Consolidated Investment Products | 9 Months Ended |
Sep. 30, 2013 |
Consolidated Investment Products [Abstract] | ' |
Consolidated Investment Products | ' |
CONSOLIDATED INVESTMENT PRODUCTS |
The following table presents the balances related to CIP that were included on the Condensed Consolidated Balance Sheets as well as Invesco's net interest in the CIP for each period presented: |
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| As of | | | | | | | | | | |
$ in millions | September 30, 2013 | | December 31, 2012 | | | | | | | | | | |
Cash and cash equivalents of CIP | 445 | | | 287.8 | | | | | | | | | | | |
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Investments of CIP | 4,514.60 | | | 4,550.60 | | | | | | | | | | | |
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Accounts receivable and other assets of CIP | 62.2 | | | 84.1 | | | | | | | | | | | |
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Less: Debt of CIP | (4,003.1 | ) | | (3,899.4 | ) | | | | | | | | | | |
Less: Other liabilities of CIP | (251.0 | ) | | (104.3 | ) | | | | | | | | | | |
Less: Retained earnings appropriated for investors in CIP | (106.3 | ) | | (128.8 | ) | | | | | | | | | | |
Less: Equity attributable to nonredeemable noncontrolling interests | (578.9 | ) | | (727.8 | ) | | | | | | | | | | |
Invesco's net interests in CIP | 82.5 | | | 62.2 | | | | | | | | | | | |
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Invesco's net interests as a percentage of investments of CIP | 1.83 | % | | 1.37 | % | | | | | | | | | | |
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The company’s risk with respect to each investment in CIP is limited to its equity ownership and any uncollected management fees. Therefore, the gains or losses of CIP have not had a significant impact on the company’s net income attributable to common shareholders, liquidity or capital resources. The company has no right to the benefits from, nor does it bear the risks associated with, these investments, beyond the company’s minimal direct investments in, and management fees generated from, the investment products. If the company were to liquidate, these investments would not be available to the general creditors of the company, and as a result, the company does not consider investments held by CIP to be company assets. Additionally, the collateral assets of consolidated collateralized loan obligations (CLOs) are held solely to satisfy the obligations of the CLOs, and the investors in the consolidated CLOs have no recourse to the general credit of the company for the notes issued by the CLOs. |
Collateralized Loan Obligations |
A significant portion of CIP are CLOs. CLOs are investment vehicles created for the sole purpose of issuing collateralized loan instruments that offer investors the opportunity for returns that vary with the risk level of their investment. The notes issued by the CLOs are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. For managing the collateral for the CLO entities, the company earns investment management fees, including in some cases subordinated management fees, as well as contingent incentive fees. The company has invested in certain of the entities, generally taking a portion of the unrated, junior subordinated position. The company’s investments in CLOs are generally subordinated to other interests in the entities and entitle the company and other subordinated tranche investors to receive the residual cash flows, if any, from the entities. The company’s subordinated interest can take the form of (1) subordinated notes, (2) income notes or (3) preference/preferred shares. The company has determined that, although the junior tranches have certain characteristics of equity, they should be accounted for and disclosed as debt on the company’s Condensed Consolidated Balance Sheets, as the subordinated and income notes have a stated maturity indicating a date for which they are mandatorily redeemable. The preference shares are also classified as debt, as redemption is required only upon liquidation or termination of the CLO and not of the company. |
The company determined that it was the primary beneficiary of certain CLOs, as it has the power to direct the activities of the CLOs that most significantly impact the CLOs’ economic performance, and the obligation to absorb losses/right to receive benefits from the CLOs that could potentially be significant to the CLOs. The primary beneficiary assessment includes an analysis of the rights of the company in its capacity as investment manager. In some CLOs, the company’s role as investment manager provides that the company contractually has the power, as defined in ASC Topic 810, to direct the activities of the CLOs that most significantly impact the CLOs’ economic performance, such as managing the collateral portfolio and its credit risk. In other CLOs, the company determined that it does not have this power in its role as investment manager due to certain rights held by other investors in the products or restrictions that limit the company's ability to manage the collateral portfolio and the CLO's credit risk. Additionally, the primary beneficiary assessment includes an analysis of the company’s rights to receive benefits and obligations to absorb losses associated with its first loss position and management/incentive fees. As part of this analysis, the company uses a quantitative model to corroborate its qualitative assessments. The quantitative model includes an analysis of the expected performance of the CLOs and a comparison of the company’s absorption of this performance relative to the other investors in the CLOs. The company has determined that it could receive significant benefits and/or absorb significant losses from certain CLOs in which it holds a first loss position and has the right to significant fees. It was determined that the company’s benefits and losses from certain other CLOs could not be significant, particularly in situations where the company does not hold a first loss position and where the fee interests are based upon a fixed percentage of collateral asset value. |
Private equity, real estate and fund-of-funds (partnerships) |
