OAK - Oaktree Cap Group LLC

[racemize]

Since it's Howard Marks and they have dropped off the IPO, I've been considering this somewhat.  Giofranchi posted this write-up in the books thread, and it seems decent:

 

http://brooklyninvestor.blogspot.it/2012/04/oak-oaktree-capital-management-ipo.html

 

 

Anyone else given this any thought?  My main concerns:

 

1) Don't get Marks as cheap as Buffett/Watsa (but how often does that happen).

2) Amount of money currently looking in non-equity investments

3) Size of the fund.

 

Otherwise, they have a pretty stellar record it seems.

[Liberty]

I had a quick look after seeing a VIC writeup, but I didn't really dig deep and can't say I understand it or even know if it's undervalued yet.

 

Anyway, I'm writing just to say that if you have a VIC membership, you should be able to find some info there.

[giofranchi]

My main concerns:

 

1) Don't get Marks as cheap as Buffett/Watsa (but how often does that happen).

2) Amount of money currently looking in non-equity investments

3) Size of the fund.

 

Otherwise, they have a pretty stellar record it seems.

 

racemize,

 

1) maybe today you do not get Mr. Marks as cheap as Mr. Buffett or Mr. Watsa, but on a sum of the parts basis OAK looks undervalued enough. I would suggest (and that’s what I did) to invest 30% to 50% of the funds you eventually intend to invest in OAK, and wait for better prices to average down.

 

2) Well, actually that’s one of the reasons I would like to invest a sizeable portion of my firm’s capital in OAK! My reasoning: there is a lot of bad debt all over the developed world right now, and many high-yielding credit opportunities will most probably follow. Look, for instance, at the section “Europe in 2012” of the Third Point 2012 Q2 Letter in attachment. The high-yield debt market, though, is not easy at all: I understand what Mr. Loeb describes in “Europe in 2012”, but I know I would not be able to perform such an analysis all by myself, and, even if I could, I would not be able to muster enough confidence to make such an opportunistic investment by myself. That’s the reason why I look for reliable partners to capitalize on the coming high-yielding credit opportunities. And who is better than Mr. Marks?

 

3) Yes, the fund has already very big AUM. But both the credit market and the real estate market are huge. BRK relies almost completely on big business acquisitions. The equity market is smaller than  the credit market, while BRK is bigger than OAK. So, it will be much harder to move the needle for BRK, than it is for OAK.

 

giofranchi

2012-Third-Point-Q2-Investor-Letter-TPOI.pdf

[17thstcapital]

The Doubleline equity interest on its own might be worth 20-25% of the mkt cap.

[giofranchi]

The Doubleline equity interest on its own might be worth 20-25% of the mkt cap.

 

Thank you, 17thstcapital!

I know, and I am aware of the fact that the sum of the parts analysis I posted doesn't take into account the Doubleline equity interest... maybe, after all, right now you are actually getting Mr. Marks as cheap as Mr. Watsa and Mr. Buffett!! ;)

 

giofranchi

[17thstcapital]

I personally compare OAK to the likes of BX and FIG and less to Berkshire and Fairfax. One could argue that the management and incentive fees alone, which should continue to increase along with AUM, might make OAK, BX, and FIG interesting investment opportunities. You then get investments like Doubleline, net cash on B/S and interests in their own funds at a discount, sometimes significant.

 

Long FIG.

[MYDemaray]

Saw Howard Marks speak at a lunch yesterday.  He said Oaktree has a 10 year lockup on its funds.  Wow.  Nice if you can get it.

[fareastwarriors]

Saw Howard Marks speak at a lunch yesterday.  He said Oaktree has a 10 year lockup on its funds.  Wow.  Nice if you can get it.

 

Did you get notes on anything else of interest?  ;)

[Guest hellsten]

http://brooklyninvestor.blogspot.com/2012/08/oaktrees-grandslam.html

 

Doubleline Worth 2% of AUM?

Two key data points support a 2% AUM valuation; the PIMCO purchase by Allianz (1.8% of AUM), and the SocGen purchase of TCW (2.1% of AUM).

…

 

Conclusion

So judging from this quick look, it seems that a 2% of AUM valuation for Doubleline might be a little aggressive in this post-crisis market (and what if bonds actually do enter a bear market?).  A 1% of AUM figure sounds totally reasonable given recent transaction trends.

