KeyBank 2014 Annual Report Download - page 162

Principal investments. Principal investments consist of investments in equity and debt instruments made by
our principal investing entities. They include direct investments (investments made in a particular company) and
indirect investments (investments made through funds that include other investors). Our principal investing
entities are accounted for as investment companies in accordance with the applicable accounting guidance,
whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the
current period’s earnings. This process is a coordinated and documented effort by the Principal Investing Entities
Deal Team (individuals from one of the independent investment managers who oversee these instruments),
accounting staff, and the Investment Committee (individual employees and a former employee of Key and one of
the independent investment managers). This process involves an in-depth review of the condition of each
investment depending on the type of investment.
Our direct investments include investments in debt and equity instruments of both private and public companies.
When quoted prices are available in an active market for the identical direct investment, we use the quoted prices
in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases,
quoted market prices are not available for our direct investments, and we must perform valuations using other
methods. These direct investment valuations are an in-depth analysis of the condition of each investment and are
based on the unique facts and circumstances related to each individual investment. There is a certain amount of
subjectivity surrounding the valuation of these investments due to the combination of quantitative and qualitative
factors that are used in the valuation models. Therefore, these direct investments are classified as Level 3 assets.
The specific inputs used in the valuations of each type of direct investment are described below.
Interest-bearing securities (i.e., loans) are valued on a quarterly basis. Valuation adjustments are determined by
the Principal Investing Entities Deal Team and are subject to approval by the Investment Committee. Valuations
of debt instruments are based on the Principal Investing Entities Deal Team’s knowledge of the current financial
status of the subject company, which is regularly monitored throughout the term of the investment. Significant
unobservable inputs used in the valuations of these investments include the company’s payment history,
adequacy of cash flows from operations, and current operating results, including market multiples and historical
and forecast earnings before interest, taxation, depreciation, and amortization (EBITDA). Inputs can also include
the seniority of the debt, the nature of any pledged collateral, the extent to which the security interest is perfected,
and the net liquidation value of collateral.
Valuations of equity instruments of private companies, which are prepared on a quarterly basis, are based on current
market conditions and the current financial status of each company. A valuation analysis is performed to value each
investment. The valuation analysis is reviewed by the Principal Investing Entities Deal Team Member, and
reviewed and approved by the Chief Administrative Officer of one of the independent investment managers.
Significant unobservable inputs used in these valuations include adequacy of the company’s cash flows from
operations, any significant change in the company’s performance since the prior valuation, and any significant
equity issuances by the company. Equity instruments of public companies are valued using quoted prices in an
active market for the identical security. If the instrument is restricted, the fair value is determined considering the
number of shares traded daily, the number of the company’s total restricted shares, and price volatility.
Our indirect investments are classified as Level 3 assets since our significant inputs are not observable in the
marketplace. Indirect investments include primary and secondary investments in private equity funds engaged
mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair
values. Indirect investments are valued using a methodology that is consistent with accounting guidance that
allows us to estimate fair value based upon net asset value per share (or its equivalent, such as member units or
an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). The
significant unobservable input used in estimating fair value is primarily the most recent value of the capital
accounts as reported by the general partners of the funds in which we invest. Under the requirements of the
Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of December 31,
2014, management has not committed to a plan to sell these investments. Therefore, these investments continue
to be valued using the net asset value per share methodology.
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