Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended September 30, 2013

OR

 

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

For the transition period from                                to                                 .

Commission file number 001-33099

 

LOGO

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

    

32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

         (I.R.S. Employer Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(Zip Code)

(212) 810-5300

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

             X               No                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

             X               No                                

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or, a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer          X      

   Accelerated filer                           Non-accelerated filer                

Smaller reporting company                  

       

 

(Do not check if a smaller

reporting company)

  

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                                

   No             X          

As of October 31, 2013, there were 167,090,120 shares of the registrant’s common stock outstanding.


Table of Contents

BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

          Page  
Item 1.    Financial Statements (unaudited)   
       Condensed Consolidated Statements of Financial Condition      1   
       Condensed Consolidated Statements of Income      2   
       Condensed Consolidated Statements of Comprehensive Income      3   
       Condensed Consolidated Statements of Changes in Equity      4   
       Condensed Consolidated Statements of Cash Flows      6   
       Notes to Condensed Consolidated Financial Statements      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      43   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      80   
Item 4.    Controls and Procedures      83   

PART II

OTHER INFORMATION

 

Item 1.    Legal Proceedings      84   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      84   
Item 6.    Exhibits      85   

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(in millions, except share data)

(unaudited)

 

         September 30,    
2013
    December 31,
2012
 

Assets

    

Cash and cash equivalents

     $    3,987        $    4,606   

Accounts receivable

     4,311        2,250   

Investments

     1,878        1,750   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     93        297   

Bank loans, other investments and other assets

     2,107        2,264   

Separate account assets

     146,646        134,768   

Separate account collateral held under securities lending agreements

     21,962        23,021   

Property and equipment (net of accumulated depreciation of $649 and $572 at September 30, 2013 and December 31, 2012, respectively)

     523        557   

Intangible assets (net of accumulated amortization of $1,019 and $899 at September 30, 2013 and December 31, 2012, respectively)

     17,513        17,402   

Goodwill

     12,938        12,910   

Other assets

     759        626   
  

 

 

   

 

 

 

Total assets

                     $212,717                        $200,451   
  

 

 

   

 

 

 

Liabilities

    

Accrued compensation and benefits

     $    1,322        $    1,547   

Accounts payable and accrued liabilities

     3,322        1,055   

Short-term borrowings

     -        100   

Liabilities of consolidated variable interest entities:

    

Borrowings

     2,068        2,402   

Other liabilities

     88        103   

Long-term borrowings

     4,938        5,687   

Separate account liabilities

     146,646        134,768   

Separate account collateral liabilities under securities lending agreements

     21,962        23,021   

Deferred income tax liabilities

     5,237        5,293   

Other liabilities

     948        858   
  

 

 

   

 

 

 

Total liabilities

     186,531        174,834   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Temporary equity

    

Redeemable noncontrolling interests

     41        32   

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     2        2   

Shares authorized: 500,000,000 at September 30, 2013 and December 31, 2012;

    

Shares issued: 171,252,185 at September 30, 2013 and December 31, 2012;

    

Shares outstanding: 167,277,854 and 168,875,304 at September 30, 2013 and December 31, 2012, respectively

    

Preferred stock (Note 16)

     -        -   

Additional paid-in capital

     19,391        19,419   

Retained earnings

     7,653        6,444   

Appropriated retained earnings

     25        29   

Accumulated other comprehensive loss

     (79     (59

Treasury stock, common, at cost (3,974,331 and 2,376,881 shares held at September 30, 2013 and December 31, 2012, respectively)

     (993     (432
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     25,999        25,403   

Nonredeemable noncontrolling interests

     127        155   

Nonredeemable noncontrolling interests of consolidated variable interest entities

     19        27   
  

 

 

   

 

 

 

Total permanent equity

     26,145        25,585   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

     $212,717        $200,451   
  

 

 

   

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Income

(in millions, except share data)

(unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2013     2012     2013     2012  

Revenue

       

Investment advisory, administration fees and securities lending revenue

       

Related parties

    $1,478        $1,319        $4,403        $3,900   

Other third parties

    675        705        2,056        2,091   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment advisory, administration fees and securities lending revenue

    2,153        2,024        6,459        5,991   

Investment advisory performance fees

    96        103        293        224   

BlackRock Solutions and advisory

    156        128        420        382   

Distribution fees

    19        19        54        58   

Other revenue

    48        46        177        143   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,472        2,320        7,403        6,798   

Expenses

       

Employee compensation and benefits

    866        828        2,635        2,439   

Distribution and servicing costs

    85        94        266        282   

Amortization of deferred sales commissions

    14        13        38        43   

Direct fund expenses

    167        144        490        440   

General and administration

    334        327        1,130        958   

Amortization of intangible assets

    40        39        120        117   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,506        1,445        4,679        4,279   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    966        875        2,724        2,519   

Nonoperating income (expense)

       

Net gain (loss) on investments

    32        75        235        143   

Net gain (loss) on consolidated variable interest entities

    (6     2        (2     1   

Interest and dividend income

    8        10        18        27   

Interest expense

    (52     (57     (159     (158
 

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense)

    (18     30        92        13   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    948        905        2,816        2,532   

Income tax expense

    219        250        715        742   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    729        655        2,101        1,790   

Less:

       

Net income (loss) attributable to redeemable noncontrolling interests

    -        3        (1     7   

Net income (loss) attributable to nonredeemable noncontrolling interests

    (1     10        11        15   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

    $730        $642        $2,091        $1,768   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to BlackRock, Inc. common stockholders:

       

Basic

    $4.30        $3.72        $12.26        $10.02   

Diluted

    $4.21        $3.65        $12.02        $9.87   

Cash dividends declared and paid per share

    $1.68        $1.50        $5.04        $4.50   

Weighted-average common shares outstanding:

       

Basic

    169,811,633        172,359,141        170,581,930        176,116,975   

Diluted

    173,371,508        175,450,532        174,012,876        178,956,699   

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in millions)

(unaudited)

 

         Three Months Ended    
September 30,
        Nine Months Ended    
September 30,
 
     2013     2012     2013     2012  

Net income

     $729        $655        $2,101        $1,790   

Other comprehensive income (loss):

        

Change in net unrealized gains (losses) from available-for-sale investments, net of tax:

        

Unrealized holding gains (losses), net of tax(1)

     2        10        3        12   

Less: reclassification adjustment included in net income(2)

     1        (4     10        (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change from available-for-sale investments, net of tax

     1        14        (7     17   

Benefit plans, net of tax(3)

     -        -        -        (1

Foreign currency translation adjustments

     118        54        (13     53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     119        68        (20     69   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     848        723        2,081        1,859   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     (1     13        10        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to BlackRock, Inc.

     $849        $710        $2,071        $1,837   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1) 

The tax benefit (expense) was not material for the three and nine months ended September 30, 2013. The tax benefit (expense) was ($7) million for the three months ended September 30, 2012 and ($8) million for the nine months ended September 30, 2012.

(2) 

The tax benefit (expense) was not material for the three and nine months ended September 30, 2013 and 2012.

