OAK - Oaktree Cap Group LLC

[Contra123]

Let's take APO and BX, for example. They compounded AuM at about 17% and 20% respectively over the past 5 years. The annualized stock total shareholder return (TSR, accounting for reinvested distributions) for them has been 17% and 18%.

 

Alternative asset management is a business with incredible operating leverage; employee comp & carry is the main expense; from what I can tell, BX's headcount growth annualized at 5%, way below the pace of AuM growth. Clearly, as the shareholder, you have not captured the benefit from those economies of scale (guess who won, though).  And the APO and BX TSR isn't even tax-efficient because when you file your K1s, a portion of the dividends that you receive is taxed at higher rates e.g. ordinary income.  If you factor-in tax efficiency and the pain-in-the-butt from filing the K1s, you'd be better off owning Blackrock (BLK) by far, and even SPY wouldn't be a bad option.

 

 

[Contra123]

Coincidentally, even BLK has been willing to modestly shrink their float (about 1% pa). The # shs out on BX & APO has been moving in the exact opposite direction.

[given2invest]

Let's take APO and BX, for example. They compounded AuM at about 17% and 20% respectively over the past 5 years. The annualized stock total shareholder return (TSR, accounting for reinvested distributions) for them has been 17% and 18%.

 

Alternative asset management is a business with incredible operating leverage; employee comp & carry is the main expense; from what I can tell, BX's headcount growth annualized at 5%, way below the pace of AuM growth. Clearly, as the shareholder, you have not captured the benefit from those economies of scale (guess who won, though).  And the APO and BX TSR isn't even tax-efficient because when you file your K1s, a portion of the dividends that you receive is taxed at higher rates e.g. ordinary income.  If you factor-in tax efficiency and the pain-in-the-butt from filing the K1s, you'd be better off owning Blackrock (BLK) by far, and even SPY wouldn't be a bad option.

 

the idea behind owning OAK vs. SPY or BLK is to make a targeted bet on distressed debt/cycle though.

[Contra123]

Let's take APO and BX, for example. They compounded AuM at about 17% and 20% respectively over the past 5 years. The annualized stock total shareholder return (TSR, accounting for reinvested distributions) for them has been 17% and 18%.

 

Alternative asset management is a business with incredible operating leverage; employee comp & carry is the main expense; from what I can tell, BX's headcount growth annualized at 5%, way below the pace of AuM growth. Clearly, as the shareholder, you have not captured the benefit from those economies of scale (guess who won, though).  And the APO and BX TSR isn't even tax-efficient because when you file your K1s, a portion of the dividends that you receive is taxed at higher rates e.g. ordinary income.  If you factor-in tax efficiency and the pain-in-the-butt from filing the K1s, you'd be better off owning Blackrock (BLK) by far, and even SPY wouldn't be a bad option.

 

the idea behind owning OAK vs. SPY or BLK is to make a targeted bet on distressed debt/cycle though.

 

I think that’s sensible (a sorta perpetual HYG put option where you are paid for the carry); the above discussion may have sprawled beyond that into a general debate on alt GPs (probably my fault).

[StevieV]

Let's take APO and BX, for example. They compounded AuM at about 17% and 20% respectively over the past 5 years. The annualized stock total shareholder return (TSR, accounting for reinvested distributions) for them has been 17% and 18%.

 

Alternative asset management is a business with incredible operating leverage; employee comp & carry is the main expense; from what I can tell, BX's headcount growth annualized at 5%, way below the pace of AuM growth. Clearly, as the shareholder, you have not captured the benefit from those economies of scale (guess who won, though).  And the APO and BX TSR isn't even tax-efficient because when you file your K1s, a portion of the dividends that you receive is taxed at higher rates e.g. ordinary income.  If you factor-in tax efficiency and the pain-in-the-butt from filing the K1s, you'd be better off owning Blackrock (BLK) by far, and even SPY wouldn't be a bad option.

 

(1) Blackrock is a very good company.  You might be better off owning them.

 

(2) Obviously, every company is different, and I agree that OAK is a little different bet than BX or APO.

 

(3) There is no doubt that the alt stocks have not performed well over their histories as public companies.  BX was the first to IPO, and its share price has moved nowhere since its IPO over a decade ago.

 

The company has grown tremendously.  As you allude to, the employees have certainly done well.  My disagreement is that I think that largely has to do with valuation.  The reason that investors in BX haven't done well is not that all the money has been taken by the employees, but that it was expensive at the IPO, and isn't expensive now. 

[undervalued]

Let's take APO and BX, for example. They compounded AuM at about 17% and 20% respectively over the past 5 years. The annualized stock total shareholder return (TSR, accounting for reinvested distributions) for them has been 17% and 18%.

 

Alternative asset management is a business with incredible operating leverage; employee comp & carry is the main expense; from what I can tell, BX's headcount growth annualized at 5%, way below the pace of AuM growth. Clearly, as the shareholder, you have not captured the benefit from those economies of scale (guess who won, though).  And the APO and BX TSR isn't even tax-efficient because when you file your K1s, a portion of the dividends that you receive is taxed at higher rates e.g. ordinary income.  If you factor-in tax efficiency and the pain-in-the-butt from filing the K1s, you'd be better off owning Blackrock (BLK) by far, and even SPY wouldn't be a bad option.

