2023年2月，公司收購了AMP Capital Investors International Holdings Limited的全球基礎設施股權投資管理業務，並在交割時更名為InfraBridge。該收購的考慮包括1000萬美元現金考慮（扣除預付現金），加上一筆根據InfraBridge的新全球基礎設施基金未來籌集目標的實現而發生的可變金額。可變考慮的估計公平值將在每個報告期進行重新評估，如註釋10所述。314.3 1000美元現金（扣除預付現金後），加上一筆取決於InfraBridge的新全球基礎設施基金未來籌集目標達成情況的可變金額。可變考慮的估計公平值將在每個報告期重新評估，詳情請參見註釋10。
Transaction-related costs increased $0.9 million in the quarter-to-date comparison due to higher unconsummated deal costs, and decreased $7.3 million in the year-to-date comparison as 2023 included higher costs related to the InfraBridge acquisition.
Depreciation and Amortization
Depreciation and amortization expense decreased $1.1 million in the quarter-to-date comparison and $2.1 million in the year-to-date comparison, primarily due to management contract intangible assets which have a declining amortization rate over time based upon projected cash flows to be generated from these contracts.
Other Gain (Loss), Net
Other gain of $47.9 million and $50.8 million was recognized in the three and nine months ended September 30, 2024, respectively, and $256.4 million and $100.0 million was recognized in the three and nine months ended September 30, 2023, respectively.
The net gain in the three and nine months ended September 30, 2024 was primarily driven by (i) net fair value increase in investments held by consolidated funds ($44.4 million and $46.0 million, respectively), (ii) net gain from partial sale and price changes on our non-core marketable equity securities ($6.5 million and $9.3 million, respectively), and (iii) fair value decrease of warrant liability ($1.2 million and $4.2 million, respectively), all of which were partially offset by impairment of warehoused investments ($8.9 million and $12.5 million, respectively).
The net gain in the three and nine months ended September 30, 2023 is mainly attributed to a $278.7 million gain recognized in connection with the deconsolidation of DataBank in September 2023 (of which $3.7 million was realized and $275.0 million unrealized), which was largely offset in the year-to-date period by a $133.3 million write-off of an unsecured promissory note from the 2022 sale of our Wellness Infrastructure business. Both periods in 2023 also included losses related to fair value increase of warrant liability ($12.4 million and $23.7 million, respectively), and net decreases in investment values, including those held by our consolidated funds ($8.0 million and $16.1 million, respectively).
Income Tax Benefit (Expense)
Income tax expense was $0.9 million and $0.1 million in the three months ended September 30, 2024 and 2023, respectively, and $2.1 million and $3.9 million in the nine months ended September 30, 2024 and 2023. This reflects the income tax expense of foreign subsidiaries, partially offset in year-to-date 2024 by various U.S. state tax refunds. The Company otherwise has operating losses and capital loss carryforwards that can be applied against current income tax expense for its domestic entities, and has established a full valuation allowance on the deferred tax assets of these entities, resulting in no net federal income tax effect for its domestic entities.
Income (Loss) from discontinued operations before income taxes
1,421
(81,089)
82,510
(13,500)
(286,735)
273,235
Income tax benefit (expense)
18
238
(220)
97
(194)
291
Income (Loss) from discontinued operations
$
1,439
$
(80,851)
82,290
$
(13,403)
$
(286,929)
273,526
Income (Loss) from discontinued operations attributable to noncontrolling interests:
Investment entities
—
(68,798)
68,798
—
(236,287)
236,287
Operating Company
94
(849)
943
(944)
(3,654)
2,710
Income (Loss) from discontinued operations attributable to DigitalBridge Group, Inc.
$
1,345
$
(11,204)
12,549
$
(12,459)
$
(46,988)
34,529
Loss from discontinued operations for the nine months ended September 30, 2024 included primarily a loss on a guarantee related to the previous bulk sale of the Company's real estate investments. The loss in 2023 represents primarily the operations of the former Operating segment and $9.7 million impairment of BRSP shares prior to disposition in March 2023, as discussed in Note 2 to the consolidated financial statements.
Operating Metrics
Assets Under Management and Fee Earning Equity Under Management
We present below our AUM and FEEUM, which are key operating metrics in the alternative investment management industry. Our calculation of AUM and FEEUM may differ from other investment managers, and as a result, may not be directly comparable to similar measures presented by other investment managers.
