OAK - Oaktree Cap Group LLC

[no_free_lunch]

Gio, you should talk to an accountant about this.  In Canada I have read that you can borrow funds and allocate the interest expense to a stock thus reducing the taxable portion of the dividends.  Of course, you still are paying the interest on the debt but if you have stocks you are confident in, it could be worthwhile.  I am sure there are a variety of different techniques that could be used to reduce the tax burden.

 

I am just waiting to figure out if the dividend will be withheld in my RRSP.  If it is, does anyone know if I can claim that back?

[giofranchi]

Gio, you should talk to an accountant about this.

 

Thank you, I will... but with very low expectations... Italy remains a difficult place to do business... :(

 

Gio

[giofranchi]

Why is incentive income only 2 million for 2013 when investment income was around 5 billion?

 

And why are management fees only around 200 million when AUM is 80 billion?

 

That is only on a GAAP basis… True Management Fees were $750 million in 2013, and true Incentive Income was $1.03 billion in 2013.

 

Gio

 

[giofranchi]

OAK might be able to increase its NAV at 15% compounded annual AND distribute the majority of its earnings.

 

Proof of this should be the fact that since 2000 OAK has increased AUM at a CAGR of 14.5%, while distributing more than 80% of earnings. :)

 

Gio

 

[vinod1]

Why is incentive income only 2 million for 2013 when investment income was around 5 billion?

 

And why are management fees only around 200 million when AUM is 80 billion?

 

That is only on a GAAP basis… True Management Fees were $750 million in 2013, and true Incentive Income was $1.03 billion in 2013.

 

Gio

 

Gio,

 

This is no doubt a very attractive business, but I am holding back primarily due to valuation.

 

How are you valuing OAK? What is your estimate of IV?

 

The way I see it three main components to value (1) Fee earnings - sticky, annuity like, hence can pay a pretty high multiple. (2) Investments - since these would be compounded at a very attractive rate, some premium to book value (3) incentive fee - variable and market dependent so a lower multiple.

 

This is how I calculated the incentive part earlier in the year,

 

Oaktree earns incentive above a hurdle rate of 8%. AUM earning incentives is about $33 billion. Assuming Oaktree earns about 15% and incentive is 20% of the return above 8%, Oaktree earns about 1.4% of AUM in fees of which it pay about 40% as compensation, thus leaving about 0.84% as profit. Thus on $33 billion AUM, incentive earnings are about $300 million. At a pre-tax multiple of about 8, these are worth about $2.4 billion.

 

If you instead assume a 20% return, then the incentive part would be worth about $5 billion.

 

Vinod

[giofranchi]

Gio,

 

This is no doubt a very attractive business, but I am holding back primarily due to valuation.

 

How are you valuing OAK? What is your estimate of IV?

 

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

 

[petec]

Gio,

 

This is no doubt a very attractive business, but I am holding back primarily due to valuation.

 

How are you valuing OAK? What is your estimate of IV?

 

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

 

Gio,

 

are you referring to Italian or US taxes?

 

Pete

[giofranchi]

Gio,

 

are you referring to Italian or US taxes?

 

Pete

 

Italian taxes, alas!! ::)

 

Gio

[giofranchi]

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

 

[vinod1]

Gio,

 

This is no doubt a very attractive business, but I am holding back primarily due to valuation.

 

How are you valuing OAK? What is your estimate of IV?

 

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

 

The way I look at it, you can either use an earnings based approach or an asset value approach, but if you use book value + earnings power, you would be double counting.

 

The problems I see

 

1. You need some assets and supporting book value to run the firm. This is what would power the earnings. So you could use a multiple of earnings to come up with an estimate of value, but to again add the book value, does not make sense to me. We do not add Fairfax book value to a multiple of its normalized earnings, then why should we do this for OAK?

 

2. Accrued Incentives, if I understand correctly, flow through to ANI in future periods. Again, by adding Accrued Incentives to a multiple of ANI would be double counting. So these are future earnings that are likely to be realized, by adding them we are double counting future earnings.

 

I see valuing the earnings (removing any earnings from assets invested alongside the clients) + adding the investments they make alongside the clients to be more appropriate.

 

Vinod

[vinod1]

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

 

OAK had made investments during the financial crisis and is reaping the rewards now. If we make the assumption that crisis of that magnitude are not going to reoccur every 5 years, then it is likely that OAK would generate somewhat lower returns than it has in the last few years.

