Fair Value | 10. Fair Value Recurring Fair Values Financial assets and financial liabilities carried at fair value on a recurring basis include financial instruments for which the fair value option was elected, but exclude financial assets under the NAV practical expedient. Fair value is categorized into a three tier hierarchy that is prioritized based upon the level of transparency in inputs used in the valuation techniques, as follows. Level 1 —Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 —Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full term of the financial instrument. Level 3 —At least one assumption or input is unobservable and it is significant to the fair value measurement, requiring significant management judgment or estimate. Due to the inherently judgmental nature of Level 3 fair value, changes in assumptions or inputs applied as of reporting date could result in a higher or lower fair value, and realized value may differ from the estimated unrealized fair value. Fair Value Measurement Hierarchy (In thousands) Level 1 Level 2 Level 3 Total September 30, 2024 Assets Investments (Note 4) Marketable equity securities $ 6,422 $ — $ — $ 6,422 CLO subordinated notes — — 47,348 47,348 Equity investments of consolidated funds 84,750 — 63,154 147,904 Fair Value Option: Equity method investment — — 133,127 133,127 Liabilities Other liabilities InfraBridge contingent consideration — — 9,100 9,100 Warrants — — 2,000 2,000 Securities of consolidated funds sold short 47,147 — — 47,147 December 31, 2023 Assets Investments (Note 4) Marketable equity securities $ 17,487 $ — $ — $ 17,487 CLO subordinated notes — — 50,927 50,927 Equity investments of consolidated funds 66,297 — 416,614 482,911 Fair Value Option: Equity method investment — — 6,700 6,700 Liabilities Other liabilities InfraBridge contingent consideration — — 11,338 11,338 Warrants — — 39,200 39,200 Securities of consolidated funds sold short 38,481 — — 38,481 Equity Investments of Consolidated Funds Equity investments of consolidated funds include marketable equity securities held by our liquid strategy funds, valued based upon listed prices in active markets, classified as Level 1; and equity investments in digital infrastructure portfolio companies held by single asset funds. The marketable equity securities comprise publicly listed stocks primarily in the U.S. and to a lesser extent, in Europe, and primarily in the technology, media and telecommunications sectors. The other equity investment, classified as level 3, was valued at September 30, 2024 using a market approach that considers revenue multiples of other comparable companies, and at December 31, 2023, was carried at its recent transacted price. Additionally, at December 31, 2023, fair value of an underlying portfolio company held by two single asset funds, prior to deconsolidation of the funds, was determined using a discounted cash flow model based upon projected net operating income of the investee with exit capitalization rate of 5.5% and discounted at 10.4%, classified as level 3. In April 2024, the two single asset funds were deconsolidated as the Company no longer holds a controlling financial interest in these funds. The Company's co-investment in the portfolio company of the funds was restructured and is no longer held through the funds, but invested in the portfolio company through a parallel vehicle. T he Company's co-investment in the portfolio company is reflected as an equity method investment under the fair value option effective April 2024. The deconsolidation of the funds resulted in a removal of approximately $263.0 million of net assets attributed to the limited partners of the funds that had represented noncontrolling interests in investment entities. Prior to December 31, 2023, equity investments of consolidated funds included equity interests in pooling entities that hold a portfolio of loans, invested alongside other parallel funds within the same credit fund complex. In December 2023, following a reorganization of the Company's ownership interest within the fund structure, the consolidated credit fund was deconsolidated. Fair value of the fund's equity interests in the pooling entities was based upon its share of expected cash flows from the loan assets held by the pooling entities, classified as level 3. In estimating fair value of the underlying loans, the pooling entities considered the prevailing market yields at which a third party might expect to receive on equivalent loans with similar credit risk. Based upon a comparison to market yields, it was determined that the transacted price or par value of the loans held by the pooling entities approximated their fair value. Fair Value Option Equity Method Investments The Company has elected to account for certain equity method investments under the fair value option. Fair value was determined using a discounted cash flow model based upon projected earnings, with discount rates ranging between 11.0% and 21.0% (weighted average discount rate based upon relative fair value of 11.0%) at September 30, 2024, and using a discount rate of 18.3%, and also taking into consideration a comparison to market values of similar public companies at December 31, 2023. The fair value is classified as Level 3 of the fair value hierarchy and changes in fair value are recorded in principal investment income. Loans Receivable There was no outstanding loans receivable balance at September 30, 2024 and December 31, 2023. In March 2023, an unsecured promissory note that had been issued in connection with the sale of the Company's former Wellness Infrastructure business in 2022 was written off in the amount of $133.3 million following the foreclosure of certain assets within the sold Wellness Infrastructure portfolio by its mezzanine lender. Warrants The Company had previously issued five warrants to affiliates of Wafra Inc. (collectively "Wafra"), a private investment firm, in connection with