Oaktree Announces First Quarter 2013 Financial Results

Oaktree Announces First Quarter 2013 Financial Results

• Adjusted net income per Class A unit grew 117%, to a record $1.95 for the first quarter of 2013 from $0.90 in the first quarter of 2012, driven by record incentive income.

• Distributable earnings per Class A unit grew 167%, to a record $1.79 for the first quarter of 2013 from $0.67 in the first quarter of 2012, on higher incentive income and investment income proceeds.

• Economic net income per Class A unit grew 43%, to $2.07 for the first quarter of 2013 from $1.45 in the first quarter of 2012, driven by a substantial increase in incentives created.

• GAAP net income attributable to Oaktree Capital Group, LLC was $57.6 million for the first quarter of 2013.

• Oaktree declares a quarterly distribution of $1.41 per Class A unit, up 156% from the $0.55 distribution for the first quarter of 2012, and bringing to $3.80 the aggregate distribution for the trailing four quarters.

LOS ANGELES--(BUSINESS WIRE)-- Oaktree Capital Group, LLC (NYS: OAK) today reported its unaudited financial results for the quarter ended March 31, 2013.

Adjusted net income ("ANI") nearly doubled, to a record $335.8 million in the first quarter of 2013 from $173.6 million in the first quarter of 2012, on an 86% increase in total segment revenues. The growth in revenues, to $593.4 million from $318.3 million, reflected a 422% gain in incentive income, to a record $327.2 million, and a 28% gain in investment income, to $82.1 million, on the quarter's strong fund realizations and returns.

Distributable earnings grew to a record $295.0 million in the first quarter of 2013 from $137.3 million in the first quarter of 2012, on higher incentive income and growth in investment income proceeds from Oaktree funds and DoubleLine Capital LP and its affiliates (collectively, "DoubleLine"). Distributable earnings generated a distribution of $1.41 per Class A unit, the highest ever, with respect to the first quarter of 2013.

Howard Marks, Chairman, said, "As we mark our first anniversary of being public, Oaktree's performance and prospects have never been better. The first quarter's records for adjusted net income, distributable earnings and the unitholder distribution reflect the strong cash generating capacity of our business. Plus, the substantial incentives created by the quarter's strong fund returns bode well for our future cash flow."

In addition to ANI, Oaktree calculates economic net income ("ENI") to facilitate comparability with other alternative asset managers that use ENI as their profit measure. Unlike ANI, ENI measures incentive income based on market values. ENI rose to $400.6 million in the first quarter of 2013 from $278.4 million in the first quarter of 2012, reflecting near-record incentives created on strong fund returns.

GAAP-basis results for the first quarter of 2013 included net income attributable to Oaktree Capital Group, LLC of $57.6 million.

As previously announced, assets under management were $78.8 billion as of March 31, 2013, up $1.7 billion from December 31, 2012 and $0.9 billion since March 31, 2012. The increase during the first quarter reflected new capital commitments and market-value appreciation that in the aggregate exceeded $3.2 billion of closed-end fund distributions. Management fee-generating assets under management were $66.4 billion as of March 31, 2013, little changed from $66.8 billion at December 31, 2012 and down slightly from $68.0 billion as of March 31, 2012, as declines from significant fund asset sales were largely offset by new capital raises and appreciation in funds for which management fees are based on net asset value.

Gross equity capital raised during the first quarter of 2013 was $2.6 billion. In March 2013, Oaktree held a final closing for Oaktree Enhanced Income Fund, L.P. ("EIF"), which invests in senior loan assets on a leveraged basis. The total fund size of EIF, including leverage, is currently $1.8 billion. The fund is expected to exceed $2.0 billion when fully invested and leveraged, exceeding our initial target of $1.5 billion. Following its third and most recent closing in March 2013, Oaktree Real Estate Opportunities Fund VI, L.P. ("ROF VI") has received capital commitments of approximately $750 million, towards a targeted size of $1.5 billion. Oaktree Emerging Market Opportunities Fund, L.P., which will invest in distressed emerging market corporate debt, held a first closing this month. Together with a potential $100 million separate account that Oaktree is in the process of establishing, the first closing brings capital for this strategy to $175 million, towards a targeted size of $500 million. Capital commitments to our new Strategic Credit strategy, which seeks to achieve an attractive total return on an unleveraged basis by investing in stressed credits, have reached $900 million.

