Memo from Brooklyn (OAK's Preferred Rate)

Howard Marks released another memo the other day talking about the state of the high yield bond market today.  This is very relevant as I mentioned it as being a concern for Oaktree Capital (OAK) unitholders.  Anyway, here is the memo:   High Yield Bonds Today

There are some interesting points here, and for OAK unitholders, there are some especially relevant points, particularly with respect to the 8% preferred rate of return (he didn't mention it in the memo).

First, Marks reminds us that we can't predict what the markets will do.  Nobody knows.  Rates can go up.  They can go down.  Who the heck knows.  He also points out that high yield bond prices may go down if interest rates go up, but so will other bond prices.  And in fact, high yield bonds may have less price risk than others.  Read the memo to see why.

There are some other things from the memo that is very interesting and makes me scratch my head. 

First, here are some great points about the current OAK high yield portfolio:

• The average spread  in the current portfolio is 490 basis points, which is actually at the high end of the historical range over the past three decades at OAK.
• This more than compensates for the average default rate of 1.4%/year in OAK's portfolios over the past 27 years.
• The portfolio can have a 9% default rate every year and the portfolio would still do better than treasuries.  OAK has never had any single year with a 9% default rate in their portfolio.
• If they bought or held a bond currently yielding 5.7% and have an average default rate of 1.4% and a loss rate of 50% and lose 0.7%/year, that's still 5% return (before fees and price movements).  This is an attractive absolute return.

Marks says,

"While we believe spreads are attractive given the risks we see in our portfolios, it is true that there is little room for price upside, making the reward for risk taking limited" (my emphasis)

"Considering these factors, should investors sell their high yield bonds and wait for a better time to invest?  We don't think so, as market timing is next to impossible to do right..."

Fair enough.  But unitholders like OAK partly for the incentive fees that it can earn on the funds.  With a preferred rate of return of 8%, and as Marks says, a 5% attractive absolute return at current spreads and rate levels but "there is little room for price upside, making the reward for risk taking limited" can we not expect much in incentive fees going forward until interest rates 'normalize'?

Just out of curiosity, I flipped through the S-1 from last year's IPO again and my eyebrows went up.  I'm just trying to get a better handle on OAK's historical returns.

This chart shows the long term returns of OAK's high yield bond strategy going back to 1986.  The interesting thing here that I'm not sure I noticed at the time is that this is based on gross returns.  I assume that means before management and incentive fees.

So since the end of 1985 through the end of 2011, the high yield strategy gained 1069% and the benchmark gained 776%.  On an annualized basis that comes to 9.9%/year and 8.7%/year respectively.

This may not be apples to apples as this composite may include funds that don't have incentive fees and have varying levels of management fees.  But just looking at this raw data and applying 1.5% management fee and 20% incentive fees, this would show a net return to the investor of 6.7%.  So net of fees, OAK's high yield strategy failed to beat the benchmark index over 26 years?   I just took the 9.9%/year gross return, deducted 1.5% in management fees and then multiplied by 80% to get 6.7%. This may not be correct due to the 8% preferred rate and other things.

This is a little contrary to my image of OAK so I may be missing something here.  I would guess that the incentive fee generating funds are more opportunistic and had higher returns over time while this composite return may include lower risk, lower fee and larger funds.  That would make sense.

But still, I was a little surprised by this.

[Comment/clarification after the fact:  Please read comments in the comments section.  I did miss something. The high yield strategy are primarily the open-end funds which have management fees of 50 bps or so and presumably  no incentive fees.  There are other comments on the returns on the distressed debt funds that do have incentive fees.  So I did miss something! ]

Tailwind to Headwind?
Also, OAK has returned 9.9%/year over the past 26 years but that was during a time of steadily declining interest rates; OAK had a huge interest rate wind at their back that may turn into headwinds going forward.

In 1985, the 10 year treasury rate was 10.6% and that is down to 1.9% now.   Even using the late 1980s as a starting point, 10-year treasuries were in the mid 8% range.

So, two points come to mind:

• OAK had a huge tailwind (rates from 8-10% down to less than 2%) since 1986.  Yes, 5% absolute returns in this environment is good, but what happens to returns over time without this tailwind?  Or if the tailwind turns into a headwind?
• I don't know how the preferred rate of return has evolved over time, but if it hasn't changed, then back in the 1980s, they only had to outdo treasury rates to earn incentive fees.  Today, they have to earn 600 basis points more than treasuries before they get incentive fees.  Back then they only had to outdo treasuries, but today they have to outdo even the high yield averages by more than 200 bps before they can collect incentive fees.  Is this possible?! And again, that's with "little room for price upside".

Marks said the other day on the conference call that OAK has done OK with funds raised in good times and really well with funds raised in bad times. 

Here is a visual look at that statement (again, from the S-1):

So it's true (not that I doubt his words!).  The funds raised in 1990/1991 did spectacularly well.  The funds raised in 2001/2002 (when even the quality-loving Buffett was buying junk bonds) did amazingly well too.

And the great thing about OAK is that funds raised in boom times didn't do so bad.  There are basically two periods in OAK's past that this was the case.  The mid-to-late 1990s and the 2005-2007 period.   The returns on those funds were not so bad; 10%-12%-ish figures.

