Business context and reporting period
The supplied filing is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014; the filing does not identify Brookfield Oaktree Holdings, LLC as the registrant. Oaktree is a global alternative investment manager, with $91.1 billion of assets under management (AUM) across distressed debt, corporate debt, control investing, real estate, and other strategies.
Oaktree consolidates many funds despite holding only a small economic interest in them. Accordingly, consolidated revenue, assets, earnings, and cash flows include substantial fund activity attributable to outside investors. Segment measures below are generally presented before fund consolidation and include non-GAAP metrics identified as such by the company.
Financial and operating results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Segment management fees | $189.1 million | $182.5 million | $377.5 million | $366.7 million |
| Segment incentive income | $59.2 million | $338.1 million | $352.1 million | $665.2 million |
| Adjusted net income (non-GAAP, Operating Group) | $134.7 million | $297.0 million | $381.7 million | $632.7 million |
| Distributable earnings (non-GAAP, Operating Group) | $116.2 million | $313.2 million | $349.3 million | $608.2 million |
| Fee-related earnings (non-GAAP, Operating Group) | $63.5 million | $61.1 million | $121.3 million | $125.9 million |
| Net income attributable to Oaktree Capital Group, LLC | $31.2 million | $56.6 million | $83.0 million | $114.1 million |
| Net income per Class A unit | $0.72 | $1.71 | $1.99 | $3.61 |
Consolidated GAAP net income was $1.307 billion in Q2 and $2.847 billion for the first half, but most was attributable to non-controlling fund investors and OCGH. Consolidated revenue was $51.6 million in Q2 and $92.0 million for the first half; these figures are not comparable to segment revenue because fund-related amounts are eliminated in consolidation.
- Assets and liquidity: At June 30, cash and cash equivalents were $413.9 million and U.S. Treasury securities were $405.1 million. The company reported $819.0 million in cash and Treasury securities against $600.0 million of corporate debt, plus an undrawn $500 million revolving facility. It said available liquidity was sufficient for operations and commitments for at least 12 months.
- Debt: Corporate debt was $600.0 million, including a $250 million term loan and senior notes. The company was in compliance with debt covenants and could draw the full revolver without breaching them. Consolidated funds also had $3.417 billion of credit-facility borrowings and $996.8 million of CLO loans payable; these obligations are generally nonrecourse to Oaktree.
- Cash flow: Consolidated operating activities used $2.425 billion in the first half of 2014, versus providing $4.474 billion in 2013. These figures include substantial fund investment purchases, sales, and financing flows and are not a standalone measure of corporate operating cash generation.
- Scale and fundraising: AUM rose 9% from year-end 2013 to $91.1 billion. Management fee-generating AUM increased 8.1% to $77.8 billion; incentive-creating AUM rose 8.3% to $35.1 billion. Uncalled capital commitments were $11.0 billion.
Material changes versus comparable periods
- Q2 adjusted net income fell 54.6% and distributable earnings fell 62.9%; for the first half, they declined 39.7% and 42.6%, respectively. Lower incentive income net of related compensation was the main driver, reflecting lower Opps VIIb distributions than in 2013.
- Management fees grew 3.6% in Q2 and 2.9% in the first half, supported by open-end and evergreen fund growth, partly offset by lower fees from liquidating closed-end funds and ancillary fee changes.
- Fee-related earnings rose 4.0% in Q2 but declined 3.7% for the first half. General and administrative expenses increased, while compensation costs also rose, partly due to headcount and equity compensation.
- Class A units outstanding increased to 43.48 million from 33.02 million weighted-average units in Q2 2013, contributing to the decline in net income per unit alongside lower attributable earnings.
- Consolidated investments increased to $45.4 billion from $39.9 billion at year-end 2013. About $24.4 billion was Level III, relying on significant unobservable valuation inputs.
Outlook, commentary, risks, and unusual items
- Outlook: Management expected significantly less net incentive income, adjusted net income, and distributable earnings in the second half of 2014 from the June 2014 accrued-incentive balance than had arisen from the prior-year balance. Of $1.3 billion in net accrued incentives at June 30, only $475.3 million related to funds then paying incentives; roughly three-quarters of that portion was associated with Opps VIIb, which was in liquidation and expected to produce less frequent or smaller incentive distributions. No specific full-year earnings guidance was provided.
- Market commentary: Management said rising markets and net capital inflows lifted AUM and investment values, while elevated asset prices made bargain opportunities scarcer. It cited opportunities in Europe, commercial bank loan portfolios, shipping, infrastructure, and energy.
- Market and valuation risk: A 10% decline in consolidated fund investment values was estimated to reduce unrealized appreciation by $4.5 billion, primarily affecting fund investors. Management estimated the same market decline would reduce six-month management fees by about $12.2 million and investment income by about $146.0 million. These are estimates, not forecasts.
- Concentration and valuation: One issuer represented 5.4% ($2.4 billion) of consolidated net assets. Level III valuations are judgmental and may differ materially from realized sale values.
- Debt financing after quarter-end: In July, subsidiaries agreed to issue $250 million of senior notes, bearing rates of 3.91%–4.21%, with funding expected September 3, 2014. The notes carry leverage and minimum-AUM covenants.
- Other subsequent events: Oaktree declared a $0.55-per-Class A-unit distribution on July 31, payable August 14. Its acquisition of the Highstar team closed August 1; the filing described the transaction as not material to Oaktree.
- Contingencies: A lawsuit seeking damages exceeding $800 million was dismissed with prejudice on July 2, 2014. The company reported no other pending legal actions expected to have a material effect. Tax examinations could result in release of $9–$11 million of previously accrued Operating Group taxes over the four quarters through June 30, 2015, though outcomes are uncertain.
- Distributions and cash commitments: Distributions are discretionary and may vary with volatile incentive income, fund realizations, and seasonal tax-related incentive distributions. Oaktree had $273.5 million of undrawn commitments to funds; consolidated funds had $880.8 million of potential credit and investment commitments.
Most important facts for investors to verify
- Confirm the registrant’s identity and distinguish Oaktree Capital Group, LLC from the company named in the request metadata.
- Track actual second-half incentive distributions, particularly from Opps VIIb, against management’s expectation of lower incentive-related earnings.
- Separate Oaktree-attributable results and liquidity from consolidated fund figures and non-GAAP Operating Group measures.
- Review the quality and realization of Level III valuations, issuer concentration, and market sensitivity assumptions.
- Confirm funding and covenant terms for the $250 million notes, and monitor fund-level borrowings and outstanding investment commitments.
- Assess the effect of higher unit count, distributions, and the Highstar acquisition on per-unit earnings, liquidity, and future expenses.