For investment products that are structured as partnerships and are determined to be VIEs, including private equity funds, real estate funds and fund-of-funds products, the company evaluates the structure of the partnership to determine if it is the primary beneficiary of the investment product. This evaluation includes assessing the rights of the limited partners to transfer their economic interests in the investment product. If the limited partners lack rights to manage their economic interests, they are considered to be de facto agents of the company, resulting in the company determining that it is the primary beneficiary of the investment product. The company generally takes less than a 1% investment in these entities as the general partner. Non-VIE general partnership investments are deemed to be controlled by the company and are consolidated under a voting interest entity (VOE) model, unless the limited partners have the substantive ability to remove the general partner without cause based upon a simple majority vote or can otherwise dissolve the partnership, or unless the limited partners have substantive participating rights over decision making. Interests in unconsolidated private equity funds, real estate funds and fund-of-funds products are classified as equity method investments in the company’s Condensed Consolidated Balance Sheets (see Note 3, "Investments.") |
Other investment products |
As discussed in Note 11, “Commitments and Contingencies,” at September 30, 2013, contingent support agreements existed for two of the company's investment trusts to enable them to sustain a stable pricing structure, creating variable interests in these VIEs. The company earns management fees from the trusts and has a nominal investment in one of these trusts. The company was not deemed to be the primary beneficiary of these trusts after considering any explicit and implicit variable interests in relation to the total expected gains and losses of the trusts. |
At September 30, 2013, the company’s maximum risk of loss in significant VIEs in which the company is not the primary beneficiary is presented in the table below. |
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$ in millions | Footnote Reference | | Carrying Value | | Company's Maximum Risk of Loss | | | | | | | |
CLO investments | 3 | | | 2.2 | | | 2.2 | | | | | | | | |
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Partnership and trust investments | — | | | 29.2 | | | 29.2 | | | | | | | | |
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Investments in Invesco Mortgage Capital Inc. | — | | | 27.7 | | | 27.7 | | | | | | | | |
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Support agreements* | 11 | | | — | | | 21 | | | | | | | | |
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Total | | | | | 80.1 | | | | | | | | |
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* | As of September 30, 2013, the committed support under these agreements was $21.0 million with an internal approval mechanism to increase the maximum possible support to $66.0 million at the option of the company. | | | | | | | | | | | | | | |
During the nine months ended September 30, 2013, the company invested in and consolidated four new VIEs and one VOE. The table below illustrates the summary balance sheet amounts related to these products at the date of consolidation into the company. The balances below are reflective of the balances existing at the consolidation date after the initial funding of the investments by the company and unrelated third-party investors. The current period activity for the consolidated funds, including the initial funding and subsequent investment of initial cash balances into underlying investments of CIP, is reflected in the company’s Condensed Consolidated Financial Statements. |
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Balance Sheet |
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$ in millions | | | | | | | | | | | | | | |
Cash and cash equivalents of CIP | 573.4 | | | | | | | | | | | | | | |
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Accounts receivable and other assets of CIP | 15.4 | | | | | | | | | | | | | | |
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Investments of CIP | 738.3 | | | | | | | | | | | | | | |
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Total assets | 1,327.10 | | | | | | | | | | | | | | |
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Debt of CIP | 856.5 | | | | | | | | | | | | | | |
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Other liabilities of CIP | 462 | | | | | | | | | | | | | | |
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Total liabilities | 1,318.50 | | | | | | | | | | | | | | |
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Equity | 8.6 | | | | | | | | | | | | | | |
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Total liabilities and equity | 1,327.10 | | | | | | | | | | | | | | |
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During the three months ended September 30, 2013, the company liquidated and deconsolidated a CLO (VIE) and a CLO warehouse (VOE). During the nine months ended September 30, 2013, the company determined it was no longer the primary beneficiary of a private equity fund (VOE) due to a change in the ownership of the parent of the general partner of the fund. The amounts deconsolidated from the Condensed Consolidated Balance Sheet are illustrated in the table below. There was no net impact to the Condensed Consolidated Statement of Income for the nine months ended September 30, 2013 from the deconsolidation of these investment products. |
Balance Sheet |
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$ in millions | | | | | | | | | | | | | | |
Cash and cash equivalents of CIP | 7.1 | | | | | | | | | | | | | | |
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Accounts receivable and other assets of CIP | 15.2 | | | | | | | | | | | | | | |
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Investments of CIP | 76.1 | | | | | | | | | | | | | | |
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Total assets | 98.4 | | | | | | | | | | | | | | |
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Debt | 25 | | | | | | | | | | | | | | |
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Other liabilities of CIP | 36 | | | | | | | | | | | | | | |
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Total liabilities | 61 | | | | | | | | | | | | | | |
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Equity | 37.4 | | | | | | | | | | | | | | |
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Total liabilities and equity | 98.4 | | | | | | | | | | | | | | |
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The following tables reflect the impact of consolidation of CIP into the Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, and the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012. |
Summary of Balance Sheet Impact of CIP |