We believe the non-GAAP financial measures of FRE and DE supplement and enhance the overall understanding of our underlying financial performance and trends, and facilitate comparison among current, past and future periods and to other companies in similar lines of business. We use FRE and DE in evaluating the Company’s ongoing business performance and in making operating decisions. For the same reasons, we believe FRE and DE are useful financial measures to the Company’s investors and analysts.
As we evaluate profitability based upon continuing operations, these non-GAAP measures exclude results from discontinued operations. DE presented for the 2023 comparative period has been recast to exclude the Operating segment which qualified as discontinued operations on December 31, 2023.
These non-GAAP financial measures should be considered as a supplement to and not an alternative or in lieu of GAAP net income (loss) as measures of operating performance, or to cash flows from operating activities as indicators of liquidity. Our calculation of these non-GAAP measures may differ from methodologies utilized by other companies for similarly titled performance measures and, as a result, may not be fully comparable to those calculated by our peers.
Fee-Related Earnings
FRE is used to assess the extent to which direct base compensation and core operating expenses are covered by recurring fee revenues in a stabilized investment management business. FRE represents recurring fee revenue, including incentive fees that are not subject to realization events related to underlying fund investments, net of compensation and administrative expenses. Such expenses generally exclude non-cash equity-based compensation, carried interest compensation, and placement fee expense. Also, consistent with DE, FRE excludes non-core items, and presents costs reimbursable by our managed funds on a net basis (as opposed to a gross-up of other income and administrative costs). Where applicable, FRE is adjusted for Start-Up FRE as defined below.
Fee revenues earned from consolidated funds and other investment vehicles are eliminated in consolidation. However, because the fees are funded by and earned from third party investors in these consolidated vehicles who represent noncontrolling interests, our allocated share of net income from the consolidated funds and other vehicles is increased by the amount of fees that are eliminated. The elimination of these fees, therefore, does not affect net income (loss) attributable to DBRG. Accordingly, FRE is presented without giving effect to the elimination of fee revenue to the extent such fees meet the definition of FRE.
FRE does not include distributed carried interest as these are not recurring revenues and are subject to variability given that they are dependent upon realization events related to underlying fund investments. Placement fees are also excluded from FRE as they are inconsistent in amount and frequency depending upon timing of fundraising for our funds. Other items excluded from FRE include realized principal investment income (loss); and interest, dividend and other income, all of which are not core to the investment management service business. Unlike DE, which is a post-tax measure, FRE does not incorporate the effect of income taxes as it is a pre-tax measure.
To reflect a stabilized investment management business, FRE is further adjusted to exclude Start-Up FRE, where applicable. Start-Up FRE is FRE associated with new investment strategies that have 1) not yet held a first close raising FEEUM; or 2) not yet achieved break-even FRE only for investment products that may be terminated solely at the Company’s discretion. The Company regularly evaluates new investment strategies and exclude Start-Up FRE until such time a new strategy is determined to form part of the Company’s core investment management business.
(1) For purposes of DE, 2023 included distributions from a portfolio company in the former Operating segment.
Fee-Related Earnings.
FRE increased $7.8 million, or 42%, to $26.2 million, resulting from continued growth in our investment management business as FEEUM increased 14% from $29.9 billion at September 30, 2023 to $34.1 billion at September 30, 2024. This reflects primarily fee revenue from new capital raised for our third flagship fund, partially offset by decreases in fees in other funds due to change in fee basis, syndications and recapitalizations. Additionally, higher administrative costs were incurred in 2024 in supporting our growing investment management business.
DE in the third quarter of 2023 of $32.6 million had benefited from $27.9 million of realized carried interest from the recapitalization of DataBank. As a result, notwithstanding a $7.8 million increase in FRE, DE decreased $21.9 million to $10.7 million in the third quarter of 2024.
