6,295 ) 13,779 Balances at September 30, 2020 $ 24,651 $ 74,626 $ 99,277 (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 on the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019: As of September 30, 2020 December 31, 2019 VIEs VIEs (in thousands) VOEs CLOs Other VOEs CLOs Other Cash and cash equivalents $ 9,128 $ 43,930 $ 1,177 $ 2,665 $ 97,130 $ 363 Investments 46,623 2,231,691 55,371 22,223 1,976,148 31,739 Other assets 2,756 23,821 838 1,563 21,450 599 Notes payable — ( 2,190,937 ) — — ( 1,834,535 ) — Securities purchased payable and other liabilities ( 2,972 ) ( 37,378 ) ( 670 ) ( 2,964 ) ( 164,887 ) ( 200 ) Noncontrolling interests ( 22,362 ) ( 8,982 ) ( 2,289 ) ( 3,865 ) ( 10,558 ) ( 1,564 ) Net interests in CIP $ 33,173 $ 62,145 $ 54,427 $ 19,622 $ 84,748 $ 30,937 14 Table of Contents Consolidated CLOs The majority of the Company's CIP that are VIEs are CLOs. At September 30, 2020, the Company consolidated six CLOs. The financial information of certain CLOs is included on 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 September 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 12.00 %. 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 September 30, 2020, the fair value of the senior bank loans was less than the unpaid principal balance by $ 135.8 million. At September 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 September 30, 2020, consisting of senior secured floating rate notes payable with a par value of $ 2.2 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 September 30, 2020, as shown in the table below: (in thousands) Subordinated notes $ 60,721 Accrued investment management fees 1,424 Total beneficial interests $ 62,145 The following table represents income and expenses of the consolidated CLOs included on the Company’s Condensed Consolidated Statements of Operations for the period indicated: (in thousands) Nine Months Ended September 30, 2020 Income: Realized and unrealized gain (loss), net $ ( 9,648 ) Interest income 81,846 Total income 72,198 Expenses: Other operating expenses 9,535 Interest expense 70,258 Total expense 79,793 Noncontrolling interests 146 Net Income (loss) attributable to CIP $ ( 7,449 ) 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 15 Table of Contents consolidated CLOs, which are eliminated upon consolidation: (in thousands) Nine Months Ended September 30, 2020 Distributions received and unrealized gains (losses) on the subordinated notes held by the Company $ ( 13,941 ) Investment management fees 6,492 Total economic interests $ ( 7,449 ) Fair Value Measurements of CIP The assets and liabilities of CIP measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 by fair value hierarchy level were as follows: As of September 30, 2020 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 43,930 $ — $ — $ 43,930 Debt investments 14,472 2,275,610 13,326 2,303,408 Equity investments 27,092 1,349 1,836 30,277 Derivatives 586 845 — 1,431 Total assets measured at fair value $ 86,080 $ 2,277,804 $ 15,162 $ 2,379,046 Liabilities Notes payable $ — $ 2,190,937 $ — $ 2,190,937 Derivatives 539 433 — 972 Short sales 472 — — 472 Total liabilities measured at fair value $ 1,011 $ 2,191,370 $ — $ 2,192,381 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, 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 16 Table of Contents 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 on 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, on 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 on the Condensed Consolidated Balance Sheets of the Company as Cash pledged or on deposit of CIP. The fair value of such derivatives at September 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 on 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 September 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: Nine Months Ended September 30, (in thousands) 2020 2019 Level 3 Investments of CIP (1) Balance at beginning of period $ 40,422 $ 6,848 Realized gains (losses), net 5 ( 95 ) Change in unrealized gains (losses), net ( 335 ) 310 Purchases 1,137 2,157 Amortization 9 ( 16 ) Sales ( 1,256 ) ( 5,414 ) Transfers to Level 2 ( 50,463 ) ( 42,232 ) Transfers from Level 2 25,643 51,544 Balance at end of period $ 15,162 $ 13,102 (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 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 17 Table of Contents 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 VIEs that the Company does not consolidate as it is not the primary beneficiary since 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 September 30, 2020, the carrying value and maximum risk of loss related to the Company's interest in these VIEs was $ 26.2 million. 18 Table of Contents