SEC Filing - Oaktree Capital Management, L.P.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

oak-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________

FORM 10-Q

________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to .

Commission File Number 001-35500

________________

Oaktree Capital Group, LLC

(Exact name of registrant as specified in its charter)

_______________________________


Delaware						26-0174894
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

333 South Grand Avenue, 28th Floor

Los Angeles, CA 90071

Telephone: (213) 830-6300

(Address, zip code, and telephone number, including

area code, of registrant’s principal executive offices)

_______________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
6.625% Series A preferred units	OAK-PA	New York Stock Exchange
6.550% Series B preferred units	OAK-PB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 4, 2020, there were 98,677,040 Class A units and 61,370,607 Class B units of the registrant outstanding.

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Statements of Financial Condition as of September 30, 2020 and December 31, 2019	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Changes in Unitholders’ Capital for the Three and Nine Months Ended September 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	84
Item 4.	Controls and Procedures	86

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	87
Item 1A.	Risk Factors	87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 3.	Defaults Upon Senior Securities	87
Item 4.	Mine Safety Disclosures	87
Item 5.	Other Information	87
Item 6.	Exhibits	88
Signature

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect our current views with respect to, among other things, our 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 our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Such forward-looking statements are subject to risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity.

In addition to factors previously disclosed in Oaktree Capital Group, LLC’s (“OCG”) reports filed with securities regulators in the United States and those identified elsewhere in this quarterly report, the following factors, among others, could cause actual results to differ materially from forward-looking statements and information or historical performance: course and severity of the COVID-19 pandemic and its direct and indirect business impacts; business disruptions resulting from the completion of the merger between an affiliate of Brookfield Asset Management Inc. and OCG that closed on September 30, 2019 that will impact OCG’s business, including current plans and operations; potential adverse reactions or changes to business relationships resulting from the completion of the merger; certain legal or regulatory restrictions resulting from the completion of the merger that may impact OCG’s ability to pursue certain business opportunities or strategic transactions; the ability of OCG to retain and hire key personnel; the continued availability of capital and financing following the merger; the business, economic and political conditions in the markets in which OCG operates; changes in OCG’s anticipated revenue and income, which are inherently volatile; changes in the value of OCG’s investments; the termination or amendment (including fee amendments) of certain service or sub-advisory agreements that generate revenues for OCG that are between OCG and its subsidiaries on the one hand and certain affiliates of OCG on the other hand; the pace of OCG’s raising of new funds; changes in assets under management; the timing and receipt of, and impact of taxes on, carried interest; distributions from and liquidation of OCG’s existing funds; the amount and timing of distributions on OCG’s preferred units; changes in OCG’s operating or other expenses; the degree to which OCG encounters competition; and general political, economic and market conditions.

Any forward-looking statements and information speak only as of the date of this quarterly report or as of the date they were made, and except as required by law, OCG does not undertake any obligation to update forward-looking statements and information. For a more detailed discussion of these factors, also see the information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in OCG’s most recent report on Form 10-K for the year ended December 31, 2019 (our “annual report”), in OCG’s report on Form 10-Q for the quarter ended March 31, 2020; and in this quarterly report, and in each case any material updates to these factors contained in any of OCG’s future filings.

As for the forward-looking statements and information that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given these uncertainties, you should not place any reliance on these forward-looking statements and information.

This quarterly report 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.

In this quarterly report, unless the context otherwise requires:

“Oaktree” refers to (i) Oaktree Capital Group, LLC and, where applicable, its subsidiaries and affiliates prior to October 1, 2019 and (ii) the Oaktree Operating Group and, where applicable, their respective subsidiaries and affiliates after September 30, 2019.

“OCG,” “Company,” “we,” “us,” “our” or “our company” refers to Oaktree Capital Group, LLC and, where applicable, its subsidiaries and affiliates, including, as the context requires, affiliated Oaktree Operating Group members after September 30, 2019.