But let's look at what the 10-year treasury rates were back then.  In the 1995-1997 period, the 10-year yielded 6.5%.  In the 2005-2007 period, it yielded 4.5% or so.

Today?  it yields 1.9%.  Assuming they do just as well on a relative basis, this would put their returns below 8%.

[ Comment after the fact: The distressed debt funds have returned 18% after fees over time, so there isn't as much risk to future incentive fees as I thought initially due to the low rates.  The distressed debt funds that have incentive fees have more equity-like returns.  Maybe that should have been made more clear on the conference call with respect to the 8% preferred rate question.  (Maybe it was made more clear and I just missed it!) ] 

Difference Versus the Stock Market

OK, you can say high yield bonds are overvalued (even though maybe not on a relative basis).  But isn't the stock market overvalued too now and then?  Would you sell out of the stock market or Berkshire Hathaway or any other great business just because the stock market is overvalued at any given point?

The quick answer is no.  I wouldn't sell stocks even if the stock market was overvalued.  I would not even sell the stock market in general if I was an index investor.  Why?  

Earnings growth.   Bond coupons do not grow over time, but earnings do.  So if a bond was overvalued based on yield, it will most certainly be a cap on returns (well, there might be capital gains if rates go even lower).

But with stocks, even if you own the stock market at overvalued territory, over time, you can still earn a decent return.  The stock market return in the last century (10%/year or whatever it was) was only achievable to those who owned stocks regardless; they owned through 1929, 1965, 1972, 1987 etc...)

For example, there was no question that the stock market was overheated, overbought and overvalued in August of 1987.  I think it was pretty much as overvalued as it was in 1929 (according to the p/e ratio at least).    The p/e ratio was above 20x, maybe close to 30x p/e. 

The S&P 500 Index peaked out at around 340 in August 1987.  But even if you bought the very high, then, and held for ten years through August 1997, you would have returned 10%/year before dividends.   If you held throught August 2000, you would have earned 12%/year before dividends.  OK, 1997 and 2000 were high valuation years for the stock market.

But even if you held on until today (and I'm pretty sure the p/e ratio is lower today than in August 1987), you would have earned 6%/year, again, before dividends.  

How does this happen?  Earnings growth.  Even if the valuation goes down, if earnings grow, you can still earn a good return over time. 

Bond coupons do not grow so if you buy it dear, then you can't have earnings growth bail you out.  So it's a real cap on return in that sense. It's very hard to make a return higher than your yield at the time of purchase.  A valuation headwind can't be overcome by earnings growth (like the stock market can).

Conclusion

First of all, this is all shorter term stuff.  I do believe if you have faith in the management, it's a good business and you pay a reasonable price, things will turn out well.  I bet the folks at OAK will figure all of this stuff out and will be in a much better place over time.

But even Howard Marks cautions us that even if we can't predict the future, we have to be aware of cycles and where we are in them.

As an investor in OAK, I am very aware of where we seem to be in the interest rate cycle.   People have been calling for interest rates to bottom for a very, very long time.  But at some point, the risk/return becomes highly unfavorable.   Even Marks acknowledges that there is little room for further upside in price.

So where does that leave us?  If rates don't go down further, it seems highly unlikely that OAK will continue collecting incentive fees.  If rates stay flat (which is a high probability scenario given what happened in Japan), then OAK's funds may return the 5% or so that Marks illustrated in his memo.  In that case, OAK also wouldn't collect incentive fees.

The best scenario is a gradual rise in rates to more 'normal' levels.  But this would cause capital losses in OAK's current portfolios.  The trick would be how quickly prices move and how much funds can be raised and be put to work at higher rates to offset losses in current portfolios.  Ironically, a rapid rise in rates may be the best scenario, even though I can't imagine OAK's stock price not going down a lot in that scenario.

In any case, there is a fine line in thinking too much about the near term and being aware of long term trends and limits on what even great companies can do given the environment.  I know OAK is expanding into other strategies and regions, so some of the above concerns will be mitigated, but still...

I really respect Howard Marks and the folks at OAK and am a current unitholder, but given the above, I have to say I am a reluctant unitholder at this point.  



Solid Results at Oaktree, But...

Oaktree Capital Group (OAK) announced pretty good earnings for the full year of 2012.  The funds, across the board, returned around 15%.

For those who don't know, OAK is co-founded and run by Howard Marks, a legendary Buffett-like figure in the fixed income world.  It would be well worth your time to google Howard Marks and read his "memos" and watch youtube and any other video interviews you can find on the net.  He also wrote a fantastic book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor.

Anyway, I'm not going to repeat all the stuff that you can get from the earnings release.  If you're interested, you can just go to the OAK website and read about revenues, adjusted net income, distributable earnings, economic net income and all of that.  I'm just going to look at some things that made me raise my eyebrows and then maybe take a quick look at valuing this thing at the end.

I did happen to pick up some OAK last year as it tanked after the IPO so I am sitting on some nice profits on this position but it doesn't feel as much like a no-brainer that it did last year.  Anyway, I am getting ahead of myself.

