tag:blogger.com,1999:blog-5389144729834496735.post9206701197715952871..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: OAK: Oaktree Capital Management IPOUnknownnoreply@blogger.comBlogger10125tag:blogger.com,1999:blog-5389144729834496735.post-42915834748882292582012-09-30T08:55:27.473-04:002012-09-30T08:55:27.473-04:00For normal profits, I think the K-1 income is taxe...For normal profits, I think the K-1 income is taxed at your ordinary rate. In the K-1 income might be some interest income, capital gains etc... and thay may pass through at those rates for you too. <br /><br />You are right that the cash distributions should usually cover tax liability but that may not always be the case depending on what the company wants to do. I don't know enough history to know how these things usually work out (this is a relatively new structure for asset managers, at least in the listed world). <br /><br />As for my comment about capital gains, dividends and interest income, that's just for the definition of an investment company. You can google it, but if most of your income (at the company level) is passive investment income, that might make you an investment company. Also, if most of your assets are in investments etc... That's what I was referring to. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-61460816866965527552012-09-29T12:02:13.883-04:002012-09-29T12:02:13.883-04:00thanks for your reply--I've been reading a fai...thanks for your reply--I've been reading a fair amount about these set-ups this morning, (e.g., looking at blackstone as a model). It seems as though I would expect the distributions and income reported on the K-1 to be around parity. For that income, presumably it is at my marginal tax rate? I'm having trouble figuring out what kind of income will be passed through, so would appreciate any input if you are aware.<br /><br />I do note that you said "most income is not capital gains, dividends, and interest income", but I'm not sure if I'm parsing the "not" correctly--sorry if you were already answering the above.<br />Joel Stevensnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-7820486205458572992012-09-29T09:50:41.812-04:002012-09-29T09:50:41.812-04:00Hi, the non-cash compensation is mostly the non-ca...Hi, the non-cash compensation is mostly the non-cash charge related to the 2007 restructuring. OAK did some sort of exchange with the original partners and this exchanged was basically marked to current value which was large. So that 'grant' of shares or units to the old partners is considered compensation and is written off over time (I think five years). So for valuation purposes, this can be ignored. No cash ever left and no cash will have to leave. <br /><br />As for the p. 55 paragraph, it just means that they don't have to register as an Investment Company as long as they don't look like a fund; most income is not capital gains, dividends and interest income. <br /><br />If they are deemed an investment company, then they have to follow the Investment Company Act of 1940 rules and post NAV on a daily or weekly basis and do other things that closed end and/or mutual funds have to do. This is a huge hassle, so companies that are not funds have to be careful not to fall into being called an investment company. <br /><br />As for the legal structure, this is an LLC so it's not a corporation. LLC is basically a partnership (even though it's a hybrid). But as an investor, it's basically a partnership as you will get a separate K-1 form and you will have to report the pass-through income (and expense) on a Schedule C unlike a stock where you just report dividend income. So your tax liability may be higher than the cash distribution paid out by OAK. <br /><br />It is a hassle, and when you do invest in something like this, oftentimes you won't be able to file your tax on time (as many K-1's come too late). But if you file an extension, that's not a problem... kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-31999324998164208842012-09-29T09:13:58.451-04:002012-09-29T09:13:58.451-04:00Thanks for this analysis--Probably the best I'...Thanks for this analysis--Probably the best I've found. I've got a couple of questions if you have the time:<br /><br />Page 14 of the prospectus shows net income losses every year, but their ANI/ANI-OCG (and everyone's analysis) shows positive income (e.g., at page 105). Page 107 does the reconciliation, but I'm not getting why GAAP's "compensation expense" (which is admittedly non-cash) causes the profit to go to a loss. I'm still digging, so perhaps I'm being dense.<br /><br />Also, this bothered me a lot (page 55):<br />As long as 90% of our gross income for each taxable year constitutes qualifying income as defined in Section 7704 of the Code and we are not required to register as an investment company under the Investment Company Act on a continuing basis, and assuming there is no change in law (see “—The U.S. Congress has considered legislation that would have taxed certain income and gains at increased rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as well as the market price of our Class A units, could be reduced.”), we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. As a result, our Class A unitholders may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on their allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow-through basis) for each of our taxable years ending with or within their taxable year, regardless of whether or not our Class A unitholders receive cash distributions from us.