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Oaktree Capital Group, LLC (NYSE:OAK)

Q4 2012 Results Earnings Call

February 14, 2013 2:00 PM ET

Executives

Andrea Williams - Head, Investor Relations

Howard Marks - Chairman

John Frank - Managing Principal

David Kirchheimer - Chief Financial Officer

Analysts

Matt Kelley - Morgan Stanley

Michael Kim - Sandler O’Neill

Marc Irizarry - Goldman Sachs

Patrick Davitt - Autonomous

Ken Worthington - JPMC

Jacob Troutman - KBW

Operator

Welcome and thank you for joining the Oaktree Capital Group Fourth Quarter 2012 Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode, where we'll be provided question-and-answer session following the prepared remarks.

And now I would like to introduce Andrea Williams, Oaktree's Head of Investor Relations, who will host today’s conference call. Ms. Williams, you may begin.

Andrea Williams

Thank you, Elon, and welcome to all of you who have joined us for today's call to discuss Oaktree's fourth quarter and full year 2012 financial results. Our earnings release issued this morning detailing these results may be accessed through the Unitholders section of our website.

Our speakers today are Oaktree Chairman, Howard Marks; Managing Principal, John Frank; and Chief Financial Officer, David Kirchheimer. We will be happy to take your questions following their prepared remarks.

Before we begin, I want to remind you that our comments today will include forward-looking statements reflecting our current views with respect to among other things, our operations and financial performance. Important factors could cause actual results to differ, possibly materially, from those indicated in these statements.

Please refer to our earnings release filed this morning with the SEC and our other filings for a discussion of these factors. We undertake no duty to update or revise any forward-looking statements.

I'd also like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Oaktree fund.

During our call today, we will be making reference to certain non-GAAP financial measures which exclude our consolidated funds. For a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure, please refer to our earnings press release and our Form 8-K, which were furnished to the SEC today and may be accessed through the Unitholders section of our website.

Additionally, references to amounts per Class A unit are after taxes and other costs borne directly by Oaktree Capital Group. Today we announced the quarterly distribution of $1.05 per Class A unit, payable on March 1 to holders of record as of the close of business on February 25. Finally, we plan to issue our 2012 Form 10-K the week of March 11.

With that, I would now like to turn the call over to Howard Marks who is joining us from New York.

Howard Marks

Thanks a lot Andrea, and hello, everyone. We are pleased to report strong financial performance for both the fourth quarter and full year 2012, including record annual quarterly revenues, distributable earnings and distributions to unitholders.

This performance was the result of compelling investment returns, as well as a record year for closed-end fund realizations and distributions resulting in strong incentive and investment income proceeds.

Across the firm, our investment teams delivered the type of performance that is the hallmark of Oaktree's risk adjusted value-based investment approach. This permitted our clients to participate in the bull market for credit and garner equity type returns in our opportunistic strategies.

First, I’d like to discuss the environment that led to an approximate 15% return across all of our funds during the year. Most public markets were quite strong in 2012. U.S. market did very well despite general uncertainty that pervaded investor sentiment in the months leading up to the U.S. Presidential Election and then the fiscal cliff.

Europe rose as the gloom receded following bullish pronouncements from Brussels. In particular, credit continued to excel globally based on strong demand for income, liquidity and the safety of contractual returns. Private equity, real estate and other alternative markets strengthen in concert with the equity markets as risk lightened.

Most of our closed-end funds participated in the year’s positive developments. These included the modest growth of the U.S. economy, acceptance of the fact that the housing recovery has begun, improve investor psychology, accommodative of capital markets and strong investor demand for riskier assets that offer the prospect of higher returns.

Opportunities Funds showed an aggregate gain of 23.5% before fees and 19.1% after. Keep in mind that those returns as almost all of our results were achieved essentially without leverage at the fund level. Despite the low incidence of distress and thus the limited supply of bargain price investment opportunities we were able to bring Opps VIIIb to 75% drawn.

Principal Funds followed a very similar pattern of rising asset prices and improve liquidity, although the gains for private investments generally come through slower than for public ones.

Since our deal flow in this area arises more from company specific, challenge circumstances and from macro conditions, we were able in 2012 to both makes spectacular attractive new investments in some cases and realize existing one.

Particular, 2012 allowed excellent exits from Jackson Square Aviation, which actually close early in 2013, HD Supply, Nordenia, Spirit Airlines and SQL Communications. These exits contributed significantly for our Global Principal Funds gaining 15.6% before fees in aggregate and 13.3% after. However, the uncertain environment and lack of economic progress in Europe limited the aggregate gain in the European Principal Fund to 4.4% before fees and 2.6% after.

It continued to be the case that whereas deal flow is only moderate for the Opportunities and Principal Funds it is strong and provides attractive risk-adjusted return in real estate and related debt.

Prices are still soft for non-Class A buildings outside the leading U.S. cities and the ability to refinance the debt on some of those properties is limited. This situation is creating some of our best investment opportunities today as we continue to be able to buy properties and the debt on them well below their peak prices.

