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, 2021
or
☐ 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 | o | Accelerated filer | ☐ | ||||||||||||||
| Non-accelerated filer | x | 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 9, 2021, there were 99,136,620 Class A units and 60,786,377 Class B units of the registrant outstanding.
TABLE OF CONTENTS
| Page | ||||||||
| PART I – FINANCIAL INFORMATION | ||||||||
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 novel coronavirus (including any subsequent variants, “COVID-19”) pandemic and its direct and indirect business impacts; the ability of OCG to retain and hire key personnel; the continued availability of capital and financing; 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, 2020 (our “annual report”), 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; for Oaktree’s BDCs, gross assets (including assets acquired with leverage), net of cash; for Oaktree’s special purpose acquisition companies (“SPACs”), 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
1
Oaktree Capital Group, LLC
Condensed Consolidated Statements of Financial Condition (Unaudited)
($ in thousands)
Please see accompanying notes to condensed consolidated financial statements.
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Cash and cash-equivalents | $ | 217,889 | $ | 329,253 | |||||||
| U.S. Treasury and other securities | 6,477 | 9,562 | |||||||||
Corporate investments (includes $103,136 and $15,429 measured at fair value as of September 30, 2021 and December 31, 2020, respectively) | 1,043,367 | 971,952 | |||||||||
| Due from affiliates | 296,355 | 129,541 | |||||||||
| Deferred tax assets | 3,829 | 4,172 | |||||||||
| Right-of-use assets | 34,374 | 37,942 | |||||||||
| Other assets | 42,498 | 43,204 | |||||||||
| Assets of consolidated funds: | |||||||||||
| Cash and cash-equivalents | 951,969 | 871,088 | |||||||||
| Investments, at fair value | 10,250,564 | 7,799,309 | |||||||||
| Dividends and interest receivable | 45,843 | 29,169 | |||||||||
| Due from brokers | 17,603 | — | |||||||||
| Receivable for securities sold | 189,093 | 107,179 | |||||||||
| Derivative assets, at fair value | 8,995 | 508 | |||||||||
| Other assets, net | 11,225 | 61,236 | |||||||||
| Total assets | $ | 13,120,081 | $ | 10,394,115 | |||||||
| Liabilities and Unitholders’ Capital | |||||||||||
| Liabilities: | |||||||||||
| Accrued compensation expense | $ | 167,210 | $ | 136,865 | |||||||
| Accounts payable, accrued expenses and other liabilities | 13,236 | 13,490 | |||||||||
| Due to affiliates | 445 | 9,688 | |||||||||
| Debt obligations (Note 8) | — | — | |||||||||
| Operating lease liabilities | 40,272 | 44,068 | |||||||||
| Liabilities of consolidated funds: | |||||||||||
| Accounts payable, accrued expenses and other liabilities | 86,490 | 82,005 | |||||||||
| Payables for securities purchased | 1,118,849 | 593,855 | |||||||||
| Derivative liabilities, at fair value | 21,124 | 933 | |||||||||
| Distributions payable | 95 | 10,098 | |||||||||
| Borrowings under credit facilities | 1,029,708 | 370,920 | |||||||||
| Debt obligations of CLOs | 7,208,109 | 6,536,858 | |||||||||
| Total liabilities | 9,685,538 | 7,798,780 | |||||||||
| Commitments and contingencies (Note 15) | 0 | 0 | |||||||||
| Non-controlling redeemable interests in consolidated funds | 1,322,017 | 715,347 | |||||||||
| Unitholders’ capital: | |||||||||||
| Series A preferred units, 7,200,000 units issued and outstanding as of September 30, 2021 and December 31, 2020 | 173,669 | 173,669 | |||||||||
| Series B preferred units, 9,400,000 units issued and outstanding as of September 30, 2021 and December 31, 2020 | 226,915 | 226,915 | |||||||||
| Class A units, no par value, unlimited units authorized, 99,136,620 and 98,677,040 units issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | — | — | |||||||||
| Class B units, no par value, unlimited units authorized, 60,834,146 and 61,370,607 units issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | — | — | |||||||||
| Paid-in capital | 949,510 | 819,963 | |||||||||
| Retained earnings | 202,742 | 119,920 | |||||||||
| Accumulated other comprehensive loss | (10,867) | (5,414) | |||||||||
| Unitholders’ capital attributable to Oaktree Capital Group, LLC | 1,541,969 | 1,335,053 | |||||||||
| Non-controlling interests in consolidated subsidiaries | 570,557 | 544,935 | |||||||||
| Total unitholders’ capital | 2,112,526 | 1,879,988 | |||||||||
| Total liabilities and unitholders’ capital | $ | 13,120,081 | $ | 10,394,115 | |||||||
2
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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Management fees | $ | 58,628 | $ | 45,466 | $ | 172,848 | $ | 138,278 | |||||||||||||||
| Incentive income | 167,534 | 116 | 811,481 | 43,532 | |||||||||||||||||||
| Total revenues | 226,162 | 45,582 | 984,329 | 181,810 | |||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Compensation and benefits | (37,080) | (33,659) | (116,803) | (96,368) | |||||||||||||||||||
| Equity-based compensation | (1,903) | (4,068) | (7,868) | (13,380) | |||||||||||||||||||
| Incentive income compensation | (81,952) | (474) | (396,435) | (15,612) | |||||||||||||||||||
| Total compensation and benefits expense | (120,935) | (38,201) | (521,106) | (125,360) | |||||||||||||||||||
| General and administrative | (5,303) | (6,395) | (18,879) | (18,816) | |||||||||||||||||||
| Depreciation and amortization | (580) | (561) | (1,745) | (1,498) | |||||||||||||||||||
| Consolidated fund expenses | (25,734) | (11,706) | (50,581) | (31,726) | |||||||||||||||||||
| Total expenses | (152,552) | (56,863) | (592,311) | (177,400) | |||||||||||||||||||
| Other income (loss): | |||||||||||||||||||||||
| Interest expense | (32,990) | (35,420) | (113,093) | (121,753) | |||||||||||||||||||
| Interest and dividend income | 90,673 | 74,128 | 273,460 | 238,294 | |||||||||||||||||||
| Net realized gain (loss) on consolidated funds’ investments | (10,345) | (19,635) | 848 | (97,642) | |||||||||||||||||||
| Net change in unrealized appreciation (depreciation) on consolidated funds’ investments | 60,329 | 533 | 185,418 | (222,746) | |||||||||||||||||||
| Investment income | 16,989 | 60,296 | 190,768 | 18,030 | |||||||||||||||||||
| Other income, net | — | 43 | 19 | 59 | |||||||||||||||||||
| Total other income (loss) | 124,656 | 79,945 | 537,420 | (185,758) | |||||||||||||||||||
| Income (loss) before income taxes | 198,266 | 68,664 | 929,438 | (181,348) | |||||||||||||||||||
| Income taxes | (3,811) | (1,170) | (9,246) | (6,499) | |||||||||||||||||||
| Net income (loss) | 194,455 | 67,494 | 920,192 | (187,847) | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Net (income) loss attributable to non-controlling interests in consolidated funds | (51,214) | 13,882 | (163,105) | 174,244 | |||||||||||||||||||
| Net (income) loss attributable to non-controlling interests in consolidated subsidiaries | (46,204) | (28,993) | (265,590) | 13,306 | |||||||||||||||||||
| Net income (loss) attributable to Oaktree Capital Group, LLC | 97,037 | 52,383 | 491,497 | (297) | |||||||||||||||||||
| 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 | $ | 90,208 | $ | 45,554 | $ | 471,010 | $ | (20,784) | |||||||||||||||
| Distributions declared per Class A unit | $ | 0.51 | $ | 0.49 | $ | 3.92 | $ | 0.71 | |||||||||||||||
| Net income (loss) per Class A unit (basic and diluted): | |||||||||||||||||||||||
| Net income (loss) per Class A unit | $ | 0.91 | $ | 0.46 | $ | 4.76 | $ | (0.21) | |||||||||||||||
| Weighted average number of Class A units outstanding | 99,137 | 98,677 | 98,995 | 98,457 | |||||||||||||||||||
Please see accompanying notes to condensed consolidated financial statements.
3
Oaktree Capital Group, LLC
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | 194,455 | $ | 67,494 | $ | 920,192 | $ | (187,847) | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | 8,606 | (5,919) | (7,733) | (10,816) | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | 8,606 | (5,919) | (7,733) | (10,816) | |||||||||||||||||||
| Total comprehensive income (loss) | 203,061 | 61,575 | 912,459 | (198,663) | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Comprehensive (income) loss attributable to non-controlling interests in consolidated funds | (51,214) | 13,882 | (163,105) | 174,244 | |||||||||||||||||||
| Comprehensive (income) loss attributable to non-controlling interests in consolidated subsidiaries | (49,477) | (26,724) | (263,310) | 17,444 | |||||||||||||||||||
| Comprehensive income (loss) attributable to OCG | 102,370 | 48,733 | 486,044 | (6,975) | |||||||||||||||||||
| Comprehensive income attributable to preferred unitholders | (6,829) | (6,829) | (20,487) | (20,487) | |||||||||||||||||||
| Comprehensive income (loss) attributable to OCG Class A unitholders | $ | 95,541 | $ | 41,904 | $ | 465,557 | $ | (27,462) | |||||||||||||||
Please see accompanying notes to condensed consolidated financial statements.
4
Oaktree Capital Group, LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 920,192 | $ | (187,847) | |||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||||||
| Investment income | (190,768) | (18,030) | |||||||||
| Depreciation and amortization | 1,745 | 1,498 | |||||||||
| Equity-based compensation | 7,868 | 13,380 | |||||||||
| Net realized and unrealized (gain) loss from consolidated funds’ investments | (186,266) | 320,388 | |||||||||
| Accretion of original issue and market discount of consolidated funds’ investments, net | (7,137) | (17,645) | |||||||||
| Income distributions from corporate investments in funds and companies | 171,106 | 23,334 | |||||||||
| SPAC deconsolidation gain and other non-cash items | (72,347) | 104 | |||||||||
| Cash flows due to changes in operating assets and liabilities: | |||||||||||
| Decrease in deferred tax assets | 105 | 6 | |||||||||
| Decrease in other assets | 3,443 | 787 | |||||||||
| (Increase) decrease in net due from affiliates | (160,078) | 57,631 | |||||||||
| Increase (decrease) in accrued compensation expense | 30,345 | (34,983) | |||||||||
| Decrease in accounts payable, accrued expenses and other liabilities | (4,676) | (3,894) | |||||||||
| Cash flows due to changes in operating assets and liabilities of consolidated funds: | |||||||||||
| (Increase) decrease in dividends and interest receivable | (16,068) | 23,967 | |||||||||
| Increase in due from brokers | (17,603) | (8,221) | |||||||||
| Increase in receivables for securities sold | (77,192) | (28,354) | |||||||||
| (Increase) decrease in other assets | 38,620 | (6,426) | |||||||||
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | 16,386 | (14,681) | |||||||||
| Increase (decrease) in payables for securities purchased | 478,914 | (17,003) | |||||||||
| Purchases of securities | (6,718,145) | (3,030,232) | |||||||||
| Proceeds from maturities and sales of securities | 4,162,323 | 2,150,565 | |||||||||
| Net cash used in operating activities | (1,619,233) | (775,656) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of U.S. Treasury and other securities | (16,322) | (35,731) | |||||||||
| Proceeds from maturities and sales of U.S. Treasury and other securities | 19,499 | 35,631 | |||||||||
| Corporate investments in funds and companies | (166,865) | (196,949) | |||||||||
| Distributions and proceeds from corporate investments in funds and companies | 325,897 | 229,543 | |||||||||
| Purchases of fixed assets | (263) | (315) | |||||||||
| Net cash provided by investing activities | 161,946 | 32,179 | |||||||||
(continued)
Please see accompanying notes to condensed consolidated financial statements.
5
Oaktree Capital Group, LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) — (Continued)
(in thousands)
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Capital contributions, net | $ | 109,393 | $ | 56,023 | |||||||
| Distributions to Class A unitholders | (381,382) | (69,797) | |||||||||
| Distributions to OCGH unitholders | (234,966) | (43,678) | |||||||||
| Distributions to preferred unitholders | (20,487) | (20,487) | |||||||||
| Cash flows from financing activities of consolidated funds: | |||||||||||
| Contributions from non-controlling interests | 766,103 | 863,893 | |||||||||
| Distributions to non-controlling interests | (126,832) | (217,851) | |||||||||
| Proceeds from debt obligations issued by CLOs | 3,046,821 | 1,030,422 | |||||||||
| Payment of debt issuance costs | (1,827) | (2,780) | |||||||||
| Repayment on debt obligations issued by CLOs | (2,162,786) | (559,694) | |||||||||
| Borrowings on credit facilities | 658,789 | 75,380 | |||||||||
| Repayments on credit facilities | — | (48,490) | |||||||||
| Net cash provided by financing activities | 1,652,826 | 1,062,941 | |||||||||
| Effect of exchange rate changes on cash | (9,563) | (8,799) | |||||||||
| Net increase in cash and cash-equivalents | 185,976 | 310,665 | |||||||||
| Initial consolidation (deconsolidation) of funds | (216,459) | (101,148) | |||||||||
| Cash and cash-equivalents, beginning balance | 1,200,341 | 841,793 | |||||||||
| Cash and cash-equivalents, ending balance | $ | 1,169,858 | $ | 1,051,310 | |||||||
| Reconciliation of cash and cash-equivalents | |||||||||||
| Cash and cash-equivalents – Oaktree | $ | 217,889 | $ | 204,522 | |||||||
| Cash and cash-equivalents – consolidated funds | 951,969 | 846,788 | |||||||||
| Total cash and cash-equivalents | $ | 1,169,858 | $ | 1,051,310 | |||||||
Please see accompanying notes to condensed consolidated financial statements.
6
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, 2021 | 99,137 | 60,835 | $ | 173,669 | $ | 226,915 | $ | 871,126 | $ | 163,579 | $ | (16,200) | $ | 554,363 | $ | 1,973,452 | |||||||||||||||||||||||||||||||||||||
| Activity for the three months ended: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of units associated with forfeitures | — | (1) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Capital contributions | — | — | — | — | 75,000 | — | — | — | 75,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Equity reallocation between controlling and non-controlling interests | — | — | — | — | 2,205 | — | — | (2,685) | (480) | ||||||||||||||||||||||||||||||||||||||||||||
| Capital increase related to equity-based compensation | — | — | — | — | 1,179 | — | — | 724 | 1,903 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared | — | — | (2,981) | (3,848) | — | (51,045) | — | (31,322) | (89,196) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 2,981 | 3,848 | — | 90,208 | — | 46,204 | 143,241 | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | 5,333 | 3,273 | 8,606 | ||||||||||||||||||||||||||||||||||||||||||||
| Unitholders’ capital as of September 30, 2021 | 99,137 | 60,834 | $ | 173,669 | $ | 226,915 | $ | 949,510 | $ | 202,742 | $ | (10,867) | $ | 570,557 | $ | 2,112,526 | |||||||||||||||||||||||||||||||||||||
| 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 December 31, 2020 | 98,677 | 61,371 | $ | 173,669 | $ | 226,915 | $ | 819,963 | $ | 119,920 | $ | (5,414) | $ | 544,935 | $ | 1,879,988 | |||||||||||||||||||||||||||||||||||||
| Activity for the nine months ended: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net issuance of units | — | 4 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Unit exchange | 460 | (460) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of units associated with forfeitures | — | (81) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Capital contributions | — | — | — | — | 121,015 | — | — | 5,226 | 126,241 | ||||||||||||||||||||||||||||||||||||||||||||
| Equity reallocation between controlling and non-controlling interests | — | — | — | — | 3,667 | — | — | (6,774) | (3,107) | ||||||||||||||||||||||||||||||||||||||||||||
| Capital increase related to equity-based compensation | — | — | — | — | 4,865 | — | — | 3,003 | 7,868 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared | — | — | (8,943) | (11,544) | — | (388,188) | — | (239,143) | (647,818) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 8,943 | 11,544 | — | 471,010 | — | 265,590 | 757,087 | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | (5,453) | (2,280) | (7,733) | ||||||||||||||||||||||||||||||||||||||||||||
| Unitholders’ capital as of September 30, 2021 | 99,137 | 60,834 | $ | 173,669 | $ | 226,915 | $ | 949,510 | $ | 202,742 | $ | (10,867) | $ | 570,557 | $ | 2,112,526 | |||||||||||||||||||||||||||||||||||||
Please see accompanying notes to condensed consolidated financial statements.
7
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 Deficit) | 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 | — | — | — | — | 1,829 | — | — | (3,124) | (1,295) | ||||||||||||||||||||||||||||||||||||||||||||
| Capital increase related to equity-based compensation | — | — | — | — | 8,059 | — | — | 5,037 | 13,096 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared | — | — | (8,943) | (11,544) | — | (69,797) | — | (43,678) | (133,962) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | 8,943 | 11,544 | — | (20,784) | — | (13,306) | (13,603) | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | (6,678) | (4,138) | (10,816) | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||
Please see accompanying notes to condensed consolidated financial statements.
8
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2021
($ in thousands, except where noted)
1. ORGANIZATION AND BASIS OF PRESENTATION
As used in these condensed consolidated financial statements:
“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; and
the “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.
Oaktree is a leader among global investment managers specializing in alternative investments. Oaktree emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in credit, private equity, real assets and listed equities. Funds managed by Oaktree (the “Oaktree funds”) include commingled funds, separate accounts, collateralized loan obligation vehicles (“CLOs”) and business development companies (“BDCs”). Commingled funds include open-end and closed-end limited partnerships in which Oaktree makes an investment and for which it serves as the general partner. CLOs are structured finance vehicles in which Oaktree typically makes an investment and for which it serves as collateral manager.
Oaktree Capital Group, LLC is a Delaware limited liability company that was formed on April 13, 2007. Prior to the Mergers described below, the Company was owned by (i) its public Class A common unitholders, (ii) its public Series A and Series B preferred unitholders and (iii) Oaktree Capital Group Holdings, L.P. (“OCGH”) who held 100% of the Company’s Class B common units which did not represent an economic interest in the Company. OCGH is owned by Oaktree’s senior executives, current and former employees, and certain other investors (collectively, the “OCGH unitholders”). The Class A units held by the public unitholders were entitled to 1 vote per unit and the Class B units held by OCGH were entitled to 10 votes per unit. The number of Class B units held by OCGH increased or decreased in response to corresponding changes in OCGH’s economic interest in the Oaktree Operating Group; consequently, the OCGH unitholders’ economic interest in the Oaktree Operating Group is reflected within non-controlling interests in consolidated subsidiaries in the accompanying condensed consolidated financial statements.
Subsequent to the Mergers, (i) all of the Company’s Class A units, which are no longer publicly traded, are held by an affiliate of Brookfield Asset Management, Inc. (“Brookfield”), (ii) the Company’s public preferred unitholders continue to hold the Series A and Series B preferred units listed on the NYSE and (iii) OCGH continues to hold all of the Company’s Class B units. Subject to the operating agreement of the Company, to the extent the approval of any matter requires the vote of the Company’s unitholders, the Class A units continue to be entitled to 1 vote per unit and the Class B units continue to be entitled to 10 votes per unit, voting together as a single class.
Additionally, prior to the Restructuring as described below, the Company’s operations were conducted through a group of 6 operating entities collectively referred to as the “Oaktree Operating Group,” and the Company had an indirect economic interest in each of the members of the Oaktree Operating Group. However, after the Restructuring, the Company has an indirect economic interest in only 2 of the 6 Oaktree Operating Group members. OCGH has a direct economic interest in all 6 of the Oaktree Operating Group members. The interests in the Oaktree Operating Group are referred to as the “Oaktree Operating Group units.” An Oaktree Operating Group unit is not a separate legal interest but represents 1 limited partnership interest in each of the Oaktree Operating Group entities.
As of October 1, 2019, Oaktree Capital Management, L.P. (“OCM”), a former indirect subsidiary of the Company, provides certain administrative and other services relating to the operations of the Company’s business pursuant to a Services Agreement between the Company and OCM (as amended from time to time, the “Services Agreement”).
9
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Brookfield Merger
On March 13, 2019, Oaktree, Brookfield, Berlin Merger Sub, LLC, a Delaware limited liability company (“Merger Sub”) and a wholly-owned subsidiary of Brookfield, Oslo Holdings LLC, a Delaware limited liability company (“SellerCo”) and a wholly-owned subsidiary of OCGH, and Oslo Holdings Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of Oaktree (“Seller MergerCo”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms and conditions set forth in the Merger Agreement, on September 30, 2019, (i) Merger Sub merged with and into Oaktree (the “Merger”), with Oaktree continuing as the surviving entity, and (ii) immediately following the Merger, SellerCo merged with and into Seller MergerCo (the “Subsequent Merger” and together with the Merger, the “Mergers”), with Seller MergerCo continuing as the surviving entity.
Upon the completion of the Mergers on September 30, 2019, Brookfield acquired 61.2% of Oaktree’s business in a stock and cash transaction. The remaining 38.8% of the business continued to be owned by OCGH, whose unitholders consist primarily of Oaktree’s founders and certain other members of management and current and former employees. As part of the Merger, Brookfield acquired all outstanding vested OCG Class A units for, at the election of OCG Class A unitholders, either $49.00 in cash or 1.0770 Class A shares of Brookfield per OCG Class A unit (subject to pro-ration to ensure that no more than fifty percent (50%) of the aggregate merger consideration is paid in the form of cash or stock), in each case, without interest and subject to any applicable withholding taxes. In addition, as part of the Subsequent Merger the founders, senior management, and current and former employee-unitholders of OCGH sold 20% of their OCGH units to Brookfield for the same consideration as the OCG Class A unitholders received in the merger.
The aggregate amount of cash payable to Class A unitholders and OCGH unitholders in the transaction was approximately $2.4 billion and approximately 52.8 million Brookfield Class A shares were issued in the Mergers. In connection with the closing of the Merger, Oaktree Class A units were delisted from the New York Stock Exchange.
Upon completion of the Merger, each unvested Class A Unit held by current, or in certain cases former, employees, officers and directors of Oaktree and its subsidiaries was converted into 1 unvested OCGH Unit (each, a “Converted OCGH Unit”) and became subject to the terms and conditions of the OCGH limited partnership agreement. The Converted OCGH Units will (i) be subject to the same vesting terms that were applicable to such units prior to the completion of the Merger, (ii) be entitled to receive ongoing distributions in respect of earnings, but not capital distributions and (iii) upon vesting, receive the accumulated value of capital distributions that accrued while such units were unvested. Please see note 13 for more information.
Restructuring Transaction
On the closing date of the Mergers, the Company and certain other entities entered into a Restructuring Agreement (the “Restructuring”) pursuant to which the Company’s direct and indirect ownership of general partner and limited partner interests in certain Oaktree Operating Group entities were transferred to newly-formed, indirect subsidiaries of Brookfield as of October 1, 2019. As a result, on October 1, 2019, 4 of the 6 Oaktree Operating Group entities were no longer indirect subsidiaries of the Company. Accordingly, subsequent to that date, the Company’s condensed consolidated financial statements reflect its indirect economic interest in only 2 of the Oaktree Operating Group entities: (i) Oaktree Capital I, L.P. (“Oaktree Capital I”), which acts as or controls the general partner of certain Oaktree funds and which holds a majority of Oaktree’s investments in its funds and (ii) Oaktree Capital Management (Cayman), L.P. (“OCM Cayman”), which represents Oaktree’s non-U.S. fee business. As of October 1, 2019, the Company’s condensed consolidated financial statements no longer reflect any economic interests in the remaining 4 Oaktree Operating Group entities: (i) Oaktree Capital II, L.P. (“Oaktree Capital II”), which acts as or controls the general partner of certain Oaktree funds and which includes Oaktree’s investments in certain funds and other businesses, including Oaktree’s investment in DoubleLine Capital, L.P., (ii) OCM, an entity that serves as the U.S. registered investment adviser to most of the Oaktree funds, (iii) Oaktree Investment Holdings, L.P. (“Oaktree Investment Holdings”), which holds certain corporate investments in other entities and (iv) Oaktree AIF Investments, L.P. (“Oaktree AIF”), which primarily holds interests in certain Oaktree fund investments for regulatory and structuring purposes. As a consequence, the assets of Oaktree Capital II, OCM, Oaktree Investment Holdings and Oaktree AIF will no longer directly support the Company’s operations.
10
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
As a result of the Restructuring of the Company’s business, references to “Oaktree” in these financial statements will generally refer to the collective business of the Oaktree Operating Group, of which the Company is a component.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) such that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The condensed consolidated financial statements include the accounts of the Company, its wholly-owned or majority-owned subsidiaries and entities in which the Company is deemed to have a direct or indirect controlling financial interest based on either a variable interest model or voting interest model. Certain of the Oaktree funds consolidated by the Company are investment companies that follow a specialized basis of accounting established by GAAP. All intercompany transactions and balances have been eliminated in consolidation.
The Restructuring was a transfer of assets among entities under common control, since both the transferring and receiving entities are under control of OCGH. Accordingly, the assets and liabilities were removed at book value and the transfer did not result in a gain or loss to the Company. The deconsolidation of the Oaktree Operating Group entities whose interests were transferred in the Restructuring was accounted for prospectively and did not require a recast of the Company's historical financial information. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2021.
Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of income and expenses during the period then ended. Actual results could differ from these estimates.
11
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies of the Company
Consolidation
The Company consolidates entities in which it has a direct or indirect controlling financial interest based on either a variable interest model or voting interest model. A limited partnership or similar entity is a variable interest entity (“VIE”) if the unaffiliated limited partners do not have substantive kick-out or participating rights. Most of the Oaktree funds are VIEs because they have not granted unaffiliated limited partners substantive kick-out or participating rights. The Company consolidates those VIEs in which it is the primary beneficiary. An entity is deemed to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation guidance requires an analysis to determine (a) whether an entity in which the Company holds a variable interest is a VIE and (b) whether the Company’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance-based fees), would give it a controlling financial interest. A decision maker’s fee arrangement is not considered a variable interest if (a) it is compensation for services provided, commensurate with the level of effort required to provide those services, and part of a compensation arrangement that includes only terms, conditions or amounts that are customarily present in arrangements for similar services negotiated at arm’s length (“at-market”), and (b) the decision maker does not hold any other variable interests that absorb more than an insignificant amount of the potential VIE’s expected residual returns.
The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Company, affiliates of the Company or third parties) or amendments to the governing documents of the respective Oaktree funds could affect an entity’s status as a VIE or the determination of the primary beneficiary. The Company does not consolidate most of the Oaktree funds because it is not the primary beneficiary of those funds due to the fact that its fee arrangements are considered at-market and thus not deemed to be variable interests, and it does not hold any other interests in those funds that are considered to be more than insignificant. Please see note 4 for more information regarding both consolidated and unconsolidated VIEs. For entities that are not VIEs, consolidation is evaluated through a majority voting interest model.
“Consolidated funds” refers to Oaktree-managed funds and CLOs that the Company is required to consolidate. When funds or CLOs are consolidated, the Company reflects the assets, liabilities, revenues, expenses and cash flows of the funds or CLOs on a gross basis, and the majority of the economic interests in those funds or CLOs, which are held by third-party investors, are reflected as non-controlling interests in consolidated funds or debt obligations of CLOs in the condensed consolidated financial statements. All of the revenues earned by the Company as investment manager of the consolidated funds are eliminated in consolidation. However, because the eliminated amounts are earned from and funded by third-party investors, the consolidation of a fund does not impact net income or loss attributable to the Company.
Certain entities in which the Company has the ability to exert significant influence, including unconsolidated Oaktree funds for which the Company acts as general partner, are accounted for under the equity method of accounting.
Non-controlling Redeemable Interests in Consolidated Funds
The Company records non-controlling interests to reflect the economic interests of the unaffiliated limited partners in Oaktree-managed funds and the class A ordinary shareholders in Oaktree sponsored SPACs. These interests are presented as non-controlling redeemable interests in consolidated funds within the condensed
12
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
consolidated statements of financial condition, outside of the permanent capital section. Limited partners in open-end and evergreen funds generally have the right to withdraw their capital, subject to the terms of the respective limited partnership agreements, over periods ranging from one month to three years. While limited partners in consolidated closed-end funds generally have not been granted redemption rights, these limited partners do have withdrawal or redemption rights in certain limited circumstances that are beyond the control of the Company, such as instances in which retaining the limited partnership interest could cause the limited partner to violate a law, regulation or rule. For Oaktree sponsored SPACs, the class A ordinary shareholders have redemption rights that are considered to be outside of the Company’s control. These shares are presented as non-controlling redeemable interests on the Company’s condensed consolidated statements of financial condition.
The allocation of net income or loss to non-controlling redeemable interests in consolidated funds and Oaktree sponsored SPACs is based on the relative ownership interests of the unaffiliated limited partners after the consideration of contractual arrangements that govern allocations of income or loss. At the consolidated level, potential incentives are allocated to non-controlling redeemable interests in consolidated funds until such incentives become allocable to the Company under the substantive contractual terms of the limited partnership agreements of the funds.
Non-controlling Interests in Consolidated Funds
Non-controlling interests in consolidated funds represent the equity interests held by third-party investors in CLOs that had not yet priced as of the respective period end. All non-controlling interests in those CLOs are attributed a share of income or loss arising from the respective CLO based on the relative ownership interests of third-party investors after consideration of contractual arrangements that govern allocations of income or loss. Investors in those CLOs are generally unable to redeem their interests until the respective CLO liquidates, is called or otherwise terminates.