In January 2013, Oaktree launched the marketing of Oaktree Principal Fund VI, L.P. ("PF VI"), a control investing closed-end fund, with a target of $3.0 billion in capital commitments. Oaktree's control investing funds primarily invest to gain control of, or significant influence over, middle-market companies that are experiencing distress or dislocation. In March 2013, Oaktree launched the marketing of Oaktree Real Estate Debt Fund, L.P. ("REDF"), with a target of $500 million in capital commitments. REDF will invest in a diversified portfolio of real estate debt instruments, including commercial mortgage-backed securities, commercial first mortgages, subordinated secured debt, mezzanine loans, corporate debt and residential first mortgage pools. First closings for both funds are expected this summer.

On May 10, 2013, OCM Opportunities Fund VIIb, L.P. ("Opps VIIb") will make a distribution to its investors of $1.4 billion, its first since February 7, 2013. From that distribution, Oaktree currently expects to recognize incentive income of an estimated $272 million, or $178 million, net of incentive income compensation expense, and investment income proceeds of an estimated $20 million, in the second quarter of 2013.

The table below presents: (a) adjusted net income, distributable earnings, fee-related earnings and economic net income, in each case for both the Operating Group and per Class A unit; (b) adjusted net income revenues, distributable earnings revenues, fee-related earnings revenues and economic net income revenues, in each case for the Operating Group; and (c) assets under management and accrued incentives (fund level) data. Please refer to the Glossary for definitions.

Note: Oaktree discloses in this earnings release certain revenues and financial measures, including adjusted net income revenues, adjusted net income, adjusted net income per Class A unit, distributable earnings revenues, distributable earnings, distributable earnings per Class A unit, fee-related earnings revenues, fee-related earnings, fee-related earnings per Class A unit, economic net income revenues, economic net income and economic net income per Class A unit, that are calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles in the United States ("non-GAAP"). Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are presented at Exhibit A.

Operating Metrics

Assets under management

Assets under management ("AUM") were $78.8 billion as of March 31, 2013, as compared with $77.1 billion as of December 31, 2012 and $77.9 billion as of March 31, 2012. The $1.7 billion increase since December 31, 2012 primarily reflected $3.3 billion of aggregate market-value gains and $1.8 billion of new capital commitments and fee-generating leverage in our closed-end funds, partially offset by $3.2 billion in distributions to investors in our closed-end funds. The $3.2 billion of closed-end fund distributions included $0.8 billion by Opps VIIb, $1.3 billion by other distressed debt funds and $0.8 billion by control investing funds.

The $0.9 billion increase in AUM since March 31, 2012 was attributable primarily to new closed-end fund capital commitments and fee-generating leverage of $6.7 billion and market-value gains of $9.4 billion, less $13.3 billion of distributions to investors in closed-end funds. Of the new capital commitments, Oaktree Opportunities Fund IX, L.P. ("Opps IX") represented $3.8 billion. Net inflows to open-end funds were $0.1 billion, driven by $0.9 billion in net inflows to our U.S. senior loans strategy.

Management fee-generating assets under management

Management fee-generating assets under management ("management fee-generating AUM") were $66.4 billion as of March 31, 2013, as compared to $66.8 billion as of December 31, 2012 and $68.0 billion as of March 31, 2012. The decrease of $0.4 billion in the first quarter of 2013 represented increases of $1.0 billion from market-value gains in funds for which management fees are based on NAV and $0.7 billion of drawdowns by closed-end funds that generate fees based on drawn capital or NAV, offset by a decrease of $2.7 billion attributable to asset sales by closed-end funds in liquidation. Of the latter, Opps VIIb accounted for $1.6 billion. As of March 31, 2013, Opps IX had made an initial 5% drawdown against its $5.0 billion of committed capital. Oaktree has not yet commenced Opps IX's investment period and, as a result, as of March 31, 2013 management fees were assessed only on its drawn capital and management fee-generating AUM included only that portion of committed capital.