“OCM” refers to Oaktree Capital Management, L.P. and, where applicable, its subsidiaries and affiliates. OCM is one of the Oaktree Operating Group entities and acts as the U.S. registered investment adviser to most of the Oaktree funds. Subsequent to September 30, 2019, OCM is no longer our indirect subsidiary.

“Oaktree Operating Group,” or “Operating Group,” refers collectively to the entities that either (i) act as or control the general partners and investment advisers of the Oaktree funds or (ii) hold interests in other entities or investments generating income for Oaktree.

“OCGH” refers to Oaktree Capital Group Holdings, L.P., a Delaware limited partnership, which holds an interest in the Oaktree Operating Group and all of our Class B units.

“OCGH unitholders” refers collectively to Oaktree senior executives, current and former employees and their respective transferees who hold interests in the Oaktree Operating Group through OCGH.

“assets under management,” or “AUM,” generally refers to the assets Oaktree manages and equals the NAV (as defined below) of the assets Oaktree manages, the leverage on which management fees are charged, the undrawn capital that Oaktree is entitled to call from investors in the funds pursuant to their capital commitments, investment proceeds held in trust for use in investment activities and Oaktree’s pro rata portion of AUM managed by DoubleLine Capital LP and its affiliates (“DoubleLine”), in which Oaktree holds a minority ownership interest. For Oaktree’s collateralized loan obligation vehicles (“CLOs”), AUM represents the aggregate par value of collateral assets and principal cash, and for Oaktree’s BDCs, gross assets (including assets acquired with leverage), net of cash, for Oaktree’s special purpose acquisition companies, the proceeds of any initial public offering held in trust for use in a business combination, and for DoubleLine funds, NAV. Oaktree’s AUM amounts include AUM for which Oaktree charges no management fees. Oaktree’s definition of AUM is not based on any definition contained in our operating agreement or the agreements governing the funds that Oaktree manages. Oaktree’s calculation of AUM and the AUM-related metric described below may not be directly comparable to the AUM metrics of other investment managers.

“incentive-creating assets under management,” or “incentive-creating AUM,” refers to the AUM that may eventually produce incentive income, as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Metrics”.

“Class A units” refer to the common units of OCG designated as Class A units.

“common units” or “common unitholders” refer to the Class A common units of OCG or Class A common unitholders, respectively, unless otherwise specified.

“consolidated funds” refers to the funds and CLOs that we are required to consolidate as of the applicable reporting date.

“funds” refers to investment funds and, where applicable, CLOs and separate accounts that are managed by Oaktree or its subsidiaries.

“Intermediate Holding Companies” collectively refers to the subsidiaries wholly owned by us.

“net asset value,” or “NAV,” refers to the value of all the assets of a fund (including cash and accrued interest and dividends) less all liabilities of the fund (including accrued expenses and any reserves established by us, in our discretion, for contingent liabilities) without reduction for accrued incentives (fund level) because they are reflected in the partners’ capital of the fund.

“preferred units” or “preferred unitholders” refer to the Series A and Series B preferred units of OCG or Series A and Series B preferred unitholders, respectively, unless otherwise specified.

“senior executives” refers collectively to Howard S. Marks, Bruce A. Karsh, Jay S. Wintrob, John B. Frank and Sheldon M. Stone.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Oaktree Capital Group, LLC

Condensed Consolidated Statements of Financial Condition (Unaudited)

($ in thousands)


	As of
	September 30, 2020		December 31, 2019
Assets
Cash and cash-equivalents	$	204,522	$	323,550
U.S. Treasury and other securities	9,150		9,232
Corporate investments (includes $19,169 and $34,934 measured at fair value as of September 30, 2020 and December 31, 2019, respectively)	915,697		709,137
Due from affiliates	69,536		164,189
Deferred tax assets	3,019		3,096
Right-of-use assets	37,605		39,702
Other assets	44,477		41,198
Assets of consolidated funds:
Cash and cash-equivalents	846,788		518,243
Investments, at fair value	6,880,386		7,358,409
Dividends and interest receivable	25,339		25,058

