Fair Value Measurements for Operating Entities and Consolidated Funds

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements for Operating Entities and Consolidated Funds

Fair Value Measurements for Operating Entities and Consolidated Funds

The following table presents the assets and liabilities that are measured at fair value on a recurring basis on the accompanying condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of September 30, 2020 and December 31, 2019:

	Assets at Fair Value as of September 30, 2020
	Level 1			Level 2			Level 3			Total
				(dollars in thousands)
Operating Entities
Securities owned, at fair value
Government bonds	$	20,324		$	—		$	—		$	20,324
Preferred stock	10,187			—			53,418			63,605
Common stock	900,885			508			19,456			920,849
Convertible bonds	—			—			5,081			5,081
Corporate bonds	—			36,181			520			36,701
Trade claims	—			—			9,390			9,390
Term loan	—			—			12,111			12,111
Warrants and rights	15,522			—			4,983			20,505
Receivable on derivative contracts, at fair value
Currency forwards	—			870			—			870
Swaps	—			4,644			—			4,644
Options	52,329			—			351			52,680
Consolidated Funds
Securities owned, at fair value
Common stock	3,598			—			102,951			106,549
Warrants and rights	—			—			5,904			5,904
Convertible bonds	—			—			75,538			75,538
	$	1,002,845		$	42,203		$	289,703		$	1,334,751
Percentage of total assets measured at fair value on a recurring basis	75.1		%	3.2		%	21.7		%
Portfolio Funds measured at net asset value (a)										123,787
Carried interest (a)										47,343
Consolidated Funds' Portfolio Funds measured at net asset value (a)										98,267
Equity method investments										33,480
Total investments										$	1,637,628

	Liabilities at Fair Value as of September 30, 2020
	Level 1			Level 2			Level 3			Total
	(dollars in thousands)
Operating Entities
Securities sold, not yet purchased, at fair value
Government bonds	$	—		$	—		$	1,500		$	1,500
Common stock	404,409			—			—			404,409
Corporate bonds	—			14,524			800			15,324
Preferred stock	10,767			—			—			10,767
Warrants and rights	8,930			—			—			8,930
Payable for derivative contracts, at fair value
Futures	123			—			—			123
Currency forwards	—			717			—			717
Swaps	—			7,514			—			7,514
Options	50,746			—			2,954			53,700
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (b)	—			—			30,024			30,024
	$	474,975		$	22,755		$	35,278		$	533,008
Percentage of total liabilities measured at fair value	89.1		%	4.3		%	6.6		%

(a) In accordance with US GAAP, certain investments are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient. Carried interest in portfolio funds have not been classified 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 condensed consolidated statement of financial condition.

(b) In accordance with the terms of the purchase agreements for acquisitions that closed during the second quarter of 2016 and the first quarter of 2019, the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended December 31, 2019 and December 31, 2023, respectively. For the acquisition that closed during 2016, the Company estimated the contingent consideration liability using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows and profits. For the acquisition that closed during 2019, the Company estimated the contingent consideration liability using the present value of the Monte Carlo simulated revenue. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of September 30, 2020 can range from $0.9 million to $35.1 million.

	Assets at Fair Value as of December 31, 2019
	Level 1			Level 2			Level 3			Total
				(dollars in thousands)
Operating Entities
Securities owned, at fair value
Government bonds	$	15,916		$	—		$	—		$	15,916
Preferred stock	4,821			—			7,835			12,656
Common stock	1,527,769			1,249			17,466			1,546,484
Convertible bonds	—			—			2,500			2,500
Corporate bonds	—			23,079			2,421			25,500
Trade claims	—			—			7,320			7,320
Term loan	—			1,067			—			1,067
Warrants and rights	21,515			—			594			22,109
Receivable on derivative contracts, at fair value
Swaps	—			2,911			—			2,911
Options	59,730			—			336			60,066
Consolidated Funds
Securities owned, at fair value
Government bonds	161,607			—			—			161,607
Preferred stock	—			—			4,393			4,393
Common stock	200,306			—			—			200,306
Corporate bonds	—			3,405			—			3,405
Warrants and rights	—			—			5,567			5,567
Receivable on derivative contracts, at fair value
Currency forwards	—			3,302			—			3,302
Equity swaps	—			927			—			927
Options	1,604			—			—			1,604
	$	1,993,268		$	35,940		$	48,432		$	2,077,640
Percentage of total assets measured at fair value on a recurring basis	95.9		%	1.7		%	2.3		%
Portfolio Funds measured at net asset value (a)										114,504
Carried interest (a)										30,360
Consolidated Funds' Portfolio Funds measured at net asset value (a)										175,769
Equity method investments										40,858
Total investments										$	2,439,131