Non-controlling Interests in Consolidated Subsidiaries
Non-controlling interests in consolidated subsidiaries reflect the portion of unitholders’ capital attributable to OCGH unitholders (“OCGH non-controlling interest”) and third parties. All non-controlling interests in consolidated subsidiaries are attributed a share of income or loss in the respective consolidated subsidiary based on the relative economic interests of the OCGH unitholders or third parties after consideration of contractual arrangements that govern allocations of income or loss. Please see note 11 for more information.
Fair Value of Financial Instruments
GAAP establishes a hierarchical disclosure framework that prioritizes the inputs used in measuring financial instruments at fair value into three levels based on their market observability. Market price observability is affected by a number of factors, such as the type of instrument and the characteristics specific to the instrument. Financial instruments with readily available quoted prices from an active market or for which fair value can be measured based on actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.
Financial assets and liabilities measured and reported at fair value are classified as follows:
•Level I – Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement. The types of investments in Level I include exchange-traded equities, debt and derivatives with quoted prices.
•Level II – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are directly or indirectly observable. Level II inputs include interest rates, yield curves, volatilities, prepayment risks, loss severities, credit risks and default rates. The types of investments in Level II generally include corporate bonds and loans, government and agency securities, less liquid and restricted equity investments, over-the-counter traded derivatives, debt obligations of consolidated CLOs, and other investments where the fair value is based on observable inputs.
13
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
•Level III – Valuations for which one or more significant inputs are unobservable. These inputs reflect the Company’s assessment of the assumptions that market participants use to value the investment based on the best available information. Level III inputs include prices of quoted securities in markets for which there are few transactions, less public information exists or prices vary among brokered market makers. The types of investments in Level III include non-publicly traded equity, debt, real estate and derivatives.
In some instances, the inputs used to value an instrument may fall into multiple levels of the fair-value hierarchy. In such instances, the instrument’s level within the fair-value hierarchy is based on the lowest of the three levels (with Level III being the lowest) that is significant to the fair-value measurement. The Company’s assessment of the significance of an input requires judgment and considers factors specific to the instrument. Transfers of assets into or out of each fair value hierarchy level as a result of changes in the observability of the inputs used in measuring fair value are accounted for as of the beginning of the reporting period. Transfers resulting from a specific event, such as a reorganization or restructuring, are accounted for as of the date of the event that caused the transfer.
In the absence of observable market prices, the Company values Level III investments inclusive of the Company’s investments in unconsolidated Oaktree funds using valuation methodologies applied on a consistent basis. The quarterly valuation process for Level III investments begins with each portfolio company, property or security being valued by the investment and/or valuation teams. With the exception of open-end funds, all unquoted Level III investment values are reviewed and approved by (i) the Company’s valuation officer, who is independent of the investment teams, (ii) a designated investment professional of each strategy and (iii) for a substantial majority of unquoted Level III holdings as measured by market value, a valuation committee of the respective strategy. For open-end funds, unquoted Level III investment values are reviewed and approved by the Company’s valuation officer. For certain investments, the valuation process also includes a review by independent valuation parties, at least annually, to determine whether the fair values determined by management are reasonable. Results of the valuation process are evaluated each quarter, including an assessment of whether the underlying calculations should be adjusted or recalibrated. In connection with this process, the Company periodically evaluates changes in fair-value measurements for reasonableness, considering items such as industry trends, general economic and market conditions, and factors specific to the investment.
Certain assets are valued using prices obtained from pricing vendors or brokers. The Company seeks to obtain prices from at least two pricing vendors for the subject or similar securities. In cases where vendor pricing is not reflective of fair value, a secondary vendor is unavailable, or no vendor pricing is available, a comparison value made up of quotes for the subject or similar securities received from broker dealers may be used. These investments may be classified as Level III because the quoted prices may be indicative in nature for securities that
are in an inactive market, may be for similar securities, or may require adjustment for investment-specific factors or restrictions. The Company evaluates the prices obtained from brokers or pricing vendors based on available market information, including trading activity of the subject or similar securities, or by performing a comparable security analysis to ensure that fair values are reasonably estimated. The Company also performs back-testing of valuation information obtained from pricing vendors and brokers against actual prices received in transactions. In addition to ongoing monitoring and back-testing, the Company performs due diligence procedures surrounding pricing vendors to understand their methodology and controls to support their use in the valuation process.
Fair Value Option
The Company has elected the fair value option for certain corporate investments that otherwise would not have reflected unrealized gains and losses in current-period earnings. Such election is irrevocable and is applied on an investment-by-investment basis at initial recognition. Unrealized gains and losses resulting from changes in fair value are reflected as a component of investment income in the condensed consolidated statements of operations. The Company’s accounting for these investments is similar to its accounting for investments held by the consolidated funds at fair value and the valuation methods are consistent with those used to determine the fair value of the consolidated funds’ investments.
The Company has elected the fair value option for the financial assets and financial liabilities of its consolidated CLOs. The assets and liabilities of CLOs are primarily reflected within the investments, at fair value and within the debt obligations of CLOs line items in the condensed consolidated statements of financial condition.
14
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
The Company’s accounting for CLO assets is similar to its accounting for its funds with respect to both carrying investments held by CLOs at fair value and the valuation methods used to determine the fair value of those investments. The fair value of CLO liabilities are measured as the fair value of CLO assets less the sum of (a) the fair value of any beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services. Realized gains or losses and changes in the fair value of CLO assets, respectively, are included in net realized gain on consolidated funds’ investments and net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations. Interest income of CLOs is included in interest and dividend income, and interest expense and other expenses, respectively, are included in interest expense and consolidated fund expenses in the condensed consolidated statements of operations. Changes in the fair value of a CLO’s financial liabilities in accordance with the CLO measurement guidance are included in net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations. Please see notes 6 and 8 for more information.
Foreign Currency
The assets and liabilities of the Company’s foreign subsidiaries with non-U.S. dollar functional currencies are translated at exchange rates prevailing at the end of each reporting period. The results of foreign operations are translated at the weighted average exchange rate for each reporting period. Translation adjustments are included in other comprehensive income (loss) within the condensed consolidated statements of financial condition until realized. Gains and losses resulting from foreign-currency transactions are included in general and administrative expense.
Derivatives and Hedging
A derivative is a financial instrument whose value is derived from an underlying financial instrument or index, such as interest rates, equity securities, currencies, commodities or credit spreads. Derivatives include futures, forwards, swaps or option contracts, and other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest-rate swaps, foreign-currency forwards or cross-currency swaps).
The Company enters into derivatives as part of its overall risk management strategy or to facilitate its investment management activities. The Company manages its exposure to interest rate and foreign exchange market risks, when deemed appropriate, through the use of derivatives, including foreign currency forward and option contracts, interest-rate and cross currency swaps with financial counterparties. Risks associated with fluctuations in interest rates and foreign-currency exchange rates in the normal course of business are addressed as part of the Company’s overall risk management strategy that may result in the use of derivatives to economically hedge or reduce these exposures. From time to time, the Company may enter into (a) foreign-currency option and forward contracts to reduce earnings and cash-flow volatility associated with changes in foreign-currency exchange rates, and (b) interest-rate swaps to manage all or a portion of the interest-rate risk associated with its variable-rate borrowings. As a result of the use of these or other derivative contracts, the Company is exposed to the risk that counterparties will fail to fulfill their contractual obligations. The Company attempts to mitigate this counterparty risk by entering into derivative contracts only with major financial institutions that have investment-grade credit ratings. Counterparty credit risk is evaluated in determining the fair value of derivatives.
The Company recognizes all derivatives as assets or liabilities in its condensed consolidated statements of financial condition at fair value. In connection with its derivative activities, the Company generally enters into agreements subject to enforceable master netting arrangements that allow the Company to offset derivative assets and liabilities in the same currency by specific derivative type or, in the event of default by the counterparty, to offset derivative assets and liabilities with the same counterparty. While these derivatives are eligible to be offset in accordance with applicable accounting guidance, the Company has elected to present derivative assets and liabilities based on gross fair value in its condensed consolidated statements of financial condition.
15
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
When the Company enters into a derivative contract, it may or may not elect to designate the derivative as a hedging instrument and apply hedge accounting as part of its overall risk management strategy. In other situations, when a derivative does not qualify for hedge accounting or when the derivative and the hedged item are both recorded in current-period earnings and thus deemed to be economic hedges, hedge accounting is not applied. Freestanding derivatives are financial instruments that we enter into as part of our overall risk management strategy but do not utilize hedge accounting. These financial instruments may include foreign-currency exchange contracts, interest-rate swaps and other derivative contracts.
Derivatives that are designated as hedging instruments are classified as either a hedge of (a) a recognized asset or liability (“fair-value hedge”), (b) a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash-flow hedge”), or (c) a net investment in a foreign operation. For a fair-value hedge, the Company records changes in the fair value of the derivative and, to the extent that it is highly effective, changes in the fair value of the hedged asset or liability attributable to the hedged risk in current-period earnings in the same caption in the condensed consolidated statements of operations as the hedged item. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a cash-flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income (loss) until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is recorded in current-period earnings. Changes in the fair value of derivatives designated as hedging instruments that are caused by factors other than changes in the risk being hedged are excluded from the assessment of hedge effectiveness and recognized in current-period earnings. For freestanding derivatives, changes in fair value are recorded in current-period earnings.
The Company formally documents at inception the hedge relationship, including identification of the hedging instrument and the hedged item, as well as the risk management objectives, the strategy for undertaking the hedge transaction, and the evaluation of effectiveness of the hedged transaction. On a quarterly basis, the Company formally assesses whether the derivative it designated in each hedging relationship has been and is expected to remain highly effective in offsetting changes in the estimated fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued and the balance remaining in other comprehensive income (loss) is released to earnings.
Cash and Cash-equivalents
Cash and cash-equivalents include demand deposit accounts, money market funds, and other short-term investments with maturities of three months or less at the date of acquisition.
U.S. Treasury and Other Securities
U.S. Treasury and other securities include holdings of U.S. Treasury bills, notes, and bonds, time deposit securities, and commercial paper with maturities greater than three months at the date of acquisition. These securities are classified as available-for-sale and are recorded at fair value with changes in fair value included in other comprehensive income (loss). Changes in fair value were not material for all years presented.
Other securities include investment grade debt securities with maturities greater than three months from the date of acquisition that are issued or guaranteed by U.S. government-sponsored entities, sovereign debt, domestic and international corporate fixed and floating rate debt, and structured credit. These securities are classified as trading and are recorded at fair value with changes in fair value included in investment income.
Corporate Investments
Corporate investments may consist of investments in funds, companies in which the Company does not have a controlling financial interest, and non-investment grade debt securities. Investments for which the Company is deemed to exert significant influence are accounted for under the equity method of accounting and reflect Oaktree’s ownership interest in each fund or company. In the case of investments for which the Company is not deemed to exert significant influence or control, the fair value option of accounting has been elected. Investment income represents the Company’s pro-rata share of income or loss from these funds or companies, or the change in fair value of the investment, as applicable. Oaktree’s general partnership interests are substantially illiquid. While investments in funds reflect each respective fund’s holdings at fair value, equity-method investments in companies
16
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
are not adjusted to reflect the fair value of the underlying company. The fair value of the underlying investments in Oaktree funds is based on the Company’s assessment, which takes into account expected cash flows, earnings multiples and/or comparisons to similar market transactions, among other factors. Valuation adjustments reflecting consideration of credit quality, concentration risk, sales restrictions and other liquidity factors are integral to valuing these instruments.
Non-investment grade debt securities include domestic and international corporate fixed and floating rating debt and structured credit investments. These securities are classified as trading and are recorded at fair value with changes in fair value included in investment income.
Revenue Recognition
The Company earns management fees and incentive income from the investment advisory services it provides to its customers. Revenue is recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. The Company typically enters into contracts with investment funds to provide investment management and administrative services. These services are generally capable of being distinct and each is accounted for as separate performance obligations comprised of distinct service periods because the services are performed over time. The Company determined that for accounting purposes, based on certain facts and circumstances specific to each investment fund structure, that either the investment fund or individual investors may be considered the customer with respect to commingled funds, while the individual investors are the customers with respect to separate account and fund-of-one vehicles. The Company receives management fees and/or incentive income with respect to its investment management services, and it is reimbursed by the funds for expenses incurred or paid on behalf of the funds with respect to its investment advisory services and its administrative services. The Company evaluates whether it is the principal (i.e., report as management fees on a gross basis) or agent (i.e., report as management fees on a net basis) with respect to each performance obligation and associated reimbursement arrangements. The Company has elected to apply the variable consideration exemption for its fee arrangements with its customers. Please see note 3 for more information on revenues.
Management Fees
Management fees are recognized over the period in which the investment management services are performed because customers simultaneously consume and receive benefits that are satisfied over time. The contractual terms of management fees generally vary by fund structure. For closed-end funds, the management fee rate is applied against committed capital, drawn capital or cost basis during the fund’s investment period and the lesser of total funded capital or cost basis of assets in the liquidation period. For closed-end funds that pay management fees based on committed capital, the Company may elect to delay the start of the fund’s investment period and thus its full management fees, in which case it earns management fees based on drawn capital, and in certain cases outstanding borrowings under a fund-level credit facility made in lieu of drawing capital, until the Company elects to start the fund’s investment period. The Company’s right to receive management fees typically ends after 10 or 11 years from either the initial closing date or the start of the investment period, even if assets remain in the fund. In the case of CLOs, the management fee is based on the aggregate par value of collateral assets and principal cash, as defined in the applicable CLO indentures, and a portion of the management fees is dependent on the sufficiency of the particular vehicle’s cash flow. For open-end and evergreen funds, the management fee is generally based on the NAV of the fund. For the BDCs, the management fee is based on gross assets (including assets acquired with leverage), net of cash. In the case of certain open-end fund accounts, the Company has the potential to earn performance-based fees, typically in reference to a relevant benchmark index or hurdle rate, which are classified as management fees. The Company also earns quarterly incentive fees on the investment income from certain evergreen funds, such as the BDCs and other fund accounts, which are generally recurring in nature and reflected as management fees.
The ultimate amount of management fees that will be earned over the life of the contract is subject to a large number and broad range of possible outcomes due to market volatility and other factors outside of the Company’s control. As a result, the amount of revenue earned in any given period is generally determined at the end of each reporting period and relates to services performed during that period. Included in this amount is a gross-up for reimbursable costs incurred on behalf of the Oaktree funds in which the Company has determined it is
17
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
the principal within the principal and agent relationship of the related fund. Such reimbursable costs are presented in compensation and benefits and general and administrative expenses.
Subsequent to the Restructuring, our management fees consist primarily of fees earned from funds managed by OCM Cayman and sub-advisory fees for services provided to OCM. Our revenue recognition for sub-advisory fees is substantially similar to revenue recognition for management fees.
Incentive Income
Incentive income generally represents 20% of each closed-end fund’s profits, subject to the return of contributed capital and a preferred return of typically 8% per annum, and up to 20% of certain evergreen fund’s annual profits, subject to high-water marks or hurdle rates. Incentive income is recognized when it is probable that a significant reversal will not occur. Revenue recognition is typically met (a) for closed-end funds, only after all contributed capital and the preferred return on that capital have been distributed to the fund’s investors, and (b) for certain evergreen funds, at the conclusion of each annual measurement period. Potential incentive income is highly susceptible to market volatility, the judgment and actions of third parties, and other factors outside of the Company’s control. The Company’s experience has demonstrated little predictive value in the amount of potential incentive income ultimately earned due to the highly uncertain nature of returns inherent in the markets and contingencies associated with many realization events. As a result, the amount of incentive income recognized in any given period is generally determined after giving consideration to a number of factors, including whether the fund is in its investment or liquidation period, and the nature and level of risk associated with changes in fair value of the remaining assets in the fund. In general, it would be unlikely that any amount of potential incentive income would be recognized until (a) the uncertainty is resolved or (b) the fund is near final liquidation, assets are under contract for sale or are at low risk of significant fluctuation in fair value, and the assets are significantly in excess of the threshold at which incentive income would be earned.
Incentives received by the Company before the revenue recognition criteria have been met are deferred and recorded as a deferred incentive income liability within accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition. The Company may receive tax distributions related to taxable income allocated by funds, which are treated as an advance of incentive income and subject to the same recognition criteria. Tax distributions are contractually not subject to clawback.
The Company may earn incentive income upon deconsolidation of a SPAC arising from the completion of a merger with an identified target. Upon deconsolidation, the Company will derecognize the net assets of the entity and record any gain or loss related to the remeasurement of its investments to fair value as incentive income in its condensed consolidated statements of operations. Subsequent fair value changes in the Company’s investments held in the entity will be recorded in investment income in its condensed consolidated statements of operations. For the nine months ended September 30, 2021, the Company recorded $72.3 million of incentive income related to the deconsolidation of a SPAC.
Total Compensation and Benefits
Compensation and Benefits
Compensation and benefits expense reflects all compensation-related items not directly related to incentive income, investment income or equity-based compensation, and includes salaries, bonuses, compensation based on management fees or a definition of profits, employee benefits, payroll taxes and phantom equity awards. Bonuses are generally accrued over the related service period. Phantom equity awards represent liability-classified awards subject to vesting and remeasurement at the end of each reporting period. Prior to the Merger, the remeasurement was based on changes in the Company’s Class A unit trading price. After the Merger, the remeasurement is based on changes in the value of Converted OCGH Units or other OCGH units, as applicable. Subsequent to the Restructuring, our consolidated operating results include compensation and benefits expense primarily related to employees of OCM Cayman.
18
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Equity-based Compensation
Equity-based compensation expense reflects the non-cash charge associated with grants of OCGH units, deferred equity units and other performance-based units, and is calculated based on the grant-date fair value of the unit award. A contemporaneous valuation report is utilized in determining fair value at the date of grant for OCGH unit awards. OCGH unit grants are valued based on a formula as described in note 13 under “Restated Exchange Agreement—Valuation” and reflect a discount for lack of marketability due to the post-vesting restrictions described in note 13. Factors that influence the formula-based valuation include the estimated time it would take for an OCGH unitholder to exchange units for value pursuant to the Restated Exchange Agreement and estimates of the Company’s future results, which are inputs to the valuation formula. Each of these factors is subject to significant judgment.
Equity-based awards that do not require future service (i.e., awards vested at grant) are expensed immediately. Equity-based awards that require future service are expensed on a straight-line basis over the requisite service period. Cash-settled equity-based awards are classified as liabilities and are remeasured at the end of each reporting period.
With respect to forfeitures, the Company made an accounting policy election to account for forfeitures when they occur. Accordingly, no forfeitures have been assumed in the calculation of compensation expense.
Incentive Income Compensation
Incentive income compensation expense primarily reflects compensation directly related to incentive income, which generally consists of percentage interests (sometimes referred to as “points” or an allocation of shares received upon the completion of a successful SPAC merger) that the Company grants to its investment professionals associated with the particular fund or SPAC that generated the incentive income, and secondarily, compensation directly related to investment income. The Company has an obligation to pay a fixed percentage of the incentive income earned from a particular fund or SPAC, including income from consolidated funds that is eliminated in consolidation, to specified investment professionals responsible for the management of the fund or SPAC. Amounts payable pursuant to these arrangements are recorded as compensation expense when they have become probable and reasonably estimable. The Company’s determination of the point at which it becomes probable and reasonably estimable that incentive income compensation expense should be recorded is based on its assessment of numerous factors, particularly those related to the profitability, realizations, distribution status, investment profile and commitments or contingencies of the individual funds that may give rise to incentive income or the completion of a merger by an Oaktree sponsored SPAC. Incentive income compensation is generally expensed in the period in which the underlying income is recognized. Payment of incentive income compensation generally occurs in the same period the related income is received or in the next period. Participation in incentive income generated by the funds or SPACs is subject to forfeiture upon departure and to vesting provisions (generally over a period of five years), in each case, under certain circumstances set forth in the applicable governing documents. These provisions are generally only applicable to incentive income compensation that has not yet been recognized as an expense by the Company or paid to the participant.
Depreciation and Amortization
Depreciation and amortization expense includes costs associated with the purchase of furniture and equipment and office leasehold improvements. Furniture and equipment are depreciated using the straight-line method over the estimated useful life of the asset, generally three to five years beginning in the first full month after the asset is placed in service. Leasehold improvements are amortized using the straight-line method over the shorter of the respective estimated useful life or the lease term.
Other Income (Expense), Net
Other income (expense), net represents non-operating income or expense items.
19
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Income Taxes
The Company is a publicly traded partnership. Because it satisfies the qualifying income test, it is not required to be treated as a corporation for U.S. federal and state income tax purposes; rather it is taxed as a partnership. The Company currently holds interests in Oaktree Capital I, L.P. (a non-corporate entity that is not subject to U.S. federal corporate income tax) and Oaktree Capital Management (Cayman), L.P. (which holds subsidiaries that are taxable in non-U.S. jurisdictions).
Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amount of assets and liabilities and their respective tax bases, using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets would be reduced by a valuation allowance if it becomes more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company analyzes its tax filing positions for all open tax years in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns. If the Company determines that uncertainties in tax positions exist, a reserve is established. The Company recognizes accrued interest and penalties related to uncertain tax positions within income tax expense in the condensed consolidated statements of operations.
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties. The Company reviews its tax positions quarterly and adjusts its tax balances as new information becomes available.
The Oaktree funds are generally not subject to U.S. federal and state income taxes and, consequently, no income tax provision has been made in the accompanying condensed consolidated financial statements because individual partners are responsible for their proportionate share of the taxable income.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting unitholders’ capital that are excluded from net income (loss). Other gains and losses result from foreign-currency translation adjustments, net of tax, and unrealized gains and losses on cash-flow hedges.
Accounting Policies of Consolidated Funds
Investment Transactions and Income Recognition
The consolidated funds record investment transactions at cost on trade date for publicly-traded securities or when they have an enforceable right to acquire the security, which is generally on the closing date if not publicly traded. Realized gains and losses on investments are recorded on a specific-identification basis. The consolidated funds record dividend income on the ex-dividend date and interest income on an accrual basis, unless the related investment is in default or if collection of the income is otherwise considered doubtful. The consolidated funds may hold investments that provide for interest payable in-kind rather than in cash, in which case the related income is recorded at its estimated net realizable amount.
Income Taxes
The consolidated funds may invest in operating entities that are treated as partnerships for U.S. federal income tax purposes which may give rise to unrelated business taxable income or income effectively connected with a U.S. trade or business. In such situations, the consolidated funds permit certain investors to elect to participate in these investments through a “blocker structure” using entities that are treated as corporations for U.S. federal income tax purposes and are generally subject to U.S. federal, state and local taxes. The consolidated funds withhold blocker expenses and tax payments from electing limited partners, which are treated as deemed distributions to such limited partners pursuant to the terms of the respective limited partnership agreement.
20
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Foreign Currency
Investments denominated in non-U.S. currencies are recorded in the condensed consolidated financial statements after translation into U.S. dollars utilizing rates of exchange on the last business day of the period. Interest and dividend income is recorded net of foreign withholding taxes and calculated using the exchange rate in effect when the income is recognized. The effect of changes in exchange rates on assets and liabilities, income, and realized gains or losses is included as part of net realized gain (loss) on consolidated funds’ investments and net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations.
Cash and Cash-equivalents
Cash and cash-equivalents held at the consolidated funds represent cash that, although not legally restricted, is not available to support the general liquidity needs of the Company as the use of such amounts is generally limited to the investment activities of the consolidated funds. Cash-equivalents, a Level I valuation, include highly liquid investments such as money market funds, whose carrying value approximates fair value due to its short-term nature.
Receivable for Investments Sold
Receivables for investments sold by the consolidated funds are recorded at net realizable value. Changes in net realizable value are reflected within net change in unrealized appreciation (depreciation) on consolidated funds’ investments and realizations are reflected within net realized gain on consolidated funds’ investments in the condensed consolidated statements of operations.
Investments, at Fair Value
The consolidated funds include investment limited partnerships and CLOs that reflect their investments, including majority-owned and controlled investments, at fair value. The Company has retained the specialized investment company accounting guidance for investment limited partnerships with respect to consolidated investments and has elected the fair value option for the financial assets of CLOs. Thus, the consolidated investments are reflected in the condensed consolidated statements of financial condition at fair value, with unrealized gains and losses resulting from changes in fair value reflected as a component of net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).
Non-publicly traded debt and equity securities and other securities or instruments for which reliable market quotations are not available are valued by management using valuation methodologies applied on a consistent basis. These securities may initially be valued at the acquisition price as the best indicator of fair value. The Company reviews the significant unobservable inputs, valuations of comparable investments and other similar transactions for investments valued at acquisition price to determine whether another valuation methodology should be utilized. Subsequent valuations will depend on the facts and circumstances known as of the valuation date and the application of valuation methodologies as further described below under “—Non-publicly Traded Equity and Real Estate Investments.” The fair value may also be based on a pending transaction expected to close after the valuation date.
Exchange-traded Investments
Securities listed on one or more national securities exchanges are valued at their last reported sales price on the date of valuation. If no sale occurred on the valuation date, the security is valued at the mean of the last “bid” and “ask” prices on the valuation date. Securities that are not readily marketable due to legal restrictions that may limit or restrict transferability are generally valued at a discount from quoted market prices. The discount would reflect the amount market participants would require due to the risk relating to the inability to access a public market for the security for the specified period and would vary depending on the nature and duration of the restriction and the perceived risk and volatility of the underlying securities. Securities with longer duration restrictions or higher volatility are generally valued at a higher discount. Such discounts are generally estimated based on put option
21
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
models or an analysis of market studies. Instances where the Company has applied discounts to quoted prices of restricted listed securities have been infrequent. The impact of such discounts is not material to the Company’s condensed consolidated statements of financial condition and results of operations for all periods presented.
Credit-oriented Investments (including Real Estate Loan Portfolios)
Investments in corporate and government debt which are not listed or admitted to trading on any securities exchange are valued at the mean of the last bid and ask prices on the valuation date based on quotations supplied by recognized quotation services or by reputable broker-dealers.
The market-yield approach is considered in the valuation of non-publicly traded debt securities, utilizing expected future cash flows and discounted using estimated current market rates. Discounted cash-flow calculations may be adjusted to reflect current market conditions and/or the perceived credit risk of the borrower. Consideration is also given to a borrower’s ability to meet principal and interest obligations; this may include an evaluation of collateral and/or the underlying value of the borrower utilizing techniques described below under “—Non-publicly Traded Equity and Real Estate Investments.”
Non-publicly Traded Equity and Real Estate Investments
The fair value of equity and real estate investments is determined using a cost, market or income approach. The cost approach is based on the current cost of reproducing a real estate investment less deterioration and functional and economic obsolescence. The market approach utilizes valuations of comparable public companies and transactions, and generally seeks to establish the enterprise value of the portfolio company or investment property using a market-multiple methodology. This approach takes into account the financial measure (such as EBITDA, adjusted EBITDA, free cash flow, net operating income, net income, book value or net asset value) believed to be most relevant for the given company or investment property. Consideration also may be given to factors such as acquisition price of the security or investment property, historical and projected operational and financial results for the portfolio company, the strengths and weaknesses of the portfolio company or investment property relative to its comparable companies or properties, industry trends, general economic and market conditions, and others deemed relevant. The income approach is typically a discounted cash-flow method that incorporates expected timing and level of cash flows. It incorporates assumptions in determining growth rates, income and expense projections, discount and capitalization rates, capital structure, terminal values, and other factors. The applicability and weight assigned to market and income approaches are determined based on the availability of reliable projections and comparable companies and transactions.
The valuation of securities may be impacted by expectations of investors’ receptiveness to a public offering of the securities, the size of the holding of the securities and any associated control, information with respect to transactions or offers for the securities (including the transaction pursuant to which the investment was made and the elapsed time from the date of the investment to the valuation date), and applicable restrictions on the transferability of the securities.
These valuation methodologies involve a significant degree of management judgment. Accordingly, valuations by the Company do not necessarily represent the amounts that eventually may be realized from sales or other dispositions of investments. Fair values may differ from the values that would have been used had a ready market for the investment existed, and the differences could be material to the condensed consolidated financial statements.
Securities Sold Short
Securities sold short represent obligations of the consolidated funds to make a future delivery of a specific security and, correspondingly, create an obligation to purchase the security at prevailing market prices (or deliver the security, if owned by the consolidated funds) as of the delivery date. As a result, these short sales create the risk that the funds’ obligations to satisfy the delivery requirement may exceed the amount recorded in the accompanying condensed consolidated statements of financial condition.
Securities sold short are recorded at fair value, with the resulting change in value reflected as a component of net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed
22
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
consolidated statements of operations. When the securities are delivered, any gain or loss is included in net realized gain on consolidated funds’ investments. The funds maintain cash deposits with prime brokers in order to cover their obligations on short sales. These amounts are included in due from brokers in the condensed consolidated statements of financial condition.
Options
The purchase price of a call option or a put option is recorded as an investment, which is carried at fair value. If a purchased option expires, a loss in the amount of the cost of the option is realized. When there is a closing sale transaction, a gain or loss is realized if the proceeds are greater or less than, respectively, the cost of the option. When a call option is exercised, the cost of the security purchased upon exercise is increased by the premium originally paid.
When a consolidated fund writes an option, the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. If a written option expires, a gain is realized in the amount of the premium received. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain or loss. The writer of an option bears the market risk of an unfavorable change in the price of the security underlying the written option. Options written are included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.