On the other hand improved psychology surrounding CMBS and housing has resulted in depreciation on assets we bought in those areas one to three years ago. In fact, now we read that the inventory of unsold homes is inadequate, quite a change from prevailing belief a few years ago that there will never be another house build in the U.S. That's the kind of swing in thinking that we try to take advantage of and I think we are in this case.

As a result, our real estate funds saw an aggregate gain of 19.1% before fees and 14.7% after. 2011, we made significant progress on Real Estate Opportunities Fund V, raising capital investing it as we raised it. Now REOF V is fully invested and we are raising REOF VI and investing it. We remain convinced that real estate and real estate-related debt offers the best combination of quality and quantity some at this time.

And I want to take a minute out reflecting on what I just said I wanted to leave the word spectacular. We are making good investments in the Principal Funds but I think it’s hyperbole on my part to say spectacular and I retract it.

Moving on, importantly for our clients, as well as our financial results, the strong market allowed us to distribute $12.7 billion from 27 different funds in 2012. Although, that's a record total, the distributions were vintage Oaktree in their demographics. In particular, they were extremely diversified without dependence on any single or handful of investments.

Our clients appreciate the premiums we attach to returning capital and profits to them in cash. I once titled a memo you can't eat IRR, thus no matter how impressive our funds IRR’s maybe, it’s the amount and timing as of cash distributions of those profits that I think distinguishes us.

For example, Opps VIIb won’t reach the second anniversary of its liquidation period until May 1st and yet following last week's distribution it already has return all $9.8 billion of its strong capital and distributed $3.7 billion of its $8.6 billion total gains to date, including paying off the entire preferred return.

Cash is good for clients and it’s good for unitholders as well. It drives incentive income which in 2012 reached an all-time high with 46% of the year’s total falling in the fourth quarter.

So what’s the result of 2012 strong investment returns, record realizations and distributions of capital? It was sizable and high-quality earnings and cash flow in the form of distributable earning.

Given the sustained strength in management fees revenue, the diversified nature of our incentive income model and the substantial investment income proceeds derived from distributions from our funds, as well as DoubleLine, we have declared a $1.5 distribution for the fourth quarter, bringing the total for 2012 $2.94.

Distribution we have announced represents the yield of more than 2% in the quarter alone and that’s an unannualized figure of course. Good as 2012 was, the future looks promising as well because as large as our incentive income was in 2012 the new incentives created by our fund performance were almost twice as large.

Over the course of the year we grew our off balance sheet receivable called accrued incentives fund level by 25% to $1.3 billion net of compensation expense or $8.52 per operating group unit as of year end.

Underlying that $8.52 our 24 funds already in liquidation, clearly the star of that group is Opps VIIb which we announced this morning has made its first distribution in 2013. Thus with the first quarter just halfway over, we already are assured of meaningful incentive income and a substantial quarterly distribution. Keep in mind that nearly all of that funds $1.7 billion of incentives created through 2012 have already been taxed and thus their distribution will not be taxable.

In addition to the value where we’ve -- we’re creating through our current funds we are also continuing to offer new strategies to provide the opportunities that are nearly 1800 investors are seeking in this low return world, namely respectable yields with the downside protection of credit.

These new products typically or organically developed the step outs or what we call adjacencies to existing Oaktree strategies. They include our enhanced income fund, strategic credit, real estate debt and emerging markets distressed debt. John Frank will elaborate on our capital expectations for these, so for now, I'll simply say that I've never been more excited about the potential for us to deliver our expertise in credit with the risks under control in so many markets.

Now make no mistake, we are telling investors to expect low returns from the investments we are making today and from the ones we are currently harvesting to do otherwise would be irresponsible.

But of course as that's happening the same buoyant markets that require those lower expectations are permitting us to realize profits from our maturing funds and investments, no the while the cap -- the cycle marches closer to the time that inevitably the next downturn will come into due turning today’s free-flowing extension of credit into tomorrow’s distressed debt and permitting us to raise bigger funds again.

Do it all, our clients continue to view Oaktree as the dependable purveyor of investment management in a growing number of alternative asset classes. That dependability also extends to our unitholders, we are proud to say.

With the end of 2012 marking our 17th straight year of positive adjusted net income, our 15th consecutive year of investment income and our 67th consecutive quarter paying distribution.

With that, I'll turn it back to David in Los Angeles.

David Kirchheimer

Thank you, Howard, and hello, everybody. In terms of total revenues, distributable earnings and the Class A distribution, 2012’s fourth quarter marked a record quarter in a record year. The revenues and distributable earnings these are quarterly and annual highs going back to our founding in 1995 and in the case of the distribution per Class A unit the $1.5 payout for the fourth quarter and the resulting $2.94 total for fiscal 2012 are the highest distributions for any quarter or annual period since we created Class A units almost six years ago.

All those unitholders new to Oaktree in our first year being public, the largely cash nature of our reported income and are historical practice and ability to distribute the bulk of that cash income to our unitholders are captured in the fact that for 2012 per Class A unit, we reported adjusted net income of $4.06 and distributable earnings of $3.82 of which we paid out $2.94.

For the fourth quarter, record quarter revenues of $447 million included incentive income of $210 million, that incentive revenue was split about evenly between on the one hand, a tax-related distribution from Opps VIIb and on the other hand, distributions from a number of our closed-end funds reflecting harvesting activity as well as annual evergreen fund incentive fees.