	Liabilities at Fair Value as of December 31, 2019
	Level 1			Level 2			Level 3			Total
	(dollars in thousands)
Operating Entities
Securities sold, not yet purchased, at fair value
US Government securities	$	—		$	—		$	1,950		$	1,950
Common stock	425,448			—			—			425,448
Corporate bonds	—			4,933			1,000			5,933
Preferred stock	3,686			—			—			3,686
Warrants and rights	14,819			—			—			14,819
Payable for derivative contracts, at fair value
Futures	217			—			—			217
Currency forwards	—			851			—			851
Swaps	—			23,169			—			23,169
Options	33,604			—			2,920			36,524
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (b)	—			—			30,896			30,896
Consolidated Funds
Payable for derivative contracts, at fair value
Currency forwards	—			88			—			88
Options	750			—			—			750
Equity swaps	—			3,931			—			3,931
	$	478,524		$	32,972		$	36,766		$	548,262
Percentage of total liabilities measured at fair value	87.3		%	6.0		%	6.7		%

(a) In accordance with US GAAP, certain investments are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient. Carried interest in portfolio funds have not been classified 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 condensed consolidated statement of financial condition.

(b) In accordance with the terms of the purchase agreements for acquisitions that closed during the second quarter of 2016 and the first quarter of 2019, the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended December 31, 2019 and December 31, 2023, respectively. For the acquisition that closed during 2016, the Company estimated the contingent consideration liability using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows and profits. For the acquisition that closed during 2019, the Company estimated the contingent consideration liability using the present value of the Monte Carlo simulated revenue. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of December 31, 2019 can range from $1.3 million to $40.0 million.

The following table includes a roll forward of the amounts for the three and nine months ended September 30, 2020 and 2019 for financial instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.

	Three Months Ended September 30, 2020
	Balance at June 30, 2020		Transfers in			Transfers out			Purchases/(covers)		(Sales)/shorts		Realized and Unrealized gains/losses		Balance at September 30, 2020		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	51,480	$	—		$	(7,744)	(b)	$	5,282	$	(3,770)	$	8,170	$	53,418	$	2,926
Common stock	14,816		—			(3)		(e)	4,000		—		643		19,456		562
Convertible bonds	5,081		—			—			—		—		—		5,081		—
Corporate bonds	758		—			(312)		(b)	72		—		2		520		22
Options, asset	337		—			—			—		—		14		351		14
Options, liability	2,177		—			—			—		—		777		2,954		777
Term Loan	11,359		—			—			245		—		507		12,111		506
Warrants and rights	4,625		3		(e)	—			—		—		355		4,983		337
Trade claims	7,587		—			—			2,690		(648)		(239)		9,390		(239)
Corporate bond, liability	800		—			—			—		—		—		800		—
Government bonds, liability	1,500		—			—			—		—		—		1,500		—
Contingent consideration liability	27,001		—			—			—		—		3,023		30,024		3,023
Consolidated Funds
Common stock	102,951		—			—			—		—		—		102,951		—
Warrants and rights	5,858		—			—			—		—		46		5,904		46
Convertible bonds	—		—			—			75,000		—		538		75,538		538