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$ in millions | | CLOs-VIEs | | Other VIEs | | VOEs | | Adjustments(1) | | Impact of CIP |
As of September 30, 2013 | | | | | | | | | | |
Cash and cash equivalents of CIP | | 393.6 | | | 1.7 | | | 49.7 | | | — | | | 445 | |
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Accounts receivable and other assets of CIP | | 59.9 | | | 0.3 | | | 2 | | | — | | | 62.2 | |
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Investments of CIP | | 4,017.10 | | | 39.8 | | | 511.3 | | | (53.6 | ) | | 4,514.60 | |
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Adjustments (1) | | — | | | — | | | — | | | (82.5 | ) | | (82.5 | ) |
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Total assets | | 4,470.60 | | | 41.8 | | | 563 | | | (136.1 | ) | | 4,939.30 | |
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Debt of CIP | | 4,111.80 | | | — | | | — | | | (108.7 | ) | | 4,003.10 | |
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Other liabilities of CIP | | 252.4 | | | 0.6 | | | 2.8 | | | (4.7 | ) | | 251.1 | |
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Total liabilities | | 4,364.20 | | | 0.6 | | | 2.8 | | | (113.4 | ) | | 4,254.20 | |
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Retained earnings appropriated for investors in CIP | | 106.7 | | | — | | | (0.4 | ) | | — | | | 106.3 | |
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Other equity attributable to common shareholders | | (0.3 | ) | | (0.2 | ) | | 22.3 | | | (22.7 | ) | | (0.9 | ) |
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Equity attributable to nonredeemable noncontrolling interests in consolidated entities | | — | | | 41.4 | | | 538.3 | | | — | | | 579.7 | |
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Total liabilities and equity | | 4,470.60 | | | 41.8 | | | 563 | | | (136.1 | ) | | 4,939.30 | |
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$ in millions | | CLOs-VIEs | | Other VIEs | | VOEs | | Adjustments(1) | | Impact of CIP |
As of December 31, 2012 | | | | | | | | | | |
Cash and cash equivalents of CIP | | 211.8 | | | 0.2 | | | 75.8 | | | — | | | 287.8 | |
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Accounts receivable and other assets of CIP | | 54.6 | | | 0.2 | | | 29.3 | | | — | | | 84.1 | |
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Investments of CIP | | 3,948.00 | | | 35.9 | | | 607.9 | | | (41.2 | ) | | 4,550.60 | |
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Adjustments (1) | | — | | | — | | | 15.8 | | | (86.9 | ) | | (71.1 | ) |
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Total assets | | 4,214.40 | | | 36.3 | | | 728.8 | | | (128.1 | ) | | 4,851.40 | |
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Debt of CIP | | 3,980.70 | | | — | | | — | | | (81.3 | ) | | 3,899.40 | |
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Other liabilities of CIP | | 105.3 | | | 0.5 | | | 2.9 | | | (4.4 | ) | | 104.3 | |
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Adjustments (1) | | — | | | — | | | — | | | (8.9 | ) | | (8.9 | ) |
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Total liabilities | | 4,086.00 | | | 0.5 | | | 2.9 | | | (94.6 | ) | | 3,994.80 | |
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Retained earnings appropriated for investors in CIP | | 128.8 | | | — | | | — | | | — | | | 128.8 | |
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Other equity attributable to common shareholders | | (0.4 | ) | | (0.1 | ) | | 34 | | | (33.5 | ) | | — | |
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Equity attributable to nonredeemable noncontrolling interests in consolidated entities | | — | | | 35.9 | | | 691.9 | | | — | | | 727.8 | |
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Total liabilities and equity | | 4,214.40 | | | 36.3 | | | 728.8 | | | (128.1 | ) | | 4,851.40 | |
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Summary of Income Statement Impact of CIP |
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$ in millions | | CLOs-VIEs | | Other VIEs | | VOEs | | Adjustments(1) | | Impact of CIP |
Three months ended September 30, 2013 | | | | | | | | | | |
Total operating revenues | | — | | | — | | | — | | | (12.0 | ) | | (12.0 | ) |
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Total operating expenses | | 23.4 | | | 0.3 | | | 1.3 | | | (12.0 | ) | | 13 | |
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Operating income | | (23.4 | ) | | (0.3 | ) | | (1.3 | ) | | — | | | (25.0 | ) |
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Equity in earnings of unconsolidated affiliates | | — | | | — | | | — | | | (2.2 | ) | | (2.2 | ) |
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Interest and dividend income | | 48.8 | | | — | | | — | | | (3.3 | ) | | 45.5 | |
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Other investment income/(losses) | | 23.4 | | | 1.1 | | | 11.3 | | | (9.4 | ) | | 26.4 | |
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Interest expense | | (36.8 | ) | | — | | | — | | | 3.3 | | | (33.5 | ) |
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Income from continuing operations before income taxes | | 12 | | | 0.8 | | | 10 | | | (11.6 | ) | | 11.2 | |
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Income tax provision | | — | | | — | | | — | | | — | | | — | |
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Income from continuing operations, net of taxes | | 12 | | | 0.8 | | | 10 | | | (11.6 | ) | | 11.2 | |
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Income/(loss) from discontinued operations, net of taxes | | — | | | — | | | — | | | — | | | — | |
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Net income | | 12 | | | 0.8 | | | 10 | | | (11.6 | ) | | 11.2 | |
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Net (income)/loss attributable to noncontrolling interests in consolidated entities | | (11.9 | ) | | (0.8 | ) | | (7.9 | ) | | — | | | (20.6 | ) |
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Net income attributable to common shareholders | | 0.1 | | | — | | | 2.1 | | | (11.6 | ) | | (9.4 | ) |
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$ in millions | | CLOs-VIEs | | Other VIEs | | VOEs | | Adjustments(1) | | Impact of CIP |
Three months ended September 30, 2012 | | | | | | | | | | |
Total operating revenues | | — | | | — | | | — | | | (11.5 | ) | | (11.5 | ) |
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Total operating expenses | | 9.9 | | | 0.2 | | | 3.7 | | | (11.5 | ) | | 2.3 | |
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Operating income | | (9.9 | ) | | (0.2 | ) | | (3.7 | ) | | — | | | (13.8 | ) |
