Virtus Investment Partners Earnings 2019-03-31

VRTS 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 vrts0331201910-q.htm 10-Q VIRTUS MARCH 31, 2019 Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-10994

VIRTUS INVESTMENT PARTNERS, INC.

(Exact name of registrant as specified in its charter)




Delaware		26-3962811
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Financial Plaza, Hartford, CT 06103

(Address of principal executive offices, including Zip Code)

(800) 248-7971

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common Stock, $0.01 par value (including Preferred Share Purchase Rights)	VRTS	The NASDAQ Stock Market LLC

The number of shares outstanding of the registrant’s common stock was 6,987,281 as of April 26, 2019.

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VIRTUS INVESTMENT PARTNERS, INC.

INDEX



		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2019 and 2018	2
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Changes in Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
	Signatures	37

"We," "us," "our," "the Company," and "Virtus" as used in this Quarterly Report on Form 10-Q, refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Virtus Investment Partners, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)



	March 31, 2019			December 31, 2018
($ in thousands, except share data)
Assets:
Cash and cash equivalents	$	142,343		$	201,705
Investments	75,925			79,558
Accounts receivable, net	74,150			70,047
Assets of consolidated investment products ("CIP")
Cash and cash equivalents of CIP	55,353			52,015
Cash pledged or on deposit of CIP	370			936
Investments of CIP	1,767,942			1,749,568
Other assets of CIP	31,153			31,057
Furniture, equipment and leasehold improvements, net	20,171			20,154
Intangible assets, net	331,271			338,812
Goodwill	290,366			290,366
Deferred taxes, net	23,564			22,116
Other assets	32,694			14,201
Total assets	$	2,845,302		$	2,870,535
Liabilities and Equity
Liabilities:
Accrued compensation and benefits	$	31,105		$	93,339
Accounts payable and accrued liabilities	27,723			27,926
Dividends payable	7,473			7,762
Debt	317,665			329,184
Other liabilities	40,573			20,010
Liabilities of CIP
Notes payable of CIP	1,640,360			1,620,260
Securities purchased payable and other liabilities of CIP	74,942			70,706
Total liabilities	2,139,841			2,169,187
Commitments and Contingencies (Note 15)
Redeemable noncontrolling interests	59,003			57,481
Equity:
Equity attributable to stockholders:
Series D mandatory convertible preferred stock, $0.01 par value, 1,150,000 shares authorized, issued and outstanding at March 31, 2019 and December 31, 2018	110,843			110,843
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 10,682,129 shares issued and 6,978,925 shares outstanding at March 31, 2019 and 10,552,624 shares issued and 6,997,382 shares outstanding at December 31, 2018, respectively	107			106
Additional paid-in capital	1,205,926			1,209,805
Retained earnings (accumulated deficit)	(289,119		)	(310,865		)
Accumulated other comprehensive income (loss)	1			(731		)
Treasury stock, at cost, 3,703,204 and 3,555,242 shares at March 31, 2019 and December 31, 2018, respectively	(394,248		)	(379,249		)
Total equity attributable to stockholders	633,510			629,909
Noncontrolling interests of CIP	12,948			13,958
Total equity	646,458			643,867
Total liabilities and equity	$	2,845,302		$	2,870,535

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Virtus Investment Partners, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended March 31,
	2019			2018
($ in thousands, except per share data)
Revenues
Investment management fees	$	105,918		$	100,476
Distribution and service fees	10,063			12,607
Administration and shareholder service fees	14,413			15,738
Other income and fees	324			207
Total revenues	130,718			129,028
Operating Expenses
Employment expenses	60,851			60,696
Distribution and other asset-based expenses	19,764			22,291
Other operating expenses	18,723			16,862
Operating expenses of consolidated investment products ("CIP")	451			511
Restructuring and severance	1,176			—
Depreciation and other amortization	1,213			1,015
Amortization expense	7,541			5,036
Total operating expenses	109,719			106,411
Operating Income (Loss)	20,999			22,617
Other Income (Expense)
Realized and unrealized gain (loss) on investments, net	3,433			438
Realized and unrealized gain (loss) of CIP, net	(1,921		)	2,259
Other income (expense), net	450			1,319
Total other income (expense), net	1,962			4,016
Interest Income (Expense)
Interest expense	(5,165		)	(3,858		)
Interest and dividend income	1,190			721
Interest and dividend income of investments of CIP	27,402			21,403
Interest expense of CIP	(19,701		)	(14,549		)
Total interest income (expense), net	3,726			3,717
Income (Loss) Before Income Taxes	26,687			30,350
Income tax expense (benefit)	4,219			6,523
Net Income (Loss)	22,468			23,827
Noncontrolling interests	(722		)	(527		)
Net Income (Loss) Attributable to Stockholders	21,746			23,300
Preferred stockholder dividends	(2,084		)	(2,084		)
Net Income (Loss) Attributable to Common Stockholders	$	19,662		$	21,216
Earnings (Loss) per Share—Basic	$	2.80		$	2.95
Earnings (Loss) per Share—Diluted	$	2.61		$	2.77
Cash Dividends Declared per Preferred Share	$	1.81		$	1.81
Cash Dividends Declared per Common Share	$	0.55		$	0.45
Weighted Average Shares Outstanding—Basic (in thousands)	7,015			7,197
Weighted Average Shares Outstanding—Diluted (in thousands)	8,322			8,411