Receivable for securities sold	69,072		58,622
Derivative assets, at fair value	339		6,890
Other assets, net	12,774		7,436
Total assets	$	9,118,704	$	9,264,762
Liabilities and Unitholders’ Capital
Liabilities:
Accrued compensation expense	$	96,119	$	130,818
Accounts payable, accrued expenses and other liabilities	8,855		11,316
Due to affiliates	47,750		87,063
Debt obligations (Note 10)	—		—
Operating lease liabilities	43,500		45,793
Liabilities of consolidated funds:
Accounts payable, accrued expenses and other liabilities	80,987		89,937
Payables for securities purchased	341,541		367,983

Derivative liabilities, at fair value	546		2,551
Distributions payable	95		34,434
Borrowings under credit facilities	—		158,477
Debt obligations of CLOs	6,241,881		5,767,999
Total liabilities	6,861,274		6,696,371
Commitments and contingencies (Note 17)
Non-controlling redeemable interests in consolidated funds	644,880		866,222
Unitholders’ capital:
Series A preferred units, 7,200,000 units issued and outstanding as of September 30, 2020 and December 31, 2019	173,669		173,669
Series B preferred units, 9,400,000 units issued and outstanding as of September 30, 2020 and December 31, 2019	226,915		226,915
Class A units, no par value, unlimited units authorized, 98,677,040 and 97,967,255 units issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	—		—
Class B units, no par value, unlimited units authorized, 61,383,742 and 61,793,286 units issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	—		—
Paid-in capital	817,504		750,299
Retained earnings (accumulated deficit)	(39,267)		51,534
Accumulated other comprehensive loss	(10,179)		(3,501)
Unitholders’ capital attributable to Oaktree Capital Group, LLC	1,168,642		1,198,916
Non-controlling interests in consolidated subsidiaries	443,908		503,253
Total unitholders’ capital	1,612,550		1,702,169
Total liabilities and unitholders’ capital	$	9,118,704	$	9,264,762

Please see accompanying notes to condensed consolidated financial statements.

Oaktree Capital Group, LLC

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per unit amounts)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Revenues:
Management fees	$	45,466	$	179,761	$	138,278	$	524,798
Incentive income	116		25,429		43,532		260,290
Total revenues	45,582		205,190		181,810		785,088
Expenses:
Compensation and benefits	(33,659)		(111,281)		(96,368)		(334,919)
Equity-based compensation	(4,068)		(22,779)		(13,380)		(59,756)
Incentive income compensation	(474)		(11,427)		(15,612)		(136,849)
Total compensation and benefits expense	(38,201)		(145,487)		(125,360)		(531,524)
General and administrative	(6,395)		(86,851)		(18,816)		(184,592)
Depreciation and amortization	(561)		(6,602)		(1,498)		(19,732)
Consolidated fund expenses	(11,706)		(6,540)		(31,726)		(12,994)
Total expenses	(56,863)		(245,480)		(177,400)		(748,842)
Other income (loss):
Interest expense	(35,420)		(59,883)		(121,753)		(149,643)
Interest and dividend income	74,128		101,882		238,294		278,782
Net realized gain (loss) on consolidated funds’ investments	(19,635)		(3,664)		(97,642)		(9,036)
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments	533		(40,964)		(222,746)		17,967
Investment income (loss)	60,296		26,819		18,030		121,804
Other income (loss), net	43		—		59		58
Total other income (loss)	79,945		24,190		(185,758)		259,932
Income (loss) before income taxes	68,664		(16,100)		(181,348)		296,178
Income taxes	(1,170)		(4,798)		(6,499)		(11,148)
Net income (loss)	67,494		(20,898)		(187,847)		285,030
Less:
Net (income) loss attributable to non-controlling interests in consolidated funds	13,882		4,208		174,244		(82,234)
Net (income) loss attributable to non-controlling interests in consolidated subsidiaries	(28,993)		6,871		13,306		(109,259)
Net income (loss) attributable to Oaktree Capital Group, LLC	52,383		(9,819)		(297)		93,537
Net income attributable to preferred unitholders	(6,829)		(6,829)		(20,487)		(20,487)
Net income (loss) attributable to Oaktree Capital Group, LLC Class A unitholders	$	45,554	$	(16,648)	$	(20,784)	$	73,050

