| Fair Values of Assets and Liabilities |
4. Investments and Fair Values of Assets and Liabilities
The disclosures below include details of Legg Mason's financial assets and financial liabilities that are measured at fair value, excluding the financial assets and financial liabilities of CIVs. See Note 13, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.
Effective April 1, 2016, Legg Mason adopted updated accounting guidance on fair value measurement which removed both the requirement to categorize within the fair value hierarchy and the requirement to provide related sensitivity disclosures for all investments for which fair value is measured using net asset value ("NAV") as a practical expedient. The amount of these investments is disclosed separately in the following tables as a reconciling item between investments included in the fair value hierarchy and investments reported in the Consolidated Balance Sheets. The updated guidance was adopted on a retrospective basis, therefore, the investment amounts for which fair value is measured using NAV as a practical expedient have been removed from the fair value hierarchy for all periods presented.
The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs: | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2016 | | | Quoted prices in active markets
(Level 1) | | Significant other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) | | Investments measured at NAV(1) | | Total | Assets: | | | | | | | | | | | Cash equivalents:(2) | | | | | | | | | | | Money market funds | | $ | 350,494 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 350,494 |
| Time deposits and other | | — |
| | 29,037 |
| | — |
| | — |
| | 29,037 |
| Total cash equivalents | | 350,494 |
| | 29,037 |
| | — |
| | — |
| | 379,531 |
| Trading investments of proprietary fund products and other trading investments:(3) | | | | | | | | | | |
| Seed capital investments | | 147,897 |
| | 87,988 |
| | — |
| | 4,486 |
| | 240,371 |
| Other(4) | | 34,978 |
| | 2,556 |
| | — |
| | 10 |
| | 37,544 |
| Trading investments relating to long-term incentive compensation plans(5) | | 146,235 |
| | — |
| | — |
| | 792 |
| | 147,027 |
| Equity method investments relating to proprietary fund products and long-term incentive compensation plans:(6) | | | | | | | | | |
|
| Seed capital investments | | — |
| | 3,334 |
| | — |
| | — |
| | 3,334 |
| Investments related to long-term incentive compensation plans | | — |
| | 6,038 |
| | 2,701 |
| | — |
| | 8,739 |
| Total current investments(7) | | 329,110 |
| | 99,916 |
| | 2,701 |
| | 5,288 |
| | 437,015 |
| Equity method investments in partnerships and LLCs:(6)(8) | | | | | | | | | | | Seed capital investments(7) | | — |
| | — |
| | 591 |
| | 38,709 |
| | 39,300 |
| Seed capital investments in real estate funds | | — |
| | — |
| | 26,679 |
| | — |
| | 26,679 |
| Investments in partnerships and LLCs:(8) | | | | | | | | | |
|
| Seed capital investments | | — |
| | — |
| | — |
| | 3,526 |
| | 3,526 |
| Investments related to long-term incentive compensation plans | | — |
| | — |
| | 7,815 |
| | — |
| | 7,815 |
| Other proprietary fund products | | — |
| | 93 |
| | 2,368 |
| | — |
| | 2,461 |
| Derivative assets(8)(9) | | 836 |
| | — |
| | — |
| | — |
| | 836 |
| Other investments(8) | | — |
| | — |
| | 162 |
| | 141 |
| | 303 |
| Total | | $ | 680,440 |
| | $ | 129,046 |
| | $ | 40,316 |
| | $ | 47,664 |
| | $ | 897,466 |
| Liabilities: | | | | | | | | | | | Contingent consideration liabilities(10) | | $ | — |
| | $ | — |
| | $ | (35,484 | ) | | $ | — |
| | $ | (35,484 | ) | Derivative liabilities(8) | | (7,047 | ) | | — |
| | — |
| | — |
| | (7,047 | ) | Total | | $ | (7,047 | ) | | $ | — |
| | $ | (35,484 | ) | | $ | — |
| | $ | (42,531 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | As of March 31, 2016 | | | Quoted prices in active markets
(Level 1) | | Significant other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) | | Investments measured at NAV(1) | | Total | Assets: | | | | | | | | | | | Cash equivalents:(2) | | | | | | | | | | | Money market funds | | $ | 1,057,916 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,057,916 |
