Business Context and Reporting Period
Filing identity: The supplied filing is Oaktree Capital Group, LLC’s Form 10-K for the fiscal year ended December 31, 2016, filed March 1, 2017. It does not identify Brookfield Oaktree Holdings, LLC as the registrant.
Oaktree is an alternative investment manager focused on credit, distressed debt, control investing, real estate and listed equities. It reported $100.5 billion of AUM and operated as one investment-management segment. This is an annual report, not a standalone fourth-quarter filing.
Financial and Operating Performance
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Segment revenue | $1.362 billion | $1.066 billion | Up 27.8% |
| Management fees, segment | $785.7 million | $753.8 million | Up 4.2% |
| Incentive income, segment | $355.2 million | $263.8 million | Up 34.6% |
| Investment income, segment | $221.4 million | $48.3 million | Higher fund investment returns; includes a $23 million CLO impairment |
| Adjusted net income (ANI) | $582.6 million | $311.9 million | Up 86.8%; non-GAAP segment measure |
| Distributable earnings | $538.4 million | $447.6 million | Up 20.3%; non-GAAP segment measure |
| Fee-related earnings | $267.7 million | $218.6 million | Up 22.5% |
| Net income attributable to Oaktree Capital Group, LLC | $194.7 million | $71.3 million | GAAP; increased partly with higher segment profits and a greater average Class A unit count |
| Net income per Class A unit | $3.11 | $1.45 | GAAP |
| AUM | $100.5 billion | $97.4 billion | Up 3.2% |
| Management fee-generating AUM | $79.8 billion | $78.9 billion | Up 1.1% |
| Uncalled capital commitments | $20.8 billion | $21.7 billion | Down $0.9 billion |
Closed-end funds’ blended gross return was 14.5% for 2016. Gross capital raised was $11.6 billion. Open-end funds recorded $7.0 billion of redemptions against $5.4 billion of contributions, a net outflow of $1.6 billion.
Profit, Cash Flow, Debt and Liquidity
Consolidated GAAP revenue was $1.126 billion and net income was $566.1 million, versus revenue of $201.9 million and a net loss of $1.533 billion in 2015. These figures are not directly comparable: adoption of revised consolidation guidance in 2016 deconsolidated substantially all previously consolidated investment funds. The adoption reduced reported assets by $45.7 billion and fund-related liabilities by $7.6 billion at January 1, 2016, with no impact on retained earnings or net income attributable to Oaktree. Management’s segment measures are more useful for comparing the investment-management business.
Consolidated operating cash flow was a use of $317.9 million in 2016, but includes investment purchases and sales by consolidated funds and is not a clean measure of corporate operating cash generation. At year-end, segment cash and cash equivalents plus U.S. Treasury and time-deposit securities totaled approximately $1.05 billion. Segment debt obligations were $745.9 million net of issuance costs; the $500 million revolving facility was undrawn. Consolidated debt obligations totaled $4.284 billion, including debt of consolidated funds and CLOs, which is generally nonrecourse to Oaktree. Oaktree reported that it expected available balances, operations and the revolver to fund operations and commitments for at least 12 months.
Management declared distributions of $2.25 per Class A unit for 2016 in the selected financial data; the distribution table reports $2.41 paid relating to 2016 quarters, including the $0.63 fourth-quarter payment made in February 2017. The board retains discretion over distributions. Estimated 2017 distribution reductions associated with the tax receivable agreement were $21.5 million.
Material Changes Versus the Prior Comparable Period
- Underlying segment results improved: ANI, distributable earnings and fee-related earnings rose, while management fee-generating AUM grew modestly.
- Incentive income and investment income increased substantially. Closed-end fund incentive income included $72.7 million of tax-related amounts; timing and realizations make incentive revenue volatile.
- Closed-end fund management fees grew, principally as new funds began investment periods; open-end and evergreen management fees declined, reflecting outflows and, for evergreen funds, a lower average fee rate.
- Reported consolidated assets fell from $51.8 billion to $7.6 billion largely because of the consolidation-guidance change, not because of a comparable decline in the managed business.
- Oaktree issued $100 million of 3.69% senior notes in July 2016 and used the proceeds to repay $100 million of its term loan. It also repaid $100 million of notes that matured during the year.
Outlook, Risks and Unusual Items
No numerical earnings guidance was provided. Management expected Oaktree Opportunities Fund Xb’s $8.0 billion of shadow AUM to begin generating committed-capital-based fees sometime in 2018, and expected the remaining $5.5 billion of shadow AUM to become fee-generating gradually. Management emphasized risk-controlled, value-oriented investing and noted that weak markets can reduce asset-based fees and realizations while creating investment opportunities.
Key risks include volatile and unpredictable incentive income and investment returns; the ability to raise and retain capital; market, credit, interest-rate, currency and liquidity conditions; competition and fee pressure; retention of key investment professionals; valuation uncertainty in illiquid assets; regulatory change and compliance costs; conflicts of interest; and cybersecurity and operational disruption. Brexit and U.S. regulatory and tax-policy uncertainty were specifically discussed. The company’s distribution policy is discretionary, and it warned that distributions may be reduced or suspended.
Unusual items included the accounting change’s major effect on consolidated presentation, a $23 million impairment on certain CLO investments, and a $4.4 million impairment charge on the existing corporate aircraft ahead of a planned replacement. A Highstar acquisition contingent consideration liability was $23.6 million at year-end, subject to performance targets and valuation assumptions. Oaktree said no recognized incentive income was subject to fund clawback and that pending legal or regulatory matters were not expected to have a material financial-statement impact. The independent auditor gave an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important Facts for Investors to Verify
- Confirm the registrant and filing period: Oaktree Capital Group, LLC, fiscal 2016—not a standalone 2016 Q4 report or a filing by Brookfield Oaktree Holdings, LLC.
- Separate segment performance from consolidated GAAP results and account for the 2016 deconsolidation when comparing revenue, assets, debt and cash flows.
- Review the composition and realization prospects of the $2.014 billion gross fund-level accrued incentives; these are not recognized revenue and are uncertain in timing and amount.
- Assess liquidity and leverage using corporate/segment cash and debt separately from consolidated fund and CLO obligations; verify revolver availability and covenant compliance.
- Reconcile the $2.25 declared distribution figure with $2.41 paid relating to 2016, and assess the effect of discretionary payouts and tax receivable agreement payments.
- Monitor fee-generating conversion of shadow AUM, open-end fund flows, fee rates, fund performance and the Highstar contingent consideration estimate.