Total-return Swaps
A total-return swap is an agreement to exchange cash flows based on an underlying asset. Pursuant to these agreements, a fund may deposit collateral with the counterparty and may pay a swap fee equal to a fixed percentage of the value of the underlying security (notional amount). A fund earns interest on cash collateral held on account with the counterparty and may be required to deposit additional collateral equal to the unrealized appreciation or depreciation on the underlying asset. Changes in the value of the swaps, which are recorded as unrealized gains or losses, are based on changes in the underlying value of the security. All amounts exchanged with the swap counterparty representing capital appreciation or depreciation, dividend income and expense, items of interest income on short proceeds, borrowing costs on short sales, and commissions are recorded as realized gains or losses. Dividend income and expense on the underlying assets are accrued as unrealized gains or losses on the ex-date.
Due From Brokers
Due from brokers represents cash owned by the consolidated funds and cash collateral on deposit with brokers and counterparties that are used as collateral for the consolidated funds’ securities and swaps.
Risks and Uncertainties
Certain consolidated funds invest primarily in the securities of entities that are undergoing, or are considered likely to undergo, reorganization, debt restructuring, liquidation or other extraordinary transactions. Investments in such entities are considered speculative and involve substantial risk of principal loss. Certain of the consolidated funds’ investments may also consist of securities that are thinly traded, securities and other assets for which no market exists, and securities which are restricted as to their transferability. Additionally, investments are subject to concentration and industry risks, reflecting numerous factors, including political, regulatory or economic issues that could cause the investments and their markets to be relatively illiquid and their prices relatively volatile. Investments denominated in non-U.S. currencies or involving non-U.S. domiciled entities are subject to risks and special considerations not typically associated with U.S. investments. Such risks may include, but are not limited to, investment and repatriation restrictions; currency exchange-rate fluctuations; adverse political, social and economic developments; less liquidity; smaller capital markets; and certain local tax law considerations.
Credit risk is the potential loss that may be incurred from the failure of a counterparty or an issuer to make payments according to the terms of a contract. Some consolidated funds are subject to additional credit risk due to strategies of investing in debt of financially distressed issuers or derivatives, as well as involvement in privately-negotiated structured notes and structured-credit transactions. Counterparties include custodian banks, major
23
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
brokerage houses and their affiliates. The Company monitors the creditworthiness of the financial institutions with which it conducts business.
Bank debt has exposure to certain types of risk, including interest rate, market, and the potential non-payment of principal and interest as a result of default or bankruptcy of the issuer. Loans are generally subject to prepayment risk, which will affect the maturity of such loans. The consolidated funds may enter into bank debt participation agreements through contractual relationships with a third-party intermediary, causing the consolidated funds to assume the credit risk of both the borrower and the intermediary.
Certain consolidated funds may invest in real property and real estate-related investments, including commercial mortgage-backed securities (“CMBS”) and real estate loans, that entail substantial inherent risks. There can be no assurance that such investments will increase in value or that significant losses will not be incurred. CMBS are subject to a number of risks, including credit, interest rate, prepayment and market. These risks can be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged properties are located, the level of the borrowers’ equity in the mortgaged properties, and the relative timing and rate of delinquencies and prepayments of mortgage loans bearing a higher rate of interest. Real estate loans include residential or commercial loans that are non-performing at the time of their acquisition or that become non-performing following their acquisition. Non-performing real estate loans may require a substantial amount of workout negotiations or restructuring, which may entail, among other things, a substantial reduction in the interest rate and/or write-down of the principal balance. Moreover, foreclosure on collateral securing one or more real estate loans held by the consolidated funds may be necessary, which may be lengthy and expensive. Residential loans are typically subject to risks associated with the value of the underlying properties, which may be affected by a number of factors including general economic conditions, mortgage qualification standards, local market conditions such as employment levels, the supply of homes, and the safety, convenience and attractiveness of the properties and neighborhoods. Commercial loans are typically subject to risks associated with the ability of the borrower to repay, which may be impacted by general economic conditions, as well as borrower-specific factors including the quality of management, the ability to generate sufficient income to make scheduled principal and interest payments, or the ability to obtain alternative financing to repay the loan.
Certain consolidated funds hold over-the-counter derivatives that may allow counterparties to terminate derivative contracts prior to maturity under certain circumstances, thereby resulting in an accelerated payment of any net liability owed to the counterparty.
Recent Accounting Developments
In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance which provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance is effective upon issuance and generally may be elected over time through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through September 30, 2021, but will continue to evaluate the possible adoption (including potential impact) of any such expedients or exceptions during the effective period as circumstances evolve.
In June 2016, the FASB issued guidance that significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The revised credit loss guidance will replace the existing “incurred loss” model with an “expected loss” model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as is required with the current other-than-temporary impairment credit loss model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The Company reviewed its condensed consolidated financial statements and determined that the amounts in scope were primarily related to short term receivables from Oaktree funds. The guidance was effective for the Company in the first quarter of 2020 and was adopted through a cumulative-effect adjustment to retained earnings as of January 1, 2020. The adoption of this guidance in the first quarter of 2020 did not have a material impact on the Company’s condensed consolidated financial statements. Upon adoption the Company recorded a cumulative-effect adjustment to retained earnings of $0.4 million in its condensed consolidated financial statements.
24
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
3. REVENUES
The Company provides investment management services through funds and separate accounts. The Company earns revenues from the management fees and incentive income generated by the funds that it manages. Additionally, for acting as a sub-investment manager, or sub-advisor, to certain Oaktree funds, the Company earns sub-advisory fees. Under certain subsidiary services agreements the Company provides certain investment and marketing related services to Oaktree affiliated entities. Revenues are affected by economic factors related to the asset class composition of the holdings and the contractual terms such as the basis for calculating the management fees and investors’ ability to redeem. Substantially all of our incentive income was generated by closed-end funds for the three and nine months ended September 30, 2021 and 2020. Revenues by fund structure and sub-advisory fees are set forth below.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Management Fees | |||||||||||||||||||||||
| Closed-end | $ | 984 | $ | 765 | $ | 3,390 | $ | 1,404 | |||||||||||||||
| Open-end | 1,816 | 2,553 | 4,479 | 6,808 | |||||||||||||||||||
| Sub-advisory fees | 55,828 | 42,148 | 164,979 | 130,066 | |||||||||||||||||||
| Total | $ | 58,628 | $ | 45,466 | $ | 172,848 | $ | 138,278 | |||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Incentive Income | |||||||||||||||||||||||
| Closed-end and Evergreen | $ | 167,534 | $ | 116 | $ | 811,481 | $ | 43,532 | |||||||||||||||
Contract Balances
The Company receives management fees monthly or quarterly in accordance with its contracts with customers. Incentive income is received when the fund makes a distribution. Contract assets relate to the Company’s conditional right to receive payment for its performance completed under the contract. Receivables are recorded when the right to consideration becomes unconditional (i.e., only requires the passage of time). Contract liabilities (i.e., deferred revenues) relate to payments received in advance of performance under the contract. Contract liabilities are recognized as revenues when the Company provides investment management services.
The table below sets forth contract balances for the periods indicated:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Receivables | $ | 64,613 | $ | 80,390 | |||||||
Contract assets (1) | — | 64,532 | |||||||||
| Contract liabilities | (559) | (100) | |||||||||
(1) The changes in the balances primarily relate to accruals, net of payments received.
25
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
4. VARIABLE INTEREST ENTITIES
The Company consolidates VIEs for which it is the primary beneficiary. VIEs include funds managed by Oaktree and CLOs for which Oaktree acts as collateral manager. The purpose of these VIEs is to provide investment opportunities for investors in exchange for management fees and, in certain cases, performance-based fees. While the investment strategies of the funds and CLOs differ by product, in general the fundamental risks of the funds and CLOs have similar characteristics, including loss of invested capital and reduction or absence of management and performance-based fees. As general partner or collateral manager, respectively, Oaktree generally considers itself the sponsor of the applicable fund or CLO. The Company does not provide performance guarantees and, other than capital commitments, has no financial obligation to provide funding to VIEs.
Consolidated VIEs
As of September 30, 2021, the Company consolidated 23 VIEs for which it was the primary beneficiary, including 8 funds managed by Oaktree and 15 CLOs for which Oaktree serves as collateral manager. As of December 31, 2020, the Company consolidated 23 VIEs.
As of September 30, 2021, the assets and liabilities of the 23 consolidated VIEs representing funds and CLOs amounted to $11.5 billion and $9.5 billion, respectively. The assets of these consolidated VIEs primarily consisted of investments in debt and equity securities, while their liabilities primarily represented debt obligations issued by CLOs. The assets of these VIEs may be used only to settle obligations of the same VIE. In addition, there is no recourse to the Company for the VIEs’ liabilities. In exchange for managing either the funds’ or CLOs’ collateral, the Company typically earns management fees and may earn performance fees, all of which are eliminated in consolidation. As of September 30, 2021, the Company’s investments in consolidated VIEs had a carrying value of $690.6 million, which represented its maximum risk of loss as of that date. The Company’s investments in CLOs are generally subordinated to other interests in the CLOs and entitle the Company to receive a pro-rata portion of the residual cash flows, if any, from the CLOs. Please see note 8 for more information on CLO debt obligations.
Unconsolidated VIEs
The Company holds variable interests in certain VIEs in the form of direct equity interests that are not consolidated because it is not the primary beneficiary, inasmuch as its fee arrangements are considered at-market and it does not hold interests in those entities that are considered more than insignificant.
The carrying value of the Company’s investments in VIEs that were not consolidated are shown below.
| Carrying Value as of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Corporate investments | $ | 922,461 | $ | 812,264 | |||||||
| Due from affiliates | 7,060 | 48,587 | |||||||||
| Maximum exposure to loss | $ | 929,521 | $ | 860,851 | |||||||
26
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
5. INVESTMENTS
Corporate Investments
Corporate investments may consist of investments in funds, companies in which the Company does not have a controlling financial interest, and non-investment grade debt securities. Investments for which the Company is deemed to exert significant influence are accounted for under the equity method of accounting and reflect the Company’s ownership interest in each fund or company. In the case of investments for which the Company is not deemed to exert significant influence or control, the fair value option of accounting has been elected. Investment income represents the Company’s pro-rata share of income or loss from these funds or companies, or the change in fair value of the investment, as applicable. The Company’s general partnership interests are substantially illiquid. While investments in funds reflect each respective fund’s holdings at fair value, equity-method investments in companies are not adjusted to reflect the fair value of the underlying company. The fair value of the underlying investments in Oaktree funds is based on the Company’s assessment, which takes into account expected cash flows, earnings multiples and/or comparisons to similar market transactions, among other factors. Valuation adjustments reflecting consideration of credit quality, concentration risk, sales restrictions and other liquidity factors are integral to valuing these instruments.
Corporate investments consisted of the following:
| As of | |||||||||||
| Corporate Investments | September 30, 2021 | December 31, 2020 | |||||||||
| Equity-method investments: | |||||||||||
| Funds | $ | 935,383 | $ | 951,660 | |||||||
| Companies | 4,848 | 4,863 | |||||||||
| Other investments, at fair value | 103,136 | 15,429 | |||||||||
| Total corporate investments | $ | 1,043,367 | $ | 971,952 | |||||||
The components of investment income (loss) are set forth below:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| Investment Income (Loss) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Equity-method investments: | |||||||||||||||||||||||
| Funds | $ | 24,663 | $ | 63,225 | $ | 194,876 | $ | 29,114 | |||||||||||||||
| Companies | — | (13) | (15) | 309 | |||||||||||||||||||
| Other investments, at fair value | (7,674) | (2,916) | (4,093) | (11,393) | |||||||||||||||||||
| Total investment income | $ | 16,989 | $ | 60,296 | $ | 190,768 | $ | 18,030 | |||||||||||||||
Equity-method Investments
The Company’s equity-method investments include its investments in Oaktree funds for which it serves as general partner, and other third-party funds and companies that are not consolidated, but for which the Company is deemed to exert significant influence. The Company’s share of income or loss generated by these investments is recorded within investment income in the condensed consolidated statements of operations. The Company’s equity-method investments in Oaktree funds principally reflect the Company’s general partner interests in those funds, which typically does not exceed 2.5% in each fund. The Oaktree funds are investment companies that follow a specialized basis of accounting established by GAAP.
Each reporting period, the Company evaluates each of its equity-method investments to determine if any are considered significant, as defined by the SEC. For the nine months ended September 30, 2021, no individual equity-method investment met the significance criteria.
27
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Summarized financial information of the Company’s equity-method investments is set forth below.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| Statements of Operations | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenues / investment income | $ | 454,038 | $ | 268,389 | $ | 1,397,866 | $ | 1,057,398 | |||||||||||||||
| Interest expense | (49,486) | (14,093) | (133,490) | (108,679) | |||||||||||||||||||
| Other expenses | (190,067) | (97,358) | (593,696) | (503,361) | |||||||||||||||||||
| Net realized and unrealized gain on investments | 1,476,912 | 2,628,272 | 8,593,086 | 77,518 | |||||||||||||||||||
| Net income | $ | 1,691,397 | $ | 2,785,210 | $ | 9,263,766 | $ | 522,876 | |||||||||||||||
Other Investments, at Fair Value
Other investments, at fair value primarily consist of (a) investments in certain Oaktree and non-Oaktree funds for which the fair value option of accounting has been elected (b) non-investment grade debt securities, and (c) derivatives utilized to hedge the Company’s exposure to investment income earned from its funds.
The following table summarizes net gains (losses) attributable to the Company’s other investments:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Realized gain (loss) | $ | 304 | $ | (1,479) | $ | 25,451 | $ | 2,024 | |||||||||||||||
| Net change in unrealized loss | (7,978) | (1,437) | (29,544) | (13,417) | |||||||||||||||||||
| Total loss | $ | (7,674) | $ | (2,916) | $ | (4,093) | $ | (11,393) | |||||||||||||||
28
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Investments of Consolidated Funds
Investments, at Fair Value
Investments held and securities sold short by the consolidated funds are summarized below:
| Fair Value as of | Fair Value as a Percentage of Investments of Consolidated Funds as of | ||||||||||||||||||||||
| Investments | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | |||||||||||||||||||
| United States: | |||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Communication services | $ | 594,210 | $ | 554,779 | 5.8 | % | 7.1 | % | |||||||||||||||
| Consumer discretionary | 598,641 | 568,195 | 5.8 | 7.3 | |||||||||||||||||||
| Consumer staples | 155,381 | 118,641 | 1.5 | 1.5 | |||||||||||||||||||
| Energy | 259,486 | 232,309 | 2.5 | 3.0 | |||||||||||||||||||
| Financials | 417,212 | 287,291 | 4.1 | 3.7 | |||||||||||||||||||
| Health care | 494,968 | 410,317 | 4.8 | 5.3 | |||||||||||||||||||
| Industrials | 799,558 | 727,471 | 7.8 | 9.3 | |||||||||||||||||||
| Information technology | 590,539 | 504,442 | 5.8 | 6.5 | |||||||||||||||||||
| Materials | 376,009 | 251,978 | 3.7 | 3.2 | |||||||||||||||||||
| Real estate | 201,873 | 111,622 | 2.0 | 1.4 | |||||||||||||||||||
| Utilities | 284,621 | 264,758 | 2.8 | 3.4 | |||||||||||||||||||
| Other | 19,119 | 11,847 | 0.2 | 0.2 | |||||||||||||||||||
| Total debt securities (cost: $4,772,404 and $4,064,289 as of September 30, 2021 and December 31, 2020, respectively) | 4,791,617 | 4,043,650 | 46.7 | 51.9 | |||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Communication services | 51,023 | 16,822 | 0.5 | 0.2 | |||||||||||||||||||
| Consumer discretionary | 104,420 | 604 | 1.0 | 0.0 | |||||||||||||||||||
| Energy | 332,738 | 21,747 | 3.2 | 0.3 | |||||||||||||||||||
| Financials | 101,981 | 85,715 | 1.0 | 1.1 | |||||||||||||||||||
| Industrials | 167,167 | 8,752 | 1.6 | 0.1 | |||||||||||||||||||
| Utilities | 146,086 | 77,085 | 1.4 | 1.0 | |||||||||||||||||||
| Total equity securities (cost: $822,459 and $282,682 as of September 30, 2021 and December 31, 2020, respectively) | 903,415 | 210,725 | 8.7 | 2.7 | |||||||||||||||||||
| Real estate: | |||||||||||||||||||||||
| Real estate | — | 6,879 | — | 0.1 | |||||||||||||||||||
| Total real estate securities (cost: $— and $6,760 as of September 30, 2021 and December 31, 2020, respectively) | — | 6,879 | — | 0.1 | |||||||||||||||||||
29
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
| Fair Value as of | Fair Value as a Percentage of Investments of Consolidated Funds as of | ||||||||||||||||||||||
| Investments | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | |||||||||||||||||||
| Europe: | |||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Communication services | $ | 619,933 | $ | 471,595 | 6.0 | % | 6.0 | % | |||||||||||||||
| Consumer discretionary | 867,166 | 755,084 | 8.5 | 9.7 | |||||||||||||||||||
| Consumer staples | 231,753 | 219,934 | 2.3 | 2.8 | |||||||||||||||||||
| Energy | 1,416 | 8,033 | 0.0 | 0.1 | |||||||||||||||||||
| Financials | 92,214 | 75,988 | 0.9 | 1.0 | |||||||||||||||||||
| Health care | 707,480 | 629,210 | 6.9 | 8.1 | |||||||||||||||||||
| Industrials | 568,028 | 487,243 | 5.5 | 6.2 | |||||||||||||||||||
| Information technology | 338,322 | 255,662 | 3.3 | 3.3 | |||||||||||||||||||
| Materials | 395,580 | 303,468 | 3.9 | 3.9 | |||||||||||||||||||
| Real estate | 32,361 | 26,100 | 0.3 | 0.3 | |||||||||||||||||||
| Utilities | 2,390 | 9,397 | 0.0 | 0.1 | |||||||||||||||||||
| Other | 14,985 | 4,628 | 0.1 | 0.1 | |||||||||||||||||||
| Total debt securities (cost: $3,863,876 and $3,233,125 as of September 30, 2021 and December 31, 2020, respectively) | 3,871,628 | 3,246,342 | 37.7 | 41.6 | |||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Consumer discretionary | 92,034 | — | 0.9 | — | |||||||||||||||||||
| Financials | 3,924 | 2,917 | 0.0 | 0.0 | |||||||||||||||||||
| Industrials | 12,848 | — | 0.1 | — | |||||||||||||||||||
| Total equity securities (cost: $81,542 and $2,919 as of September 30, 2021 and December 31, 2020, respectively) | 108,806 | 2,917 | 1.0 | 0.0 | |||||||||||||||||||
| Real estate: | |||||||||||||||||||||||
| Real estate | 28,832 | — | 0.3 | — | |||||||||||||||||||
| Total real estate securities (cost: $30,033 and $— as of September 30, 2021 and December 31, 2020, respectively) | 28,832 | — | 0.3 | — | |||||||||||||||||||
| Asia and other: | |||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Communication services | 4,997 | 18,741 | 0.0 | 0.2 | |||||||||||||||||||
| Consumer discretionary | 79,024 | 35,580 | 0.8 | 0.5 | |||||||||||||||||||
| Consumer staples | 13,740 | 23,755 | 0.1 | 0.3 | |||||||||||||||||||
| Energy | 23,443 | 9,247 | 0.2 | 0.1 | |||||||||||||||||||
| Financials | 17,807 | 12,335 | 0.2 | 0.2 | |||||||||||||||||||
| Health care | 2,707 | 1,084 | 0.0 | 0.0 | |||||||||||||||||||
| Industrials | 6,393 | 4,759 | 0.1 | 0.1 | |||||||||||||||||||
| Information technology | — | 3,631 | — | 0.0 | |||||||||||||||||||
| Materials | 122,405 | 68,791 | 1.2 | 0.9 | |||||||||||||||||||
| Real estate | 140,350 | 75,187 | 1.4 | 1.0 | |||||||||||||||||||
| Utilities | 955 | 9,619 | 0.0 | 0.1 | |||||||||||||||||||
| Other | 10,376 | 26,067 | 0.1 | 0.3 | |||||||||||||||||||
| Total debt securities (cost: $415,838 and $288,452 as of September 30, 2021 and December 31, 2020, respectively) | 422,197 | 288,796 | 4.2 | 3.7 | |||||||||||||||||||
30
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
| Fair Value as of | Fair Value as a Percentage of Investments of Consolidated Funds as of | ||||||||||||||||||||||
| Investments | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | |||||||||||||||||||
| Asia and other: | |||||||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Consumer discretionary | $ | 10,868 | $ | — | 0.1 | % | — | % | |||||||||||||||
| Energy | 7,059 | — | 0.1 | — | |||||||||||||||||||
| Industrials | 68,816 | — | 0.7 | — | |||||||||||||||||||
| Real estate | 37,326 | — | 0.4 | — | |||||||||||||||||||
| Total equity securities (cost: $120,650 and $— as of September 30, 2021 and December 31, 2020, respectively) | 124,069 | — | 1.3 | — | |||||||||||||||||||
| Total debt securities | 9,085,442 | 7,578,788 | 88.6 | 97.2 | |||||||||||||||||||
| Total equity securities | 1,136,290 | 213,642 | 11.1 | 2.7 | |||||||||||||||||||
| Total real estate | 28,832 | 6,879 | 0.3 | 0.1 | |||||||||||||||||||
| Total investments, at fair value | $ | 10,250,564 | $ | 7,799,309 | 100.0 | % | 100.0 | % | |||||||||||||||
As of September 30, 2021 and December 31, 2020, no single issuer or investment had a fair value that exceeded 5% of Oaktree’s total consolidated net assets.
31
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Net Gains (Losses) From Investment Activities of Consolidated Funds
Net gains (losses) from investment activities in the condensed consolidated statements of operations consist primarily of realized and unrealized gains and losses on the consolidated funds’ investments (including foreign exchange gains and losses attributable to foreign-denominated investments and related activities) and other financial instruments. Unrealized gains or losses result from changes in the fair value of these investments and other financial instruments. Upon disposition of an investment, unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period.
The following table summarizes net gains (losses) from investment activities:
| Three months ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | ||||||||||||||||||||
| Investments and other financial instruments | $ | 3,424 | $ | 61,928 | $ | (19,781) | $ | 118,110 | |||||||||||||||
CLO liabilities (1) | (13,865) | 4,987 | — | (117,948) | |||||||||||||||||||
Foreign-currency forward contracts (2) | 1,103 | 2,507 | 192 | 417 | |||||||||||||||||||
Total-return and interest-rate swaps (2) | (288) | (13,404) | 68 | (6) | |||||||||||||||||||
Options and futures (2) | (719) | 898 | (114) | (40) | |||||||||||||||||||
Warrants (2) | — | 3,413 | — | — | |||||||||||||||||||
| Total | $ | (10,345) | $ | 60,329 | $ | (19,635) | $ | 533 | |||||||||||||||
| Nine months ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | ||||||||||||||||||||
| Investments and other financial instruments | $ | 10,659 | $ | 169,760 | $ | (86,506) | $ | (325,510) | |||||||||||||||
CLO liabilities (1) | (9,335) | 17,132 | — | 126,410 | |||||||||||||||||||
Foreign-currency forward contracts (2) | 803 | 7,329 | (11,200) | (23,483) | |||||||||||||||||||
Total-return and interest-rate swaps (2) | (367) | (12,420) | 68 | (6) | |||||||||||||||||||
Options and futures (2) | (912) | 1,016 | (4) | (157) | |||||||||||||||||||
Warrants (2) | — | 2,601 | — | — | |||||||||||||||||||
| Total | $ | 848 | $ | 185,418 | $ | (97,642) | $ | (222,746) | |||||||||||||||
(1) Represents the net change in the fair value of CLO liabilities based on the more observable fair value of CLO assets, as measured under the CLO measurement guidance. Please see note 2 for more information.
(2) Please see note 7 for additional information.
32
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
6. FAIR VALUE
Fair Value of Financial Assets and Liabilities
The short-term nature of cash and cash-equivalents, receivables and accounts payable causes each of their carrying values to approximate fair value. The fair value of short-term investments included in cash and cash-equivalents is a Level I valuation. The Company’s other financial assets and financial liabilities by fair-value hierarchy level are set forth below. Please see notes 8 and 16 for the fair value of the Company’s outstanding debt obligations and amounts due from/to affiliates, respectively.
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Level I | Level II | Level III | Total | Level I | Level II | Level III | Total | ||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and other securities (1) | $ | 6,477 | $ | — | $ | — | $ | 6,477 | $ | 9,562 | $ | — | $ | — | $ | 9,562 | |||||||||||||||||||||||||||||||
| Corporate investments | 63,854 | 4,529 | 32,639 | 101,022 | — | 4,575 | 27,045 | 31,620 | |||||||||||||||||||||||||||||||||||||||
Foreign-currency forward contracts (2) | — | 5,095 | — | 5,095 | — | 459 | — | 459 | |||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 70,331 | $ | 9,624 | $ | 32,639 | $ | 112,594 | $ | 9,562 | $ | 5,034 | $ | 27,045 | $ | 41,641 | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign-currency forward contracts (3) | $ | — | $ | (407) | $ | — | $ | (407) | $ | — | $ | (20,051) | $ | — | $ | (20,051) | |||||||||||||||||||||||||||||||
(1) For U.S. Treasury securities the carrying value approximates fair value due to their short-term nature and are classified as Level I investments within the fair value hierarchy detailed above.
(2) Amounts are included in other assets, except for $2,345 as of September 30, 2021, which is included within corporate investments in the consolidated statements of financial condition.
(3) Amounts are included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition, except for $147 and $16,191 as of September 30, 2021 and December 31, 2020, respectively, which are included within corporate investments in the condensed consolidated statements of financial condition.
33
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
The table below sets forth a summary of changes in the fair value of Level III financial instruments:
| Three months ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Corporate Investments: | |||||||||||||||||||||||
| Beginning balance | $ | 32,771 | $ | 22,022 | |||||||||||||||||||
| Contributions or additions | 257 | 772 | |||||||||||||||||||||
| Distributions | (141) | (1,996) | |||||||||||||||||||||
| Net gain (loss) included in earnings | (248) | 2,536 | |||||||||||||||||||||
| Ending balance | $ | 32,639 | $ | 23,334 | |||||||||||||||||||
| Net change in unrealized gains (losses) attributable to financial instruments still held at end of period | $ | (436) | $ | 2,536 | |||||||||||||||||||
| Nine months ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Corporate Investments: | |||||||||||||||||||||||
| Beginning balance | $ | 27,045 | $ | 30,311 | |||||||||||||||||||
| Contributions or additions | 10,475 | 2,562 | |||||||||||||||||||||
| Distributions | (14,165) | (6,993) | |||||||||||||||||||||
| Net gain (loss) included in earnings | 9,284 | (2,546) | |||||||||||||||||||||
| Ending balance | $ | 32,639 | $ | 23,334 | |||||||||||||||||||
| Net change in unrealized losses attributable to financial instruments still held at end of period | $ | (7,968) | $ | (989) | |||||||||||||||||||
The table below sets forth a summary of the valuation techniques and quantitative information utilized in determining the fair value of the Company’s Level III financial instruments:
| Fair Value as of | Significant Unobservable Input | |||||||||||||||||||||||||||||||||||||
| Financial Instrument | September 30, 2021 | December 31, 2020 | Valuation Technique | Range | Weighted Average | |||||||||||||||||||||||||||||||||
| Corporate investment – Limited partnership interests | $ | 32,639 | $ | 27,045 | Market approach (value of underlying assets) | Not applicable | Not applicable | Not applicable | ||||||||||||||||||||||||||||||
34
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Fair Value of Financial Instruments Held By Consolidated Funds
The short-term nature of cash and cash-equivalents held at the consolidated funds causes their carrying value to approximate fair value. The fair value of cash-equivalents is a Level I valuation. Derivatives may relate to a mix of Level I, II or III investments, and therefore their fair-value hierarchy level may not correspond to the fair-value hierarchy level of the economically hedged investment. The table below summarizes the investments and other financial instruments of the consolidated funds by fair-value hierarchy level:
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Level I | Level II | Level III | Total | Level I | Level II | Level III | Total | ||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt – bank debt | $ | — | $ | 7,074,261 | $ | 548,822 | $ | 7,623,083 | $ | — | $ | 6,363,403 | $ | 255,282 | $ | 6,618,685 | |||||||||||||||||||||||||||||||
| Corporate debt – all other | — | 1,251,350 | 211,009 | 1,462,359 | — | 881,018 | 79,085 | 960,103 | |||||||||||||||||||||||||||||||||||||||
| Equities – common stock | 186,951 | 49,057 | 470,437 | 706,445 | 3,052 | 1 | 187,370 | 190,423 | |||||||||||||||||||||||||||||||||||||||
| Equities – preferred stock | 70,803 | 32,190 | 326,852 | 429,845 | — | — | 23,219 | 23,219 | |||||||||||||||||||||||||||||||||||||||
| Real estate | — | — | 28,832 | 28,832 | — | 6,879 | — | 6,879 | |||||||||||||||||||||||||||||||||||||||
| Total investments | 257,754 | 8,406,858 | 1,585,952 | 10,250,564 | 3,052 | 7,251,301 | 544,956 | 7,799,309 | |||||||||||||||||||||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign-currency forward contracts | — | 8,010 | — | 8,010 | — | 482 | — | 482 | |||||||||||||||||||||||||||||||||||||||
| Swaps | — | 8 | — | 8 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Options and futures | 977 | — | — | 977 | 26 | — | — | 26 | |||||||||||||||||||||||||||||||||||||||
Total derivatives (1) | 977 | 8,018 | — | 8,995 | 26 | 482 | — | 508 | |||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 258,731 | $ | 8,414,876 | $ | 1,585,952 | $ | 10,259,559 | $ | 3,078 | $ | 7,251,783 | $ | 544,956 | $ | 7,799,817 | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| CLO debt obligations: | |||||||||||||||||||||||||||||||||||||||||||||||
| Senior secured notes | $ | — | $ | (6,890,368) | $ | — | $ | (6,890,368) | $ | — | $ | (6,321,580) | $ | — | $ | (6,321,580) | |||||||||||||||||||||||||||||||
| Subordinated notes | — | (317,741) | — | (317,741) | — | (215,278) | — | (215,278) | |||||||||||||||||||||||||||||||||||||||
Total CLO debt obligations (2) | — | (7,208,109) | — | (7,208,109) | — | (6,536,858) | — | (6,536,858) | |||||||||||||||||||||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign-currency forward contracts | — | (1,048) | — | (1,048) | — | (933) | — | (933) | |||||||||||||||||||||||||||||||||||||||
| Swaps | — | (14,502) | — | (14,502) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Options and futures | — | (193) | — | (193) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Warrants | — | (5,381) | — | (5,381) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Total derivatives (3) | — | (21,124) | — | (21,124) | — | (933) | — | (933) | |||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | — | $ | (7,229,233) | $ | — | $ | (7,229,233) | $ | — | $ | (6,537,791) | $ | — | $ | (6,537,791) | |||||||||||||||||||||||||||||||
(1) Amounts are included in other assets under “assets of consolidated funds” in the condensed consolidated statements of financial condition.