| Time deposits and other | | — |
| | 35,265 |
| | — |
| | — |
| | 35,265 |
| Total cash equivalents | | 1,057,916 |
| | 35,265 |
| | — |
| | — |
| | 1,093,181 |
| Trading investments of proprietary fund products and other trading investments:(3) | | | | | | | | | | | Seed capital investments | | 205,608 |
| | 102,021 |
| | 3 |
| | 18,304 |
| | 325,936 |
| Other(4) | | 65,112 |
| | 2,331 |
| | — |
| | 21 |
| | 67,464 |
| Trading investments relating to long-term incentive compensation plans(5) | | 105,568 |
| | — |
| | — |
| | 996 |
| | 106,564 |
| Equity method investments relating to proprietary fund products and long-term incentive compensation plans:(6) | | | | | | | | | |
|
| Seed capital investments | | 1,329 |
| | 7,575 |
| | — |
| | — |
| | 8,904 |
| Investments related to long-term incentive compensation plans | | — |
| | 6,467 |
| | — |
| | — |
| | 6,467 |
| Total current investments(7) | | 377,617 |
|
| 118,394 |
| | 3 |
| | 19,321 |
| | 515,335 |
| Equity method investments in partnerships and LLCs:(6)(8) | | | | | | | | | | | Seed capital investments | | — |
| | — |
| | 627 |
| | 19,812 |
| | 20,439 |
| Other proprietary fund products | | — |
| | — |
| | — |
| | 9,434 |
| | 9,434 |
| Investments in partnerships and LLCs:(8) | | | | | | | | | | | Investments related to long-term incentive compensation plans | | — |
| | — |
| | 7,501 |
| | — |
| | 7,501 |
| Other proprietary fund products | | — |
| | — |
| | 4,807 |
| | 3,124 |
| | 7,931 |
| Derivative assets(8)(9) | | 1,051 |
| | 7,599 |
| | — |
| | — |
| | 8,650 |
| Other investments(8) | | — |
| | — |
| | 83 |
| | — |
| | 83 |
| Total | | $ | 1,436,584 |
| | $ | 161,258 |
| | $ | 13,021 |
| | $ | 51,691 |
| | $ | 1,662,554 |
| Liabilities: | | | | | | | | | | | Contingent consideration liabilities(10) | | $ | — |
| | $ | — |
| | $ | (84,585 | ) | | $ | — |
| | $ | (84,585 | ) | Derivative liabilities(9) | | (18,079 | ) | | — |
| | — |
| | — |
| | (18,079 | ) | Total | | $ | (18,079 | ) | | $ | — |
| | $ | (84,585 | ) | | $ | — |
| | $ | (102,664 | ) |
| | (1) | Reflects certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy. |
| | (2) | Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are classified as Level 1. Cash investments in time deposits and other are measured at amortized 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. |
| | (3) | Trading investments of proprietary fund products and other trading investments consist of approximately 76% and 24% equity and debt securities, respectively, as of December 31, 2016, and approximately 68% and 32% equity and debt securities, respectively, as of March 31, 2016. |
| | (4) | Includes $24,016 and $54,392 in noncontrolling interests associated with consolidated seed investment products as of December 31, 2016 and March 31, 2016, respectively. |
| | (5) | Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability. |
| | (6) | Legg Mason's equity method investments that are investment companies record underlying investments at fair value. Therefore, fair value is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee. |
| | (7) | Excludes $31,779 and $13,641 of seed capital as of December 31, 2016, and March 31, 2016, respectively, which is related to Legg Mason's investments in CIVs. See Note 13. |
| | (8) | Amounts are included in Other non-current assets in the Consolidated Balance Sheets for each of the periods presented. |
| | (10) | See Note 3 and Note 9. |
Proprietary fund products include seed capital investments made by Legg Mason to fund new investment strategies and products. Legg Mason had seed capital investments in proprietary fund products, which totaled $344,989 and $368,920, as of December 31, 2016 and March 31, 2016, respectively, which are substantially comprised of investments in 65 funds and 63 funds, respectively, that are individually greater than $1,000, and together comprise over 90% of the total seed capital investments at each period end.