<br /><br />This whole paragraph seemed quite odd to me--normally, US is only taxed on gains or dividends, but the above seems much more like a partnership set-up. In that case, is it partnership type IRS filings and not a stock? Joel Stevenshttp://joelstevens.netnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-5368511391970287312012-06-20T12:26:35.280-04:002012-06-20T12:26:35.280-04:00Hi, I think that sounds about right. AUM is hard ...Hi, I think that sounds about right. AUM is hard to project as these guys don't want to grow AUM in good times unless prices are good; they are sort of counter-cyclical in that sense. <br /><br />But yes, the best way to look at this is to find a steady-state FRE figure as the 'core' value/floor and then anything above that is a bonus. That doesn't mean we should value incentive income and investment income at zero, of course.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-84109009954121223322012-06-20T09:56:35.905-04:002012-06-20T09:56:35.905-04:00Yes, I was looking at the segment data but it both...Yes, I was looking at the segment data but it bothers me that I couldn't correlated back to the consolidated statements. I don't know wither to hate the fact that their prospectus is so convoluted or cheer them for not simplifying things just to marketing their shares to the investor.<br /><br />Thank you for helping me understand the 900M stock vesting thing. They are still doing small RSU issuance for performance incentive. In the march 31 quarterly statement, it still showed "Issuance of Class B units" of 2.313M shares which works out to be $81M worth viewed simplistically based on $35 share price. But this can be absorbed into the expenses pretty easily. <br /><br /> I believe Bridgewater is ~$120B and I don't think oaktree can be compared to something like PIMCO. So in my view I think its hard for the AUM to grow more. Then based on the $60-80B AUM, you would be looking at a $250-400M FRE which should be pretty consistent. So I think you can probably get 5-6% cash distribution payed out consistently plus the upside of any incentive income. Would this be a correct way to view things?tsparehttps://www.blogger.com/profile/00889404644154605509noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-3122577985564115162012-06-19T13:36:44.246-04:002012-06-19T13:36:44.246-04:00Hi, I agree this is an interesting stock, and more...Hi, I agree this is an interesting stock, and more so now that it's cheaper. You can ignore the $900 mn stock vesting cost as that is something related to the "reorganization" and is a non-cash charge to account for something that happened in 2007 (created new entity OCG and exchanged OCG stake for old ICM partnership units). 2012 should be the last year this takes place so it is irrelevant for analyzing the company. <br /><br />As for the distribution, I don't know what drove the rise; I think it's pretty variable so they will pay out what they think is right. I wouldn't worry about that too much as I think the key is going to be distributable earnings and ANI. <br /><br />I would basically ignore consolidated stuff because accounting rules force consolidation of funds Oaktree manages. This can get really messy and misleading. This is why they present their segment data the way they do. I would pay attention to that.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-52449034517046525282012-06-19T11:26:35.894-04:002012-06-19T11:26:35.894-04:00Thank you for writing this. Since the stock has d...Thank you for writing this. Since the stock has dropped almost 20% after IPO, I thought it warrants a second look. The IPO prospectus is hard to parse so I am grateful for the guidance your post provided. <br /><br />Here are a few thoughts I have on this one (hopefully they can contribute to the conversation). <br /><br />- With the drop in stock price, the company is now worth ~$5.2B. So with $1B capital and $1B of accrued net incentive fee of $1.2B, you only have to put a value on the future income stream based on ~$3B valuation. I think valuing the company at $300M per year at 10x multiple pretax is a good value. Comparing to other similar companies like Avenue capital or Apollo, the 1% mgmt fee seem to be competitive.<br /><br />- The company brought back stock at $35 and a few others smart money like greenlight, scorggin, davis have all invested which is good sign. I think you should be pretty safe following these guys.<br /><br />- I am not sure about the stock vesting cost. Its a big piece resulting in ~1.5% share dilution and is accounted as ~$900M cost in each of the last 3 years . I don't know how to interpret the "consolidated statements of operation" at all, so I don't really understand how this cost impact the valuation. Any idea how this should be viewed? <br /><br />- The distribution to class A holders suddenly jumped in 2010 and I couldn't find a reason what drove that. The distribution last quarter is above the mgmt fee earned so it can only be sustainable if incentive income and investment keeps up.<br /><br />- I think this should be a pretty sticky business because I don't think you can just create a index based ETF that will do nearly as good. However, this is definitely a business that require a smart team on top so its not a idiot proof business.tsparehttps://www.blogger.com/profile/00889404644154605509noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-8922731067780720972012-05-16T21:33:50.717-04:002012-05-16T21:33:50.717-04:00Yes, thanks for that. My figures don't reflec...Yes, thanks for that. My figures don't reflect that but income from Doubleline Capital LP flows through the "investment income" line in the OAK income statement so it does show up as earnings there.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-13698603978111122662012-05-16T20:36:41.197-04:002012-05-16T20:36:41.197-04:00They are also holding their 22% stake in DoubleLin...They are also holding their 22% stake in DoubleLine at CONSIDERABLY less than its true value. At $30b AUM and rapid growth, a 2% Equity Value / AUM is fair, valuing this business at $600m. That would be $132m to OAK <br /><br />http://articles.latimes.com/2011/sep/01/business/la-fi-tcw-gundlach-20110901Anonymousnoreply@blogger.com