(2) The fair value of CLO liabilities is classified based on the more observable fair value of CLO assets. Please see notes 2 and 8 for more information.
(3) Amounts are included in accounts payable, accrued expenses and other liabilities under “liabilities of consolidated funds” in the condensed consolidated statements of financial condition
35
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
The following tables set forth a summary of changes in the fair value of Level III investments:
| Corporate Debt – Bank Debt | Corporate Debt – All Other | Equities – Common Stock | Equities – Preferred Stock | Real Estate | Total | |||||||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 421,031 | $ | 176,598 | $ | 350,194 | $ | 192,185 | $ | 45,666 | $ | 1,185,674 | ||||||||||||||||||||||||||
| Deconsolidation of funds | — | (12,598) | — | — | — | (12,598) | ||||||||||||||||||||||||||||||||
| Transfers into Level III | 18,700 | — | 204 | — | — | 18,904 | ||||||||||||||||||||||||||||||||
| Transfers out of Level III | (1,858) | (560) | — | (32,190) | — | (34,608) | ||||||||||||||||||||||||||||||||
| Purchases | 138,682 | 42,609 | 99,446 | 150,394 | 6,233 | 437,364 | ||||||||||||||||||||||||||||||||
| Sales | (35,919) | (312) | (11,828) | — | (22,233) | (70,292) | ||||||||||||||||||||||||||||||||
| Realized gain (losses), net | 737 | 10 | (2,714) | 5 | (583) | (2,545) | ||||||||||||||||||||||||||||||||
| Unrealized appreciation (depreciation), net | 7,449 | 5,262 | 35,135 | 16,458 | (251) | 64,053 | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 548,822 | $ | 211,009 | $ | 470,437 | $ | 326,852 | $ | 28,832 | $ | 1,585,952 | ||||||||||||||||||||||||||
| Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period | $ | 7,705 | $ | 4,248 | $ | 32,002 | $ | 16,458 | $ | (250) | $ | 60,163 | ||||||||||||||||||||||||||
| Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 148,679 | $ | 73,473 | $ | 100,159 | $ | 214 | $ | — | $ | 322,525 | ||||||||||||||||||||||||||
| Deconsolidation of funds | — | (47,436) | — | — | — | (47,436) | ||||||||||||||||||||||||||||||||
| Transfers into Level III | 27,458 | 2,334 | 12,751 | — | — | 42,543 | ||||||||||||||||||||||||||||||||
| Transfers out of Level III | (27,022) | (9,705) | (43,205) | — | — | (79,932) | ||||||||||||||||||||||||||||||||
| Purchases | 2,422 | 1,288 | — | — | — | 3,710 | ||||||||||||||||||||||||||||||||
| Sales | (55,461) | (1,459) | — | — | — | (56,920) | ||||||||||||||||||||||||||||||||
| Realized gains (losses), net | (84) | 155 | — | — | — | 71 | ||||||||||||||||||||||||||||||||
| Unrealized appreciation (depreciation), net | (1,019) | 1,239 | 18,205 | (78) | — | 18,347 | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 94,973 | $ | 19,889 | $ | 87,910 | $ | 136 | $ | — | $ | 202,908 | ||||||||||||||||||||||||||
| Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period | $ | (1,989) | $ | 1,592 | $ | (12,355) | $ | (79) | $ | — | $ | (12,831) | ||||||||||||||||||||||||||
36
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
| Corporate Debt – Bank Debt | Corporate Debt – All Other | Equities – Common Stock | Equities – Preferred Stock | Real Estate | Total | |||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 255,283 | $ | 79,085 | $ | 187,370 | $ | 23,219 | $ | — | $ | 544,957 | ||||||||||||||||||||||||||
| Deconsolidation of funds | (3,065) | (12,598) | — | — | — | (15,663) | ||||||||||||||||||||||||||||||||
| Transfers into Level III | 69,983 | 2,960 | 209 | — | — | 73,152 | ||||||||||||||||||||||||||||||||
| Transfers out of Level III | (68,258) | (15,776) | — | (32,190) | — | (116,224) | ||||||||||||||||||||||||||||||||
| Purchases | 395,707 | 151,573 | 264,946 | 311,256 | 52,850 | 1,176,332 | ||||||||||||||||||||||||||||||||
| Sales | (115,799) | (4,798) | (16,622) | (1,655) | (22,233) | (161,107) | ||||||||||||||||||||||||||||||||
| Realized gain (loss), net | 4,158 | 450 | (10,986) | 162 | (583) | (6,799) | ||||||||||||||||||||||||||||||||
| Unrealized appreciation (depreciation), net | 10,813 | 10,113 | 45,520 | 26,060 | (1,202) | 91,304 | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 548,822 | $ | 211,009 | $ | 470,437 | $ | 326,852 | $ | 28,832 | $ | 1,585,952 | ||||||||||||||||||||||||||
| Net change in unrealized appreciation attributable to assets still held at end of period | $ | 10,670 | $ | 9,659 | $ | 34,008 | $ | 22,845 | $ | (1,200) | $ | 75,982 | ||||||||||||||||||||||||||
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 77,736 | $ | 103,172 | $ | 130,437 | $ | 657 | $ | 230,741 | $ | 542,743 | ||||||||||||||||||||||||||
| Deconsolidation of funds | (78,451) | (86,507) | (264,513) | — | (269,404) | (698,875) | ||||||||||||||||||||||||||||||||
| Transfers into Level III | 147,449 | 58,374 | 13,105 | — | — | 218,928 | ||||||||||||||||||||||||||||||||
| Transfers out of Level III | (71,282) | (24,669) | (43,205) | — | — | (139,156) | ||||||||||||||||||||||||||||||||
| Purchases | 119,557 | 17,747 | 264,909 | — | 38,663 | 440,876 | ||||||||||||||||||||||||||||||||
| Sales | (75,663) | (38,788) | — | — | — | (114,451) | ||||||||||||||||||||||||||||||||
| Realized gain (loss), net | (8,890) | 97 | — | — | — | (8,793) | ||||||||||||||||||||||||||||||||
| Unrealized depreciation, net | (15,483) | (9,537) | (12,823) | (521) | — | (38,364) | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 94,973 | $ | 19,889 | $ | 87,910 | $ | 136 | $ | — | $ | 202,908 | ||||||||||||||||||||||||||
| Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period | $ | (9,448) | $ | (3,429) | $ | (12,657) | $ | (507) | $ | — | $ | (26,041) | ||||||||||||||||||||||||||
Total realized and unrealized gains and losses recorded for Level III investments are included in net realized gain on consolidated funds’ investments or net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations.
Transfers out of Level III are generally attributable to certain investments that experienced a more significant level of market trading activity or completed an initial public offering during the respective period and thus were valued using observable inputs. Transfers into Level III typically reflect either investments that experienced a less significant level of market trading activity during the period or portfolio companies that undertook restructurings or bankruptcy proceedings and thus were valued in the absence of observable inputs.
37
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
The following table sets forth a summary of the valuation techniques and quantitative information utilized in determining the fair value of the consolidated funds’ Level III investments as of September 30, 2021:
| Investment Type | Fair Value | Valuation Technique | Significant Unobservable Inputs (1)(2) | Range | Weighted Average (3) | |||||||||||||||||||||||||||
| Credit-oriented investments: | ||||||||||||||||||||||||||||||||
| Communication services | 55,349 | Market approach (comparable companies) (4) | Revenue multiple (5) | 1x - 3x | 2x | |||||||||||||||||||||||||||
| 40,057 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| 2,987 | Recent transaction price (7) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Consumer discretionary: | 12,779 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| 6,001 | Discounted cash flow (8) | Discount rate | 11% - 13% | 12% | ||||||||||||||||||||||||||||
| Energy: | 16,437 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| 1,844 | Discounted cash flow (8) | Discount rate | 12% - 14% | 13% | ||||||||||||||||||||||||||||
| Financials: | 25,904 | Discounted cash flow (8) | Discount rate | 11% - 13% | 12% | |||||||||||||||||||||||||||
| 17,169 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| 7,700 | Recent transaction price (7) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Health care: | 61,055 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| 7,772 | Market approach (comparable companies) (4) | Multiple of underlying assets (9) | 0.9x - 1.1x | 1x | ||||||||||||||||||||||||||||
| Industrials | 116,386 | Discounted cash flow (8) | Discount rate | 12% - 13% | 13% | |||||||||||||||||||||||||||
| 10,311 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Materials: | 139,152 | Discounted cash flow (8) | Discount rate | 10% - 13% | 11% | |||||||||||||||||||||||||||
| 11,224 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Real estate: | 78,382 | Market approach (comparable companies) (4) | Multiple of underlying assets (9) | 0.9x - 1.1x | 1x | |||||||||||||||||||||||||||
| 71,263 | Recent transaction price (7) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| 36,248 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Utilities | 26,049 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| Other: | 15,762 | Recent market information (6) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| Equity investments: | ||||||||||||||||||||||||||||||||
| 320,838 | Recent transaction price (7) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| 181,378 | Market approach (comparable companies) (4) | Multiple of underlying assets (9) | 0.9x - 1.1x | 1x | ||||||||||||||||||||||||||||
| 159,811 | Discounted cash flow (8) | Discount rate | 7% - 16% | 12% | ||||||||||||||||||||||||||||
| 94,428 | Market approach (comparable companies) (4) | Earnings multiple (10) | 5x - 35x | 13x | ||||||||||||||||||||||||||||
| 40,834 | Market approach (comparable companies) (4) | Revenue multiple (5) | 13x - 14x | 14x | ||||||||||||||||||||||||||||
| Real estate-oriented investments: | ||||||||||||||||||||||||||||||||
| 16,098 | Recent transaction price (7) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| 12,734 | Discounted cash flow (8) | Discount rate | 24% - 26% | 25% | ||||||||||||||||||||||||||||
| Total Level III investments | $ | 1,585,952 | ||||||||||||||||||||||||||||||
38
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
The following table sets forth a summary of the valuation techniques and quantitative information utilized in determining the fair value of the consolidated funds’ Level III investments as of December 31, 2020:
| Investment Type | Fair Value | Valuation Technique | Significant Unobservable Inputs (1)(2) | Range | Weighted Average (3) | |||||||||||||||||||||||||||
| Credit-oriented investments: | ||||||||||||||||||||||||||||||||
| Energy: | $ | 14,318 | Discounted cash flow (4) | Discount rate | 7% - 9% | 8% | ||||||||||||||||||||||||||
| 10,431 | Recent market information (5) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Financials: | 24,301 | Recent market information (5) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| Health care: | 20,447 | Recent market information (5) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| Industrials: | 50,263 | Recent market information (5) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| 12,298 | Recent transaction price (6) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Materials: | 59,615 | Recent transaction price (6) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| Real estate: | 78,635 | Recent transaction price (6) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| 18,177 | Recent market information (5) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| Other: | 38,932 | Recent market information (5) | Quoted prices | Not applicable | Not applicable | |||||||||||||||||||||||||||
| 6,951 | Discounted cash flow (4) | Discount rate | 6% – 8% | 7% | ||||||||||||||||||||||||||||
| Equity investments: | ||||||||||||||||||||||||||||||||
| 133,779 | Recent transaction price (6) | Quoted prices | Not applicable | Not applicable | ||||||||||||||||||||||||||||
| 76,809 | Discounted cash flow (4) | Discount rate | 6% - 8% | 7% | ||||||||||||||||||||||||||||
| Total Level III investments | $ | 544,956 | ||||||||||||||||||||||||||||||
(1) The discount rate is the significant unobservable input used in the fair-value measurement of performing credit-oriented investments in which the consolidated funds do not have a controlling interest in the underlying issuer, as well as certain equity investments and real estate loan portfolios. An increase (decrease) in the discount rate would result in a lower (higher) fair-value measurement.
(2) Multiple of either earnings or underlying assets is the significant unobservable input used in the market approach for the fair-value measurement of distressed credit-oriented investments, credit-oriented investments in which the consolidated funds have a controlling interest in the underlying issuer, equity investments and certain real estate-oriented investments. An increase (decrease) in the multiple would result in a higher (lower) fair-value measurement.
(3) The weighted average is based on the fair value of the investments included in the range.
(4) A market approach is generally used to value distressed investments and investments in which the consolidated funds have a controlling interest in the underlying issuer
(5) Revenue multiples are based on comparable public companies and transactions with comparable companies. The Company typically applies the multiple to trailing twelve-months' revenue. However, in certain cases other revenue measures, such as pro forma revenue, may be utilized if deemed to be more relevant
(6) Certain investments are valued using vendor prices or broker quotes for the subject or similar securities. Generally, investments valued in this manner are classified as Level III because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities, or may require adjustment for investment-specific factors or restrictions.
(7) Certain investments are valued based on recent transactions, generally defined as investments purchased or sold within six months of the valuation date. The fair value may also be based on a pending transaction expected to close after the valuation date.
(8) A discounted cash-flow method is generally used to value performing credit-oriented investments in which the consolidated funds do not have a controlling interest in the underlying issuer, as well as certain equity investments, real estate-oriented investments and real estate loan portfolios.
(9) A market approach using the value of underlying assets utilizes a multiple, based on comparable companies, of underlying assets or the net book value of the portfolio company. The Company typically obtains the value of underlying assets from the underlying portfolio company’s financial statements or from pricing vendors. The Company may value the underlying assets by using prices and other relevant information from market transactions involving comparable assets.
(10) Earnings multiples are based on comparable public companies and transactions with comparable companies. The Company typically utilizes multiples of EBITDA; however, in certain cases the Company may use other earnings multiples believed to be most relevant to the investment. The Company typically applies the multiple to trailing twelve-months’ EBITDA. However, in certain cases other earnings measures, such as pro forma EBITDA, may be utilized if deemed to be more relevant.
39
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
A significant amount of judgment may be required when using unobservable inputs, including assessing the accuracy of source data and the results of pricing models. The Company assesses the accuracy and reliability of the sources it uses to develop unobservable inputs. These sources may include third-party vendors that the Company believes are reliable and commonly utilized by other marketplace participants. As described in note 2, other factors beyond the unobservable inputs described above may have a significant impact on investment valuations.
During the three months ended September 30, 2021 and 2020, there were no changes in the valuation techniques for Level III securities.
7. DERIVATIVES AND HEDGING
The fair value of freestanding derivatives consisted of the following:
| Assets | Liabilities | ||||||||||||||||||||||
| Notional | Fair Value | Notional | Fair Value | ||||||||||||||||||||
| As of September 30, 2021 | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | 318,313 | $ | 5,095 | $ | (21,500) | $ | (407) | |||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | 22,624 | $ | 459 | $ | (288,626) | $ | (20,051) | |||||||||||||||
Realized and unrealized gains and losses arising from freestanding derivatives were recorded in the condensed consolidated statements of operations as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Investment income | $ | 4,617 | $ | (6,503) | $ | 12,555 | $ | (4,906) | |||||||||||||||
General and administrative expense (1) | 2,697 | (3,288) | 6,315 | (5,926) | |||||||||||||||||||
| Total gain (loss) | $ | 7,314 | $ | (9,791) | $ | 18,870 | $ | (10,832) | |||||||||||||||
(1) To the extent that the Company’s freestanding derivatives are utilized to hedge its foreign-currency exposure to investment income and management fees earned from consolidated funds, the related hedged items are eliminated in consolidation, with the derivative impact (a positive number reflects a reduction in expenses) reflected in consolidated general and administrative expense.
There were no derivatives outstanding that were designated as hedging instruments for accounting purposes as of September 30, 2021 and December 31, 2020. Additionally, the Company had not designated any derivatives as fair-value hedges or hedges of net investments in foreign operations as of September 30, 2021 and December 31, 2020.
Derivatives Held By Consolidated Funds
Certain consolidated funds utilize derivatives in their ongoing investment operations. These derivatives primarily consist of foreign-currency forward contracts and options utilized to manage currency risk, interest-rate swaps to hedge interest-rate risk, options and futures used to hedge certain exposures for specific securities, and total-return swaps utilized mainly to obtain exposure to leveraged loans or to participate in foreign markets not readily accessible. The primary risk exposure for options and futures is price, while the primary risk exposure for total-return swaps is credit. None of the derivative instruments are accounted for as a hedging instrument utilizing hedge accounting.
40
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
The fair value of derivatives held by the consolidated funds consisted of the following:
| Assets | Liabilities | ||||||||||||||||||||||
| Notional | Fair Value | Notional | Fair Value | ||||||||||||||||||||
| As of September 30, 2021 | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | 175,804 | $ | 8,010 | $ | (8,969) | $ | (1,048) | |||||||||||||||
| Total-return and interest-rate and credit default swaps | 137 | 8 | (64,651) | (14,502) | |||||||||||||||||||
| Options and futures | 222,812 | 977 | (1,199) | (193) | |||||||||||||||||||
| Warrants | — | — | — | (5,381) | |||||||||||||||||||
| Total | $ | 398,753 | $ | 8,995 | $ | (74,819) | $ | (21,124) | |||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | 28,638 | $ | 482 | $ | (47,787) | $ | (933) | |||||||||||||||
| Options and futures | 22,567 | 26 | — | — | |||||||||||||||||||
| Total | $ | 51,205 | $ | 508 | $ | (47,787) | $ | (933) | |||||||||||||||
The impact of derivatives held by the consolidated funds in the consolidated statements of operations was as follows:
| Three months ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | ||||||||||||||||||||
| Foreign-currency forward contracts | $ | 1,103 | $ | 2,507 | $ | 192 | $ | 417 | |||||||||||||||
| Total-return and interest-rate and credit default swaps | (288) | (13,404) | 68 | (6) | |||||||||||||||||||
| Options and futures | (719) | 898 | (114) | (40) | |||||||||||||||||||
| Warrants | — | 3,413 | — | — | |||||||||||||||||||
| Total | $ | 96 | $ | (6,586) | $ | 146 | $ | 371 | |||||||||||||||
| Nine months ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | Net Realized Gain (Loss) on Investments | Net Change in Unrealized Appreciation (Depreciation) on Investments | ||||||||||||||||||||
| Foreign-currency forward contracts | $ | 803 | $ | 7,329 | $ | (11,200) | $ | (23,483) | |||||||||||||||
| Total-return and interest-rate and credit default swaps | (367) | (12,420) | 68 | (6) | |||||||||||||||||||
| Options and futures | (912) | 1,016 | (4) | (157) | |||||||||||||||||||
| Warrants | — | 2,601 | — | — | |||||||||||||||||||
| Total | $ | (476) | $ | (1,474) | $ | (11,136) | $ | (23,646) | |||||||||||||||
41
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Balance Sheet Offsetting
The Company recognizes all derivatives as assets or liabilities at fair value in its condensed consolidated statements of financial condition. In connection with its derivative activities, the Company generally enters into agreements subject to enforceable master netting arrangements that allow the Company to offset derivative assets and liabilities in the same currency by specific derivative type or, in the event of default by the counterparty, to offset derivative assets and liabilities with the same counterparty. While these derivatives are eligible to be offset in accordance with applicable accounting guidance, the Company has elected to present derivative assets and liabilities based on gross fair value in its condensed consolidated statements of financial condition. The table below sets forth the setoff rights and related arrangements associated with derivatives held by the Company. The “gross amounts not offset in statements of financial condition” columns represent derivatives that management has elected not to offset in the condensed consolidated statements of financial condition even though they are eligible to be offset in accordance with applicable accounting guidance.
| Gross Amounts of Assets (Liabilities) Presented | Gross Amounts Not Offset in Statements of Financial Condition | Net Amount | |||||||||||||||||||||
| As of September 30, 2021 | Derivative Assets (Liabilities) | Cash Collateral Received (Pledged) | |||||||||||||||||||||
| Derivative Assets: | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | 5,095 | $ | 407 | $ | — | $ | 4,688 | |||||||||||||||
| Derivative assets of consolidated funds: | |||||||||||||||||||||||
| Foreign-currency forward contracts | 8,010 | — | — | 8,010 | |||||||||||||||||||
| Total-return and interest-rate and credit default swaps | 8 | — | — | 8 | |||||||||||||||||||
| Options and futures | 977 | — | — | 977 | |||||||||||||||||||
| Subtotal | 8,995 | — | — | 8,995 | |||||||||||||||||||
| Total | $ | 14,090 | $ | 407 | $ | — | $ | 13,683 | |||||||||||||||
| Derivative Liabilities: | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | (407) | $ | (407) | $ | — | $ | — | |||||||||||||||
| Derivative liabilities of consolidated funds: | |||||||||||||||||||||||
| Foreign-currency forward contracts | (1,048) | — | — | (1,048) | |||||||||||||||||||
| Total-return and interest-rate and credit default swaps | (14,502) | — | — | (14,502) | |||||||||||||||||||
| Options and futures | (193) | — | — | (193) | |||||||||||||||||||
| Warrants | (5,381) | — | — | (5,381) | |||||||||||||||||||
| Subtotal | (21,124) | — | — | (21,124) | |||||||||||||||||||
| Total | $ | (21,531) | $ | (407) | $ | — | $ | (21,124) | |||||||||||||||
42
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
| Gross Amounts of Assets (Liabilities) Presented | Gross Amounts Not Offset in Statements of Financial Condition | Net Amount | |||||||||||||||||||||
| As of December 31, 2020 | Derivative Assets (Liabilities) | Cash Collateral Received (Pledged) | |||||||||||||||||||||
| Derivative Assets: | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | 459 | $ | 459 | $ | — | $ | — | |||||||||||||||
| Derivative assets of consolidated funds: | |||||||||||||||||||||||
| Foreign-currency forward contracts | 482 | — | — | 482 | |||||||||||||||||||
| Options and futures | 26 | — | — | 26 | |||||||||||||||||||
| Subtotal | 508 | — | — | 508 | |||||||||||||||||||
| Total | $ | 967 | $ | 459 | $ | — | $ | 508 | |||||||||||||||
| Derivative Liabilities: | |||||||||||||||||||||||
| Foreign-currency forward contracts | $ | (20,051) | $ | (459) | $ | — | $ | (19,592) | |||||||||||||||
| Derivative liabilities of consolidated funds: | |||||||||||||||||||||||
| Foreign-currency forward contracts | (933) | — | — | (933) | |||||||||||||||||||
| Total | $ | (20,984) | $ | (459) | $ | — | $ | (20,525) | |||||||||||||||
43
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
8. DEBT OBLIGATIONS AND CREDIT FACILITIES
Prior to the Restructuring, the Company’s financial statements reflected debt and debt service of the entire Oaktree Operating Group. OCM, Oaktree Capital I, Oaktree Capital II and Oaktree AIF are co-obligors and jointly and severally liable for all debt obligations listed below, however, debt obligations are reflected in the condensed consolidated financial statements based upon the entity that actually made the borrowing and received the related proceeds. OCM has historically been the only direct borrower or issuer under credit agreements and private placement notes with third parties and made all payments of principal and interest. In connection with the Restructuring, debt obligations with a net carrying amount of $746.3 million related to OCM were transferred as part of the deconsolidation of entities effective October 1, 2019. Accordingly, the Company’s financial statements after the Restructuring generally will not reflect debt obligations, interest expense or related liabilities associated with its operating subsidiaries, until such time as Oaktree Capital I directly borrows or issues notes under such arrangements.
On May 1, 2020, OCM received commitments from certain accredited investors to purchase $250 million of senior unsecured notes that bear a blended 3.68% fixed rate of interest and a weighted average maturity of 2031. The notes are guaranteed by Oaktree Capital I, a consolidated subsidiary of the Company, along with Oaktree Capital II and Oaktree AIF, as co-obligors. As OCM is the issuer of such senior notes, the outstanding principal and interest payments guaranteed by Oaktree Capital I will not be included in the Company’s financial statements unless an event of default occurs. The offering closed on July 22, 2020 and OCM received proceeds of $250 million on the closing date.
Oaktree Capital I, along with certain other Oaktree Operating Group members as co-borrowers, are parties to a credit agreement with a subsidiary of Brookfield that provides for a subordinated credit facility maturing on May 19, 2023. The subordinated credit facility has a revolving loan commitment of $250 million and borrowings generally bear interest at a spread to either LIBOR or an alternative base rate. Borrowings on the subordinated credit facility are subordinate to the outstanding debt obligations and borrowings on the primary credit facility of Oaktree Capital I and its co-borrowers. Oaktree Capital I is jointly and severally liable, along with its co-obligors for outstanding borrowings on the subordinated credit facility. For reasons set forth in the preceding paragraph, the Company’s financial statements generally will not reflect debt obligations, interest expense or related liabilities associated with its operating subsidiaries until such time as Oaktree Capital I directly borrows from the subordinated credit facility. No amounts were outstanding on the subordinated credit facility as of September 30, 2021.
As of September 30, 2021, Oaktree Capital I is jointly and severally liable, along with its co-obligors, for the debt obligations listed below with an aggregate outstanding principal balance of $850 million. The Company’s maximum exposure to these debt obligations is set forth below:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| $250,000, 3.78%, issued in December 2017, payable on December 18, 2032 | $ | 250,000 | $ | 250,000 | |||||||
| Credit facility, issued in March 2014, variable rate obligations payable on December 14, 2026 | — | — | |||||||||
| $50,000, 3.91%, issued in September 2014, payable on September 3, 2024 | 50,000 | 50,000 | |||||||||
| $100,000, 4.01%, issued in September 2014, payable on September 3, 2026 | 100,000 | 100,000 | |||||||||
| $100,000, 4.21%, issued in September 2014, payable on September 3, 2029 | 100,000 | 100,000 | |||||||||
| $100,000, 3.69%, issued in July 2016, payable on July 12, 2031 | 100,000 | 100,000 | |||||||||
| $200,000, 3.64%, issued in July 2020, payable on July 22, 2030 | 200,000 | 200,000 | |||||||||
| $50,000, 3.84%, issued in July 2020, payable on July 22, 2035 | 50,000 | 50,000 | |||||||||
| Total remaining principal | $ | 850,000 | $ | 850,000 | |||||||
Oaktree’s credit facility was amended on December 13, 2019 to among other things, increase the revolving loan commitment from $500 million to $650 million, provide for the refinancing of the then-outstanding $150 million term loan with revolving loans, extend the maturity date from March 29, 2023 to December 13, 2024, favorably update the commitment fee and interest rate in the corporate ratings-based pricing grid and increase the assets under management covenant threshold from $60 billion to $65 billion. Borrowings generally bear interest at a
44
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
spread to either LIBOR or an alternative base rate. Based on the current credit ratings of OCM, the interest rate on borrowings is LIBOR plus 0.88% per annum and the commitment fee on the unused portions of the revolving credit facility is 0.08% per annum. The credit agreement contains customary financial covenants and restrictions, including ones regarding a maximum leverage ratio and a minimum required level of assets under management (as defined in the credit agreement, as amended above). Oaktree’s credit facility was further amended on September 14, 2021 to among other things, (i) extend the maturity date from December 13, 2024 to September 14, 2026, (ii) modify the assets under management covenant threshold from $65 billion of assets under management to $57.5 billion of management-fee generating assets under management and (iii) increase the maximum leverage ratio to 4.00 to 1.00. As of September 30, 2021, OCM had no outstanding borrowings under the revolving credit facility. OCM and the Company were in compliance with all financial maintenance covenants associated with its senior notes and bank credit facility as of September 30, 2021 and December 31, 2020, respectively.
Credit Facilities of the Consolidated Funds
Certain consolidated funds may maintain revolving credit facilities that are secured by the assets of the fund or may issue senior variable rate notes to fund investments on a longer term basis, generally up to ten years. The obligations of the consolidated funds are nonrecourse to the Company.
The consolidated funds had the following debt obligations outstanding:
| Outstanding Amount as of | Senior variable rate notes key terms as of September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Credit Agreement | September 30, 2021 | December 31, 2020 | Facility Capacity | Effective Interest Rate | Weighted Average Remaining Maturity (years) | Commitment Fee Rate | L/C Fee | ||||||||||||||||||||||||||||||||||
Revolving credit facility (1) | $ | 1,029,708 | $ | 370,920 | $ | 1,131,880 | 1.93% | 0.9 | 0.25% | N/A | |||||||||||||||||||||||||||||||
| Less: Debt issuance costs | (3,754) | (4,932) | |||||||||||||||||||||||||||||||||||||||
Total debt obligations, net (2) | $ | 1,025,954 | $ | 365,988 | |||||||||||||||||||||||||||||||||||||
(1) The credit facility capacity is calculated on a pro rata basis using fund commitments as of September 30, 2021.