 

At 1% of AUM, Doubleline today would be worth around $400 million.  OAK owns 22%, so that's $88 million or about $0.60/share  (That means if we double the valuation, it's worth $1.20/share (at 2% of AUM)).

[racemize]

Questions I came up with today (still reading):

 

Page 14 of the prospectus shows net income losses every year, but their ANI/ANI-OCG (and everyone's analysis) shows positive income (e.g., at page 105).  Page 107 does the reconciliation, but I'm not getting why GAAP's "compensation expense" (which is admittedly non-cash) causes the profit to go to a loss.  I'm still digging, so perhaps I'm being dense.

 

Also, this bothered me a lot (page 55):

As long as 90% of our gross income for each taxable year constitutes qualifying income as defined in Section 7704 of the Code and we are not required to register as an investment company under the Investment Company Act on a continuing basis, and assuming there is no change in law (see “—The U.S. Congress has considered legislation that would have taxed certain income and gains at increased rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as well as the market price of our Class A units, could be reduced.”), we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. As a result, our Class A unitholders may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on their allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow-through basis) for each of our taxable years ending with or within their taxable year, regardless of whether or not our Class A unitholders receive cash distributions from us.

 

This whole paragraph seemed quite odd to me--normally, US is only taxed on gains or dividends, but the above seems much more like a partnership set-up.  In that case, is it partnership type IRS filings and not a stock? 

 

 

If anyone has any thoughts on the above, please let me know!

[racemize]

Ok, so looking more at the tax question, it seems clear that all unit holders will get a K-1. 

 

Here's IR for OAK:

http://ir.oaktreecapital.com/phoenix.zhtml?c=212597&p=irol-irhome

 

and here's a FAQ for BX which has a similar structure:

http://ir.blackstone.com/faq.cfm

 

Looking at some forums, the K-1's from BX are showing up in September (!), so this seems like a huge PIA.  I'm also not clear on how the income is taxed--presumably at carried interest rates?

 

Edit: Forbes Guide to taxation with MLPs:

 

http://www.forbes.com/sites/baldwin/2010/12/02/tax-guide-to-master-limited-partnerships/

[giofranchi]

racemize,

I don’t know when they published the file in attachment on OAK’s website. Maybe, it had always been there, and I had just missed it…  :-[

Anyway, I think it adds useful information on the income tax topic. If you hadn’t already downloaded this file, I hope it might be helpful.

 

giofranchi

2Q2012_Qualified_Notice_8-7-121.pdf

[racemize]

Thanks Gio, I've been talking to IR and they pointed me to the file, though I still have a couple of questions that I'm waiting for an answer on:

 

1) It's my understanding that distributions should be (or at least can be) different from the K-1 income and should only affect cost basis; and

2) I'm not sure what rate portfolio interest is taxed at (presumably long term capital gains?).

 

 

[biaggio]

Do you guys have any concerns re capital structure shown here on page 9, http://sec.gov/Archives/edgar/data/1403528/000119312512115227/d189118ds1a.htm

 

I have tried to look at it a few times. Is there a simple way you guys are looking at this?

 

Seeing you guys are interested I figure that it can t be as complicated as it looks.

 

I certainly would be interested in investing my money alongside Howard Marks, but somehow it does not seem so with how it is structured.

[giofranchi]

Do you guys have any concerns re capital structure shown here on page 9, http://sec.gov/Archives/edgar/data/1403528/000119312512115227/d189118ds1a.htm

 

I have tried to look at it a few times. Is there a simple way you guys are looking at this?

 

Seeing you guys are interested I figure that it can t be as complicated as it looks.

 

I certainly would be interested in investing my money alongside Howard Marks, but somehow it does not seem so with how it is structured.

 

biaggio,

I must admit OAK’s structure is far from easy to understand: a lot of investment strategies, a lot of investment vehicles, a still preponderant insider ownership, etc..

A few days ago, racemize pointed out two specific topics he would like to shed some light on. We had an interesting conversation (at least, I thought it was interesting!), trying to understand what at first glance didn’t seem to be clear. And I found it very useful!

Could you please do the same? Could you bring up specific topics you would like to dig deeper into? I think that could start another interesting conversation!

Thank you,

 

giofranchi

 

[racemize]

Thanks Gio, I've been talking to IR and they pointed me to the file, though I still have a couple of questions that I'm waiting for an answer on:

 

1) It's my understanding that distributions should be (or at least can be) different from the K-1 income and should only affect cost basis; and

2) I'm not sure what rate portfolio interest is taxed at (presumably long term capital gains?).