 

 

I am just wondering, BX stock price 5 years ago was around $19, now it's at $31, about 63% returns.. not anywhere close to 18%? How do you get 18%?

[Spekulatius]

I am just wondering, BX stock price 5 years ago was around $19, now it's at $31, about 63% returns.. not anywhere close to 18%? How do you get 18%?

 

Most likely the difference comes from distributions.

[TwoCitiesCapital]

Let's take APO and BX, for example. They compounded AuM at about 17% and 20% respectively over the past 5 years. The annualized stock total shareholder return (TSR, accounting for reinvested distributions) for them has been 17% and 18%.

 

Alternative asset management is a business with incredible operating leverage; employee comp & carry is the main expense; from what I can tell, BX's headcount growth annualized at 5%, way below the pace of AuM growth. Clearly, as the shareholder, you have not captured the benefit from those economies of scale (guess who won, though).  And the APO and BX TSR isn't even tax-efficient because when you file your K1s, a portion of the dividends that you receive is taxed at higher rates e.g. ordinary income.  If you factor-in tax efficiency and the pain-in-the-butt from filing the K1s, you'd be better off owning Blackrock (BLK) by far, and even SPY wouldn't be a bad option.

 

 

 

 

I am just wondering, BX stock price 5 years ago was around $19, now it's at $31, about 63% returns.. not anywhere close to 18%? How do you get 18%?

 

Shot in the dark - probably including dividend in return analysis as well. Looks like that would get you the rest of the way there.

[james22]

One criticism I have heard about investing in PE firms however is while they may do well, investors don’t share proportionally in the returns. Instead most profits go out the door in the form of excessive management bonuses and compensation.

 

While I agree with this from a general perspective - these barbarians at the gate do get paid ridiculous amounts of money. The reality is public investors in these firms can also make a decent return. Like any other investment, it depends on choosing which firm to invest in and when.

 

https://seekingalpha.com/article/4164077-pe-mlp-eni-oh

[james22]

Oaktree Capital Group (NYSE:OAK): Q1 EPS of $0.93 beats by $0.22.

 

Revenue of $451.15M (+15.3% Y/Y) beats by $101.33M.

 

[vinod1]

Not related to OAK, but in general to how these private equity managers view investors can be found in this quarter KKR's conf call:

 

When we listed, we had $55 billion of AUM. We now have almost $200 million. Our book value per share was about $6. It's now $14.50. So, this is a much bigger discussion. Our stock price has really just not grown at the same pace as our company. So, we've really spent the last eight years working to sort out why. And if you think back, we've worked on articulating our story and we thought about reporting changes. We went out and tried to find new investors with many of you. We worked with back offices of mutual funds to help them operationalize K-1s. But honestly, after eight years of effort, it's not clear we've made a lot of lasting progress. So, where this is really coming from is we're stepping back and simplifying our thought process about what's been going on.

 

So, the high level is as best we can sort out, over 60% of the capital investing in the U.S. equity markets cannot or will not buy PTPs. And if you think about where flows have been going, it's been going to passive smart beta indices, none of which invest in PTPs. So, in other words, virtually 100% of net flows could not or would not buy us and 60% of existing capital can't buy us. So, we kind of stepped way back and it's no wonder it's been hard.

 

So, it kind of became clear to us that we've been fishing in a small pond with a slow leak and wondering why we weren't catching anything. So then, it was pretty clear there's a big ocean nearby, we had a lot of fish that might like our bait, so we started thinking about moving over to the ocean. And then, we asked our largest shareholders, what do they think, what's their advice. And that was virtually all consistent that moving to the ocean was a good idea.

 

The analogy of investors as fish to be baited kind of shows their thinking.

 

Vinod

 

[sleepydragon]

I guess before they want to maximize their bonus. Now they feel it’s time to cash out.

 

Not related to OAK, but in general to how these private equity managers view investors can be found in this quarter KKR's conf call:

 

When we listed, we had $55 billion of AUM. We now have almost $200 million. Our book value per share was about $6. It's now $14.50. So, this is a much bigger discussion. Our stock price has really just not grown at the same pace as our company. So, we've really spent the last eight years working to sort out why. And if you think back, we've worked on articulating our story and we thought about reporting changes. We went out and tried to find new investors with many of you. We worked with back offices of mutual funds to help them operationalize K-1s. But honestly, after eight years of effort, it's not clear we've made a lot of lasting progress. So, where this is really coming from is we're stepping back and simplifying our thought process about what's been going on.

 

So, the high level is as best we can sort out, over 60% of the capital investing in the U.S. equity markets cannot or will not buy PTPs. And if you think about where flows have been going, it's been going to passive smart beta indices, none of which invest in PTPs. So, in other words, virtually 100% of net flows could not or would not buy us and 60% of existing capital can't buy us. So, we kind of stepped way back and it's no wonder it's been hard.