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Virtus Investment Partners, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended March 31,
	2019			2018
($ in thousands)
Net Income (Loss)	$	22,468		$	23,827
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax of $(3) and ($4) for the three months ended March 31, 2019 and 2018, respectively	6			10
Unrealized gain (loss) on available-for-sale securities, net of tax of $97 for the three months ended March 31, 2018	—			(249		)
Other comprehensive income (loss)	6			(239		)
Comprehensive income (loss)	22,474			23,588
Comprehensive (income) loss attributable to noncontrolling interests	(722		)	(527		)
Comprehensive Income (Loss) Attributable to Stockholders	$	21,752		$	23,061

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Virtus Investment Partners, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended March 31,
	2019			2018
($ in thousands)
Cash Flows from Operating Activities:
Net income (loss)	$	22,468		$	23,827
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense, intangible asset and other amortization	9,874			6,819
Stock-based compensation	5,629			5,909
Amortization of deferred commissions	980			737
Payments of deferred commissions	(455		)	(1,075		)
Equity in earnings of equity method investments	(496		)	(1,322		)
Realized and unrealized (gains) losses on investments, net	(3,292		)	(333		)
Sales (purchases) of investments, net	9,413			4,718
Deferred taxes, net	(1,705		)	646
Changes in operating assets and liabilities:
Accounts receivable, net and other assets	(2,732		)	2,629
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities	(60,857		)	(51,148		)
Operating activities of consolidated investment products ("CIP"):
Realized and unrealized (gains) losses on investments of CIP, net	1,497			(2,382		)
Purchases of investments by CIP	(157,158		)	(264,398		)
Sales of investments by CIP	152,572			217,564
Net purchases of short term investments by CIP	(911		)	(177		)
Sales (purchases) of securities sold short by CIP, net	1,064			190
Change in other assets of CIP	578			(492		)
Change in liabilities of CIP	316			(3,467		)
Net cash provided by (used in) operating activities	(23,215		)	(61,755		)
Cash Flows from Investing Activities:
Capital expenditures	(2,568		)	(1,275		)
Change in cash and cash equivalents of CIP due to consolidation (deconsolidation), net	(1,571		)	—
Sale of available-for-sale securities	2,044			—
Purchases of available-for-sale securities	—			(20,302		)
Net cash provided by (used in) investing activities	(2,095		)	(21,577		)
Cash Flows from Financing Activities:
Repayments on debt	(12,413		)	(650		)
Payment of deferred financing costs	—			(3,400		)
Common stock dividends paid	(4,441		)	(3,412		)
Preferred stock dividends paid	(2,084		)	(2,084		)
Repurchases of common shares	(14,999		)	—
Stock options exercised	449			698
Taxes paid related to net share settlement of restricted stock units	(4,804		)	(5,014		)
Net subscriptions received from (redemptions/distributions paid to) noncontrolling interests	6,012			(589		)
Financing activities of CIP:
Borrowings (payments) on borrowings by CIP	—			350,000
Proceeds from issuance of notes payable by CIP	1,000			—
Repayment of notes payable by CIP	—			(350,000		)
Net cash provided by (used in) financing activities	(31,280		)	(14,451		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(56,590		)	(97,783		)
Cash, cash equivalents and restricted cash, beginning of period	254,656			234,282
Cash, Cash Equivalent and Restricted Cash, End of Period	$	198,066		$	136,499
Non-Cash Investing Activities:
Change in accrual for capital expenditures	$	(1,267	)	$	(375	)
Non-Cash Financing Activities:
Increase (decrease) to noncontrolling interest due to consolidation (deconsolidation) of CIP, net	$	(6,423	)	$	—
Common stock dividends payable	$	3,865		$	3,248
Preferred stock dividends payable	$	2,084		$	2,084



	March 31, 2019		December 31, 2018
($ in thousands)
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	142,343	$	201,705
Cash of consolidated investment products	55,353		52,015
Cash pledged or on deposit of consolidated investment products	370		936
Cash, cash equivalents and restricted cash at end of period	$	198,066	$	254,656

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Virtus Investment Partners, Inc.

Condensed Consolidated Statements of Changes in Equity

(Unaudited)