Net of compensation incentive income was $106 million; add in solid fee-related earnings and investment income and adjusted net income for the fourth quarter was $220 million or 49% of revenues. Per Class A unit, adjusted net income was $1.36 or more than four times the year earlier $0.33 per unit.

For full year 2012, total revenues of $1.4 billion produced adjusted net income of $770 million or 51% profit margin, strong returns and realizations drove incentive income, net of compensation to $239 million, but that amount was eclipsed by our fee-related earnings at over $300 million.

Per Class A unit adjusted net income amounted to $4.06, nearly twice 2011’s $2.15 per unit. That comparison benefited from lower effective income tax rates in 2012 versus 2011, a relationship that held across nearly all fourth quarter and full year non-GAAP measures per Class A unit.

One reason adjusted net income is our preferred non-GAAP income metric is that it most closely represents cash earnings. Thus it’s not a coincidence that our distributable earnings per Class A unit of $1.37 for the fourth quarter and $3.82 for all of 2012 were similar in size to their anti-counterparts.

In the case of our fee-related earnings and incentive income, income and cash are essentially synonymous. Plus, our investment income proceeds have become a significant source of cash. Some of that is a normal cyclical affect, as we receive our share of realized profits with respect to our investments in our funds as the general partner.

But importantly, another major reason for this increased cash flow is DoubleLine which, including performance fees and a small amount applicable to 2011, provided $34 million of our distributable earnings in 2012, as the investment management firm more than doubled it's AUM to over $50 billion, after less than three years in business.

Although, equity accounting causes our share of DoubleLine’s corporate income and performance fees to be classified as investment income, in many respects we consider that income to be identical to fee-related earnings. On the strength of this cash flow, distributable earnings grew to a record $672 million in 2012 or $3.82 per Class A unit, up 38% versus 2011.

To amplify Howard’s point about the future, economic net income serves as further testament to the fact that in 2012 we created more potential future distributable earnings than even the record $672 million that we realized in cash during the year.

Incentives created is our mark-to-market indicator of potential future incentive income. In 2012, our gross incentives created were $912 million, nearly twice the $461 million of gross incentive income that we recognized. Thus, economic net income was $5.75 per Class A unit about 40% higher than adjusted net income.

Viewed another way, our off balance sheet receivable called accrued incentives fund level grew 25% in 2012 to nearly $1.3 billion net of compensation or the $8.52 per operating group unit mentioned by Howard. Now, of that amount, $8.12 or fully 95% represents funds already in liquidation.

Value also is generated by the diversified nature of our asset classes, investment strategies and fund structures and vintages. Thus, despite the year’s record level of fund realizations, which in the case of liquidating funds reduces the assets on which we received management fees.

Management fee generating AUM ended the year almost exactly where it started, thanks to capital inflows as well as market appreciation in funds whose management fees are calculated on the basis of NAV. Opportunities Fund IX is not yet included in the $66.8 billion of management fee generating AUM because that fund has not yet commenced its investment period.

Now, let me provide an update on Opps VIIb. Late in December, we announced that the funds distributions had reached the milestone that we called crossover, at which point the funds had distributed to LPs, all of their drawn capital and the full 8% preferred return.

A week ago, Opps VIIb made the first distribution of 2013 equal to $700 million of cash. That distribution resulted in approximately $195 million of estimated gross incentive income to Oaktree. That amount, net of associated compensation expense will be included in adjusted net income and distributable earnings for the first quarter of 2013.

Additional incentive income in the first quarter is likely to arise from tax related incentive distributions by certain other funds. With last week's distribution, Opps VIIb is now entirely through, both the catch-up layer of its waterfall calculation and any impact from earlier tax related incentive distributions to Oaktree. Thus, Oaktree will receive 20% of Opps VIIb’s future distributions to limited partners.

On the basis of year-end 2012 values and giving effect to last week's distribution, Opps VIIb’s NAV stands at about $4.9 billion. The pace, size and timing of Opps VIIb’s, future distributions are of course unknowable. It wouldn't surprise us if future distributions occurred at a slower pace than the $13.5 billion dollars paid out to date by the fund.

A slowdown would be normal for a closed-end fund, because the investments that are most liquid and are quickest to reach attractive prices often are sold first. How do the funds remaining holdings breakdown? Well, following last week's distribution, Opps VIIb’s portfolio remains relatively liquid with about 80% of its NAV in Level I or Level II securities. There's been a pickup in Level I, thanks to restructurings of debt into equity. Thus, roughly 40% of Opps VIIb is now in equities, mostly public.

And finally, a comment about our balance sheet management. Just as we like to have ample dry powder at the fund level, we've always maintained sizable liquidity at corporate for both regular and opportunistic investments.

To that end, we recently doubled the capacity of our undrawn revolver to $500 million. That was part of a refinancing of our revolving and term bank facilities for a new five-year term that coupled with a recent credit rating upgrade, lowered our interest rates to LIBOR plus 100 basis points. Through interest rate swaps, we fixed the all in interest rate on the bulk of our $250 million amortizing bank term loan at 2.60%.

And with that, I'm delighted to turn the call over to John.