 

Ok, it turns out those listings are only for foreign investors, so they are less meaningful for the US.  The reason being, they only affect cost basis for the US and the K-1's are what determine taxation type.

[racemize]

Do you guys have any concerns re capital structure shown here on page 9, http://sec.gov/Archives/edgar/data/1403528/000119312512115227/d189118ds1a.htm

 

I have tried to look at it a few times. Is there a simple way you guys are looking at this?

 

Seeing you guys are interested I figure that it can t be as complicated as it looks.

 

I certainly would be interested in investing my money alongside Howard Marks, but somehow it does not seem so with how it is structured.

 

Hi Biaggio, honestly I haven't figured out the capital structure completely.  I hit the questions above and have focused on them first.  I've been generally assuming the structure isn't that important as long as we keep Marks' structure; however, if the culture has any shift once he's gone, these unitholders may not be in a great position (e.g., no control over the board).

[Kraven]

One quick thought.  I have never looked at Oaktree as an investment, but I see that people are struggling to figure out what's going on with the K-1.  Just a word of advice.  It may not be worth making the investment if you don't understand how the tax situation is going to work unless you believe you can figure it out or have a good accountant.  K-1s are a huge pain in the ass.  I have received many in my life and gave up even attempting to figure them out.  The numbers never made clear sense to me and didn't seem to add up exactly.  I ended up always just giving them to an accountant.  Oftentimes too with partnership income there will be phantom income on which you need to pay tax, but have never (and will never) receive the corresponding funds.  Just my 2 cents.  Be careful.

[racemize]

One quick thought.  I have never looked at Oaktree as an investment, but I see that people are struggling to figure out what's going on with the K-1.  Just a word of advice.  It may not be worth making the investment if you don't understand how the tax situation is going to work unless you believe you can figure it out or have a good accountant.  K-1s are a huge pain in the ass.  I have received many in my life and gave up even attempting to figure them out.  The numbers never made clear sense to me and didn't seem to add up exactly.  I ended up always just giving them to an accountant.  Oftentimes too with partnership income there will be phantom income on which you need to pay tax, but have never (and will never) receive the corresponding funds.  Just my 2 cents.  Be careful.

 

Yeah, this is what I'm trying to figure out (and the IR people aren't being too forthcoming on what type of income it will be).  I think it would be worth it for a substantial amount of money (e.g., >500k or 1 mil), but is not worth it for the level of funds I would commit.  Kind of sad really, I liked the idea of getting with Marks and getting some exposure to distressed debt rather than my 100% equities.

[Kraven]

One quick thought.  I have never looked at Oaktree as an investment, but I see that people are struggling to figure out what's going on with the K-1.  Just a word of advice.  It may not be worth making the investment if you don't understand how the tax situation is going to work unless you believe you can figure it out or have a good accountant.  K-1s are a huge pain in the ass.  I have received many in my life and gave up even attempting to figure them out.  The numbers never made clear sense to me and didn't seem to add up exactly.  I ended up always just giving them to an accountant.  Oftentimes too with partnership income there will be phantom income on which you need to pay tax, but have never (and will never) receive the corresponding funds.  Just my 2 cents.  Be careful.

 

Yeah, this is what I'm trying to figure out (and the IR people aren't being too forthcoming on what type of income it will be).  I think it would be worth it for a substantial amount of money (e.g., >500k or 1 mil), but is not worth it for the level of funds I would commit.  Kind of sad really, I liked the idea of getting with Marks and getting some exposure to distressed debt rather than my 100% equities.

 

The IR people aren't going to know how the partnership income is going to be treated.  You're asking a very complex question of someone whose job it is to look good and communicate effectively.  Being an ex jock (high school or college football a plus) or a leggy blonde is of more importance than tax knowledge.  If it's a K-1, it's partnership income.  That's all you need to know right now.  Beyond that, the specific characterization of each item may not be known until the books are audited and it may change each year.  The truth is that an accountant will be able to digest the K-1 easily enough, but you may never have a full understanding of what the numbers represent.  And it's always nice to be told you owe tons of taxes on money that has never come in and will never come in.  Rarely is it the opposite, i.e. you receive more than you are paying taxes on.  But what do I know?  I'm not a tax expert.