	Permanent Equity																													Temporary Equity
	Common Stock				Preferred Stock			Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Total Attributed To Stockholders			Non- controlling Interests			Total Equity			Redeemable Non- controlling Interests
($ in thousands, except per share data)	Shares		Par Value		Shares	Amount		Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Shares	Amount			Total Attributed To Stockholders			Non- controlling Interests			Total Equity			Redeemable Non- controlling Interests
Balances at December 31, 2017	7,159,645		$	105	1,150,000	$	110,843	$	1,216,173		$	(386,216	)	$	(600	)	3,296,289	$	(351,748	)	$	588,557		$	16,667		$	605,224		$	4,178
Adjustment for adoption of ASU 2016-01	—		—		—	—		—			(178		)	178			—	—			—			—			—			—
Net income (loss)	—		—		—	—		—			23,300			—			—	—			23,300			672			23,972			(145		)
Net unrealized gain (loss) on securities available-for-sale	—		—		—	—		—			—			(249		)	—	—			(249		)	—			(249		)	—
Foreign currency translation adjustments	—		—		—	—		—			—			10			—	—			10			—			10			—
Net subscriptions (redemptions) and other	—		—		—	—		—			—			—			—	—			—			(720		)	(720		)	129
Cash dividends declared ($1.8125 per preferred share)	—		—		—	—		(2,084		)	—			—			—	—			(2,084		)	—			(2,084		)	—
Cash dividends declared ($0.45 per common share)	—		—		—	—		(3,394		)	—			—			—	—			(3,394		)	—			(3,394		)	—
Issuance of common shares related to employee stock transactions	57,798		—		—	—		698			—			—			—	—			698			—			698			—
Taxes paid on stock-based compensation	—		—		—	—		(5,014		)	—			—			—	—			(5,014		)	—			(5,014		)	—
Stock-based compensation	—		—		—	—		6,963			—			—			—	—			6,963			—			6,963			—
Balances at March 31, 2018	7,217,443		$	105	1,150,000	$	110,843	$	1,213,342		$	(363,094	)	$	(661	)	3,296,289	$	(351,748	)	$	608,787		$	16,619		$	625,406		$	4,162
Balances at December 31, 2018	6,997,382		$	106	1,150,000	$	110,843	$	1,209,805		$	(310,865	)	$	(731	)	3,555,242	$	(379,249	)	$	629,909		$	13,958		$	643,867		$	57,481
Net income (loss)	—		—		—	—		—			21,746			—			—	—			21,746			(453		)	21,293			1,175
Foreign currency translation adjustments	—		—		—	—		—			—			6			—	—			6			—			6			—
Net subscriptions (redemptions) and other	—		—		—	—		—			—			—			—	—			—			(557		)	(557		)	347
Reclassification from other comprehensive (income) loss	—		—		—	—		—			—			726			—	—			726			—			726			—
Cash dividends declared ($1.8125 per preferred share)	—		—		—	—		(2,084		)	—			—			—	—			(2,084		)	—			(2,084		)	—
Cash dividends declared ($0.55 per common share)	—		—		—	—		(4,152		)	—			—			—	—			(4,152		)	—			(4,152		)	—
Repurchases of common shares	(147,962	)	—		—	—		—			—			—			147,962	(14,999		)	(14,999		)	—			(14,999		)	—
Issuance of common shares related to employee stock transactions	129,505		1		—	—		448			—			—			—	—			449			—			449			—
Taxes paid on stock-based compensation	—		—		—	—		(4,804		)	—			—			—	—			(4,804		)				(4,804		)	—
Stock-based compensation	—		—		—	—		6,713			—			—			—	—			6,713			—			6,713			—
Balances at March 31, 2019	6,978,925		$	107	1,150,000	$	110,843	$	1,205,926		$	(289,119	)	$	1		3,703,204	$	(394,248	)	$	633,510		$	12,948		$	646,458		$	59,003

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Virtus Investment Partners, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Business

Virtus Investment Partners, Inc. ("the Company," "we," "us," "our" or "Virtus"), a Delaware corporation, operates in the investment management industry through its subsidiaries.

The Company provides investment management and related services to individuals and institutions. The Company’s retail investment management services are provided to individuals through products consisting of U.S. 1940 Act mutual funds and Undertaking for Collective Investment in Transferable Securities ("UCITS" or "offshore funds" and collectively with U.S. 1940 Act mutual funds, "open-end funds"), exchange traded funds ("ETFs"), closed-end funds (collectively with open-end funds and ETFs, "funds") and retail separate accounts. Institutional investment management services are provided to corporations, multi-employer retirement funds, employee retirement systems, foundations, endowments and structured products. The Company also provides subadvisory services to other investment advisors.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission. The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2018 Annual Report on Form 10-K.

New Accounting Standards Implemented

In July 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-09, Codification Improvements. On January 1, 2019, the Company adopted this standard. This standard which does not prescribe any new accounting guidance, makes minor improvements and clarifications of several different FASB Accounting Standards Codification ("ASC") areas based on comments and suggestions made by various stakeholders. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard provides financial statement preparers with the option to reclassify tax effects within other comprehensive income (referred to as stranded tax effects) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. On January 1, 2019, the Company adopted this standard. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard replaces current codification Topic 840 - Leases with updated guidance on accounting for leases that requires a lessee to recognize assets and liabilities arising from an operating lease on the balance sheet, whereas previous guidance did not require lease assets and liabilities to be recognized for most operating leases. Furthermore, this standard permits companies to make an accounting policy election to not recognize lease assets and liabilities on the balance sheet for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the future lease payments. In addition to recognizing the lease liability, companies are required to recognize a corresponding asset representing the right to use the underlying asset over the lease term. The right of use asset ("ROU") is initially measured as the value of the lease liability, plus indirect costs and prepaid lease payments, less lease incentives. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain

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aspects of ASU 2016-02, allowing entities the option to instead apply the provisions of the new lease standards at the effective date without adjusting comparative periods presented. The Company elected this optional transition method along with the package of practical expedients permitted under the guidance which resulted in not having to reassess whether expired or existing contracts upon adoption contained a lease as well as retaining the historical classifications of the Company's leases and initial direct costs. The Company also elected the hindsight practical expedient in evaluating lessee options and to combine lease and non-lease components in calculating the lease liability and ROU asset for operating leases. The adoption of this standard resulted in the recording of a ROU asset of $20.5 million and lease liability of $28.6 million on January 1, 2019 which represented a non-cash investing activity in the Company's condensed consolidated statements of cash flows. See Note 8 for further discussion.

New Accounting Standards Not Yet Implemented

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40) ("ASU 2018-15"). This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, including an internal use software license. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this standard will have a material impact on the Company's condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This standard modifies the disclosure requirements on fair value measurements and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the potential impact of the guidance but does not expect the adoption of this standard will have a material impact on the Company's condensed consolidated financial statements.

3. Revenues

The Company's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. Investment management fees, distribution and service fees and administration and shareholder service fees are generally calculated as a percentage of average net assets of the investment portfolios managed. The net asset values from which investment management, distribution and service and administration and shareholder service fees are calculated are variable in nature and subject to factors outside of the Company's control such as deposits, withdrawals and market performance. Because of this, they are considered constrained until the end of the contractual measurement period (monthly or quarterly) which is when asset values are generally determinable.