(3) 

The tax benefit (expense) for the nine months ended September 30, 2012 was not material.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
Common
    Total
BlackRock
Stockholders’
Equity
    Nonredeemable
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Noncontrolling
Interests /
Temporary
Equity
 

December 31, 2012

    $19,421         $6,444       $29         ($59)         ($432)         $25,403         $155         $27         $25,585         $32    

Net income

    -          2,091       -          -          -          2,091         13          (2)         2,102         (1)    

Allocation of gains (losses) of consolidated collateralized loan obligations

    -          -          (4)         -          -          (4)         -          4         -          -     

Dividends paid

    -          (882)       -          -          -          (882)         -          -          (882)         -     

Stock-based compensation

    339         -          -          -          1         340         -          -          340         -     

Issuance of common shares related to employee stock transactions

    (402)         -          -          -          422         20         -          -          20         -     

Employee tax benefit withholdings related to employee stock transactions

    -          -          -          -          (234)         (234)         -          -          (234)         -     

Shares repurchased

    -          -          -          -          (750)         (750)         -          -          (750)         -     

Net tax benefit (shortfall) from stock-based compensation

    35         -          -          -          -          35         -          -          35         -     

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -          -          -          -          -          -          (41)         124         83         104    

Net consolidations (deconsolidations) of sponsored investment funds

    -          -          -          -          -          -          -          (134)         (134)         (94)    

Other comprehensive income (loss)

    -          -          -          (20)         -          (20)         -          -          (20)         -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

      $19,393           $7,653             $25             ($79)             ($993)             $25,999             $127             $19             $26,145             $41    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include $2 million of common stock at both September 30, 2013 and December 31, 2012.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
Held in
Escrow
    Treasury
Stock
Common
    Total
BlackRock
Stockholders’
Equity
    Nonredeemable
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity (2)
 

December 31, 2011

    $20,276          $5,046          $72          ($127)          ($1)          ($218)          $25,048          $184          $38          $25,270          $92     

Net income

    -          1,768          -          -          -          -          1,768          14          1          1,783          7     

Consolidation of a collateralized loan obligation (3)

    -          -          (13)          -          -          -          (13)          -          -          (13)          -     

Allocation of losses of consolidated collateralized loan obligations

    -          -          (3)          -          -          -          (3)          -          3          -          -     

Dividends paid

    -          (804)          -          -          -          -          (804)          -          -          (804)          -     

Stock-based compensation

    344          -          -          -          -          -          344          -          -          344          -     

Merrill Lynch cash capital contribution

    7          -          -          -          -          -          7          -          -          7          -     

Issuance of common shares related to employee stock transactions

    (366)          -          -          -          -          419          53          -          -          53          -     

Employee tax benefit withholdings related to employee stock transactions

    -          -          -          -          -          (141)          (141)          -          -          (141)          -     

Shares repurchased

    (1,000)          -          -          -          -          (334)          (1,334)          -          -          (1,334)          -     

Net tax benefit (shortfall) from stock-based compensation

    63          -          -          -          -          -          63          -          -          63          -     

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -          -          -          -          -          -          -          (20)          (8)          (28)          221     

Net consolidations (deconsolidations) of sponsored investment funds

    -          -          -          -          -          -          -          (8)          -          (8)          (272)     

Other comprehensive income (loss)

    -          -          -          69          -          -          69          -          -          69          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

      $19,324            $6,010              $56              ($58)              ($1)            ($274)            $25,057              $170                $34            $25,261              $48     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include $2 million and $1 million of common stock at September 30, 2012 and December 31, 2011, respectively.

(2)

Amount at September 30, 2012 includes $20 million related to variable interest entities.

(3)

Consolidated during the three months ended September 30, 2012.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)

 

         Nine Months Ended    
    September 30,    
 
     2013     2012  

Cash flows from operating activities

    

Net income

     $2,101        $1,790   

Adjustments to reconcile net income to cash flows from operating activities:

    

Depreciation and amortization

     215        219   

Amortization of deferred sales commissions

     38        43   

Stock-based compensation

     340        344   

Deferred income tax expense (benefit)

     (44     (42

Gain related to PennyMac initial public offering

     (39     -   

Gain related to the charitable contribution

     (80     -   

Charitable contribution

     124        -   

Net (gains) losses on nontrading investments

     (46     (32

Purchases of investments within consolidated sponsored investment funds

     (45     (83

Proceeds from sales and maturities of investments within consolidated sponsored investment funds

     112        48   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     204        (32

Net (gains) losses within consolidated VIEs

     2        (1

Net (purchases) proceeds within consolidated VIEs

     15        233   

(Earnings) losses from equity method investees

     (110     (124

Distributions of earnings from equity method investees

     39        29   

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,061     (493

Deferred sales commissions

     (42     (31

Investments, trading

     (205     (197

Other assets

     (97     (173

Accrued compensation and benefits

     (225     (199

Accounts payable and accrued liabilities

     2,264        489   

Other liabilities

     16        98   
  

 

 

   

 

 

 

Cash flows from operating activities

     2,476        1,886   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (188     (397

Proceeds from sales and maturities of investments

     225        391   

Distributions of capital from equity method investees

     51        51   

Net consolidations (deconsolidations) of sponsored investment funds

     (63     (208

Acquisitions, net of cash acquired

     (240     (267

Purchases of property and equipment

     (60     (121
  

 

 

   

 

 

 

Cash flows from investing activities

     (275     (551
  

 

 

   

 

 

 

Cash flows from financing activities

    

Repayments of short-term borrowings

     (100     -   

Repayments of long-term borrowings

     (750     -   

Proceeds from long-term borrowings

     -        1,495   

Cash dividends paid

     (882     (804

Proceeds from stock options exercised

     15        47   

Proceeds from issuance of common stock

     5        6   

Repurchases of common stock

     (984     (1,475

Merrill Lynch cash capital contribution

     -        7   

Net proceeds from (repayments of) borrowings by consolidated VIEs

     (343     (203

Net (redemptions/distributions paid) subscriptions received from noncontrolling interests holders

     187        193   

Excess tax benefit from stock-based compensation

     40        73   
  

 

 

   

 

 

 

Cash flows from financing activities

     (2,812     (661
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (8     43   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (619     717   

Cash and cash equivalents, beginning of period

     4,606        3,506   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $3,987        $4,223   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest

     $125        $116   

Interest on borrowings of consolidated VIEs

     $82        $52   

Income taxes

     $746        $837   

Supplemental schedule of noncash investing and financing transactions:

    

Issuance of common stock

     $402        $366   

Increase (decrease) in noncontrolling interests due to net consolidation (deconsolidation) of sponsored investment funds

     ($228     ($280

Increase (decrease) in borrowings due to consolidation of VIEs

     $-        $406   

See accompanying notes to condensed consolidated financial statements.

 

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BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.  Business Overview

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversified investment management services to institutional clients, intermediary and individual investors through various investment vehicles. Investment management services primarily consist of the management of equity, fixed income, multi-asset, alternative investment and cash management products. BlackRock offers investment products in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”), collective investment trusts and separate accounts. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

At September 30, 2013, The PNC Financial Services Group, Inc. (“PNC”) held 20.9% of the Company’s voting common stock and 21.9% of the Company’s capital stock, which includes outstanding common and nonvoting preferred stock.