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Equity in earnings of unconsolidated affiliates | | — | | | — | | | — | | | (0.5 | ) | | (0.5 | ) |
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Interest and dividend income | | 68.7 | | | — | | | — | | | (3.4 | ) | | 65.3 | |
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Other investment income/(losses) | | (38.5 | ) | | 1.6 | | | 14.2 | | | (11.2 | ) | | (33.9 | ) |
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Interest expense | | (45.3 | ) | | — | | | — | | | 3.4 | | | (41.9 | ) |
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Income from continuing operations before income taxes | | (25.0 | ) | | 1.4 | | | 10.5 | | | (11.7 | ) | | (24.8 | ) |
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Income tax provision | | — | | | — | | | — | | | — | | | — | |
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Income from continuing operations, net of taxes | | (25.0 | ) | | 1.4 | | | 10.5 | | | (11.7 | ) | | (24.8 | ) |
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Income from discontinued operations, net of taxes | | — | | | — | | | — | | | — | | | — | |
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Net income | | (25.0 | ) | | 1.4 | | | 10.5 | | | (11.7 | ) | | (24.8 | ) |
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Net (income)/loss attributable to noncontrolling interests in consolidated entities | | 25 | | | (1.4 | ) | | (9.9 | ) | | — | | | 13.7 | |
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Net income attributable to common shareholders | | — | | | — | | | 0.6 | | | (11.7 | ) | | (11.1 | ) |
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Summary of Income Statement Impact of CIP (continued) |
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$ in millions | | CLOs-VIEs | | Other VIEs | | VOEs | | Adjustments(1) | | Impact of CIP |
Nine months ended September 30, 2013 | | | | | | | | | | |
Total operating revenues | | — | | | — | | | 0.4 | | | (30.2 | ) | | (29.8 | ) |
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Total operating expenses | | 48.9 | | | 0.8 | | | 5.3 | | | (30.2 | ) | | 24.8 | |
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Operating income | | (48.9 | ) | | (0.8 | ) | | (4.9 | ) | | — | | | (54.6 | ) |
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Equity in earnings of unconsolidated affiliates | | — | | | — | | | — | | | (3.4 | ) | | (3.4 | ) |
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Interest and dividend income | | 155.5 | | | — | | | — | | | (12.7 | ) | | 142.8 | |
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Other investment income/(losses) | | (15.8 | ) | | 1.3 | | | 28.6 | | | (10.4 | ) | | 3.7 | |
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Interest expense | | (109.5 | ) | | — | | | — | | | 12.7 | | | (96.8 | ) |
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Income from continuing operations before income taxes | | (18.7 | ) | | 0.5 | | | 23.7 | | | (13.8 | ) | | (8.3 | ) |
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Income tax provision | | — | | | — | | | — | | | — | | | — | |
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Income from continuing operations, net of taxes | | (18.7 | ) | | 0.5 | | | 23.7 | | | (13.8 | ) | | (8.3 | ) |
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Income from discontinued operations, net of taxes | | — | | | — | | | — | | | — | | | — | |
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Net income | | (18.7 | ) | | 0.5 | | | 23.7 | | | (13.8 | ) | | (8.3 | ) |
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Net (income)/loss attributable to noncontrolling interests in consolidated entities | | 18.9 | | | (0.5 | ) | | (19.9 | ) | | — | | | (1.5 | ) |
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Net income attributable to common shareholders | | 0.2 | | | — | | | 3.8 | | | (13.8 | ) | | (9.8 | ) |
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$ in millions | | CLOs-VIEs | | Other VIEs | | VOEs | | Adjustments(1) | | Impact of CIP |
Nine months ended September 30, 2012 | | | | | | | | | | |
Total operating revenues | | — | | | — | | | — | | | (32.4 | ) | | (32.4 | ) |
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Total operating expenses | | 34 | | | 0.7 | | | 20.8 | | | (32.4 | ) | | 23.1 | |
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Operating income | | (34.0 | ) | | (0.7 | ) | | (20.8 | ) | | — | | | (55.5 | ) |
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Equity in earnings of unconsolidated affiliates | | — | | | — | | | — | | | 0.1 | | | 0.1 | |
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Interest and dividend income | | 206.4 | | | — | | | — | | | (10.3 | ) | | 196.1 | |
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Other investment income/(losses) | | (79.1 | ) | | 2.5 | | | 11.2 | | | (13.1 | ) | | (78.5 | ) |
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Interest expense | | (144.7 | ) | | — | | | — | | | 10.3 | | | (134.4 | ) |
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Income from continuing operations before income taxes | | (51.4 | ) | | 1.8 | | | (9.6 | ) | | (13.0 | ) | | (72.2 | ) |
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Income tax provision | | — | | | — | | | — | | | — | | | — | |
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Income from continuing operations, net of taxes | | (51.4 | ) | | 1.8 | | | (9.6 | ) | | (13.0 | ) | | (72.2 | ) |
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Income from discontinued operations, net of taxes | | — | | | — | | | — | | | — | | | — | |
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Net income | | (51.4 | ) | | 1.8 | | | (9.6 | ) | | (13.0 | ) | | (72.2 | ) |
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Net (income)/loss attributable to noncontrolling interests in consolidated entities | | 51.4 | | | (1.8 | ) | | 9.5 | | | — | | | 59.1 | |
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Net income attributable to common shareholders | | — | | | — | | | (0.1 | ) | | (13.0 | ) | | (13.1 | ) |
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-1 | Adjustments include the elimination of intercompany transactions between the company and its CIP, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company. These also include the reclassification of the company's gain or loss (representing the changes in the market value of the company's holding in the consolidated CLOs) from other comprehensive income into other gains/losses upon consolidation. | | | | | | | | | | | | | | |