[giofranchi]

however, if the culture has any shift once he's gone, these unitholders may not be in a great position (e.g., no control over the board).

 

Fortunately, I think Mr. Marks is young enough to be at OAK’s helm for at least the next 10 years. Imho, management is the first and most important reason why an investment in OAK should be considered. Paraphrasing Mr. Munger, you should not consider to invest in a financial firm, unless you know the ethos of management. I believe that, as soon as Mr. Marks is gone, I will be gone too! And I have really no problem with that!

 

giofranchi

[racemize]

One quick thought.  I have never looked at Oaktree as an investment, but I see that people are struggling to figure out what's going on with the K-1.  Just a word of advice.  It may not be worth making the investment if you don't understand how the tax situation is going to work unless you believe you can figure it out or have a good accountant.  K-1s are a huge pain in the ass.  I have received many in my life and gave up even attempting to figure them out.  The numbers never made clear sense to me and didn't seem to add up exactly.  I ended up always just giving them to an accountant.  Oftentimes too with partnership income there will be phantom income on which you need to pay tax, but have never (and will never) receive the corresponding funds.  Just my 2 cents.  Be careful.

 

Yeah, this is what I'm trying to figure out (and the IR people aren't being too forthcoming on what type of income it will be).  I think it would be worth it for a substantial amount of money (e.g., >500k or 1 mil), but is not worth it for the level of funds I would commit.  Kind of sad really, I liked the idea of getting with Marks and getting some exposure to distressed debt rather than my 100% equities.

 

The IR people aren't going to know how the partnership income is going to be treated.  You're asking a very complex question of someone whose job it is to look good and communicate effectively.  Being an ex jock (high school or college football a plus) or a leggy blonde is of more importance than tax knowledge.  If it's a K-1, it's partnership income.  That's all you need to know right now.  Beyond that, the specific characterization of each item may not be known until the books are audited and it may change each year.  The truth is that an accountant will be able to digest the K-1 easily enough, but you may never have a full understanding of what the numbers represent.  And it's always nice to be told you owe tons of taxes on money that has never come in and will never come in.  Rarely is it the opposite, i.e. you receive more than you are paying taxes on.  But what do I know?  I'm not a tax expert.

 

They just indicated details of exemplary income will be posted in a month or two, so I'll wait to see that (plus the lockup period).  On these partnerships, apparently they are typically good tax shelters for energy partnerships with high depreciation (so the income is much lower than the distributions), but I doubt that is the case with an investment partnership like this one.

 

Moreover, I think it will be in our favor re taxation versus the 35% corporate+ordinary dividend rate (currently 15%) that would be the case for other companies, but the K-1 is a hassle to get that benefit.

[biaggio]

Do you guys have any concerns re capital structure shown here on page 9, http://sec.gov/Archives/edgar/data/1403528/000119312512115227/d189118ds1a.htm

 

I have tried to look at it a few times. Is there a simple way you guys are looking at this?

 

Seeing you guys are interested I figure that it can t be as complicated as it looks.

 

I certainly would be interested in investing my money alongside Howard Marks, but somehow it does not seem so with how it is structured.

 

biaggio,

I must admit OAK’s structure is far from easy to understand: a lot of investment strategies, a lot of investment vehicles, a still preponderant insider ownership, etc..

A few days ago, racemize pointed out two specific topics he would like to shed some light on. We had an interesting conversation (at least, I thought it was interesting!), trying to understand what at first glance didn’t seem to be clear. And I found it very useful!

Could you please do the same? Could you bring up specific topics you would like to dig deeper into? I think that could start another interesting conversation!

Thank you,

 

giofranchi

 

 

Thanks Gio + Race

 

 

My question was more about the ownership structure- the A shares , the operating group shares, the multiple voting shares (I don t mind if Mr Marks votes my shares), the general partner group, the C shares.

 

It confuses me so much that I cannot even ask the question properly.

 

The actual business itself I lump together as a bunch of alternative investments, that generate fees based on some sort of % of AUM.-have no problem with this. This is the part I like

 

How the profit is allocated to owners so you don t overpay for shares is my question.-this is the part that does not seem right (though I may not be looking at it right)

 

In the Q2 earnings report they breakdown fee related earnings of $82 million (this is net of $106 million in expenses which includes compensation & benefits-this I assume is fees paid to money managers)  to $66 million to non controlling OCGH and $6.2 million to non operating group other income, and basically the rest to A shareholders or about 41 cents per share.

