Business context and reporting period
Oaktree Capital Group, LLC’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. Oaktree is a global alternative investment manager. The supplied filing identifies Oaktree Capital Group, LLC as the registrant; this differs from the company name in the request metadata.
Financial and operating highlights
- Second-quarter revenue: $282.7 million, versus $51.5 million a year earlier. GAAP management fees were $195.0 million and incentive income was $87.7 million. The large year-over-year increase primarily reflects a change in fund consolidation, so it is not a like-for-like measure of underlying business growth.
- Six-month revenue: $537.2 million, versus $102.3 million in 2015, also materially affected by deconsolidation.
- Net income attributable to Oaktree: Q2 was $49.0 million ($0.78 per Class A unit), versus $19.8 million ($0.41) in 2015. Six-month income was $77.1 million ($1.24 per unit), versus $58.1 million ($1.24 per unit).
- Management’s segment measures: Second-quarter adjusted net income (ANI) was $142.6 million, up 67%; distributable earnings were $127.5 million, up 15%; and fee-related earnings were $64.6 million, up 22%. For the first six months, ANI was $247.7 million, up 5%; distributable earnings were $253.2 million, up 3%; and fee-related earnings were $127.0 million, up 24%. These are non-GAAP measures and differ in definition from GAAP earnings.
- AUM and fundraising: AUM was $98.1 billion at quarter-end, down from $103.1 billion a year earlier. Management fee-generating AUM was $79.5 billion, up from $78.6 billion; uncalled commitments reached a record $22.8 billion, including $13.1 billion of “Shadow AUM” not yet generating fees. Incentive-creating AUM was $30.4 billion, versus $33.9 billion a year earlier.
- Cash flow and liquidity: Consolidated operating cash flow was a $240.5 million use in the first half, versus a $1.274 billion use in 2015; fund investment activity materially affects these consolidated figures. Oaktree reported $403.4 million of cash and $684.2 million of U.S. Treasury securities, or about $1.1 billion combined. Corporate debt was $796.0 million net of issuance costs; the $500 million revolving facility was undrawn. Management said liquidity sources were expected to meet working-capital needs for at least 12 months.
- Debt and distributions: Oaktree repaid $50 million of notes at maturity in June. After quarter-end, it issued $100 million of 3.69% notes due 2031 and used the proceeds to repay $100 million of its term loan. A $0.58-per-Class A unit distribution was declared July 28 for payment in August; Q2 distributions declared were $0.55 per unit.
Material changes, outlook and risks
- Accounting change: New consolidation guidance effective January 1, 2016 led Oaktree to deconsolidate substantially all previously consolidated investment funds. At adoption, reported assets fell $45.7 billion, liabilities $7.6 billion, redeemable fund interests $38.0 billion and unitholders’ capital $90.6 million. Retained earnings and net income attributable to Oaktree were not affected. Prior periods were not recast, substantially limiting direct comparison of consolidated balance-sheet and operating-statement totals.
- Management commentary: Q2 markets were broadly positive, though the Brexit vote contributed to valuation declines in some holdings. Closed-end fund strategies returned 1.4% gross for the quarter. Oaktree raised $3.0 billion in Q2 and $10.2 billion over the last 12 months. Management expected Opps Xb, representing nearly $8 billion of Shadow AUM, to begin its investment period and fee generation in late 2017; it expected other Shadow AUM to generate fees gradually. No formal earnings guidance is provided in the supplied filing.
- Key risks and contingencies: Brexit could affect European and global markets, currency values, fund assets and fundraising. Incentive income and investment valuations are volatile; accrued fund-level incentives of $1.526 billion are not recognized revenue until realization criteria are met, and timing and ultimate realization are uncertain. Oaktree disclosed a $25.0 million fair-value liability for Highstar acquisition contingent consideration and $516.6 million of undrawn commitments to funds. Tax examinations could result in a release of up to approximately $3.8 million of previously accrued Operating Group taxes, though outcomes are uncertain. The company reported compliance with financial covenants and no pending legal or regulatory matters expected to have a material financial-statement impact.
- Margins: Consolidated margins are not a useful like-for-like indicator here because fund consolidation changed materially. Segment earnings measures provide a more comparable view, but are non-GAAP.
Important facts for investors to verify
- Separate underlying fee and incentive trends from the effects of the 2016 deconsolidation when comparing GAAP results with 2015.
- Track conversion of the $22.8 billion of uncalled commitments—and especially $13.1 billion of Shadow AUM—into fee-generating AUM and revenue.
- Assess the sustainability and cash realization of incentive income, fund distributions and reported fund-level accrued incentives.
- Review liquidity, the remaining debt maturity profile, commitments and the post-quarter $100 million refinancing; distinguish Oaktree obligations from nonrecourse fund and CLO debt.
- Monitor Brexit-related market, foreign-exchange and fundraising effects, alongside valuation risk in less-liquid investments.