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The carrying value of investments held and notes issued by CIP is also their fair value. The following table presents the fair value hierarchy levels of investments held and notes issued by CIP, which are measured at fair value as of September 30, 2013 and December 31, 2012: |
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| As of September 30, 2013 | | | | |
$ in millions | Fair Value Measurements | | Quoted Prices in | | Significant Other | | Significant | | | | |
Active Markets for | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | | | | |
Identical Assets (Level 1) | | | | | | |
Assets: | | | | | | | | | | | |
CLO collateral assets: | | | | | | | | | | | |
Bank loans | 3,795.10 | | | — | | | 3,795.10 | | | — | | | | | |
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Bonds | 151 | | | — | | | 151 | | | — | | | | | |
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Equity securities | 17.5 | | | — | | | 17.5 | | | — | | | | | |
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Private equity fund assets: | | | | | | | | | | | |
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Equity securities | 100.8 | | | 37.4 | | | 4.8 | | | 58.6 | | | | | |
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Investments in other private equity funds | 448.2 | | | — | | | — | | | 448.2 | | | | | |
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Debt securities issued by the U.S. Treasury | 2 | | | 2 | | | — | | | — | | | | | |
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Total assets at fair value | 4,514.60 | | | 39.4 | | | 3,968.40 | | | 506.8 | | | | | |
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Liabilities: | | | | | | | | | | | |
CLO notes | (4,003.1 | ) | | — | | | — | | | (4,003.1 | ) | | | | |
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Total liabilities at fair value | (4,003.1 | ) | | — | | | — | | | (4,003.1 | ) | | | | |
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| As of December 31, 2012 | | | | |
$ in millions | Fair Value Measurements | | Quoted Prices in | | Significant Other | | Significant | | | | |
Active Markets for | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | | | | |
Identical Assets (Level 1) | | | | | | |
Assets: | | | | | | | | | | | |
CLO collateral assets: | | | | | | | | | | | |
Bank loans | 3,709.30 | | | — | | | 3,709.30 | | | — | | | | | |
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Bonds | 185.4 | | | — | | | 185.4 | | | — | | | | | |
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Equity securities | 12.1 | | | — | | | 12.1 | | | — | | | | | |
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Private equity fund assets: | | | | | | | | | | | |
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Equity securities | 125 | | | 21 | | | 9.9 | | | 94.1 | | | | | |
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Investments in other private equity funds | 503.5 | | | — | | | — | | | 503.5 | | | | | |
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Debt securities issued by the U.S. Treasury | 10 | | | 10 | | | — | | | — | | | | | |
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Real estate investments | 5.3 | | | — | | | — | | | 5.3 | | | | | |
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Total assets at fair value | 4,550.60 | | | 31 | | | 3,916.70 | | | 602.9 | | | | | |
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Liabilities: | | | | | | | | | | | |
CLO notes | (3,899.4 | ) | | — | | | — | | | (3,899.4 | ) | | | | |
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Total liabilities at fair value | (3,899.4 | ) | | — | | | — | | | (3,899.4 | ) | | | | |
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The following table shows a reconciliation of the beginning and ending fair value measurements for level 3 assets and liabilities using significant unobservable inputs: |
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| Three months ended September 30, 2013 | | Nine months ended September 30, 2013 | | | | |
$ in millions | Level 3 Assets | | Level 3 Liabilities | | Level 3 Assets | | Level 3 Liabilities | | | | |
Beginning balance | 508.3 | | | (4,044.3 | ) | | 602.9 | | | (3,899.4 | ) | | | | |
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Purchases | 8.3 | | | — | | | 21.6 | | | — | | | | | |
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Sales | (24.5 | ) | | — | | | (115.7 | ) | | — | | | | | |
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Issuances | — | | | (408.1 | ) | | 3.8 | | | (813.1 | ) | | | | |
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Settlements | — | | | 410.9 | | | — | | | 768.2 | | | | | |
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Deconsolidation of CIP | — | | | — | | | (18.4 | ) | | — | | | | | |
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Gains and losses included in the Condensed Consolidated Statements of Income* | 14.7 | | | 43.7 | | | 19.2 | | | (54.8 | ) | | | | |
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Transfers to Level 2** | — | | | — | | | (6.1 | ) | | — | | | | | |
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Foreign exchange | — | | | (5.3 | ) | | (0.5 | ) | | (4.0 | ) | | | | |
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Ending balance | 506.8 | | | (4,003.1 | ) | | 506.8 | | | (4,003.1 | ) | | | | |
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| Three months ended September 30, 2012 | | Nine months ended September 30, 2012 | | | | |
$ in millions | Level 3 Assets | | Level 3 Liabilities | | Level 3 Assets | | Level 3 Liabilities | | | | |
Beginning balance | 854.6 | | | (5,069.7 | ) | | 929.1 | | | (5,512.9 | ) | | | | |
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Purchases | 6.2 | | | — | | | 6.7 | | | — | | | | | |
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Sales | (92.3 | ) | | — | | | (148.0 | ) | | — | | | | | |
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Issuances | — | | | (433.1 | ) | | — | | | (758.4 | ) | | | | |
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Settlements | — | | | 354.7 | | | — | | | 550.5 | | | | | |
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Deconsolidation of CIP | — | | | 1,550.30 | | | — | | | 2,123.70 | | | | | |
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Gains and losses included in the Condensed Consolidated Statements of Income* | 23.3 | | | (121.2 | ) | | 14.5 | | | (279.9 | ) | | | | |
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Foreign exchange | 4.8 | | | (136.0 | ) | | (5.7 | ) | | 22 | | | | | |
