OAK - Oaktree Cap Group LLC

[racemize]

Biaggio, wrt your question above, I did a cursory analysis that was influenced by the Brooklyn investor site, the VIC write-up, and the fact that the IPO did not go well.  I was just starting the due diligence to get comfortable with all of that when I ran into the problems/questions I've posted above, so I'm not all the way through the analysis of the financials themselves.  I was bothered with the charges that bring income (e.g., ANI-OCI) to negative, but it is my impression that those had to do with the 2007 restructuring and are gone at this point.  Accordingly, I was planning to base the majority of the valuation on the ANI-OCI numbers and conservative estimates, though I haven't gotten to it.  However, I may not even bother with it given the tax implications.

[theando]

I think Howard Marks is extremely smart and understanding of value concepts. I also think OAK is a reasonably priced stock. The one item  I can't reconcile is that Marks  purchased one of if not the most expensive ever apartment  in Manhattan at the time. That purchase seems incongruous to me.

[Guest rimm_never_sleeps]

the purchase of a home, which he can easily afford, two can easily maintain, and three, is likely to be a good investment matters about .01% for me in evaluating this investment.

[Kraven]

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 didn't mean to scare you.  The K-1 isn't some mysterious document, it's a standard (albeit complicated) form.  My point was simply that an individual attempting to figure it out by contacting IR may not be in the right investment as partnership income isn't something where you read a 1 page IRS form and know what's going to happen.  Also, it isn't the company's job to tell someone how to do it.  So if you're accountant has blessed your treatment I am sure it's fine.  Note too that treatment of foreign holders would be different in many cases than US holders.  It's been a long time, but I never even pretended to try and understand the foreign treatment for partnerships, etc.

[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

 

 

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.

 

Biaggio,

41 cents are fee-related earnings-OCG per class A unit in Q2 2012 (82 cents for the first six months of 2012), but net income per class A unit in Q2 2012 was 84 cents ($1.66 for the first six months of 2012), which is consistent with the $3 per share 2012 forecast. ANI, which is the measure they use to evaluate financial performance was 89 cents per unit A in Q2 2012 ($1,79 for the first six months of 2012).

You think that some hypothesis in the Brooklyn Investor or in the VIC sum of the parts analysis might be somewhat misleading? If so, which one?

Thank you,

 

giofranchi

[biaggio]

Gio, I  doubt myself more than analysis/hypothesis of Brooklyn or VIC. (I did not look at VIC hypothesis)

 

Maybe I was making it more complicated that it needs to be.

 

Thanks for responding.

 

I will continue to follow conversation here + look over the filings again.

[giofranchi]

Gio, I  doubt myself more than analysis/hypothesis of Brooklyn or VIC. (I did not look at VIC hypothesis)

 

Maybe I was making it more complicated that it needs to be.

 

Thanks for responding.

 

I will continue to follow conversation here + look over the filings again.

 

biaggio,

I thank you and Kraven for raising serious and well-founded doubts about OAK. That’s what I look for and what I really want. As far as I am concerned, it has nothing to do with “trust”. It is just a matter of gathering as many information as possible: the Brooklyn Investor’s analysis is just a piece of information, the VIC’s analysis, the 10-qs, the Prospectus, other files that can be downloaded from OAK’s website, racemize’s questions, Kraven’s warning, your own doubts are all very important and useful information. I always try to gather all the information available, then I put them together and judge what makes sense and what doesn’t. That’s it! I don’t doubt anything, I don’t take anything for granted. It is just information: the more exhaustive, the better! ;)

 

giofranchi

 

[Kraven]

Gio, I  doubt myself more than analysis/hypothesis of Brooklyn or VIC. (I did not look at VIC hypothesis)

 

Maybe I was making it more complicated that it needs to be.

 

Thanks for responding.

 

I will continue to follow conversation here + look over the filings again.

 

biaggio,

I thank you and Kraven for raising serious and well-founded doubts about OAK. That’s what I look for and what I really want. As far as I am concerned, it has nothing to do with “trust”. It is just a matter of gathering as many information as possible: the Brooklyn Investor’s analysis is just a piece of information, the VIC’s analysis, the 10-qs, the Prospectus, other files that can be downloaded from OAK’s website, racemize’s questions, Kraven’s warning, your own doubts are all very important and useful information. I always try to gather all the information available, then I put them together and judge what makes sense and what doesn’t. That’s it! I don’t doubt anything, I don’t take anything for granted. It is just information: the more exhaustive, the better! ;)

 

giofranchi

 

No warning from me!  I was simply saying the K-1 can be complicated.  I don't know anything about Oaktree as an investment and nothing I said should be viewed as such.  Invest or not as you choose, just be cognizant that it's a potentially different tax treatment than a typical equity investment that people might generally be used to.  That's it.

