OAK - Oaktree Cap Group LLC

[vinod1]

To me, there is a reason why they are accrued and not realized. There is a chance that they might not be realized.

 

80% of Accrued Incentives are from funds that are already liquidating. Of course, I understand your doubt about the remaining 20%. But why should incentives accrued from funds that are liquidating not be realized?

 

Gio

 

We just see it differently I think.

 

They may not be realized if asset values go down or who knows what else can go wrong. It is accrued precisely because it is likely but not certain.

 

If I am valuing the firm on a liquidation basis, then I would be valuing the accrued incentives. As a going concern however, we are giving credit to incentives by capitalizing those earnings. It is the accrued incentives that are generating the incentive income in future years. So why would you value both? 

 

The way I am seeing it, AUM -> Management Fee + Accrued Incentives -> Earnings.

 

Put a multiple on the final output, why look further back and add accrued incentives?

 

We probably never see eye to eye on this and I might be completely wrong since most of the valuations seem to do it your way.

 

Vinod

[Picasso]

I think the best way to think of three different buckets.

 

Bucket 1 are the assets owned by Oaktree.  Cash, investments in funds, and DoubleLine.

 

Bucket 2 are the accrued incentives.  Apply some discount to the value of these incentive payments to account for some fluctuations.

 

Bucket 3 are the future management fees and incentive fees.  This is the value driver of the stock. 

 

So back out bucket 1 and 2 from the current share price and compare the rest to the value of bucket 3.  It isn't unusual for private equity stocks to trade at perpetual discounts to fair value or SOTP especially when they have no plans for buybacks. 

[AtlCDore]

I don't want to hijack this thread but I think it's relevant to the conversation about OAK.

 

If looking at APO, BX, KKR, OAK, etc, my thought is that the firms have sold a lot of investments over the past year.  Leon Black of APO said earlier this year that they were trying to sell as many of their investments as possible.  And I think Schwarzman of BX has said they have sold a lot this year as well.  Given the sales of their portfolio holdings, the funds have paid out a lot of dividends last year and this year.  So in the present market, they have cash from selling investments and also raising new funds but given the current valuations of equities, it wouldn't seem like there is a whole lot to buy on the cheap (except for maybe the oil sector currently). 

 

Wouldn't this imply that their earnings and their dividends should be lower over the next couple of years until they are able to make new investments and then sell those investments?  Thus they are at the upper end of their valuations. 

 

In today's WSJ, there is a piece on APO.  "The average private-equity buyout is getting done at about 10x EBITDA..."  "Apollo aims to do deals at around 6x to ensure better returns when it later sells a company or takes it public."  Of course, it doesn't say how they are managing to find deals at 6x given the average deal is getting done at about 10x. 

[giofranchi]

Wouldn't this imply that their earnings and their dividends should be lower over the next couple of years until they are able to make new investments and then sell those investments?  Thus they are at the upper end of their valuations. 

 

Well, of course that depends on when new investment opportunities might present themselves in abundance. Who really thought we could see Oil below $60?! Probably very few people! Who might expect a market crash next year?… Right… Very few people…

 

What I would ask isn’t where the pendulum is going, but where the pendulum IS right now:

 

1) Huge amounts of debt in Japan, Europe, China, and even North America… It is very difficult to imagine all that capital has been wisely allocated… When capital gets misallocated, investment opportunities usually follow.

2) Volatility in the stock market has been practically non-existent for 5 years now.

 

So, the question is: given where we are right now in the cycle, does it make sense to hold a portion of our portfolios in something as counter-cyclical as OAK?

 

How long this cycle might still go on, or when vice versa it might start going the other way, is something we cannot know.

 

Gio

 

[giofranchi]

So, the question is: given where we are right now in the cycle, does it make sense to hold a portion of our portfolios in something as counter-cyclical as OAK?

 

Imo this question is relevant, also because OAK might be looked at as both a long term investment and as a cyclical investment: even if you don’t believe OAK enjoys the opportunities to still grow handsomely in the future, you’d better ask yourself if at this point in the cycle it might make sense to hold a company which, given its proven ability of raising huge amounts of funds in a downturn, is one of the best counter-cyclical investment available on the market today.