	Three Months Ended September 30, 2019
	Balance at June 30, 2019		Transfers in			Transfers out			Purchases/(covers)		(Sales)/shorts		Realized and Unrealized gains/losses		Balance at September 30, 2019		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	7,401	$	—		$	(1,000)	(f)	$	—	$	—	$	1,434	$	7,835	$	2,295
Common stock	11,006		—			—			2,579		(480)		208		13,313		210
Convertible bonds	6,318		—			(2,801)		(f)	1,049		(2,072)		47		2,541		4
Corporate bonds	775		20		(e)	—			1,117		—		161		2,073		161
Options, liability	2,779		—			—			—		—		(279)		2,500		(279)
Warrants and rights	595		—			—			—		(72)		61		584		(12)
Trade claims	10,488		—			—			1,871		(5,354)		57		7,062		57
Corporate bond, liability	—		2,525		(e)	—			—		—		(1,325)		1,200		(1,325)
Government bonds, liability	—		4,681		(e)	—			—		—		(2,431)		2,250		(2,431)
Contingent consideration liability	29,536		—			—			—		—		298		29,834		298
Consolidated Funds
Preferred stock	24,322		—			(19,929)		(f)	—		—		—		4,393		—
Common stock	1,017		—			(94)		(f)	—		(957)		34		—		—
Warrants and rights	6,274		—			—			—		(670)		(139)		5,465		(809)

	Nine Months Ended September 30, 2020
	Balance at December 31, 2019		Transfers in			Transfers out			Purchases/(covers)		(Sales)/shorts		Realized and Unrealized gains/losses		Balance at September 30, 2020		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	7,835	$	45,530	(c)	$	(7,744)	(b)	$	5,647	$	(5,870)	$	8,020	$	53,418	$	5,337
Common stock	17,466		—			(29)		(a)(e)	5,798		(3,712)		(67)		19,456		(1,023)
Convertible bonds	2,500		—			—			2,581		—		—		5,081		—
Corporate bond	2,421		—			(312)		(b)	592		(1,938)		(243)		520		(180)
Options, asset	336		—			—			—		—		15		351		15
Options, liability	2,920		—			—			—		—		34		2,954		35
Term loan	—		11,149		(c)	—			245		—		717		12,111		717
Warrants and rights	594		3,636		(a)(c)	—			—		—		753		4,983		753
Trade claims	7,320		1,044		(a)(e)	—			4,663		(2,863)		(774)		9,390		(795)
Corporate bond, liability	1,000		—			—			—		—		(200)		800		(200)
Government bonds, liability	1,950		—			—			—		—		(450)		1,500		(450)
Contingent consideration liability	30,896		—			—			—		(5,653)		4,781		30,024		4,781
Consolidated Funds
Preferred stock	4,393		—			(4,000)		(d)	—		—		(393)		—		—
Common stock	—		4,000		(d)	—			100,000		—		(1,049)		102,951		(1,049)
Warrants and rights	5,567		—			—			—		—		337		5,904		337
Convertible bonds	$	—	$	—		$	—		$	75,000	$	—	$	538	$	75,538	$	538

	Nine Months Ended September 30, 2019
	Balance at December 31, 2018		Transfers in			Transfers out			Purchases/(covers)		(Sales)/shorts		Realized and Unrealized gains/losses		Balance at September 30, 2019		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	5,168	$	—		$	(1,000)	(f)	$	3,243	$	(1,000)	$	1,424	$	7,835	$	2,285
Common stock	9,850		—			—			16,737		(12,952)		(322)		13,313		(122)
Convertible bonds	3,000		—			(4,826)		(b)(f)	16,021		(11,764)		110		2,541		41
Corporate bond	—		20		(e)	—			1,892		—		161		2,073		161
Options, liability	2,096		—			—			—		(4)		408		2,500		408
Warrants and rights	1,666		—			—			—		(188)		(894)		584		20
Trade claim	5,543		—			—			6,965		(5,506)		60		7,062		57
Corporate bond, liability	—		2,525		(e)	—			—		—		(1,325)		1,200		(1,325)
Government bonds, liability	—		4,681		(e)	—			—		—		(2,431)		2,250		(2,431)
Contingent consideration liability	3,070		—			—			27,700		(1,234)		298		29,834		298
Consolidated Funds
Preferred stock	24,314		—			(19,929)		(f)	—		—		8		4,393		8
Common stock	94		—			(94)		(f)	407		(958)		551		—		—
Warrants and rights	$	5,279	$	—		$	—		$	—	$	(1,758)	$	1,944	$	5,465	$	190

(1) Unrealized gains/losses are reported in other income (loss) in the accompanying condensed consolidated statements of operations.