 

 

[giofranchi]

Gio, I  doubt myself more than analysis/hypothesis of Brooklyn or VIC. (I did not look at VIC hypothesis)

 

Maybe I was making it more complicated that it needs to be.

 

Thanks for responding.

 

I will continue to follow conversation here + look over the filings again.

 

biaggio,

I thank you and Kraven for raising serious and well-founded doubts about OAK. That’s what I look for and what I really want. As far as I am concerned, it has nothing to do with “trust”. It is just a matter of gathering as many information as possible: the Brooklyn Investor’s analysis is just a piece of information, the VIC’s analysis, the 10-qs, the Prospectus, other files that can be downloaded from OAK’s website, racemize’s questions, Kraven’s warning, your own doubts are all very important and useful information. I always try to gather all the information available, then I put them together and judge what makes sense and what doesn’t. That’s it! I don’t doubt anything, I don’t take anything for granted. It is just information: the more exhaustive, the better! ;)

 

giofranchi

 

No warning from me!  I was simply saying the K-1 can be complicated.  I don't know anything about Oaktree as an investment and nothing I said should be viewed as such.  Invest or not as you choose, just be cognizant that it's a potentially different tax treatment than a typical equity investment that people might generally be used to.  That's it.

 

I knew and I understood. Ok, no warning, but useful information anyway! :)

 

giofranchi

[Junto]

You guys are over-thinking the tax implications of your investment as the driver for the investment. K-1s are simple and generally easy for the accountant to maneuver through as they prepare your tax return in the US. I don't speak for foreign investors and have no inclination to learn or spend time learning as I will never be one.

 

The distributions are generally split out in the spring for what was income, capital, etc.. in the spring. I have investments in OAK and KKR and feel comfortable the tax burden is likely less than it would be if they were a C-Corporation.

[WhoIsWarren]

I've been following this thread with much interest as I've been doing a bit of work on Oaktree over the last few weeks.  There is a lot to like about Oaktree but, like a few of you have already noted, the structure and the tax implications are complicated and a tad confusing.

 

I run some funds for non-US clients, so all I typically have to worry about is withholding tax on dividends (15% for US companies). 

 

So here’s my “pidgin” understanding of the rationale for a Publicly Traded Partnership.  Unitholders in a PTP avoid the double taxation (corporate tax plus income tax / withholding tax on dividends) that shareholders are subject to.  In addition, some profits in a PTP can be deemed capital gains (e.g. carried interest) and hence taxed at 15%, which further lowers the overall tax bill of a unitholder.  Thereafter, “distributions” (return of capital) are free of tax, so long as the “basis” is greater than zero.  Have I understood all this correctly?  [i will speak to a tax expert if I ever decide to invest, but this is my understanding of things thus far.]

 

So here are my questions:

 

From the IPO document on page 104, ANI-OCI (i.e. net profit attributable to Class A shareholders) was $88m, $96m and $49m in the last 3 years.  That’s after taxes of $15m, $20m and $16m (tax rates of 15%, 17% and 24% respectively).  What does this tax relate to?  OCGH holders don’t appear to share in the payment of this tax, so are Class A unitholders footing the tax bill for all stakeholders?  [Presumably not, but can't hurt to ask!]  And when it comes to the K-1 form, does the IRS take account of this tax already paid??

 

Ballpark, what total percentage rate of income / capital gains tax should unitholders expect to pay in Oaktree?  I know, this will vary year to year and it will be very specific to a unitholder’s circumstances, but again my reference point is the c.35% corporate tax rate plus the 15% WHT I typically pay.  Any help in understanding all the dynamics would be much appreciated.  Racemize, as you indicated, when Oaktree gives more information about taxation on its website it might clarify a number of these questions.

 

Giofranchi, I’m particularly interested to know how you’re getting on, as your situation would appear to mirror mine.  I see from a Wikipedia page (gotta be true, right?) that foreign and tax exempt investors often invest in PTPs through “blocker” corporations, who are registered in the Cayman Islands or the like.  Going down the blocker route avoids having to return a K-1; instead the investor pays U.S. corporate tax and receives dividends (via the blocker corp.) which are taxed at the WHT rate of 15%.  Giofranchi, perhaps that’s how you’re invested?  Anyone know about the risks involved here?  It seems like there’s counterparty risk here at the very least and I can’t say I’d be all that enthused about that option.