No Longer Counter-cyclical?
The first thing that made me raise my eyebrows is that on the conference call, Howard Marks said that in 2012, they raised $12 billion in capital for funds which was their sixth year that they raised $10.8 billion or more. 

I thought, great!  That's really fantastic.  They are on fire!

But then I thought, wait a second.  I thought these guys were counter-cyclical.  I remembered a graph they had in their S-1 (prospectus) last year that really impressed me.  Here it is:

So in 2006, while private equity investors fell over each other investing, Oaktree Distressed Debt funds were laid back and not doing much.  The same happened in 2007.  But then when the wheels fell off, Oaktree pounced and made a lot of investments while private equity scaled back dramatically.  See how investments ballooned from $1.5 - $2.5 billion in 2006-2007 to $9.9 billion in the 4Q08-3Q09 period.

OAK can raise a lot of funds to maximize management fees, but this is not who they are.  They won't raise funds just to earn fees. 

But then we see that OAK has raised more than $9.8 billion for the sixth straight year in 2012.  To be clear, the above table is only for the Oaktree Distressed Debt funds and not for all of OAK.  In recent years, they have been adding different strategies (real estate, Europe etc...) so it's not apples to apples (plus the above table is for capital invested, not capital raised).

But still, with default rates and high yield spreads at historical lows, it's hard to imagine where all of this capital will be invested.  I don't mean to second guess Howard Marks or the smart folks at OAK.  They are the pros.  I'm an equity guy so have no clue about fixed income markets.

It seems to me, though, the combination of low nominal interest rates and low credit spreads around the world is at a historical level.  It's hard to imagine how they can earn good returns going forward in this market.

Marks did say on the conference call that he thinks they can still earn 10% returns over time. This was in response to a question of whether OAK would consider lowering the 8% hurdle rate of return (before earning incentive fees) because interest rates are so low.  Marks said that it is a fair intellectual argument to say that that should be lower, but he doesn't want to go to the investor and say they are lowering the hurdle rate due to lower interest rates when he still thinks they can earn 10% going forward.

Marks did say that their funds have done very well when launched in turbulent times but has also done OK when launched in good times.  I suppose we can point to 2006-2007 launched funds.

But even then, interest rates weren't this low even though credit spreads might have been this low. 

In any case, this is just my own reservation.  OAK believes that there are opportunities and that's why they are raising capital.  They are more concerned with deal flow.  It the deal flow is not there, they can't invest, but they feel there is plenty on the way.

I have to say that investing in a fixed income asset manager during the peaking of the biggest bond bubble of all time, and one that particularly specializes in credit analysis when credit spreads are at ridiculously low levels is a little frightening. 

Of course, OAK is just about the best in the business, but even great equity managers suffer during stock market bear markets.   In a real blowup, OAK would definitely benefit as their pool of potential investments would expand.  But their current funds would take big marks against them, so that's sort of a conundrum with owning OAK today.  It can get bad before it gets really great.


Interesting Nugget From Call
By the way, there was an interesting comment from Marks on the call.  Someone asked him about OAK's underperformance (versus benchmarks) in 2012, as they have underperformed by 50 bps or so.

Marks said that nine or ten years ago, some consultant asked OAK to add up their performance in each quarter the markets (benchmark) went up and do the same for each quarter the market went down.  Marks cautioned that this is out of memory, but he said that OAK's funds underperformed by 55 bps in up markets but outperformed by 600 bps in down markets (annualized).

That's a fascinating piece of information.  This should probably go into every OAK presentation.  (I think Och-Ziff puts a similar thing in their filings; how their funds do well in down markets).

Anyway, let's take a quick look at what this thing is worth.

What's it Worth?
At the end of the day, we can't really predict where the bond market and credit markets will go.  People have been calling the bond market a bubble for a long time.  So the most important thing (as Marks would say), I guess, is to figure out what this thing is worth.  The uncommon sense thing for the thoughtful investor to do would be if the stock is trading substantially below what it's worth, buy it (or hold on to it).  If not, sell or don't buy.  Of course, since OAK is a great organization, it makes sense for long term investors to hold on even if it is fairly valued.

We can look at OAK valuation as the sum of four (or five if you include DoubleLine as a separate piece) parts:  Fee-related earnings stream,  incentive fee stream, balance sheet value (cash, treasuries and investments in funds) and off-balance sheet accrued incentive fees.

Fee-related Earnings
In 2012, Fee-related earnings (which is management fee minus compensation expense and SGA) was $307 million.   It was $315 million in 2011.   Management fee-generating AUM has been stable at $67 billion in 2011 and 2012, so I think this $307 million is an OK number to use to value this stream.

At 10x this, that's $3.1 billion value for this stable stream of income.  With 150 million total units outstanding, that's worth $20.70/share.

Incentive Fee Income
This part gets a little funky because it's very lumpy, so we have to make some assumptions.  I think the funds that OAK offers are designed to earn 10% or more over time.

The incentive fee is 20% of what they earn (once the hurdle as passed), and much of that is paid out as performance bonus to the fund managers (and other employees, hopefully).   Looking at the accrued incentive fees at the end of both 2011 and 2012, it looks like employees get 40% and OAK gets 60% (this varies by fund/strategy so may change over time).