(a) The security stopped trading on an open market.

(b) The investments were converted to common stock.

(c) The Company consolidated an operating entity which holds preferred stock, loans and warrants.

(d) The investment was involved in a reverse merger and preferred stock was converted to common shares.

(e) The transfers between level 1 and level 3 are due to the change in the availability of observable inputs.

(f) The entity in which the Company is invested completed an initial public offering.

All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying condensed consolidated statements of operations.

Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above.

The Company recognizes all transfers and the related unrealized gain (loss) at the beginning of the reporting period.

Transfers between level 2 and 3 generally relate to whether significant relevant observable inputs are available for the fair value measurements or due to change in liquidity restrictions for the investments.

The following table includes quantitative information as of September 30, 2020 and December 31, 2019 for financial instruments classified within level 3. The table below quantifies information about the significant unobservable inputs used in the fair value measurement of the Company's level 3 financial instruments.

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value September 30, 2020		Valuation Techniques	Unobservable Inputs	Range	Weighted Average
Level 3 Assets	(dollars in thousands)
Common and preferred stocks	$	61,220	Discounted cash flows Guideline companies	Discount rate EBITDA Market Multiples	10% - 12% 6.25x - 6.75x	11% 6.5x
Options	352		Discounted cash flows Guideline companies	Discount rate EBITDA Market Multiples	10% - 12% 6.25x - 6.75x	11% 6.5x
Trade claims	3,446		Discounted cash flows	Discount rate	15%	15%
Warrants and rights	10,865		Discounted cash flows Guideline companies	Discount rate EBITDA Market Multiples	4% - 11% 6.25x - 6.75x	7.0% 6.5x
Corporate, convertible bonds and term loan	12,110		Discounted cash flows Guideline companies	Discount rate EBITDA Market Multiples	10% - 12% 6.25x - 6.75x	11% 6.5x
Other level 3 assets (a)	201,710
Total level 3 assets	$	289,703
Level 3 Liabilities
Options	2,954		Option pricing models	Volatility	35%	35%
Contingent consideration liability	30,024		Discounted cash flows Monte Carlo simulation	Discount rate Volatility	15% - 22% 22%	15% 22%
Other level 3 liabilities (a)	2,300
Total level 3 liabilities	$	35,278

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at December 31, 2019		Valuation Techniques	Unobservable Inputs	Range	Weighted Average
Level 3 Assets	(dollars in thousands)
Common and preferred stocks	$	10,876	Discounted cash flows Guideline companies	Discount rate EBITDA Market Multiples	8% - 11.25% 6.5x - 7x	10.4% 6.75x
Trade claims	24		Discounted cash flows	Discount rate	20%	20%
Warrants and rights	6,162		Model based Discounted cash flows	Volatility Discount rate	30% 6% - 7%	—% 6.1%
Options	336		Option pricing models	Discount rate EBITDA Market Multiples	9.75% - 11.25% 6.5x - 7x	10.5% 6.75x
Corporate and convertible bonds	311		Discounted cash flows Recovery	Discount rate Probability of recovery	20% 1% - 3%	20% 2.3%
Other level 3 assets (a)	30,723
Total level 3 assets	$	48,432
Level 3 Liabilities
Options	2,920		Option pricing models	Volatility	35% to 40%	35%
Contingent consideration liability	30,896		Discounted cash flows	Discount rate Volatility	15% - 22% 17%	15% 17%
Other level 3 liabilities (a)	2,950
Total level 3 liabilities	$	36,766

(a)The quantitative disclosures exclude financial instruments for which the determination of fair value is based on prices from recent transactions.

The Company has established valuation policies, procedures and internal control infrastructure over the fair value measurement of financial instruments. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approach utilized is applicable, reasonable and consistently applied. Where a pricing model is used to determine fair value, these control processes include reviews of the methodology and inputs for both reasonableness and applicability. Consistent with best practices, recently executed comparable transactions and other observable market data are used for the purposes of validating both the model and the assumptions used to calculate fair value. Independent of trading and valuation functions, the Company’s Valuation Committee in conjunction with its Price Verification team, plays an important role in determining that financial instruments are appropriately valued and that fair value measurements are both reasonable and reliable. This is particularly important where prices or valuations that require inputs are less observable. The Valuation Committee is comprised of senior management, including non-investment professionals, who are responsible for overseeing and monitoring the pricing of the Company's investments.

