4.	Fair Value Measurement

The fair value measurement accounting guidance establishes a hierarchal disclosure framework which ranks the observability of market price inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, will generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.

Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:

Level I – inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date. The type of financial instruments included in Level I include unrestricted securities, including equities and derivatives, listed in active markets. The Partnership does not adjust the quoted price for these instruments, even in situations where the Partnership holds a large position and a sale could reasonably impact the quoted price.

Level II – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The type of financial instruments in this category includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs. Investments in hedge funds are classified in this category when their net asset value is redeemable without significant restriction.

Level III – inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category include investments in privately-held entities, non-investment grade residual interests in securitizations, collateralized loan obligations, and certain over-the-counter derivatives where the fair value is based on unobservable inputs. Investments in fund of funds are generally included in this category.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

The following table summarizes the Partnership’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of March 31, 2013:

(Dollars in millions)

Level I

Level II

Level III

Total

Assets

Investments of Consolidated Funds:

Equity securities

756.1

21.9

2,573.1

3,351.1

Bonds

—

909.2

Loans

—

13,507.4

Partnership and LLC interests⁽¹⁾

—

4,002.2

Hedge funds

—

3,314.9

—

3,314.9

Other

—

8.8

756.1

3,336.8

21,000.7

25,093.6

Trading securities

—

22.0

Restricted securities of Consolidated Funds

0.2

—

0.2

Total

756.3

3,336.8

21,022.7

25,115.8

Liabilities

Loans payable of Consolidated Funds

—

14,312.7

Interest rate swaps

—

9.2

—

9.2

Derivative instruments of the CLOs

—

10.3

Contingent consideration⁽²⁾

—

65.7

166.8

232.5

Total

—

74.9

14,489.8

14,564.7

(1)	Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.

(2)	Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion, excluding employment-based contingent consideration (see Note 9).

The following table summarizes the Partnership’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of December 31, 2012:


(Dollars in millions)	Level I		Level II		Level III		Total
Assets
Investments of Consolidated Funds:
Equity securities	$	872.8	$	32.0	$	2,475.1	$	3,379.9
Bonds		—		—		934.2		934.2
Loans		—		—		13,290.1		13,290.1
Partnership and LLC interests⁽¹⁾		—		—		4,315.5		4,315.5
Hedge funds		—		2,888.7		—		2,888.7
Other		—		—		7.3		7.3

		872.8		2,920.7		21,022.2		24,815.7
Trading securities		—		—		20.0		20.0
Restricted securities of Consolidated Funds		0.6		—		—		0.6

Total	$	873.4	$	2,920.7	$	21,042.2	$	24,836.3


Liabilities
Loans payable of Consolidated Funds	$	—	$	—	$	13,656.7	$	13,656.7
Interest rate swaps		—		10.5		—		10.5
Derivative instruments of the CLOs		—		—		15.8		15.8
Contingent consideration⁽²⁾		—		57.6		186.7		244.3

Total	$	—	$	68.1	$	13,859.2	$	13,927.3

(1)	Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.

(2)	Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion, excluding employment-based contingent consideration (see Note 9).

Transfers from Level II to Level I during the three months ended March 31, 2013 were due to the expiration of transferability restrictions on certain securities that were classified as Level II at December 31, 2012.

In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments and various relationships between investments.

In the absence of observable market prices, the Partnership values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist. Management’s determination of fair value is then based on the best information available in the circumstances and may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies, real estate properties, and certain debt positions. The valuation technique for each of these investments is described below:

Corporate Private Equity Investments – The fair values of corporate private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other measures which, in many cases, are unaudited at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (e.g., multiplying a key performance metric of the investee company such as EBITDA by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar models. Certain fund investments in the Partnership’s Global Market Strategies, Real Assets and Solutions segments are comparable to corporate private equity investments and are valued in accordance with these policies.

Real Estate Investments – The fair values of real estate investments are determined by considering projected operating cash flows, sales of comparable assets, if any, and replacement costs, among other measures. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may be derived by reference to observable valuation measures for comparable assets (e.g., multiplying a key performance metric of the investee asset, such as net operating income, by a relevant cap rate observed in the range of comparable transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to pricing models or other similar methods.