So instead of using actual incentive fees earned over time, I'll assume the funds earn 10% (they earned 15% in 2012 so 2012 earnings are obviously better than they would usually be), they get 20% of that and pay out 40% of that for the bonus pool.

Let's assume incentive fee creating AUM of $34 billion.  It was $34 billion in 2012 and $36 billion in 2011.

So the incentive fee earned in a typical year on $34 billion would be $3.4 billion x 20% = $680 million x 60% (40% to employees) = $408 million.

10x that stream would be $4.1 billion.  With 150 million units outstanding, that's  $27.20/share.

Balance Sheet Value
OAK has cash, investments and funds on it's balance sheet and some debt.  This equity value is largely liquid, financial instruments so should be counted at book (funds are carried at market value).

Total assets at OAK was $2.36 billion and total liabilities were $966 million.  Book value comes to $1.4 billion.   If we use $1.4 billion and add it to the above parts, there will be some double counting involved as some of the assets on the balance sheet is being used to generate the above management fee and incentive fee (think office supplies/equipment etc.). 

So let's deduct the $146 million in "other assets".  I don't know what's in there, but we can be sure that PC's, servers and other office equipment isn't in any of the other balance sheet categories.

That would get book value down to $1.25 billion.  That comes to $8.33/share. 

Off Balance Sheet Accrued Incentive Fee Value
Due to the way OAK accounts for incentive fees (not booked until realized and paid), there is a lot of value that hasn't gone through the income statement and doesn't show up on the balance sheet (incentive fees only hit the income statement and balance sheet when it is paid out (or when it becomes payable)).

This amount of accrued incentive fees held at the fund level is $1.3 billion at the end of 2012.  This comes to $8.52/share.   (If the funds were liquidated today, this is the amount that would be payable to OAK as incentive fees (this is net of what gets paid out as performance bonus too))

Add it Up
So if you add it all up, you get:

                                                   Value of per unit
Fee-related earnings:                      $20.70
Incentive fee:                                  $27.20
Book value:                                       $8.33
Accrued incentive fee:                      $8.52
Total:                                              $64.75

DoubleLine
OK, so then there is another piece to this puzzle, and that's OAK's 20% stake in DoubleLine which is on the balance sheet at $29 million. That comes to less than $0.20/share, but it's grossly undervalued there.  

As I said in a previous post, I figured DoubleLine is worth somewhere between 1% and 2% of AUM.  DoubleLine now has more than $50 billion in AUM (versus I think $28 billion at the time of OAK's S-1 filing).   So the value of DoubleLine would be $500 million - $1 billion.  20% of that would be $100 million - $200 million.  That's far higher than the $29 million balance sheet value.

It's already on the books at $29 million, so the incremental value per unit would be $71 million - $171 million.  On a per unit basis that comes to $0.47 - $1.14/unit.

Now, that's not a whole lot given the $50-51 stock price and $64.75/unit fair value.

But Wait!
In the earnings release, DoubleLine's results is included in investment income.  I assume that is a cash dividend distribution to OAK from DoubleLine (I think someone confirmed that on the conference call).   That amount was $22.7 million for 2012.

But on the conference call, OAK said that the DoubleLine stake created distributable earnings of $34 million and that they feel although this goes through the investment income line, it is actually more like fee-related income.  If that is the case, let's put a 10x multiple on that and it comes to $340 million.

That comes to $2.27/unit.  That's far higher than the valuation we would get from a 1%-2% AUM valuation.  Excluding the $29 million already on the balance sheet, that's an additional $2.00/unit in value you can add to the above $64.75/unit  sum of the parts value for OAK.

So the total, total would come to $66.75/unit.

With the stock trading at $50.74/unit right now, that's a 24% discount to what it's worth.

Conclusion
So OAK still looks cheap despite a nice runup.  I don't know the details of the DoubleLine earnings, so I don't know what can be 'normalized' and what's due to a good market last year.  But it seems like using 2012 figures leads to a far higher valuation for DoubleLine than a 1-2% AUM valuation.  I'm still on the fence on that one, but it's certainly possible that DoubleLine can be worth more than 1-2% AUM if they offer more funds with higher fees.   But again, I just don't know the details.

OAK is a solid shop run by solid people and it is definitely one that you can own and be comfortable with over the long term.  I would not worry about management, corporate governance, risk management and things like that.

But what I do worry about is the current state of the fixed income markets and the sub-6% high yield rates.  It just sounds insane to me that junk yields less than 6%.  I don't know how anyone can generate high returns going forward in this kind of market without going further out on the risk curve (and that often doesn't end too well).

I thought initially that OAK would be a great holding in front of a European collapse or something like that; they would raise funds and go over there and pick up the pieces.  But it sort of looks like that might not happen (due to intervention by the ECB etc.).

But seeing how they are doing so well and making so much money in this almost maniacal bull market in credit, I fear what would happen on a hiccup.

I don't worry about OAK over the long term, of course.  But I can't help but imagine that returns on capital raised today will be far lower than any of their funds in the past, and this may not bode well over the short-medium term.

I know, I'm a long term investor and I shouldn't think of things like that; I should just think about the long term.

But there is a part of me that feels like I'm looking at a private equity manager in 2006-2007 when looking at a fixed income manager today.   