Wafra's investment in the Company's investment management business in 2020. Wafra's investment was subsequently redeemed in 2022, with the warrants remaining outstanding. Each warrant entitled Wafra to purchase up to 1,338,000 shares of the Company's class A common stock at staggered strike prices between $9.72 and $24.00 each, exercisable through July 17, 2026. The terms of the warrant purchase agreement provided for net cash settlement upon exercise of the warrants, at election of either the Company or Wafra, if such exercise would result in Wafra beneficially owning in excess of 9.8% of the issued and outstanding shares of the Company's class A common stock. Inclusion of the cash settlement feature resulted in the warrants being classified as liability. Accordingly, the warrants were carried at fair value with changes in fair value recorded in other gain (loss) on the consolidated statements of operations. In March 2024, three of the warrants were reclassified to equity at their prevailing fair value following a removal of the net cash settlement feature, as the terms of the warrants were amended in connection with a sale of the three warrants by Wafra to a third party. The equity-classified warrants are no longer subject to fair value remeasurement. At September 30, 2024, the liability-classified warrants were carried at fair value, measured using a Black-Scholes option pricing model, applying the following inputs: (a) estimated volatility for DBRG's class A common stock of 31.4% (37.8% at December 31, 2023); (b) closing stock price of DBRG's class A common stock on the last trading day of the quarter; (c) the strike price for each warrant; (d) remaining term to expiration of the warrants; and (e) risk free rate of 3.72% per annum (4.11% per annum at December 31, 2023), derived from the daily U.S. Treasury yield curve rates to correspond to the remaining term to expiration of the warrants. Contingent Consideration In connection with the acquisition of InfraBridge, contingent consideration is payable if prescribed fundraising targets are met. In measuring the contingent consideration at September 30, 2024 and December 31, 2023, the Company applied a probability-weighted approach to the likelihood of meeting various fundraising targets and discounted the estimated future contingent consideration payment at 6.6% and 4.9%, respectively, to derive a present value amount, classified as Level 3 of the fair value hierarchy. Changes in Level 3 Fair Value The following table presents changes in recurring Level 3 fair value assets held for investment. Realized and unrealized gains (losses) are included in other gain (loss). Level 3 Assets Level 3 Liabilities Fair Value Option Equity Investment of Consolidated Funds Warrants InfraBridge Contingent Consideration (In thousands) Loans Receivable Equity Method Investments Fair value at December 31, 2022 $ 133,307 $ — $ 46,770 $ (17,700) $ — Contributions — — 58,952 — — Consolidation of sponsored funds — — — — — Business combination — — — — (10,874) Change in consolidated fund's share of equity investment (1) — — 1,842 — — Paydown of underlying loans held by equity investment of consolidated fund — — (2,344) — — Change in accrued interest and capitalization of paid-in-kind interest — — — — — Unrealized gain (loss) in earnings, net (133,307) — 1,812 (23,700) (329) Fair value at September 30, 2023 $ — $ — $ 107,032 $ (41,400) $ (11,203) Net unrealized gain (loss) in earnings on instruments held at September 30, 2023 $ (133,307) $ — $ 1,812 $ (23,700) $ (329) Fair value at December 31, 2023 $ — $ 6,700 $ 416,614 $ (39,200) $ (11,338) Election of fair value option — 128,742 — — — Unrealized gain (loss) in earnings, net — (2,315) 40,154 4,200 2,238 Reclassification to equity — — — 33,000 — Deconsolidation of sponsored funds — — (393,614) — — Fair value at September 30, 2024 $ — $ 133,127 $ 63,154 $ (2,000) $ (9,100) Net unrealized gain (loss) in earnings on instruments held at September 30, 2024 $ — $ (2,315) $ 40,154 $ 7,100 $ 2,238 __________ (1) Represents reallocation of investment value when relative ownership of the pooling entity across its fund owners change following additional capital contributions prior to final close of the fund. Nonrecurring Fair Values The Company measures fair value of certain assets on a nonrecurring basis: (i) on the acquisition date for business combinations; (ii) when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable; and (iii) upon deconsolidation of a subsidiary for any retained interest. Adjustments to fair value generally result from application of the lower of amortized cost or fair value for assets held for disposition or otherwise, a write-down of asset values due to impairment. At September 30, 2024, certain warehoused investments, previously carried at cost under the measurement alternative, were determined to be impaired and written down to an aggregate fair value of $15.0 million, classified as level 3 of the fair value hierarchy. Fair value of these investments were estimated based upon pricing from a recent funding or applying a probability-weighted approach to different recovery outcomes. Fair Value of Financial Instruments Reported at Cost Fair value of financial instruments reported at amortized cost are presented below. Fair Value Measurements Carrying Value (In thousands) Level 1 Level 2 Level 3 Total September 30, 2024 Liabilities Secured fund fee revenue notes $ — $ 278,605 $ — $ 278,605 $ 295,838 December 31, 2023 Liabilities Secured fund fee revenue notes $ — $ 250,547 $ — $ 250,547 $ 294,267 Exchangeable senior notes 152,296 — 152,296 77,516 Debt —Senior notes and secured fund fee revenue notes were valued based on indicative quotes. Other —The carrying values of cash and cash equivalents, accounts receivable, due from and to affiliates, interest payable and accounts payable generally approximate fair value due to their short term nature, and credit risk, if any, is negligible. |