 

Gio

 

[giofranchi]

Most great investments begin in discomfort…bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.

- Howard Marks, one of the world’s finest money managers

 

Describes OAK pretty well, doesn’t it? ;)

 

And I would add: things that, despite the recent poor performance, we know will still be needed 20 years from now! And how could one of the world’s finest money managers cease to be needed?!

 

Gio

[AtlCDore]

Wouldn't this imply that their earnings and their dividends should be lower over the next couple of years until they are able to make new investments and then sell those investments?  Thus they are at the upper end of their valuations. 

 

Well, of course that depends on when new investment opportunities might present themselves in abundance. Who really thought we could see Oil below $60?! Probably very few people! Who might expect a market crash next year?… Right… Very few people…

 

What I would ask isn’t where the pendulum is going, but where the pendulum IS right now:

 

1) Huge amounts of debt in Japan, Europe, China, and even North America… It is very difficult to imagine all that capital has been wisely allocated… When capital gets misallocated, investment opportunities usually follow.

2) Volatility in the stock market has been practically non-existent for 5 years now.

 

So, the question is: given where we are right now in the cycle, does it make sense to hold a portion of our portfolios in something as counter-cyclical as OAK?

 

How long this cycle might still go on, or when vice versa it might start going the other way, is something we cannot know.

 

Gio

 

 

Gio,

 

I would agree with what you say.  In any sort of market dislocation, I know the guys at OAK, APO, BX will be able to take advantage of opportunities. 

 

I don't necessarily think the stocks would be counter-cyclical because I do think they would get hit along with a market sell-off.  (Maybe that's not what you meant).  And maybe I am just too focused on timing stock purchases.

 

My point is that right now there is not a whole lot for them to buy except for maybe in the energy space.  And if there isn't a lot for them to buy what's going to drive their stock price up if the market sits here?  Shouldn't their earning be near the peak?

 

I think the odds are pretty good that we will experience greater volatility in the future than we have experienced over the last couple of years.  Therefore, even the OAKs of the world should present a better buying opportunity in the future.

 

AtlCDore

 

 

[tombgrt]

Most great investments begin in discomfort…bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.

- Howard Marks, one of the world’s finest money managers

 

Describes OAK pretty well, doesn’t it? ;)

 

 

Well it also fits commodity companies (think oil), russian & southern Europe companies, ... Does that mean these companies are all likely bargains? Of course not.

 

Marks could just as well say "You're likely to find the best prices when demand is low and supply is high" or just refer to Buffett's famous greed and fear quote. While obviously true, they all carry little weight when making an investment case.

 

Another one I dislike is: "It's always darkest before the dawn". No shit.

I prefer: “It’s always darkest just before it goes pitch black”. A good reminder when investing in anything.

[giofranchi]

Most great investments begin in discomfort…bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.

- Howard Marks, one of the world’s finest money managers

 

Describes OAK pretty well, doesn’t it? ;)

 

 

Well it also fits commodity companies (think oil), russian & southern Europe companies, ... Does that mean these companies are all likely bargains? Of course not.

 

Marks could just as well say "You're likely to find the best prices when demand is low and supply is high" or just refer to Buffett's famous greed and fear quote. While obviously true, they all carry little weight when making an investment case.

 

Another one I dislike is: "It's always darkest before the dawn". No shit.

I prefer: “It’s always darkest just before it goes pitch black”. A good reminder when investing in anything.

 

That's why you should read my whole post! ;)

 

Gio

[tombgrt]

That doesn't change my opinion. I can make an "investment case" for any stock based on such vague quotes. Not saying OAK won't do well.

[giofranchi]

I don't necessarily think the stocks would be counter-cyclical because I do think they would get hit along with a market sell-off.  (Maybe that's not what you meant). 

 

AtlCDore,

 

Please don’t get me wrong: in a market crash OAK’s stock price might plummet like all the rest!

 

But… either we just hold cash, or we must choose something to invest in, right? So, my idea is simply that at this point in the market cycle I prefer to hold a company cash rich and with the proven ability to raise much more cash in a downturn, than to hold a company with little cash (maybe some debt) and that in a downturn won’t have much dry powder to put to good use! This is what I mean by counter-cyclical.