Anyway, that's just a quick look and thoughts on OAK today.  I may have more to say or corrections after seeing the 10-k (or more immediate corrections which would be pointed out in comments below).

I still own OAK, but would look to lighten up on further gains.  I wouldn't mind owning a smaller stake as a 'permanent' holding, but wouldn't overweight it too much in my active account.

It's a conundrum for me;  I love the company, management etc., but I don't love the sector at all right now; too much love there... 

DoubleLine Capital Valuation Hint

So here's another followup post, this time for my OAK/DoubleLine post (here).

Jeffrey Gundlach was on CNBC yesterday and talked about the markets and surprisingly talked about what he sees for the future of DoubleLine.    Gary Kaminsky conducted the interview and he asked a really good question that lead to Gundlach's discussion of DoubleLine's future which may have implications for DoubleLine's valuation (for OAK shareholders).

Anyway, firstly, here is what he said in general about the markets:

• The 10 year treasury yields bottomed out in July.  What more is there to gain here?  How much lower can rates go?   Even if rates go down a little more, there isn't much gains to be had.
• This feels like the mirror image of the mid 80's when treasury yields were very high and everybody hated it.
• 10 year rates can go up 100 bps from here even before year-end.  People ask him what the catalyst for rising rates would be and he says that they are already going up; the catalyst is simply the bad return the low rates provide.
• QE3 is not going to be effective.  Can't see any connection between QE3 and increasing employment.
• Quotes Jim Grant; the markets now is a "hall of mirrors" due to the extensive market manipulation by central banks around the world.
• Wouldnt' buy equities now as risk assets are at a high level.  So short term not positive on stocks, but over the long term due to the central bank actions there will be inflation so real businesses and assets would be good.   Gundlach doesn't think there will be another lost decade in equities.
• He liked Spanish stocks in May because they were bombed out.  Liked it not because he thought Europe would solve problems, but just because it was bombed out.  Now the market that is bombed out to a scary extent is the Shanghai composite.  World markets at their highs and yet Shanghai and some other emerging markets are at multi-year lows.
• Apple obsession / fixation means it is over-bought and over-believed.
• Would (or said in the past) short Apple and the S&P and be long things like natural gas and commodities.  Apple is up 14% since he said that but natural gas is up 40%, so please don't look at only one leg of the long/short, pair trade idea.
• Where to invest?  Get away from traditional ideas and indexation.  He likes bank debt for the first time in a long, long time.  International bonds are interesting as U.S. treasuries are no good.  Some mortgages around the edges.  Also, really, really safe dividend paying stocks.  Not tech stocks, but really safe ones (he later mentioned Campbell Soup).
• Returns going forward, 5%.  Buy-and-hold is out the door.  Investors have to be more active, or have to find someone to do it for them.
• Bank stocks not short but wouldn't own them for dividends.  They are not safe.  If something happens in Europe they are still vulnerable to significant shocks.

So that's the sort of things he said.

DoubleLine's Future
But what really got my attention was when Kaminsky asked Gundlach what level of assets is too much for a bond fund.  What AUM level would his investors have to start to worry as it might be getting too big.

At first Gundlach went off on this tangent about counterparty risk but Kaminsky got him back on track and asked the question again.  And then Gundlach said:

• Maximum AUM is $100 billion, probably south of that.
• For the Total Return fund (their flagship fund), they probably won't be open after $50-60 billion in assets.
• Not interested in having offices in Singapore and Mumbai, travelling around the world.
• Sees DoubleLine as a company with "mid-size staff and a mid-size culture".
• Wants a manageable business, know what they're doing with people working together.
• Maybe 100 employees, they now have 80.
• Current AUM north of $45 billion.
• Will probably close fixed income strategies at $60 billion.

So there you have it.  For those hoping for DoubleLine to become the next Pimco, this may not be very encouraging (Pimco AUM is over $1 trillion).

DoubleLine's Valuation
So going back to my other post and looking at the table there, if $100 billion AUM is going to be the maximum, DoubleLine would be worth $1.47/OAK share or $2.93/OAK share (at 1% of AUM or 2% of AUM respectively).

Of course, this doesn't mean that AUM can't keep going up with performance; just because they close funds doesn't mean AUM won't grow, so over time they can still get much bigger than Gundlach envisions at this point.  But it is one (and pretty significant) input we can use to value DoubleLine.

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:

$bn
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.

Conclusion
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!).

OAK: Oaktree Capital Management IPO

Oaktree Capital Managment had their IPO recently (April 12?); the stock was offered at $43.00/share but is now trading at $39.41 (today's close).   The price range for the offering was $43-46 so it came it at the lower end, and the planned 10,295,841 share offering was reduced to 7,888,864 shares (excluding the shares sold by current shareholders).  All of the proceeds are to be used to buy out existing shareholders (or partnership units).

I'm not going to go into the details here because Oaktree is a bit complicated like all of these publicly listed hedge fund/private equity fund management firms, but I'll cut and paste (snip function on Windows 7) a bunch of interesting looking charts from the prospectus and also take a stab at valuing OAK.  (OK, it was co-lead by Goldman Sachs and Morgan Stanley if you must know.  They earned fees of $17,781,635 on this deal that comes to a gross spread of 7%.  I guess Oaktree doesn't have the negotiating power of a Facebook... A $380 million offering is not worth a discount).