Credit-Oriented Investments – The fair values of credit-oriented investments are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. Specifically, for investments in distressed debt and corporate loans and bonds, the fair values are generally determined by valuations of comparable investments. In some instances, the Partnership may utilize other valuation techniques, including the discounted cash flow method.

CLO Investments and CLO Loans Payable – The Partnership has elected the fair value option to measure the loans payable of the CLOs at fair value, as the Partnership has determined that measurement of the loans payable and preferred shares issued by the CLOs at fair value better correlates with the value of the assets held by the CLOs, which are held to provide the cash flows for the note obligations. The investments of the CLOs are also carried at fair value.

The fair values of the CLO loan and bond assets are primarily based on quotations from reputable dealers or relevant pricing services. In situations where valuation quotations are unavailable, the assets are valued based on similar securities, market index changes, and other factors. The Partnership corroborates quotations from pricing services either with other available pricing data or with its own models. Generally, the bonds and loans in the CLOs are not actively traded and are classified as Level III.

The fair values of the CLO loans payable and the CLO structured asset positions are determined based on both discounted cash flow analyses and third-party quotes. Those analyses consider the position size, liquidity, current financial condition of the CLOs, the third-party financing environment, reinvestment rates, recovery lags, discount rates, and default forecasts and are compared to broker quotations from market makers and third party dealers.

Fund Investments – The Partnership’s investments in funds are valued based on its proportionate share of the net assets provided by the third party general partners of the underlying fund partnerships based on the most recent available information which is typically a lag of up to 90 days. The terms of the investments generally preclude the ability to redeem the investment. Distributions from these investments will be received as the underlying assets in the funds are liquidated, the timing of which cannot be readily determined.

The changes in financial instruments measured at fair value for which the Partnership has used Level III inputs to determine fair value are as follows (Dollars in millions):

Financial Assets
Three Months Ended March 31, 2013

Investments of Consolidated Funds

Equity
securities

Bonds

Loans

Partnership and
LLC interests

Other

Trading
securities and
other

Total

Balance, beginning of period

2,475.1

934.2

13,290.1

4,315.5

7.3

20.0

21,042.2

Transfers out ⁽¹⁾

(4.3

)

—

(4.3

)

Purchases

68.1

175.2

2,255.5

88.4

—

2,587.2

Sales

(44.5

)

(209.4

)

(593.5

)

(240.0

)

—

(1,087.4

)

Settlements

—

(1,418.4

)

—

(1,418.4

)

Realized and unrealized gains (losses), net

78.7

9.2

(26.3

)

(161.7

)

1.5

2.0

(96.6

)

Balance, end of period

2,573.1

909.2

13,507.4

4,002.2

8.8

22.0

21,022.7

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

124.5

21.7

121.8

69.9

(8.1

)

2.0

331.8


	Financial Assets Three Months Ended March 31, 2012
	Investments of Consolidated Funds
	Equity securities			Bonds			Loans			Partnership and LLC interests			Other			Trading securities and other		Total

Balance, beginning of period	$	1,868.9		$	557.0		$	10,152.6		$	4,198.6		$	20.8		$	30.6	$	16,828.5
Initial consolidation of funds		25.2			262.6			2,256.4			—			—			—		2,544.2
Transfers out ⁽¹⁾		(125.4	)		—			—			—			—			—		(125.4	)
Purchases		21.9			72.5			1,349.1			161.0			—			—		1,604.5
Sales		(94.3	)		(60.4	)		(595.3	)		(89.6	)		(1.7	)		—		(841.3	)
Settlements		—			—			(711.0	)		—			—			—		(711.0	)
Realized and unrealized gains (losses), net		165.3			45.0			298.5			(120.9	)		(7.5	)		1.8		382.2

Balance, end of period	$	1,861.6		$	876.7		$	12,750.3		$	4,149.1		$	11.6		$	32.4	$	19,681.7

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date	$	381.1		$	32.9		$	198.3		$	174.6		$	(4.1	)	$	1.8	$	784.6

(1)	Transfers out of Level III financial assets were due to changes in the observability of market inputs used in the valuation of such assets. Transfers are measured as of the beginning of the quarter in which the transfer occurs.