Distributable Earnings and Fee-Related Earnings Reconciliation
Three Months Ended September 30,
(In thousands)
2024
2023
Net income (loss) attributable to common stockholders
$
(883)
$
261,828
Net income (loss) attributable to noncontrolling interests in Operating Company
(50)
19,918
Net income (loss) attributable to Operating Company
(933)
281,746
Transaction-related costs and non-core items (1)
9,541
6,515
Other (gain) loss, net (2)
(47,906)
(256,439)
Unrealized principal investment income
(7,308)
(17,943)
Unrealized carried interest, net of associated expense (allocation) reversal (3)
7,658
(24,874)
Equity-based compensation
8,828
14,340
Depreciation and amortization expense
8,227
9,319
Amortization of deferred financing costs, debt premiums and discounts
524
660
Preferred stock redemption (gain) loss
—
—
Adjustments attributable to noncontrolling interests in investment entities (4)
33,540
5,243
OP share of (income) loss from discontinued operations (5) (6)
(1,439)
14,051
Distributable Earnings, after tax—attributable to Operating Company
10,732
32,618
Realized principal investment income (6)
(2,129)
(1,994)
Distributed carried interest and incentive fees subject to realization events, net of associated expense allocation (3)
—
(27,927)
Interest, dividend and other income
(2,828)
(6,436)
Interest expense and preferred dividends
18,245
19,261
Placement fee and other expenses
1,247
1,668
Income tax (benefit) expense
887
59
Start-up FRE
—
1,155
Fee-Related Earnings—attributable to Operating Company
$
26,154
$
18,404
__________
(1) Non-core items primarily include acquisition-related compensation and certain severance costs, as well as litigation and settlement-related matters, which are presented within compensation expense—cash and equity-based, administrative and other expenses, and other gain (loss), net on GAAP income statement.
(2) Comprises (i) all unrealized gains and losses; and (ii) realized gains and losses recorded by consolidated funds or associated with non-core investments.
(3) Carried interest and incentive fees are presented net of expense allocation or reversal. The expense component is included within compensation expense—incentive fees and carried interest allocation (reversal), other gain (loss), and net income (loss) attributable to noncontrolling interests in investment entities on the GAAP income statement.
(4) Adjustments attributable to noncontrolling interests in investment entities pertain to other gain/loss attributed to limited partners of consolidated funds, and a third party investor's share of principal investment income attributed to our general partner interest in certain sponsored funds. Allocation of unrealized carried interest to management and a third party investor is netted against "unrealized carried interest, net of expense (allocation) reversal" for all periods presented (recasted for periods prior to the second quarter of 2024 when it was previously presented gross in "adjustments attributable to noncontrolling interests in investment entities").
(5) OP share of discontinued operations represents primarily operating results of portfolio companies consolidated in the former Operating segment prior to 2024, net of associated noncontrolling interests in investment entities.
(6) For purposes of DE, 2023 included distributions from a portfolio company in the former Operating segment.
Liquidity and Capital Resources
We regularly evaluate our liquidity position, and anticipated cash needs to fund our business and operations based upon our projected financial performance. Our evaluation of future liquidity requirements is regularly reviewed and updated for changes in internal projections, economic conditions, and other factors as applicable.
Our primary liquidity needs, both short term and long term, are to fund:
•our operations, including compensation, administrative and overhead costs;
•our general partner and general partner affiliate commitments to our investment vehicles;
•principal and interest payments on our debt;
•dividends to our preferred and common stockholders;
•our liability for corporate and other taxes;
•acquisitions of target investment management businesses;
•warehouse investments pending the raising of third party capital for future investment vehicles; and
•obligation for lease payments on our corporate offices.
Our primary sources of liquidity are:
•cash on hand;
•fees received from our investment management business, including our share of distributed net incentive fees and carried interest;
•cash flow generated from our investments, both from operations and return of capital, including proceeds from full or partial realization of investments;
•availability under our Variable Funding Notes ("VFN");
•issuance of additional term notes under our corporate securitization; and
•proceeds from public or private equity and debt offerings.
Overview
At September 30, 2024, our liquidity position was approximately $427 million, composed of available corporate cash and including the full $300 million under our VFN. Available corporate cash generally represents cash at our OP entity after allocating cash for certain compensatory liabilities, and excludes cash held at subsidiaries of the OP, including cash maintained to satisfy regulatory capital requirements in applicable foreign jurisdictions.
We believe we have sufficient cash on hand, and anticipated cash generated from operating activities and availability of external financing sources, to meet our short term and long term liquidity and capital requirements.