John Frank

Hi, everyone. Thanks, David. I’m going to address both these recent fund raising activities and strategic initiatives, and then we’ll get to your questions as typical.

The compelling fund results, profitable realizations and strong distributions that Howard and David have mentioned enabled us to raise significant new assets from the fourth quarter.

The quarter brought year-to-date gross capital rates to a total of $11 billion. For the six years since January 1/07, we’ve raised proximately $10 billion or more every year, including the crisis Europe 2008, for a total of $76.3 billion in gross new capital.

Our new Oaktree Enhanced Income Fund, which is a closed-end senior loan fund, held to interim closed during the fourth quarter and the final close just in the last two weeks. Counting a few anticipated late closers, we expect EIF’s total fund size including leverage to reach $2 billion in a couple of months, exceeding our initial capital target of $1.5 billion.

So far, we’ve raised about $430 million for our newest real estate fund, Real Estate Fund VI towards a capital target of at least $1.5 billion. As Howard referenced, we regard the breadth and depth of stressed opportunities across the real estate sector and some of the most exciting opportunities we see for Oaktree.

Our last two real estate funds have performed well to date and we continue to see a large opportunity set, with overleveraged properties from the last real estate cycle and commercial residential and bank loan portfolios, both in U.S. and in Europe.

We recently launched the fundraising for our newest principal fund - Fund VI, which is our global control investing vehicle. Our strategy for control investing is different from that’s pursued by most private equity firms, and that we focused on middle-market opportunities involving an element of distress or dislocation, rather than the large cap files relying on leverage that many others pursue.

Our focus is on providing unique capital solutions to troubled companies, and we believe that the financial and operational sophistication we bring to these opportunities distinguishes from most of our competitors in this particular market.

Our principal fund area inclusive of Asia, Europe and power opportunities currently represents $16 billion of AUM and we expect to raise approximately $3 billion for Principal Fund VI, which would make it about the same size as its predecessor thought.

We have a number of other funds in the marketplace as well. We are making good progress with our new strategic credit product, which targets stressed opportunities with potential returns that fall between our high yield and senior loan strategies on one hand and our distressed debt strategy on the other.

Although, we only introduced a few months ago, we already have $500 million under management in the strategy and we had strong interest from a number of other major investors. Similarly, although we don’t expect to hold the first closing for few months, we are enjoying the strong response to our new emerging markets opportunity strategy which I described at some length on the last call.

Our RiverNorth/Oaktree High Income mutual fund launched on December 28, through these mutual fund individual investors and advisors can access a tactical allocation that includes Oaktree senior loan and high yield strategies.

Now, what’s significant is this one adds to our mutual fund offering with already include convertibles and emerging markets equities through Vanguard and high yield through Russell Investment.

Another new product that we mentioned last quarter was a real estate debt fund, which will succeed our PPIP Fund. As of December, our PPIP Fund had generated a gross IRR of 30%. The highest reported IRR of all of the PPIP managers.

Now, our PPIP Fund is under liquidating and the new real estate fund, we will utilize the skill of the existing real estate team to invest primarily in CMBS, first mortgages junior secured debt, unsecured debt and mezzanine debt. We already have $200 million in commitments to this new strategy, which we expect will be particularly appealing to offer investors looking for exposure to real estate without the tax dragon posed on direct real estate investment.

From a strategic perspective, I’m very proud of the progress we made in 2012. I think we’ve been successful in communicating our business philosophy in the exact same terms to both our clients and our investors. Everyone who listens to us knows that nothing is more important to us than generating good returns for our clients and doing so with the highest integrity.

We are continuing to build and develop all aspects of our organization and while, we will never be interested in simply adding assets for asset sake. We do see opportunities to build our business in ways that will be good both for clients and for all of us, for Oaktree equity holders.

In 2013, we expect to continue to build on the progress we begin in 2012. We anticipate that our newest products and strategies will continued to attract new assets and we expect to focus, particularly on new avenues of distribution.

Historically, most of our market investment has been directed towards the most significant institutional investors around the world. While that will continue to be our focus, and while I expect that we will continue to attract significant new institutional investors, particularly in Asia and Latin America. We also expect to develop other distribution channels and product structures.

We have in mind making our products more accessible to high net worth investors to intermediary such as the larger investment banks, sub-advisory arrangements and listed open-end and close-end vehicles. We are also continuing to focus on making our strategies more accessible to non-U.S. investors and in that connection, we are pleased to be introducing a group of European based de-cap vehicles, which should facilitate the marketing of our high-yield and convertible strategies in many non-U.S. jurisdictions.

In sum, we feel good about where we are and where we are headed. We enjoy great client support, almost half of our nearly 1,800 LPs are invested in multiple Oaktree strategies and we feel we are well positioned to whatever the markets may throw at us.

Finally, we are gratified that there seems to be growing recognition of what we would known all along and what we’ve emphasized on prior calls, which is that we are capable of generating substantial incoming cash flow on a regular and ongoing basis.

For example, with respect to incentive income, 29 different funds created incentives in 2012 and 17 paid us incentive income. We’ve now earned and paid out to unitholders positive incentive income for 36 consecutive quarters and I doubt that will change anytime soon.

So with that, we’d be happy to address your questions. Andrea?