2.  Significant Accounting Policies

Basis of Presentation.    These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Noncontrolling interests on the condensed consolidated statements of financial condition include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accounts and transactions between consolidated entities have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013 (“2012 Form 10-K”).

The interim financial information at September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.

 

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2.  Significant Accounting Policies (continued)

 

Fair Value Measurements.

Hierarchy of Fair Value Inputs.    The provisions of Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 Inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.

 

   

Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”), which in accordance with GAAP, are calculated under fair value measures and the changes in fair values are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives.

Level 2 Inputs:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company relies on the NAV (or its equivalent) of certain investments as their fair value.

 

   

Level 2 assets may include debt securities, bank loans, short-term floating-rate notes and asset-backed securities, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds valued based on NAV (or its equivalent) where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data.

Level 3 Inputs:

Unobservable inputs for the valuation of the asset or liability, which may include nonbinding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV (or its equivalent) and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.

 

   

Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds.

 

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2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

   

Level 3 liabilities include borrowings of consolidated collateralized loan obligations (“CLOs”) valued based upon nonbinding single-broker quotes.

 

   

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices.

Significance of Inputs.    The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Valuation Techniques.    The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of the current market environment and other analytical procedures.

As a practical expedient, the Company relies on NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information from third-party sources including independent appraisals. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

A significant amount of inputs used to value equity, debt securities and bank loans is sourced from well-recognized third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRock’s internal valuation committee or other designated groups review both the valuation methodologies, including the general assumptions and methods used to value various asset classes, and operational processes with these vendors. In addition, on a quarterly basis, meetings are held with the vendors to identify any significant changes to the vendors’ processes.

In addition, quotes obtained from brokers generally are nonbinding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.

 

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2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

Fair Value Option.    ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies an irrevocable election to use fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, which must be applied to an entire instrument, and not only specified risks, specific cash flows, or portions of that instrument, and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method.

Derivative Instruments and Hedging Activities.    ASC 815-10, Derivatives and Hedging (“ASC 815-10”), establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. ASC 815-10 generally requires an entity to recognize all derivatives as either assets or liabilities on the condensed consolidated statements of financial condition and to measure those investments at fair value.

The Company does not use derivative financial instruments for trading or speculative purposes. The Company uses derivative financial instruments primarily for purposes of hedging: (i) exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, (ii) market exposures for certain seed investments and (iii) future cash flows on floating-rate notes. The Company may also use derivatives within its separate account assets, which are segregated funds held for purposes of funding individual and group pension contracts. In addition, certain consolidated sponsored investment funds may also invest in derivatives as a part of their investment strategy.

Changes in the fair value of the Company’s derivative financial instruments are generally recognized in earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities or hedged investments, on the condensed consolidated statements of income.

Separate Account Assets and Liabilities.    Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The life insurance company does not underwrite any insurance contracts that involve any insurance risk transfer from the insured to the life insurance company. The separate account assets primarily include equity, debt securities, money market funds and derivatives. The separate account assets are not subject to general claims of the creditors of BlackRock. These separate account assets and the related equal and offsetting liabilities are recorded as separate account assets and separate account liabilities on the condensed consolidated statements of financial condition in accordance with the ASC 944-80, Financial Services – Separate Accounts.

The net investment income attributable to separate account assets supporting individual and group pension contracts accrues directly to the contract owner and is not reported on the condensed consolidated statements of income. While BlackRock has no economic interest in these separate account assets and liabilities, BlackRock earns policy administration and management fees associated with these products, which are included in investment advisory, administration fees and securities lending revenue on the condensed consolidated statements of income.

 

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Table of Contents

2.  Significant Accounting Policies (continued)

 

Separate Account Collateral Assets Held and Liabilities Under Securities Lending Agreements.    The Company facilitates securities lending arrangements whereby securities held by separate accounts maintained by BlackRock Life Limited are lent to third parties under global master securities lending agreements. In exchange, the Company receives collateral with minimum values generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. The required collateral value is calculated on a daily basis. The global master securities lending agreements provide the Company, in the event of customer default, the right to liquidate collateral or to request additional collateral. Under the Company’s securities lending arrangements, the Company can resell or re-pledge the collateral and the borrower can resell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales under ASC 860, Transfers and Servicing.

As a result of the Company’s ability to resell or re-pledge the collateral, the Company records on the condensed consolidated statements of financial condition the cash and noncash collateral received under these arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. During the nine months ended September 30, 2013 and 2012, the Company had not re-sold or re-pledged any of the collateral received under these arrangements. At September 30, 2013 and December 31, 2012, the fair value of loaned securities held by separate account assets was approximately $20.2 billion and $21.0 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $22.0 billion and $23.0 billion, respectively.

Appropriated Retained Earnings.    Upon the initial consolidation of CLOs, BlackRock records a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statements of financial condition equal to the difference between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. The net change in the fair value of the CLOs’ assets and liabilities is recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as an adjustment to appropriated retained earnings.

Accounting Pronouncements Adopted in the Nine Months Ended September 30, 2013

Amendments to Accumulated Other Comprehensive Income Disclosures.    On February 5, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which added new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). See Note 15, Accumulated Other Comprehensive Income (Loss).

Disclosures About Offsetting Assets and Liabilities.    On December 16, 2011, the FASB issued ASU 2011-11, Disclosures About Offsetting Assets and Liabilities (“ASU 2011-11”), which created new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), that provides clarification about which instruments and transactions are subject to ASU 2011-11. The adoption of ASU 2011-11 and ASU 2013-01 on January 1, 2013 was not material to the condensed consolidated financial statements.

 

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2.  Significant Accounting Policies (continued)

 

Benchmark Interest Rate for Hedge Accounting.    In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2013-10”). ASU 2013-10 provides for the inclusion of certain interest rate benchmarks for hedge accounting purposes. The adoption of ASU 2013-10 in the third quarter 2013 did not have a material impact on the condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Cumulative Translation Adjustment.    In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”).    ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-05 will have a material impact on the condensed consolidated financial statements.

Investment Company Guidance.    In June 2013, the FASB issued ASU 2013-08, Financial Services — Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 amends the current criteria for an entity to qualify as an investment company, creates new disclosure requirements and amends the measurement criteria for certain interests in other investment companies. ASU 2013-08 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-08 will have a material impact on the condensed consolidated financial statements.

Presentation of an Unrecognized Tax Benefit.    In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-11 will have a material impact on the condensed consolidated financial statements.

