giofranchi

What I think is important to understand regarding OAK is that their ability to raise funds has little to do with the short term performance of their investment strategies. Instead, it depends almost exclusively on two things: 1) Their reputation of being great at scooping up bargains in the middle of markets turmoil, 2) And of course the long term performance of their investment strategies. As an example, look no further than this year: their investments clearly are performing well below their long term average, Investment income for the 9 months ended September 30 have decreased from $170 million last year to $98 million this year… This notwithstanding they have been able to increase fee-generating AUM 18%! Don’t get me wrong: when the next downturn comes, their BV might surely suffer, though as I have already said almost half of their BV is in cash and equivalents, and their Incentives income might suffer too, though somewhat mitigated by Management fees that might instead get a boost. But all that will surely be only temporary: their BV will rebound strongly when $1.1 billion they are holding in cash and equivalents is put to good use and starts paying off, while both their Management fees and Incentives income should increase substantially, following AUM on their way up. Gio

Thanks for your response. I'm incredibly disappointed that Sardar feels the need to do this. Best, Ragu Same here. This action is directly contradictory to what he constantly says in the annual meeting and shareholder letters about not talking to any investors outside of the annual meeting, not giving any special information outside of the shareholder letter, and treating all investors equally. Once again, what would I do if I were in his stead? Once again, I would do the same! With the words of Neil Young: If I had felt threatened, I would have defended myself too. And if talking to large, institutional shareholders might be helpful, so be it! Imo it is only a pity that Biglari’s time should be wasted that way! Gio

Not only!! Rights offerings are a very good way to increase my investment in BH at a price substantially below BVPS after all the new shares have been issued! For someone like me, who always keeps a cash reserve at hand, those rights offerings are simply a great way to average down! Though I understand they might not be so great for cash strapped investors… ;) Gio

Imo this is a misconception about OAK, and one of the reasons this company is very cheap today. The sum of the parts I calculated for OAK is made of two parts basically: BV + a multiple of fees and incentives income. Now let’s examine both: - Fees and incentives income depends on AUM. My belief is that, should trouble come our way, OAK’s AUM will increase substantially… not decrease! If we don’t experience a contraction in the multiple assigned by the market to OAK’s fees and incentive income, this part of my sum of the parts won’t go down. Vice versa, it will increase! - Book Value: first of all almost half of BV today is in cash and equivalent, therefore a lot of dry powder to be opportunistically deployed when the right time comes. Second, don’t forget they are first and foremost value investors: they don’t go where they don’t see value. For instance, $36 billion out of $93 billion of AUM are invested in strategies other than Distressed Debt or High Yield Bonds, and also Distressed Debt and High Yield Bonds strategies are focused on regions like Europe and some emerging markets, where the pain of too much debt has already been felt. This is what Marks had to say during the Conference Call for Q3 2014: Value might be destroyed only if they fail to understand where we are in the cycle and to act accordingly. Making, as a consequence, stupid investments. And I don’t believe they are making stupid investments! Instead, I think their investments right now will make some money... just not as much money as with the opportunities that will present themselves when the next downturn finally arrives. After all, I guess their track record speaks loudly enough: OAK has produced strong earnings and cash flow even during the global financial crisis of 2008-09. It has generated positive adjusted net income for 18 consecutive years and paid quarterly distributions for 71 straight quarters! It is difficult to destroy value, when you generate earnings for almost 20 years in a row, right? ;) Gio

Picasso, What you are pointing out is true, and it is precisely the reason why OAK is cheap today... Because the cycle is so much overextended that opportunities for value investments are very difficult to come by... And the high yield bonds market is no exception... I have said many times that OAK is a countercyclical investment and that patience will be required... Therefore, I don't think I am missing the point... What I asked you is: don't you think the current economic environment in North America, Europe, Japan, and even China might lead to lots of distressed debt opportunities? This is what truly interests me... Because, when something stressful happens, yields will increase very rapidly, and that's when OAK will raise tens of billions and deploy them opportunistically. Gio

Picasso, I don't know what to answer to 1) and 3), but I will answer 2): OAK is a value investor looking for distressed opportunities... It is not an investor in government bonds... In which situation do you think the largest number of distressful opportunities might occour: when government bonds yields are high and gradually coming down with debt burdens that are light and easily manageable... Or when yields cannot possibly go lower, and yet debt burdens have become so heavy that the payment of interests is a problem? Also don't forget we are talking of markets that are already huge! Many trillions of capital! OAK at $93 billion might still be just scratching the surface! Gio