Distributions declared per Class A unit	$	0.49	$	3.13	$	0.71	$	4.93
Net income (loss) per Class A unit (basic and diluted):
Net income (loss) per Class A unit	$	0.46	$	(0.22)	$	(0.21)	$	0.99
Weighted average number of Class A units outstanding	98,677		75,995		98,457		74,005

Please see accompanying notes to condensed consolidated financial statements.

Oaktree Capital Group, LLC

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

Net income (loss)	$	67,494	$	(20,898)	$	(187,847)	$	285,030
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(5,919)		(5,780)		(10,816)		(2,411)
Other comprehensive loss, net of tax	(5,919)		(5,780)		(10,816)		(2,411)
Total comprehensive income (loss)	61,575		(26,678)		(198,663)		282,619
Less:
Comprehensive (income) loss attributable to non-controlling interests in consolidated funds	13,882		4,208		174,244		(82,234)
Comprehensive (income) loss attributable to non-controlling interests in consolidated subsidiaries	(26,724)		8,725		17,444		(109,423)
Comprehensive income (loss) attributable to OCG	48,733		(13,745)		(6,975)		90,962
Comprehensive income attributable to preferred unitholders	(6,829)		(6,829)		(20,487)		(20,487)
Comprehensive income (loss) attributable to OCG Class A unitholders	$	41,904	$	(20,574)	$	(27,462)	$	70,475

Please see accompanying notes to condensed consolidated financial statements.

Oaktree Capital Group, LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine months ended September 30,
	2020		2019
Cash flows from operating activities:
Net income (loss)	$	(187,847)	$	285,030
Adjustments to reconcile net income (loss) to net cash used in operating activities:

Investment income	(18,030)		(121,804)
Depreciation and amortization	1,498		19,732
Equity-based compensation	13,380		59,756
Net realized and unrealized (gain) loss from consolidated funds’ investments	320,388		(8,931)
Accretion of original issue and market discount of consolidated funds’ investments, net	(17,645)		(4,305)
Income distributions from corporate investments in funds and companies	23,334		123,911
Other non-cash items	104		3,295
Cash flows due to changes in operating assets and liabilities:
Decrease in deferred tax assets	6		—
(Increase) decrease in other assets	787		(3,883)
Decrease in net due from affiliates	57,631		281,791
Decrease in accrued compensation expense	(34,983)		(191,859)
Increase (decrease) in accounts payable, accrued expenses and other liabilities	(3,894)		65,325
Cash flows due to changes in operating assets and liabilities of consolidated funds:
(Increase) decrease in dividends and interest receivable	23,967		(8,437)
(Increase) decrease in due from brokers	(8,221)		11,476
Increase in receivables for securities sold	(28,354)		(27,609)
Increase in other assets	(6,426)		(7,074)
Increase (decrease) in accounts payable, accrued expenses and other liabilities	(14,681)		26,111
Increase (decrease) in payables for securities purchased	(17,003)		123,853
Purchases of securities	(3,030,232)		(5,571,689)
Proceeds from maturities and sales of securities	2,150,565		2,149,132
Net cash used in operating activities	(775,656)		(2,796,179)
Cash flows from investing activities:
Purchases of U.S. Treasury and other securities	(35,731)		(602,600)
Proceeds from maturities and sales of U.S. Treasury and other securities	35,631		1,124,951
Corporate investments in funds and companies	(196,949)		(254,478)
Distributions and proceeds from corporate investments in funds and companies	229,543		373,916
Purchases of fixed assets	(315)		(6,366)
Net cash provided by investing activities	32,179		635,423

(continued)

Please see accompanying notes to condensed consolidated financial statements.