 

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3.  Investments

A summary of the carrying value of investments is as follows:

 

(in millions)   September 30,
2013
   December 31,
2012

Available-for-sale investments

    $168           $158     

Held-to-maturity investments

    57           112     

Trading investments:

        

Consolidated sponsored investment funds

    381           123     

Other equity and debt securities

    67           94     

Deferred compensation plan mutual funds

    57           53     
 

 

 

  

 

 

Total trading investments

    505           270     

Other investments:

        

Consolidated sponsored investment funds

    314           401     

Equity method investments

    564           595     

Deferred compensation plan hedge fund equity method investments

    11           9     

Cost method investments(1)

    122           120     

Carried interest

    137           85     
 

 

 

  

 

 

Total other investments

    1,148           1,210     
 

 

 

  

 

 

Total investments

                $1,878                       $1,750     
 

 

 

  

 

 

 

  (1) 

Amounts primarily include Federal Reserve Bank Stock.

At September 30, 2013, the Company consolidated $695 million of investments held by consolidated sponsored investment funds (excluding variable interest entities (“VIEs”)) of which $381 million and $314 million were classified as trading investments and other investments, respectively. At December 31, 2012, the Company consolidated $524 million of investments held by consolidated sponsored investment funds (excluding VIEs) of which $123 million and $401 million were classified as trading investments and other investments, respectively.

Available-for-Sale Investments

A summary of the cost and carrying value of investments classified as available-for-sale investments is as follows:

 

(in millions)                                    
        Gross Unrealized   Carrying
Value
 
At September 30, 2013   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $163          $6          ($4)          $165   

Other securities

    1          2          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

    $164          $8          ($4)          $168   
 

 

 

 

 

 

 

 

 

 

 

 

 
At December 31, 2012                                    

Equity securities of sponsored investment funds

    $142          $14          ($1)          $155   

Other securities

    2          1          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

            $144                  $15                  ($1)                  $158   
 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale investments primarily included seed investments in BlackRock sponsored investment mutual funds.

 

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Table of Contents

3.  Investments (continued)

 

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $57 million and $112 million at September 30, 2013 and December 31, 2012, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and the amortized cost (carrying value) of these investments approximated fair value. At September 30, 2013, $43 million of these investments would mature in one year or less and $14 million would mature after 10 years.

Trading Investments

A summary of the cost and carrying value of trading investments is as follows:

 

(in millions)        September 30, 2013              December 31, 2012      
     Cost     

Carrying

Value

     Cost     

Carrying

Value

 
  

 

 

    

 

 

 

Trading investments:

           

Deferred compensation plan mutual funds

     $  51         $  57         $  46         $  53   

Equity/Multi-asset mutual funds

     190         194         154         162   

Debt securities/fixed income mutual funds:

           

Corporate debt

     126         126         44         44   

Government debt

     132         128         11         11   
  

 

 

    

 

 

 

Total trading investments

             $499                 $505                 $255                 $270   
  

 

 

    

 

 

 

At September 30, 2013, trading investments included $187 million of equity securities and $194 million of debt securities held by consolidated sponsored investment funds, $57 million of deferred compensation plan mutual fund investments and $67 million of other equity and debt securities.

Other Investments

A summary of the cost and carrying value of other investments is as follows:

 

(in millions)        September 30, 2013              December 31, 2012      
     Cost     

Carrying

Value

     Cost     

Carrying

Value

 
  

 

 

    

 

 

 

Other investments:

           

Consolidated sponsored investment funds

     $303         $314         $378         $401   

Equity method

     480         564         541         595   

Deferred compensation plan hedge fund

equity method investments

     9         11         15         9   

Cost method investments:

           

Federal Reserve Bank stock

     93         93         89         89   

Other

     17         29         31         31   
  

 

 

    

 

 

 

Total cost method investments

     110         122         120         120   

Carried interest

     -         137         -         85   
  

 

 

    

 

 

 

Total other investments

             $902                 $1,148                 $1,054                 $1,210   
  

 

 

    

 

 

 

Consolidated sponsored investment funds include third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.

 

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Table of Contents

3.  Investments (continued)

 

Other Investments (continued)

 

Equity method investments primarily include BlackRock’s direct investment in certain BlackRock sponsored investment funds. See Note 10, Other Assets, for information on the Company’s investment in PennyMac Financial Services, Inc. (“PennyMac”), which is included in other assets on the condensed consolidated statements of financial condition.

Cost method investments include nonmarketable securities, including Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale. At September 30, 2013 and December 31, 2012, there were no indicators of impairment on these investments.

Carried interest represents allocations to BlackRock’s general partner capital accounts from certain funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds.

4.  Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. The investments owned by these consolidated sponsored investment funds are classified as trading or other investments. The following table presents the balances related to these consolidated funds that were included on the condensed consolidated statements of financial condition as well as BlackRock’s net interest in these funds:

 

(in millions)    September 30,
2013
     December 31,
2012
 

Cash and cash equivalents

     $105         $133   

Investments:

     

Trading investments

     381         123   

Other investments

     314         401   

Other assets

     13         25   

Other liabilities

     (33)         (65)   

Noncontrolling interests

     (168)         (187)   
  

 

 

    

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

                       $612                           $430   
  

 

 

    

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds of $612 million and $430 million at September 30, 2013 and December 31, 2012, respectively, represents the value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in nonoperating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.

In addition, at September 30, 2013 and December 31, 2012, several consolidated CLOs and one investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion of these consolidated investment products.

The Company is not able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company is not able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in the Company’s operations.

 

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5.  Fair Value Disclosures

Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value

 

September 30, 2013

(in millions)

 

Quoted

Prices in

Active

Markets for
Identical
Assets

(Level 1)

    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other Assets
Not Held at Fair
Value(1)
   

September 30,

2013

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities (funds and CDOs)

  $ 165      $ -      $ 1      $ -      $ 166   

Debt securities

    -        2        -        -        2   
 

 

 

 

Total available-for-sale

    165        2        1        -        168   

Held-to-maturity debt securities

    -        -        -        57        57   

Trading:

         

Deferred compensation plan mutual funds

    57        -        -        -        57   

Equity/Multi-asset mutual funds

    194        -        -        -        194   

Debt securities / fixed income mutual funds

    61        193        -        -        254   
 

 

 

 

Total trading

    312        193        -        -        505   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    1        21        45        -        67   

Private / public equity(2)

    5        8        234        -        247   
 

 

 

 

Total consolidated sponsored investment funds

    6        29        279        -        314   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        67        145        55        267   

Private equity investments

    -        -        98        -        98   

Real estate funds

    -        20        103        7        130   

Fixed income mutual funds

    63        -        -        -        63   

Equity/Multi-asset, alternative mutual funds

    6        -        -        -        6   
 

 

 

 

Total equity method

    69        87        346        62        564   

Deferred compensation plan hedge fund equity method investments

    -        11        -        -        11   

Cost method investments

    -        -        -        122        122   

Carried interest

    -        -        -        137        137   
 

 

 

 

Total investments

    552        322        626        378        1,878   
 

 

 

 

Separate account assets

    106,085        39,675        -        886        146,646   

Separate account collateral held under securities lending agreements:

         

Equity securities

    19,851        -        -        -        19,851   

Debt securities

    -        2,111        -        -        2,111   
 

 

 

 

Total separate account collateral held under securities lending agreements

    19,851        2,111        -        -        21,962   

Other assets(3)

    -        12        -        -        12   

Assets of consolidated VIEs:

         

Bank loans and other assets

    -        1,867        97        20        1,984   

Bonds

    -        64        35        -        99   

Private / public equity(4)

    -        7        17        -        24   
 

 

 

 

Total assets of consolidated VIEs

    -        1,938        149        20        2,107   
 

 

 

 

Total

  $ 126,488      $ 44,058      $ 775      $ 1,284      $ 172,605   
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

  $ -      $ -      $ 2,068      $ -      $ 2,068   

Separate account collateral liabilities under securities lending agreements

    19,851        2,111        -        -        21,962   

Other liabilities(5)

    19        4        33        -        56   
 

 

 

 

Total

  $ 19,870      $ 2,115      $ 2,101      $ -      $ 24,086   
 

 

 

 

 

  (1) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

  (2) 

Level 3 amounts include $202 million and $32 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Amount includes company-owned and split-dollar life insurance policies.