While we have sufficient liquidity to meet our operational needs, we continuously evaluate alternatives to manage our capital structure and market opportunities to strengthen our liquidity and to provide further operational and strategic flexibility.
Significant Liquidity and Capital Activities in 2024
•We continued to reduce higher cost corporate indebtedness through the full exchange or redemption of the remaining $78.4 million of 5.75% senior notes, which results in annual interest savings of approximately $4.5 million.
•We settled the remaining $35 million contingent consideration payable to Wafra in connection with the 2022 redemption of their investment in the Company's investment management business, 50% each in shares of the Company's Class A common stock and in cash.
•We monetized marketable equity securities that form non-core investments for total net proceeds of $35.0 million.
•As the subordinated note holder of a third party managed CLO, we received $10.4 million of excess net proceeds from a refinancing of the CLO in October 2024, which we applied as a return of capital.
Liquidity Needs and Capital Activities
Dividends
Common Stock—The payment of common stock dividends and determination of the amount thereof is at the discretion of our Board of Directors.
Preferred Stock—We have outstanding preferred stock totaling $822 million, bearing a weighted average dividend rate of 7.135% per annum, with aggregate dividend payments of $14.7 million per quarter.
Contractual Obligations, Commitments and Contingencies
Debt Obligations
As of the date of this filing, our corporate debt is composed of our securitized financing facility, as summarized below.
($ in thousands)
Outstanding Principal
Interest Rate (Per Annum)
Anticipated Repayment Date
Years Remaining to Maturity
Class A-2 Notes
$
300,000
3.93
%
September 2026
2.0
Investment Commitments
Fund Commitments—As general partner, we typically have minimum capital commitments to our sponsored funds. With respect to our flagship value-add DBP fund series, and InfraBridge funds, we have made additional capital commitments as a general partner affiliate alongside our limited partner investors. Our fund capital investments further align our interests to our investors. As of September 30, 2024, we have unfunded equity commitments to our unconsolidated funds as general partner and general partner affiliate of $262.5 million (including commitments attributed to the ownership by employees and former employees in the general partner entities). Generally, the timing for funding of these commitments is not known and the commitments are callable on demand at any time prior to their respective expirations.
Contingent Consideration
InfraBridge Acquisition—In connection with the InfraBridge acquisition in February 2023, contingent consideration of up to AUD 180 million may become payable based upon achievement of future fundraising targets for the third and fourth flagship InfraBridge funds. The current estimated fair value of the contingent consideration is $9.1 million.
Warehoused Investments
We temporarily warehouse investments on behalf of prospective sponsored investment vehicles that are actively fundraising. The warehoused investments are transferred to the investment vehicle if and when sufficient third party capital, including debt, is raised. Generally, the timing of future warehousing activities is not known. Nevertheless, investment warehousing is undertaken only if it is determined that we will have sufficient liquidity through the anticipated warehousing period.
At September 30, 2024, warehoused investments have an aggregate carrying value of $22 million.
Carried Interest Clawback
Depending on the final realized value of all investments at the end of the life of a fund (and, with respect to certain funds, periodically during the life of the fund), if it is determined that cumulative carried interest distributions have exceeded the final carried interest amount earned (or amount earned as of the calculation date), we are obligated to return the excess carried interest received. Therefore, carried interest distributions may be subject to clawback if a decline in investment values results in the cumulative performance of the fund falling below minimum return hurdles in the interim period. If it is determined that the Company has a clawback obligation, a liability would be established based upon a hypothetical liquidation of the net assets of the fund at reporting date. The actual determination and required payment of any clawback obligation would generally occur after final disposition of the investments of the fund or otherwise as set forth in the governing documents of the fund.
If the related carried interest distributions received by the Company are subject to clawback, the previously distributed carried interest would be similarly subject to clawback. The Company withholds a portion of the distribution of carried interest to employees to satisfy their potential clawback obligation.
Generally, the Company, through the OP, has guaranteed the clawback obligation of its subsidiaries that act as general partner or special limited partner of its respective sponsored funds, for the benefit of these funds and their limited partners.
At September 30, 2024, the Company had no liability for clawback obligations on distributed carried interest.