Ross, If interest rates start to increase, that's exactly when the most pain will be felt, and distressed debt opportunities will become plentiful! Far from being a scenario in which AUM will decline! They will increase a lot! The majority of governments around the world are still able to service their debt because of very low yields... If they were to increase, trouble would follow... (think for instance Southern Europe in 2011)... And also opportunities! And when there are opportunities, OAK has proven its ability to raise huge amount of capital. Furthermore, don't confuse NAV with IV... If NAV is circa $60, and OAK grows AUM at a CAGR of 15%, IV is much higher!! And if OAK grows AUM at a CAGR of 15% for the next 20 years, it would still be managing less than half the money BlackRock is managing today, in markets that will be far larger! Finally, it is a business that won't go away... Your downside is very well protected! Of course, the whole industry might experience a lot of consolidation in the future, but consolidation is very good for the strong! Cheers, Gio

Actually, ANI also considers Investment income… Instead in my sum of the parts analysis only Management fees and Incentive income should be considered. For the Nine Months Ended September 30, 2014 Management fees have been $572 million, while Incentive income has been $438 million. Fee-related earnings per Class A unit were $1.03. But I could not find Incentive income per Class A unit. A simple (yet probably not accurate) proportion would yield: (438 / 572) x 1.03 = $0.79. Therefore Fee-related earnings per Class A unit + Incentive income per Class A unit = 1.03 + 0.79 = $1.82, which annualized would become: (1.82 / 3) x 4 = $2.43. Let’s normalize this number 15% higher: 1.15 x 2.43 = $2.8 Sum of the parts: $11.30 + $4.63 + $2.8 x 15 = $57.93. Vinod, I understand this might not be very clear… A sum of the parts analysis done this way may not be appropriate. But what I am trying to understand is straightforward imo: what multiple might the market assign to OAK’s BV 20 years from now? A multiple of 1? Ok. What multiple the might market assign to OAK’s fees and incentive income 20 years from now? A multiple of 15? Ok. What multiple are they selling for today? Less than 1 and 15? Very well, if it is so, I don’t need to rely on multiple expansion. If OAK compounds BV at 15% annual and fees and incentive income compounds at 15% annual, my investment will return 15% compounded annual. Why do I think OAK might manage to grow BV at 15% compounded annual? Because they have a track record of 20% IRR for their investments until now. Why do I think OAK might manage to grow fees and incentive income at 15% compounded annual? Because AUM have grown at a CAGR of 14.5% since 2000. There is a huge amount of very questionable debt around the world… if something goes wrong, OAK is very well positioned to do even better than it has done in the past! Gio

Vinod, think of them as two separate businesses: business 1): BV is your own capital that you manage for yourself alone. business 2): AUM – BV is the capital you manage for your client, generating fees and incentives. Calculate a FV for business 1), a FV for business 2), then sum the two. I don’t see where the double counting lies. Gio

Ok, but $477 million annualized is $636 million, which is 0.68% of $93.2 billion… 15% below the average 0.8% you have mentioned. Gio

Well, you might be right… but it doesn’t change much! Book Value is $2.6 billion, while AUM are $93.2 billion. So let’s calculate a “proportional” ANI per class A unit, using 93.2 – 2.6 = $90.6 billion: (2.63 / 93.2) x 90.6 = $2.56. Now, let’s annualize that “proportional” ANI per class A unit: ($2.56 / 3) x 4 = $3.41 I don’t see why Accrued Incentive should be disregarded… They surely will be recorded as future earnings, but they have already been earned, right?... In other words, they are not future earnings that will come from new and larger AUM... Anyway, let’s disregard Accrued Incentive altogether. But, let’s use the average multiple OAK’s peers are selling for: 15. Sum of the parts: $11.30 + $4.63 (you surely don’t want to use the number DoubleLine is carried on OAK's balance sheet, right?!) + $3.41 x 15 = $67.08 My point is: here you have something that’s selling below NAV (I don’t know exactly how much, neither do I care!), and that could grow NAV at a CAGR of 15% easily enough! (at least given their historical track record, and the amount of opportunities which will probably present themselves in the distressed debt market) Why so cheap then? Because it surely will require patience. Being a countercyclical investment, who knows when it might finally pay off? 2014 for instance has not been a good year... Maybe 2015 will be difficult too... For this reason people prefer to stay away from countercyclical investments like OAK. Gio