(2) For the revolving credit facilities, amount is shown net of debt issuance costs that are included in other assets, net at September 30, 2021.
As of September 30, 2021 and December 31, 2020, the consolidated funds had debt obligations with an aggregate outstanding principal balance of $1.0 billion and $370.9 million, respectively. The carrying value of the revolving credit facilities approximated fair value due to recent issuance. Financial instruments that are valued using quoted prices for the security or similar securities are generally classified as Level III because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities, or may require adjustment for investment-specific factors or restrictions.
45
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Debt Obligations of CLOs
Debt obligations of CLOs represent amounts due to holders of debt securities issued by the CLOs, as well as term loans of CLOs that had not priced as of period end. Outstanding debt obligations of CLOs were as follows:
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||
Fair Value (1) | Weighted Average Interest Rate | Weighted Average Remaining Maturity (years) | Fair Value (1) | Weighted Average Interest Rate | Weighted Average Remaining Maturity (years) | ||||||||||||||||||||||||||||||
| Senior secured notes | $ | 6,890,368 | 1.84% | 11.1 | $ | 6,321,580 | 2.00% | 10.2 | |||||||||||||||||||||||||||
Subordinated notes (2) | 317,741 | N/A | 11.6 | 215,278 | N/A | 10.6 | |||||||||||||||||||||||||||||
| Total CLO debt obligations | $ | 7,208,109 | $ | 6,536,858 | |||||||||||||||||||||||||||||||
(1) The fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (a) the fair value of any beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services. Please see notes 2 and 6 for more information.
(2) The subordinated notes do not have a contractual interest rate; instead, they receive distributions from the excess cash flows generated by the CLO.
The debt obligations of CLOs are nonrecourse to the Company and are backed by the investments held by the respective CLO. Assets of one CLO may not be used to satisfy the liabilities of another. As of September 30, 2021 and December 31, 2020, the fair value of CLO assets was $8.5 billion and $7.3 billion, respectively, and consisted of cash, corporate loans, corporate bonds and other securities.
The fair value of the Company’s CLO beneficial interests held at September 30, 2021 was calculated using a discounted cash flow model specific to each investment structure. The significant valuation inputs, including the input range and weighted average rate, are as follows:
| Valuation Input | Low | High | Weighted Average Rate | |||||||||||||||||
| Discount rates | 8.0% | 26.0% | 14.3% | |||||||||||||||||
| Constant default rates | 2.0% | 2.0% | 2.0% | |||||||||||||||||
| Recovery rates | 65.0% | 70.0% | 67.5% | |||||||||||||||||
As of September 30, 2021, future scheduled principal or par value payments with respect to the debt obligations of CLOs were as follows:
| Remainder of 2021 | $ | 30,709 | |||
| 2022 | — | ||||
| 2023 | — | ||||
| 2024 | — | ||||
| 2025 | — | ||||
| Thereafter | 7,259,845 | ||||
| Total | $ | 7,290,554 | |||
46
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
9. LEASES
The Company has operating leases related to office space and certain equipment with remaining lease terms expiring within one year through 2031, some of which include options to extend the leases for up to five years and some of which include options to terminate the leases within one year. As of September 30, 2021, there were no finance leases outstanding and no additional operating leases that have not yet commenced.
The components of lease expense included in general and administrative expense were as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Operating lease cost | $ | 1,960 | $ | 1,784 | $ | 5,994 | $ | 5,114 | |||||||||||||||
| Sublease income | (103) | (96) | (308) | (285) | |||||||||||||||||||
| Total lease cost | $ | 1,857 | $ | 1,688 | $ | 5,686 | $ | 4,829 | |||||||||||||||
Supplemental cash flow information related to leases was as follows:
| Nine months ended September 30, 2021 | |||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||
| Operating cash flows used for operating leases | $ | 5,378 | |||
| Weighted average remaining lease term for operating leases (in years) | 9.22 | ||||
| Weighted average discount rate for operating leases | 4.3 | % | |||
As of September 30, 2021, maturities of operating lease liabilities were as follows:
| Remainder of 2021 | $ | 1,645 | |||
| 2022 | 6,565 | ||||
| 2023 | 5,695 | ||||
| 2024 | 4,683 | ||||
| 2025 | 4,601 | ||||
| Thereafter | 25,783 | ||||
| Total lease payments | 48,972 | ||||
| Less: imputed interest | (8,700) | ||||
| Total operating lease liabilities | $ | 40,272 | |||
47
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
10. NON-CONTROLLING REDEEMABLE INTERESTS IN CONSOLIDATED FUNDS
The following table sets forth a summary of changes in the non-controlling redeemable interests in the consolidated funds. Dividends reinvested and in-kind contributions or distributions are non-cash in nature and have been presented on a gross basis in the table below.
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Beginning balance | $ | 715,347 | $ | 866,222 | |||||||
| Fund consolidation and deconsolidation, net | (192,984) | (720,729) | |||||||||
| Contributions | 766,103 | 864,281 | |||||||||
| Distributions | (126,832) | (217,804) | |||||||||
| Net income (loss) | 163,105 | (174,244) | |||||||||
| Change in distributions payable | 10,003 | (47) | |||||||||
| Change in contribution receivable | — | 15,826 | |||||||||
| Foreign currency translation and other, net | (12,725) | 11,375 | |||||||||
| Ending balance | $ | 1,322,017 | $ | 644,880 | |||||||
11. UNITHOLDERS’ CAPITAL
Unitholders’ capital reflects the economic interests attributable to Class A unitholders, preferred unitholders, non-controlling interests in consolidated subsidiaries and non-controlling interests in consolidated funds. Non-controlling interests in consolidated subsidiaries represent the portion of unitholders’ capital attributable to the OCGH non-controlling interest and third parties. The OCGH non-controlling interest is determined at the Oaktree Operating Group level, after giving effect to distributions, if any, attributable to the preferred unitholders, based on the proportionate share of Oaktree Operating Group units held by the OCGH unitholders. Certain expenses, such as income taxes and related administrative expenses of Oaktree Capital Group, LLC and its Intermediate Holding Companies, are solely attributable to the Class A unitholders.
As of September 30, 2021 and December 31, 2020, OCGH units represented 60,834,146 of the total 159,970,766 Oaktree Operating Group units and 61,370,607 of the total 160,047,647 Oaktree Operating Group units, respectively. Based on total allocable capital of $1,495,896 and $1,421,127 as of September 30, 2021 and December 31, 2020, respectively, the OCGH non-controlling interest was $570,557 and $544,935. As of September 30, 2021 and December 31, 2020, there were no non-controlling interests attributable to third parties.
Preferred Unit Issuances
On May 17, 2018, the Company issued 7,200,000 of its 6.625% Series A preferred units representing limited liability company interests with a liquidation preference of $25.00 per unit. The issuance resulted in $173.7 million in net proceeds to the Company. Distributions on the Series A preferred units, when and if declared by the board of directors of Oaktree, will be paid quarterly on March 15, June 15, September 15 and December 15 of each year. The first distribution was paid on September 17, 2018. Distributions on the Series A preferred units are non-cumulative.
On August 9, 2018, the Company issued 9,400,000 of its 6.550% Series B preferred units representing limited liability company interests with a liquidation preference of $25.00 per unit. The issuance resulted in $226.9 million in net proceeds to the Company. Distributions on the Series B preferred units, when and if declared by the board of directors of Oaktree, will be paid quarterly on March 15, June 15, September 15 and December 15 of each year. The first distribution was paid on December 17, 2018. Distributions on the Series B preferred units are non-cumulative.
48
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Unless distributions have been declared and paid or declared and set apart for payment on the preferred units for a quarterly distribution period, during the remainder of that distribution period the Company may not repurchase any common units or any other units that are junior in rank, as to the payment of distributions, to the preferred units and the Company may not declare or pay or set apart payment for distributions on any common units or junior units for the remainder of that distribution period, other than certain Permitted Distributions (as defined in the unit designation related to the applicable preferred units (each, the “Preferred Unit Designation”)).
The Company may redeem, at its option, out of funds legally available, the preferred units, in whole or in part, at any time on or after June 15, 2023 in respect of the Series A preferred units or September 15, 2023 in respect of the Series B preferred units, at a price of $25.00 per preferred unit plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of the preferred units have no right to require the redemption of the preferred units.
If a Change of Control Event (as defined in the applicable Preferred Unit Designation) occurs prior to June 15, 2023 in respect of the Series A preferred units or September 15, 2023 in respect of the Series B preferred units, the Company may, at its option, out of funds legally available, redeem the applicable preferred units, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such Change of Control Event, at a price of $25.25 per preferred unit, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions.
If a Tax Redemption Event or Rating Agency Event (each, as defined in the applicable Preferred Unit Designation) occurs prior to June 15, 2023 in respect of the Series A preferred units or September 15, 2023 in respect of the Series B preferred units, the Company may, at its option, out of funds legally available, redeem the applicable preferred units, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such Tax Redemption Event or Rating Agency Event, at a price of $25.50 per preferred unit, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions.
The preferred units are not convertible into Class A units or any other class or series of the Company’s interests or any other security. Holders of the preferred units do not have any of the voting rights given to holders of our Class A units, except that holders of the preferred units are entitled to certain voting rights under certain conditions.
49
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
The following table sets forth a summary of net income attributable to the preferred unitholders, the OCGH non-controlling interest and the Class A common unitholders:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Weighted average Oaktree Operating Group units outstanding (in thousands): | |||||||||||||||||||||||
| OCGH non-controlling interest | 60,834 | 61,385 | 61,013 | 61,508 | |||||||||||||||||||
| Class A unitholders | 99,137 | 98,677 | 98,995 | 98,457 | |||||||||||||||||||
| Total weighted average units outstanding | 159,971 | 160,062 | 160,008 | 159,965 | |||||||||||||||||||
| Oaktree Operating Group net income (loss): | |||||||||||||||||||||||
Net income attributable to preferred unitholders (1) | $ | 6,829 | $ | 6,829 | $ | 20,487 | $ | 20,487 | |||||||||||||||
| Net income (loss) attributable to OCGH non-controlling interest | 46,680 | 28,993 | 263,863 | (13,306) | |||||||||||||||||||
| Net income (loss) attributable to OCG Class A unitholders | 76,070 | 45,902 | 426,575 | (19,878) | |||||||||||||||||||
| Oaktree Operating Group net income (loss) | $ | 129,579 | $ | 81,724 | $ | 710,925 | $ | (12,697) | |||||||||||||||
| Net income (loss) attributable to OCG Class A unitholders: | |||||||||||||||||||||||
| Oaktree Operating Group net income (loss) attributable to OCG Class A unitholders | $ | 76,070 | $ | 45,902 | $ | 426,575 | $ | (19,878) | |||||||||||||||
| Non-Operating Group income and expense | 14,138 | (348) | 44,435 | (906) | |||||||||||||||||||
| Net income (loss) attributable to OCG Class A unitholders | $ | 90,208 | $ | 45,554 | $ | 471,010 | $ | (20,784) | |||||||||||||||
(1) Represents distributions declared, if any, on the preferred units.
The change in the Company’s ownership interest in the Oaktree Operating Group is set forth below:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) attributable to OCG Class A unitholders | $ | 90,208 | $ | 45,554 | $ | 471,010 | $ | (20,784) | |||||||||||||||
| Equity reallocation between controlling and non-controlling interests | 2,205 | (184) | 3,667 | 1,829 | |||||||||||||||||||
| Change from net income (loss) attributable to OCG Class A unitholders and transfers from non-controlling interests | $ | 92,413 | $ | 45,370 | $ | 474,677 | $ | (18,955) | |||||||||||||||
Please see notes 11, 12 and 13 for additional information regarding transactions that impacted unitholders’ capital.
50
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
12. EARNINGS PER UNIT
The computation of net income (loss) per Class A unit is set forth below:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands, except per unit amounts) | |||||||||||||||||||||||
| Net income (loss) per Class A unit (basic and diluted): | |||||||||||||||||||||||
| Net income (loss) attributable to OCG Class A unitholders | $ | 90,208 | $ | 45,554 | $ | 471,010 | $ | (20,784) | |||||||||||||||
| Weighted average number of Class A units outstanding (basic and diluted) | 99,137 | 98,677 | 98,995 | 98,457 | |||||||||||||||||||
| Basic and diluted net income (loss) per Class A unit | $ | 0.91 | $ | 0.46 | $ | 4.76 | $ | (0.21) | |||||||||||||||
Prior to the Mergers, OCGH units could be exchanged on a 1-for-1 basis into Class A units, subject to certain restrictions. The exchange of these units would have proportionally increased the Company’s interest in the Oaktree Operating Group. Subsequent to the Mergers, OCGH units are no longer exchangeable into Class A units. As the restrictions set forth in the then-current exchange agreement were in place for each applicable reporting period, OCGH units were not included in the computation of diluted earnings per unit for the three and nine months ended September 30, 2021 and 2020.
Certain compensation arrangements include performance-based awards that could result in the issuance of OCGH units, which would vest over periods of four to ten years from date of issuance. As of and for the three and nine months ended September 30, 2021 and 2020, no OCGH units were considered issuable under the terms of these arrangements; consequently, no contingently issuable units were included in the computation of diluted earnings per unit for those periods.
13. EQUITY-BASED AND OTHER DEFERRED COMPENSATION
Long-Term Incentive Plan Awards
In March 2020 the Company adopted the Oaktree Capital Group, LLC Long-Term Incentive Plan (the “LTIP”). The LTIP provides for the granting of cash-based incentive awards to senior executives, directors, officers, partners, employees, consultants and advisors of the Company and its affiliates. Awards may be denominated in U.S. dollars or other currencies determined by the LTIP’s plan administrator. The unvested value of each LTIP award adjusts over its vesting period to track the performance of a fund designated by the plan administrator or by the award recipient from investment options selected by the plan administrator. Investment options may include funds managed by Company affiliates or by third parties. Awards do not represent an actual interest in the funds whose performance they track. Such fund investments are purely nominal and solely for the purpose of calculating the value of an award on each vesting or payment date. Awards under the LTIP represent only a contractual right to receive a cash payment upon vesting from the Company or the affiliate that issued the award. Awards tracking the performance of funds that make periodic distributions to their investors may provide for award recipients to receive corresponding payments from the Company or the affiliate issuing the award, with the remaining unvested value of the award reduced to reflect the amount of each such payment. Each payment under an award is fully vested upon receipt. Awards denominated in currencies other than U.S. dollars which track the performance of U.S. dollar-denominated funds are nominally converted into U.S. dollars for performance tracking purposes, with amounts payable under the awards converted back into the original currency at a market rate at the time of each vesting payment. Certain recipients of awards denominated in currencies other than U.S. dollars which track the performance of U.S. dollar-denominated funds receive the option to hedge the value of their awards to a currency other than U.S. dollars. All such currency hedges are calculated on a purely hypothetical basis and do not represent a right to participate in actual currency hedging contracts.
51
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
During the nine months ended September 30, 2021, the Company granted LTIP awards valued at $18.0 million to employees, partners and directors of the Company and its subsidiaries, subject to annual vesting over a weighted average period of approximately 4.0 years. No awards were granted during the three months ended September 30, 2021. As of September 30, 2021, the Company expected to recognize compensation expense on its unvested LTIP awards of $49.3 million, subject to adjustment based on future performance, over a weighted average period of 3.2 years. During the three and nine months ended September 30, 2021, the Company recognized $4.7 million and $12.1 million, respectively, of compensation expense related to the LTIP, which was included in compensation and benefits expense in the condensed consolidated statement of operations.
Equity-Based Compensation
In December 2011, the Company adopted the 2011 Oaktree Capital Group, LLC Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provides for the granting of options, unit appreciation rights, restricted unit awards, unit bonus awards, phantom equity awards or other unit-based awards to senior executives, directors, officers, certain employees, consultants, and advisors of the Company and its affiliates. As of September 30, 2021, a maximum of 24,007,147 units have been authorized to be awarded pursuant to the 2011 Plan, and 15,756,422 units (including 2,000,000 EVUs) have been awarded under the 2011 Plan. Each Class A and OCGH unit, when issued, represents an indirect interest in one Oaktree Operating Group unit. Total vested and unvested Converted OCGH Units, OCGH units and Class A units issued and outstanding were 159,970,766 as of September 30, 2021.
Restated Exchange Agreement
At the closing of the Mergers, Oaktree entered into a Third Amended and Restated Exchange Agreement that will, among other things, allow limited partners of OCGH to exchange (“Exchanges”) certain vested limited partnership units of OCGH (“OCGH Units”) for cash, Brookfield Class A Shares, notes issued by a Brookfield subsidiary or equity interests in a subsidiary of OCGH that will entitle such limited partners to the proceeds from a note, or a combination of the foregoing. Either of such notes will have a three-year maturity and will accrue interest at the then-current 5-year treasury note rate plus 3%. Only Converted OCGH Units, OCGH Units issued and outstanding at the time of the closing of the Mergers, OCGH Units issued after the closing of the Mergers pursuant to agreements in effect on March 13, 2019, OCGH Units issuable upon vesting of certain phantom equity awards (“Phantom Units”) and other OCGH Units consented-to by Brookfield will be, when vested, eligible to participate in an Exchange. The form of the consideration in an Exchange is generally in the discretion of Brookfield, subject to certain limitations.
In general, OCGH limited partners will be entitled to provide an election notice to participate in an Exchange with respect to eligible vested OCGH Units during the first 60 calendar days of each year beginning January 1, 2022 (an “Open Period”). However, holders of Converted OCGH Units and Phantom Units will be eligible to provide an election notice with respect to their vested units beginning as early as 2020 and each year thereafter subject to certain limitations. Each Exchange will thereafter be consummated within the first 155 days of such calendar year, subject to extension in certain circumstances.
Valuation
Except as described below, each OCGH Unit will be valued (i) by applying a 13.5x multiple to the trailing three-year average (or two-year average for Exchanges in 2022) of fee-related earnings less stock-based compensation at grant value and excluding depreciation and amortization and a 6.75x multiple to the trailing three-year average of net incentives created, and (ii) adding 100% of the value of net cash (defined as cash less the face value of debt and preferred stock, other than certain preferred stock issued in connection with certain Exchanges), 100% of the value of corporate investments and 75% of fund-level net accrued incentives as of December 31 of the prior year, in each case subject to certain adjustments. Amounts received in respect of each OCGH Unit will be reduced by the amount of any non-tax related distributions received in the calendar year in which the Exchange occurs, but increased by an amount accruing daily from January 1 of such year to the date of the closing of the Exchange at a rate per annum equal to the 5-year treasury note rate as of December 31 of the prior year plus 3%. However, in 2020 and 2021, Converted OCGH Units and Phantom Units were and will be valued at $49.00 per unit, less the amount of any capital distributions received upon vesting. Thereafter any such Converted OCGH Units and Phantom Units will be valued using the same methodology applied to all other OCGH Units.
52
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Annual Limits
Exchanges of OCGH Units, other than Converted OCGH Units and Phantom Units, will be subject to certain annual caps and limitations as follows:
•Messrs. Howard Marks, Bruce Karsh, Jay Wintrob, John Frank, Sheldon Stone, Richard Masson and Larry Keele can, for the Open Period beginning in 2022, exchange up to 20% of the OCGH Units held by them collectively at the closing of the Mergers (or issued pursuant to agreements in place on March 19, 2019, or as agreed to by Brookfield). For each year thereafter, they will be able to exchange an additional 20% of such OCGH Units (subject to yearly caps and inclusive of any prior exchanges), such that they will be entitled to exchange 100% of their OCGH Units beginning during the Open Period in 2026 (subject to yearly caps and inclusive of any prior exchanges).
•Current employees other than those included in the group named in the preceding bullet can, for the Open Period beginning in 2022, sell up to 12.5% of the OCGH Units held by them collectively at the closing (or issued pursuant to agreements in place on March 13, 2019, or as agreed to by Brookfield). For each year thereafter, they will be able to exchange an additional 12.5% of such OCGH Units (subject to yearly caps and inclusive of any prior exchanges). They will be entitled to exchange 100% of their OCGH Units beginning during the Open Period in 2029 (subject to yearly caps).
•Brookfield is not obligated to permit Exchanges that, in the aggregate together with Exchanges requested by all other OCGH limited partners, exceed certain maximum amounts per year. These maximum amounts are: 20% of the exchangeable OCGH Units in calendar year 2022, 25% in 2023, 30% in 2024, and 35% in 2025 and each year thereafter.
•In the event that OCGH limited partners wish to sell or exchange units in excess of the maximum amount for a given year, OCGH will reallocate the exchangeable units among the OCGH limited partners in its sole discretion so that the amount exchanged does not exceed the maximum amount for such year.
With respect to Exchanges of Converted OCGH Units and Phantom Units, OCGH limited partners will not be entitled to exchange such units to the extent the aggregate exchange consideration payable in respect thereof, in any given Exchange, would exceed an amount equal to (i) the amount of exchange consideration that would have been payable in respect of Converted OCGH Units and Phantom Units that were eligible for participation in the applicable Open Period in accordance with their original vesting schedule as of the date the notice for such Exchange was delivered plus (ii) $20 million; and in the event that OCGH limited partners deliver election notices that would result in such excess, OCGH will reallocate such units among the OCGH limited partners in its sole discretion.
In the event that OCGH limited partners would, following an Exchange, beneficially own less than 1% of the equity of the Oaktree Operating Group (as defined in the operating agreement of the Company, as amended from time to time), Brookfield can require that all remaining OCGH Units be exchanged on 36-months’ notice. In addition, following the 8th anniversary of the closing date of the Mergers, Brookfield can discontinue the Exchange rights on 36-months’ notice. In the event that OCGH limited partners would, following the final Exchange pursuant to a discontinuation notice, beneficially own less than 5% of the equity of the Oaktree Operating Group, Brookfield can require that all remaining OCGH Units be exchanged in such final Exchange. As a result of the foregoing, the earliest the exchange rights can be terminated is the 11th anniversary of the closing date of the Mergers. Following the delivery of a discontinuation notice, the caps and limits set forth above will cease to be in effect.
Revisions to the terms of the exchange agreement governing post-vesting restrictions and exchange consideration described above and to the terms of the operating agreement of the Company and the partnership agreement of OCGH resulted in a Type I modification of unvested Class A and OCGH units at September 30, 2019. There was no incremental compensation cost resulting from the modifications.
53
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
OCGH Unit Awards
The Company did not grant any OCGH units during the nine months ended September 30, 2021. As of September 30, 2021, the Company expected to recognize compensation expense on its unvested OCGH unit and Converted OCGH unit awards of $18.7 million over a weighted average period of 2.8 years. With respect to forfeitures, the Company made an accounting policy election to account for forfeitures when they occur. Accordingly, no forfeitures have been assumed in the calculation of compensation expense.
The Company utilizes a contemporaneous valuation report in determining fair value at the date of grant for OCGH unit awards. Prior to the Merger, each valuation report was based on the market price of Oaktree’s Class A units. A discount was then applied to the Class A unit market price to reflect the lack of marketability for the OCGH units. The determination of an appropriate discount for lack of marketability was based on a review of discounts on the sale of restricted shares of publicly traded companies and multi-period put-based quantitative methods. Factors that influenced the size of the discount for lack of marketability include (a) the estimated time it would take for an OCGH unitholder to exchange units into Class A units, (b) the volatility of the Company’s business and (c) thin trading of the Class A units. Each of these factors is subject to significant judgment.
The estimated time-to-liquidity assumption ranged between 7.0 years in March 2018 to 6.4 years in the most recent valuation in 2019. The estimated time to liquidity was influenced primarily by the need, prior to the Merger, for (a) the general partner of OCGH to elect in its discretion to declare an open period during which an OCGH unitholder could exchange his or her unrestricted vested OCGH units for, at the option of the Company’s board of directors, Class A units on a 1-for-1 basis, an equivalent amount of cash based on then-prevailing market prices, other consideration of equal value or any combination of the foregoing, and (b) the approval of the Company’s board of directors to exchange such OCGH units into any of the foregoing. Board approval was based primarily on the objective of maintaining an orderly market for Oaktree’s units, but may have taken into account any other factors that the board deemed appropriate in its sole discretion. Volatility was estimated from historical and implied volatilities of the Company and 5 other comparable public alternative asset management companies.
In valuing employee OCGH unit grants, the discount percentage applied to the then-prevailing Class A unit trading price was 20% for all OCGH units granted in the first three quarters of 2018 and 17.5% for the fourth quarter of 2018 through September 30, 2019. After the Merger, OCGH unit grants are valued based on a formula as described above under “Restated Exchange Agreement - Valuation” and reflect a discount for lack of marketability due to the post-vesting restrictions described above. Factors that influence the formula-based valuation include the estimated time it would take for an OCGH unitholder to exchange units for value pursuant to the Restated Exchange Agreement and estimates of the Company’s future results, which are inputs to the valuation formula. Each of these factors is subject to significant judgment.
Through December 31, 2021, Converted OCGH Units will be valued at $49.00 per unit, less the amount of any capital distributions received upon vesting. Thereafter, any such Converted OCGH Units will be valued using the same methodology applied to all other OCGH units.
54
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
A summary of the status of the Company’s unvested Converted OCGH units and other OCGH unit awards and changes for the period presented are set forth below (actual dollars per unit):
Converted OCGH Units (1) | OCGH Units | ||||||||||||||||||||||
| Number of Units | Weighted Average Grant Date Fair Value | Number of Units | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
Balance as of December 31, 2020 (2) | 462,742 | $ | 46.25 | 556,352 | $ | 37.87 | |||||||||||||||||
| Granted | — | — | — | — | |||||||||||||||||||
| Vested | (181,852) | 45.38 | (164,193) | 37.66 | |||||||||||||||||||
| Forfeited | (2,450) | 49.52 | — | — | |||||||||||||||||||
| Balance as of September 30, 2021 | 278,440 | $ | 46.80 | 392,159 | $ | 37.96 | |||||||||||||||||
(1) Upon completion of the Merger, each unvested Class A Unit held by current, or in certain cases former, employees, officers and directors of Oaktree and its subsidiaries was converted into 1 unvested OCGH Unit (each, a “Converted OCGH Unit”) and thereafter became subject to the terms and conditions of the OCGH limited partnership agreement. The Converted OCGH Units (i) are subject to the same vesting terms that were applicable to such units prior to the completion of the Merger, (ii) are entitled to receive ongoing distributions in respect of earnings, but not capital distributions and (iii) upon vesting, receive the accumulated value of capital distributions that accrued while such units were unvested. However, in 2020 and 2021, Converted OCGH Units will be valued at $49.00 per unit, less the amount of any capital distributions received upon vesting.
(2) Effective with the Restructuring, compensation related to unvested equity awards granted for service provided by employees of OCM is no longer included in these condensed consolidated financial statements.
Equity Value Units
OCGH equity value units (“EVUs”) represent special limited partnership units in OCGH that entitle the holder the right to receive special distributions that will be settled in OCGH units, based on value created during a specified period in excess of a fixed “Base Value.” The value created is measured on a per unit basis, based on the appreciation of the OCGH units (before the Merger, the Class A units) and certain components of quarterly distributions with respect to OCGH units over the period beginning on January 1, 2015 and ending on each of December 31, 2019, December 31, 2020 and December 31, 2021, with one-third of the EVUs recapitalizing on each such date. As of September 30, 2021, the value created did not exceed the Base Value. EVUs also give the holder the right, subject to service vesting and Oaktree performance relative to the accreting Base Value, to receive certain quarterly distributions from OCGH. EVUs do not entitle the holder to any voting rights.
The value received under the EVUs will be reduced by (i) distributions received by the holder on 225,000 OCGH units granted to the holder on April 26, 2017, (ii) the value of the portion of profit sharing payments received by the holder attributable to the net incentive income received from certain funds, and (iii) the full value of the OCGH units granted to the holder on April 26, 2017. To the extent that the reduction relates to the value of any such OCGH units that are unvested at the time of the reduction, such OCGH units will vest at that time.
Certain EVUs provide the holder with liquidity rights in respect of the special distributions, if any, that will be settled in OCGH units. The fair value is affected by the Class A unit trading price and assumptions regarding certain complex and subjective variables, including the expected Class A unit trading price volatility, distributions and exercise timing, and the risk-free interest rate.
All of the outstanding EVUs were granted to an employee of OCM, accordingly, subsequent to the Restructuring, compensation expense related to these awards is no longer included in these condensed consolidated financial statements.
55
Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Deferred Equity Units
A deferred equity unit represents a special unit award that, when vested, will be settled with an unvested OCGH unit on a 1-for-1 basis. The number of deferred equity units that will vest is based on the achievement of certain performance targets through June 2024. Once a performance target has been met, the applicable number of OCGH units will be issued and begin to vest over periods of up to 10.0 years. The holder of a deferred equity unit is not entitled to any distributions until settled by the issuance of an OCGH unit. As of September 30, 2021, there were 767,499 deferred equity units outstanding, none of which were expected to vest. All of the outstanding deferred equity units were granted to employees of OCM, accordingly, subsequent to the Restructuring, compensation expense related to these awards is no longer included in these condensed consolidated financial statements.
14. INCOME TAXES AND RELATED PAYMENTS
The Company is a publicly traded partnership and currently holds interests in Oaktree Capital I, L.P. (a non-corporate entity that is not subject to U.S. federal and state corporate income tax) and Oaktree Capital Management (Cayman), L.P. (which holds subsidiaries that are taxable in non-U.S. jurisdictions).