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Ending balance | 796.6 | | | (3,855.0 | ) | | 796.6 | | | (3,855.0 | ) | | | | |
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* | Included in gains and losses of CIP in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2013 are $6.0 million in net unrealized gains and $8.0 million in net unrealized losses attributable to investments still held at September 30, 2013 by CIP (three and nine months ended September 30, 2012: $42.6 million in net unrealized gains and $39.5 million in net unrealized losses attributable to investments still held at September 30, 2012). | | | | | | | | | | | | | | |
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** | During nine months ended September 30, 2013, $6.1 million of equity securities held by consolidated private equity funds were transferred from Level 3 to Level 2 due to the public offering of securities in the underlying companies with legal lock-up restrictions in place. For transfers to public offerings, the company's policy is to use the fair value of the transferred security on the offering date. | | | | | | | | | | | | | | |
Fair value of consolidated CLOs |
The company elected the fair value option for collateral assets held and notes issued by its consolidated CLOs to eliminate the measurement and recognition inconsistency that would otherwise arise from measuring assets and liabilities and recognizing the related gains and losses on different accounting bases. |
The collateral assets held by consolidated CLOs are primarily invested in senior secured bank loans, bonds, and equity securities. Bank loan investments, which comprise the majority of consolidated CLO portfolio collateral, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. Bank loan investments mature at various dates between 2013 and 2023, pay interest at Libor or Euribor plus a spread of up to 14.0%, and typically range in S&P credit rating categories from BBB down to unrated. Interest income on bank loans and bonds is recognized based on the unpaid principal balance and stated interest rate of these investments on an accrual basis. At September 30, 2013 the unpaid principal balance exceeded the fair value of the senior secured bank loans and bonds by approximately $58.4 million (December 31, 2012: $121.6 million excess). Approximately 1.1% of the collateral assets are in default as of September 30, 2013 (December 31, 2012: less than 1.8% of the collateral assets were in default). CLO investments are valued based on price quotations provided by independent third-party pricing sources. These third party sources aggregate indicative price quotations daily to provide the company with a price for the CLO investments. The company has developed internal controls to review the reasonableness and completeness of theses price quotations on a daily basis. If necessary, price quotations are challenged through the third-party pricing source challenge process. For the nine months ended September 30, 2013, there were no price quotation challenges by the company. |
In addition, the company's valuation committee conducts an annual due diligence review of all independent third-party pricing sources to review the provider's valuation methodology, as well as ensure internal controls exist over the valuation of the CLO investments. In the event that the third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment, interest in similar investments, the market environment, investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including, for senior secured corporate loans, the cost, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the senior secured corporate loan and any related agreements, and the position of the senior secured corporate loan in the borrower’s debt structure; iii) the nature, adequacy and value of the senior secured corporate loan’s collateral, including the CLO’s rights, remedies and interests with respect to the collateral; iv) for senior secured corporate loans, the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi) general economic and market conditions affecting the fair value of the senior secured corporate loan. |
Notes issued by consolidated CLOs mature at various dates between 2015 and 2025 and have a weighted average maturity of 9.0 years. The notes are issued in various tranches with different risk profiles. The interest rates are generally variable rates based on Libor or Euribor plus a pre-defined spread, which varies from 0.21% for the more senior tranches to 7.10% for the more subordinated tranches. Interest expense on notes issued by consolidated CLOs is accrued based on the stated rate and outstanding par of the issued notes. At September 30, 2013, the outstanding balance on the notes issued by consolidated CLOs exceeds their fair value by approximately $0.2 billion (December 31, 2012: $0.3 billion excess). The investors in this debt are not affiliated with the company and have no recourse to the general credit of the company. Notes issued by CLOs are recorded at fair value using an income approach. Fair value is determined using current information, notably market yields and projected cash flows of collateral assets, which are impacted by forecasted default and recovery rates. Market yields, default rates and recovery rates used in the company’s estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the notes may be adversely affected. The current liquidity constraints within the market for CLO products require the use of certain unobservable inputs for CLO valuation. Once the undiscounted cash flows of the collateral assets have been determined, the company applies appropriate discount rates that a market participant would use to determine the discounted cash flow valuation of the notes. |
Certain CLOs with Euro-denominated debt that were deconsolidated as of August 30, 2012 entered into swap agreements with various counterparties to hedge economically interest rate and foreign exchange risk related to CLO collateral assets with non-Euro interest rates and currencies. These swap agreements were not designated as qualifying as hedging instruments. These derivative contracts were valued under an income approach using forecasted interest rates and were classified within level 2 of the valuation hierarchy. As of September 30, 2013, there were no open swap agreements (December 31, 2012; there were no open swap agreements). For the three and nine months ended September 30, 2012, $3.8 million and $10.5 million, respectively was recorded as losses in gains/ (losses) of CIP related to swap agreements. |