  (4) 

Level 3 amounts include $15 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by a private equity fund.

  (5) 

Amounts include a credit default swap (see Note 7, Derivatives and Hedging, for more information), securities sold short within consolidated sponsored investment funds and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

 

16


Table of Contents

5.  Fair Value Disclosures (continued)

 

Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value

 

                               

December 31, 2012

(in millions)

  Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other Assets
Not Held at
Fair Value (1)
    December 31,
2012
 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities (funds and CDOs)

  $ 155      $ -      $ 1      $ -      $ 156   

Debt securities

    -        2        -        -        2   
 

 

 

 

Total available-for-sale

    155        2        1        -        158   

Held-to-maturity debt securities

    -        -        -        112        112   

Trading:

         

Deferred compensation plan mutual funds

    53        -        -        -        53   

Equity/Multi-asset mutual funds

    159        3        -        -        162   

Debt securities / fixed income mutual funds

    5        50        -        -        55   
 

 

 

 

Total trading

    217        53        -        -        270   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    3        39        73        -        115   

Private / public equity(2)

    10        10        266        -        286   
 

 

 

 

Total consolidated sponsored investment funds

    13        49        339        -        401   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        61        161        39        261   

Private equity investments

    -        -        90        -        90   

Real estate funds

    -        19        88        15        122   

Fixed income mutual funds

    46        -        -        -        46   

Equity/Multi-asset, alternative mutual funds

    76        -        -        -        76   
 

 

 

 

Total equity method

    122        80        339        54        595   

Deferred compensation plan hedge fund equity method investments

    -        9        -        -        9   

Cost method investments

    -        -        -        120        120   

Carried interest

    -        -        -        85        85   
 

 

 

 

Total investments

    507        193        679        371        1,750   
 

 

 

 

Separate account assets

    95,514        38,392        2        860        134,768   

Separate account collateral held under securities lending agreements:

         

Equity securities

    21,273        -        -        -        21,273   

Debt securities

    -        1,748        -        -        1,748   
 

 

 

 

Total separate account collateral held under securities lending agreements

    21,273        1,748        -        -        23,021   

Other assets(3)

    -        12        -        -        12   

Assets of consolidated VIEs:

         

Bank loans

    -        2,004        106        -        2,110   

Bonds

    -        78        46        -        124   

Private / public equity(4)

    2        6        22        -        30   
 

 

 

 

Total assets of consolidated VIEs

    2        2,088        174        -        2,264   
 

 

 

 

Total

  $ 117,296      $ 42,433      $ 855      $ 1,231      $ 161,815   
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

  $ -      $ -      $ 2,402      $ -      $ 2,402   

Separate account collateral liabilities under securities lending agreements

    21,273        1,748        -        -        23,021   

Other liabilities(5)

    15        5        -        -        20   
 

 

 

 

Total

  $ 21,288      $ 1,753      $ 2,402      $ -      $ 25,443   
 

 

 

 

 

  (1) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

  (2) 

Level 3 amounts include $212 million and $54 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Amount includes company-owned and split-dollar life insurance policies.

  (4) 

Level 3 amounts include $20 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by a private equity fund.

  (5) 

Amounts include a credit default swap (see Note 7, Derivatives and Hedging, for more information) and securities sold short within consolidated sponsored investment funds.

 

17


Table of Contents

5.  Fair Value Disclosures (continued)

 

Level 3 Assets.  Level 3 investments of $626 million and $679 million at September 30, 2013 and December 31, 2012, respectively, primarily related to equity method investments and consolidated sponsored investment funds. Level 3 assets within investments, except for direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal and third-party fund managers.

Direct investments in private equity companies held by private equity funds totaled $34 million and $56 million at September 30, 2013 and December 31, 2012, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used is evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the expected cash flows to a single present value amount using current expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

Level 3 assets recorded within separate account assets include single-broker nonbinding quotes for fixed income securities and equity securities that have unobservable inputs due to certain corporate actions.

Level 3 assets of consolidated VIEs include bank loans and bonds valued based on single-broker non-binding quotes and direct private equity investments and private equity funds valued based upon internal as well as third-party fund manager valuations, which may be adjusted by using the returns of certain market indices.

Level 3 Liabilities.  Level 3 liabilities recorded as borrowings of consolidated VIEs include CLO borrowings valued based upon single-broker non-binding quotes.

 

18


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2013

 

(in millions)   June 30,
2013
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2013
    Total net 
gains (losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

    $1        $-        $-        $-        $-        $-        $-        $1        $-   

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    47        2        -        (2     (2     -        -        45        -   

Private equity

    249        10        -        (23     -        -        (2     234        7   

Equity method:

                 

Hedge funds / Funds of hedge funds

    157        1        1        (1     (13     -        -        145        1   

Private equity investments

    105        4        1        (10     (2     -        -        98        4   

Real estate funds

    97        6        2        -        (2     -        -        103        6   
 

 

 

   

 

 

 

Total Level 3 investments

    656        23        4        (36     (19     -        (2     626        18   
 

 

 

   

 

 

 

Assets of consolidated VIEs:

                 

Bank loans

    93        -        18        (8     -        40        (46     97     

Bonds

    35        1        -        (1     -        -        -        35     

Private equity

    19        -        -        (2     -        -        -        17     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    147        1        18        (11     -        40        (46     149        n/a (3) 
 

 

 

   

Total Level 3 assets

    $803        $24        $22        ($47     ($19     $40        ($48     $775     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

            $2,145        ($5     $-        $-        ($82     $-        $-        $2,068        n/a (3) 

Other liabilities

    -        -        -        -        33        -        -        33     
 

 

 

   

Total Level 3 liabilities

    $2,145        ($5     $-        $-        ($49     $-        $-        $2,101     
 

 

 

   

 

  n/a – not applicable
  (1) 

Amounts primarily include distributions from equity method investees, repayments of borrowings of consolidated VIEs and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

19


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2013

 

(in millions)    December 31,
2012
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    September 30,
2013
     Total net
gains
(losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of hedge funds

     73         8        12         (11     (30     -         (7     45         6   

Private equity

     266         26        12         (62     -        -         (8     234         21   

Equity method:

                      