Andrea Williams

Elon, we are ready to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today is from Matt Kelley from Morgan Stanley.

Matt Kelley - Morgan Stanley

Good afternoon, guys. Sorry, I have a bad line here. Wait a second. Okay.

John Frank

We hear you.

Matt Kelley - Morgan Stanley

Okay. Perfect. I couldn’t hear you very well but all right. So, my first question on Opps VIIb, that was helpful color you guys gave in terms of incentive distributions, what the actual distribution is. I was hoping you could, any change versus prior on what the comp ratio is relative to that fund and if that’s changing at all relative to your future funds as well?

Howard Marks

Sure, Matt. You'll recall from last quarter's call that we mentioned that the blended comp rate for the accrued incentives for VIIb 7 was about 36% and that 36% remains true as of December 31. The actual comp for individual distributions including, for example, the one that we mentioned on the call and into this morning's release will inevitably vary. Sometimes it will be lower. Sometimes it will be higher due to various factors.

But for now, I think that 36% is about as good a number as is available. As to other funds, if you take a look at the total pool of accrued incentives as of year-end 2012 including VIIb, the average compensation rate is somewhere, almost exactly 40% of the gross. So as you will recognize given that VIIb is roughly half of the total gross amount that that means the other funds spring up the average from the 36% to 40%.

Matt Kelley - Morgan Stanley

Yeah. That's helpful. And then you laid out, what the February distribution was and then you noted some distribution tax related distributions from other funds in the first quarter. Is there any -- in terms of when you have the distribution announcements from VIIb, will that come -- is there anything else that could come in the first quarter as well or is that all you expect for the first quarter?

Howard Marks

Well, to John's point, in terms of the -- historically recurring nature of incentive income and the realizations that we've been experiencing of late, certainly wouldn't surprise us if we had incentive income from one of those funds that was already paying out incentives but there's nothing to date. So we may have none and we may have some. It’s hard to know at this point.

Matt Kelley - Morgan Stanley

Okay. And then, I’ll jump back in after this but, couple of housekeeping items, I guess, in terms of how we should think about 2013 base comp and G&A expense. It would be helpful if you gave your color there and then just the other kind of bottling related question is trying to make sure we know what's hit management fees, what hasn’t and when you expect it to?

David Kirchheimer

Okay. Well, in terms of the expense run rates, in 2012, we built up both comp and G&A because we became public. So we’re filling in some positions because of our new responsibilities on the public reporting and compliance side, also heightened industry regulatory requirements and just our ongoing growth and investments in the operational infrastructure, which continue.

But I think that absent growth which is for us always unknown in terms of some of the opportunities that we may capitalize on. I think that most of the hiring to achieve that new public company status is behind us. You should expect to see ongoing increases in comp and G&A in absolute terms just because of the natural growth of the company.

In terms of management fees, as we've noted Opportunities Fund IX is not yet generating management fees, distributions by liquidating funds including up VIIb, of course reduced management fees. If those distributions are in the liquidation period, which almost all of them are and you can see the impact of that from quarter to quarter with the fee generating AUM that's disclosed in the fund table.

And other than that, it's a function of inflows and outflows across the various strategies, market value changes in our NAV-based funds, a lot of which is unpredictable. We just point to the past for the diversified nature of our strategies that in 2012, I think, really reflected that where even in a risk-harvesting year such as we had that, that same environment of course implied, rising markets which had a beneficial impact on those funds that earn management fees based on their NAV and we continue to see capital inflows across a number of our individual asset classes.

Matt Kelley - Morgan Stanley

Thank you very much guys.

David Kirchheimer

Thanks Matt.

Operator

Thank you. Our next question is from Michael Kim from Sandler O’Neill.

Michael Kim - Sandler O’Neill

Hey, guys. Good afternoon. First, can you just talk a bit more in terms of your outlook for the credit markets over the next year or so and what the implications are for your fundraising efforts, deal flow and kind of the trajectory of realizations? And then related to that, any update in terms when you’re think about bringing Opps IX online?

John Frank

Howard, you want to take that?

Howard Marks

I think that Opps IX, it’s -- all I can say is rather soon. I don't think I’d say tomorrow but I think the best guess would be sometime in the second quarter, I believe. That's not ironclad but VIIIb is making very good progress. And the only hesitance is that the deal flow is sporadic and sporadic means unpredictable.

I think that overall as you could tell in 2012, the flow of capital for our kinds of things is pretty good. People are interested in credit. They are not counting on much from fixed income nowadays and not that excited about equities. So still interested in credit alternatives, some hesitance to invest in illiquid assets, which bit a bunch of people in the crisis, not all of whom have recovered in full.

But I think it's very safe to say that we’re happy with the flows we’re getting. We’re still filling up every fund, reaching our targets or exceeding them, getting a good response to our new products and basically getting the kind of money we’re looking for. $9.8 billion last year was our sixth year in row, I mean, I'm sorry, $11 billion last year was our sixth year in a row at $9.8 billion or more. And you know you just can't quibble with that kind of flow. We’re very happy.