Revenue Disaggregated by Source

The following table summarizes revenue by source:



	Three Months Ended March 31,
	2019		2018
($ in thousands)
Investment management fees
Open-end funds	$	53,293	$	54,361
Closed-end funds	10,019		10,378
Retail separate accounts	18,005		16,529
Institutional accounts	22,177		15,818
Structured products	1,647		2,326
Other products	777		1,064
Total investment management fees	105,918		100,476
Distribution and service fees	10,063		12,607
Administration and shareholder service fees	14,413		15,738
Other income and fees	324		207
Total revenues	$	130,718	$	129,028

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4. Business Combinations

Sustainable Growth Advisers, LP

On July 1, 2018, the Company completed the acquisition of 70% of the outstanding limited partnership interests of Sustainable Growth Advisors, LP ("SGA") and 100% of the membership interests in its general partner, SGIA, LLC (the "SGA Acquisition"). SGA is an investment manager specializing in U.S. and global growth equity portfolios. The total purchase price of the SGA Acquisition was $129.5 million. The Company accounted for the acquisition in accordance with ASC 805, Business Combinations. The purchase price was allocated to the assets acquired, liabilities assumed and noncontrolling interests based upon their estimated fair values at the date of the SGA Acquisition. Goodwill of $120.2 million and other intangible assets of $62.0 million were recorded as a result of the SGA Acquisition. The Company expects $127.5 million of this amount to be tax deductible over 15 years. The Company has not completed its final assessment of the fair values of purchased receivables or acquired contracts. The final fair value of the net assets acquired may result in adjustments to certain assets and liabilities, including goodwill.

The following table summarizes the identified acquired assets, liabilities assumed and redeemable noncontrolling interests as of the acquisition date:



	July 1, 2018
($ in thousands)
Assets:
Cash and cash equivalents	$	2,505
Investments	262
Accounts receivable	6,649
Furniture, equipment and leasehold improvements	70
Intangible assets	62,000
Goodwill	120,213
Other assets	659
Total Assets	192,358
Liabilities
Accrued compensation and benefits	824
Accounts payable and accrued liabilities	6,534
Total liabilities	7,358
Redeemable noncontrolling interests	55,500
Total Net Assets Acquired	$	129,500

Identifiable Intangible Assets Acquired

In connection with the allocation of the purchase price, the Company identified the following intangible assets:



	July 1, 2018
	Approximate Fair Value		Weighted Average of Useful Life
($ in thousands)
Definite-lived intangible assets:
Institutional and retail separate account investment contracts	$	49,000	6 years
Trade name	7,000		10 years
Non-competition agreements	6,000		5 years
Total definite-lived intangible assets	$	62,000

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5. Intangible Assets, Net

Intangible assets, net are summarized as follows:



	March 31, 2019			December 31, 2018
($ in thousands)
Definite-lived intangible assets:
Investment contracts and other	$	487,747		$	487,747
Accumulated amortization	(199,992		)	(192,451		)
Definite-lived intangible assets, net	287,755			295,296
Indefinite-lived intangible assets	43,516			43,516
Total intangible assets, net	$	331,271		$	338,812

Activity in intangible assets, net is as follows:



	Three Months Ended March 31,
	2019			2018
($ in thousands)
Intangible assets, net
Balance, beginning of period	$	338,812		$	301,954
Amortization	(7,541		)	(5,036		)
Balance, end of period	$	331,271		$	296,918

Estimated amortization expense of intangible assets for the remainder of fiscal year 2019 and succeeding fiscal years is as follows:



Fiscal Year	Amount ($ in thousands)
Remainder of 2019	$	22,569
2020	29,945
2021	29,933
2022	29,809
2023	29,148
2024 and thereafter	146,351
	$	287,755

6. Investments

Investments consist primarily of investments in the Company's sponsored products. The Company's investments, excluding the assets of consolidated investment products discussed in Note 17, at March 31, 2019 and December 31, 2018, were as follows:



	March 31, 2019		December 31, 2018
($ in thousands)
Investment securities - fair value	$	56,362	$	59,271
Investment securities - available for sale	—		2,023
Equity method investments	11,051		10,573
Nonqualified retirement plan assets	7,519		6,716
Other investments	993		975
Total investments	$	75,925	$	79,558

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Investment Securities - fair value

Investment securities - fair value consist of investments in the Company's sponsored funds, separately managed accounts and trading debt securities. The composition of the Company’s investment securities - fair value is summarized as follows:



	March 31, 2019				December 31, 2018
	Cost		Fair Value		Cost		Fair Value
($ in thousands)
Investment Securities - fair value
Sponsored funds	$	33,082	$	33,075	$	43,507	$	40,191
Equity securities	16,628		18,827		16,380		16,981
Debt securities	4,460		4,460		3,816		2,099
Total Investment Securities - fair value	$	54,170	$	56,362	$	63,703	$	59,271

For the three months ended March 31, 2019, the Company recognized a realized loss of $0.8 million on the sale of its investment securities - fair value. For the three months ended March 31, 2018, the Company recognized a realized loss of $0.4 million on investment securities - fair value.