Don’t worry… Next time I want to share something with Liberty, I’ll send him a PM… Promised! ;) Cheers, Gio

Ok! Thank you! Gio

If you simply use Adjusted net income per Class A unit for the Nine Months Ended September 30 2014 ($2.63), and annualize that number: ($2.63 / 3) x 4 = $3.51, Then apply my multiple of 12: $3.51 x 12 = $42.08, Sum of the parts: $18.36 + $4.63 + $42.08 = $65.07. Just be aware that 2014 is not a good year: in 2013 Adjusted net income per Class A unit for the Nine Months Ended September 30 had been $4.76, 81% above the 2014 result. That’s why I think LTM Adjusted Net Income could be used, and probably it is even somewhat conservative. Gio

Kyle Bass: 'Only massive debt restructuring can save EU' http://news.bbc.co.uk/2/hi/programmes/hardtalk/9639507.stm Gio

Italian taxes, alas!! ::) Gio

This is my view on valuation: Book Value: $11.30 per share Accrued Incentives: $7.06 per share Total: $18.36 per share DoubleLine Stake: it earns circa $60 million after taxes in 2014, applying a multiple of 14, you get to $4.63 per share LTM Adjusted Net Income: $745 million, applying a multiple of 12, you get to $49.32 per share Sum of the parts: $18.36 + $4.63 + $49.32 = $72.31 And all those parts might grow at a CAGR of 15%: Book Value + Accrued Incentives are investments + cash which, given their very solid track record, might keep growing in value quite satisfactorily; DoubleLine is growing very fast; Adjusted Net Income depends on fees, incentives, and investment income, which in turn depend on AUM: if they succeed in growing AUM, ANI will follow suit. What I see is a machine which might compound value at 15% annual for the next two decades, and which might get a further boost in price from multiple expansion, because of the discount to NAV in my calculation. Furthermore, and this is a feature I like a lot!, OAK might be able to make money if the present cycle goes on… But most probably will score an home run, when this cycle finally ends, and the stock market starts going south. It is true: I pay too high a tax rate on distributions… but I have come to the conclusion that this is worthwhile nonetheless, because OAK will pay out the majority of its earnings AND grow at the same time. Gio

Liberty, One last question if I may: earlier in the thread you have said you are holding 0% cash right now. To imagine you holding 100% cash “on a few occasions” during the last 10 years is hard… I mean, you hold cash only if there is no investment that offers good value… And I can hardly think of any time in the last 10 years in which it was as difficult to find attractive bargains as it is today (with the possible exception of 2007)… So, could you please tell me when those “few occasions” have happened? Thank you! Gio

I hope actions speak louder than words! ;) Gio

Thank you very much agaglio, dcollon is also meeting the two of them… and I have already sent him my list of questions! ;) Cheers, Gio

In my experience those who claim to do so end up being almost always fully invested. Clearly it is not your case! Glad to hear that. :) Gio

Well, I think it was Vinod who asked how my cash reserve would change if FFH, LMCA, and BH were at certain price levels… Anyway, let may ask you a question: how many times in the last 10 years have you held a significant amount of cash for an extended period of time? My point is: the problem is not to hold or not to hold cash, the problem is those who hold cash tend to always hold it, while those who are fully invested tend to always be fully invested. ;) Gio

Anyway, let me explain just a little: Imo Fairfax and Oaktree share this feature: although for different reasons, they both will make money if the current cycle goes on, and they both will make much more money if the current cycle ends and the stock markets start going south. Of course, you never know what happens to stock prices… And in a stock market correction both Fairfax and Oaktree stock prices might get hurt. But, when people realize they are making lots of money, while others don’t, who knows what might actually happen to the price of their stocks? Original mungerville said he thinks about Fairfax as cash… If the same is true for Oaktree, my asset allocation has not changed at all! ;) Gio

I think I have explained why I sold out of Oaktree Capital almost an year ago, and also why I think my reasoning was wrong back then, and why now I have invested again. With the only exception of GLRE and TPRE, which I intend to buy again in the future, OAK is the first company I have bought back once I sold it. I am not invested in GLRE and TPRE right now because through FFH I think I have more than enough exposure to the insurance and reinsurance markets. This also I have already pointed out many times! ;) Gio

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