 

Anyway, OAK’s earnings are driven by: fees + incentives + investment income. Now let’s just pretend that in 2015 a market crash awaits us: I would be very surprised if OAK’s 2015 AUM wouldn’t end up being much higher than today. Fees, therefore, would follow AUM and will be higher. Of course, incentives + investment income will be much lower… But their effect would be somehow mitigated by higher fees… And I don’t see OAK’s earnings to decline drastically… In fact, OAK posted good earnings in 2008 too!

 

And we know the stock market should be a discounting machine… During the market crash of 2015 it will see OAK’s earnings holding up much better than the rest, and it will see OAK investing large sums of capital in opportunities that will make incentives + investment income grow dramatically in future years… In a market crash there are not many places where it seems safe to park your money, right?… Under the mattress might be one such a place… OAK might be another!… So, who knows what really could happen to its stock price?! ;)

 

Gio

 

[giofranchi]

That doesn't change my opinion. I can make an "investment case" for any stock based on such vague quotes. Not saying OAK won't do well.

 

Well, I remember Buffett saying something like this about BAC: I could never pretend I understand BAC as well as I understand WFC… But I reasoned it is cheap and it will still be around 50 years from now.

 

The difference is: if Buffett says something like that, he sounds intelligent… If I say something like that, it sounds like a platitude! ;)

 

Gio

 

[tombgrt]

Buffett valued BAC and found out it is cheap. He measured it.

 

You are claiming OAK is cheap based on a quote of Marks on where you can find bargains. You don't know whether OAK is cheap just because it has performed badly and people are pestimistic about it. You have to actually value it to come to that conclusion.

 

Can you see the difference?

 

Edit: Not saying you didn't do your homework btw. Just that the quote doesn't add any value to your thesis. I'm starting to think I should learn Italian..  ;)

 

[giofranchi]

Can you see the difference?

 

Can you read the the last few posts of mine about OAK?

 

Gio

[tombgrt]

:D

 

Good talk Gio...

[giofranchi]

:D

 

Good talk Gio...

 

If not clear, I meant the following:

 

Just as you regard Buffett’s qualitative judgment that BAC will still be doing business 50 years from now in context with his valuation of the bank, so you should also regard my sentence that a very capable money manager like OAK will probably always be needed in context with the valuation of OAK I have attempted in the last few posts of mine for this thread!

 

I hope it is clear now! ;)

 

Gio

 

[giofranchi]

Regarding OAK’s potential for future growth, we should not forget that ANI is composed of three parts: fees + incentives + investment income. And, although AUM today are $93 billion, fee-generating AUM are $79 billion, while incentive-generating AUM are only $35 billion.

 

Therefore, in order to grow ANI at a CAGR of 15%, OAK needs:

1) To be able to grow fee-generating AUM at a CAGR of 15%: starting from $79 billion today, it might not be easy;

2) To be able to grow incentive-generating AUM at a CAGR of 15%: starting from $35 billion today, that might be easier. If all AUM today would be generating incentives, it translates into 7 years of 15% annual growth for incentive-generating AUM;

3) To be able to compound its capital at 15% annual: given their 20% IRR track record, I think this goal could be even exceeded.

 

If 1) falls short of expectations, 2) meets expectations, and 3) exceeds expectations (in between 15% and 20%), overall I wouldn’t rule out an healthy future growth in ANI.

 

Furthermore, please note that also a multiple expansion cannot be ruled out: as we have seen, OAK is selling at a multiple of 12 x ANI. And it is selling at a discount to the average multiple the market is currently assigning to its peers, which is 15. If OAK shows the kind of growth in ANI I expect, it is only logical the market should price it at a premium to peers, not a discount! I wouldn’t be surprise to see OAK selling for 16-17 x ANI.

Therefore, even if ANI ultimately doesn’t compound at 15% annual, OAK’s stock price might still.

 

Finally, don’t forget that, given its very generous distributions policy, we don’t really need OAK’s stock price to compound at 15% to get a return of 15% annual on our investment. In my case, assuming an average 6% dividend, and assuming a very burdensome 50% tax rate, I might be left with a 3% return from distributions alone. If reinvested, that would bring down the return needed from OAK’s stock price to a more manageable 12% annual.