Investments securities - available for sale

The investment securities - available for sale primarily consist of investments in CLOs for which the Company provides investment management services and does not consolidate. The Company had no investment securities - available for sale as of March 31, 2019. The composition of the Company’s investment securities - available for sale is summarized as follows:



	December 31, 2018
	Cost		Unrealized Loss			Unrealized Gain		Fair Value
($ in thousands)
Investment Securities - available for sale
Investments in CLOs	$	3,696	$	(1,673	)	$	—	$	2,023

7. Fair Value Measurements

The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of consolidated investment products discussed in Note 17, as of March 31, 2019 and December 31, 2018 by fair value hierarchy level were as follows:

March 31, 2019



	Level 1		Level 2		Level 3		Total
($ in thousands)
Assets
Cash equivalents	$	110,304	$	—	$	—	$	110,304
Investment securities - fair value
Sponsored funds	33,075		—		—		33,075
Equity securities	18,827		—		—		18,827
Debt securities	—		43		4,417		4,460
Nonqualified retirement plan assets	7,519		—		—		7,519
Total assets measured at fair value	$	169,725	$	43	$	4,417	$	174,185

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December 31, 2018



	Level 1		Level 2		Level 3		Total
($ in thousands)
Assets
Cash equivalents	$	158,596	$	—	$	—	$	158,596
Investment securities - fair value
Sponsored funds	40,191		—		—		40,191
Equity securities	16,981		—		—		16,981
Debt securities	—		—		2,099		2,099
Investment securities - available for sale	—		—		2,023		2,023
Nonqualified retirement plan assets	6,716		—		—		6,716
Total assets measured at fair value	$	222,484	$	—	$	4,122	$	226,606

The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value:

Cash equivalents represent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.

Sponsored funds represent investments in open-end funds, closed-end funds and ETFs for which the Company acts as the investment manager. The fair value of open-end funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds and ETFs is determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.

Equity securities represent securities traded on active markets and are valued at the official closing price (typically last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.

Debt securities primarily represent investments in CLOs for which the Company provides investment management services. The investments in CLOs are measured at fair value based on independent third-party valuations and are categorized as Level 2 and Level 3. The independent third-party valuations are based on discounted cash flow models and comparable trade data.

Nonqualified retirement plan assets represent mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.

Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.

Transfers into and out of levels are reflected when significant inputs used for the fair value measurement, including market inputs or performance attributes, become observable or unobservable or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a net asset value, or if the book value no longer represents fair value. There were no transfers between levels during the three months ended March 31, 2019 and 2018.

The following table is a reconciliation of assets for Level 3 investments for which significant unobservable inputs were used to determine fair value.



	Three Months Ended March 31,
($ in thousands)	2019		2018
Level 3 Investments (a)
Balance at beginning of period	$	4,122	$	4,439
Purchases (sales), net	232		1,326
Change in realized and unrealized gain (loss), net	63		(233		)
Balance at end of period	$	4,417	$	5,532


^(a)	The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment.

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8. Leases

When an arrangement qualifies as a lease, the Company recognizes a lease liability and a corresponding asset (ROU asset) on the lease’s commencement date. The lease liability is initially measured at the present value of the future minimum lease payments over the lease term using the rate implicit in the arrangement or, if not available, the Company's incremental borrowing rate. An operating lease asset is measured initially at the value of the lease liability excluding any lease incentives and initial direct costs incurred. The Company's leases qualify as operating leases and consist primarily of real estate leases for its office locations which have remaining initial lease terms of 1.3 to 11.1 years and a weighted average remaining lease term of 7.3 years. The Company has options to renew some of its leases for periods ranging from 3.0 to 15.0 years, depending on the lease. None of the Company's renewal options were considered reasonably assured of being exercised and were excluded from the initial lease term used to determine the Company's ROU asset and lease liability. The balance at March 31, 2019 of the ROU asset recorded in other assets was $19.6 million and the balance of the lease liability recorded in other liabilities was $27.8 million in the Company's condensed consolidated balance sheet. As the Company's leases do not provide an implicit rate, the Company used its incremental borrowing rate in determining the present value of its lease payments which was 4.91%. at March 31, 2019.

Lease expense is recorded within other operating expenses on the Company’s condensed consolidated statement of operations and is recognized on a straight-line basis over the lease term. Lease expense for the Company totaled $1.3 million and $1.7 million for the three months ended March 31, 2019 and 2018, respectively. Cash payments relating to operating leases during the three months ended March 31, 2019 were $1.1 million.

The maturities of lease liabilities as of March 31, 2019 is as follows:



($ in thousands)	Amount
Remainder of 2019	$	4,054
2020	5,703
2021	4,707
2022	3,664
2023	3,339
Thereafter	12,202
Total lease payments	33,669
Less: Imputed interest	5,872
Present value of lease liabilities	$	27,797

Minimum aggregate rental payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year recorded in accordance with ASC 840 as of December 31, 2018 were as follows: $6.1 million in 2019; $6.5 million in 2020; $5.1 million in 2021; $3.9 million in 2022; $3.5 million in 2023; and $12.9 million thereafter.

9. Equity Transactions

On February 21, 2019, the Company declared a quarterly cash dividend of $0.55 per common share to be paid on May 15, 2019 to shareholders of record at the close of business on April 30, 2019. The Company also declared a quarterly cash dividend of $1.8125 per share on the Company's 7.25% mandatory convertible preferred stock ("MCPS") to be paid on May 1, 2019 to shareholders of record at the close of business on April 15, 2019.

As of March 31, 2019, 4,180,045 shares of the Company's common stock had been authorized to be repurchased under the share repurchase program approved by the Company's Board of Directors, and 476,841 shares remained available for repurchase. Under the terms of the program, the Company may repurchase shares of its common stock from time to time at its discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. The program, which has no specified term, may be suspended or terminated at any time.

During the three months ended March 31, 2019, the Company repurchased 147,962 common shares at a weighted average price of $101.34 per share for a total cost, including fees and expenses, of $15.0 million.