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local and foreign tax regulators. With limited exceptions, the Company is no longer subject to income tax audits by taxing authorities for periods before 2017. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to its tax examinations and that any settlements related thereto will not have a material adverse effect on the Company’s condensed consolidated financial statements; however, there can be no assurances as to the ultimate outcomes.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Oaktree enters into contracts that contain certain representations, warranties and indemnifications. The Company’s exposure under these arrangements would involve future claims that have not yet been asserted. Inasmuch as no such claims currently exist or are expected to arise, the Company has not accrued any liability in connection with these indemnifications.
Legal Actions
Oaktree, its affiliates, investment professionals, and portfolio companies are routinely involved in litigation and other legal actions in the ordinary course of their business and investing activities. In addition, Oaktree is subject to the authority of a number of U.S. and non-U.S. regulators, including the SEC and the Financial Industry Regulatory Authority, and those authorities periodically conduct examinations of Oaktree and make other inquiries that may result in the commencement of regulatory proceedings against Oaktree and its personnel. Oaktree is currently not subject to any pending actions or regulatory proceedings that either individually or in the aggregate are expected to have a material impact on its condensed consolidated financial statements.
Incentive Income
In addition to the incentive income recognized by the Company, certain of its funds have amounts recorded as potentially allocable to the Company as its share of potential future incentive income, based on each fund’s net asset value. Inasmuch as this incentive income is contingent upon future investment activity and other factors, it is not recognized by the Company as revenue until it is probable that a significant reversal will not occur. As of September 30, 2021 and December 31, 2020, respectively, the aggregate of such amounts recorded at the fund level in excess of incentive income recognized by the Company was $1,949,827 and $1,321,782, for which related direct incentive income compensation expense was estimated to be $1,044,223 and $710,774, respectively.
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Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Commitments to Funds
As of September 30, 2021 and December 31, 2020, the Company, generally in its capacity as general partner, had undrawn capital commitments of $315.3 million and $350.6 million, respectively, including commitments to both unconsolidated and consolidated funds. Additionally, as of September 30, 2021, the Company had undrawn capital commitments of $600.0 million in its capacity as a limited partner in Opps XI (as defined in note 16).
Investment Commitments of the Consolidated Funds
Certain of the consolidated funds are parties to credit arrangements that provide for the issuance of letters of credit and/or revolving loans, which may require the particular fund to extend loans to investee companies. The consolidated funds use the same investment criteria in making these commitments as they do for investments that are included in the condensed consolidated statements of financial condition. The unfunded liability associated with these credit arrangements is equal to the amount by which the contractual loan commitment exceeds the sum of funded debt and cash held in escrow, if any. As of September 30, 2021 and December 31, 2020, the consolidated funds had potential aggregate commitments of $6.0 million and $1.1 million, respectively. These commitments are expected to be funded by the funds’ cash balances, proceeds from asset sales or drawdowns against existing capital commitments.
A consolidated fund may agree to guarantee the repayment obligations of certain investee companies. As of September 30, 2021 and December 31, 2020, there were no guaranteed amounts under such arrangements.
Certain consolidated funds are investment companies that are required to disclose financial support provided or contractually required to be provided to any of their portfolio companies. During the nine months ended September 30, 2021, the consolidated funds did not provide any financial support to portfolio companies.
16. RELATED-PARTY TRANSACTIONS
The Company considers its senior executives, employees and unconsolidated Oaktree funds to be affiliates (as defined in the FASB ASC Master Glossary). Amounts due from and to affiliates are set forth below. The fair value of amounts due from and to affiliates is a Level III valuation and was valued based on a discounted cash-flow analysis. The carrying value of amounts due from affiliates approximated fair value due to their short-term nature or because their weighted average interest rate approximated the Company’s cost of debt.
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Due from affiliates: | |||||||||||
| Loans to affiliates and employees | $ | 190,026 | $ | 2,372 | |||||||
| Amounts due from unconsolidated funds | 5,818 | 6,429 | |||||||||
| Management fees and incentive income due from unconsolidated funds and affiliates | 64,613 | 119,600 | |||||||||
| Payments made on behalf of unconsolidated entities | 35,712 | 905 | |||||||||
| Non-interest bearing advances made to certain non-controlling interest holders and employees | 186 | 235 | |||||||||
| Total due from affiliates | $ | 296,355 | $ | 129,541 | |||||||
| Due to affiliates: | |||||||||||
| Amounts due to unconsolidated entities | $ | 223 | $ | 9,688 | |||||||
| Amounts due to senior executives, certain non-controlling interest holders and employees | 222 | — | |||||||||
| Total due to affiliates | $ | 445 | $ | 9,688 | |||||||
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Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Loans To Affiliates and Employees
Loans primarily consist of interest-bearing loans made to affiliates and interest-bearing loans made to certain Oaktree employees to meet tax obligations related to vesting of equity awards.
On May 7, 2021 the Company, through its consolidated subsidiary Oaktree Capital I, L.P, entered into 2 revolving line of credit notes with Oaktree Capital Management, L.P., one as a borrower and the other as a lender. Both revolving line of credit notes allow for outstanding principal amounts not to exceed $250.0 million and mature on May 7, 2024. As of September 30, 2021, Oaktree Capital Management, L.P. has borrowed $190.0 million from the Company through Oaktree Capital I, L.P, and generated interest income of $26 and $52 for the three and nine months ended September 30, 2021, respectively.
The employee loans, which are generally recourse to the borrower or secured by vested equity and other collateral, typically bear interest at the Company’s cost of debt. As of September 30, 2021, there were no Company loans to employees, and as of December 31, 2020, the Company’s loans to employees totaled $2.4 million. The Company’s loans generated no interest income and interest income of $3 for the three and nine months ended September 30, 2021, respectively, and $2 and $7 for the three and nine months ended September 30, 2020, respectively.
Due From Oaktree Funds
In the normal course of business, the Company advances certain expenses on behalf of Oaktree funds. Amounts advanced on behalf of consolidated funds are eliminated in consolidation. Certain expenses paid by the Company, which typically are employee travel and other costs associated with particular portfolio company holdings, are reimbursed to the Company by the portfolio companies. In addition, the Company recognizes distributions and proceeds from corporate investments in Oaktree funds for which it serves as general partner, and other third-party managed funds and companies as receivables when certain criteria is met.
Revenues Earned From Oaktree Funds
In aggregate, management fees and incentive income earned from unconsolidated Oaktree funds totaled $169.4 million and $816.6 million for the three and nine months ended September 30, 2021, respectively, and $1.5 million and $46.8 million for the three and nine months ended September 30, 2020, respectively.
Other Investment Transactions
The Company’s senior executives, directors and senior professionals are permitted to invest their own capital (or the capital of family trusts or other estate planning vehicles they control) in Oaktree funds, for which they typically pay the particular fund’s management fee but not its incentive allocation. To facilitate the funding of capital calls by funds in which employees are invested, the Company periodically advances on a short-term basis the capital calls on certain employees’ behalf. These advances are reimbursed generally toward the end of the calendar quarter in which the capital calls occurred. Amounts advanced by the Company are included within “non-interest bearing advances made to certain non-controlling interest holders and employees” in the table above.
Aircraft Services
OCM owns an aircraft for business purposes. Howard Marks, the Company’s Co-Chairman, may use this aircraft for personal travel and will reimburse OCM to the extent his use of the aircraft for personal travel exceeds a certain threshold pursuant to an Oaktree policy. Oaktree also provides certain senior executives a personal travel allowance for private aircraft usage up to a certain threshold pursuant to the same Oaktree policy. Additionally, Oaktree occasionally makes use of an aircraft owned by one of its senior executives for business purposes at a price to Oaktree that is based on market rates.
Special Allocations
Certain senior executives receive special allocations based on a percentage of profits of the Oaktree Operating Group. These special allocations, which are recorded as compensation expense, are made on a current basis for so long as they remain senior executives of the Company, with limited exceptions.
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Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
Administrative Services
Effective October 1, 2019, the Company is party to the Services Agreement with OCM. Pursuant to the Services Agreement, OCM provides administrative services to the Company necessary for the operations of the Company, which include providing office facilities, equipment, clerical, bookkeeping and record keeping services at such facilities and such other services as OCM, subject to review by the Company’s Board of Directors, shall from time to time deem to be necessary or useful to perform its obligations under the Services Agreement. OCM may, on behalf of the Company, conduct relations and negotiate agreements with custodians, trustees, depositories, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable. OCM makes reports to the Company’s Board of Directors of its performance of obligations under the Services Agreement and furnishes advice and recommendations with respect to such other aspects of the Company’s business and affairs, in each case, as it shall determine to be desirable or as reasonably required by the Company’s Board of Directors.
OCM is responsible for the financial and other records that the Company is required to maintain and prepares, prints and disseminates reports to the Company’s unitholders and all other materials filed with the SEC. In addition, OCM assists the Company in overseeing the preparation and filing of the Company’s tax returns, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others.
On an annual basis the Company will reimburse OCM $750,000 of the costs incurred for providing these administrative services. This reimbursement is payable quarterly, in equal installments, and relates to the Company’s allocable portion of overhead and other expenses (facilities and personnel) incurred by OCM in performing its obligations under the Services Agreement. This amount includes the Company’s allocable portion of (i) the rent of the Company’s principal executive offices (which are located in a building owned by a Brookfield affiliate) at market rates and (ii) the costs of compensation and related expenses of various personnel at Oaktree that perform duties for the Company. The Services Agreement may be terminated by either party without penalty upon 90 days’ written notice to the other.
The Company incurred administrative services expense of $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, no amounts and $0.8 million, respectively were included in “Due to affiliates” in the condensed consolidated statements of financial condition.
Leases
OCM leases certain office space from affiliates of Brookfield. Effective with the Restructuring, OCM’s lease expense and obligations are no longer included in these condensed consolidated financial statements.
Subordinated Credit Facility
Oaktree Capital I, along with certain other Oaktree Operating Group members as co-borrowers, are parties to a credit agreement with a subsidiary of Brookfield that provides for a subordinated credit facility maturing on May 19, 2023. The subordinated credit facility has a revolving loan commitment of $250 million and borrowings generally bear interest at a spread to either LIBOR or an alternative base rate. Borrowings on the subordinated credit facility are subordinate to the outstanding debt obligations and borrowings on the primary credit facility of Oaktree Capital I and its co-borrowers as detailed in note 8. Oaktree Capital I is jointly and severally liable, along with its co-obligors for outstanding borrowings on the subordinated credit facility. As set forth in note 8, the Company’s financial statements generally will not reflect debt obligations, interest expense or related liabilities associated with its operating subsidiaries until such time as Oaktree Capital I directly borrows from the subordinated credit facility. No amounts were outstanding on the subordinated credit facility as of September 30, 2021.
Investment in Oaktree Opportunities Fund XI
On August 3, 2020, the Company subscribed for a limited partner interest in, and made a capital commitment of, $750 million to Oaktree Opportunities Fund XI, L.P., a parallel investment vehicle thereof or a feeder
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Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2021
($ in thousands, except where noted)
fund in respect of one of the foregoing (such limited partner interest, the “Opps XI Investment” and such fund entities collectively, “Opps XI”). In order to make the Opps XI Investment, the Company’s sole Class A unitholder, or one of its affiliates, will contribute cash as a capital contribution (the “Opps XI Investment Cash”) as and to the extent required to satisfy the Company’s obligations to Opps XI. The Company will use the Opps XI Investment Cash solely to fund the Opps XI Investment and satisfy its obligations in respect of Opps XI and distributions from the Opps XI Investment are intended for the benefit of the Class A unitholder, subject to applicable law. The Company’s preferred unitholders should not rely on distributions received by the Company in respect of the Company’s Opps XI Investment for payment of dividends or redemption of the preferred units. During the nine months ended September 30, 2021, the Company funded $112.5 million of its capital commitment. As of September 30, 2021, the Company has funded in the aggregate $150 million of the $750 million capital commitment.
17. SEGMENT REPORTING
As a global investment manager, the Company provides investment management services through funds, separate accounts and subsidiary services agreements. The Company earns revenues from the management fees and incentive income generated by the funds that it manages or serves as the general partner. Additionally, for acting as a sub-investment manager, or sub-advisor, to certain Oaktree funds, the Company earns sub-advisory fees. Under the subsidiary services agreements, the Company provides certain investment and marketing related services to Oaktree affiliated entities. Management uses a consolidated approach to assess performance and allocate resources. As such, the Company’s business is comprised of 1 segment, the investment management business.
18. SUBSEQUENT EVENTS
Class A Unit Distributions
A distribution of $0.83 per Class A unit was paid on November 10, 2021 to holders of record at the close of business on October 31, 2021.
Preferred Unit Distributions
A distribution of $0.414063 per Series A preferred unit will be paid on December 15, 2021 to Series A preferred unitholders of record at the close of business on December 1, 2021.
A distribution of $0.409375 per Series B preferred unit will be paid on December 15, 2021 to Series B preferred unitholders of record at the close of business on December 1, 2021.
Private Placement Notes
On November 4, 2021, OCM entered into a note and guaranty agreement with certain accredited investors pursuant to which OCM agreed to issue and sell to such investors $200 million aggregate principal amount of its 3.06% Senior Notes due January 12, 2037. These notes are guaranteed by Oaktree Capital I, a consolidated subsidiary of the Company, along with Oaktree Capital II and Oaktree AIF, as co-obligors. The issuance and funding of these notes are subject to customary closing conditions and are expected to occur on or before January 12, 2022. As OCM is the issuer of such notes, the outstanding principal and interest payments guaranteed by Oaktree Capital I will not be included in the Company’s financial statements unless an event of default occurs.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Oaktree Capital Group, LLC and the related notes included within this quarterly report. This discussion contains forward-looking statements that are subject to risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. The factors listed under “Risk Factors” and “Forward-Looking Statements” in this quarterly report and under “Risk Factors” in our annual report provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in any forward-looking statements.
Business Overview
Oaktree is a leading global alternative investment management firm with expertise in investing in credit, real assets, private equity, and listed equities. Oaktree’s mission is to deliver superior investment results with risk under control and to conduct its business with the highest integrity. Oaktree emphasizes an opportunistic, value-oriented and risk-controlled approach to its investments. Over more than three decades, Oaktree has developed a large and growing client base through its ability to identify and capitalize on opportunities for attractive investment returns in less efficient markets.
Oaktree was formed in 1995 by a group of individuals who had been investing together since the mid-1980s. Oaktree’s founders were pioneers in the management of high yield bonds, convertible securities and distressed debt. From those roots Oaktree has developed a diversified mix of specialized credit- and equity-oriented strategies. Oaktree operates according to a unifying investment philosophy, which consists of six tenets-risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing-and is complemented by a set of core business principles that articulate our commitment to excellence in investing, commonality of interests with clients, a collaborative and cooperative culture, and a disciplined, opportunistic approach to the expansion of products.
Business Environment and Developments
As a global investment manager, Oaktree is affected by a wide range of factors, including the condition of the global economy and financial markets; the relative attractiveness of Oaktree’s investment strategies and investors’ demand for them; and regulatory or other governmental policies or actions. Global economic conditions can significantly impact the values of Oaktree’s and its funds’ investments and the ability to make new investments or sell existing investments for these funds. Historically, however, Oaktree’s diversified nature, of both its investment strategies and revenue mix, has generally allowed it to benefit from both strong and weak economic environments. Weak economies and the declining financial markets that typically accompany them tend to dampen revenues from asset-based management fees, investment realizations or price appreciation, but their prospect can present opportunities to raise relatively larger amounts of capital for certain strategies, especially opportunistic credit. Additionally, weak financial markets may also present more opportunities for funds to make investments at reduced prices. Conversely, strong financial markets generally increase the value of fund investments, which positions Oaktree, and us, for growth in management fees that are based on asset value, and typically create favorable exit opportunities that enhance the prospect for incentive income and fund-related realized investment income proceeds. Those same markets may delay or diminish opportunities to deploy capital and thus management fees from certain funds.
COVID-19 continues to pose serious threats to the health and economic wellbeing of the worldwide population and the overall economy in light of COVID-19 variants that seem to spread more easily than the original COVID-19 virus. The number of reported COVID-19 infections are rising again in certain countries worldwide likely due to these variants and the relaxation of certain efforts to mitigate the spread of COVID-19 previously imposed by governmental authorities. While the equity markets have rebounded from their steep declines in March 2020 after the World Health Organization announced that infections of COVID-19 had become a pandemic, there is continued uncertainty as to the duration of the global health and economic impact caused by COVID-19 even with COVID-19 vaccines now available. Actions at the outset of the pandemic that were intended to mitigate the spread of COVID-19 and the worldwide efforts to isolate at home and practice social distancing had caused a dramatic increase in unemployment and economic instability in the United States and in certain other regions in which Oaktree operates. While such instability in certain parts of the world, including in the United States, have shown signs of recovery in large part because of the availability of COVID-19 vaccines, the continued uncertainty of COVID-19 variants may lead to renewed governmental efforts to mitigate COVID-19 spread seen at the beginning of the pandemic. Such renewed
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mitigation efforts will create significant uncertainty and volatility in Oaktree’s business and its funds’ and their respective portfolio companies’ businesses as compared to pre-pandemic levels.
Prolonged difficult market and economic conditions and uncertainty caused by COVID-19 will adversely impact the valuations of Oaktree’s and its funds’ investments, particularly if the value of an investment is determined in whole or in part by reference to public equity, public debt, or private debt markets. However, while any market dislocation caused by COVID-19 will adversely impact the value of Oaktree’s and its funds’ investments, the increased volatility in the financial markets may also present attractive investment opportunities for certain Oaktree investment strategies. Currently, we are unaware of any material risk to the stability of our condensed consolidated financial statements caused by any COVID-19 uncertainties or the materiality of any effect such uncertainties may have on our business and operations. Please see “Item 1A. Risk Factors— The outbreak of a novel strain of coronavirus disease (“COVID-19”) has significantly disrupted economic conditions and may adversely affect our operations, business, financial performance and operating results" within Oaktree’s annual report.
Brookfield Merger
On March 13, 2019, Oaktree, Brookfield Asset Management Inc., a corporation incorporated under the laws of the Province of Ontario (“Brookfield”), Berlin Merger Sub, LLC, a Delaware limited liability company (“Merger Sub”) and a wholly-owned subsidiary of Brookfield, Oslo Holdings LLC, a Delaware limited liability company (“SellerCo”) and a wholly-owned subsidiary of Oaktree Capital Group Holdings, L.P. (“OCGH”), and Oslo Holdings Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of Oaktree (“Seller MergerCo”) entered into an agreement and plan of merger (the “Merger Agreement”). Pursuant to the terms and conditions set forth in the Merger Agreement, effective on September 30, 2019, (i) Merger Sub merged with and into Oaktree (the “Merger”), with Oaktree continuing as the surviving entity, and (ii) immediately following the Merger, SellerCo merged with and into Seller MergerCo (the “Subsequent Merger” and together with the Merger, the “Mergers”), with Seller MergerCo continuing as the surviving entity.
Upon the completion of the Mergers on September 30, 2019, Brookfield acquired 61.2% of Oaktree’s business in a stock and cash transaction. The remaining 38.8% of the business continued to be owned by OCGH, whose unitholders consist primarily of Oaktree’s founders and certain other members of management and current and former employees. As part of the Merger, Brookfield acquired all outstanding vested OCG Class A units for, at the election of OCG Class A unitholders, either $49.00 in cash or 1.0770 Class A shares of Brookfield per OCG Class A unit (subject to pro-ration to ensure that no more than fifty percent (50%) of the aggregate merger consideration is paid in the form of cash or stock), in each case, without interest and subject to any applicable withholding taxes. In addition, as part of the Subsequent Merger the founders, senior management, and current and former employee-unitholders of OCGH sold 20% of their OCGH units to Brookfield for the same consideration as the OCG Class A unitholders received in the merger.
Restructuring Transaction
On the closing date of the Mergers, we and certain other entities entered into a Restructuring Agreement (the “Restructuring”) pursuant to which our direct and indirect ownership of general partner and limited partner interests in certain Oaktree Operating Group entities were transferred to newly-formed, indirect subsidiaries of Brookfield as of October 1, 2019. As a result, as of October 1, 2019, four of the six Oaktree Operating Group entities are no longer our indirect subsidiaries. Accordingly, our condensed consolidated financial statements will reflect our indirect economic interest in only two of the Oaktree Operating Group entities: (i) Oaktree Capital I, L.P. (“Oaktree Capital I”), which acts as or controls the general partner of certain Oaktree funds and which holds a majority of Oaktree’s investments in its funds and (ii) Oaktree Capital Management (Cayman), L.P. (“OCM Cayman”), which represents Oaktree’s non-U.S. fee business. As of October 1, 2019, our condensed consolidated financial statements will no longer reflect any economic interests in the remaining four Oaktree Operating Group entities: (i) Oaktree Capital II, L.P. (“Oaktree Capital II”), which acts as or controls the general partner of certain Oaktree funds and which includes Oaktree’s investments in certain funds and other businesses, including Oaktree’s investment in DoubleLine, (ii) Oaktree Capital Management, L.P. (“OCM”), an entity that serves as the U.S. registered investment adviser to most of the Oaktree funds, (iii) Oaktree Investment Holdings, L.P. (“Oaktree Investment Holdings”), which holds certain corporate investments in other entities and (iv) Oaktree AIF Investments, L.P. (“Oaktree AIF”), which primarily holds interests in certain Oaktree fund investments for regulatory and structuring purposes. As a consequence, the assets of Oaktree Capital II, OCM, Oaktree Investment Holdings and Oaktree AIF will no longer support our operations. Please see “Business—Organizational Structure” in our annual report for a diagram of our organizational structure after the Restructuring.
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As a result of the Restructuring of our business, references to “Oaktree” in this quarterly report will generally refer to the collective business of the Oaktree Operating Group, of which we are a component.
Understanding Our Results—Consolidation of Oaktree Funds
Generally accepted accounting principles in the United States (“GAAP”) requires us to consolidate entities in which we have a direct or indirect controlling financial interest based on either a variable interest model or voting interest model. A limited partnership or similar entity is a variable interest entity (“VIE”) if the unaffiliated limited partners do not have substantive kick-out or participating rights. Most of the Oaktree funds are VIEs because they have not granted unaffiliated limited partners substantive kick-out or participating rights. The Company consolidates those VIEs in which we are the primary beneficiary. For entities that are not VIEs, consolidation is evaluated through a majority voting interest model. Please see note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report for more information.
We do not consolidate most of the Oaktree funds that are VIEs because we are not the primary beneficiary due to the fact that our fee arrangements are considered at-market and thus not deemed to be variable interests, and we do not hold any other interests in those funds that are considered to be more than insignificant. However, investment vehicles in which we have a significant investment, such as CLOs and certain Oaktree funds, are consolidated (“consolidated funds”). When a CLO or fund is consolidated, we reflect the assets, liabilities, revenues, expenses and cash flows of the consolidated funds on a gross basis, and the majority of the economic interests in those consolidated funds, which are held by third-party investors, are reflected as debt obligations of CLOs or non-controlling interests in consolidated funds in the condensed consolidated financial statements. All of the revenues earned by us as investment manager of the consolidated funds are eliminated in consolidation. However, because the eliminated amounts are earned from and funded by third-party investors, the consolidation of a fund does not impact net income or loss attributable to us.
Certain entities in which we have the ability to exert significant influence, including unconsolidated Oaktree funds for which we act as general partner, are accounted for under the equity method of accounting. As a result of the Restructuring, we re-assessed our prior variable interest entity consolidation determinations, noting that we were no longer the primary beneficiary of three funds in which our direct ownership interests are held by Oaktree Operating Group entities that are no longer directly controlled by us.
Revenues
Our business generates three types of revenue: management fees, incentive income and investment income. Management fees earned from third parties are billed monthly or quarterly based on annual rates and are typically earned for each of the funds that we manage. The contractual terms of management fees generally vary by fund structure. Management fees also may include performance-based fees earned from certain open-end and evergreen fund accounts. Subsequent to the Restructuring, our management fees consist primarily of fees earned from funds managed by OCM Cayman and sub-advisory fees for services provided to OCM. We also have the potential to earn incentive income from most of the closed-end and certain evergreen funds managed by Oaktree in our capacity as the general partner of those funds. These closed-end funds generally provide that we receive incentive income only after we have returned to our investors all of their contributed capital plus an annual preferred return, typically 8%. Once this occurs, we generally receive as incentive income 80% of all distributions otherwise attributable to our investors, and those investors receive the remaining 20% until we have received, as incentive income, 20% of all such distributions in excess of the contributed capital from the inception of the fund. Thereafter, all such future distributions attributable to our investors are distributed 80% to those investors and 20% to us as incentive income. Our third revenue source, investment income, represents our pro-rata share of income or loss from our investments, generally in our capacity as general partner in Oaktree funds and as an investor in our CLOs and third-party managed funds and companies.
We may earn incentive income upon deconsolidation of a SPAC arising from the completion of a merger with an identified target. Upon deconsolidation, we will derecognize the net assets of the entity and record any gain or loss related to the remeasurement of its investments to fair value as incentive income in its condensed consolidated statements of operations. Subsequent fair value changes in our investments held in the entity will be recorded in investment income in our condensed consolidated statements of operations.
Our consolidated revenues reflect the elimination of all management fees, incentive income and investment income earned related to consolidated Oaktree funds. Investment income is presented within the other income (loss) section of our condensed consolidated statements of operations. Please see “Business—Structure and Operation of Our Business—Structure of Funds” in our annual report for a detailed discussion of the structure of Oaktree funds.
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Expenses
Compensation and Benefits
Compensation and benefits expense reflects all compensation-related items not directly related to incentive income, investment income or the vesting of Class A units, OCGH units, OCGH equity value units (“EVUs”), deferred equity units and other performance-based units, and includes salaries, bonuses, compensation based on management fees or a definition of profits, employee benefits, payroll taxes and phantom equity awards. Phantom equity awards represent liability-classified awards subject to vesting and remeasurement at the end of each reporting period. Phantom equity award expense reflects the vesting of those liability-classified awards, the equity distribution declared in the period and changes in the OCGH unit fair value. Compensation and benefits expense reflects the gross-up of reimbursable costs incurred on behalf of Oaktree funds in which the Company has determined it is the principal. Subsequent to the Restructuring, our consolidated operating results primarily include compensation and benefits expense related to employees of OCM Cayman.
Equity-based Compensation
Equity-based compensation expense reflects the non-cash charge associated with grants of Class A units, OCGH units, EVUs, deferred equity units and other performance-based units. Subsequent to the Restructuring, our consolidated operating results primarily include equity-based compensation expense related to employees of OCM Cayman.
Incentive Income Compensation
Incentive income compensation expense primarily reflects compensation directly related to incentive income, which generally consists of percentage interests (sometimes referred to as “points” or an allocation of shares received upon the completion of a successful SPAC merger) that are granted to Oaktree investment professionals associated with the particular fund or SPAC that generated the incentive income, and secondarily, compensation directly related to investment income. There is no fixed percentage for the incentive income-related portion of this compensation, either by fund, SPAC or strategy. In general, within a particular strategy more recent funds have a higher percentage of aggregate incentive income compensation expense than do older funds. The percentage that consolidated incentive income compensation expense represents of the particular period’s consolidated incentive income may not be meaningful because incentive income from consolidated funds or SPACs is eliminated in consolidation, whereas no incentive income compensation expense is eliminated in consolidation, and, in periods prior to the adoption of the new revenue standard on January 1, 2018, the criteria for recognizing income and expense differed and thus may have resulted in timing differences. Subsequent to the Restructuring, our consolidated operating results primarily include incentive income compensation expense related to employees of OCM Cayman.
General and Administrative
General and administrative expense includes costs related to occupancy, outside auditors, tax professionals, legal advisers, research, consultants, travel and entertainment, communications and information services, business process outsourcing, foreign-exchange activity, insurance, placement costs, changes in the contingent consideration liability, and other general items related directly to the Company’s operations. These expenses are net of amounts borne by fund investors and are not offset by credits attributable to fund investors’ non-controlling interests in consolidated funds. General and administrative expense reflects the gross-up of reimbursable costs incurred on behalf of Oaktree funds in which the Company has determined it is the principal. Subsequent to the Restructuring, general and administrative expenses primarily include direct and reimbursable expenses incurred by Oaktree Capital I and OCM Cayman and the Company's share of certain expenses through a service agreement with OCM.
Depreciation and Amortization
Depreciation and amortization expense includes costs associated with the purchase of furniture and equipment, capitalized software, office leasehold improvements and acquired intangibles. Furniture and equipment and capitalized software costs are depreciated using the straight-line method over the estimated useful life of the asset, which is generally three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the respective estimated useful life or the lease term. Acquired intangibles primarily relate to contractual rights and are amortized over their estimated useful lives, which range from seven to 25 years. Subsequent to the Restructuring, the majority of Oaktree's acquired intangible assets are no longer included in our consolidated statement of financial condition.
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Consolidated Fund Expenses
Consolidated fund expenses consist primarily of costs, expenses and fees that are incurred by, or arise out of the operation and activities of or otherwise are related to, our consolidated funds, including, without limitation, travel expenses, professional fees, research and software expenses, insurance, and other costs associated with administering and supporting those funds. Inasmuch as most of these fund expenses are borne by third-party investors, they reduce the investors’ interests in the consolidated funds and have no impact on net income or loss attributable to the Company.
