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Oaktree Capital Group, LLC Announces Third 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 September 30,

Nine Months Ended September 30,

  2012       2011     2012       2011  
(in thousands, except per unit data)
Consolidated Statements of Operations:
Revenues:
Management fees $ 30,586 $ 34,717 $ 91,813 $ 104,770
Incentive income   1,320     2,766     6,368     15,055  
Total revenues   31,906     37,483     98,181     119,825  
Expenses:
Compensation and benefits (83,141 ) (65,860 ) (247,907 ) (228,091 )
Incentive income compensation expense (29,546 ) (16,377 ) (118,268 ) (111,372 )
Equity-based compensation   (7,498 )   (238,013 )   (27,482 )   (710,563 )
Total compensation and benefits expense (120,185 ) (320,250 ) (393,657 ) (1,050,026 )
General, administrative and other expenses (27,866 ) (26,982 ) (77,967 ) (77,385 )
Consolidated fund expenses   (19,969 )   (23,660 )   (70,971 )   (75,512 )
Total expenses   (168,020 )   (370,892 )   (542,595 )   (1,202,923 )
Other income (loss):
Interest expense (10,789 ) (11,389 ) (33,639 ) (37,864 )
Interest and dividend income 452,473 458,343 1,455,964 1,993,982
Net realized gain on investments 1,097,305 34,922 2,904,964 1,308,766
Net change in unrealized appreciation (depreciation) on investments 808,989 (4,146,070 ) 1,434,596 (4,204,804 )
Investment income 8,298 1,608 17,683 8,646
Other income (expense), net   (59 )   314     8,534     395  
Total other income (loss)   2,356,217     (3,662,272 )   5,788,102     (930,879 )
Income (loss) before income taxes 2,220,103 (3,995,681 ) 5,343,688 (2,013,977 )
Income taxes   (5,801 )   (1,328 )   (27,493 )   (15,920 )
Net income (loss) 2,214,302 (3,997,009 ) 5,316,195 (2,029,897 )
Less:

Net (income) loss attributable to non-controlling redeemableinterests in consolidated funds

(2,069,855 ) 3,761,006 (4,868,300 ) 1,654,687
Net (income) loss attributable to OCGH non-controlling interest   (119,235 )   199,460     (379,356 )   308,181  
Net income (loss) attributable to Oaktree Capital Group, LLC $ 25,212   $ (36,543 ) $ 68,539   $ (67,029 )
Distributions declared per Class A unit $ 0.79   $ 0.51   $ 1.76   $ 2.05  
Income (loss) per unit (basic and diluted):
Net income (loss) per Class A unit $ 0.84   $ (1.61 ) $ 2.49   $ (2.96 )
Weighted average number of Class A units outstanding   30,181     22,677     27,494     22,677  
 

Segment Financial Data (Unaudited)

 
As of or for the Three

Months Ended September 30,

As of or for the Nine

Months Ended September 30,

  2012       2011     2012       2011  
(in thousands, except per unit data or as otherwise indicated)
Segment Statements of Operations Data: (1)
Revenues:
Management fees $ 182,587 $ 173,585 $ 562,692 $ 538,256
Incentive income 59,174 33,697 250,861 271,906
Investment income (loss)   62,801     (86,059 )   150,382     (19,496 )
Total revenues   304,562     121,223     963,935     790,666  
Expenses:
Compensation and benefits (83,208 ) (65,860 ) (247,915 ) (228,079 )
Incentive income compensation expense (29,546 ) (16,377 ) (118,268 ) (111,372 )
General, administrative and other expenses   (26,330 )   (28,111 )   (79,238 )   (74,741 )
Total expenses   (139,084 )   (110,348 )   (445,421 )   (414,192 )
Adjusted net income before interest and other income (expense) 165,478 10,875 518,514 376,474
Interest expense, net of interest income (2) (7,687 ) (7,888 ) (23,914 ) (25,192 )
Other income (expense), net   (59 )   314     2,274     395  
Adjusted net income $ 157,732   $ 3,301   $ 496,874   $ 351,677  
 
Adjusted net income-OCG $ 26,690 $ (206 ) $ 73,384 $ 41,357
Adjusted net income-OCG per Class A unit 0.88 (0.01 ) 2.67 1.82
Fee-related earnings 73,049 79,614 235,539 235,436
Fee-related earnings-OCG 12,213 8,781 33,601 24,553
Fee-related earnings-OCG per Class A unit 0.40 0.39 1.22 1.08
Distributable earnings 120,363 109,385 434,047 439,112
Distributable earnings-OCG 21,126 11,776 66,426 50,629
Distributable earnings-OCG per Class A unit 0.70 0.52 2.42 2.23
Economic net income 368,000 (443,264 ) 750,028 52,298
Economic net income-OCG 66,889 (57,957 ) 117,595 4,710
Economic net income-OCG per Class A unit 2.22 (2.56 ) 4.28 0.21
 
