Investment Securities

9 Months Ended

Sep. 30, 2019

Investment Securities

Investment Securities

4. Investment Securities

Investment securities at September 30, 2019 and December 31, 2018 were as follows:

	September 30,		December 31,
	2019		2018
		(in thousands)
Available for sale securities:
Certificates of deposit	$	—	5,001
Commercial paper		1,975	7,970
Corporate bonds		267,064	218,121
U.S. Treasury bills		—	19,672
Total available for sale securities		269,039	250,764
Trading debt securities:
Commercial paper		1,975	1,993
Corporate bonds		89,057	77,250
U.S. Treasury bills		5,968	5,884
Mortgage-backed securities		5	7
Term loans		42,272	—
Consolidated sponsored funds		41,269	33,088
Total trading securities		180,546	118,222
Equity securities:
Common stock		31,744	21,204
Sponsored funds		174,219	153,548
Sponsored privately offered funds		781	678
Consolidated sponsored funds		—	24,879
Total equity securities		206,744	200,309
Equity method securities:
Sponsored funds		35,287	47,840
Total securities	$	691,616	617,135

Commercial paper and corporate bonds accounted for as available for sale and held as of September 30, 2019 mature as follows:

		Amortized
		cost	Fair value
		(in thousands)
Within one year	$	83,965	84,173
After one year but within five years		181,873	184,866
	$	265,838	269,039

Commercial paper, corporate bonds, U.S. Treasury bills, mortgage-backed securities and term loans accounted for as trading and held as of September 30, 2019 mature as follows:

		Fair value
		(in thousands)
Within one year	$	32,977
After one year but within five years		76,645
After five years but within 10 years		29,655
	$	139,277

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at September 30, 2019:

	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)
Available for sale securities:
Commercial paper	$	1,975	—	—	1,975
Corporate bonds		263,863	3,240	(39)	267,064
	$	265,838	3,240	(39)	269,039

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2018:

	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)
Available for sale securities:
Certificates of deposit	$	5,000	1	—	5,001
Commercial paper		7,902	68	—	7,970
Corporate bonds		219,236	254	(1,369)	218,121
U.S. Treasury bills		19,672	—	—	19,672
	$	251,810	323	(1,369)	250,764

A summary of available for sale investment securities with fair values below carrying values at September 30, 2019 is as follows:

	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
September 30, 2019	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Corporate bonds	$	19,987	(19)	27,105	(20)	47,092	(39)

A summary of available for sale investment securities with fair values below carrying values at December 31, 2018 is as follows:

	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
December 31, 2018	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Corporate bonds	$	36,302	(160)	119,480	(1,209)	155,782	(1,369)

The Company’s investment portfolio included 12 available for sale securities in an unrealized loss position at September 30, 2019.

The Company evaluated available for sale securities in an unrealized loss position at September 30, 2019 and concluded no other-than-temporary impairment existed.  The unrealized losses in the Company’s investment portfolio were primarily caused by changes in interest rates. At this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized cost.

Sponsored Funds

The Company has classified its equity investments in the Ivy Funds as equity method investments (when the Company owns between 20% and 50% of the fund) or equity securities measured at fair value through net income (when the Company owns less than 20% of the fund).  These entities do not meet the criteria of a variable interest entity (“VIE”) and are considered to be voting interest entities (“VOE”). The Company has determined the Ivy Funds are VOEs because the structure of the investment products is such that the voting rights held by the equity holders provide for equality among equity investors.  

Sponsored Privately Offered Funds

The Company holds an interest in a privately offered fund structured in the form of a limited liability company.  The members of this entity have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote.  This entity does not meet the criteria of a VIE and is considered to be a VOE.

Consolidated Sponsored Funds

The following table details the balances related to consolidated sponsored funds at September 30, 2019 and December 31, 2018, as well as the Company’s net interest in these funds:

	September 30,		December 31,
	2019		2018
	(in thousands)
Cash	$	5,161	4,285
Investments		41,269	57,967
Other assets		486	872
Other liabilities		—	(79)
Redeemable noncontrolling interests		(16,913)	(11,463)
Net interest in consolidated sponsored funds	$	30,003	51,582

At September 30, 2019, we consolidated an Ivy Fund and Ivy Global Investors Funds in which we provided initial seed capital at the time of the funds’ formation. During 2018, we liquidated the Ivy Global Investors Société d’Investissement à Capital Variable and its Ivy Global Investors sub-funds, including converting the investments held by the sub-funds to cash, and redeemed the majority of our investment.  During the third quarter of 2019, the formerly consolidated Ivy Nextshares were liquidated and distributed to shareholders. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements.  