Fair value of consolidated private equity funds |
Consolidated private equity funds are generally structured as partnerships. Generally, the investment strategy of underlying holdings in these partnerships is to seek capital appreciation through direct investments in public or private companies with compelling business models or ideas or through investments in partnerships that also invest in similar private or public companies. Various strategies may be used. Companies targeted could be distressed organizations, targets of leveraged buyouts or fledgling companies in need of venture capital. Investees of these CIP may not redeem their investment until the partnership liquidates. Generally, the partnerships have a life that range from seven to twelve years unless dissolved earlier. The general partner may extend the partnership term up to a specified period of time as stated in the Partnership Agreement. Some partnerships allow the limited partners to cause an earlier termination upon the occurrence of certain events as specified in the Partnership Agreement. |
For private equity partnerships, fair value is determined by reviewing each investment for the sale of additional securities of an issuer to sophisticated investors or for investee financial conditions and fundamentals. Publicly traded portfolio investments are carried at market value as determined by their most recent quoted sale, or if there is no recent sale, at their most recent bid price. For these investments held by CIP, level 1 classification indicates that fair values have been determined using unadjusted quoted prices in active markets for identical assets that the partnership has the ability to access. Level 2 classification may indicate that fair values have been determined using quoted prices in active markets but give effect to certain lock-up restrictions surrounding the holding period of the underlying investments. |
The fair value of level 3 investments held by CIP are derived from inputs that are unobservable and which reflect the limited partnerships’ own determinations about the assumptions that market participants would use in pricing the investments, including assumptions about risk. These inputs are developed based on the partnership’s own data, which is adjusted if information indicates that market participants would use different assumptions. The partnerships which invest directly into private equity portfolio companies (direct private equity funds) take into account various market conditions, subsequent rounds of financing, liquidity, financial condition, purchase multiples paid in other comparable third-party transactions, the price of securities of other companies comparable to the portfolio company, and operating results and other financial data of the portfolio company, as applicable. |
The partnerships which invest into other private equity funds (funds-of-funds) take into account information received from those underlying funds, including their reported net asset values and evidence as to their fair value approach, including consistency of their fair value application. These investments do not trade in active markets and represent illiquid long-term investments that generally require future capital commitments. The partnerships’ reported share of the underlying net asset values of the underlying funds is used as a practical expedient, as allowed by ASC Topic 820, in arriving at fair value. |
Unforeseen events might occur that would subsequently change the fair values of these investments, but such changes would |
be inconsequential to the company due to its minimal investments in these products (and the large offsetting noncontrolling interests resulting from their consolidation). Any gains or losses resulting from valuation changes in these investments are substantially offset by resulting changes in gains and losses attributable to noncontrolling interests in consolidated entities and therefore do not have a material effect on the financial condition, operating results (including earnings per share), liquidity or capital resources of the company's common shareholders. |
Fair value of consolidated real estate funds |
As of the date of this Report, the company's consolidated real estate funds are in liquidation; the funds had disposed of their investments in the first half of 2013. The following discussion relates to the prior period consolidation of real estate funds. |
Consolidated real estate funds are structured as limited liability companies. These limited liability companies invest in other real estate funds, and these investments are carried at fair value and presented as investments in CIP. The net asset value of the underlying funds, which primarily consists of the real estate investment value and mortgage loans, is adjusted to fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Real estate fund assets are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Due to the illiquid nature of investments made in real estate companies, all of the real estate assets are classified as level 3. The real estate investment vehicles use one or more valuation techniques (e.g., the market approach, the income approach, or the cost approach) for which sufficient and reliable data is available to value investments classified within level 3. The income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. |
The inputs used by the real estate funds in estimating the value of level 3 investments include the original transaction price, recent transactions in the same or similar instruments, as well as completed or pending third-party transactions in the underlying investment or comparable investments. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability. Other inputs used include discount rates, cap rates and income and expense assumptions. The fair value measurement of level 3 investments does not include transaction costs and acquisition fees that may have been capitalized as part of the investment’s cost basis. Due to the lack of observable inputs, the assumptions used may significantly impact the resulting fair value and therefore the real estate funds’ results of operations. |
Quantitative Information about Level 3 Fair Value Measurements |
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The following table shows significant unobservable inputs used in the fair value measurement of level 3 assets and liabilities: |
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Assets and Liabilities * | | Fair Value at September 30, 2013 ($ in millions) | | Valuation Technique | | Unobservable Inputs | | Range | | Weighted Average (by fair value) | | | | | |