As compared to March 31, 2012, management fee-generating AUM decreased $1.6 billion, reflecting the net effect of a $7.1 billion decline from asset sales by closed-end funds in liquidation and increases of $3.3 billion from market-value gains in funds for which management fees are based on NAV and $2.8 billion from closings for ROF VI and drawdowns in our Strategic Credit strategy, Opps IX, EIF and Oaktree PPIP Fund, L.P., including leverage.

Incentive-creating assets under management

Incentive-creating assets under management ("incentive-creating AUM") were $34.0 billion as of March 31, 2013, unchanged from December 31, 2012, and down from $36.6 billion as of March 31, 2012. The $2.6 billion decrease since March 31, 2012 primarily reflected the net effect of $13.1 billion in closed-end fund distributions, $4.4 billion in closed-end fund drawdowns and $5.7 billion in market-value gains. Of the $34.0 billion in incentive-creating AUM as of March 31, 2013, $25.1 billion, or 73.8%, was generating incentives at the fund level.

Accrued incentives (fund level) and incentives created (fund level)

Accrued incentives (fund level) amounted to $2.3 billion as of March 31, 2013, as compared with $2.1 billion as of December 31, 2012 and $1.9 billion as of March 31, 2012. The $0.2 billion increase in the first quarter of 2013 resulted from $459.7 million of incentives created, on the period's relatively strong fund returns, less $327.2 million of segment incentive income recognized.

Net of incentive income compensation expense, accrued incentives (fund level) amounted to $1.3 billion, $1.3 billion and $1.1 billion as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

Uncalled capital commitments

Uncalled capital commitments amounted to $11.2 billion as of March 31, 2013, as compared with $11.2 billion as of December 31, 2012 and $12.1 billion as of March 31, 2012.

Segment Results

Revenues

Total segment revenues increased $275.1 million, or 86.4%, to $593.4 million for the first quarter of 2013 from $318.3 million for the first quarter of 2012, as a result of growth of $264.5 million in incentive income and $17.8 million in investment income, partially offset by a decline of $7.1 million in management fees.

Management fees

Management fees decreased $7.1 million, or 3.7%, to $184.2 million for the first quarter of 2013 from $191.3 million in the prior year's first quarter. The decline reflected a decrease of $19.7 million in fees attributable to closed-end funds in liquidation, partially offset by increases of $5.6 million from open-end funds and $4.0 million from new commitments to closed-end funds. Additionally, a portion of Oaktree Mezzanine Fund III, L.P.'s management fees is dependent on the fund's cash flow, which resulted in $4.5 million and zero such fees in the first quarters of 2013 and 2012, respectively. Of the $19.7 million decline attributable to closed-end funds in liquidation, Opps VIIb accounted for $10.0 million. During the first quarter of 2013, closed-end funds represented $139.0 million, or 75.5%, of total management fees.

Incentive income

Incentive income increased $264.5 million, or 421.9%, to $327.2 million for the first quarter of 2013, from $62.7 million for the prior year's first quarter. Opps VIIb accounted for $195.2 million of the $327.2 million, another $18.6 million arose from other funds making incentive distributions, and the remaining $113.4 million was attributable to tax-related incentive distributions from certain closed-end funds for their 2012 taxable income. In the first quarter of 2012, tax-related incentive distributions by closed-end funds accounted for $38.0 million of that quarter's $62.7 million in incentive income.

Investment income

Investment income rose $17.8 million, or 27.7%, to $82.1 million for the first quarter of 2013 from $64.3 million for the first quarter of 2012, reflecting increases of $11.8 million and $6.0 million from Oaktree's investments in funds and companies, respectively. The higher income from fund investments reflected a blended average return of approximately 6.6% in the first quarter of 2013 on an average invested balance that declined 5.0% from the first quarter of 2012. The higher income from investments in companies stemmed from our one-fifth ownership of DoubleLine, which accounted for investment income of $11.0 million and $4.1 million in the first quarters of 2013 and 2012, respectively. Performance fees accounted for $2.0 million and $1.6 million of the current-year and prior-year amounts, respectively.