Financial Liabilities
Three Months Ended March 31, 2013

Loans Payable
of Consolidated
Funds

Derivative
Instruments of
Consolidated
Funds

Contingent
Consideration

Total

Balance, beginning of period

13,656.7

15.8

186.7

13,859.2

Borrowings

1,236.4

—

1,236.4

Paydowns

(820.7

)

—

(10.0

)

(830.7

)

Sales

—

0.1

—

0.1

Realized and unrealized (gains) losses, net

240.3

(5.6

)

(9.9

)

224.8

Balance, end of period

14,312.7

10.3

166.8

14,489.8

Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date

354.2

(6.6

)

(9.9

)

337.7


	Financial Liabilities Three Months Ended March 31, 2012
	Loans Payable of Consolidated Funds			Derivative Instruments of Consolidated Funds		Subordinated Loan Payable to Affiliate			Contingent Consideration			Total

Balance, beginning of period	$	9,689.9		$	—	$	262.5		$	169.2		$	10,121.6
Initial consolidation of funds		2,215.8			4.6		—			—			2,220.4
Borrowings		490.1			—		—			—			490.1
Paydowns		(182.9	)		—		(260.0	)		(0.7	)		(443.6	)
Realized and unrealized (gains) losses, net		241.7			0.2		(2.5	)		2.0			241.4

Balance, end of period	$	12,454.6		$	4.8	$	—		$	170.5		$	12,629.9

Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date	$	153.2		$	3.9	$	—		$	(0.8	)	$	156.3

Total realized and unrealized gains and losses included in earnings for Level III investments for trading securities are included in investment income (loss), and such gains and losses for investments of Consolidated Funds and loans payable and derivative instruments of the CLOs are included in net investment gains (losses) of Consolidated Funds in the condensed consolidated statements of operations.

The following table summarizes quantitative information about the Partnership’s Level III inputs as of March 31, 2013:


(Dollars in millions)	Fair Value at March 31, 2013		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Assets
Investments of Consolidated Funds:
Equity securities	$	2,412.5	Comparable Multiple	LTM EBITDA Multiple	5.6x - 14.0x (10.6x)
		76.4	Comparable Multiple	Price Earnings Multiple	(13.1x)
		15.6	Comparable Multiple	Book Value Multiple	(1.0x)
		25.3	Consensus Pricing	Indicative Quotes ($ per Share)	(1)
		43.3	Discounted Cash Flow	Discount Rate	7% - 11% (9%)
				Exit Cap Rate	5% - 8% (7%)

Bonds		909.2	Consensus Pricing	Indicative Quotes (% of Par)	(96)

Loans		13,244.5	Consensus Pricing	Indicative Quotes (% of Par)	(95)
		262.9	Market Yield Analysis	Market Yield	8% - 18% (10%)

Partnership and LLC interests		4,002.2	NAV of Underlying Fund ⁽¹⁾	N/A	N/A

Other		8.8	Counterparty Pricing	Indicative Quotes (% of Notional Amount)	(3)

	$	21,000.7
Trading securities and other		13.1	Dealer Pricing	Indicative Quotes (% of Par)	(95)
		6.2	Comparable Multiple	LTM EBITDA Multiple	(5.7x)
		2.7	Discounted Cash Flow	Discount Rate	(7%)

Total	$	21,022.7


Liabilities
Loans payable of Consolidated Funds
Senior secured notes	$	13,204.1	Discounted Cash Flow with Consensus Pricing	Discount Rates	(3%)
				Default Rates	(3%)
				Recovery Rates	(59%)
				Indicative Quotes (% of Par)	(95)

Subordinated notes and preferred shares		1,102.3	Discounted Cash Flow with Consensus Pricing	Discount Rates	(21%)
				Default Rates	(3%)
				Recovery Rates	(55%)
				Indicative Quotes (% of Par)	(52)

Combination notes		6.3	Consensus Pricing	Indicative Quotes (% of Par)	(100)

Derivative instruments of Consolidated Funds		10.3	Counterparty Pricing	Indicative Quotes (% of Notional Amount)	(8)

Contingent cash consideration ⁽²⁾		166.8	Discounted Cash Flow	Assumed % of Total Potential Contingent Payments	13% - 100% (89%)
				Discount Rate	2% - 32% (16%)

Total	$	14,489.8

(1)	Represents the Partnership’s investments in funds that are valued using the NAV of the underlying fund.

