Friday, August 17, 2012

Oaktree's Grand Slam

I don't plan on updating things every quarter on companies I mention here; figures will go up and down over the short term due to markets and AUM changes due new fund launches and returning of capital to investors (due to realizations) etc.

But anyway, one of the interesting things about OAK is the off-balance sheet items.  One of the large ones is the accrued incentive fees that is not booked as income at OAK (other managers book these even if not realized which causes higher p/l volatility).  The accrued incentive fee is held at the fund level and not paid out so doesn't show up in earnings or on the balance sheet.  It is itemized in the filings, though, so we always know how much is there.

At the end of the 2nd quarter, there was around $1.1 billion of that held at funds that actually belong to OAK (if realized and paid out). This comes to a little more than $7/share so is not trivial.  It's a nice chunk of the value at OAK.

Doubleline Capital
The other piece that is not reflected on the balance sheet is Doubleline Capital, a fund management company started with the help of OAK by Jeffrey Gundlach.  If you google him, you will find an interesting past to this person; trying to become a rock star in California, seeing an episode of the Lifestyles of the Rich and Famous and wanting to get rich, becoming (or trying to) an investment banker etc.  How can you not love America?

So as of the end of the last quarter, Doubleline already has $40 billion in assets under management (AUM), and has earned OAK $4.8 million in the second quarter alone (this includes their 22% stake in Doubleline Capital LP and an affiliated entity).  Earnings in Doubleline Opportunistic Income LP is stated separately.

This stake in Doubleline Capital LP is on the books at a cost basis of $18 million (the original investment was $20 million, I think, so they must have gotten dividends paid out or some other thing to reduce the cost basis).

Since the equity income passes through the income statement, this is not a completely off-balance sheet item; it is reflected in distributable income, economic net income etc.   It's just on the balance sheet at a really low price that doesn't reflect reality, so any valuation using distributable income or ENI is not affected by this.

The question becomes, how much is Doubleline Capital worth?  

Someone commented on my previous OAK post that it may be worth 2% of AUM.  Using 2% of $40 billion, that makes Doubleline Capital LP worth $800 million.  OAK owns 22% of that so that would be worth $176 million.  That's a nine-bagger ($176 mn / $20 mn)!  Nice trade.

Since there is 150 million total A and B shares outstanding, that comes to $1.17/share.  So currently, it's not a huge part of the total valuation of OAK (trading now just under $40/share).  But Doubleline is growing rapidly.  I think they had $30 billion earlier this year and it is now up to $40 billion.

Valuation Comps:  PIMCO
So I don't really know who the comps are for Doubleline other than TCW itself and PIMCO.  Blackrock used to be a fixed income manager until they bought Merrill's asset management business (which was mostly equities) in 2006.  So before that, they were a fixed income manager.  But those guys were a little different than TCW / PIMCO.

Anyway, thanks to the internet we have some data on PIMCO.   PIMCO was bought by Allianz back in March 2000.  They bought 70% of it for $3.3 billion, valuing the whole company at $4.7 billion.  At the time, PIMCO had AUM of $256 billion (they now have a whopping $1.8 trillion).

From the Allianz / PIMCO purchase presentation, the valuation of PIMCO was 1.8% of AUM and 14.5x EBITDA.  However, at the time back in 2000, 36% of PIMCO's AUM was in equities.

TCW / METwest
SocGen paid $880 million for a 51% stake in 2001 valuing TCW back then at $1.7 billion. They had AUM of $80 billion then, so that's 2.1% of AUM.

In 2009, Gundlach tried to buy TCW (51% stake) for $350 million, valuing TCW at the time at $700 million.  With TCW AUM at around $100 billion at the time, that comes to 0.7% of AUM.

The Carlyle purchase of TCW is said to be worth $700-800 million. With a current AUM of $131 billion, that comes to 0.53% - 0.61% of AUM. 

In 2009, Citibank bankers (hired by TCW to seek strategic options) valued TCW at between $700 - 900 million; AUM in 2009 was $100 billion, so that comes to 0.7% - 0.9% of AUM.

TCW, after Gundlach left, bought Metropolitan West Asset Management to fill the void for $300 million, and the AUM for MetWest at the time was $30 billion, so that's 1.0% of AUM.

So these are the data points from various articles written recently about the Carlyle / TCW deal.