Michael Kim - Sandler O’Neill

Okay. And then just coming back to DoubleLine, as the firm continues to grow and mature. How do you think about possibly more fully leveraging that relationship and then now that your stake is becoming a bigger contributor. How are you thinking about the investment over time from both our strategic standpoint as well as the financial perspective?

Howard Marks

We always have the hope that we will join forces with DoubleLine someday. And when the time is right, there may be joint products that take advantage of their expertise and ours together and when it's -- when the time is right, I'm sure we'll do something together. We’re not going to do it, as you know about us other than when the time is right.

DoubleLine is moving very fast, doing new things and can only do so much at one time. But my guess is one of these days there will be something, some joint effort. In terms of the investment, we view it as long-term investment and we have no expectation to think of it other than that. And if your question hints at an exit, I can tell you that there is no consideration of an exit.

John Frank

And Howard, I’ll just emphasize that while we do think about ways to operate together, we have synergies already. We meet and talk all the time. Frankly, we never did things formally together. We benefited enormously from their success.

Michael Kim - Sandler O’Neill

Okay. That’s helpful. That’s it for me. Thanks.

Operator

Thank you. Our next question is from Marc Irizarry from Goldman Sachs.

David Kirchheimer

Hey, Marc.

Marc Irizarry - Goldman Sachs

Hey, how are you? Howard, question for you on the investing environment, today’s the risk reward landscape and in particular, your distressed investments and distressed investing with an 8% preferred return hurdle. Could you talk about how you think about investing in credit with that kind of preferred return in the low yield world? How that sort of plays into thinking about risk reward?

Howard Marks

Sure. You could make an intellectual case for why 8% is too high a preferred return in this low return world. But I don't want to go to my clients with academic argument. And the truth is I still think we can clear that hurdle consistently. And I'm not sure I want to make an argument why they should pay us 20% of the profits if they make 6 for example.

You know, if their net return is 6, that means their gross return is 7.5 and 20% of 6 would produce 4.8. So I don’t want to be the guy who says we made 7.5 gross and you got 4.8 net. So the answer is I don't have an intention and I don’t think we have intention to put forth the argument that something other than 8 is the right objective on Opps Funds.

And this is part of being a good partner. We put a lot of emphasis on being a good partner and you could say well, look, they have no alternative. They need it today because the bond yields are so low and stocks are so interesting and have moved up. So since they need you, you can press the advantage today and get the preferred return down to 6, it’s not our style.

Marc Irizarry - Goldman Sachs

Okay. And then when you look at across the fund raising activity, I know, John, maybe this is a question for you. You know we’re you seeing sort of the best, the easiest sort of response to raising up assets and if you look at, I guess, the real estate efforts, it seems like there's lots to do there but the pace of the fund raising is maybe a bit slower than we would've anticipated on it. Do you have any comment on that?

John Frank

Sure. First of all, actually, we’re very happy with the way the real estate fund raising is going and we’re actually at a faster pace, I think, for this newest fund than our last fund, which as you know, we only close -- I think the final closing was just last February about a year ago. So to be in the market with another fund basically, immediately, we feel we’re doing very well. We’ll have another closing here in another couple of months and I feel very good about what that closing will look like.

So we’re getting a good response to real estate but another area, we’re getting a great response to as -- I think I mentioned in my remarks that we’ve got a new strategic credit product that aims between the area above high yield and senior loans and below distress. We’re getting a lot of interest in that. So we’re getting -- as Howard said, clients -- clients have to generate return.

They have to deal with this low-yield environment. Our products are one way, they can try to deal with that realty and we’re getting a good response really across the board.

Marc Irizarry - Goldman Sachs

Okay. And then just David, one for you, on the closed-end fund, I’ll call it capital commitments that are at the end of investment period. How should we think about what that looks like when we head into ‘13. Do you have some other capital that sort of coming through the end of its period there that you might return?

David Kirchheimer

Two things, Marc, great question. One looking back, that amount was particularly large at the end of 2012 because of this PPIP fund that we had -- that reached end of its investment period in the fourth quarter and that one plus billion dollar amount of capital wasn't generating management fees because that fund has fees earned based on drawn capital. So that's why they didn’t have any effect on fee generating AUM or management fees and that's why that particular amount was so large in the fourth quarter.

Looking ahead, you can see the fund table -- I don’t think there is a single fund that has an investment period ending in 2013 and there is nothing significant on the horizon that compares in magnitude to what you saw that category did in 2012.

John Frank

Marc, the PPIP fund was kind of aberrational. We raised a lot of capital for them. We are very explicit with our clients and with the government that we’re not at all sure we would actually invest at all. And that was why we priced the fund based on invested capital rather than committed capital, which is also unusual for us. And that’s why we ended up with the fair amount that was not invested but that’s not our typical pattern.

Marc Irizarry - Goldman Sachs

Okay. Great. Thanks.

John Frank

Thank you, Marc.

Operator

And our next question is from Patrick Davitt from Autonomous.

Patrick Davitt - Autonomous

Hey, guys. Could you speak about the investment opportunity, kind of, across Europe for the extent that you're seeing more ability to get that bit of a math closed together for banks. We’re hearing a little more from Spain particularly in the real estate side and to what extent the real estate fund is restricted from investing in Europe?

