Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Other Securities

v2.4.0.6
Fair Value of Other Securities
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
FAIR VALUE OF OTHER SECURITIES
FAIR VALUE OF OTHER SECURITIES
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of March 31, 2013, November 30, 2012 and December 31, 2012. These assets and liabilities are measured on a recurring basis.
March 31, 2013
 
 
 
 
Fair Value

 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
Investments:
 
 
 
 
 
 
 
 
Trading securities
 
$
—

 
$
—

 
$
—

 
$
—

Other equity securities
 
21,895,854

 
—

 
—

 
21,895,854

Total Assets
 
$
21,895,854

 
$
—

 
$
—

 
$
21,895,854

November 30, 2012
 
 
November 30, 2012
 
Fair Value

 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Trading securities
 
$
55,219,411

 
$
27,480,191

 
$
27,739,220

 
$
—

Other equity securities
 
19,866,621

 
—

 
—

 
19,866,621

Total Assets
 
$
75,086,032

 
$
27,480,191

 
$
27,739,220

 
$
19,866,621

December 31, 2012
 
 
December 31, 2012
 
Fair Value

 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Trading securities
 
$
4,318,398

 
$
4,318,398

 
$
—

 
$
—

Other equity securities
 
19,707,126

 
—

 
—

 
19,707,126

Total Assets
 
$
24,025,524

 
$
4,318,398

 
$
—

 
$
19,707,126


The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 are as follows:
 
For the Three-Month Periods Ended
 
For the One-Month Transition Period Ended December 31, 2012

March 31, 2013
 
February 29, 2012
 
Fair value beginning balance
$
19,707,126

 
$
41,856,730

 
$
19,866,621

Total realized and unrealized gains (losses) included in net income
2,425,986

 
6,069,194

 
(159,495
)
Return of capital adjustments impacting cost basis of securities
(237,258
)
 
(656,195
)
 
—

Fair value ending balance
$
21,895,854

 
$
47,269,729

 
$
19,707,126

Changes in unrealized gains (losses), included in net income, relating to securities still held (1)
$
2,425,986

 
$
6,069,194

 
$
(159,495
)
(1) Located in Net realized and unrealized gain (loss) on other equity securities in the Statements of Income

As of February 29, 2012, the Company’s other equity securities, which represented equity interests in private companies, and were classified as Level 3 assets, included High Sierra Energy, LP. On June 19, 2012, NGL Energy Partners, LP and certain of its affiliates (collectively “NGL”) acquired High Sierra Energy, LP and High Sierra Energy GP, LLC (collectively “High Sierra”) pursuant to which NGL, a New York Stock Exchange listed company, paid to the limited partners of High Sierra approximately $9.4 million in cash and approximately 1.2 million newly issued units of NGL. A realized gain of $15.8 million was recognized during the third quarter of 2012 upon the sale. These NGL units are classified as a Level 2 Trading security above as of November 30, 2012.
The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels 1, 2 or 3 for the three-month periods ended March 31, 2013 and February 29, 2012, respectively. For the one-month transition period ended December 31, 2012 there were transfers out of Level 2 assets in the amount of $4.32 million, which represents the value of the Company's equity interest in NGL. There were no transfers between Level 1 and Level 3 for the one-month transition period ended December 31, 2012.
Valuation Techniques and Unobservable Inputs
An equity security of a publicly traded company acquired in a private placement transaction without registration under the Securities Act of 1933, as amended (the “1933 Act”), is subject to restrictions on resale that can affect the security’s liquidity (and hence its fair value). If the security has a common share counterpart trading in a public market, the Company generally determines an appropriate percentage discount for the security in light of the restrictions that apply to its resale (taking into account, for example, whether the resale restrictions of Rule 144 under the 1933 Act apply). This pricing methodology applies to the Company’s Level 2 trading securities.
The Company’s other equity securities, which represent securities issued by private companies, are classified as Level 3 assets. Valuation of these investments is determined by weighting various valuation metrics for each security. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments. See Note 2, Significant Accounting Policies.
The Company’s investments in private companies are typically valued using one of or a combination of the following valuation techniques: (i) analysis of valuations for publicly traded companies in a similar line of business (“public company analysis”), (ii) analysis of valuations for comparable M&A transactions (“M&A analysis”) and (iii) discounted cash flow analysis. The table entitled “Quantitative Table for Valuation Techniques” outlines the valuation technique(s) used for each asset category.
The public company analysis utilizes valuation multiples for publicly traded companies in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on the ratio of enterprise value to earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) which is commonly referred to as an EV/EBITDA multiple. The Company selects a range of multiples given the trading multiples of similar publicly traded companies and applies such multiples to the portfolio company’s EBITDA to estimate the portfolio company’s trailing, proforma, projected or average (as appropriate) EBITDA to estimate the portfolio company’s enterprise value and equity value. The Company also selects a range of trading market yields of similar public companies and applies such yields to the portfolio company’s estimated distributable cash flow. When calculating these values, the Company applies a discount, when applicable, to the portfolio company’s estimated equity value for the size of the company and the lack of liquidity in the portfolio company’s securities.
The M&A analysis utilizes valuation multiples for historical M&A transactions for companies or assets in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on EV/EBITDA multiples. The Company selects a range of multiples based on EV/EBITDA multiples for similar M&A transactions or similar companies and applies such ranges to the portfolio company’s analytical EBITDA to estimate the portfolio company’s enterprise value.
The discounted cash flow ("DCF") analysis is used to estimate the equity value for the portfolio company based on estimated DCF of such portfolio company. Such cash flows include an estimate of terminal value for the portfolio company. A present value of these cash flows is determined by using estimated discount rates (based on the Company’s estimate for weighted average cost of capital for such portfolio company).
Under all of these valuation techniques, the Company estimates operating results of its portfolio companies (including EBITDA). These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which will be based on expected operating assumptions for such portfolio company. The Company also consults with management of the portfolio companies to develop these financial projections. These estimates will be sensitive to changes in assumptions specific to such portfolio company as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: possible discounts for lack of marketability, selection of publicly-traded companies, selection of similar M&A transactions, selected ranges for valuation multiples, selected range of yields and expected required rates of return and weighted average cost of capital. The various inputs will be weighted as appropriate, and other factors may be weighted into the valuation, including recent capital transactions of the Company.
Changes in EBITDA multiples, or discount rates may change the fair value of the Company’s portfolio investments. Generally, a decrease in EBITDA multiples or DCF multiples, or an increase in discount rates, when applicable, may result in a decrease in the fair value of the Company’s portfolio investments.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize.
The following table summarizes the significant unobservable inputs that the Company uses to value its portfolio investments categorized as Level 3 as of March 31, 2013.
Quantitative Table for Valuation Techniques 
Significant Unobservable Inputs Used To Value Portfolio Investments
 
