Business Context and Reporting Period
Company: Oaktree Capital Group, LLC (a leading global investment management firm focused on alternative markets including distressed debt, corporate debt, control investing, convertible securities, real estate, and listed equities).
Reporting Period: Quarterly period ended June 30, 2012 (Form 10-Q).
Key Event: The Company completed its Initial Public Offering (IPO) on April 12, 2012, listing Class A units on the NYSE. As of June 30, 2012, Assets Under Management (AUM) totaled $78.7 billion.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|
| Total Revenues (Consolidated) | $66.3 million | $82.3 million |
| Net Income (Consolidated) | $3,101.9 million | $1,967.1 million |
| Net Income Attributable to Oaktree Capital Group, LLC | $43.3 million | $(30.5) million |
| Adjusted Net Income (Segment) | $339.1 million | $348.4 million |
| Net Cash Provided by Operating Activities | $2,691.1 million | $2,811.4 million |
| Total Assets | $44.8 billion | $44.3 billion |
| Debt Obligations (Company) | $626.4 million | $652.1 million |
| Cash and Cash Equivalents (Company) | $279.3 million | $297.2 million |
Note: Consolidated Net Income is heavily influenced by the consolidation of funds where the Company holds a minority economic interest. The majority of this income is attributable to non-controlling interests.
Material Changes vs. Prior Period
- Net Income Attributable to Company: Improved from a net loss of $30.5 million in the prior year to a net income of $43.3 million. This turnaround was primarily driven by a significant reduction in non-cash compensation expense for the vesting of OCGH units (decreased from $472.6 million to $20.0 million) as the 2007 Private Offering units fully vested in January 2012.
- Revenues: Consolidated revenues decreased 19.5% year-over-year. Management fees declined due to lower performance-based fees in convertible securities and net outflows, partially offset by market value gains in high yield bonds. Incentive income recognized by the Company decreased 59.3% due to fewer realizations in unconsolidated funds.
- Investment Performance: Net realized gains on consolidated funds' investments increased 41.9% to $1.8 billion, and net change in unrealized appreciation improved significantly to a gain of $625.6 million (compared to a loss of $58.7 million in the prior year), reflecting strong fund performance in distressed debt and control investing.
- Assets Under Management: Increased 5.1% to $78.7 billion, driven by $5.2 billion in new capital commitments (including $4.6 billion for Opps IX) and $4.4 billion in market value gains, offset by $5.3 billion in distributions from funds in liquidation.
Guidance, Outlook, and Risks
- Outlook: Management expects general, administrative, and other expenses to increase due to costs associated with being a public company (compliance, insurance, reporting). The Company anticipates that Adjusted Net Income will include non-cash equity compensation charges related to unit grants made after the IPO.
- Regulatory Risks: The filing highlights significant risks related to the Dodd-Frank Act, including potential designation as a "systemically important" nonbank financial firm, the Volcker Rule (restricting proprietary trading and investments by depository institutions), and new reporting requirements (Form PF) and CFTC registration rules. These could increase compliance costs and restrict fundraising.
- Market Risks: The Company is exposed to price risk, interest rate risk, and foreign exchange risk. A 10% decline in market values would result in a $3.9 billion negative change in unrealized appreciation on consolidated funds (though this would largely impact non-controlling interests).
- Legal Proceedings: The Company is a defendant in Kaplan Industry, Inc. v. Oaktree Capital Management, L.P., seeking damages in excess of $800 million. The Company believes the case is without merit and exposure is remote; the case is currently stayed pending arbitration.
Investor Verification Checklist
- Non-GAAP Measures: Verify the reconciliation of "Adjusted Net Income" and "Distributable Earnings" to GAAP Net Income, as these are the primary metrics used by management to evaluate performance.
- Compensation Expense: Confirm the impact of the one-time vesting of 2007 OCGH units on the current period's profitability and the remaining unrecognized compensation expense ($115.0 million) expected to be recognized over 5.8 years.
- Consolidation Impact: Understand that consolidated revenues and net income are grossed up for fund consolidation; the Company's economic interest in these funds is minority, and the majority of income flows to non-controlling interests.
- Debt Covenants: Review compliance with financial covenants on the $300 million term loan and $250 million revolving credit facility, specifically the minimum leverage ratio (2.5-to-1) and minimum AUM ($50 billion).
- Tax Receivable Agreement: Note the $6.3 million reduction in the tax receivable agreement liability due to a change in state tax law, which impacted other income and tax expense in the current period.