Oaktree Capital Group, LLC

Condensed Consolidated Statements of Cash Flows (Unaudited) — (Continued)

(in thousands)


	Nine months ended September 30,
	2020		2019
Cash flows from financing activities:

Capital contributions, net	$	56,023	$	—


Repurchase and cancellation of units	—		(12,191)
Distributions to Class A unitholders	(69,797)		(436,494)
Distributions to OCGH unitholders	(43,678)		(358,455)
Distributions to preferred unitholders	(20,487)		(20,487)
Distributions to non-controlling interests	—		(3,421)


Cash flows from financing activities of consolidated funds:
Contributions from non-controlling interests	863,893		519,684
Distributions to non-controlling interests	(217,851)		(107,071)
Proceeds from debt obligations issued by CLOs	1,030,422		3,892,380
Payment of debt issuance costs	(2,780)		(3,070)
Repayment on debt obligations issued by CLOs	(559,694)		(1,188,452)
Borrowings on credit facilities	75,380		505,521
Repayments on credit facilities	(48,490)		(372,000)
Net cash provided by financing activities	1,062,941		2,415,944
Effect of exchange rate changes on cash	(8,799)		(12,078)
Net increase in cash and cash-equivalents	310,665		243,110

Deconsolidation of funds	(101,148)		(102,839)
Cash and cash-equivalents, beginning balance	841,793		831,727
Cash and cash-equivalents, ending balance	$	1,051,310	$	971,998


Reconciliation of cash and cash-equivalents
Cash and cash-equivalents – Oaktree	$	204,522	$	356,431
Cash and cash-equivalents – consolidated funds	846,788		615,567
Total cash and cash-equivalents	$	1,051,310	$	971,998

Please see accompanying notes to condensed consolidated financial statements.

Oaktree Capital Group, LLC

Condensed Consolidated Statements of Changes in Unitholders’ Capital (Unaudited)

(in thousands)


	Oaktree Capital Group, LLC												Non-controlling Interests in Consolidated Subsidiaries		Total Unitholders’ Capital
	Class A Units	Class B Units	Series A Preferred Units		Series B Preferred Units		Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income (Loss)

Unitholders’ capital as of June 30, 2020	98,677	61,386	$	173,669	$	226,915	$	777,686	$	(36,469)	$	(6,529)	$	445,746	$	1,581,018
Activity for the three months ended:



Cancellation of units associated with forfeitures	—	(2)	—		—		—		—		—		—		—
Capital contributions	—	—	—		—		37,500		—		—		—		37,500

Equity reallocation between controlling and non-controlling interests	—	—	—		—		(184)		—		—		(39)		(223)
Capital increase related to equity-based compensation	—	—	—		—		2,502		—		—		1,556		4,058
Distributions declared	—	—	(2,981)		(3,848)		—		(48,352)		—		(30,079)		(85,260)
Net income	—	—	2,981		3,848		—		45,554		—		28,993		81,376
Foreign currency translation adjustment, net of tax	—	—	—		—		—		—		(3,650)		(2,269)		(5,919)
Unitholders’ capital as of September 30, 2020	98,677	61,384	$	173,669	$	226,915	$	817,504	$	(39,267)	$	(10,179)	$	443,908	$	1,612,550


	Oaktree Capital Group, LLC												Non-controlling Interests in Consolidated Subsidiaries		Total Unitholders’ Capital
	Class A Units	Class B Units	Series A Preferred Units		Series B Preferred Units		Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)

Unitholders’ capital as of December 31, 2019	97,967	61,793	$	173,669	$	226,915	$	750,299	$	51,534	$	(3,501)	$	503,253	$	1,702,169
Activity for the nine months ended:
Adoption of new accounting guidance (ASU 2016-13)	—	—	—		—		—		(220)		—		(136)		(356)
Net issuance of units	—	319	—		—		—		—		—		—		—
Unit exchange	710	(710)	—		—		—		—		—		—		—
Cancellation of units associated with forfeitures	—	(18)	—		—		—		—		—		—		—
Capital contributions	—	—	—		—		57,317		—		—		—		57,317

Equity reallocation between controlling and non-controlling interests	—	—	—		—