 

OAK ANI had averaged about 0.8% of AUM over the last 8 years (ending in 2013) with 2013 an outlier that generated ANI of 1.29% of AUM. I would not base ANI upon 2013 reported results.

 

Vinod

[giofranchi]

The way I look at it, you can either use an earnings based approach or an asset value approach, but if you use book value + earnings power, you would be double counting.

 

The problems I see

 

1. You need some assets and supporting book value to run the firm. This is what would power the earnings. So you could use a multiple of earnings to come up with an estimate of value, but to again add the book value, does not make sense to me. We do not add Fairfax book value to a multiple of its normalized earnings, then why should we do this for OAK?

 

2. Accrued Incentives, if I understand correctly, flow through to ANI in future periods. Again, by adding Accrued Incentives to a multiple of ANI would be double counting. So these are future earnings that are likely to be realized, by adding them we are double counting future earnings.

 

I see valuing the earnings (removing any earnings from assets invested alongside the clients) + adding the investments they make alongside the clients to be more appropriate.

 

Vinod

 

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 

 

[giofranchi]

OAK ANI had averaged about 0.8% of AUM over the last 8 years (ending in 2013) with 2013 an outlier that generated ANI of 1.29% of AUM. I would not base ANI upon 2013 reported results.

 

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 

 

[vinod1]

The way I look at it, you can either use an earnings based approach or an asset value approach, but if you use book value + earnings power, you would be double counting.

 

The problems I see

 

1. You need some assets and supporting book value to run the firm. This is what would power the earnings. So you could use a multiple of earnings to come up with an estimate of value, but to again add the book value, does not make sense to me. We do not add Fairfax book value to a multiple of its normalized earnings, then why should we do this for OAK?

 

2. Accrued Incentives, if I understand correctly, flow through to ANI in future periods. Again, by adding Accrued Incentives to a multiple of ANI would be double counting. So these are future earnings that are likely to be realized, by adding them we are double counting future earnings.

 

I see valuing the earnings (removing any earnings from assets invested alongside the clients) + adding the investments they make alongside the clients to be more appropriate.

 

Vinod

 

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

 

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

 

I might not have explained it well. What I am saying is you cannot add $11.3 - this is book value that cannot be added back to earnings. That is where the double counting occurs.

 

As to Accrued Incentive Income, it shows up in ANI in future years. When OAK reports ANI, it has incentive income as part of ANI. Some of the incentive income would have been shown as Accrued Incentive Income in the past years.

 

All the company is saying is that we have x amount of future earnings that are going to be coming through at current valuations for the assets. So this would show up in ANI in future years.

 

Say your company made some transaction that results in a gain but cannot be realized until next year. It is well and fine to add that earnings to your estimate of IV. But next year's results should include that gain when it is actually realized. What you are saying is, I am going to add the estimate of gain to the IV and also going to count the gain again in next year's earnings. That is double counting.

 

Vinod

 

 

[giofranchi]

I might not have explained it well. What I am saying is you cannot add $11.3 - this is book value that cannot be added back to earnings. That is where the double counting occurs.

 

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

 

[vinod1]

OAK ANI had averaged about 0.8% of AUM over the last 8 years (ending in 2013) with 2013 an outlier that generated ANI of 1.29% of AUM. I would not base ANI upon 2013 reported results.

 

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

 

ANI does come to around $750 million, ~$5 per share. This is a pre-tax number. We have to pay taxes every year on this. So multiple should be closer to 10. I agree with adjusting the DoubleLine stake. To this we can add back the actual investments the company makes which are around $8 per share.

 

Vinod

 

 

[vinod1]

I might not have explained it well. What I am saying is you cannot add $11.3 - this is book value that cannot be added back to earnings. That is where the double counting occurs.

 

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. We are just using different terminology. I am calling that investments alongside the clients (Invested Capital). When I hear BV, I immediately think company BV.

 

The invested capital is around $1.2 billion only exluding DoubleLine. (I am using 2013 YE numbers as that is the data I had when researching the company).

 

Vinod

[vinod1]

Gio,

 

Why do you think they can compound at 15%? AUM has to compound at nearly the same rate as well and given the specialized nature of their business, it would be difficult I think - assuming Europe does not blow up :).

 

Vinod

[giofranchi]

Gio,

 

Why do you think they can compound at 15%? AUM has to compound at nearly the same rate as well and given the specialized nature of their business, it would be difficult I think - assuming Europe does not blow up :).

