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Oaktree Capital Group, LLC Announces Second Quarter 2012 Financial Results

This release and its contents do not constitute and should not be construed as (a) a recommendation to buy, (b) an offer to buy or solicitation of an offer to buy, (c) an offer to sell, or (d) advice in relation to, any securities of OCG or securities of any Oaktree investment fund.

Consolidated Statements of Operations (GAAP basis – Unaudited)
                                         
Three Months Ended June 30, Six Months Ended June 30,
  2012     2011     2012     2011  
(in thousands, except per unit data)
Consolidated Statements of Operations:
Revenues:
Management fees $ 29,207 $ 31,415 $ 61,227 $ 70,053
Incentive income   -     6,478     5,048     12,289  
Total revenues   29,207     37,893     66,275     82,342  
Expenses:
Compensation and benefits (80,302 ) (83,919 ) (164,766 ) (162,231 )
Incentive income compensation expense (60,965 ) (41,229 ) (88,722 ) (94,995 )
Compensation expense for vesting of OCGH units   (7,795 )   (235,393 )   (19,984 )   (472,550 )
Total compensation and benefits expense (149,062 ) (360,541 ) (273,472 ) (729,776 )
General, administrative and other expenses (24,166 ) (27,926 ) (50,101 ) (50,404 )
Consolidated fund expenses   (33,780 )   (32,917 )   (51,002 )   (51,851 )
Total expenses   (207,008 )   (421,384 )   (374,575 )   (832,031 )
Other income (loss):
Interest expense (11,860 ) (13,584 ) (22,850 ) (26,475 )
Interest and dividend income 463,873 800,957 1,003,491 1,535,639
Net realized gain on investments 733,521 513,583 1,807,659 1,273,844
Net change in unrealized appreciation (depreciation) on investments (180,216 ) (737,362 ) 625,607 (58,734 )
Investment income 3,705 4,343 9,385 7,038
Other income, net   6,326     844     8,593     81  
Total other income   1,015,349     568,781     3,431,885     2,731,393  
Income before income taxes 837,548 185,290 3,123,585 1,981,704
Income taxes   (13,925 )   (7,582 )   (21,692 )   (14,592 )
Net income 823,623 177,708 3,101,893 1,967,112
Less:
Net income attributable to non-controlling redeemable interests in consolidated funds (673,673 ) (279,918 ) (2,798,445 ) (2,106,319 )
Net (income) loss attributable to OCGH non-controlling interest   (125,231 )   81,851     (260,121 )   108,721  
Net income (loss) attributable to Oaktree Capital Group, LLC $ 24,719   $ (20,359 ) $ 43,327   $ (30,486 )
Distributions declared per Class A unit $ 0.55   $ 0.64   $ 0.97   $ 1.54  
Income (loss) per unit (basic and diluted):
Net income (loss) per Class A unit $ 0.84   $ (0.90 ) $ 1.66   $ (1.34 )
Weighted average number of Class A units outstanding   29,586     22,677     26,137     22,677  
 

Segment Financial Data (Unaudited)
                                       
   

As of or for the Three Months Ended June 30,

As of or for the Six Months Ended June 30,
  2012     2011     2012     2011  
(in thousands, except per unit data

or as otherwise indicated)
Segment Statements of Operations Data: (1)
Revenues:
Management fees $ 188,843 $ 179,412 $ 380,105 $ 364,671
Incentive income 129,018 107,320 191,687 238,209
Investment income   23,241     13,546     87,581     66,563  
Total revenues   341,102     300,278     659,373     669,443  
Expenses:
Compensation and benefits (80,303 ) (83,907 ) (164,707 ) (162,219 )
Incentive income compensation expense (60,965 ) (41,229 ) (88,722 ) (94,995 )
General, administrative and other expenses   (26,327 )   (26,380 )   (52,908 )   (46,630 )
Total expenses   (167,595 )   (151,516 )   (306,337 )   (303,844 )
Adjusted net income before interest and other income (expense) 173,507 148,762 353,036 365,599
Interest expense, net of interest income (8,063 ) (8,584 ) (16,227 ) (17,304 )
Other income (expense), net   66     844     2,333     81  
Adjusted net income $ 165,510   $ 141,022   $ 339,142   $ 348,376  
 
Adjusted net income-OCG $ 26,247 $ 15,582 $ 46,694 $ 41,563
Adjusted net income-OCG per Class A unit 0.89 0.69 1.79 1.83
Fee-related earnings 82,213 69,125 162,490 155,822
Fee-related earnings-OCG 12,120 6,705 21,388 15,772
Fee-related earnings-OCG per Class A unit 0.41 0.30 0.82 0.70
Distributable earnings 176,355 170,280 313,684 329,727
Distributable earnings-OCG 30,073 20,644 45,300 38,853
Distributable earnings-OCG per Class A unit 1.02 0.91 1.73 1.71
Economic net income 103,637 97,983 382,028 495,562
Economic net income-OCG 17,824 9,705 50,706 62,667
Economic net income-OCG per Class A unit 0.60 0.43 1.94 2.76
 