Oaktree is very interesting because it is founded and run by Howard Marks, who is just about the best in the business with respect to fixed income investing.  He specializes in distressed debt and has a great track record.

He has also written what I think is one of the best investment books out there today; The Most Important Thing:  Uncommon Sense for the Thoughtful Investor.   Buffett's blurb on the cover says, "This is that rarity, a useful book".

Other people who wrote blurbs on the back cover are Joel Greenblatt, Jeremy Grantham, Seth Klarman and John Bogle.    That tells you Marks has written a pretty good book, and it is a really great book.

I have been reading his letters to investors for years (I'm not an investor in his funds, but read it when it floats around on the internet), and he is one of those people who are no nonsense and spot on.

Some basics are that they have $75 billion in assets under management as of December 2011, has 650 employees in 13 offices around the world and it was founded in 1995.

The asset breakdown by strategy is:

Distressed debt:  32%
Corporate debt:  28%
Control investing:  23%
Convertibles:  10%
Real estate:  6%
Listed equities: 1%

Anyway, here are some interesting charts from the prospectus.

The Alternative Asset Management Business
Like all the other alternative asset managers, the prospectus describes the industry and it's bright prospects.

This may disagree with Buffett's views that he doesn't think any hedge fund, after fees, will outperform the S&P 500 index over 10 years (he made a bet with someone on that; this bet is still ongoing so there is no winner yet).
The graph below shows that alternative investments have outperformed traditional investments over the past ten years.

This, and similar graphs are used by alternative managers to raise capital.  It is not surprising that these alternatives have beaten the S&P 500 index over the past decade, as the past decade has been pretty bad for stocks and hedge funds tend to do well in volatile markets.

This graph also worries me a little bit.   I always worry when pensions rush into any certain asset class.  This is totally understandable given that we've had TWO big bear markets where the S&P 500 index went down 50% in the past decade; it's been a high risk, no return market.  People want returns.  They don't want 50% bear markets and flat returns.   Also, many pensions assume an 8% return on plan assets and if they don't achieve it, they may have to contribute cash to it causing a hit to earnings. 

They would much rather reallocate the pension funds away from stocks and bonds (low return assets) into alternative assets which promise such high returns.

This sort of thing *always* cause trouble.  

I think this is also one of the reasons why equities remain reasonably valued:  there is an ongoing reallocation out of equities into alternatives.  People just don't want stocks.

Anyway, this has nothing to do with OAK, so let's go on.

Assets Under Management

Like other hedge funds and private equity funds, OAK has really grown their assets under management (AUM) dramatically in the past decade.  As usual, my primary concern would be if they can perform just as well with $80 billion in AUM as they did when they managed $20-30 billion.   Size really cuts down on the choice of investments.   Some of this is tempered by going global; when the universe is expanded, so should the opportunities.  But still, it gets tougher to get high returns with higher amount of capital.   I don't think there is a way around that.

Performance

The returns on their distressed debt strategy has been pretty stellar.  The gross internal rate of return on their closed-end funds (not to be confused with publicly listed, perpetually discount-traded, poorly performing closed-end funds) was +19.4% and +22.9% for the distressed debt strategy.  These are nice returns, but that's to be somewhat expected as it is a distressed strategy where equity-like returns are expected (in this case, it's way better than equity-like returns!).

One thing I should mention is that these IRR's are a little different and not directly comparable to other hedge fund, mutual fund returns.   I think these IRR's are calculated on capital actually employed.  This means that if you raise a $1 billion fund, the investors don't have to put up the capital until you call it.  And you don't have to call it until you find an investment.  So if the $1 billion is not deployed in the first year or first few months or whatever, that doesn't affect your IRR.

Once you invest it, then the IRR calculation starts.  But if you are a hedge fund and you raise $1 billion, then your performance is going to be tracked on day one.  If you own only cash, then you made zero return on day one.  If you do nothing for a year, this will negatively impact your annual returns.  This is the same with mutual funds.

For private equity and many of these 'closed end' funds with terms, that is not the case.  Obviously, the IRR will be much higher than with other types of funds as you are not penalized for the cash or undeployed/uncalled capital.

The following is a composite return chart of the high yield bond strategy.  Since 1986, the strategy has returned 1069% versus 776% for the benchmark.   So that's 10.3%/year since vs 9.1% for the benchmark index.

Here is the return on specific funds compared to the default rates of non-investment grade debt at the time of the launch.

You will notice that the funds launched in bad times have the highest returns versus funds that were launched when defaults were at a low point.  Oaktree understands this very well so tries to adjust their capital raising to be counter-cyclical; raise more money in bad times when prices are cheap, and less in good times when prices are high. 

Below is a graph that shows how they deployed very little capital in good times while the private equity industry was falling over themselves buying stuff up, and then when things blew up, Oaktree stepped in to buy and private equity fund capital deployment plunged.

This really illustrates the counter-cyclical nature of Oaktree.  They act when prices are low and their performance is improved by that.  They clearly don't follow the crowd.  We can see with these figures that Oaktree really walks the talk; they do what they say they will do (and what Marks says investors should do in his book).