Lease Obligations
At September 30, 2024, we had $45 million of operating lease obligations on our corporate offices, which will be funded through corporate operating cash. The lease obligation amount represents fixed lease payments, excluding any contingent or other variable lease payments, and factor in lease renewal or termination options only if it is reasonably certain that such options would be exercised.
As of the date of this filing, we have $300 million of outstanding principal on our corporate debt, as discussed above under "—Debt Obligation."
Our securitized financing facility is subject to various covenants, including financial covenants that require the maintenance of minimum thresholds for debt service coverage ratio and maximum loan-to-value ratio, as defined. As of the date of this filing, we are in compliance with all of the financial covenants, and the full $300 million is available to be drawn on our VFN.
Our securitized financing facility allows for the issuance of additional term notes in the future to supplement our liquidity. The decision to enter into a particular financing arrangement is made after consideration of various factors including future cash needs, current sources of liquidity, demand for the Company’s debt or equity, and prevailing interest rates.
Cash From Operations
Fee-Related Earnings—We generate FRE from our investment management business, generally encompassing recurring fee revenue net of associated compensation and administrative expenses. Management fee revenue is generally a predictable and stable revenue stream. Our ability to generate new management fee streams through establishing new investment vehicles and raising investor capital depends on general market conditions and availability of attractive investment opportunities as well as availability of debt capital.
Incentive Fees—Incentive fees, net of employee allocations, are earned based upon the financial performance of a vehicle above a specified return threshold, which is largely driven by appreciation in value of underlying investments. Incentive fees are recognized as fee revenue when they are no longer probable of significant reversal. As investment fair values and changes thereof could be affected by various factors, including market and economic conditions, incentive fees are by nature less predictable in amount and timing.
Carried Interest Distributions—Carried interest is distributed generally upon profitable disposition of an investment if at the time of distribution, cumulative returns of the fund exceed minimum return hurdles. Carried interest distributions are recognized in earnings net of clawback obligations, if any. The amount and timing of carried interest distributions received may vary substantially from period to period depending upon the occurrence and size of investments realized by our sponsored funds.
Investments—Our investments, primarily in our sponsored funds as general partner affiliate, generate cash largely through capital appreciation upon liquidation, and interest income from our credit fund.
Asset Monetization
We intend to monetize and recycle capital from our non-core investments through opportunistic asset sales. Following monetization of a substantial portion of our holdings in the third quarter of 2024, remaining marketable equity securities available for future monetization totaled $6.4 million at September 30, 2024.
Public Offerings
We may offer and sell various types of securities from time to time at our discretion based upon our needs and depending upon market conditions and available pricing.
The following table summarizes the activities from our consolidated statements of cash flows, including discontinued operations.
Nine Months Ended September 30,
(In thousands)
2024
2023
Cash, cash equivalents and restricted cash—beginning of period
$
350,250
$
1,036,739
Net cash generated by (used in):
Operating activities
31,418
192,080
Investing activities
(6,847)
(768,072)
Financing activities
(77,806)
78,596
Effect of exchange rates on cash, cash equivalents and restricted cash
1,461
(673)
Cash, cash equivalents and restricted cash—end of period
$
298,476
$
538,670
Operating Activities
Cash inflows from operating activities are generated primarily through fee-related earnings, distributions of our share of net carried interest, distribution of earnings from our general partner affiliate interests in our sponsored funds, and prior to deconsolidation of the portfolio companies in the former Operating segment during 2023, net operating income from investment properties.
Our operating activities generated net cash inflows of $31.4 million and $192.1 million in 2024 and 2023, respectively. 2023 cash inflows were driven largely by the operating activities of portfolio companies in the former Operating segment.
Investing Activities
Investing activities relate to general partner and general partner affiliate investments in sponsored funds, including drawdown of commitments and return of capital from realized fund investments; business combinations; and prior to deconsolidation of portfolio companies in the Operating segment in 2023, acquisition of real estate.
Our investing activities generated net cash outflows of $6.8 million in 2024 and $768.1 million in 2023.
•Net cash outflows in 2024 were driven by $76.8 million of fundings for our general partner and general partner affiliate commitments in our sponsored funds, net of return of capital, largely offset by $35.0 million of net proceeds from sale of our non-core investments and $38.0 million of net inflows from the investing activities of our consolidated liquid funds which hold marketable equity securities.