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10. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2019 and 2018 were as follows:



	Unrealized Net Gains and (Losses) on Securities Available-for-Sale			Foreign Currency Translation Adjustments
($ in thousands)
Balance at December 31, 2018	$	(726	)	$	(5	)
Foreign currency translation adjustments, net of tax of $(3)	—			6
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of $(254)	726			—
Net current-period other comprehensive income (loss)	726			6
Balance at March 31, 2019	$	—		$	1


	Unrealized Net Gains and (Losses) on Securities Available-for-Sale			Foreign Currency Translation Adjustments
($ in thousands)
Balance at December 31, 2017	$	(612	)	$	12
Unrealized net gain (loss) on securities available-for-sale, net of tax of $97	(249		)	—
Foreign currency translation adjustments, net of tax of $(4)	—			10
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of ($61) ⁽¹⁾	178			—
Net current-period other comprehensive income (loss)	(71		)	10
Balance at March 31, 2018	$	(683	)	$	22

⁽¹⁾On January 1, 2018, the Company adopted amendments to ASC 825 pursuant to ASU 2016-01. This standard requires all equity investments (other than those accounted for under the equity method) to be measured at fair value with changes in the fair value recognized through net income.

11. Stock-Based Compensation

The Company has an Omnibus Incentive and Equity Plan (the "Plan") under which officers, employees, consultants and directors may be granted equity-based awards, including restricted stock units ("RSUs"), performance stock units ("PSUs"), stock options and unrestricted shares of common stock. At March 31, 2019, 162,031 shares of common stock remained available for issuance of the 2,400,000 shares that are authorized for issuance under the Plan.

Stock-based compensation expense is summarized as follows:



	Three Months Ended March 31,
	2019		2018
($ in thousands)
Stock-based compensation expense	$	5,629	$	5,909

Restricted Stock Units

Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs generally have a term of one to three years and may be time-vested or performance-contingent. The fair value of each RSU is based on the closing market price of the Company's common stock on the date of grant unless it contains a performance metric that is considered a market condition. RSUs that contain a market condition are valued using a simulation valuation model. Shares that are issued upon vesting are newly issued shares from the Plan and are not issued from treasury stock.

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RSU activity for the three months ended March 31, 2019 is summarized as follows:



	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2018	552,238		$	111.49
Granted	147,369		$	108.03
Forfeited	(11,993	)	$	77.21
Settled	(126,081	)	$	96.57
Outstanding at March 31, 2019	561,533		$	114.67

For the three months ended March 31, 2019 and 2018, a total of 47,658 and 28,851 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $4.8 million and $5.0 million for the three months ended March 31, 2019 and 2018, respectively, in minimum employee tax withholding obligations related to RSUs withheld. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have been otherwise issued as a result of the vesting.

During the three months ended March 31, 2019, the Company granted 43,445 PSUs included in the table above which contain performance-based metrics in addition to a service condition. Compensation expense for PSUs is generally recognized over a three-year service period based upon the value determined using a combination of (1) the intrinsic value method, for awards that contain a performance metric that represents a "performance condition" in accordance with ASC 718, and (2) the Monte Carlo simulation valuation model for awards that contain a "market condition" performance metric under ASC 718. Compensation expense for the awards that contain a market condition is fixed at the date of grant and will not be adjusted in future periods based upon the achievement of the market condition. Compensation expense for the awards with a performance condition is recorded each period based upon a probability assessment of the expected outcome of the performance metric with a final adjustment upon the final outcome. For the three months ended March 31, 2019, total stock-based compensation expense for PSUs was $2.0 million.

As of March 31, 2019, unamortized stock-based compensation expense for unvested RSUs and PSUs was $39.5 million, with a weighted-average remaining amortization period of 1.8 years.

Stock Options

Stock options generally cliff vest after three years and have a contractual life of 10 years. Stock options are granted with an exercise price equal to the fair market value of the shares at the date of grant.

Stock option activity for the three months ended March 31, 2019 is summarized as follows:



	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2018	76,751		$	12.86
Exercised	(55,106	)	$	9.52
Outstanding, vested and exercisable at March 31, 2019	21,645		$	21.37

12. Earnings (Loss) Per Share

Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period, excluding dilution for potential common stock issuances. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, including: (1) shares issuable upon the vesting of RSUs and common stock option exercises using the treasury stock method; and (2) shares issuable upon the conversion of the Company's MCPS, as determined under the if-converted method. For purposes of calculating diluted EPS, preferred stock dividends have been subtracted from net income (loss) in periods in which utilizing the if-converted method would be anti-dilutive.

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The computation of basic and diluted EPS is as follows:



	Three Months Ended March 31,
	2019			2018
($ in thousands, except per share amounts)
Net Income (Loss)	$	22,468		$	23,827
Noncontrolling interests	(722		)	(527		)
Net Income (Loss) Attributable to Stockholders	21,746			23,300
Preferred stock dividends	(2,084		)	(2,084		)
Net Income (Loss) Attributable to Common Stockholders	$	19,662		$	21,216
Shares (in thousands):
Basic: Weighted-average number of common shares outstanding	7,015			7,197
Plus: Incremental shares from assumed conversion of dilutive instruments	1,307			1,214
Diluted: Weighted-average number of common shares outstanding	8,322			8,411
Earnings (Loss) per Share—Basic	$	2.80		$	2.95
Earnings (Loss) per Share—Diluted	$	2.61		$	2.77

The following table details the securities that have been excluded from the above computation of weighted-average number of shares for diluted EPS, because the effect would be anti-dilutive.



	Three Months Ended March 31,
	2019	2018
(in thousands)
Restricted stock units and stock options	121	15
Total anti-dilutive securities	121	15

13. Income Taxes

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances at each interim period. On a quarterly basis, the estimated annual effective tax rate is adjusted, as appropriate, based upon changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and at each interim period thereafter.

The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 15.8% and 21.5% for the three months ended March 31, 2019 and 2018, respectively. The decrease in the estimated effective tax rate for the three months ended March 31, 2019 was primarily due to the decrease in the valuation allowance associated with various investments the Company holds.