 
 
 
 
 
Unobservable Inputs
 
Range
 
Weighted Average
Assets at Fair Value
 
Fair Value
 
Valuation Technique
 
 
Low
 
High
 
Other equity securities, at fair value
 
$
21,895,854

 
Public company historical EBITDA analysis
 
Historical EBITDA Valuation Multiples
 
9.0x
 
12.3x
 
10.7x
 
 
 
 
Public company projected EBITDA analysis
 
Projected EBITDA Valuation Multiples
 
8.8x
 
11.4x
 
10.1x
 
 
 
 
M&A company analysis
 
EV/LTM 2012 EBITDA
 
9.0x
 
10.3x
 
9.7x
 
 
 
 
Discounted cash flow
 
Weighted Average Cost of Capital
 
9.5%
 
14.0%
 
11.8%

 
As of March 31, 2013, December 31, 2012 and November 30, 2012, the Company held a 6.7% equity interest in Lightfoot Capital Partners LP and an 11.1% equity interest in VantaCore Partners LP.

The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value, but fair value is included for disclosure purposes only, as required under disclosure guidance related to the fair value of financial instruments.
Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.

Escrow Receivable — The escrow receivable due the Company, which relates to the sale of International Resource Partners, LP, is anticipated to be released upon satisfaction of certain post-closing obligations and/or the expiration of certain time periods (the shortest of which was to be 14 months from the April 2011 closing date of the sale). The fair value of the escrow receivable reflects a discount for the potential that the full amount due to the Company will not be realized. No clear agreement has been reached as to the remaining escrow balance and Management anticipates that it may take more than a year to satisfy other post-closing obligations, prior to receiving the approximately $699 thousand escrow balance remaining.
Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the Company’s current expected rate for an equivalent transaction.
Line of Credit — The carrying value of the line of credit approximates the fair value due to its short term nature.
Carrying and Fair Value Amounts
 
 
Level within fair value hierarchy
 
March 31, 2013
 
November 30, 2012
 
December 31, 2012
 
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
18,196,151

 
$
18,196,151

 
$
14,333,456

 
$
14,333,456

 
$
17,680,783

 
$
17,680,783

Escrow receivable
 
Level 2
 
$
698,729

 
$
698,729

 
$
698,729

 
$
698,729

 
$
698,729

 
$
698,729

Financial Liabilities:
 

 

 

 

 

 

Long-term debt
 
Level 2
 
$
70,000,000

 
$
70,000,000

 
$
—

 
$
—

 
$
70,000,000

 
$
70,000,000

Line of credit
 
Level 1
 
$
139,397

 
$
139,397

 
$
120,000

 
$
120,000

 
$
—

 
$
—