 

Vinod

 

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

 

[vinod1]

Gio,

 

Why do you think they can compound at 15%? AUM has to compound at nearly the same rate as well and given the specialized nature of their business, it would be difficult I think - assuming Europe does not blow up :).

 

Vinod

 

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

 

I agree ANI does consider investment income. We can either use Sum of Parts or use ANI. I had a brain freeze.

 

I used (1) sum of parts (2) liquidation value (3) average of past earnings (adjusted for AUM). Since liquidation is not on the table the other two methods give me an IV of about $50. Not too far from your number.

 

I have to spend some time thinking through the possibility of 15% growth going forward. As you said, if this does materialize OAK is deeply undervlaued - and my valuation does not give any benefit to this growth.

 

Thanks for sharing your thoughts on OAK. Very helpful.

 

Vinod

[Ross812]

 

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.

 

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

 

Gio,

 

If you do not normalize earnings then by your assessment they should be worth $52.3 which is about where they are trading right now.

 

OAK does not strike me as a business that would interest you. Investment management is dependent on AUM and is inherently fickle trending up and down with client emotion. What happens if bonds reverse their 30 year bull market and bond prices fall? Not only does AUM fall, but clients may pull their money out.

 

If bonds continue to increase in value, at what point do OAK's fees erode the return potential of lower and lower yielding bonds?

 

What happens if Howard Marks leaves or dies? ala Pimco?

 

CAGR of AUM is not very impressive considering they EM bonds have a CAGR of ~9%. Growth of new AUM is only ~5%.

 

AUM does not have the same characteristics as insurance float or bank deposits. I see very little margin of safety in OAK.

 

[thepupil]

 

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.

 

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

 

Gio,

 

If you do not normalize earnings then by your assessment they should be worth $52.3 which is about where they are trading right now.

 

OAK does not strike me as a business that would interest you. Investment management is dependent on AUM and is inherently fickle trending up and down with client emotion. What happens if bonds reverse their 30 year bull market and bond prices fall? Not only does AUM fall, but clients may pull their money out.

 

If bonds continue to increase in value, at what point do OAK's fees erode the return potential of lower and lower yielding bonds?

 

What happens if Howard Marks leaves or dies? ala Pimco?

 

CAGR of AUM is not very impressive considering they EM bonds have a CAGR of ~9%. Growth of new AUM is only ~5%.

 

AUM does not have the same characteristics as insurance float or bank deposits. I see very little margin of safety in OAK.

 

OAK is not a plain vanilla bond manager, it is primarily a distressed credit manager that invests long duration institutional capital at hefty fees, much more akin to a PE manager than a Pimco (daily liquidity, low fees, scale, in every 401k).

[giofranchi]

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

[Picasso]

I have a few issues with Oaktree.

 

1) Barron's made it a feature stock a couple weeks ago.  That was the kiss of death in my books.

 

2) A good portion of the value in OAK comes from incentive fees with a hurdle rate.  While good for a client of Oaktree, I think this is bad for investors in OAK.  Over the past twenty years, the 30-year Treasury averaged 5% versus today at under 2.9%.  OAK has a flat hurdle rate which is hurt by lower benchmark rates.  No matter how skilled you are, you can't keep returning 15% a year with tens of billions of capital when Treasury rates are under 3%.  If OAK can return 8% a year from here, clients will be happy in comparison to other options but as a shareholder we won't get paid.

 

3) Howard Marks is revered by the investment world in many ways, but I find his letters to be somewhat drab and repetitive.  I think if I did a keyword search for "risk" it would pop up 100 times in a single letter.  We get it, manage risk.  He has always been the PR guy for Oaktree versus an asset manager.  They have had a lot of duds in their investment portfolios this year but no one has mentioned it because, well, I don't know why.

 

Stock doesn't look expensive but it doesn't look cheap either.  My sum of the parts was somewhere around $60 best case and $48 worst case.  While the sum might grow like in the past, I have my doubts.

[tytthus]

3) Howard Marks is revered by the investment world in many ways, but I find his letters to be somewhat drab and repetitive.  I think if I did a keyword search for "risk" it would pop up 100 times in a single letter.  We get it, manage risk.

 

i'm a huge fan of Marks' memos, they'd be even better if the word "risk" popped up 1000 times per letter....