Expenses

Compensation and benefits

Compensation and benefits for the first quarter of 2013 amounted to $93.6 million, an increase of $9.2 million, or 10.9%, from $84.4 million in the first quarter of 2012, primarily reflecting growth in headcount of 10.1% between March 31, 2012 and March 31, 2013.

Equity-based compensation

Equity-based compensation increased to $0.7 million for the first quarter of 2013 from zero in the first quarter of 2012, reflecting non-cash amortization expense upon vesting of restricted unit grants made to employees and directors subsequent to our initial public offering in April 2012.

Incentive income compensation

Incentive income compensation expense rose $102.5 million, or 368.7%, to $130.3 million for the first quarter of 2013 from $27.8 million for the first quarter of 2012, reflecting the 421.9% increase in incentive income over the same period. The increase would have been $15.2 million greater had we not acquired and expensed in 2011 a small portion of certain investment professionals' carried interest in Opps VIIb.

General and administrative

General and administrative expenses decreased $0.8 million, or 3.2%, to $24.0 million for the first quarter of 2013 from $24.8 million in the first quarter of 2012. Excluding the impact of foreign currency-related items, as well as $2.1 million in non-recurring costs associated with our initial public offering that were incurred in the first quarter of 2012, general and administrative expenses increased $2.5 million, or 11.2%, to $24.8 million for the first quarter of 2013 from $22.3 million in the first quarter of 2012. The increase reflected costs associated with corporate growth, enhancements to our operational infrastructure and being a public company.

Adjusted net income

Adjusted net income rose $162.2 million, or 93.4%, to $335.8 million for the first quarter of 2013 from $173.6 million in the first quarter of 2012, reflecting increases of $162.0 million in incentive income, net of incentive income compensation expense, and $17.8 million in investment income, and a decrease of $16.1 million in fee-related earnings. The portion of adjusted net income attributable to our Class A units was $58.7 million and $20.4 million for the first quarters of 2013 and 2012, respectively. Per Class A unit, adjusted net income-OCG amounted to $1.95 and $0.90 for the first quarters of 2013 and 2012, respectively.

The effective income tax rates applied to ANI for the three months ended March 31, 2013 and 2012 were 12% and 21%, respectively. The effective income tax rate is a function of the mix of income and other factors, each of which often varies significantly within or between years and can have a material impact on the particular year's income tax expense. The rate used for interim fiscal periods is based on the estimated full-year effective income tax rate, which is subject to change as the year progresses.

Distributable earnings

Distributable earnings increased $157.7 million, or 114.9%, to $295.0 million for the first quarter of 2013 from $137.3 million for the first quarter of 2012, reflecting increases of $162.0 million in incentive income, net of incentive income compensation expense, and $12.4 million in receipts of investment income, slightly offset by a decline of $16.1 million in fee-related earnings. For the first quarter of 2013, receipts of investment income totaled $43.0 million, including $34.0 million from fund liquidations and $9.0 million from Oaktree's one-fifth equity ownership in DoubleLine, of which the latter included $2.0 million attributable to performance fees. The portion of distributable earnings attributable to our Class A units was $1.79 and $0.67 per unit for the first quarters of 2013 and 2012, respectively, reflecting distributable earnings per Operating Group unit of $1.96 and $0.91, respectively, less costs borne by Class A unitholders for professional fees and other expenses, cash taxes attributable to the Intermediate Holding Companies and amounts payable pursuant to the tax receivable agreement.

Fee-related earnings

Fee-related earnings decreased $16.1 million, or 20.0%, to $64.2 million for the first quarter of 2013 from $80.3 million for the first quarter of 2012, reflecting the $7.1 million decline in management fees and $9.2 million increase in compensation and benefits. The portion of FRE attributable to our Class A units was $0.34 and $0.41 per Class A unit for the first quarters of 2013 and 2012, respectively.