Howard Marks

Here the real estate fund is not restricted from investing in Europe. It can have a component of non-U.S. investments. I would say that the investment flow in Europe continues to be moderate at best. We had hoped for deluge, the ECB actions and statements precluded that.

We -- as I say, we have what deal flow depending on the area in the country and the time-dependent ranges from a trickle to moderate. And we were making investments. In fact, we made some good investments in U.S. particularly about real estate. We made some good real estate investments in Europe last year but still not a deluge.

Patrick Davitt - Autonomous

It sounds great. And then on the -- in the principal fund, could you give us some color on to what extent you’re seeing from an exit standpoint increasing, I guess, incoming interest from strategic buyers?

Howard Marks

I’m sorry. Part of that was gobbled, can you say it again?

Patrick Davitt - Autonomous

I’m curious. On the principal fund, in particular, to what extent you’re seeing an increasing interest from strategic buyers which have been, kind of, on the side line for a while?

Howard Marks

Well, I mean, we did have some good exits last year and several of them were -- I would say most of them were too strategic buyers. In particular, I’m thinking of Jackson Square Aviation, which we sold to a unit of Mitsubishi UFJ and that's our -- the airplane leasing company, we created from scratch in crisis and they took it on. So I think the strategics are very important to us today. We’re doing a lot with them.

Patrick Davitt - Autonomous

Okay. Thank you.

Operator

Thank you. Our next question is from Ken Worthington from JPMC.

Ken Worthington - JPMC

Hi. Good afternoon. Maybe first for Howard, you mentioned that you may take Fund IX kind of online in 2Q and my impression has been that you’re pretty opportunistic about when you turn on this kind of big funds. And I think as you had recently like although few people are bullish and you’re acting bullish. Should we kind of take this as a read into a strong view on credit?

Howard Marks

No. First of all, we’re not market timers. We can adjust somewhat the starting date but we’re not going to -- it's not a situation where I can say, you know, Ken, you can rest assure we’re going to hold IX until it's a buyers market.

We have to complete VIIIb and we have to see flow for IX. And then we’ll start IX. We don't want to start it too early. There would be two possible reasons for that. One would be that we need three years to invest it and we don't want start to soon to eat into those three years. That's not the issue because virtually all of our Opps Funds have taken between one and two years to invest.

The real thing is we don't want to stick this fund with management fee bills in early quarters in which we can’t buy much because then the juxtaposition of high management fee bills based on 100% committed capital and earnings based on the small amount of invested capital can have a very deleterious effect on performance at the beginning of our funds life.

So we’re going to take a gradual approach and not start the fund until we can start investing but nobody should think that you know that we’re going to wait till it's a buyers market. The answer is we form funds continuously. I think the lawyers say seriatim and we --- the funds formed at the greatest times have produced great returns and the funds that have performed lukewarm times have performed return -- decent returns.

And we're okay with that. The clients are okay with that and when I say decent returns, all the funds today, I believe, have produced at least double-digit growth returns and hopefully we can keep doing that. And if we do I think everybody will say get on with it.

Ken Worthington - JPMC

Great. Thank you for that. And then actually speaking of performance in return, if we to go to, I think, 23 in the release, it looks like the open-end strategies under perform benchmarks almost across the board in 2012 whether you’re looking on a kind of, gross or net basis, inception numbers are still very strong. But ‘12 was, I know, once a week but more to say below benchmark.

So what do you tell your customers about performance and it's a year and you have a very long history. What are the implications of one year of underperformance given, I call it, maybe flat year condition. And then since at least maybe, I don’t have data. How does the three and the five-year numbers look for those products that actually have five years of relevant history?

Howard Marks

Sure.

Ken Worthington - JPMC

Yeah. I think I got 20 questions in that one, so.

Howard Marks

That’s a lot of question but it’s okay. First of all, I would say that the performance pattern in 2012 was absolutely normal for us. It is not uncharacteristic for us to underperform by a few tenths of a percent in a very strong year. We normally do not have full -- first of all an index is by definition of 100 invested. And it’s very hard to keep a portfolio of 100% invested.

Number two, we never have a full complement of the risk securities that belong to an index. And if you look at high yields, for example, the CCC were the strongest performing component of 2012 and we don't buy CCC and we since we’re a good credit selectors, we don't home grow many CCCs. So in the year when the CCC's outperform, it’s very hard for us to keep up with an overall index which includes CCC's.

We have done a good job in last year in keeping up with the B and BB in high yield, for example. So that’s a -- that performance pattern is the performance pattern that our client come to us for. And I don't so -- if I were capable of giving you a short answer, which I'm apparently not, it would be that this is the norm.

Several years ago maybe nine, 10 years ago, a consultant sent in a questionnaire which had a very good question in it. And it said take all your up quarters, take all the quarters in which the index went up, how did you do in those quarters? First, you take all the quarters in which the index went down, how did you do in those quarters. And at that time, as I recall the numbers for memory, we lagged -- if you run all the up quarters together, we lagged by an average of about 55 basis points a year.

And if you run all the down quarters together, we outperformed by an average of about 600 basis points a year. So I would say that our underperformance in 2012 was just about in line with our underperformance of about 55 a year. And as for the five-year, let see five years is now ‘8 to ‘12. So we generally went down less than the benchmarks in ‘8. recovered little less in ‘9, lagged it -- did okay in ‘10 and ’11, lagged little in ‘12.