Hedge funds / Funds of hedge funds

     161         10        2         (1     (27     -         -        145         10   

Private equity investments

     90         14        10         (10     (6     -         -        98         14   

Real estate funds

     88         14        5         -        (4     -         -        103         14   
  

 

 

    

 

 

 

Total Level 3 investments

     679         72        41         (84     (67     -         (15     626         65   
  

 

 

    

 

 

 

Separate account assets

     2         -        -         (2     -        -         -        -         n/a (3) 

Assets of consolidated VIEs:

                      

Bank loans

     106         (1     91         (48     -        71         (122     97      

Bonds

     46         -        4         (15     -        -         -        35      

Private equity

     22         1        -         (6     -        -         -        17      

Fund of hedge funds

     -         -        134         -        (134     -         -        -      
  

 

 

    

Total Level 3 assets of consolidated VIEs

     174         -        229         (69     (134     71         (122     149         n/a (4) 
  

 

 

    

Total Level 3 assets

     $855         $72        $270         ($155     ($201     $71         ($137     $775      
  

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

             $2,402         ($9     $-         $-        ($343     $-         $-        $2,068         n/a (4) 

Other liabilities

     -         -        -         -        33        -         -        33      
  

 

 

    

Total Level 3 liabilities

     $2,402         ($9     $-         $-        ($310     $-         $-        $2,101      
  

 

 

    

 

  n/a – not applicable
  (1) 

Amounts primarily include distributions from equity method investees, repayments of borrowings of consolidated VIEs, elimination of investment related to a deconsolidation of a consolidated VIE, a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the condensed consolidated statements of income.

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

20


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2012

 

(in millions)   June 30,
2012
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2012
    Total net gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

    $1        $-        $-        $-        $-        $-        $-        $1        $-   

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    46        8        3        (2     -        -        -        55        8   

Private equity

    298        22        -        (14     (8     -        -        298        20   

Equity method:

                 

Hedge funds / Funds of hedge funds

    187        14        -        -        (21     -        -        180        14   

Private equity investments

    88        1        1        -        -        -        -        90        2   

Real estate funds

    101        6        6        (7     (3     -        -        103        4   
 

 

 

   

 

 

 

Total Level 3 investments

    721        51        10        (23     (32     -        -        727        48   
 

 

 

   

 

 

 

Separate account assets

    7        (4     6        (7     -        34        -        36        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    85        2        7        (24     7        36        (24     89     

Bonds

    44        1        -        -        -        -        -        45     

Private equity

    25        2        2        (3     -        -        -        26     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    154        5        9        (27     7        36        (24     160        n/a (4) 
 

 

 

   

Total Level 3 assets

    $882        $52        $25        ($57     ($25     $70        ($24     $923     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

            $1,439        ($27     $-        $-        $377        $-        $-        $1,843        n/a (4) 

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the condensed consolidated statements of income.

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

21


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2012

 

(in millions)   December 31,
2011
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2012
    Total net gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

    $1        $-        $-        $-        $-        $-        $-        $1        $-   

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    22        4        30        (2     (2     3        -        55        4   

Private equity

    313        43        2        (46     (8     -        (6     298        38   

Equity method:

                 

Hedge funds / Funds of hedge funds

    193        33        -        -        (46     -        -        180        33   

Private equity investments

    85        7        4        -        (6     -        -        90        8   

Real estate funds

    88        8        19        (7     (5     -        -        103        6   
 

 

 

   

 

 

 

Total Level 3 investments

    702        95        55        (55     (67     3        (6     727        89   
 

 

 

   

 

 

 

Separate account assets

    10        (5     10        (18     -        48        (9     36        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    83        2        25        (31     7        89        (86     89     

Bonds

    40        3        2        -        -        -        -        45     

Private equity

    27        4        2        (7     -        -        -        26     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    150        9        29        (38     7        89        (86     160        n/a (4) 
 

 

 

   

Total Level 3 assets

    $862        $99        $94        ($111     ($60     $140        ($101     $923     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

            $1,574        ($66     $-        $-        $203        $-        $-        $1,843        n/a (4) 

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the condensed consolidated statements of income.

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

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5.  Fair Value Disclosures (continued)

 

Realized and Unrealized Gains (Losses) for Level 3 Assets and Liabilities. Realized and unrealized gains (losses) recorded for Level 3 assets and liabilities are reported in nonoperating income (expense) on the condensed consolidated statements of income. A portion of net income (loss) for consolidated investments and all of the net income (loss) for consolidated VIEs are allocated to noncontrolling interests to reflect net income (loss) not attributable to the Company.

Transfers in and/or out of Levels. Transfers in and/or out of levels are reflected when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable/unobservable, or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a NAV (or a capital account), or when the book value of certain equity method investments no longer represents fair value as determined under valuation methodologies.

Separate Account Assets.    During the three and nine months ended September 30, 2012, there were $34 million and $48 million, respectively, of transfers of equity securities into Level 3 from Level 1, primarily due to market inputs no longer being considered observable.

Assets of Consolidated VIEs.    During the three and nine months ended September 30, 2013, there were $46 million and $122 million, respectively, of transfers out of Level 3 to Level 2 related to bank loans. In addition, during the three and nine months ended September 30, 2013, there were $40 million and $71 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of Levels 2 and 3 were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

During the three and nine months ended September 30, 2012, there were $24 million and $86 million, respectively, of transfers out of Level 3 into Level 2 related to bank loans. In addition, during the three and nine months ended September 30, 2012, there were $36 million and $89 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of Levels 2 and 3 were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

Consolidated Sponsored Investment Funds.    During the nine months ended September 30, 2013, there were $12 million of transfers out of Level 1 to Level 2 related to consolidated private equity funds. This transfer was due to a direct investment in a public company valued at a discount due to restrictions on sale.

Other Significant Settlements.    During the three and nine months ended September 30, 2013, there were $17 million and $37 million, respectively, of distributions from equity method investees categorized in Level 3.

During the nine months ended September 30, 2013, other settlements included $134 million related to a deconsolidation of a consolidated fund of hedge funds, which was previously classified as a VIE. This fund was deconsolidated during the second quarter 2013 due to the granting of additional substantive rights to unaffiliated investors of the fund.

In addition, during the nine months ended September 30, 2013, there was a $28 million reclassification of a Level 3 investment from a consolidated sponsored investment fund to an equity method investment due to a change in BlackRock’s ownership percentage.

During the three and nine months ended September 30, 2012, there were $24 million and $57 million, respectively, of distributions from equity method investees categorized in Level 3.

 

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5.  Fair Value Disclosures (continued)

 

In addition, during the three and nine months ended September 30, 2012, other settlements included $406 million of borrowings related to the consolidation of one additional CLO.