•The large netcash outflows in 2023 can be attributed to (i) real estate investing activities which generated net cash outflows of $613.1 million, attributable to capital expenditures in the data center portfolio of our former Operating segment; (ii) derecognition of $102.4 million of cash and restricted cash following the deconsolidation of a portfolio company in our former Operating segment, and (iii) $314.3 million paid, net of cash assumed, for the acquisition of InfraBridge. These outflows were partially offset by net cash inflows of $232.3 million from equity investments, largely representing $201.6 million proceeds from the sale of BRSP shares, return of capital from a non-digital equity investment following a final sale of its underlying assets, and investing activities of our consolidated liquid funds which hold marketable equity securities, partially offset by funding of our general partner and general partner affiliate commitments, net of return of capital.
Financing Activities
We may draw upon our securitized financing facility to finance our operating activities, and have the ability to raise capital in the public markets through issuances of preferred stock, common stock and private placement notes. We incur cash outlays primarily for payments on our corporate debt, and dividends to our preferred stockholders and common stockholders. Prior to deconsolidation in 2023, portfolio companies in the former Operating segment financed their activities largely through investment-level secured debt and incurred cash outlays for debt servicing and distributions to their third party investors who represented noncontrolling interests.
Financing activities generated net cash outflows in 2024 and inflows in 2023.
•In 2024, net cash outflows of $77.8 million were driven by preferred dividend payments of $44.0 million, cash settlement of contingent consideration to Wafra of $17.5 million, and limited partner redemptions in our consolidated liquid funds, partially offset by syndication of our interest in a consolidated fund and funding by Wafra for its share of our general partner commitment in DBP I.
•Net cash inflows of $78.6 million in 2023 represent primarily $489.9 million of additional investment-level debt in the former Operating segment, largely offset by the full repayment of our $200 million 5.00% convertible senior notes, $90 million contingent consideration payment to Wafra, $73.5 million redemption by a limited partner in a consolidated liquid fund, and income distribution to noncontrolling interests in our former Operating segment.
Guarantees and Off-Balance Sheet Arrangements
We have no guarantees or off-balance sheet arrangements that we believe are reasonable likely to have a material effect on our financial condition.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and
assumptions that involve the exercise of judgment and that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our critical accounting policies and estimates are integral to understanding and evaluating our reported financial results as they require subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable.
There have been no changes to our critical accounting policies or those of our unconsolidated joint ventures since the filing of our Annual Report on Form 10-K for the year ended December 31, 2023.
With respect to all critical estimates, we have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. We believe that all of the decisions and assessments applied were reasonable at the time made, based upon information available to us at that time. Due to the inherently judgmental nature of the various projections and assumptions used, and unpredictability of economic and market conditions, actual results may differ from estimates, and changes in estimates and assumptions could have a material effect on our financial statements in the future.
Recent Accounting Updates
The effects of accounting standards adopted in 2024 and the potential effects of accounting standards to be adopted in the future are described in Note 2 to our consolidated financial statements in Item 1 of this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of financial loss from adverse movement in market prices. The primary sources of market risk are interest rates, foreign currency rates, equity prices and commodity prices.
Our business is exposed primarily to the effect of market risk on our fee revenue, principal investment income and net carried interest allocation, foreign currency risk on non-U.S. investment management business and foreign denominated warehoused investments (if any), interest rate risk on our VFN and other variable rate debt financing warehoused investments (if any), and, equity price risk on marketable equity securities, held primarily by consolidated investment vehicles.
Market Risk Effect on Fee Revenue, Principal Investment Income and Net Carried Interest Allocation
Management Fees—To the extent management fees are based upon fair value of the underlying investments of our managed investment vehicles, an increase or decrease in fair value will directly affect our management fee revenue. Generally, our management fee revenue is calculated based upon investors' committed capital during the commitment period of the vehicle, and thereafter, contributed or invested capital during the investing and liquidating periods, or invested capital from inception for Credit and co-investment vehicles. To a lesser extent, management fees are based upon the NAV of vehicles in our Liquid Strategies or GAV for certain InfraBridge vehicles, measured at fair value. At September 30, 2024, vehicles with NAV or GAV fee basis made up 5% of our $34.1 billion FEEUM. Accordingly, most of our management fee revenue will not be directly affected by changes in investment fair values.