See Notes 2 and 13 for information regarding the determination of whether investments in proprietary fund products represent VIEs and consolidation. The net realized and unrealized gain (loss) for investment securities classified as trading was $1,617 and $2,148 for the three months ended December 31, 2016 and 2015, respectively, and $26,969 and $(25,283) for the nine months ended December 31, 2016 and 2015, respectively. The net unrealized gains (losses) relating to trading investments still held as of the reporting dates were $(165) and $7,028 for the three months ended December 31, 2016 and 2015, respectively, and $16,991 and $(36,137) for the nine months ended December 31, 2016 and 2015, respectively. The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2016 and 2015, are presented in the tables below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2016 | | Purchases | | Sales | | Redemptions/ Settlements/ Other | | Transfers | | Realized and unrealized gains/(losses), net | | Balance as of December 31, 2016 | Assets: | | | | | | | | | | | | | | | Trading investments of seed capital investments in proprietary fund products | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Equity method investments relating to long-term incentive compensation plans | | 2,653 |
| | 20 |
| | — |
| | (20 | ) | | — |
| | 48 |
| | 2,701 |
| Equity method investments in partnerships and LLCs: | | | | | | | | | | | | | | | Seed capital investments | | 552 |
| | — |
| | — |
| | — |
| | — |
| | 39 |
| | 591 |
| Seed capital investments in real estate funds | | 25,722 |
| | 667 |
| | — |
| | (197 | ) | | — |
| | 487 |
| | 26,679 |
| Investments in partnerships and LLCs: | | | | | | | | | | | | | |
|
| Investments related to long-term incentive compensation plans | | 7,501 |
| | 314 |
| | — |
| | — |
| | — |
| | — |
| | 7,815 |
| Other proprietary fund products | | 3,827 |
| | — |
| | — |
| | (2,000 | ) | | — |
| | 541 |
| | 2,368 |
| Other investments | | 245 |
| | — |
| | — |
| | — |
| | — |
| | (83 | ) | | 162 |
| | | $ | 40,500 |
| | $ | 1,001 |
| | $ | — |
| | $ | (2,217 | ) | | $ | — |
| | $ | 1,032 |
| | $ | 40,316 |
| Liabilities: | | | | | | | | | | | | | | | Contingent consideration liabilities | | $ | (52,053 | ) | | $ | — |
| | n/a |
| | $ | — |
| | n/a |
| | $ | 16,569 |
| | $ | (35,484 | ) |
n/a - not applicable
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2015 | | Purchases | | Sales | | Redemptions/ Settlements/ Other | | Transfers | | Realized and unrealized gains/(losses), net | | Balance as of December 31, 2015 | Assets: | | | | | | | | | | | | | | | Trading investments of seed capital investments in proprietary fund products | | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
| Equity method investments in partnerships and LLCs: | | | | | | | | | | | | | | | Seed capital investments | | 634 |
| | — |
| | — |
| | (19 | ) | | — |
| | 71 |
| | 686 |
| Other | | 87 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 88 |
| Investments in partnerships and LLCs: | | | | | | | | | | | | | |
|
| Investments related to long-term incentive compensation plans | | 7,040 |
| | 220 |
| | — |
| | — |
| | — |
| | — |
| | 7,260 |
| Other proprietary fund products | | 8,071 |
| | — |
| | — |
| | (2,875 | ) | | — |
| | (2 | ) | | 5,194 |
| Other investments | | 77 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 77 |
| | | $ | 15,911 |
| | $ | 221 |
| | $ | — |
| | $ | (2,894 | ) | | $ | — |
| | $ | 70 |
| | $ | 13,308 |
| Liabilities: | | | | | | | | | | | | | | | Contingent consideration liabilities | | $ | (90,219 | ) | | $ | (27,457 | ) | | n/a |
| | $ | — |
| | n/a |
| | $ | 27,212 |
| | $ | (90,464 | ) |
n/a - not applicable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of March 31, 2016 | | Purchases | | Sales | | Redemptions/ Settlements/ Other | | Transfers | | Realized and unrealized gains/(losses), net | | Balance as of December 31, 2016 | Assets: | | | | | | | | | | | | | | | Trading investments of seed capital investments in proprietary fund products | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | — |
| Equity method investments relating to long-term incentive compensation plans | | — |
| | 2,979 |
| | — |
| | (448 | ) | | — |
| | 170 |
| | 2,701 |