Other Income (Loss)
Interest Expense
Interest expense primarily reflects the interest expense of the consolidated funds, as well as the interest expense of Oaktree and its operating subsidiaries. Prior to the Restructuring, our financial statements reflected debt service of the entire Oaktree Operating Group. After the Restructuring since OCM has historically been the only direct borrower or issuer under credit agreements and private placement notes with third parties and made all payments of principal and interest, our financial statements generally will not reflect debt obligations, interest expense or related liabilities associated with our operating subsidiaries, until such time as Oaktree Capital I, one of our two remaining Oaktree Operating Group entities, directly borrows or issues notes under such arrangements.
Interest and Dividend Income
Interest and dividend income consists of interest and dividend income earned on the investments held by our consolidated funds, and interest income earned by Oaktree and its operating subsidiaries.
Net Realized Gain (Loss) on Consolidated Funds’ Investments
Net realized gain (loss) on consolidated funds’ investments consists of realized gains and losses arising from dispositions of investments held by our consolidated funds.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments reflects both unrealized gains and losses on investments held by our consolidated funds and the reversal upon disposition of investments of unrealized gains and losses previously recognized for those investments.
Investment Income
Investment income represents our pro-rata share of income or loss from our investments, generally in our capacity as general partner in certain Oaktree funds and as an investor in our CLOs and third-party managed funds and companies. Investment income, as reflected in our condensed consolidated statements of operations, excludes investment income earned by us from our consolidated funds.
Other Income (Expense), Net
Other income (expense), net represents non-operating income or expense, including income related to amounts received from a legacy Highstar fund for contractually reimbursable costs in connection with the Highstar acquisition.
Income Taxes
The Company is a publicly traded partnership. Because it satisfies the qualifying income test, it is not required to be treated as a corporation for U.S. federal and state income tax purposes; rather it is taxed as a partnership. The Company currently holds interests in Oaktree Capital I, L.P. (a non-corporate entity that is not subject to U.S. federal corporate income tax) and Oaktree Capital Management (Cayman), L.P. (which holds subsidiaries that are taxable in non-U.S. jurisdictions).
Prior to the Restructuring on October 1, 2019, Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., which were two of the Company’s Intermediate Holding Companies and wholly-owned corporate subsidiaries, were subject to U.S. federal and state income taxes. The remainder of the Company’s income was generally not subject to U.S. corporate-level taxation.
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Upon the Restructuring, Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. merged with and into newly formed, indirect subsidiaries of Brookfield, with those subsidiaries surviving the mergers. As a result, as of October 1, 2019, Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. ceased to exist and the Company no longer includes on our financial statements economic interests in Oaktree Capital II, Oaktree Investment Holdings, OCM, and Oaktree AIF. All deferred tax balances related to these entities were deconsolidated as part of the Restructuring effective October 1, 2019.
Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amount of assets and liabilities and their respective tax bases, using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets would be reduced by a valuation allowance if it becomes more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company analyzes its tax filing positions for all open tax years in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns. If the Company determines that uncertainties in tax positions exist, a reserve is established. The Company recognizes accrued interest and penalties related to uncertain tax positions within income tax expense in the condensed consolidated statements of operations.
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties. The Company reviews its tax positions quarterly and adjusts its tax balances as new information becomes available.
The Oaktree funds are generally not subject to U.S. federal and state income taxes and, consequently, no income tax provision has been made in the accompanying condensed consolidated financial statements because individual partners are responsible for their proportionate share of the taxable income.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests represents the ownership interests that third parties hold in entities that are consolidated in our financial statements. These interests fall into two categories:
•Net Income Attributable to Non-controlling Interests in Consolidated Funds. This category represents the economic interests of the unaffiliated investors in the consolidated funds, as well as the equity interests held by third-party investors in CLOs that had not yet priced as of the respective period end. Those interests are primarily driven by the investment performance of the consolidated funds. In comparison to net income, this measure excludes our operating results and other items solely attributable to the Company; and,
•Net Income Attributable to Non-controlling Interests in Consolidated Subsidiaries. This category primarily represents the economic interest in the Oaktree Operating Group owned by OCGH (“OCGH non-controlling interest”), as well as the economic interest in certain consolidated subsidiaries held by third parties. Prior to the Restructuring, this category included the OCGH non-controlling interest in all six Oaktree Operating Group entities; subsequent to the Restructuring, it includes only the OCGH non-controlling interest in Oaktree Capital I and OCM Cayman. The OCGH non-controlling interest is determined at the Oaktree Operating Group level based on the weighted average proportionate share of Oaktree Operating Group units held by the OCGH unitholders. Inasmuch as the number of outstanding Oaktree Operating Group units corresponds with the total number of outstanding Class A and OCGH units, changes in the economic interest held by the OCGH unitholders are driven by our additional issuances of Class A and OCGH units, as well as repurchases and forfeitures of, and exchanges between, Class A and OCGH units. Certain of our expenses, such as income tax and related administrative expenses of Oaktree Capital Group, LLC and its Intermediate Holding Companies, are solely attributable to the Class A unitholders. Please see note 11 to our condensed consolidated financial statements included elsewhere in this quarterly report for additional information on the economic interest in the Oaktree Operating Group owned by OCGH.
Net Income Attributable to Preferred Unitholders
This category represents distributions declared, if any, on our preferred units. Please see note 11 to our condensed consolidated financial statements for more information.
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Operating Metrics
We monitor certain operating metrics that we believe provide important information and data regarding our business. As a result of the Restructuring, a substantial portion of our revenues will be comprised of incentive income and investment income earned in our capacity as general partner of certain Oaktree funds. To analyze and monitor our operating performance we utilize incentive-creating AUM, incentives created (fund level) and accrued incentives (fund level). These operating metrics provide us with detailed information and insight into the operating performance of the funds we manage.
Incentive-creating Assets Under Management
Incentive-creating AUM refers to the AUM that may eventually produce incentive income. It generally represents the NAV of Oaktree funds for which we are entitled to receive an incentive allocation, excluding CLOs and investments made by us and our or Oaktree employees and directors (which are not subject to an incentive allocation) and gross assets (including assets acquired with leverage), net of cash, for our BDCs. All funds for which we are entitled to receive an incentive allocation are included in incentive-creating AUM, regardless of whether or not they are currently above their preferred return or high-water mark and therefore generating incentives. Incentive-creating AUM does not include undrawn capital commitments.
Accrued Incentives (Fund Level) and Incentives Created (Fund Level)
Oaktree funds record as accrued incentives the incentive income that would be paid to us if the funds were liquidated at their reported values as of the date of the financial statements. Incentives created (fund level) refers to the gross amount of potential incentives generated by these funds during the period. We refer to the amount of accrued incentives recognized as revenue by us as incentive income. Amounts recognized by us as incentive income are no longer included in accrued incentives (fund level), the term we use for remaining fund-level accruals. The amount of incentives created may fluctuate substantially as a result of changes in the fair value of the underlying investments of the fund, as well as incentives created in excess of our typical 20% share due to catch-up allocations for applicable closed-end funds. In general, while in the catch-up layer, approximately 80% of any increase or decrease, respectively, in the fund’s NAV results in a commensurate amount of positive or negative incentives created (fund level).
The same performance and market risks inherent in incentives created (fund level) affect the ability to ultimately realize accrued incentives (fund level). One consequence of the accounting method we follow for incentives created (fund level) is that accrued incentives (fund level) is an off-balance sheet metric, rather than being an on-balance sheet receivable that could require reduction if fund performance suffers. We track accrued incentives (fund level) because it provides an indication of potential future value, though the timing and ultimate realization of that value are uncertain.
Incentives created (fund level), incentive income and accrued incentives (fund level) are presented gross, without deduction for direct compensation expense that is owed to Oaktree investment professionals associated with the particular fund when we earn the incentive income. We call that charge “incentive income compensation expense.” Incentive income compensation expense varies by the investment strategy and vintage of the particular fund, among many other factors.
Incentives created (fund level) often reflects investments measured at fair value and therefore is subject to risk of substantial fluctuation by the time the underlying investments are liquidated. We earn the incentive income, if any, that the fund is then obligated to pay us with respect to our incentive interest (generally 20%) in the profits of our unaffiliated investors, subject to an annual preferred return of typically 8%. Incentive income is recognized when it is probable that significant reversal of revenue will not occur. We track incentives created (fund level) because it provides an indication of the value for us currently being created by investment activities of the funds and facilitates comparability with those companies in our industry that account for investments in carry funds as equity-method investments, thus effectively reflecting an accrual-based method for recognizing incentive income in their financial statements.
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GAAP Consolidated Results of Operations
The following table sets forth our unaudited condensed consolidated statements of operations:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands, except per unit data) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Management fees | $ | 58,628 | $ | 45,466 | $ | 172,848 | $ | 138,278 | |||||||||||||||
| Incentive income | 167,534 | 116 | 811,481 | 43,532 | |||||||||||||||||||
| Total revenues | 226,162 | 45,582 | 984,329 | 181,810 | |||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Compensation and benefits | (37,080) | (33,659) | (116,803) | (96,368) | |||||||||||||||||||
| Equity-based compensation | (1,903) | (4,068) | (7,868) | (13,380) | |||||||||||||||||||
| Incentive income compensation | (81,952) | (474) | (396,435) | (15,612) | |||||||||||||||||||
| Total compensation and benefits expense | (120,935) | (38,201) | (521,106) | (125,360) | |||||||||||||||||||
| General and administrative | (5,303) | (6,395) | (18,879) | (18,816) | |||||||||||||||||||
| Depreciation and amortization | (580) | (561) | (1,745) | (1,498) | |||||||||||||||||||
| Consolidated fund expenses | (25,734) | (11,706) | (50,581) | (31,726) | |||||||||||||||||||
| Total expenses | (152,552) | (56,863) | (592,311) | (177,400) | |||||||||||||||||||
| Other income (loss): | |||||||||||||||||||||||
| Interest expense | (32,990) | (35,420) | (113,093) | (121,753) | |||||||||||||||||||
| Interest and dividend income | 90,673 | 74,128 | 273,460 | 238,294 | |||||||||||||||||||
| Net realized gain (loss) on consolidated funds’ investments | (10,345) | (19,635) | 848 | (97,642) | |||||||||||||||||||
| Net change in unrealized appreciation (depreciation) on consolidated funds’ investments | 60,329 | 533 | 185,418 | (222,746) | |||||||||||||||||||
| Investment income | 16,989 | 60,296 | 190,768 | 18,030 | |||||||||||||||||||
| Other income, net | — | 43 | 19 | 59 | |||||||||||||||||||
| Total other income (loss) | 124,656 | 79,945 | 537,420 | (185,758) | |||||||||||||||||||
| Income (loss) before income taxes | 198,266 | 68,664 | 929,438 | (181,348) | |||||||||||||||||||
| Income taxes | (3,811) | (1,170) | (9,246) | (6,499) | |||||||||||||||||||
| Net income (loss) | 194,455 | 67,494 | 920,192 | (187,847) | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Net (income) loss attributable to non-controlling interests in consolidated funds | (51,214) | 13,882 | (163,105) | 174,244 | |||||||||||||||||||
| Net (income) loss attributable to non-controlling interests in consolidated subsidiaries | (46,204) | (28,993) | (265,590) | 13,306 | |||||||||||||||||||
| Net income (loss) attributable to OCG | 97,037 | 52,383 | 491,497 | (297) | |||||||||||||||||||
| Net income attributable to preferred unitholders | (6,829) | (6,829) | (20,487) | (20,487) | |||||||||||||||||||
| Net income (loss) attributable to OCG Class A unitholders | $ | 90,208 | $ | 45,554 | $ | 471,010 | $ | (20,784) | |||||||||||||||
| Distributions declared per Class A unit | $ | 0.51 | $ | 0.49 | $ | 3.92 | $ | 0.71 | |||||||||||||||
| Net income (loss) per Class A unit (basic and diluted): | |||||||||||||||||||||||
| Net income (loss) per Class A unit | $ | 0.91 | $ | 0.46 | $ | 4.76 | $ | (0.21) | |||||||||||||||
| Weighted average number of Class A units outstanding | 99,137 | 98,677 | 98,995 | 98,457 | |||||||||||||||||||
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Third Quarter Ended September 30, 2021 Compared to the Third Quarter Ended September 30, 2020
Revenues
Management Fees
Management fees increased $13.1 million, or 28.8%, to $58.6 million for the third quarter of 2021, from $45.5 million for the third quarter of 2020. The increase was primarily due to sub-advisory fees earned, reflecting both growth of Oaktree’s business operations and its impact to the sub-advisory fees we earn from these arrangements.
Incentive Income
Incentive income increased $167.4 million to $167.5 million for the third quarter of 2021, from $0.1 million for the third quarter of 2020. The increase in incentive income was primarily due to higher distributions from Private Equity closed-end funds that were paying incentive income.
Expenses
Compensation and Benefits
Compensation and benefits expense increased $3.4 million, or 10.1%, to $37.1 million for the third quarter of 2021, from $33.7 million for the third quarter of 2020. The increase in compensation and benefits expense was primarily due to foreign exchange, Long-Term Incentive Plan awards and headcount growth.
Equity-based Compensation
Equity-based compensation expense decreased $2.2 million, or 53.7%, to $1.9 million for the third quarter of 2021, from $4.1 million for the third quarter of 2020, reflecting that beginning in 2020, deferred compensation is primarily paid in Long-Term Incentive Plan awards rather than equity-based awards.
Incentive Income Compensation
Incentive income compensation expense increased $81.5 million to $82.0 million for the third quarter of 2021, from $0.5 million for the third quarter of 2020, primarily reflecting the increase in incentive income.
General and Administrative
General and administrative expense decreased $1.1 million, or 17.2%, to $5.3 million for the third quarter of 2021, from $6.4 million for the third quarter of 2020, primarily driven by foreign exchange.
Depreciation and Amortization
Depreciation and amortization expense was $0.6 million and $0.6 million for the third quarter of 2021 and 2020, respectively.
Consolidated Fund Expenses
Consolidated fund expenses increased $14.0 million, or 119.7%, to $25.7 million for the third quarter of 2021, from $11.7 million for the third quarter of 2020. The increase reflects the impact of general costs incurred by our consolidated funds and changes to the funds that were consolidated during the third quarter of 2021.
Other Income (Loss)
Interest Expense
Interest expense decreased $2.4 million, or 6.8%, to $33.0 million for the third quarter of 2021, from $35.4 million for the third quarter of 2020. The decrease was primarily attributable to lower interest rates, partially offset by increased debt outstanding.
Interest and Dividend Income
Interest and dividend income increased $16.6 million, or 22.4%, to $90.7 million for the third quarter of 2021, from $74.1 million for the third quarter of 2020. The increase was primarily attributable to our consolidated funds.
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Net Realized Gain (Loss) on Consolidated Funds’ Investments
Net realized gain (loss) on consolidated funds’ investments increased $9.3 million, to a loss of $10.3 million for the third quarter of 2021, from a loss of $19.6 million for the third quarter of 2020. The increase in our net realized gain (loss) reflects our consolidated funds’ performance on investments sold and primarily resulted from our CLOs and our investment in Opps XI.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments increased $59.8 million, to a gain of $60.3 million for the third quarter of 2021, from a gain of $0.5 million for the third quarter of 2020. Excluding the impact of the reversal of net realized gain (loss) on consolidated funds’ investments, the net change in unrealized appreciation (depreciation) on consolidated funds’ investments increased $69.1 million, to a net gain of $50.0 million for the third quarter of 2021, from a net loss of $19.1 million for the third quarter of 2020, primarily resulted from our investment in Opps XI.
Investment Income
Investment income decreased $43.3 million, or 71.8%, to $17.0 million for the third quarter of 2021, from $60.3 million for the third quarter of 2020. The decrease primarily reflected lower returns on certain Private Equity investments.
Income Taxes
Income taxes increased $2.6 million, or 216.7%, to $3.8 million for the third quarter of 2021, from $1.2 million for the third quarter of 2020. The increase primarily reflected higher taxable net income attributable to our operations outside of the United States during the third quarter of 2021. Please see the Income Taxes section of “—Understanding Our Results—Consolidation of Oaktree Funds” for details.
Net (Income) Loss Attributable to Non-controlling Interests in Consolidated Funds
Net (income) loss attributable to non-controlling interests in consolidated funds increased $65.1 million, to net income of $51.2 million for the third quarter of 2021, from net loss of $13.9 million for the third quarter of 2020. The increase reflected our consolidated funds’ performance attributable to third-party investors in each period. These effects are described in more detail under “—Other Income (Loss)” above.
Net Income (Loss) Attributable to Oaktree Capital Group, LLC Class A Unitholders
Net income attributable to Oaktree Capital Group, LLC Class A unitholders increased $44.6 million, or 97.8%, to $90.2 million for the third quarter of 2021, from $45.6 million for the third quarter of 2020, primarily reflecting higher net incentive income.
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Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
Revenues
Management Fees
Management fees increased $34.5 million, or 25.0%, to $172.8 million for the first nine months of 2021, from $138.3 million for the first nine months of 2020. The increase was primarily due to sub-advisory fees earned, reflecting both growth of Oaktree’s business operations and its impact to the sub-advisory fees we earn from these arrangements.
Incentive Income
Incentive income increased $768.0 million to $811.5 million for the first nine months of 2021, from $43.5 million for the first nine months of 2020. The increase in incentive income was primarily due to higher distributions from Private Equity and Credit closed-end funds that were paying incentive income and the deconsolidation of a SPAC in 2021.
Expenses
Compensation and Benefits
Compensation and benefits expense increased $20.4 million, or 21.2%, to $116.8 million for the first nine months of 2021, from $96.4 million for the first nine months of 2020. The increase in compensation and benefits expense was primarily due to foreign exchange, Long-Term Incentive Plan awards and headcount growth.
Equity-based Compensation
Equity-based compensation expense decreased $5.5 million, or 41.0%, to $7.9 million for the first nine months of 2021, from $13.4 million for the first nine months of 2020, reflecting that beginning in 2020, deferred compensation is primarily paid in Long-Term Incentive Plan awards rather than equity-based awards.
Incentive Income Compensation
Incentive income compensation expense increased $380.8 million to $396.4 million for the first nine months of 2021, from $15.6 million for the first nine months of 2020, primarily reflecting the increase in incentive income.
General and Administrative
General and administrative expense increased $0.1 million, or 0.5%, to $18.9 million for the first nine months of 2021, from $18.8 million for the first nine months of 2020.
Depreciation and Amortization
Depreciation and amortization expense was $1.7 million and $1.5 million for the first nine months of 2021 and 2020, respectively.
Consolidated Fund Expenses
Consolidated fund expenses increased $18.9 million, or 59.6%, to $50.6 million for the first nine months of 2021, from $31.7 million for the first nine months of 2020. The increase reflects the impact of general costs incurred by our consolidated funds and changes to the funds that were consolidated during the first nine months of 2021.
Other Income (Loss)
Interest Expense
Interest expense decreased $8.7 million, or 7.1%, to $113.1 million for the first nine months of 2021, from $121.8 million for the first nine months of 2020. The decrease was primarily attributable to lower interest rates, partially offset by increased debt outstanding.
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Interest and Dividend Income
Interest and dividend income increased $35.2 million, or 14.8%, to $273.5 million for the first nine months of 2021, from $238.3 million for the first nine months of 2020. The increase was primarily attributable to our consolidated funds.
Net Realized Gain (Loss) on Consolidated Funds’ Investments
Net realized gain (loss) on consolidated funds’ investments increased $98.4 million, to a gain of $0.8 million for the first nine months of 2021, from a loss of $97.6 million for the first nine months of 2020. The increase in our net realized gain (loss) reflects our consolidated funds’ performance on investments sold and primarily resulted from our CLOs and our consolidated open-end credit funds.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments increased $408.1 million, to a gain of $185.4 million for the first nine months of 2021, from a loss of $222.7 million for the first nine months of 2020. Excluding the impact of the reversal of net realized gain (loss) on consolidated funds’ investments, the net change in unrealized appreciation (depreciation) on consolidated funds’ investments increased $506.7 million, to a net gain of $186.3 million for the first nine months of 2021, from a net loss of $320.4 million for the first nine months of 2020, primarily resulted from improved investment performance related to our consolidated closed-end and open-end credit funds and our CLO investments in the first nine months of 2021.
Investment Income
Investment income increased $172.8 million, or 960.0%, to $190.8 million for the first nine months of 2021, from income of $18.0 million for the first nine months of 2020. The increase primarily reflected higher returns on our Credit and Private Equity investments for the first nine months of 2021.
Income Taxes
Income taxes increased $2.7 million, or 41.5%, to $9.2 million for the first nine months of 2021, from $6.5 million for the first nine months of 2020. The increase primarily reflected higher taxable net income attributable to our operations outside of the United States during the first nine months of 2021. Please see the Income Taxes section of “—Understanding Our Results—Consolidation of Oaktree Funds” for details.
Net (Income) Loss Attributable to Non-controlling Interests in Consolidated Funds
Net (income) loss attributable to non-controlling interests in consolidated funds increased $337.3 million, to net income of $163.1 million for the first nine months of 2021, from a loss of $174.2 million for the first nine months of 2020. The increase reflected our consolidated funds’ performance attributable to third-party investors in each period. These effects are described in more detail under “—Other Income (Loss)” above.
Net Income (Loss) Attributable to Oaktree Capital Group, LLC Class A Unitholders
Net income (loss) attributable to Oaktree Capital Group, LLC Class A unitholders increased $491.8 million, or 2,364.4%, to $471.0 million for the first nine months of 2021, from a loss of $20.8 million for the first nine months of 2020, primarily reflecting higher net incentive income.
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Operating Metrics
We monitor certain operating metrics that we believe provide important data regarding our business. These operating metrics include incentive-creating AUM, incentives created (fund level), and accrued incentives (fund level).
Incentive-creating AUM
Our incentive-creating AUM is set forth below and includes only incentive-creating AUM generated by our indirect subsidiaries, Oaktree Capital I and OCM Cayman for the periods ended September 30, 2021 and December 31, 2020. Incentive-creating AUM does not include undrawn capital commitments and is set forth below:
| As of | |||||||||||||||||
| September 30, 2021 | June 30, 2021 | September 30, 2020 | |||||||||||||||
| Incentive-creating AUM: | (in millions) | ||||||||||||||||
| Closed-end funds | $ | 33,455 | $ | 32,220 | $ | 26,130 | |||||||||||
| Evergreen funds | 4,334 | 4,042 | 3,711 | ||||||||||||||
| Total | $ | 37,789 | $ | 36,262 | $ | 29,841 | |||||||||||
Third Quarter Ended September 30, 2021
Incentive-creating AUM increased $1.5 billion, or 4.1%, to $37.8 billion as of September 30, 2021, from $36.3 billion as of June 30, 2021. This increase reflected $1.8 billion of market-value appreciation, inclusive of the impact of foreign currency fluctuations, partially offset by $0.3 billion of net distributions in the third quarter of 2021.
Nine Months Ended September 30, 2021
Incentive-creating AUM increased $5.8 billion, or 18.1%, to $37.8 billion as of September 30, 2021, from $32.0 billion as of December 31, 2020. This increase reflected $9.3 billion of market-value appreciation, inclusive of the impact of foreign currency fluctuations, partially offset by $3.5 billion of net distributions during the nine months ended 2021.
Accrued Incentives (Fund Level) and Incentives Created (Fund Level)
Accrued incentives (fund level), gross and net of incentive income compensation expense, as well as changes in accrued incentives (fund level), are set forth below.
| As of or for the Three Months Ended September 30, | As of or for the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Accrued Incentives (Fund Level): | (in thousands) | ||||||||||||||||||||||
| Beginning balance | $ | 1,862,008 | $ | 611,689 | $ | 1,314,443 | $ | 938,806 | |||||||||||||||
| Incentives created (fund level): | |||||||||||||||||||||||
| Closed-end funds | 238,256 | 207,082 | 1,429,088 | 8,694 | |||||||||||||||||||
| Evergreen funds | 17,097 | 2,935 | 60,264 | (1,132) | |||||||||||||||||||
| Total incentives created (fund level) | 255,353 | 210,017 | 1,489,352 | 7,562 | |||||||||||||||||||
| Less: incentive income recognized by us | (167,534) | (116) | (853,967) | (124,778) | |||||||||||||||||||
| Ending balance | $ | 1,949,827 | $ | 821,590 | $ | 1,949,828 | $ | 821,590 | |||||||||||||||
| Accrued incentives (fund level), net of associated incentive income compensation expense | $ | 905,604 | $ | 381,090 | $ | 905,604 | $ | 381,090 | |||||||||||||||
As of September 30, 2021 and 2020, the portion of net accrued incentives (fund level) represented by funds that were currently paying incentives was $66.5 million (or 7.3%) and $35.3 million (or 9.3%), respectively, with the remainder arising from funds that as of that date were not at the stage of their cash distribution waterfall where Oaktree was entitled to receive incentives, other than possibly tax-related distributions.
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As of September 30, 2021, $372.5 million, or 41.1%, of the net accrued incentives (fund level) were in evergreen or closed-end funds that were incentive paying or in their liquidation period. Please see “—Critical Accounting Policies—Fair Value of Financial Instruments” for a discussion of the fair-value hierarchy level established by GAAP.
Third Quarter Ended September 30, 2021
Incentives created (fund level) was $255.4 million for the third quarter of September 30, 2021, primarily reflecting $148.4 million from Credit funds and $66.2 million from Private Equity funds.
Nine Months Ended September 30, 2021
Incentives created (fund level) was $1.5 billion for the first nine months of September 30, 2021, primarily reflecting $679.0 million from Credit funds and $540.7 million from Private Equity funds.
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GAAP Statement of Financial Condition (Unaudited)
We manage our financial condition without the consolidation of the Oaktree funds in which we serve as general partner. Since Oaktree’s founding, Oaktree and, by extension, we have managed our financial condition in a way that builds our capital base and maintains sufficient liquidity for known and anticipated uses of cash. Our assets do not include accrued incentives (fund level), an off-balance sheet metric.
The following table presents our unaudited condensed consolidating statement of financial condition:
| As of September 30, 2021 | |||||||||||||||||||||||
| Oaktree and Operating Subsidiaries | Consolidated Funds | Eliminations | Consolidated | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash-equivalents | $ | 217,889 | $ | — | $ | — | $ | 217,889 | |||||||||||||||
| U.S. Treasury and other securities | 6,477 | — | — | 6,477 | |||||||||||||||||||
| Corporate investments | 1,741,300 | — | (697,933) | 1,043,367 | |||||||||||||||||||
| Deferred tax assets | 3,829 | — | — | 3,829 | |||||||||||||||||||
| Right-of-use assets | 34,374 | — | — | 34,374 | |||||||||||||||||||
| Receivables and other assets | 340,802 | — | (1,949) | 338,853 | |||||||||||||||||||
| Assets of consolidated funds | — | 11,475,292 | — | 11,475,292 | |||||||||||||||||||
| Total assets | $ | 2,344,671 | $ | 11,475,292 | $ | (699,882) | $ | 13,120,081 | |||||||||||||||
| Liabilities and Capital: | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 180,446 | $ | — | $ | — | $ | 180,446 | |||||||||||||||
| Due to affiliates | 445 | — | — | 445 | |||||||||||||||||||
| Debt obligations | — | — | — | — | |||||||||||||||||||
| Operating lease liabilities | 40,272 | — | — | 40,272 | |||||||||||||||||||
| Liabilities of consolidated funds | — | 9,497,105 | (32,730) | 9,464,375 | |||||||||||||||||||
| Total liabilities | 221,163 | 9,497,105 | (32,730) | 9,685,538 | |||||||||||||||||||
| Non-controlling redeemable interests in consolidated funds | — | — | 1,322,017 | 1,322,017 | |||||||||||||||||||
| Capital: | |||||||||||||||||||||||
| Capital attributable to OCG preferred unitholders | 400,584 | — | — | 400,584 | |||||||||||||||||||
| Capital attributable to OCG Class A unitholders | 1,148,191 | 406,629 | (413,435) | 1,141,385 | |||||||||||||||||||
| Non-controlling interest in consolidated subsidiaries | 574,733 | 249,541 | (253,717) | 570,557 | |||||||||||||||||||
| Non-controlling interest in consolidated funds | — | 1,322,017 | (1,322,017) | — | |||||||||||||||||||
| Total capital | 2,123,508 | 1,978,187 | (1,989,169) | 2,112,526 | |||||||||||||||||||
| Total liabilities and capital | $ | 2,344,671 | $ | 11,475,292 | $ | (699,882) | $ | 13,120,081 | |||||||||||||||
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Corporate Investments
| As of | |||||||||||||||||
| September 30, 2021 | June 30, 2021 | September 30, 2020 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Oaktree funds: | |||||||||||||||||
| Credit | $ | 1,298,949 | $ | 1,177,639 | $ | 954,919 | |||||||||||
| Private Equity | 268,343 | 274,982 | 279,490 | ||||||||||||||
| Real Assets | 91,558 | 103,367 | 159,408 | ||||||||||||||
| Listed Equities | 39,652 | 32,983 | 26,531 | ||||||||||||||
| Non-Oaktree | 42,798 | 55,313 | 17,483 | ||||||||||||||
| Total corporate investments – Oaktree and operating subsidiaries | 1,741,300 | 1,644,284 | 1,437,831 | ||||||||||||||
| Eliminations | (697,933) | (626,138) | (522,134) | ||||||||||||||
| Total corporate investments – Consolidated | $ | 1,043,367 | $ | 1,018,146 | $ | 915,697 | |||||||||||
Liquidity and Capital Resources
We manage our liquidity and capital requirements by focusing on our cash flows before the consolidation of Oaktree funds and the effect of normal changes in short-term assets and liabilities. Our primary cash flow activities on an unconsolidated basis involve (a) generating cash flow from operations, (b) generating income from investment activities, including strategic investments in certain third parties, (c) funding capital commitments that we have made to Oaktree funds in which we act as general partner, (d) funding our growth initiatives, (e) distributing cash flow to our Class A and OCGH unitholders, (f) borrowings, interest payments and repayments under credit agreements, our senior notes and other borrowing arrangements, and (g) issuances of, and distributions made on, our preferred units. As of September 30, 2021, the Company had $224.4 million of cash and U.S. Treasury and other securities and no outstanding debt. See the Future Sources and Uses of Liquidity section for additional details of Oaktree and its indirect subsidiaries financing activities in 2020.