Fair Value

Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset.  Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset.  An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation.  The three-level hierarchy of inputs is summarized as follows:

● Level 1 – Investments are valued using quoted prices in active markets for identical securities.

● Level 2 – Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities.  

● Level 3 – Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.

Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value due to the short-time between purchase and expected maturity of the investments. Depending on the nature of the inputs, these investments are generally classified as Level 1 or 2 within the fair value hierarchy. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. Term loans are valued using a price or composite price from one or more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally observable market inputs obtained from independent sources. Term loans are generally categorized in Level 2 of the fair value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.

The following tables summarize our investment securities as of September 30, 2019 and December 31, 2018 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

September 30, 2019	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
	(in thousands)
Cash equivalents: (1)
Money market funds	$	3,090	—	—	—	3,090
U.S. government sponsored enterprise note		—	896	—	—	896
Commercial paper		—	37,104	—	—	37,104
Total cash equivalents	$	3,090	38,000	—	—	41,090
Available for sale securities:
Commercial paper	$	—	1,975	—	—	1,975
Corporate bonds		—	267,064	—	—	267,064
Trading debt securities:
Commercial paper		—	1,975	—	—	1,975
Corporate bonds		—	89,057	—		89,057
U.S. Treasury bills		—	5,968	—	—	5,968
Mortgage-backed securities		—	5	—	—	5
Term loans		—	40,879	1,393	—	42,272
Consolidated sponsored funds		—	41,269	—	—	41,269
Equity securities:
Common stock		31,742	—	2	—	31,744
Sponsored funds		174,219	—	—	—	174,219
Sponsored privately offered funds measured at net asset value (2)		—	—	—	781	781
Equity method securities: (3)
Sponsored funds		35,287	—	—	—	35,287
Total investment securities	$	241,248	448,192	1,395	781	691,616

December 31, 2018	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
	(in thousands)
Cash equivalents: (1)
Money market funds	$	121,759	—	—	—	121,759
U.S. government sponsored enterprise note		—	895	—	—	895
Commercial paper		—	74,277	—	—	74,277
Total cash equivalents	$	121,759	75,172	—	—	196,931
Available for sale securities:
Certificates of deposit	$	—	5,001	—	—	5,001
Commercial paper		—	7,970	—	—	7,970
Corporate bonds		—	218,121	—	—	218,121
U.S. Treasury bills		—	19,672	—	—	19,672
Trading debt securities:
Commercial paper		—	1,993	—	—	1,993
Corporate bonds		—	77,250	—		77,250
U.S. Treasury bills		—	5,884	—	—	5,884
Mortgage-backed securities		—	7	—	—	7
Consolidated sponsored funds		—	33,088	—	—	33,088
Equity securities:
Common stock		21,192	—	12	—	21,204
Sponsored funds		153,548	—	—	—	153,548
Sponsored privately offered funds measured at net asset value (2)		—	—	—	678	678
Consolidated sponsored funds		24,879	—	—	—	24,879
Equity method securities: (3)
Sponsored funds		47,840	—	—	—	47,840
Total investment securities	$	247,459	368,986	12	678	617,135

(1) Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at net asset value and are classified as Level 1. Cash investments in commercial paper are measured at cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization, and are classified as Level 2.

(2) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.  The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

(3) Substantially all of the Company’s equity method investments are investment companies that record their underlying investments at fair value.

The following table summarizes the activity of investments categorized as Level 3 for the nine months ended September 30, 2019:

	For the nine months ended
	September 30, 2019
	(in thousands)
Level 3 assets at December 31, 2018	$	12
Additions		2,357
Transfers out of level 3		(196)
Losses in Investment and other income		(23)
Redemptions/Paydowns		(755)
Level 3 assets at September 30, 2019	$	1,395
Change in unrealized losses for Level 3 assets held at September 30, 2019	$	(21)