 

Gio

 

[writser]

Whoah, you're telling us you have to pay 3% taxes annually on this position at current prices with the current distribution rate? That's ridiculous. Can't you sell the position before the dividend and buy it back afterwards? Or isn't there any other way to circumvent this tax?

 

If I were you (and if I understand you correctly), tax considerations would be a huge reason to invest in something else for me.

[giofranchi]

Whoah, you're telling us you have to pay 3% taxes annually on this position at current prices with the current distribution rate? That's ridiculous. Can't you sell the position before the dividend and buy it back afterwards? Or isn't there any other way to circumvent this tax?

 

Well, two things:

 

1) OAK is treated like a MLP: its GAAP net income is always much smaller than ANI from which distributions are calculated, therefore I guess it is inevitable that taxes on distributions are much higher than on regular dividends.

 

2) Good for you, that you live in the Netherlands, and don’t have to deal with Italian taxes! ;)

 

Gio

 

[writser]

2) Good for you, that you live in the Netherlands, and don’t have to deal with Italian taxes! ;)

 

I thought the good thing about Italian taxes was that you don't actually have to pay them  :P .

[giofranchi]

I thought the good thing about Italian taxes was that you don't actually have to pay them  :P .

 

Well, there is a corollary to that: in Milan we have to pay for all the taxes the rest of Italy evades…!! ;)

 

Ahahahah!!!!!

 

Gio

 

[giofranchi]

My understanding is that the size of the high yield market itself is around $2.5 trillion - this includes bonds & loans both public and private. Distressed is a much smaller portion of this. Since Oaktree is not indexing into this market and most of the public bond market does not offer much scope for alpha, the opportunity set for them is a fraction of this market. They cannot own say 25% of the market and still generate a ton of alpha as implied by your 20% return expectation on their investments.

 

The following is from an article about OAK that appeared on The Motley Fool last Janaury 26th, 2014:

 

Consider its core markets: The total value of U.S. commercial real estate is $11.5 trillion, high-yield debt issues totaled $812 billion in 2012, $737 billion of high-yield debt and bank facilities will mature between 2014 and 2018, and $1.3 trillion worth of commercial real estate loans will mature from 2014 to 2017. Two growth avenues stick out. Emerging market corporate bond issuance is still comparatively small, at just $300 billion last year—a market that will grow, and afford opportunities for Oaktree. With banks shedding complex credit assets, as mandated under Basel III and Dodd Frank, and European banks retrench from lending markets, Oaktree's credit expertise uniquely suits it to serve a burgeoning secular trend.

 

That's a long way of saying that, with $83 billion under management, Oaktree might just be scratching the surface.

 

Gio

[giofranchi]

http://www.valuewalk.com/2014/12/stick-mission-howard-marks-oaktree-capital-management/

 

 

Gio

[giofranchi]

http://seekingalpha.com/news/2178265-buys-and-sells-as-morgan-stanley-launches-p-e-coverage?uide=7935531&uprof=25#email_link

 

Started at Outperform are Blackstone (BX -1.2%), Oaktree (OAK +0.2%), and KKR (KKR +1.8%), while Apollo Global (APO -1.2%) rates an Underweight. Initiated at Equal Weight are Ares Management (ARES -0.8%) and Carlyle Group (CG -1.5%).

 

 

Gio

[AtlCDore]

http://seekingalpha.com/news/2178265-buys-and-sells-as-morgan-stanley-launches-p-e-coverage?uide=7935531&uprof=25#email_link

 

Started at Outperform are Blackstone (BX -1.2%), Oaktree (OAK +0.2%), and KKR (KKR +1.8%), while Apollo Global (APO -1.2%) rates an Underweight. Initiated at Equal Weight are Ares Management (ARES -0.8%) and Carlyle Group (CG -1.5%).

 

 

Gio

 

Gio,

 

In that link there is a link to BX's Schwarzman and he is quoted, ""There are a lot of people who borrowed a lot of money based on higher price levels and they’re going to need more capital," said Schwarzman (NYSE:BX) at a conference yesterday. "There’s going to be a fallout. It’s going to be one of the best opportunities we’ve had in many, many years.”

 

I would have to believe the same would apply to OAK as well.  I guess we'll see what happens. 

 

AtlCDore