The following is the breakdown of revenues since 2000:

So you can see that like other similar listed hedge funds and private equity funds, the three pillars of revenue are management fees, incentive fees and investment income.

So What is OAK Worth?

As usual, here's the tough part.  What the heck is this thing worth?  We know that the value of Oaktree comes from the three sources of revenue shown above. 

So OAK is worth the sum value of these three parts:  some stable revenue/income based on management fees, the assets they own on their balance sheet which is cash, treasuries and investments in their own funds (and some other assets, but most of the assets are financial assets), and the option value of the incentive income.

The ownership structure is complex and the financial statements can be quite confusing.  So I will ignore all the confusion and assume that only one class of  stock is outstanding and that represents the equity in the whole firm. 

According to this simplification, OAK would have 148,524,215 shares outstanding (never mind if it's class A or class B or whatever class.  I think this is what will be outstanding if all the partnership units, class B and others is converted to class A, which is the listed class).

The financial statements are confusing too because accounting rules force them to consolidate assets in certain of their funds even if that doesn't make much sense.  And then the balance sheet/income statement shown with consolidated fund assets/liabilities and income/expense shown separately is confusing too as OAK does own shares in some of their funds which shows up in the portion of assets on the balance sheet in the "assets of consolidated funds" (which would include assets that actually is owned by OAK).

So Oakmark has a separate table somewhere else that shows segment income statement and balance sheet which sorts all of this stuff out and puts what Oakmark owns in the operating segment.

OK, that's kind of confusing, I know.

Anyway, let's take this one piece at a time.

Fee-Related Earnings

Fee-related earnings (FRE) is a convenient measure that shows us what the business will earn on a steady-state basis with no investment returns or incentive fee income.  It's basically the management fee revenue minus compensation and benefit expense (excluding bonuses tied to incentive fees) and general and administrative expense.  

If you are running an asset management firm, this would be a key indicator.  Basically, you want to be able to cover all of your fixed cost with management fees, and if you can make positive earnings, that's even better.  This leaves the incentive fee income and investment income as bonuses, or icing on the cake.  You don't ever want to be in a position where you have to make good returns and earn incentive fees just to cover expenses (or depend on investment gains on from your balance sheet). 

The FRE for the past five years were:

             FRE  ($mn)

2007      $119

2008      $256

2009      $290

2010      $375

2011      $315

Over the past five years, FRE averaged $271 million and for the last three, it was $326 million. So what is normal here?  This is the problem with valuing businesses.  FRE and AUM has grown in the past few years, but is that because of the financial crisis and many great opportunities, or is the AUM trending upwards on a secular basis for the long term? 

If this growth is secular, then using $326 million as a base-case FRE figure would be fine.  If current AUM is bloated due to the financial crisis and extraordinary opportunities that arose in the past couple of years, then it may not be. 

So let's just use the figure in between and call FRE $300 million per year.   The other big question is what multiple you put on this.   I will use a conservative figure (what I consider conservative, of course, may be silly to others; anyone can use their own multiple).   I will use a figure of 10x this pretax figure.  10x is a 10% pretax coupon and that is very reasonable in this environment. 

At 10x the pretax income, the value of the FRE flow comes to $3 billion.  With 149 million shares outstanding, this is worth $20/share. 

Their management fees for funds is 1.48% for closed end, 0.47% of open end and the overall (including Evergreen funds) management fee is 1.11%. 

So if they maintain AUM at current levels and expenses remain the same, they can earn $315 million (same as 2011) on an ongoing basis.  I do think that management fees will actually go up going forward as increasing expenses in the past few years are due to expanding the business (international etc...).  If this is the case, AUM may rise.  If it doesn't work out, we can expect expenses to come down. 

(Actually, FRE is taxed at the corporate level at OAK so after tax and per share FRE can be found at in the prospectus (but only for 2009-2011).  After-tax FRE per class A share were $1.30, $1.75 and $1.47 in 2009, 2010 and 2011. Put a 14x p/e on that and you get $18.20 - $24.50/share value.  The average for the three years was $1.50.  At 14x $1.50, you get $21/share in value.  But it's the same valuation (10x pretax = 14x after tax etc...).  

Balance Sheet Value

OAK owns cash, treasuries and investments in their limited partnerships (funds) among other things.  They also have debt and other liabilities.  One quick way to measure their balance sheet value is to look at the tangible book value per share listed in the prospectus.  That's $7.44/share proforma after the offering.  This is a quick proxy because most of the assets at OAK is in financial assets such as the above. 

Of course, this may be double counting to some extent if there are assets used in the asset management business itself.  To prevent that (and I don't know the details of 'other assets' and total liabilities), we can just be very conservative and add up the cash, treasuries and investments and subtract total liabilities so that we can be sure we don't include assets that help generate income other than investment income. 