Weighted average number of Operating Group units outstanding 150,464 148,539 150,564 148,667
Weighted average number of Class A units outstanding 30,181 22,677 27,494 22,677
 
Operating Metrics:
Assets under management (in millions):
Assets under management (3) $ 80,967 $ 73,010 $ 80,967 $ 73,010
Management fee-generating assets under management (4) 66,171 63,367 66,171 63,367
Incentive-creating assets under management (5) 37,071 33,626 37,071 33,626
Uncalled capital commitments (6) 13,262 12,376 13,262 12,376
Accrued incentives (fund level):
Incentives created (fund level) (7) 446,401 (745,113 ) 702,447 (277,663 )

Incentives created (fund level), net of associated incentive incomecompensation expense (7)

246,960 (426,574 ) 405,806 (151,148 )
Accrued incentives (fund level) (7) 2,138,553 1,517,277 2,138,553 1,517,277

Accrued incentives (fund level), net of associated incentive incomecompensation expense (7)

1,280,865 867,204 1,280,865 867,204

Change in accrued incentives (fund level), net of associated incentiveincome compensation expense (8)

210,268 (446,565 ) 253,154 (299,379 )
(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 related to OCGH units issued prior to our initial public offering, (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. For additional information regarding the reconciling adjustments discussed above, please see Exhibit A.
(2) Interest income was $0.8 million and $1.0 million for the three months ended September 30, 2012 and 2011, respectively, and $1.9 million and $2.2 million for the nine months ended September 30, 2012 and 2011, respectively.
(3) 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.
(4) 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.
(5) Incentive-creating assets under management refers to the assets under management that may eventually produce incentive income. It represents the NAV of our funds for which we are entitled to receive an incentive allocation, excluding investments made by us and our employees (which are not subject to an incentive allocation).
(6) 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.
(7) 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.
(8) 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.

Assets Under Management

 
As of
September 30,

2012

 

June 30, 2012

  September 30,

2011

(in millions)
Assets Under Management:
Closed-end funds $ 50,966 $ 49,795 $ 46,037
Open-end funds 27,589 26,542 24,612
Evergreen funds   2,412   2,376   2,361
Total $ 80,967 $ 78,713 $ 73,010
 
Three Months Ended   Twelve Months Ended
September 30, September 30,
  2012       2011     2012       2011  
(in millions)
Change in Assets Under Management:
Beginning balance $ 78,713 $ 79,519 $ 73,010 $ 79,121
Closed-end funds:
New capital commitments 657 1,898 7,459 5,075
Distributions for a realization event/other (1,647 ) (1,973 ) (8,523 ) (9,819 )
Cancellation of uncalled capital commitments - - (18 ) (1,209 )
Foreign currency translation 77 (196 ) (310 ) (50 )
Change in market value 1,949 (3,493 ) 6,283 1,139
Change in leverage 135 (25 ) 37 -
Open-end funds:
Contributions 790 656 3,322 4,351
Redemptions (911 ) (942 ) (4,308 ) (4,294 )
Foreign currency translation 54 (238 ) (106 ) (43 )
Change in market value 1,114 (1,824 ) 4,068 (29 )
Evergreen funds:
Contributions 66 27 266 179
Redemptions (125 ) (30 ) (522 ) (346 )
Distributions from restructured funds - (24 ) (45 ) (1,037 )
Foreign currency translation - (4 ) (1 ) 7
Change in market value   95     (341 )   355     (35 )
Ending balance $ 80,967   $ 73,010   $ 80,967   $ 73,010  
 

Management Fee-Generating AUM

 
As of
September 30,

2012

 

June 30, 2012

 

September 30,

2011

(in millions)
Management Fee-Generating Assets Under Management:
Closed-end funds $ 36,509 $ 37,709 $ 36,738
Open-end funds 27,553 26,523 24,594
Evergreen funds   2,109   2,079   2,035
Total $ 66,171 $ 66,311 $ 63,367
 