 

So, it kind of became clear to us that we've been fishing in a small pond with a slow leak and wondering why we weren't catching anything. So then, it was pretty clear there's a big ocean nearby, we had a lot of fish that might like our bait, so we started thinking about moving over to the ocean. And then, we asked our largest shareholders, what do they think, what's their advice. And that was virtually all consistent that moving to the ocean was a good idea.

 

The analogy of investors as fish to be baited kind of shows their thinking.

 

Vinod

[Haasje]

Let's take APO and BX, for example. They compounded AuM at about 17% and 20% respectively over the past 5 years. The annualized stock total shareholder return (TSR, accounting for reinvested distributions) for them has been 17% and 18%.

 

Alternative asset management is a business with incredible operating leverage; employee comp & carry is the main expense; from what I can tell, BX's headcount growth annualized at 5%, way below the pace of AuM growth. Clearly, as the shareholder, you have not captured the benefit from those economies of scale (guess who won, though).  And the APO and BX TSR isn't even tax-efficient because when you file your K1s, a portion of the dividends that you receive is taxed at higher rates e.g. ordinary income.  If you factor-in tax efficiency and the pain-in-the-butt from filing the K1s, you'd be better off owning Blackrock (BLK) by far, and even SPY wouldn't be a bad option.

 

I think the big PEs firms have all started leveraging their brand and are slapping it on a lot of strategies that are somewhat adjacent to their core competencies. Usually its their traditional business that really has the high fees and large carry. So its not always the most valuable type of AUM which they are adding. Having said I'm thinking most of them are purposely raising only modest amounts of new AUM. I suspect they are going to start hitting clients up big time if and when the set of opportunities for their traditional core strategies expands.

[Gamecock-YT]

Oaktree founder warns private equity standards slipping

Howard Marks sees risk in groups being pushed into accepting poor terms on deals

 

https://www.ft.com/content/c97c7f1a-6008-11e8-9334-2218e7146b04

[investmd]

Question: Is the nearly 9% yield stable/sustainable?

Am new to this. On a simplistic level OAK is trading at essentially lowest level in 5 years. Is a company with a good business model and assets. At the current yield, it's hard to see downside for longer term investors? 

[Sportgamma]

This is what I find particularly interesting in regards to an [iurl=https://fundamentalfinanceplaybook.com/2018/06/04/oaktree-capital-valuation/]OAK long thesis[/iurl]:

 

 

And they have dry powder.

[Cigarbutt]

https://www.bloomberg.com/news/articles/2018-05-31/wintrob-sees-distressed-debt-drought-ending-in-1-trillion-flood

[Spekulatius]

The problem with this is, that if you believe in what OAK is saying, there is no reason to own the units, as you almost certainly will get it cheaper in selloff  that for sure will accompany problems in the credit markets. If you don’t believe them and think that everything is just fine and will continue as is, then there is no  reason to own OAK  either. Almost a perfect Catch 22.

[netnet]

The problem with this is, that if you believe in what OAK is saying, there is no reason to own the units, as you almost certainly will get it cheaper in selloff  that for sure will accompany problems in the credit markets. If you don’t believe them and think that everything is just fine and will continue as is, then there is no  reason to own OAK  either. Almost a perfect Catch 22.

Except that you do get paid to wait, a kind of honey trap, perhaps?

[Sportgamma]

The problem with this is, that if you believe in what OAK is saying, there is no reason to own the units, as you almost certainly will get it cheaper in selloff  that for sure will accompany problems in the credit markets. If you don’t believe them and think that everything is just fine and will continue as is, then there is no  reason to own OAK  either. Almost a perfect Catch 22.

Except that you do get paid to wait, a kind of honey trap, perhaps?

 

Indeed. There is also the implied operational leverage from investing in the asset manager as opposed to in the assets. It would surprise me if these two had the same profile in terms of expected returns.

[no_free_lunch]

OAK, is still bumping around at IPO levels.  However, this industry is so far out of my competency it's hard for me to judge what price they should trade at.  All I know is that the thesis is they are counter-cyclical and that the bull market was reducing future opportunities.  Now that we have turmoil, does that not change things for the better?  Any buyers?

[given2invest]

Pays a big distribution too so don't discount that to total return.

[Haasje]

I own it. Feels great. Should perform anti-cyclical. But you can never be sure... we'll find out soon enough.

[Liberty]

Brookfield to Acquire 62% of Oaktree Capital Management

 

https://bam.brookfield.com/press-releases/2019/03-13-2019-132118887

[TwoCitiesCapital]

Brookfield to Acquire 62% of Oaktree Capital Management

 

https://bam.brookfield.com/press-releases/2019/03-13-2019-132118887

 

:(

 

I don't own it, but have been waiting for the right opportunity to buy it. I guess that will never come.

 

 

Sucks for anybody who has owned it long-term. Squeezes them out at a favorable price while management and Brookfield continue to benefit.