Here's the balance sheet summary from the "Segment Statements of Financial Condition":

Cash and cash equivalents:                                       $297 million

U.S. Treasury and government agency securities:   $382 million

Investments in limited partnerships at equity:          $1,159 million

Total investments and cash:                                     $1,838 million

Total liabilities:                                                      $ 960 million

Net cash and investments:                                   $ 878 million

With 149 shares outstanding, that comes to around $5.90/share.  So that's only off by $1.50 or so from the tangible book value per share.  I don't know exactly what the difference is as the balance sheet asset items listed on the Segment Statement of Financial Condition doesn't add up to the Total assets figure (only the financial assets are itemized). 

So let's just say that $5.90/share in net cash and investments is conservative as the asset side really does include only the financial assets and we deducted all liabilities from that. 

Incentive Fee Income

So what does that leave?  The last piece of the valuation puzzle is basically the incentive fee income.  Incentive fee is generally 20% at Oakmark and 40% to 55% of that is allocated (when earned) to incentive fee-linked bonuses.  So what is left over to Oakmark after paying bonuses on that is somewhere between 9% and 12% of fund returns.

There are a lot of ways to look at this but let's look at the first, simplest one.  Incentive fees are obviously lumpy, so let's just look at the average incentive fee income for the past five years: 

                              net of incentive compensation (bonus)

2007   $332           $254

2008   $174           $109

2009   $175           $109 

2010   $413           $254

2011   $304           $125

The average is $280 million through this period.  It would be $170 million after incentive based compensation.   

How do we value this?  Just using 10x pretax income, that would value the incentive fee stream at $1.7 billion, or $11.40/share.  But one important point is that the incentive fees earned are booked using a more stringent standards than other funds; there are accrued incentive fees that are not on the balance sheet and does not pass through the income statement. 

Apparently, this is a choice by management so as to reduce the volatility of earnings (by booking earnings on accrued incentive fees, this may cause volatility as market declines can force a reversal of these accrued fees). 

So we would have to add back the balance of accrued incentive fees (net of associated incentive compensation (we can get the same result simply by adding incentive income to incentive created instead of just using incentive income). 

The balance of accrued incentive income (net of bonuses) was $1 billion at December end 2011.  So that $1 billion comes to $6.71/share. 

So the incentive fee stream (including accrued incentive fees) comes to $18.10/share.  

Of course, there is a problem with just using the average incentive income for that past five years as incentive creating AUM has grown from $15 billion in 2007 to $36 billion.   I suppose it is conservative in that sense. 

Just as a sanity check, let's look at it another way.  Incentive fee, or carried interest is sort of like having a direct equity interest in the funds (except that you don't have to participate on the downside). 

As we said above, we know that incentive fees are 20% and 40%-55% of that is paid out as performance bonuses to employees, so what is left to OAK is something like 9-12% of the fund returns (assuming they can earn more than 8%). 

So another way to look at this is to assume that OAK owns 9% of the incentive fee generating AUM.  That figure is $36 billion at December-end 2011.  9% of that (to be conservative, I will use the lower portion of 9-12%) is $3.2 billion.  That comes to $21.50/share.   Of course, this is just a rough estimate.  The good thing about this approach is that you don't have to make any assumptions about investment returns.  The bad is that it doesn't take into account the fact that OAK will earn no incentive fee if they return 7% (or anything lower than the preferred return rate of 8%). 

As another cross-check, let's just say that the funds earn 10% gross returns.  That would generate $3.6 billion in profits at the funds and an incentive fee of $720 million and net of incentive compensation $324 million.  Slap on a 10x multiple on that pretax number and you get $3.2 billion or $21.50/share. 

So we come to the same valuation as the above.  

Summing the Parts

So putting those pieces together, we have: 

Management fee value per share:          $20.00

Net cash and investments per share:        $6.90

Incentive fee value per share:                $21.50

Total value per share:                          $48.40

(I used $21.50 because two approaches converged on that number and it makes more sense since it uses the more recent AUM number). 

So with the current price at $39 or so, OAK appears to be trading at a discount of 20%.  This is a really simple analysis and I may be missing something (or a lot!), but I think this sums up the gist of the value in OAK.  You can use your own multiples to see what you come up with.

As a final sanity check, I thought about looking at the adjusted net income per share of OAK over time and distributions per share.  But I realized it may not be that meaningful as although adjusted net income is a very good measure of the economics of the operating business given the complexity and non-cash expenses, it doesn't include accrued incentives so understates earnings.  

The above approach allows us to plug in our own numbers and multiples on each piece of the value so I am more comfortable with this sort of analysis rather than slapping a multiple on a single earnings figure, particularly when it's so easy to separate out the value pieces. 

Conclusion

Anyway, this is just a quick look at this thing.  I will keep an eye on it but am in no rush to go out and buy OAK at this point.  As usual, I am concerned about the rapid growth in AUM and what it will do to prospective returns on their funds and whether they will do as well internationally.  One well known thing, at least until recently, is the legal clarity and structure in distressed situations in the U.S. versus other countries. I remember distressed investors having trouble in Japan, for example, since there wasn't a clear legal route to value realization like there was in the U.S. 

I can be confident in the honesty and integrity of the folks at OAK.  I would never worry about that. Their philosophy and approach too makes a lot of sense and I would be very comfortable with that. Read the beginning of the prospectus; it is well worth reading to get a feel for who these people are. 

And obviously, Howard Mark's book is also pretty much a must read for value investors and you will get a feel for how this firm is run.