 

http://en.wikipedia.org/wiki/Taxation_of_private_equity_and_hedge_funds

 

I’ve loads more questions, but like Biaggio says, I can’t even ask them properly.  Little by little…..

 

Appreciate any help people can give.  Thanks.

 

[giofranchi]

WhoIsWarren,

truth be told, I had never heard about “blocker” corporations before!!  ;D

No, my case is much easier: I invested in OAK through my firm’s bank account, which is managed by Banca Intesa SpA. What my firm’s accountant has told me is this: the rate of withholding on distributions will be 15%, just like on any foreign (US) dividend, then at the end of the year, or just before my firm approves and publishes its end of the year Income Statement, distributions from OAK will be subject to the Italian taxation regimen for commercial enterprises. Of course, I am not a tax expert, that’s why my firm hires one! And he has told me the above is basically all I need to know… I haven’t investigated further!!  ;D

 

giofranchi

 

[racemize]

 

So here’s my “pidgin” understanding of the rationale for a Publicly Traded Partnership.  Unitholders in a PTP avoid the double taxation (corporate tax plus income tax / withholding tax on dividends) that shareholders are subject to.  In addition, some profits in a PTP can be deemed capital gains (e.g. carried interest) and hence taxed at 15%, which further lowers the overall tax bill of a unitholder.  Thereafter, “distributions” (return of capital) are free of tax, so long as the “basis” is greater than zero.  Have I understood all this correctly?  [i will speak to a tax expert if I ever decide to invest, but this is my understanding of things thus far.]

 

 

My understanding is that when you pay taxes from the K-1 for your share of the income, your cost basis is raised by that amount.  On the other hand, distributions lower your cost basis by their amount, but are not taxed at all.  For most master partnerships, this means your cost basis gradually goes to 0 due to high depreciation.  However, for OAK and BX, I would think they could be close to parity, so your cost basis wouldn't move around a ton.  Accordingly, I'm trying to balance whether the additional hassle of getting a late K-1 (and probably the incremental cost of a CPA) is worth the effort.  I could easily go find another company, though probably not as good, which would pay a similar dividend without all the hassle.  There's some break-over point where it is worth it, but I'm not sure where yet.  Probably a bit higher than I'm willing to invest right now.

[WhoIsWarren]

WhoIsWarren,

truth be told, I had never heard about “blocker” corporations before!!  ;D

No, my case is much easier: I invested in OAK through my firm’s bank account, which is managed by Banca Intesa SpA. What my firm’s accountant has told me is this: the rate of withholding on distributions will be 15%, just like on any foreign (US) dividend, then at the end of the year, or just before my firm approves and publishes its end of the year Income Statement, distributions from OAK will be subject to the Italian taxation regimen for commercial enterprises. Of course, I am not a tax expert, that’s why my firm hires one! And he has told me the above is basically all I need to know… I haven’t investigated further!!  ;D

 

giofranchi

 

Thanks giofranchi -- clear as mud!! ;)

 

So effectively you are paying three layers of tax: Income taxes-OCG, withholding tax on distributions and a further Italian tax on the same distributions.  Have you worked out what your all-in tax leak is or will likely be?

 

WhoIsWarren

[WhoIsWarren]

 

So here’s my “pidgin” understanding of the rationale for a Publicly Traded Partnership.  Unitholders in a PTP avoid the double taxation (corporate tax plus income tax / withholding tax on dividends) that shareholders are subject to.  In addition, some profits in a PTP can be deemed capital gains (e.g. carried interest) and hence taxed at 15%, which further lowers the overall tax bill of a unitholder.  Thereafter, “distributions” (return of capital) are free of tax, so long as the “basis” is greater than zero.  Have I understood all this correctly?  [i will speak to a tax expert if I ever decide to invest, but this is my understanding of things thus far.]

 

 

My understanding is that when you pay taxes from the K-1 for your share of the income, your cost basis is raised by that amount.  On the other hand, distributions lower your cost basis by their amount, but are not taxed at all.  For most master partnerships, this means your cost basis gradually goes to 0 due to high depreciation.  However, for OAK and BX, I would think they could be close to parity, so your cost basis wouldn't move around a ton.  Accordingly, I'm trying to balance whether the additional hassle of getting a late K-1 (and probably the incremental cost of a CPA) is worth the effort.  I could easily go find another company, though probably not as good, which would pay a similar dividend without all the hassle.  There's some break-over point where it is worth it, but I'm not sure where yet.  Probably a bit higher than I'm willing to invest right now.