 

Then there is the capital on the balance sheet of  $1.254 billion- would this be attributable to A shares and other controlling shareholders

 

It seems that you make money on OAK via earnings made from AUM + growth in shareholder capital by having H Marks invest it for you.

 

Is it cheap enough? The way I see it, for $40 or a market cap of ~$6b

 

i expected to earn ~ $3 per share (according to analysts- sorry about that- I have trouble reconciling this seeing that A shares only earned 41 cents in the 2nd Q i.e I don't believe it)

 

plus

 

ii has shareholder capital invested in various vehicles of $1.2B or about $7 per share

 

iii plus investment in Gundlak's firm (which I like as well) ~$1-2 per share according to http://brooklyninvestor.blogspot.ca/2012/08/oaktrees-grandslam.html

 

iv off balance sheet asset (unpaid/accrued incentive fees) ~$1.1B or $7 per share according to Brooklyn ( I could be double counting this)

 

v the talent of H marks + opportunity to participate in alternative investments that are usually not available to small investors.

 

I could be wrong but complexity is a warning flag for me.

 

How do you value OAK?

 

I would love to be able to own it, thats why I ask the question.

 

 

 

 

[giofranchi]

One quick thought.  I have never looked at Oaktree as an investment, but I see that people are struggling to figure out what's going on with the K-1.  Just a word of advice.  It may not be worth making the investment if you don't understand how the tax situation is going to work unless you believe you can figure it out or have a good accountant.  K-1s are a huge pain in the ass.  I have received many in my life and gave up even attempting to figure them out.  The numbers never made clear sense to me and didn't seem to add up exactly.  I ended up always just giving them to an accountant.  Oftentimes too with partnership income there will be phantom income on which you need to pay tax, but have never (and will never) receive the corresponding funds.  Just my 2 cents.  Be careful.

 

Yeah, this is what I'm trying to figure out (and the IR people aren't being too forthcoming on what type of income it will be).  I think it would be worth it for a substantial amount of money (e.g., >500k or 1 mil), but is not worth it for the level of funds I would commit.  Kind of sad really, I liked the idea of getting with Marks and getting some exposure to distressed debt rather than my 100% equities.

 

The IR people aren't going to know how the partnership income is going to be treated.  You're asking a very complex question of someone whose job it is to look good and communicate effectively.  Being an ex jock (high school or college football a plus) or a leggy blonde is of more importance than tax knowledge.  If it's a K-1, it's partnership income.  That's all you need to know right now.  Beyond that, the specific characterization of each item may not be known until the books are audited and it may change each year.  The truth is that an accountant will be able to digest the K-1 easily enough, but you may never have a full understanding of what the numbers represent.  And it's always nice to be told you owe tons of taxes on money that has never come in and will never come in.  Rarely is it the opposite, i.e. you receive more than you are paying taxes on.  But what do I know?  I'm not a tax expert.

 

They just indicated details of exemplary income will be posted in a month or two, so I'll wait to see that (plus the lockup period).  On these partnerships, apparently they are typically good tax shelters for energy partnerships with high depreciation (so the income is much lower than the distributions), but I doubt that is the case with an investment partnership like this one.

 

Moreover, I think it will be in our favor re taxation versus the 35% corporate+ordinary dividend rate (currently 15%) that would be the case for other companies, but the K-1 is a hassle to get that benefit.

 

My firm received its first distribution and paid 15% in taxes, just like on any other foreign dividend. And my firm’s accountant assured me that a capital gain will be taxed just like any other capital gain. But wait… now you are scaring me! How is it possible that for a foreign firm it seems to be so easy, while for a US citizen it gets so complicated?! Hmmm… I don’t like it! >:(

 

giofranchi

[racemize]

 

My firm received its first distribution and paid 15% in taxes, just like on any other foreign dividend. And my firm’s accountant assured me that a capital gain will be taxed just like any other capital gain. But wait… now you are scaring me! How is it possible that for a foreign firm it seems to be so easy, while for a US citizen it gets so complicated?! Hmmm… I don’t like it! >:(

 

giofranchi

 

I can say with confidence that I have no idea how it works for foreign investors.  Apparently, it is just based on the distributions?  In the U.S., the distributions only affect cost basis and the K-1 is what determines our taxes, which we will have to deal with and file a late/amended return for.