So I actually don't know those numbers offhand. But any of us can get it for you. And the only exception to that is that in the high-yield area, we have been held back by the fact that the highly-depressed bank securities have had a comeback. And we are biased against financial institution bonds because we think they're complex leverage than on transparent.

So we have not participated fully in the recovery that's one of the things that held us back in 2012 and it held us back ever since those things started recovering. Now, you might say yeah, but didn’t you think outperform in ’08 by not having them and the answer is they weren’t in the index in ‘08 because in ‘08, they were high grades.

So the index did not have to decline when they were downgraded and when they collapsed, but the index has had the recovery and not us. So that’s a rather full explanation.

Ken Worthington - JPMC

Okay. Perfect. One last question. Just DoubleLine cash flow, I assume when you are generating cash flow from DoubleLines, it’s really through dividends. So if that’s a correct assumption, how regular are the dividends, are they kind of quarterly biannual or annual and what kind of payout ratio is DoubleLine pursuing with its owners in Oaktree?

David Kirchheimer

Yeah. I will take that. Ken, David here. You're absolutely right. It is a form of dividend for their core income amount, which is paid out roughly quarterly, which it has been. We are not in charge of their dividend decisions. So we always refer to historical practice, but it's been a quarterly and then we get our share of their performance fees, monthly or quarterly and some of those performance fees are earned annually, so that varies.

And in terms of the payout ratio, you can do your own calculation looking at the separately disclosed income and distributable earnings. When you do that you'll see that their payout ratio is implied to be very high and I hope it’s just like our own payout ratios benign. That’s just historical. You shouldn't read anything into in terms of their future practice because that's up to them.

Ken Worthington - JPMC

Okay. Great. Thank you very much.

David Kirchheimer

Thank you, Ken.

Operator

Thank you. Our next question is from Jacob Troutman from KBW.

Jacob Troutman - KBW

Hey. Good afternoon, guys. My first question, on the tax related distribution, so I think given that there was about half -- little under half of the total incentive revenues. And I think it was substantially above what you guys had guided to on your last earnings call. Can you maybe provide a little color on that and what you see it going forward?

Howard Marks

Sure, Jacob. Recall that the number that I mentioned in the third quarter call was not even halfway through the fourth quarter, right, because the call as I recall was around November 7th or so. And so it was a busy and productive and profitable end of the year for that fund and so the taxable income for VIIb ended up being larger than was noble as or estimable as of halfway through the quarter. And that’s typical for taxable income. It’s just a function of a lot of factors, realized profits, current income, et cetera. So that’s answer to that and I forget. Jacob, does that answer all your questions or was there anything else?

Jacob Troutman - KBW

I think that’s on the tax distribution, I’m sure you don’t have any complaining unitholders on that front?

David Kirchheimer

No.

Jacob Troutman - KBW

Maybe another question on the investment pace, could you just give the total dollar of invested capital in the closed-end funds? I mean, based on your fund disclosure, I can go back and look, looks you draw -- drew down a fair amount of money in VIIIb? But does the total additional amount of drawn down capital under estimate the investments given recycling of capital?

David Kirchheimer

Yeah. You’re absolutely right and I’m flipping through it, so I can’t reference a page. But I’m confident that in our incentive creating AUM commentary that in fact we give you the total amount of drawn capital just to save you from having to do a calculation of the front table.

But you are absolutely right, there historically has been especially in the more liquid funds such as distress debt, a very high velocity of selling and buying and recycling of the capital, so that number, I would think vastly understates, in fact the amount of investing activity given any period.

Jacob Troutman - KBW

What do you see as a normalized total investment rate going forward? I guess you have the $5 billion Opps IX fund and just the distress debt funds coming on when I guess that would be about over three years, $1.7 a year? Is that a good kind of base for are thinking about the investment pace?

John Frank

So, maybe, Jacob, I’ll take that. Historically, we are not big on trying foretell the future. Historically, as Howard already mentioned, we have tended to invest our distress funds on 18 to 24 months, some have been slower, some have been faster, depends on the environment. We are opportunistic. So even some weeks we’ll think, there is not much to do and the next thing that happens is we get an opportunity to buy a big portfolio and also we put a lot of money to work.

But, obviously, we are not just about distress. We’ve got whole panoply of strategies. We’ve got, as I have mentioned, on this strategic credit product. We’ve got our new principal fund that we’re raising and we’ve got real estate, so to say nothing of our marketable strategies, like high yield and senior loans and convertible. So, we are deploying a lot capital everyday.

Jacob Troutman - KBW

Okay. Thanks. That was all from me.

Operator

Thank you. And we have no further questions, Ms. Williams.

Andrea Williams

Thank you again for joining us for our fourth quarter 2012 earnings conference call. A replay of this conference call will be available for 30 days on Oaktree’s website in the Unitholder section or by dialing 1800-294-4350 in the U.S., or 1-402-220-9777 outside of the U.S. This call will be available approximately one hour after this broadcast.

Operator

Thank you. And this concludes today’s conference. You may disconnect at this time.

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