By the way, here is the TCW AUM trend:

2006  $145
2007  $147
2008  $103
2009  $100
2010  $116
2011  $118
2012  $131 (current)

Doubleline Worth 2% of AUM?
Two key data points support a 2% AUM valuation; the PIMCO purchase by Allianz (1.8% of AUM), and the SocGen purchase of TCW (2.1% of AUM).    I think the underlying companies may be close comparables, but the problem is that these purchases were by large European financial institutions (not the most price sensitive?) and the deals were done in 2000 and 2001.  This was at the peak of the bubble so valuations may be peak-ish too.  More importantly, this was before the financial crisis and all financial valuations are far lower now than pre-crisis (if we want to use pre-crisis valuations, we might as well value GS at 3x book and just stay at the beach).

More recent data points suggest something closer to 1% of AUM.  Of course, TCW may be 'troubled' so it may not be such a great comp as far as the Carlyle deal is concerned.

But the Citibank valuation in 2009 of 0.7% - 0.9% of AUM is post-crisis and I assume TCW was still doing well at the time (Gundlach still there?).   Also, Gundlach himself bid 0.7% of AUM for TCW.  Of course, this may have just been a low-ball bid, but if he really wanted TCW he wouldn't bid such a small fraction of what it is worth.   Since it comes in at the low end of Citibank's evaluation, this 0.7% - 0.9% of AUM range is probably not too far off.

Also, TCW paid 1.0% of AUM for MetWest, which was presumably not a troubled firm.  This supports the notion that Doubleline may be worth closer to 1.0% of AUM rather than 2.0% of AUM.

By the way, you can't compare Doubleline with OAK; the big difference is that OAK is a hedge fund manager with higher fees and incentive fees which account for a large part of the value of OAK.

Blackrock (BLK)
Just as a sanity check, I took a quick look at BLK pre-2006 (when they bought Merrill's asset management business) as they were primarily a bond manager at the time. Since this is pre-crisis, it may not be too useful.

But anyway, a quick look shows that at year end 2005 and 2006, enterprise value to AUM was around 1.5% and 1.7% (10k's don't go back that far), and the p/e ratio ranged from 25-29x in 2001-2006 (on a year-end basis).

They are a totally different beast now, with a lot of equity assets and a big ETF business.  I think we will be laughed out of the room if we mentioned a 25x p/e ratio for someone in the financial industry.

P/E Ratio
Just as a cross check, since we know that Doubleline earned for OAK $4.8 million in the second quarter, let's look at some earnings ratios of some asset managers.  This measure will be more stable across different types of asset managers (percent-of-AUM valuation differs drastically according to what type of fund it is; equity, fixed income, hedge fund, mutual fund etc...).  P/E ratios are indifferent to asset type and only look at earnings. 

Since Doubleline is an LP, I assume the equity income that OAK books is a pretax figure.  So we will have to look at pretax P/E ratios (market cap divided by pretax earnings).  These are some listed asset managers in no particular order and their pretax p/e (based on FY 2011) and their trailing twelve month p/e (ttm) which I just pulled from Yahoo Finance.

Asset Manager Valuation

From this, we see that a pretax earnings multiple is pretty consistent across asset managers regardless of type of assets, and they average around 10x pretax earnings.  I put the ttm p/e ratio in there just for reference (note that the time period is different; ttm versus FY 2011).

OAK booked equity income of $4.8 million on their Doubleline stake in the second quarter.  Since Doubleline is growing so quickly, let's annualize this rather than double the six month figure (which happens to be $8.9 million). 

That gives us pretax earnings of $19.2 million.  Assuming little debt at Doubleline and minimal D&A, this may be close to EBITDA.  In that case, we can compare this figure to the PIMCO purchase by Allianz which was at 14.5x EBITDA.   This would give a value for Doubleline (OAK's share of it) of $278 million, or $1.86/share.

Using the above 10x pretax figure, OAK's stake in Doubleline would be worth $192 million or $1.28/share.   This is just a cross check; I can't really get too comfortable with an earnings valuation without a little more data and some more detail.  But if we keep an eye on it, it can be a good sanity check.

So judging from this quick look, it seems that a 2% of AUM valuation for Doubleline might be a little aggressive in this post-crisis market (and what if bonds actually do enter a bear market?).  A 1% of AUM figure sounds totally reasonable given recent transaction trends.