Principal Investment Income (Loss)—This is our share of income (loss) from equity interests in our sponsored funds, which in turn is largely driven by fair value changes in the underlying investments of the funds.
A hypothetical 10% decline in the fair value of fund investments at September 30, 2024 would decrease the OP's share of principal investment income by approximately $124 million.
Incentive Fees and Carried Interest—Incentive fees and carried interest, net of management allocations, are earned based upon the financial performance of a vehicle above a specified return threshold, which is largely driven by appreciation in value of underlying investments. The amount of carried interest allocation recognized is based upon the cumulative performance of the fund if it were liquidated as of the reporting date. Carried interest is subject to reversal until such time it is distributed. The extent of the effect of fair value changes to the amount of incentive fees and carried interest earned will depend upon the cumulative performance of an investment vehicle relative to its return threshold, the performance measurement period used to calculate incentives and carried interest, and the stage of the vehicle's lifecycle.
A hypothetical 10% decline in the fair value of fund investments at September 30, 2024 would decrease carried interest by approximately $168 million, representing the OP's share of carried interest net of allocations to employees, former employees and Wafra. In the same scenario, generally no incentive fees would be realized.
Foreign Currency Risk
As of September 30, 2024, we have limited direct foreign currency exposure from our foreign operations and foreign currency denominated investments warehoused on the balance sheet for future sponsored vehicles. Changes in foreign currency rates can adversely affect earnings and the value of our foreign currency denominated investments, including investments in our foreign subsidiaries.
We have exposure to foreign currency risk from the operations of our foreign subsidiaries to the extent these subsidiaries do not transact in U.S. dollars. Generally, this is limited to our InfraBridge advisor subsidiary which receives fee revenue predominantly in U.S. dollars but incur operating costs in Pound Sterling.
We may have foreign currency denominated investments held by our U.S. subsidiaries that are temporarily warehoused on the balance sheet. At September 30, 2024, our foreign currency exposure is limited to only one AUD equity investment (cost of investment at AUD 35 million). Based upon book value of the investment (which is lower than cost), a hypothetical 100 basis point decline in the AUD/USD rate at September 30, 2024 would have an immaterial effect on earnings.
Interest Rate Risk
Instruments bearing variable interest rates include debt obligations, which are subject to interest rate fluctuations that will affect future cash flows, specifically interest expense.
Our corporate debt exposure to variable interest rates is limited to our VFN revolver, which had no outstanding balance as of September 30, 2024.
Equity Price Risk
At September 30, 2024, we had $91 million of long positions and $47 million of short positions in marketable equity securities, held predominantly by our consolidated sponsored liquid funds. Realized and unrealized gains and losses from marketable equity securities are recorded in other gain (loss) on the consolidated statement of operations. Market prices for publicly traded equity securities may fluctuate due to a myriad of factors, including but not limited to, financial performance of the investee, industry conditions, economic and political environment, trade volume, and general sentiments in the equity markets. Therefore the level of volatility and price fluctuations are unpredictable. Our funds constantly rebalance their investment portfolio to take advantage of market opportunities and to manage risk. Additionally, one of our funds employs a long/short equity strategy, taking long positions that serve as collateral for short positions, which in combination, reduces its market risk exposure. The effect of equity price decreases to earnings attributable to our stockholders is further reduced as our consolidated liquid funds are partially owned by third party capital, which represent redeemable noncontrolling interests.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at September 30, 2024.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company may be involved in litigation and claims in the ordinary course of business. As of September 30, 2024, the Company was not involved in any material legal proceedings.
Item 1A. Risk Factors.
There have been no material changes from the risk factors previously disclosed in response to "Part I—Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2023, which is available on the SEC’s website at www.sec.gov.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Shares of class A common stock, as described below, were issued in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended.
Redemption of Membership Units in OP ("OP Units")
Holders of OP Units have the right to require the OP to redeem all or a portion of their OP Units for cash or, at our option, shares of our class A common stock on a one-for-one basis. In the third quarter of 2024, in satisfaction of redemption requests by a former employee OP Unit holder, we issued 167,344 shares of our class A common stock.
Conversion of Class B Common Stock
In the third quarter of 2024, 987 shares of class B common stock were converted to class A common stock on a one-for-one basis.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Plans
During the quarter ended September 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.