14. Debt

Credit Agreement

The Company's credit agreement, as amended ("Credit Agreement"), comprises (1) $365.0 million of seven-year term debt ("Term Loan") expiring in May 2024 and (2) a $100.0 million five-year revolving credit facility ("Credit Facility") expiring in May 2022. During the three months ended March 31, 2019, the Company made principal loan payments of $12.4 million. At March 31, 2019, $328.2 million was outstanding under the Term Loan, and the Company had no outstanding borrowings under its Credit Facility. In accordance with ASC 835, Interest, the amounts outstanding under the Company's Term Loan are presented on the consolidated balance sheet net of related debt issuance costs, which were $10.5 million as of March 31, 2019.

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15. Commitments and Contingencies

Legal Matters

The Company is regularly involved in litigation and arbitration as well as examinations, inquiries and investigations by various regulatory bodies, including the Securities and Exchange Commission, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature involve or may involve but are not limited to the Company’s activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions.

The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Loss Contingencies. The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Based on information currently available, available insurance coverage, indemnities and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome, and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.

16. Redeemable Noncontrolling Interests

Redeemable noncontrolling interests represent third-party investor equity in the Company's consolidated investment products and minority interests held in a consolidated affiliate. Minority interests held in an affiliate are subject to holder put rights and Company call rights at established multiples of earnings before interest, taxes, depreciation and amortization and, as such, are considered redeemable at other than fair value. They are exercisable at pre-established intervals (between four and seven years from their July 2018 issuance or upon certain conditions such as retirement). The put and call rights are not legally detachable or separately exercisable and are deemed to be embedded in the related noncontrolling interests. The Company, in purchasing affiliate equity, has the option to settle in cash or shares of common stock and is entitled to the cash flow associated with any purchased equity. In addition, under certain circumstances, the Company may issue or sell equity interests of the affiliate to employees or partners of the affiliate. Minority interests held in an affiliate are generally recorded at estimated redemption value within redeemable noncontrolling interests on the Company's condensed consolidated balance sheets, and changes in estimated redemption value of these interests are recorded in the Company’s condensed consolidated statements of operations within noncontrolling interests.

Redeemable noncontrolling interests for the three months ended March 31, 2019 included the following amounts:



($ in thousands)	Consolidated Investment Products		Affiliate Noncontrolling Interests			Total
Balances at December 31, 2018	$	2,384	$	55,097		$	57,481
Net income (loss) attributable to noncontrolling interests	338		837			1,175
Net subscriptions (redemptions) and other	1,923		(1,576		)	347
Balances at March 31, 2019	$	4,645	$	54,358		$	59,003

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17. Consolidation

The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest, which is typically present when the Company owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the entity.

The Company evaluates any variable interest entities ("VIEs") in which the Company has a variable interest for consolidation. A VIE is an entity in which either: (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support; or (b) where as a group, the holders of the equity investment at risk do not possess: (i) the power through voting or similar rights to direct the activities that most significantly impact the entity’s economic performance, (ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity or (iii) proportionate voting and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights. If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

In the normal course of its business, the Company sponsors various investment products, some of which are consolidated by the Company. Consolidated investment products include both VOEs, made up primarily of open-end funds in which the Company holds a controlling financial interest, and VIEs, which primarily consist of collateralized loan obligations ("CLOs") of which the Company is considered the primary beneficiary. The consolidation and deconsolidation of these investment products have no impact on net income (loss) attributable to stockholders. The Company’s risk with respect to these investment products is limited to its beneficial interests in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products beyond the Company’s investments in, and fees generated from, these products.

The following table presents the balances of the consolidated investment products that, after intercompany eliminations, are reflected in the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018:



	As of
	March 31, 2019									December 31, 2018
				VIEs									VIEs
	VOEs			CLOs			Other			VOEs			CLOs			Other
($ in thousands)
Cash and cash equivalents	$	592		$	54,805		$	326		$	1,029		$	51,363		$	559
Investments	15,495			1,723,411			29,036			12,923			1,709,266			27,379
Other assets	66			30,444			643			228			30,426			403
Notes payable	—			(1,640,360		)	—			—			(1,620,260		)	—
Securities purchased payable and other liabilities	(482		)	(74,070		)	(390		)	(823		)	(69,737		)	(146		)
Noncontrolling interests	(4,645		)	(12,948		)	—			(2,348		)	(13,958		)	(36		)
The Company’s net interests in consolidated investment products	$	11,026		$	81,282		$	29,615		$	11,009		$	87,100		$	28,159

Consolidated CLOs

The majority of the Company's consolidated investment products that are VIEs are CLOs. At March 31, 2019, the Company consolidated five CLOs. The financial information for certain of these CLOs is included in the Company's condensed consolidated financial statements one-month in arrears based upon the availability of financial information. Majority-owned consolidated private funds, whose primary purpose is to invest in CLOs for which the Company serves as the collateral manager, are also included.

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Investments of CLOs

The CLOs' investments of $1.7 billion at March 31, 2019 represented bank loan investments, which comprise the majority of the CLOs' portfolio asset collateral and are senior secured corporate loans across a variety of industries. These bank loan investments mature at various dates between 2019 and 2026 and pay interest at LIBOR plus a spread of up to 8.75%. At March 31, 2019, the fair value of the senior bank loans exceeded the unpaid principal balance by $36.8 million.

Notes Payable of CLOs

The CLOs have issued notes payable with a total value, at par, of $1.8 billion, consisting of senior secured floating rate notes payable with a par value of $1.4 billion, warehouse facility debt with a par value of $156.7 million and subordinated notes with a par value of $179.8 million. These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread. The principal amounts outstanding of the note obligations issued by the CLOs mature on dates ranging from April 2019 to October 2029. The CLOs may elect to reinvest any prepayments received on bank loan investments between October 2019 and October 2021, depending on the CLO. Generally, subsequent prepayments received after the reinvestment period must be used to pay down the note obligations.