The US GAAP fair value leveling hierarchy is designated and monitored on an ongoing basis. In determining the designation, the Company takes into consideration a number of factors including the observability of inputs, liquidity of the investment and the significance of a particular input to the fair value measurement. Designations, models, pricing vendors, third party valuation providers and inputs used to derive fair market value are subject to review by the valuation committee and the internal audit group. The Company reviews its valuation policy guidelines on an ongoing basis and may adjust them in light of improved valuation metrics and models, the availability of reliable inputs and information, and prevailing market conditions. The Company regularly reviews a profit and loss report, as well as other periodic reports, and analyzes material changes from period to period in the valuation of its investments as part of its control procedures. The Company also performs back testing on a regular basis by comparing prices observed in executed transactions to previous valuations.

The fair market value for level 3 securities may be highly sensitive to the use of industry-standard models, unobservable inputs and subjective assumptions. The degree of fair market value sensitivity is also contingent upon the subjective weight given to specific inputs and valuation metrics. The Company holds various equity and debt instruments where different weight may be applied to industry-standard models representing standard valuation metrics such as: discounted cash flows, market multiples, comparative transactions, capital rates, recovery rates and timing, and bid levels. Generally, changes in the weights ascribed to the various valuation metrics and the significant unobservable inputs in isolation may result in significantly lower or higher fair value measurements. Volatility levels for warrants and options are not readily observable and subject to interpretation. Changes in capital rates, discount rates and replacement costs could significantly increase or decrease the valuation of the real estate investments. The interrelationship between unobservable inputs may vary significantly amongst level 3 securities as they are

generally highly idiosyncratic. Significant increases (decreases) in any of those inputs in isolation can result in a significantly lower (higher) fair value measurement.

Other financial assets and liabilities

The following table presents the carrying values and fair values, at September 30, 2020 and December 31, 2019, of financial assets and liabilities and information on their classification within the fair value hierarchy which are not measured at fair value on a recurring basis. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value (see Note 2e).

	September 30, 2020						December 31, 2019						Fair Value Hierarchy
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
				(dollars in thousands)
Financial Assets
Operating companies
Cash and cash equivalents	$	539,733	(f)	$	539,733	(f)	$	301,123		$	301,123		Level 1 & 2
Cash collateral pledged	110,666			110,666			6,563			6,563			Level 2
Segregated cash	139,152			139,152			107,328			107,328			Level 1
Securities borrowed	1,272,428			1,272,428			754,441			754,441			Level 2
Loans receivable	9,045			9,045		(d)	42,830			42,830		(d)	Level 3
Consolidated Funds
Cash and cash equivalents	946			946			30,874			30,874			Level 1
Financial Liabilities
Securities sold under agreements to repurchase	6,218			7,587			23,244			27,384			Level 2
Securities loaned	1,326,917			1,326,917			1,601,866			1,601,866			Level 2
Convertible debt	122,485		(a)	147,166		(b)	118,688		(a)	148,786		(b)	Level 2
Notes payable and other debt	383,722		(e)	406,309		(c)	345,451		(e)	372,591		(c)	Level 2

(a)The carrying amount of the convertible debt includes an unamortized discount of $11.4 million and $14.9 million as of September 30, 2020 and December 31, 2019, respectively.

(b)The convertible debt includes the conversion option and is based on the last broker quote available.

(c)Notes payable and other debt are based on the last broker quote available.

(d)The fair market value of level 3 loans is calculated using discounted cash flows where applicable.

(e)The carrying amount of the notes payable and other debt includes an unamortized premium of $0.4 million and $0.5 million as of September 30, 2020 and December 31, 2019, respectively.

(f)As of September 30, 2020, cash and cash equivalents include Level 1 cash in the amount of $479.7 million and Level 2 certificates of deposit of $60.0 million.