| Equity method investments in partnerships and LLCs: | | | | | | | | | | | | | | | Seed capital investments | | 627 |
| | — |
| | — |
| | — |
| | — |
| | (36 | ) | | 591 |
| Seed capital investments in real estate funds | | — |
| | 25,966 |
| | — |
| | (636 | ) | | — |
| | 1,349 |
| | 26,679 |
| Investments in partnerships and LLCs: | | | | | | | | | | | | | |
|
| Investments related to long-term incentive compensation plans | | 7,501 |
| | 314 |
| | — |
| | — |
| | — |
| | — |
| | 7,815 |
| Other proprietary fund products | | 4,807 |
| | — |
| | — |
| | (3,000 | ) | | — |
| | 561 |
| | 2,368 |
| Other investments | | 83 |
| | — |
| | — |
| | — |
| | — |
| | 79 |
| | 162 |
| | | $ | 13,021 |
|
| $ | 29,259 |
|
| $ | — |
|
| $ | (4,087 | ) |
| $ | — |
|
| $ | 2,123 |
| | $ | 40,316 |
| Liabilities: | | | | | | | | | | | | | | | Contingent consideration liabilities | | $ | (84,585 | ) | | $ | (2,000 | ) | | n/a |
| | $ | 6,587 |
| | n/a |
| | $ | 44,514 |
| | $ | (35,484 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of March 31, 2015 | | Purchases | | Sales | | Redemptions/Settlements/ Other | | Transfers | | Realized and unrealized gains/(losses), net | | Balance as of December 31, 2015 | Assets: | | | | | | | | | | | | | | | Trading investments of seed capital investments in proprietary fund products | | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
| Equity method investments in partnerships and LLCs: | | | | | | | | | | | | | | | Seed capital investments | | 734 |
| | — |
| | — |
| | (19 | ) | | — |
| | (29 | ) | | 686 |
| Other | | 7,526 |
| | — |
| | (5,352 | ) | | (1,821 | ) | | — |
| | (265 | ) | | 88 |
| Investments in partnerships and LLCs: | | | | | | | | | | | | | | | Investments related to long-term incentive compensation plans | | 5,595 |
| | 1,665 |
| | — |
| | — |
| | — |
| | — |
| | 7,260 |
| Other proprietary fund products | | 10,027 |
| | — |
| | — |
| | (5,448 | ) | | — |
| | 615 |
| | 5,194 |
| Other investments | | 77 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 77 |
| | | $ | 23,961 |
| | $ | 1,666 |
| | $ | (5,352 | ) | | $ | (7,288 | ) | | $ | — |
| | $ | 321 |
| | $ | 13,308 |
| Liabilities: | | | | | | | | | | | | | | | Contingent consideration liabilities | | $ | (110,784 | ) | | $ | (27,457 | ) | | n/a |
| | $ | 22,765 |
| | n/a |
| | $ | 25,012 |
| | $ | (90,464 | ) |
Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other non-operating income (expense), net, in the Consolidated Statements of Income (Loss). The change in unrealized gains (losses) for Level 3 investments and liabilities still held at the reporting date was $15,448 and $22,911 for the three months ended December 31, 2016 and 2015, respectively, and $44,636 and $21,269 for the nine months ended December 31, 2016 and 2015, respectively.
There were no significant transfers between Level 1 and Level 2 during the periods ended December 31, 2016 and 2015.
As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value. The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes, as of December 31, 2016 and March 31, 2016, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized: | | | | | | | | | | | | | | | | | | | | | | Fair Value Determined Using NAV | | As of December 31, 2016 | Category of Investment | | Investment Strategy | | December 31, 2016 | | March 31, 2016 | | Unfunded Commitments | | Remaining Term | Funds-of-hedge funds | | Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge | | $ | 18,707 |
| (1) | $ | 19,139 |
| | n/a |
| | n/a | Hedge funds | | Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge | | 10,300 |
| | 11,403 |
| | $ | 20,000 |
| | n/a | Private equity funds | | Long/short equity | | 18,433 |
| (2) | 20,471 |
| | 7,436 |
| | Up to 12 years | Other | | Various | | 224 |
| | 678 |
| | n/a |
| | Various (3) | Total | | | | $ | 47,664 |
| | $ | 51,691 |
| | $ | 27,436 |
| | |
n/a - not applicable | | (1) | Liquidation restrictions: 1% daily redemption, 11% monthly redemption, 14% quarterly redemption, and 74% are not subject to redemption or are not currently redeemable. |
| | (2) | Liquidations are expected over the remaining term. |
| | (3) | Of this balance, 28% has a remaining term of less than one year and 72% has a remaining term of 15 years. |
There are no current plans to sell any of these investments held as of December 31, 2016. |