Fair Value of Derivatives and Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Fair Value of Derivatives and Financial Instruments

Fair Value of Derivatives and Financial Instruments

As of March 31, 2023, the Company’s fair valued investments consisted of senior loans, corporate bonds, CLOs, convertible notes, common stocks, rights, warrants, life settlement contracts, LP interests and LLC interests. The fair value of the Company’s senior loans, bonds, and CLOs are generally based on quotes received from brokers or independent pricing services. Senior loans, bonds, and CLOs with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Senior loans, bonds, and CLOs that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

The fair value of the Company’s common stocks, rights, and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. At the end of each calendar quarter, the Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities.

The fair value of the Company’s common stocks, exchange-traded funds, other registered investment companies and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The Company’s real estate investments include equity interests in limited liability companies and equity issued by REITs that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed by the Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Company has classified the investments as Level 3 assets. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.

The fair value of the Company’s convertible notes are categorized as Level 3 assets in the fair value hierarchy. Convertible notes are valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows.

Upon initial acquisition, the Company’s life settlement contracts are recognized at the transaction price. For each subsequent reporting period, the investments are measured at fair value by a third-party valuation specialist using a life settlement pricing model and are categorized as Level 3 assets in the fair value hierarchy. Key assumptions utilized in determining fair value include but are not limited to: (i) life expectancy estimates provided by independent third-party underwriters based on actuarially developed mortality tables and industry life expectancy reports; (ii) future premium estimates; (iii) rates of return consistent with those sought by independent purchasers of life policies at the time of purchase; and (iv) offers and/or commitments from purchasers. In addition, the valuation agent will also consider recent sales as well as offers received for the life policies deemed likely to close in the near future in estimating fair value.

The assumptions used to value life policies are by nature, inherently uncertain and the effect of changes in estimates may be material. The fair value measurement used in estimating the present value calculations are derived from valuation techniques that include inputs that are not based on observable market data. Changes in the fair value of the life settlement contracts are reported as net unrealized gains or losses on the consolidated statement of operations (Successor Basis). Upon the death of an insured or the sale of a life policy, the Company will recognize the difference between the proceeds received and the cost of the life policy as a realized gain or loss in the Company's consolidated statement of operations (Successor Basis).

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The table below summarizes the inputs used to value the Company’s assets carried at fair value on a recurring basis as of March 31, 2023 (in thousands):

			Fair Value
	Cost Basis		Level 1		Level 2		Level 3		Total
Assets
Bond	$	17	$	—	$	21	$	—	$	21
CLO	34,958		—		563		6,900		7,463
Common stock	316,867		45,239		—		228,867		274,106
Convertible notes	54,802		—		—		51,302		51,302
Life settlement	64,267		—		—		66,384		66,384
LLC interest	66,492		—		—		60,128		60,128
LP interest	322,453		—		76,300		215,129		291,429
Rights and warrants	3,937		—		3,795		—		3,795
Senior loan	39,447		—		59		39,553		39,612
	$	903,240	$	45,239	$	80,738	$	668,263	$	794,240

The table below summarizes the inputs used to value the Company’s assets carried at fair value on a recurring basis as of December 31, 2022 (in thousands):

			Fair Value
	Cost Basis		Level 1		Level 2		Level 3		Total
Assets
Bond	$	17	$	—	$	20	$	—	$	20
CLO	34,958		—		563		6,412		6,975
Common stock	325,275		53,872		—		234,667		288,539
Convertible notes	54,802		—		—		50,828		50,828
Life settlement	64,267		—		—		67,711		67,711
LLC interest	66,492		—		—		60,836		60,836
LP interest	321,026		—		77,370		223,141		300,511
Rights and warrants	3,947		—		3,794		—		3,794
Senior loan	43,399		—		66		43,341		43,407
	$	914,183	$	53,872	$	81,813	$	686,936	$	822,621

The table below sets forth a summary of changes in the Company’s Level 3 assets (assets measured at fair value using significant unobservable inputs) for the three months ended March 31, 2023 (in thousands):

	December 31, 2022		Contributions/ Purchases		Paid in- kind dividends		Redemptions/ Conversions		Return of capital		Realized gain/(loss)		Unrealized gain/(loss)		March 31, 2023
CLO	$	6,412	$	—	$	—	$	—	$	—	$	—	$	488	$	6,900
Common stock	234,667		—		—		—		—		—		(5,800)		228,867
Convertible notes	50,828		—		—		—		—		—		474		51,302
Life settlement	67,711		1,266		—		—		—		—		(2,593)		66,384
LLC interest	60,836		—		—		—		—		—		(708)		60,128
LP interest	223,141		1,427		—		—		—		—		(9,439)		215,129
Senior loan	43,341		—		1,008		(4,971)		—		11		164		39,553
Total	$	686,936	$	2,693	$	1,008	$	(4,971)	$	—	$	11	$	(17,414)	$	668,263

The following is a summary of the significant unobservable inputs used in the fair valuation of assets categorized within Level 3 of the fair value hierarchy as of March 31, 2023.

Category	Valuation Technique	Significant Unobservable Inputs	Input Value(s) (Arithmetic Mean)				Fair Value
CLO	Discounted Net Asset Value	Discount		70%			$	6,900
Common Stock	Market Approach	Unadjusted Price/MHz-PoP	$0.09	—	$0.95	(0.52%)	$	228,867
		NAV / sh multiple	$1.10x	—	$1.45x	$(1.28)x
	Discounted Cash Flow	Discount Rate	8.63%	—	12.00%	(9.85)%
		Market Rent (per sqft)	$16.00	—	$58.00	$(37.00)
		RevPAR	$74.00	—	$192.00	$113.00
		Capitalization Rates	5.38%	—	9.75%	(8.67)%
	Recent Transaction	Implied Enterprise Value from Transaction Price ($mm)		$841.00
		N/A	$25.31	—	$28.00	$(26.655)
Convertible Notes	Discounted Cash Flow	Discount Rate	7.00%	—	9.25%	(8.13)%	51,302
Life Settlement	Discounted Cash Flow	Discount Rate		14%			66,384
		Life Expectancy (Months)	12	—	302	63 Months
LLC Interest	Discounted Cash Flow	Discount Rate	8.75%	—	30.00%	(19.375)%	60,128
		Market Rent (per sqft)	$16	—	$58	$(37)
		Capitalization Rate		5.375%
LP Interest	Discounted Cash Flow	Discount Rate	6.40%	—	9.10%	(7.75)%	215,129
		Capitalization Rate	3.6%	—	7.0%	(5.3)%
	Recent Transaction	Price per Share		$22.75
Senior Loan	Discounted Cash Flow	Discount Rate	11.30%	—	20.00%	(15.65)%	$	39,553
Total							$	668,263