The effective income tax rates applied to FRE for the three months ended March 31, 2013 and 2012 were 18% and 22%, respectively. The effective income tax rate used for interim fiscal periods is based on the estimated full-year income tax rate, which is a function of various factors and is subject to change as the year progresses.

GAAP-Basis Results

Net income attributable to Oaktree Capital Group, LLC was $57.6 million for the first quarter of 2013. The comparable amount in the first quarter of 2012 was $18.6 million.

Capital and Liquidity

As of March 31, 2013, Oaktree had a cash balance of $687.4 million, or $1.0 billion when including investments in U.S. Treasury and government agency securities, and $608.9 million in outstanding debt. Oaktree had then and currently has no borrowings outstanding against its $500 million revolving credit facility. Oaktree's investments in funds and companies had a carrying value of $1.1 billion as of March 31, 2013. While all of these investments in funds and companies follow the equity method of accounting, whereby original cost is adjusted for Oaktree's share of income/loss and distributions, investments in funds reflect each fund's holdings at fair value, whereas investments in DoubleLine and other companies are not adjusted to reflect the fair value of the underlying companies.

Distribution

Oaktree Capital Group, LLC has declared a distribution attributable to the first quarter of 2013 of $1.41 per Class A unit. This distribution will be paid on May 21, 2013 to Class A unitholders of record at the close of business on May 17, 2013.

Conference Call

Oaktree will host a conference call to discuss first quarter 2013 results today at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time. The conference call may be accessed by dialing (888) 769-9724 (U.S. callers) or +1 (415) 228-4639 (non-U.S. callers), participant password OAKTREE. Alternatively, a live webcast of the conference call can be accessed through the Unitholders - Investor Relations section of the Oaktree website, http://ir.oaktreecapital.com/.

For those individuals unable to listen to the live broadcast of the conference call, a replay will be available for 30 days on Oaktree's website, or by dialing (888) 293-8914 (U.S. callers) or +1 (203) 369-3603 (non-U.S. callers), beginning approximately one hour after the broadcast.

About Oaktree

Oaktree is a leading global investment management firm focused on alternative markets, with $78.8 billion in assets under management as of March 31, 2013. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Headquartered in Los Angeles, the firm has over 700 employees and offices in 13 cities worldwide. For additional information, please visit Oaktree's website at www.oaktreecapital.com.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 (the "Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934, each as amended, which reflect the current views of Oaktree Capital Group, LLC ("OCG"), with respect to, among other things, its future results of operations and financial performance. In some cases, you can identify forward-looking statements by words such as "anticipate," "approximately," "believe," "continue," "could," "estimate," "expect," "intend," "may," "outlook," "plan," "potential," "predict," "seek," "should," "will" and "would" or the negative version of these words or other comparable or similar words. These statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those indicated in these statements. Forward-looking statements are based on OCG's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to OCG. Such forward-looking statements are subject to risks and uncertainties and assumptions relating to OCG's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including, but not limited to, changes in our anticipated revenue and income, which are inherently volatile; changes in the value of our investments; the pace of our raising of new funds; the timing and receipt of and impact of taxes on carried interest; distributions from and liquidation of our existing funds; changes in our operating or other expenses; the degree to which we encounter competition; and general economic and market conditions. The factors listed in the item captioned "Risk Factors" in OCG's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013, which is accessible on the SEC's website at www.sec.gov, provide examples of risks, uncertainties and events that may cause OCG's actual results to differ materially from the expectations described in its forward-looking statements.

Forward-looking statements speak only as of the date the statements are made. Except as required by law, OCG does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

This release and its contents do not constitute and should not be construed as (a) a recommendation to buy, (b) an offer to buy or solicitation of an offer to buy, (c) an offer to sell or (d) advice in relation to, any securities of OCG or securities of any Oaktree investment fund.

Consolidated Statements of Operations Data (GAAP basis)

Segment Financial Data