Disclosures of Fair Value for Financial Instruments Not Held at Fair Value. At September 30, 2013 and December 31, 2012, the fair value of the Company’s financial instruments not held at fair value are categorized in the table below:

 

    September 30, 2013     December 31, 2012        
(in millions)      Carrying   
Amount
       Estimated   
Fair Value
       Carrying   
Amount
       Estimated   
Fair Value
       Fair Value   
Hierarchy
 

Financial Assets:

         

Cash and cash equivalents

  $ 3,987      $ 3,987      $ 4,606      $ 4,606        Level 1 (1) 

Accounts receivable

    4,311        4,311        2,250        2,250        Level 1 (2) 

Cash and cash equivalents of consolidated VIEs

    93        93        297        297        Level 1 (1) 

Financial Liabilities:

         

Accounts payable and accrued liabilities

    3,322        3,322        1,055        1,055        Level 1 (2) 

Short-term borrowings

    -        -        100        100        Level 1 (2) 

Long-term borrowings

    4,938        5,310        5,687        6,275        Level 2 (3) 

 

  (1) 

Cash and cash equivalents are carried at either cost or amortized cost that approximates fair value due to their short-term maturities. At September 30, 2013 and December 31, 2012, approximately $76 million and $98 million, respectively, of money market funds were recorded within cash and cash equivalents on the condensed consolidated statements of financial condition. Money market funds are valued based on quoted market prices, or $1.00 per share, which generally is the NAV of the fund. At September 30, 2013 and December 31, 2012, approximately $105 million and $133 million, respectively, related to cash and cash equivalents held by consolidated sponsored investment funds.

 

  (2) 

The carrying amounts of accounts receivable, accounts payable and accrued liabilities and short-term borrowings approximate fair value due to their short-term nature.

 

  (3) 

Long-term borrowings are recorded at amortized cost. The fair value of the long-term borrowings, including the current portion of long-term borrowings, is estimated using market prices at the end of September 2013 and December 2012, respectively. See Note 11, Borrowings, for further information on the September 30, 2013 fair value of the Company’s long-term borrowings.

 

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5.  Fair Value Disclosures (continued)

 

Investments in Certain Entities that Calculate Net Asset Value Per Share

As a practical expedient to value certain investments that do not have a readily determinable fair value and have attributes of an investment company, the Company relies on NAV as the fair value. The following tables list information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a NAV per share (or equivalent).

September 30, 2013

 

(in millions)   Ref     Fair Value     Total Unfunded
Commitments
   

Redemption
Frequency

  Redemption
Notice Period

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (a     $202        $25      n/r   n/r

Other funds of hedge funds

    (b     57        -     

Monthly (26%),

Quarterly (2%),

n/r (72%)

  2 – 90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (c     212        92     

Monthly (2%), Quarterly (32%)

n/r (66%)

  15 – 90 days

Private equity funds

    (d     98        57      n/r   n/r

Real estate funds

    (e     123        11     

Quarterly (16%)

n/r (84%)

  60 days

Deferred compensation plan hedge fund investments

    (f     11        -      Monthly (27%), Quarterly (73%)   60 – 90 days

Consolidated VIEs:

         

Private equity fund

    (g     15        1      n/r   n/r
   

 

 

   

 

 

     

Total

      $718        $186       
   

 

 

   

 

 

     

 

  n/r – not redeemable

 

  (1) 

Comprised of equity method investments, which include investment companies, which in accordance with GAAP account for their financial assets and most financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees approximates fair value.

 

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5.  Fair Value Disclosures (continued)

 

Investments in Certain Entities that Calculate Net Asset Value Per Share (continued)

 

December 31, 2012

 

(in millions)   Ref     Fair Value     Total
Unfunded
Commitments
   

Redemption
Frequency

  Redemption
Notice Period

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (a     $212        $32      n/r   n/r

Other funds of hedge funds

    (b     98        -     

Monthly (22%)

Quarterly (11%)

n/r (67%)

  1 – 90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (c     222        42     

Monthly (2%)

Quarterly (28%)

n/r (70%)

  15 – 90 days

Private equity funds

    (d     90        135      n/r   n/r

Real estate funds

    (e     107        15     

Quarterly (18%)

n/r (82%)

  60 days

Deferred compensation plan hedge fund investments

    (f     9        -     

Monthly (33%)

Quarterly (67%)

  60 – 90 days

Consolidated VIE:

         

Private equity funds

    (g     20        1      n/r   n/r

Trading:

         

Equity

    (h     3        -      Daily (100%)   None
   

 

 

   

 

 

     

Total

      $761        $225       
   

 

 

   

 

 

     

 

  n/r – not redeemable

 

  (1) 

Comprised of equity method investments, which include investment companies, which in accordance with GAAP account for their financial assets and most financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees approximates fair value.

 

  (a) This category includes the underlying third-party private equity funds within consolidated BlackRock sponsored private equity funds of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds, the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately seven years at both September 30, 2013 and December 31, 2012. The total remaining unfunded commitments to other third-party funds were $25 million and $32 million at September 30, 2013 and December 31, 2012, respectively. The Company was contractually obligated to fund $30 million at both September 30, 2013 and December 31, 2012 to the consolidated funds.

 

  (b) This category includes consolidated funds of hedge funds that invest in multiple strategies to diversify risks. The fair values of the investments have been estimated using the NAV of the fund’s ownership interest in partners’ capital of each fund in the portfolio. Certain of the underlying funds can be redeemed as long as there are no restrictions in place. At September 30, 2013 and December 31, 2012, the underlying funds that are currently restricted from redemptions within one year will be redeemable in approximately 12 to 24 months. This category also includes a consolidated offshore feeder fund that invests in a master fund with multiple alternative investment strategies. The fair value of this investment has been estimated using the NAV of the master offshore fund held by the feeder fund. The investment is currently subject to restrictions in place by the underlying master fund.

 

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5.  Fair Value Disclosures (continued)

 

Investments in Certain Entities that Calculate Net Asset Value Per Share (continued)

 

  (c) This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit and mortgage instruments and other third-party hedge funds. The fair values of the investments have been estimated using the NAV of the Company’s ownership interest in partners’ capital. It was estimated that the investments in the funds that are not subject to redemption will be liquidated over a weighted-average period of approximately four and five years at September 30, 2013 and December 31, 2012, respectively.

 

  (d) This category includes several private equity funds that initially invest in nonmarketable securities of private companies, which ultimately may become public in the future. The fair values of these investments have been estimated using capital accounts representing the Company’s ownership interest in the funds as well as other performance inputs. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the private equity funds. It was estimated that the investments in these funds will be liquidated over a weighted-average period of approximately five years at both September 30, 2013 and December 31, 2012.

 

  (e) This category includes several real estate funds that invest directly in real estate and real estate related assets. The fair values of the investments have been estimated using capital accounts representing the Company’s ownership interest in the funds. A majority of the Company’s investments are not subject to redemption or are not currently redeemable and is normally returned through distributions as a result of the liquidation of the underlying assets of the real estate funds. It is estimated that the investments in these funds not subject to redemptions will be liquidated over a weighted-average period of approximately seven years at September 30, 2013 and eight years at December 31, 2012.

 

  (f) This category includes investments in certain hedge funds that invest in energy and health science related equity securities. The fair values of the investments in this category have been estimated using capital accounts representing the Company’s ownership interest in partners’ capital as well as performance inputs. The investments in these funds will be redeemed upon settlement of certain deferred compensation liabilities.

