Oaktree Second-Quarter Profit Falls 45% on Incentive Income

Jul 31, 2014 4:16 pm ET

(Updates with closing share price in fifth paragraph.)

July 31 (Bloomberg) -- Oaktree Capital Group LLC, the world’s largest distressed-debt investor, said second-quarter profit fell 45 percent as the firm earned less money for generating returns above performance targets.

Net income decreased to $31.2 million, or 72 cents a share, from $56.6 million, or $1.71 a share, a year earlier, Los Angeles-based Oaktree said in a statement today. Assets under management rose to $91.1 billion from $86.2 billion at the end of the first quarter as the firm attracted new money.

Oaktree Chairman Howard Marks has urged caution in credit investing since last year, noting that loan funds are flush with unprecedented amounts of cash, allowing the lowest-rated companies to borrow at cheap rates. His concerns were echoed this month by Ares Management LP senior partner Greg Margolies, who said in a Bloomberg Television interview that his firm became more selective in choosing companies to invest in as investors have taken on more risk than they’re paying for.

“There’s no question that bargains are harder to come by,” John Frank, Oaktree’s managing principal, said on a conference call today with investors and analysts. “But we have no doubt distress opportunities will eventually pick back up. Aggressive extension of credit of the sort we’re seeing today has always been a precursor to a substantial distressed-debt opportunity.”

Incentive Income

Oaktree fell 0.2 percent to $50 at the close of trading in New York, extending its decline this year to 15 percent. The company sold shares to the public in 2012 for $43 apiece.

Adjusted net income, a measure of profit excluding costs such as noncash equity compensation and income taxes, fell to $134.7 million, or 75 cents a share, from $297 million, or $1.75 a share, in the second quarter last year. Analysts had expected adjusted earnings of 67 cents a share for last quarter, according to the average of eight estimates in a Bloomberg survey.

While revenue from management fees and balance sheet investments rose from the second quarter last year, incentive income, which Oaktree earns for generating returns above certain thresholds, dropped to $59 million from $338 million. Much of the decline was due to lower distributions from Oaktree’s Opportunities VIIb fund, which earned $39 million in the latest quarter, compared with $273 million a year ago.

New Funds

The firm plans to start raising its 10th distressed-debt fund this year, Frank said, as Oaktree prepares for a future cycle of distress. It’s also gathering capital for a sixth distress-for-control fund, a seventh real estate opportunities pool and a fourth mezzanine fund. Next year, the firm plans to start raising its first infrastructure fund and a fourth power opportunities vehicle, said Frank.

Oaktree in June agreed to acquire an 18-member team of infrastructure investors at Highstar Capital LP, assuming management of the firm’s $2.4 billion fourth fund. Oaktree is seeking to invest more in the infrastructure supporting the decade-old shale revolution, which has unlocked a large supply of oil and gas in North America, as such projects rely more on non-bank sources of financing.

Oaktree said it will pay stockholders a dividend of 55 cents a share on Aug. 14.