Ongoing sources of cash include (a) management and sub-advisory fees, which are collected monthly or quarterly, (b) incentive income, which is volatile and largely unpredictable as to amount and timing, and (c) distributions stemming from our corporate investments in funds and companies. We primarily use cash flow from operations and distributions from our corporate investments to pay compensation and related expenses, general and administrative expenses, income taxes, debt service, capital expenditures and distributions. This same cash flow, together with proceeds from equity and debt issuances, is also used to fund corporate investments, fixed assets and other capital items. Subject to applicable law and certain consent rights contained in our operating agreement, pursuant to a covenant in our operating agreement we plan to cause the Oaktree Operating Group, including our indirect subsidiaries Oaktree Capital I and OCM Cayman, to distribute, on a quarterly basis, at least 85% of its adjusted distributable earnings, as defined in our operating agreement, and we plan to distribute amounts we receive in respect of such distributions, less any tax and tax receivable obligations, to holders of our Class A units. Distributions from each Operating Group entity may not be proportionate to its share of adjusted distributable earnings.
Distributions on the preferred units are discretionary and non-cumulative. We may redeem, at our option, out of funds legally available, the preferred units, in whole or in part, at any time on or after June 15, 2023 in respect of the Series A preferred units or September 15, 2023 in respect of the Series B preferred units, at a price of $25.00 per preferred unit plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of the preferred units have no right to require the redemption of such preferred units.
On August 3, 2020, the Company subscribed for a limited partner interest in, and made a capital commitment of, $750 million to Oaktree Opportunities Fund XI, L.P., a parallel investment vehicle thereof or a feeder fund in respect of one of the foregoing (such limited partner interest, the “Opps XI Investment” and such fund entities collectively, “Opps XI”). In order to make the Opps XI Investment, the Company’s sole Class A unitholder, or one of its affiliates, will contribute cash as a capital contribution (the “Opps XI Investment Cash”) as and to the extent required to satisfy the Company’s obligations to Opps XI. The Company will use the Opps XI Investment Cash solely to fund the Opps XI Investment and satisfy its obligations in respect of Opps XI and distributions from the Opps XI Investment are intended for the benefit of the Class A unitholder, subject to applicable law. The Company’s preferred unitholders should not rely on distributions received by the Company in respect of the Company’s Opps XI Investment for payment of dividends or redemption of the preferred units. As of September 30, 2021, $150 million of the $750 million capital commitment was funded.
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Consolidated Cash Flows
The accompanying condensed consolidated statements of cash flows include our consolidated funds, despite the fact that we typically have only a minority economic interest in those funds. The assets of consolidated funds, on a gross basis, are larger than the assets of our business and, accordingly, have a substantial effect on the cash flows reflected in our condensed consolidated statements of cash flows. The primary cash flow activities of our consolidated funds involve:
•raising capital from third-party investors;
•using the capital provided by us and third-party investors to fund investments and operating expenses;
•financing certain investments with indebtedness;
•generating cash flows through the realization of investments, as well as the collection of interest and dividend income; and
•distributing net cash flows to fund investors and to us.
Because our consolidated funds are either treated as investment companies for accounting purposes or represent CLOs whose primary operations are investing activities, their investing cash flow amounts are included in our cash flows from operations. We believe that we and each of the consolidated funds has sufficient access to cash to fund our and their respective operations in the near term.
Significant amounts from our condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 are discussed below.
Operating Activities
Operating activities used $1.6 billion and $775.7 million of cash for the first nine months of 2021 and 2020, respectively. These amounts principally reflected net income (loss), purchases of securities, net of non-cash adjustments, and net realized and unrealized (gain) loss from consolidated fund investments in each of the respective periods as well as net purchases of securities of the consolidated funds.
Investing Activities
Investing activities provided $161.9 million and $32.2 million of cash for the first nine months of 2021 and 2020, respectively. Net activity from purchases, maturities and sales of U.S. Treasury and other securities included net proceeds of $3.2 million and net purchases of $0.1 million for the first nine months of 2021 and 2020, respectively. Corporate investments in funds and companies of $166.9 million and $196.9 million for the first nine months of 2021 and 2020, respectively, consisted of the following:
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Funds | $ | 439,217 | $ | 538,608 | |||||||
| Eliminated in consolidation | (272,352) | (341,659) | |||||||||
| Total investments | $ | 166,865 | $ | 196,949 | |||||||
Distributions and proceeds from corporate investments in funds and companies of $325.9 million and $229.5 million for the first nine months of 2021 and 2020, respectively, consisted of the following:
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Funds | $ | 397,945 | $ | 406,495 | |||||||
| Eliminated in consolidation | (72,048) | (176,952) | |||||||||
| Total proceeds | $ | 325,897 | $ | 229,543 | |||||||
Purchases of fixed assets were $0.3 million for the first nine months of 2021 and 2020.
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Financing Activities
Financing activities provided $1.7 billion and $1.1 billion of cash for the first nine months of 2021 and 2020, respectively, and included: (a) net contributions from non-controlling interests of $639.3 million and $646.0 million; (b) distributions to unitholders of $636.8 million and $134.0 million; (c) net capital contributions of $109.4 million and $56.0 million; (d) proceeds from CLO debt obligations of $3.0 billion and $1.0 billion and repayments of $2.2 billion and $559.7 million, and (e) payments of debt issuance costs of $1.8 million and $2.8 million. Additionally, the first nine months of 2021 and 2020 included borrowings of $658.8 million and $75.4 million, respectively, and no repayments and $48.5 million of repayments, respectively, related to consolidated funds.
Future Sources and Uses of Liquidity
We expect to continue to make distributions to our preferred unitholders in accordance with their contractual terms and our Class A unitholders pursuant to our distribution policy for our common units as described in our operating agreement. In the future, subject to our operating agreement we may also issue additional units or debt and other equity securities with the objective of increasing our available capital. In addition, we may, from time to time, repurchase our preferred units in open market or privately negotiated purchases or otherwise, redeem our preferred units pursuant to the terms of their respective governing documents, or repurchase OCGH units.
In addition to our ongoing sources of cash that include management and sub-advisory fees, incentive income and distributions related to our corporate investments in funds and companies, we also have access to liquidity through our debt financings, credit agreements and equity financings. Prior to the Restructuring, our financial statements reflected debt and debt service of the entire Oaktree Operating Group, however, OCM has historically been the only direct borrower or issuer under credit agreements and private placement notes with third parties and made all payments of principal and interest. While certain Oaktree Operating Group entities (including Oaktree Capital I) are co-obligors and jointly and severally liable, debt obligations are reflected in the condensed consolidated financial statements based upon the entity that actually made the borrowing and received the related proceeds. Accordingly, our financial statements after the Restructuring generally will not reflect debt obligations, interest expense or related liabilities associated with our operating subsidiaries, until such time as Oaktree Capital I, one of our two remaining Oaktree Operating Group entities, directly borrows or issues notes under such arrangements.
We believe that the sources of liquidity described below will be sufficient to fund our working capital requirements for at least the next twelve months.
Debt Financings
On November 4, 2021, OCM entered into a note and guaranty agreement with certain accredited investors pursuant to which OCM agreed to issue and sell to such investors $200 million aggregate principal amount of its 3.06% Senior Notes due January 12, 2037. These notes are guaranteed by Oaktree Capital I, a consolidated subsidiary of the Company, along with Oaktree Capital II and Oaktree AIF, as co-obligors. The issuance and funding of these notes are subject to customary closing conditions and are expected to occur on or before January 12, 2022. As OCM is the issuer of such notes, the outstanding principal and interest payments guaranteed by Oaktree Capital I will not be included in the Company’s financial statements unless an event of default occurs.
In May 2020, Oaktree Capital I, along with certain other Oaktree Operating Group members as co-borrowers, entered into a credit agreement with a subsidiary of Brookfield that provides for a subordinated credit facility maturing on May 19, 2023. The subordinated credit facility has a revolving loan commitment of $250 million and borrowings generally bear interest at a spread to either LIBOR or an alternative base rate. Borrowings on the subordinated credit facility are subordinate to the outstanding debt obligations and borrowings on the primary credit facility of Oaktree Capital I and its co-borrowers as detailed in note 8 to our condensed consolidated financial statements included elsewhere in this quarterly report. Oaktree Capital I is jointly and severally liable, along with its co-obligors for outstanding borrowings on the subordinated credit facility. As set forth in such note 8, the Company’s financial statements generally will not reflect debt obligations, interest expense or related liabilities associated with its operating subsidiaries until such time as Oaktree Capital I directly borrows from the subordinated credit facility. No amounts were outstanding on the subordinated credit facility as of September 30, 2021.
In May 2020, OCM received commitments from certain accredited investors to purchase $250 million of senior unsecured notes that bear a blended 3.68% fixed rate of interest and a weighted average maturity of 2031. The notes are guaranteed by Oaktree Capital I, one of our consolidated subsidiaries, along with Oaktree Capital II and Oaktree AIF, as co-obligors. As OCM is the issuer of such senior unsecured notes, the outstanding principal and
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interest payments guaranteed by Oaktree Capital I will not be included in our financial statements unless an event of default occurs. The offering closed on July 22, 2020 and OCM received proceeds of $250 million on the closing date.
In December 2019, our former indirect subsidiaries OCM, Oaktree Capital II, Oaktree AIF, and our indirect subsidiary Oaktree Capital I (collectively, the “Borrowers”) entered into the Fifth Amendment to Credit Agreement (the “Fifth Amendment”), which amended the credit agreement dated as of March 31, 2014 (as amended through and including the Fifth Amendment, the “Credit Agreement”). The Fifth Amendment extended the maturity date of the Credit Agreement from March 29, 2023 to December 13, 2024, increased the revolving credit facility (the “Revolver”) from $500 million to $650 million, provided for the refinancing of the then-outstanding $150 million term loan balance with revolving loans, and provides the Borrowers with the option to extend the new maturity date by one year up to two times if the lenders holding at least 50% of the aggregate amount of the revolving loan commitment thereunder on the date of the Borrowers’ extension request consent to such extension. The Fifth Amendment also favorably updated the commitment fee and interest rate margins in the corporate ratings-based pricing grid, increased the AUM covenant threshold from $60 billion to $65 billion and made certain other amendments to the provisions of the Credit Agreement. Borrowings under the Credit Agreement generally bear interest at a spread to either LIBOR or an alternative base rate. Based on the current credit ratings of OCM, the interest rate on borrowings is LIBOR plus 0.88% per annum and the commitment fee on the unused portions of the Revolver is 0.08% per annum. The Credit Agreement contains customary financial covenants and restrictions, including (after giving effect to the Fifth Amendment) covenants regarding a maximum leverage ratio of 3.50x-to-1.00x and a minimum required level of assets under management (as defined in the credit agreement). In September 2021, the Borrowers entered into the Sixth Amendment to Credit Agreement (the “Sixth Agreement”). The Sixth Amendment extended the maturity date of the Credit Agreement from December 13, 2024 to September 14, 2026, modified the AUM covenant threshold from $65 billion of AUM to $57.5 billion of management fee-generating AUM, and increased the maximum leverage ratio to 4.00x-to-1.00x. As of September 30, 2021, OCM had no outstanding borrowings under the $650 million revolving credit facility.
In December 2017, our former indirect subsidiary, OCM, issued and sold to certain accredited investors $250 million of 3.78% senior notes due 2032 (the “2032 Notes”). The 2032 Notes are senior unsecured obligations of the issuer, jointly and severally guaranteed by our indirect subsidiary, Oaktree Capital I and our former indirect subsidiaries, Oaktree Capital II and Oaktree AIF. The proceeds from the sale of the 2032 Notes and cash on hand were used to redeem the $250 million of 6.75% Senior Notes due 2019 and to pay the related make-whole premium to holders thereof. In connection with the Notes offering, we entered into a cross-currency swap agreement to euros, reducing the interest cost to 1.95% per year. The 2032 Notes provide for certain affirmative and negative covenants, including financial covenants relating to the issuer’s and guarantors’ combined leverage ratio and minimum assets under management. In addition, the 2032 Notes contain customary representations and warranties of the issuer and the guarantors, and customary events of default, in certain cases, subject to cure periods. The issuer may prepay all, or from time to time any part of, the 2032 Notes at any time, subject to the issuer’s payment of the applicable make-whole amount determined with respect to such principal amount prepaid. Upon the occurrence of a change of control, the issuer will be required to make an offer to prepay the 2032 Notes together with the applicable make-whole amount determined with respect to such principal amount prepaid.
In July 2016, our former indirect subsidiary, OCM, issued and sold to certain accredited investors $100 million of 3.69% senior notes due July 12, 2031 (the “2031 Notes”). The 2031 Notes are senior unsecured obligations of the issuer, jointly and severally guaranteed by our indirect subsidiary Oaktree Capital I, and our former indirect subsidiaries, Oaktree Capital II and Oaktree AIF pursuant to a note and guaranty agreement. The proceeds from the sale of the 2031 Notes were used to simultaneously repay $100 million of borrowings outstanding under the $250 million term loan due March 31, 2021. The 2031 Notes provide for certain affirmative and negative covenants, including financial covenants relating to the issuer’s and guarantors’ combined leverage ratio and minimum assets under management. In addition, the 2031 Notes contain customary representations and warranties of the issuer and the guarantors, and customary events of default, in certain cases, subject to cure periods. The issuer may prepay all, or from time to time any part of, the 2031 Notes at any time, subject to the issuer’s payment of the applicable make-whole amount determined with respect to such principal amount prepaid. Upon the occurrence of a change of control, the issuer will be required to make an offer to prepay the 2031 Notes together with the applicable make-whole amount determined with respect to such principal amount prepaid.
In September 2014, our former indirect subsidiary, OCM issued and sold to certain accredited investors $50 million aggregate principal amount of 3.91% Senior Notes, Series A, due September 3, 2024 (the “Series A Notes”), $100 million aggregate principal amount of 4.01% Senior Notes, Series B, due September 3, 2026 (the “Series B Notes”) and $100 million aggregate principal amount of 4.21% Senior Notes, Series C, due September 3, 2029 (the “Series C Notes” and together with the Series A Notes and the Series B Notes, the “Senior Notes”) pursuant to a note
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and guarantee agreement. The Senior Notes are senior unsecured obligations of the issuer, guaranteed on a joint and several basis by our indirect subsidiary Oaktree Capital I, and our former indirect subsidiaries, Oaktree Capital II and Oaktree AIF. Interest on the 2014 Notes is payable semi-annually. The Senior Notes provide for certain affirmative and negative covenants, including financial covenants relating to the issuer’s and guarantors’ combined leverage ratio and minimum assets under management. In addition, the Senior Notes contain customary representations and warranties of the issuer and the guarantors, and customary events of default, in certain cases, subject to cure periods. The issuer may prepay all, or from time to time any part of, the Senior Notes at any time, subject to the issuer’s payment of the applicable make-whole amount determined with respect to such principal amount prepaid. Upon the occurrence of a change of control, the issuer will be required to make an offer to prepay the Senior Notes together with the applicable make-whole amount determined with respect to such principal amount prepaid.
Preferred Unit Issuances
On May 17, 2018, we issued 7,200,000 of our 6.625% Series A preferred units representing limited liability company interests with a liquidation preference of $25.00 per unit. The issuance resulted in $173.7 million in net proceeds to us. Distributions on the Series A preferred units, when and if declared by the board of directors of Oaktree, will be paid quarterly on March 15, June 15, September 15 and December 15 of each year. Distributions on the Series A preferred units are non-cumulative.
On August 9, 2018, we issued 9,400,000 of our 6.550% Series B preferred units representing limited liability company interests with a liquidation preference of $25.00 per unit. The issuance resulted in $226.9 million in net proceeds to us. Distributions on the Series B preferred units, when and if declared by the board of directors of Oaktree, will be paid quarterly on March 15, June 15, September 15 and December 15 of each year. Distributions on the Series B preferred units are non-cumulative.
Unless distributions have been declared and paid or declared and set apart for payment on the preferred units for a quarterly distribution period, during the remainder of that distribution period we may not repurchase any common units or any other units that are junior in rank, as to the payment of distributions, to the preferred units and we may not declare or pay or set apart payment for distributions on any common units or junior units for the remainder of that distribution period, other than certain Permitted Distributions (as defined in the unit designation related to the applicable preferred units (each, the “Preferred Unit Designation”)).
We may redeem, at our option, out of funds legally available, the preferred units, in whole or in part, at any time on or after June 15, 2023 in respect of the Series A preferred units or September 15, 2023 in respect of the Series B preferred units, at a price of $25.00 per preferred unit plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of the preferred units have no right to require the redemption of the preferred units.
If a Change of Control Event (as defined in the applicable Preferred Unit Designation) occurs prior to June 15, 2023 in respect of the Series A preferred units or September 15, 2023 in respect of the Series B preferred units, we may, at our option, out of funds legally available, redeem the applicable preferred units, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such Change of Control Event, at a price of $25.25 per preferred unit, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions.
If a Tax Redemption Event or Rating Agency Event (each, as defined in the applicable Preferred Unit Designation) occurs prior to June 15, 2023 in respect of the Series A preferred units or September 15, 2023 in respect of the Series B preferred units, we may, at our option, out of funds legally available, redeem the applicable preferred units, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such Tax Redemption Event or Rating Agency Event, at a price of $25.50 per preferred unit, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions.
The preferred units are not convertible into Class A units or any other class or series of our interests or any other security. Holders of the preferred units do not have any of the voting rights given to holders of our Class A units, except that holders of the preferred units are entitled to certain voting rights under certain conditions.
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Contractual Obligations, Commitments and Contingencies
In the ordinary course of business, we and our consolidated funds enter into contractual arrangements that may require future cash payments. The following table sets forth information related to anticipated future cash payments as of September 30, 2021:
| Remainder of 2021 | 2022-2023 | 2024-2025 | Thereafter | Total | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Oaktree and Operating Subsidiaries: | |||||||||||||||||||||||||||||
Operating lease obligations (1) | $ | 1,645 | $ | 12,260 | $ | 9,284 | $ | 25,783 | $ | 48,972 | |||||||||||||||||||
OCG limited partner commitments to Oaktree funds (2) | 600,000 | — | — | — | 600,000 | ||||||||||||||||||||||||
Oaktree Capital I general partner commitments to Oaktree and third-party funds (2) | 315,254 | — | — | — | 315,254 | ||||||||||||||||||||||||
| Subtotal | 916,899 | 12,260 | 9,284 | 25,783 | 964,226 | ||||||||||||||||||||||||
| Consolidated Funds: | |||||||||||||||||||||||||||||
Debt obligations payable (3) | — | 1,029,708 | — | — | 1,029,708 | ||||||||||||||||||||||||
Interest obligations on debt (4) | 4,975 | 17,080 | — | — | 22,055 | ||||||||||||||||||||||||
Debt obligations of CLOs (3) | 30,709 | — | — | 7,259,845 | 7,290,554 | ||||||||||||||||||||||||
Interest on debt obligations of CLOs (4) | 31,708 | 253,660 | 253,660 | 867,415 | 1,406,443 | ||||||||||||||||||||||||
Commitments to fund investments (5) | 6,011 | — | — | — | 6,011 | ||||||||||||||||||||||||
| Total | $ | 990,302 | $ | 1,312,708 | $ | 262,944 | $ | 8,153,043 | $ | 10,718,997 | |||||||||||||||||||
(1) We lease our office space under agreements that expire periodically through 2031. The table includes both guaranteed and expected minimum lease payments for these leases and does not project other lease-related payments.
(2) These obligations represent commitments by us to provide limited and general partner capital funding to our funds and limited partner capital funding to funds managed by unaffiliated third parties. These amounts are generally due on demand and are therefore presented in the 2021 column. Capital commitments are expected to be called over a period of several years.
(3) These obligations represent future principal payments, gross of debt issuance costs, and for CLOs, the par value.
(4) Interest obligations include accrued interest on outstanding indebtedness. Where applicable, current interest rates are applied to estimate future interest obligations on variable-rate debt.
(5) These obligations represent commitments by our funds to make investments or fund uncalled contingent commitments. These amounts are generally due either on demand or by various contractual dates that vary by investment and are therefore presented in the 2021 column. Capital commitments are expected to be called over a period of several years.
In some of our service contracts or management agreements, we have agreed to indemnify third-party service providers or separate account clients under certain circumstances. The terms of the indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined and has neither been included in the above table nor recorded in our condensed consolidated financial statements as of September 30, 2021.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements. Please see note 15 to our condensed consolidated financial statements included elsewhere in this quarterly report for information on our commitments and contingencies.
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Critical Accounting Policies
We prepare our condensed consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe our critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. For a summary of our significant accounting policies, please see the notes to our condensed consolidated financial statements included elsewhere in this quarterly report. For a summary of our critical accounting policies, please see “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Critical Accounting Policies” in our annual report.
Recent Accounting Developments
Please see note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report for information regarding recent accounting developments.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to a broad range of risks inherent in the financial markets in which we participate, including price risk, interest-rate risk, access to and cost of financing risk, liquidity risk, counterparty risk and foreign exchange-rate risk. Potentially negative effects of these risks may be mitigated to a certain extent by those aspects of our investment approach, investment strategies, fundraising practices or other business activities that are designed to benefit, either in relative or absolute terms, from periods of economic weakness, tighter credit or financial market dislocations.
Our predominant exposure to market risk is related to our role as general partner or investment adviser to our funds and as an investor in our CLOs, and the sensitivities to movements in the fair value of their investments on management fees, incentive income and investment income, as applicable. The fair value of the financial assets and liabilities of our funds and CLOs may fluctuate in response to changes in, among many factors, the fair value of securities, foreign-exchange rates, commodities prices and interest rates.
Price Risk
Impact on Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
As of September 30, 2021, we had investments, at fair value of $10.3 billion related to our consolidated funds, primarily consisting of investments held by our CLOs. We estimate that a 10% decline in market values would result in a decrease in unrealized appreciation (depreciation) on the consolidated funds’ investments of $1.0 billion. Of this decline, approximately $328.0 million would impact net income and $203.3 million would impact net income attributable to OCG Class A unitholders, with the remainder attributable to non-controlling interests and third-party debt holders in our CLOs. The magnitude of the impact on net income is largely affected by the percentage of our equity ownership interest and levered nature of our CLO investments.
Impact on Management Fees (before consolidation of funds)
Management fees are generally assessed in the case of (a) our open-end and evergreen funds, based on NAV, and (b) our closed-end funds, based on committed capital, drawn capital or cost basis during the investment period and, during the liquidation period, based on the lesser of (i) the total funded committed capital or (ii) the cost basis of assets remaining in the fund. Management fees are affected by changes in market values to the extent they are based on NAV. For the nine months ended September 30, 2021 and 2020, NAV-based management fees represented approximately 2% and 5%, respectively, of total management fees. Based on investments held as of September 30, 2021, we estimate that a 10% decline in market values of the investments held in our funds would result in an approximate $0.2 million decrease in the amount of quarterly management fees. These estimated effects are without regard to a number of factors that would be expected to increase or decrease the magnitude of the change to degrees that are not readily quantifiable, such as the use of leverage facilities in certain of our funds, the timing of fund flows, or the impact on our sub-advisory fees which are excluded from this analysis.
Impact on Incentive Income (before consolidation of funds)
Incentive income is recognized only when it is probable that a significant reversal will not occur, which in the case of (a) our closed-end funds, generally occurs only after all contributed capital and an annual preferred return on that capital (typically 8%) have been distributed to the fund’s investors and (b) our active evergreen funds, generally occurs as of December 31, based on the increase in the fund’s NAV during the year, subject to any high-water marks or hurdle rates. In the case of closed-end funds, the link between short-term fluctuations in market values and a particular period’s incentive income may in part be indirect. Thus the effect on incentive income of a 10% decline in market values is not readily quantifiable. A decline in market values would be expected to cause a decline in incentive income.
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Impact on Investment Income (before consolidation of funds)
Investment income or loss arises from our pro-rata share of income or loss from our investments, generally in our capacity as general partner in our funds and as an investor in our CLOs and third-party managed funds or companies. This income is directly affected by changes in market risk factors. Based on investments held as of September 30, 2021, a 10% decline in fair values of the investments held in our funds and other holdings would result in a $347.1 million decrease in the amount of investment income. The estimated decline of $347.1 million is greater than 10% of the September 30, 2021 corporate investments balance primarily due to the levered nature of our CLO investments. These estimated effects are without regard to a number of factors that would be expected to increase or decrease the magnitude of the change to degrees that are not readily quantifiable, such as the use of leverage facilities in certain of our funds, the timing of fund flows or the timing of new investments or realizations.
Exchange-rate Risk
Our business is affected by movements in the exchange rate between the U.S. dollar and non-U.S. dollar currencies in the case of (a) management fees that vary based on the NAV of our funds that hold investments denominated in non-U.S. dollar currencies, (b) management fees received in non-U.S. dollar currencies, (c) operating expenses for our foreign offices that are denominated in non-U.S. dollar currencies, and (d) cash and other balances we hold in non-U.S. dollar currencies. We manage our exposure to exchange-rate risks through our regular operating activities and, when appropriate, through the use of derivative instruments.
We estimate that for the nine months ended September 30, 2021, without considering the impact of derivative instruments, corporate investments or consolidated funds, a 10% decline in the average exchange rate of the U.S. dollar would have resulted in the following approximate effects on our operating results:
•our management fees (relating to (a) and (b) above) would have increased by $18.4 million;
•our operating expenses would have increased by $15.7 million;
•OCGH interest in net income of consolidated subsidiaries would have increased by $1.6 million; and
•our income tax expense would have increase by $0.7 million.
These movements would have increased our net income attributable to OCG Class A unitholders by $2.0 million.
At any point in time, some of the investments held by our closed-end and evergreen funds may be denominated in non-U.S. dollar currencies on an unhedged basis. Changes in currency rates could affect incentive income, incentives created (fund level) and investment income with respect to such closed-end and evergreen funds; however, the degree of impact is not readily determinable because of the many indirect effects that currency movements may have on individual investments.
Credit Risk
We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting to reputable financial institutions the counterparties with which we enter into financial transactions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.
Interest-rate Risk
As of September 30, 2021, the Company and its operating subsidiaries had no debt obligations outstanding under the three senior notes issuances and two revolving credit facilities in its condensed consolidated statements of financial condition for which it is jointly and severally liable. Each senior notes issuance accrues interest at a fixed rate. The revolving credit facilities accrue interest at a variable rate. Of the $224.4 million of aggregate cash and U.S. Treasury and other securities as of September 30, 2021, we estimate that the Company and its operating subsidiaries would generate an additional $2.2 million in interest income on an annualized basis as a result of a 100-basis point increase in interest rates.
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Our consolidated funds have debt obligations, most of which accrue interest at variable rates. Changes in these rates would affect the amount of interest payments that our funds would have to make, impacting future earnings and cash flows. As of September 30, 2021, the consolidated funds had $6.2 billion of principal or par value, as applicable, outstanding under these debt obligations. We estimate that interest expense relating to variable-rate debt would increase on an annualized basis by $61.9 million in the event interest rates were to increase by 100 basis points.
As credit-oriented investors, we are also subject to interest-rate risk through the securities we hold in our consolidated funds. A 100-basis point increase in interest rates would be expected to negatively affect prices of securities that accrue interest income at fixed rates and therefore negatively impact the net change in unrealized appreciation (depreciation) on consolidated funds’ investments. The actual impact is dependent on the average duration of such holdings. Conversely, securities that accrue interest at variable rates would be expected to benefit from a 100-basis point increase in interest rates because these securities would generate higher levels of current income and therefore positively impact interest and dividend income. In cases where our funds pay management fees based on NAV, we would expect our management fees to experience a change in direction and magnitude corresponding to that experienced by the underlying portfolios.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective at the reasonable assurance level to accomplish their objectives of ensuring that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during our most recent quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, please see the section entitled “Legal Actions” in note 15 to our condensed consolidated financial statements included elsewhere in this quarterly report, which section is incorporated herein by reference. Also, please see “Item 1A. Risk Factors—Risks Related to Our Business—Extensive regulation in the United States and abroad affects our activities and creates the potential for significant liabilities and penalties that could adversely affect our business and results of operations” in our annual report.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, please see the information under “Risk Factors” in our annual report. There have been no material changes to the risk factors disclosed in those reports.
The risks described in our annual report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
For a list of exhibits filed with this report, refer to the Exhibits Index on the page immediately preceding the exhibits, which Exhibit Index is incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 12, 2021
| Oaktree Capital Group, LLC | ||||||||
| By: | /s/ Daniel D. Levin | |||||||
| Name: | Daniel D. Levin | |||||||
| Title: | Chief Financial Officer and Authorized Signatory | |||||||
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EXHIBITS INDEX
| Exhibit No. | Description of Exhibit | ||||
| 101.INS | XBRL Instance Document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | ||||
† Furnished herewith
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