Private Equity Funds --Equity Securities | | 58.6 | | Market Comparable | | Revenue Multiple | | 1 - 5x | | 3.0x | | | | | |
| | | | | | Discount | | 24% - 50% | | 28.20% | | | | | |
CLO Notes | | -4,003.10 | | Discounted Cash Flow- Euro | | Assumed Default Rate | | 4.7% - 5% | | <1yr: 4.7% >1yr: 5.0% | | | | | |
| | | | | | Spread over Euribor ** | | 150 - 1080 bps | | 294 | | | | | |
| | | | Discounted Cash Flow- USD | | Assumed Default Rate*** | | 1% - 3% | | <1yr: 1.6% >1yr: 3.0% | | | | | |
| | | | | | Spread over Libor ** | | 128 - 882 bps | | 202 bps | | | | | |
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Assets and Liabilities * | | Fair Value at December 31, 2012 ($ in millions) | | Valuation Technique | | Unobservable Inputs | | Range | | Weighted Average (by fair value) | | | | | |
Private Equity Funds --Equity Securities | | 94.1 | | Market Comparable | | Revenue Multiple | | 1 - 4x | | 1.9x | | | | | |
| | | | | | Discount | | 15% - 50% | | 27.50% | | | | | |
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Real Estate Investments | | 5.3 | | Discounted Cash Flow | | In-Place Rent Rates | | JPY 218 - JPY 397 per sq ft | | JPY 231 - JPY 384 per sq ft | | | | | |
| | | | | | Market Rent Rates | | JPY 333 - JPY 417 per sq ft | | JPY 348 - JPY 379 per sq ft | | | | | |
| | | | | | Revenue Growth Rate | | n/a | | 2.18% | | | | | |
| | | | | | Discount Rate | | 6.75% - 7.00% | | 6.86% | | | | | |
| | | | | | Exit Capitalization Rate | | 7.00% - 7.25% | | 7.11% | | | | | |
| | | | | | Stabilized Occupancy Rate | | n/a | | 95% | | | | | |
| | | | | | Expense Growth Rate | | n/a | | 1.00% | | | | | |
CLO Notes | | -3,899.40 | | Discounted Cash Flow- Euro | | Assumed Default Rate | | 3% - 5% | | <1yr: 3.3% >1yr: 5.0% | | | | | |
| | | | | | Spread over Euribor ** | | 325 - 1920 bps | | 563 bps | | | | | |
| | | | Discounted Cash Flow- USD | | Assumed Default Rate*** | | 1% - 3% | | <1yr: 1.1% >1yr: 3.0% | | | | | |
| | | | | | Spread over Libor ** | | 130 - 1632 bps | | 323 bps | | | | | |
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* | Certain equity securities held by consolidated private equity funds are valued using recent private market transactions (September 30, 2013: $5.7 million; December 31, 2012: $50.0 million). At September 30, 2013, certain tranches of the consolidated CLOs are valued using third-party pricing information. Quantitative unobservable inputs for such valuations were not developed or adjusted by the company. Investments in other private equity funds as of September 30, 2013 of $448.2 million (as of December 31, 2012: $503.5 million) are also excluded from the table above as they are valued using the NAV practical expedient. The NAVs that have been provided are derived from the fair values of the underlying investments as of the consolidation date. | | | | | | | | | | | | | | |
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** | Lower spreads relate to the more senior tranches in the CLO note structure; higher spreads relate to the less senior tranches. | | | | | | | | | | | | | | |
*** Assumed default rates listed in the table above apply to CLOs established prior to 2012. A default rate of 1.4% was assumed for CLOs established in 2012 and thereafter. |
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The table below summarizes as of September 30, 2013, the nature of investments that are valued using the NAV as a practical expedient and any related liquidation restrictions or other factors which may impact the ultimate value realized: |
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| | Fair Value at September 30, 2013 ($ in millions) | | Total Unfunded Commitments | | Weighted Average Remaining Term (2) | | | | | | | | | |
Private equity fund of funds (1) | | $434.50 | | $120.20 | | 2.9 years | | | | | | | | | |
Private equity funds (1) | | $13.70 | | $74.00 | | 7.8 years | | | | | | | | | |
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| | Fair Value at December 31, 2012 ($ in millions) | | Total Unfunded Commitments | | Weighted Average Remaining Term (2) | | | | | | | | | |
Private equity fund of funds (1) | | $498.90 | | $127.50 | | 2.7 years | | | | | | | | | |
Private equity funds (1) | | $4.60 | | $5.00 | | 1.0 years | | | | | | | | | |
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(1) These investments are not subject to redemption; however, for certain funds, the investors may sell or transfer their interest, which may require approval by the general partner of the underlying funds. |
(2) These investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over the weighted average periods indicated. |
The following narrative will indicate the sensitivity of inputs illustrating the impact of significant increases to the inputs. A directionally-opposite impact would apply for significant decreases in these inputs: |
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• | For investments held by consolidated private equity funds, significant increases in discounts in isolation would result in significantly lower fair value measurements, while significant increases in revenue multiple assumptions in isolation would result in significantly higher fair value measurements. An increase in discount assumptions would result in a directionally opposite change in the assumptions for revenue multiple resulting in lower fair value measurements. | | | | | | | | | | | | | | |
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• | For real estate investments, a change in the revenue growth rate generally would be accompanied by a directionally-similar change in the assumptions for in-place and market rent rates and stabilized occupancy rates. Significant increases in any of the unobservable inputs for in-place and market rent rates and stabilized occupancy rates in isolation would result in significantly higher fair values. An increase in these assumptions would result in a directionally-opposite change in the assumptions for discount rate, exit capitalization rate, and expense growth rate. Significant increases in the assumptions for discount rate, exit capitalization rate, and expense growth rate in isolation would result in significantly lower fair value measurements. | | | | | | | | | | | | | | |
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• | For CLO Notes, a change in the assumption used for spreads is generally accompanied by a directionally similar change in default rate. Significant increases in any of these inputs in isolation would result in a significantly lower fair value measurements. | | | | | | | | | | | | | | |