Weighted average number of Operating Group units outstanding 150,791 148,524 150,616 148,734
Weighted average number of Class A units outstanding 29,586 22,677 26,137 22,677
 
Operating Metrics:
Assets under management (in millions):
Assets under management (2) $ 78,713 $ 79,519 $ 78,713 $ 79,519
Management fee-generating assets under management (3) 66,311 63,869 66,311 63,869
Incentive-creating assets under management (4) 35,996 37,275 35,996 37,275
Uncalled capital commitments (5) 13,737 12,661 13,737 12,661
Accrued incentives (fund level):
Incentives created (fund level) (6) (9,116 ) 33,699 256,046 467,450
Incentives created (fund level), net of associated incentive compensation expense (6) (589 ) 20,941 158,846 275,426
Accrued incentives (fund level) (6) 1,751,326 2,296,087 1,751,326 2,296,087
Accrued incentives (fund level), net of associated incentive income compensation expense (6) 1,070,597 1,313,769 1,070,597 1,313,769
Change in accrued incentives (fund level), net of associated incentive income compensation expense (7) (61,873 ) (43,039 ) 42,886 147,186
 

(1)

 
Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients. The components of revenues and expenses used in determining adjusted net income do not give effect to the consolidation of the funds that we manage. In addition, adjusted net income excludes the effect of: (a) non-cash equity compensation charges, (b) income taxes, (c) expenses that OCG or its Intermediate Holding Companies bear directly and (d) the adjustment for the Oaktree Capital Group Holdings, L.P. (“OCGH”) non-controlling interest. Adjusted net income is calculated at the Operating Group level. We expect that adjusted net income will include non-cash equity compensation charges related to unit grants made after our initial public offering. For additional information regarding the reconciling adjustments discussed above, please see Exhibit A.

(2)

 
Assets under management represents the NAV of the assets we manage, plus the undrawn capital that we are entitled to call at the end of the applicable period and fund-level leverage that generates management fees.

(3)

 
Management fee-generating assets under management reflects assets under management on which we earn management fees. It excludes certain assets under management, such as differences between assets under management and committed capital or cost basis for most closed-end funds, the investments we make in our funds as general partners, undrawn capital commitments to funds for which management fees are based on NAV or drawn capital, contributed capital and capital commitments to closed-end funds that have not yet commenced their investment periods, closed-end funds that are beyond the term during which they pay management fees, and assets under management in restructured and liquidating evergreen funds for which management fees were waived.

(4)

 
Incentive-creating assets under management refers to the assets under management that may eventually produce incentive income. It represents the NAV of our closed-end and evergreen funds, excluding investments made by us and our employees (which are not subject to an incentive allocation).

(5)

 
Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as general partner) of our closed-end funds in their investment periods. If a fund distributes capital during its investment period, that capital is typically subject to possible recall, in which case it is included in uncalled capital commitments.

(6)

 
Our funds record as accrued incentives the incentive income that would be paid to us if the funds were liquidated at their reported values as of the date of the financial statements. Incentives created (fund level) refers to the amount generated by the funds during the period. We refer to the amount of incentive income recognized as revenue by us as segment incentive income. We recognize incentive income when it becomes fixed or determinable, all related contingencies have been removed and collection is reasonably assured. Amounts recognized by us as incentive income no longer are included in accrued incentives (fund level), the term we use for remaining fund-level accruals. Incentives created (fund level), incentive income and accrued incentives (fund level) are presented gross, without deduction for direct compensation expense that is owed to our investment professionals associated with the particular fund when we earn the incentive income. We call that charge “incentive income compensation expense.” Incentive income compensation expense varies by the investment strategy and vintage of the particular fund, among other factors, but generally equals between 40% and 55% of segment incentive income revenue.

(7)

 
The change in accrued incentives (fund level), net of associated incentive income compensation expense, represents the difference between (a) net incentive income recognized by us, and (b) the incentive income generated by the funds during the period that would be due to us if the funds were liquidated at their reported values as of that date, net of associated incentive income compensation expense.
 

Operating Metrics (Unaudited)

We monitor certain operating metrics that are either common to the alternative asset management industry or that we believe provide important data regarding our business. As described below, these operating metrics include AUM, management fee-generating AUM, incentive-creating AUM, incentives created (fund level), accrued incentives (fund level) and uncalled capital commitments.

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