 

Thanks racemize, I get what you're saying on additions / reductions in the cost basis, that's helpful.  I suppose the cost basis must drift down over time though, as Oaktree's distributions are likely to be high (a low capital intensity business) relative to taxes paid, right?  This would be especially the case if a high proportion taxed as capital gains rather than income tax?

 

And back to an earlier point of mine, what does 'Income taxes - OCG' relate to?  And is this amount added to the cost basis for the calculation of capital gains?

 

WhoIsWarren

 

[giofranchi]

 

So effectively you are paying three layers of tax: Income taxes-OCG, withholding tax on distributions and a further Italian tax on the same distributions.  Have you worked out what your all-in tax leak is or will likely be?

 

WhoIsWarren

 

I checked it out: what you say seems to be always the case for the individual investor who chooses to invest overseas… but corporations don’t have to pay the third layer of taxes. Of course, if my firm uses the proceeds from the OAK’s distributions to pay a dividend, then my own personal account, and the accounts of all the other shareholders in my firm, will be taxed again (yes, for the third time!).

But, as far as my firm is concerned, it is going to pay Income taxes-OCG plus the US federal withholding at a rate of 15%.

 

giofranchi

[racemize]

 

 

Thanks racemize, I get what you're saying on additions / reductions in the cost basis, that's helpful.  I suppose the cost basis must drift down over time though, as Oaktree's distributions are likely to be high (a low capital intensity business) relative to taxes paid, right?  This would be especially the case if a high proportion taxed as capital gains rather than income tax?

 

 

That's certainly reasonable, although I'm not sure what the income will be/how it will be taxed.

 

 

[WhoIsWarren]

Thanks giofranchi / racemize.

[racemize]

Recent interview with Marks:

 

You're 66. Is retirement in the near future, or do you plan to continue at Oaktree? There's nothing else I'd rather do in its place. It's intellectually rewarding and it's fun. I like the people here, and investing is a puzzle. I think that solving (that puzzle) is a great stimulating challenge, and working with my long-term partners to do so is very exciting.

 

http://www.pionline.com/article/20121029/FACETOFACE/310299994/howard-marks-established-oaktree-as-a-leader-in-distressed-debt

[giofranchi]

Recent interview with Marks:

 

You're 66. Is retirement in the near future, or do you plan to continue at Oaktree? There's nothing else I'd rather do in its place. It's intellectually rewarding and it's fun. I like the people here, and investing is a puzzle. I think that solving (that puzzle) is a great stimulating challenge, and working with my long-term partners to do so is very exciting.

 

http://www.pionline.com/article/20121029/FACETOFACE/310299994/howard-marks-established-oaktree-as-a-leader-in-distressed-debt

 

Thank you racemize!

Always can count on you for insightful news and comments! ;)

 

giofranchi

[giofranchi]

Q3 2012 Results:

 

Howard Marks, Chairman, said, “The third quarter demonstrated again Oaktree’s ability to deliver strong financial results that generate cash for our unitholders. Building on the investment success that underlies these results, as well as our expertise in credit, we’re focused on exciting opportunities ahead in real estate, emerging markets, corporate credit and distressed debt.”

 

giofranchi

Oaktree_3Q12_Earnings_Release_FINAL.pdf

3Q2012_Qualified_Notice_11-6-121.pdf

[giofranchi]

Please, take a look at the "Solid As An OAK" presentation in attachment. I have found it to be very interesting. :)

 

giofranchi

Solid-As-An-OAK.pdf

[cmattporter]

Someone tell me why OAK can't be discussed in the YouTube comment section with all of the other shit

[biaggio]

Please, take a look at the "Solid As An OAK" presentation in attachment. I have found it to be very interesting. :)

 

giofranchi

 

Thanks for posting.

 

Have looked over my notes from previous review + some clarity from presentation= have bought a small starting position today. (be prepared for buying opportunity in near future)

[obtuse_investor]

Latest presentation from OAK:

Perception and Reality

Howard Marks, Chairman Oaktree Capital Group, LLC

 

http://www.sec.gov/Archives/edgar/data/1403528/000119312512490268/d449181dex991.htm