At 1% of AUM, Doubleline today would be worth around $400 million.  OAK owns 22%, so that's $88 million or about $0.60/share  (That means if we double the valuation, it's worth $1.20/share (at 2% of AUM)).

So even though this investment already is a home run for OAK, it's still not a big part of OAK's total intrinsic value.

We looked at the EBITDA valuation, but we can probably throw that out as it's based on a pre-crisis transaction at the peak of another bubble.  Using 10x pretax earnings which many listed asset managers seem to be consistently valued at, and a 2Q2012 run rate earnings, OAK's stake in Doubleline is worth $1.28/share  ($4.8 million x 4 / 150 mn SOS). 

This curiously gets us back to 2% AUM valuation, so maybe Doubleline is worth 2% of AUM after all.  But since Doubleline is still starting up, we have yet to see what their normalized earnings is going to be; we don't know what Doubleline will earn over time.

In any case, either way, Doubleline now is worth anywhere from $0.60-$1.28/share (1% or 2% of AUM or 10x pretax earnings).

But we have to remember that Doubleline is growing dramatically now.  Earlier this year they had less than $30 billion in AUM and now it's $40 billion.

So let's project out what they can possibly do.

Let's say that Doubleline can basically recreate TCW.  From the above table, we see that TCW had AUM in the $100 billion - 150 billion over the years.

Using the 1% and 2% AUM figures (we won't know what the pretax earnings are going to be), here is what Doubleline might be worth to OAK on a per share basis:

The first column is simply the AUM Doubleline will have.  The Total value figures are just 1% and 2% of that.  The value per OAK share is simply the total value times 0.22 (22% ownership) divided by 150 million shares of OAK shares outstanding.

From this, we see that OAK's stake in Doubleline is currently worth $0.59 - $1.17 / OAK share.  If Doubleline can recreate TCW and get AUM up to where they are, then the value to OAK of their stake would be $2.05/share (at 1% AUM valuation) or $4.11/share (at 2% AUM valuation).

Of course, they can keep growing.  If they get AUM up to $200 billion, then Doubleline would be worth $2.93 - $5.87 / OAK share.

If you want to up the AUM assumptions, just double the $400 billion AUM, or just use $1.50 per share per $100 billion etc.   I'm sure some bulls will want to argue that  Doubleline can become more like the $1.8 trillion PIMCO.   Now that would be something.

Doubleline is already a home run for OAK, but if they get AUM up to $140 billion, OAK's share at 2% could be worth $616 million.  Think about that.  A $20 million investment going to $616 million.  That would be a 30-bagger.

But as much a home run Doubleline is for OAK, it would still account for only $4.11/share in value to OAK shareholders.  Doesn't seem like much on a $40 stock (but we'll take it!).


  1. This was a great post. I'm curious as to how you reached it. The whole piece seemed to lead to a fully formed conclusion, and I'm curious as to what led you to dig into the OAK/Doubline situation other than that you had mentioned it before.

  2. Hi, thanks for the comment. I am a big fan of Howard Marks. His book, as you probably know is fantastic. So I want to keep an eye on OAK. I had a general view and feel for the valuation of OAK but never really dug into Doubleline and I knew that it was one of the off-balance sheet items that management points out on conference calls and OAK bulls talk about.

    So I just wanted to get a sense of what kind of value it might have, that's all. On companies I follow or like, I like to dig into certain areas where there may be value that is not well understood and this is a classic example of that. At this point, Doubleline doesn't look huge as a percentage of OAK's intrinsic value, but it can get big quickly if they keep growing like they are.

    Anyway, that's about it.

    What lead me to turn it into a blog post is that I had a question; "what is Doubleline worth?" and I felt I had enough information to make an interesting post out of it and it was meaningful for me too in the sense of understanding the situation.

    I can look into a lot of stuff like this but then come up with nothing special enough to talk about. That happens most of the time when I look at stuff...

  3. Charles Schwab just bought Thomas Partners with $2.3B in assets for $85M which is 3.7% of assets.

  4. Hi Kk, have you seen the last piece about H. Marks in Pensions&Investments by Randy Diamond? "Our mantra is 'good company, bad balance sheet'". Really great.

  5. Who is the Brooklyn Investor? Please idetify yourself and tell us something about you that makes you a guru.

    1. lol, I am not a guru. I'm just an anonymous blogger posting my thoughts. I don't pretend to be anything other than that.

      Thanks for reading.