  Three Months Ended   Twelve Months Ended
September 30, September 30,
  2012       2011     2012       2011  
(in millions)
Change in Management Fee-Generating Assets Under Management:
Beginning balance $ 66,311 $ 63,869 $ 63,367 $ 65,134
Closed-end funds:
New capital commitments to funds that pay fees based on committed capital 235 2,721 4,917 3,957
Capital drawn by funds that pay fees based on drawn capital or NAV 232 414 1,023 822
Change for funds that pay fees based on the lesser of funded capital or cost
basis during liquidation (1) (1,765 ) (681 ) (5,853 ) (3,749 )
Change in fee basis from committed capital to drawn capital - - - (978 )
Cancellation of uncalled capital commitments for funds that pay fees based
on committed capital - - - (1,066 )
Distributions by funds that pay fees based on NAV (79 ) (59 ) (441 ) (480 )
Foreign currency translation 118 (80 ) (48 ) 6
Change in market value (2) (52 ) (128 ) 158 9
Change in leverage 110 (25 ) 13 -
Open-end funds:
Contributions 775 655 3,308 4,350
Redemptions (910 ) (942 ) (4,307 ) (4,296 )
Foreign currency translation 54 (238 ) (106 ) (43 )
Change in market value 1,112 (1,823 ) 4,065 (29 )
Evergreen funds:
Contributions 66 27 266 149
Redemptions (125 ) (29 ) (521 ) (331 )
Change in market value   89     (314 )   330     (88 )
Ending balance $ 66,171   $ 63,367   $ 66,171   $ 63,367  
(1)   For most closed-end funds, management fees are charged during the liquidation period on the lesser of (a) total funded capital and (b) the cost basis of assets remaining in the fund, with the cost basis of assets generally calculated by excluding cash balances. Thus, changes in fee basis during the liquidation period are not dependent on distributions made from the fund; rather, they are tied to the cost basis of the fund’s investments, which generally declines as the fund sells assets.
(2) The change in market value reflects certain funds that pay management fees based on NAV and leverage, as applicable.
 
    As of September 30,
  2012       2011  
(in millions)
Reconciliation of Assets Under Management to Management Fee-Generating Assets Under Management:
Assets under management $ 80,967 $ 73,010

Difference between assets under management and committed capital or cost basis for closed-end funds (1)

(6,303 ) (2,487 )
Capital commitments to funds that have not yet begun to generate management fees (4,898 ) (3,224 )

Undrawn capital commitments to funds for which management fees are based on drawn capital or NAV

(1,701 ) (2,265 )
General partner investments in management fee-generating funds (1,092 ) (967 )
Closed-end funds that are no longer paying management fees (548 ) (419 )
Funds for which management fees were permanently waived   (254 )   (281 )
Management fee-generating assets under management $ 66,171   $ 63,367  
(1)   Not applicable to closed-end funds that pay management fees based on NAV or leverage, as applicable.
 

The period-end weighted average annual management fee rates applicable to the respective management fee-generating AUM balances are set forth below:

As of September 30,
2012     2011  
Weighted Average Annual Management Fee Rates:
Closed-end funds 1.48 % 1.45 %
Open-end funds 0.48 0.49
Evergreen funds 1.82 1.84
Overall 1.07 1.09
 

Incentive-Creating AUM

As of
September 30,

2012

 

June 30, 2012

 

September 30,

2011

(in millions)
Incentive-Creating Assets Under Management:
Closed-end funds $ 34,980 $ 33,930 $ 31,555
Evergreen funds   2,091   2,066   2,071
Total $ 37,071 $ 35,996 $ 33,626
 

Accrued Incentives and Incentives Created (Fund Level)

   
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2012       2011     2012       2011  
(in thousands)
Accrued Incentives (Fund Level):
Beginning balance $ 1,751,326   $ 2,296,087   $ 1,686,967   $ 2,066,846  
Incentives created (fund level):
Closed-end funds 430,555 (723,144 ) 673,284 (282,571 )
Evergreen funds   15,846     (21,969 )   29,163     4,908  
Total incentives created (fund level)   446,401     (745,113 )   702,447     (277,663 )
Less: segment incentive income recognized by us   (59,174 )   (33,697 )   (250,861 )   (271,906 )
Ending balance $ 2,138,553   $ 1,517,277   $ 2,138,553   $ 1,517,277  

Accrued incentives (fund level), net of associated incentive income compensation expense

$ 1,280,865   $ 867,204   $ 1,280,865   $ 867,204  
 

Uncalled Capital Commitments

Uncalled capital commitments amounted to $13.3 billion as of September 30, 2012, as compared with $13.7 billion as of June 30, 2012 and $12.4 billion as of September 30, 2011.

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