 

  (g) This category includes the underlying third-party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying third-party funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately two years at September 30, 2013 and three years at December 31, 2012. Total remaining unfunded commitments to other third-party funds were $1 million at both September 30, 2013 and December 31, 2012, which commitments are required to be funded by capital contributions from noncontrolling interest holders.

 

  (h) This category includes consolidated offshore feeder funds that invest in master funds with multiple equity strategies to diversify risks. The fair values of the investments in this category have been estimated using the NAV of master offshore funds held by the feeder funds. Investments in this category generally can be redeemed at any time, as long as there are no restrictions in place by the underlying master funds.

Fair Value Option.    Upon the initial consolidation of certain CLOs, the Company elected to adopt the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings of the CLOs to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplification. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference will be reflected as net income (loss) attributable to nonredeemable noncontrolling interests on the condensed consolidated statements of income and offset by a change in appropriated retained earnings on the condensed consolidated statements of financial condition.

 

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5.  Fair Value Disclosures (continued)

 

The following table summarizes information related to those assets and liabilities selected for fair value accounting at September 30, 2013 and December 31, 2012:

 

(in millions)        September 30,    
2013
         December 31,    
2012
 

CLO Bank Loans:

     

Aggregate principal amounts outstanding

     $1,976         $2,124   

Fair value

     1,964         2,110   
  

 

 

    

 

 

 

Aggregate unpaid principal balance in excess of (less than) fair value

     $12         $14   
  

 

 

    

 

 

 

Unpaid principal balance of loans more than 90 days past due

     $12         $4   

Aggregate fair value of loans more than 90 days past due

     7         -   
  

 

 

    

 

 

 

Aggregate unpaid principal balance in excess of fair value for loans more than 90 days past due

     $5         $4   
  

 

 

    

 

 

 

CLO Borrowings:

     

Aggregate principal amounts outstanding

     $2,201         $2,535   

Fair value

     $2,068         $2,402   

At September 30, 2013, the principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2025.

During the three months ended September 30, 2013 and 2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $25 million and a $45 million gain, respectively, which were offset by a $28 million and a $44 million loss, respectively, from the change in fair value of the CLO borrowings.

During the nine months ended September 30, 2013 and 2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $104 million and a $123 million gain, respectively, which were offset by a $92 million and a $118 million loss, respectively, from the change in fair value of the CLO borrowings.

The net gains (losses) were recorded in net gain (loss) on consolidated VIEs on the condensed consolidated statements of income.

The change in fair value of the assets and liabilities included interest income and expense, respectively.

6.  Variable Interest Entities

In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt obligations (“CDOs”)/CLOs and sponsored investment funds, which may be considered VIEs. The Company receives advisory fees and/or other incentive-related fees for its services and may from time to time own equity or debt securities or enter into derivatives with the vehicles, each of which are considered variable interests. The Company enters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Company’s involvement in financing the operations of the VIEs is generally limited to its equity interests.

 

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6.  Variable Interest Entities (continued)

 

The primary beneficiary (“PB”) of a VIE that is an investment fund that meets the conditions of ASU 2010-10, Amendments to Statement 167 for Certain Investment Funds (“ASU 2010-10”), is the enterprise that has a variable interest (or combination of variable interests, including those of related parties) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns or both. In order to determine whether the Company is the PB of a VIE, management must make significant estimates and assumptions of probable future cash flows of the VIEs. Assumptions made in such analyses may include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, pre-payments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.

The PB of a CDO/CLO or other entity that is a VIE that does not meet the conditions of ASU 2010-10 is the enterprise that has the power to direct activities of the entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the entity.

Consolidated VIEs. Consolidated VIEs included CLOs in which BlackRock did not have an investment; however, BlackRock, as the collateral manager, was deemed to have both the power to control the activities of the CLOs and the right to receive benefits that could potentially be significant to the CLOs. In addition, BlackRock was the PB of one investment fund because it absorbed the majority of the variability due to its de facto third-party relationships with other partners in the fund. The assets of these VIEs are not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company. At September 30, 2013 and December 31, 2012, the following balances related to VIEs were consolidated on the condensed consolidated statements of financial condition:

 

(in millions)      September 30, 2013          December 31, 2012    

Assets of consolidated VIEs:

     

Cash and cash equivalents

                 $93                     $297   

Bank loans

     1,964         2,110   

Bonds

     99         124   

Other investments and other assets

     44         30   
  

 

 

    

 

 

 

Total bank loans, bonds, other investments and other assets

     2,107         2,264   

Liabilities of consolidated VIEs:

     

Borrowings

     (2,068)         (2,402)   

Other liabilities

     (88)         (103)   

Appropriated retained earnings

     (25)         (29)   

Noncontrolling interests of consolidated VIEs

     (19)         (27)   
  

 

 

    

 

 

 

Total BlackRock net interests in consolidated VIEs

     $-         $-   
  

 

 

    

 

 

 

For the three months ended September 30, 2013 and 2012, the Company recorded a nonoperating loss of $6 million and a nonoperating gain of $2 million, respectively, offset by a $6 million net loss attributable to nonredeemable noncontrolling interests and a $2 million net gain attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

 

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6.  Variable Interest Entities (continued)

 

For the nine months ended September 30, 2013 and 2012, the Company recorded a nonoperating loss of $2 million and a nonoperating gain of $1 million, respectively, offset by a $2 million net loss attributable to nonredeemable noncontrolling interests and a $1 million net gain attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

At September 30, 2013 and December 31, 2012, the weighted-average maturities of the bank loans and bonds attributable to consolidated VIEs were approximately 4.7 and 4.5 years, respectively.

Non-Consolidated VIEs.    At September 30, 2013 and December 31, 2012, the Company’s carrying value of assets and liabilities and its maximum risk of loss related to VIEs for which it was the sponsor or in which it held a variable interest, but for which it was not the PB, was as follows:

 

(in millions)   Variable Interests on the Condensed
Consolidated
Statement of Financial Condition
       
At September 30, 2013   Investments     Advisory
Fee
Receivables
    Other Net
Assets
(Liabilities)
    Maximum
Risk of Loss
 (1)
 

CDOs/CLOs

    $1        $1        ($4)        $19   

Other sponsored investment funds:

       

Collective trusts

    -       166        -       166   

Other

    18        130        (5)        148   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $19        $297        ($9)        $333   
 

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2012

 

CDOs/CLOs

    $1        $1        ($5)        $19   

Other sponsored investment funds:

       

Collective trusts

    -       248        -       248   

Other

    17        61        (3)        77   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $18        $310        ($8)        $344   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

At both September 30, 2013 and December 31, 2012, BlackRock’s maximum risk of loss associated with these VIEs primarily related to: (i) advisory fee receivables; (ii) BlackRock’s investments; and (iii) $17 million of credit protection sold by BlackRock to a third party in a synthetic CDO transaction.

The net assets related to the above CDOs/CLOs and other sponsored investment funds, including collective trusts, that the Company does not consolidate were as follows:

CDOs/CLOs

 

(in billions)        September 30, 2013              December 31, 2012      

Assets at fair value

     $3 &nbs