The Company’s beneficial interests and maximum exposure to loss related to these consolidated CLOs is limited to: (i) ownership in the subordinated notes and (ii) accrued management fees. The secured notes of the consolidated CLOs have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative prescribed by ASU 2014-13, results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at March 31, 2019, as shown in the table below:



	As of
	March 31, 2019
($ in thousands)
Subordinated notes	$	80,206
Accrued investment management fees	1,076
Total Beneficial Interests	$	81,282

The following table represents income and expenses of the consolidated CLOs included in the Company’s condensed consolidated statements of operations for the period indicated:



	Three Months Ended March 31,
($ in thousands)	2019
Income:
Realized and unrealized gain (loss), net	$	(5,719	)
Interest income	26,882
Total Income	21,163

Expenses:
Other operating expenses	305
Interest expense	19,701
Total Expense	20,006
Noncontrolling interest	(453		)
Net Income (loss) attributable to CIPs	$	704

Table of Contents

As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation:



	Three Months Ended March 31,
($ in thousands)	2019
Distributions received and unrealized gains (losses) on the subordinated notes held by the Company	$	(1,036	)
Investment management fees	1,740
Total Economic Interests	$	704

Fair Value Measurements of Consolidated Investment Products

The assets and liabilities of the consolidated investment products measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 by fair value hierarchy level were as follows:

As of March 31, 2019



	Level 1		Level 2		Level 3		Total
($ in thousands)
Assets
Cash equivalents	$	54,805	$	—	$	—	$	54,805
Debt investments	5,681		1,715,732		31,759		1,753,172
Equity investments	14,770		—		—		14,770
Total Assets Measured at Fair Value	$	75,256	$	1,715,732	$	31,759	$	1,822,747
Liabilities
Notes payable	$	—	$	1,640,360	$	—	$	1,640,360
Short sales	297		—		—		297
Total Liabilities Measured at Fair Value	$	297	$	1,640,360	$	—	$	1,640,657

As of December 31, 2018



	Level 1		Level 2		Level 3		Total
($ in thousands)
Assets
Cash equivalents	$	51,363	$	—	$	—	$	51,363
Debt investments	5,306		1,724,714		6,848		1,736,868
Equity investments	12,700		—		—		12,700
Total Assets Measured at Fair Value	$	69,369	$	1,724,714	$	6,848	$	1,800,931
Liabilities
Notes payable	$	—	$	1,620,260	$	—	$	1,620,260
Short sales	707		—		—		707
Total Liabilities Measured at Fair Value	$	707	$	1,620,260	$	—	$	1,620,967

The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment products measured at fair value:

Cash equivalents represent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.

Debt and equity investments represent the underlying debt, equity and other securities held in consolidated investment products. Equity investments are valued at the official closing price on the exchange on which the securities are traded and are generally categorized within Level 1. Level 2 investments represent most debt securities, including bank loans and certain

Table of Contents

equity securities (including non-U.S. securities), for which closing prices are not readily available or are deemed to not reflect readily available market prices, and are valued using an independent pricing service. Debt investments are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Bank loan investments, which are included as debt investments, are generally priced at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the fair value measurement hierarchy. Level 3 investments include debt securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security.

Notes payable represent notes issued by consolidated investment products that are CLOs and are measured using the measurement alternative in ASU 2014-13. Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of: (a) the fair value of the beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services.

Short sales are transactions in which a security is sold which is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded in the condensed consolidated balance sheets within other liabilities of consolidated investment products and are classified as Level 1 based on the underlying equity security.

For the three months ended March 31, 2019 and 2018, no securities held by consolidated investment products were transferred from Level 2 to Level 1. For the three months ended March 31, 2019 and 2018, no securities held by consolidated investment products were transferred from Level 1 to Level 2.

The securities purchase payable at March 31, 2019 and December 31, 2018 approximated fair value due to the short-term nature of the instruments.

The following table is a reconciliation of assets of consolidated investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value:



	Three Months Ended March 31,
($ in thousands)	2019	2018
Level 3 Investments of CIPs ^(a)

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$117.85	7	$823

10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-05-15	Officers, Shareholder Vote, Exhibits
8-K	2019-04-26	Earnings, Exhibits
8-K	2019-04-10	Regulation FD, Exhibits
8-K	2019-02-01	Earnings, Exhibits
8-K	2018-10-26	Earnings, Exhibits
8-K	2018-07-27	Earnings, Exhibits
8-K	2018-07-02	Off-BS Arrangement
8-K	2018-06-11	Regulation FD, Exhibits
8-K	2018-05-15	Shareholder Vote
8-K	2018-04-27	Earnings, Exhibits
8-K	2018-03-26	Accountant, Exhibits
8-K	2018-02-15	Enter Agreement, Exhibits
8-K	2018-02-14	Amend Bylaw, Exhibits
8-K	2018-02-07	Enter Agreement
8-K	2018-02-02	Earnings, Exhibits

AZUL	Azul	3,230
QURE	Uniqure	2,170
TALO	Talos Energy	1,540
NNBR	NN	382
KNSA	Kiniksa Pharmaceuticals	274
DHX	DHI Group	205
AIRT	Air T	56
LPTX	Leap Therapeutics	39
TXHD	Textmunication Holdings	0
AGUSA	AG Acquisition Group	0

EX-31.1	q119ex-311.htm
EX-31.2	q119ex-312.htm
EX-32.1	q119ex-321.htm