(2)	Related to contingent cash consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion (see Note 9).

The following table summarizes quantitative information about the Partnership’s Level III inputs as of December 31, 2012:


(Dollars in millions)	Fair Value at December 31, 2012		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Assets
Investments of Consolidated Funds:
Equity securities	$	2,311.5	Comparable Multiple	LTM EBITDA Multiple	5.6x - 13.5x (9.7x)
		69.4	Comparable Multiple	Price Earnings Multiple	(13.5x)
		15.4	Comparable Multiple	Book Value Multiple	(1.0x)
		33.8	Consensus Pricing	Indicative Quotes ($ per Share)	(10)
		45.0	Discounted Cash Flow	Discount Rate	9% - 15% (11%)
				Exit Cap Rate	6% - 8% (7%)

Bonds		934.2	Consensus Pricing	Indicative Quotes (% of Par)	(94)

Loans		12,952.9	Consensus Pricing	Indicative Quotes (% of Par)	(94)
		337.2	Market Yield Analysis	Market Yield	7% - 18% (10%)

Partnership and LLC interests		4,315.5	NAV of Underlying Fund ⁽¹⁾	N/A	N/A

Other		7.3	Counterparty Pricing	Indicative Quotes (% of Notional Amount)	(3)

	$	21,022.2
Trading securities and other		11.2	Dealer Pricing	Indicative Quotes (% of Par)	(83)
		6.2	Comparable Multiple	LTM EBITDA Multiple	(5.6x)
		2.6	Discounted Cash Flow	Discount Rate	(7%)

Total	$	21,042.2


Liabilities
Loans payable of Consolidated Funds
Senior secured notes	$	12,658.4	Discounted Cash Flow with Consensus Pricing	Discount Rates	(4%)
				Default Rates	(3%)
				Recovery Rates	(58%)
				Indicative Quotes (% of Par)	(93)

Subordinated notes and preferred shares		996.9	Discounted Cash Flow with Consensus Pricing	Discount Rates	(29%)
				Default Rates	(3%)
				Recovery Rates	(53%)
				Indicative Quotes (% of Par)	(42)

Combination notes		1.4	Consensus Pricing	Indicative Quotes (% of Par)	(96)

Derivative instruments of Consolidated Funds		15.8	Counterparty Pricing	Indicative Quotes (% of Notional Amount)	(6)

Contingent cash consideration ⁽²⁾		186.7	Discounted Cash Flow	Assumed % of Total Potential Contingent Payments	32% - 100% (79%)
				Discount Rate	2% - 35% (17%)

Total	$	13,859.2

(1)	Represents the Partnership’s investments in funds that are valued using the NAV of the underlying fund.

(2)	Related to contingent cash consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion (see Note 9).

The significant unobservable inputs used in the fair value measurement of the Partnership’s investments in equity securities include EBITDA, price-earnings and book value multiples, indicative quotes, discount rates and exit cap rates. Significant decreases in EBITDA, price-earnings, book value multiples or indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount rates or exit cap rates in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s investments in bonds and loans are market yields and indicative quotes. Significant increases in market yields would result in a significantly lower fair value measurement. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s other investments of Consolidated Funds and derivative instruments of Consolidated Funds are primarily indicative quotes. A significant decrease in this input in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s trading securities and other investments include indicative quotes, EBITDA multiples and discount rates. Significant decreases in EBITDA multiples or indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount rates in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s loans payable of Consolidated Funds are discount rates, default rates and recovery rates. Significant increases in discount rates or default rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value.

The significant unobservable inputs used in the fair value measurement of the Partnership’s contingent consideration are assumed percentage of total potential contingent payments and discount rates. A significant decrease in the assumed percentage of total potential contingent payments or increase in discount rates in isolation would result in a significantly lower fair value measurement.