Business context and reporting period
Oaktree Capital Group, LLC (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. Oaktree is an alternative investment manager focused on credit, real assets, private equity and listed equities. The results are not directly comparable with 2022: the 2022 restructuring removed OCM Cayman and CLOs from the Company’s consolidated financial statements, eliminating management and sub-advisory fees and much of the related compensation, operating expenses, assets and liabilities.
Key financial results
Amounts below are in millions of dollars except per-unit figures. Consolidated statements include investment funds in which third parties hold most of the economic interests; consolidated totals therefore do not represent solely Oaktree’s corporate resources or earnings.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $0.005 | $59.8 | $61.5 | $239.4 |
| Incentive income | $0.005 | $(0.033) | $61.5 | $56.1 |
| Net income attributable to Class A unitholders | $25.1 | $18.7 | $57.7 | $8.2 |
| Basic and diluted earnings per Class A unit | $0.23 | $0.18 | $0.54 | $0.08 |
| Class A distributions declared per unit | $0.09 | $0.38 | $0.92 | $1.51 |
Q3 Class A earnings rose 34% year over year, mainly reflecting higher investment income. Nine-month earnings increased substantially, reflecting improved realized and unrealized results from consolidated fund investments and the restructuring’s effects. Revenue and conventional operating margins are not meaningful comparisons given the restructuring and the resulting shift in the Company’s revenue mix.
For the first nine months, investment income was $35.4 million versus a $20.0 million loss a year earlier; realized gains on consolidated fund investments were $76.4 million versus a $68.9 million loss. Unrealized depreciation on those investments was $47.3 million, compared with $14.0 million in 2022. Incentive income increased to $61.5 million, while incentive compensation expense rose to $57.3 million from $17.1 million.
Financial position, liquidity and cash flow
- At September 30, consolidated assets were $6.50 billion and total liabilities were $682.8 million; these figures include consolidated funds. Non-controlling redeemable interests in funds were $3.41 billion.
- Corporate investments were $1.51 billion. Company cash was $34.4 million; an additional $234.4 million of cash belonged to consolidated funds and generally was not available for the Company’s general liquidity needs.
- Debt obligations recorded on the balance sheet were $210.5 million, primarily euro-denominated senior notes. Oaktree Capital I was also jointly and severally liable for approximately $1.05 billion of senior notes issued by Oaktree affiliates; those obligations are generally not reflected in the Company’s statements unless an event of default occurs. Consolidated-fund credit-facility borrowings were $227.4 million and are nonrecourse to the Company.
- Oaktree reported no outstanding borrowing under its $650 million revolving credit facility or its $250 million subordinated facility at quarter-end. Management said liquidity sources should cover working-capital needs for at least the next 12 months.
- Consolidated operating activities used $288.7 million of cash and investing activities used $354.8 million in the first nine months; financing activities provided $740.1 million, producing a $92.7 million net increase in cash including fund cash flows. These consolidated cash flows should not be read as corporate-only cash generation.
Material changes, outlook and risks
- Incentive-creating AUM reached $53.1 billion, up 13.9% from year-end 2022, primarily from $4.7 billion of net contributions and $1.8 billion of market appreciation. Fund-level accrued incentives were $2.01 billion gross and $1.21 billion net of estimated related compensation; timing and realization remain uncertain.
- Oaktree committed $750 million to each of Opps XI and Opps XII. It had funded $637.5 million of Opps XI by quarter-end, leaving $112.5 million, and had not funded Opps XII. The filing says the Class A unitholder or an affiliate will contribute cash as needed for these investments; related distributions are intended for the Class A unitholder, not preferred-unit distributions.
- A Brookfield-related transaction resulted in a $314.4 million investment in Brookfield Real Estate Income Trust-related entities, included in corporate investments; the Company recorded a $6.5 million equity investment loss in Q3.
- After quarter-end, the Brookfield subordinated facility maturity was extended to October 2028, with annual one-year extensions unless lenders give notice otherwise. A Class A distribution of $0.08 per unit was paid in November; preferred distributions were scheduled for December.
- No numeric earnings guidance was provided. Management cited volatile and difficult-to-predict incentive income and investment returns. Market, valuation, financing, liquidity, counterparty, currency and geopolitical risks remain relevant. The Company reported cash balances above FDIC insurance limits, though it said it had no direct exposure to the failed U.S. banks discussed in the filing.
- A 10% decline in consolidated-fund investment values was estimated to reduce unrealized investment results by $451 million, of which $76.5 million would affect Class A earnings. A 10% decline in fair values of investments held in funds and other holdings was estimated to reduce investment income by $262.9 million. Management said no pending legal or regulatory matter was expected to have a material financial-statement impact; it reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the effect of the 2022 restructuring on the earnings base, fee income, expenses, debt presentation and comparability with prior periods.
- Assess how much of accrued fund-level incentives can be realized, when realizations may occur, and the associated compensation burden.
- Review funding sources and timing for remaining Opps XI/XII commitments and the $413.8 million of general-partner commitments, alongside the Company’s $34.4 million of cash.
- Distinguish Company-level obligations from affiliate guarantees and nonrecourse fund borrowings; review covenant compliance and maturities.
- Evaluate valuation sensitivity, especially the $3.01 billion of Level III consolidated-fund investments, and the concentration of corporate investments in illiquid funds and real estate-related holdings.
- Check the terms and non-cumulative nature of preferred distributions, and note that management’s 12-month liquidity assessment is forward-looking rather than a guarantee.