Oaktree Capital's Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 7.13 | About: Oaktree Capital (OAK)

Oaktree Capital Group, LLC (NYSE:OAK)

Q1 2013 Earnings Conference Call

May 7, 2013 11:00 a.m. ET

Executives

Andrea Williams – Head, Investor Relations

John Frank – Managing Principal

David Kirchheimer – CFO

Analysts

Matt Kelley – Morgan Stanley

Michael Carrier – Bank of America Merrill Lynch

James Tally - Sandler O’Neill

Marc Irizarry - Goldman Sachs

Howard Chen – Credit Suisse

Chris Harris – Wells Fargo

Robert Lee – KBW

Ken Worthington – JPMC

Operator

Welcome and thank you for joining the Oaktree Capital Group First Quarter 2013 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 for 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 first quarter 2013 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 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 SEC 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 at www.oaktreecapital.com.

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 $41 per Class A unit, payable on May 21 to holders of record as of the close of business on May 17. Finally, we plan to issue our Form 10-K for the first quarter later this week.

With that, I would now like to turn the call over to John Frank.

John Frank

Thank you Andrea. Hello everyone. Thanks for joining us this morning. The first quarter represented a strong start to 2013. Our results are driven by an aggregate gross investment return in our closed-end funds of 7% and a continued favorable realization environment which resulted in an incentive income of 327 million our highest quarter revenue.

Contributions from all three income sources management fees, incentive income and investment income produce record first quarter adjusted net income 336 million or $95 per class A unit and else more than double than $0.90 per unit in last year’s first quarter.

Distributable earning of 295 million or $79 per Class A unit were also a quarterly record funding the upcoming Class A distribution of $41 up a 156% over the year earlier payout. Thus our distributions for the trailing four quarters will aggregate at $3.80 per Class A unit.

Our strong financial results in cash generation were driver by our focus on generating superior risk adjusted returns for the clients. Investment performance were strong across the board. Distressed debt produced a 10% gross return in Q1 and 25% over the last 12 months. Real estate had a 7% gross return in Q1 and 22% in the last twelve months.

And global principal are controlled investing returned 6% gross in Q1 and 19% in the last 12 months and mind you all of these returns were achieved without any fund level leverage. This performance in turn resulted from the strength of our investment teams and there are many factors that distinguish our approach namely the power of credit, our sizing the funds to opportunities there, our emphasis on risk control and the control application of our investment philosophy across our breath for the asset classes.

Now these factors coupled with a periods of accommodative credit in equity markets led to an especially strong quarter for incentives created which is of course the source of our future incentive income. Indeed David will detail we actually created more incentives at the fund level than the record amount we received in income from incentives.

As of March 31, all 48 of our closed-end funds that were more than a year old had positive gross IRRs and 38 of those funds were added above the 8% net IRR level which is generally the return threshold we must exceed to earn incentive allocations. Significant realizations in refinancing activity within our portfolios continue to be the key themes across many of our closed-end funds.

In the quarter, we capitalized on rising asset prices and strengthening capital markets to continue the profitable harvesting investments leading the 3.2 billion of distributions to our (inaudible) In the current second quarter significant activity on the IPO front has included Taylor Morrison which priced at the top of this range and has risen approximately 22% since April 10th IPO.

Taylor Morrison is a great example of our contrarian investment approach that worked. In early 2011, our real estate and distressed debt funds purchased nearly half of what became the largest privately held home builder in the United states and they did this at the time when many thought there would never be another home built in America. We paid approximately book value now aided by the housing recovery and the management team’s solid execution we were able to sell around 20% of our shares in the IPO with a substantial profit.

So we’ve already recovered about 60% of our equity investment and we continue to hold stock worth well over a billion dollar in the company. At Taylor Morrison’s current stock price our funds show a 3.5 times multiple on this investment. In Europe, we recently completed an IPO for Countrywide the largest residential real estate brokerage in the UK again at the top of the range with subscription orders far exceeding even our ambitious expectations. That position is also up materially trading up 34% since the IPO on March 20th.

We are excited about the prospects to both Taylor Morrison and Countrywide and other real estate investments as the housing industry continues its recovery. Of course it is well observed many times before. It’s really a good time to be both a big buyer and a big seller simultaneously. Given the strong selling environment, it is naturally harder for some of our groups to find attractive buying opportunities. That’s our pace of investing has slowed in some of the closed-end fund strategies. Not surprisingly, this has particularly affected our distress oriented funds which are distributing more than they are investing.

Today we don’t see (inaudible) we don’t proceed trigger in the investment period of our newest distress opportunity’s funds (inaudible) for some months. Though of course that could change depending on circumstance. The effective any delay would be the delay to receive of its full management fees. Now this is all typical for us at this stage of the cycle.

And this will straights the natural counter balancing characteristics of our business. First for example take a mature or closed-end funds. As they liquidate the management fees they generate declined well at the same time their incentive income increases. This complimentary relationship is especially strong at Oaktree thanks to both our accounting method and the nature of our fund work waterfall.

Under our conservative accounting incentive income which would have already been recognized under the market-to-market approach followed by others, it’s just now or still lies ahead to be recognized upon realizations. And the fund waterfall results in that receiving net income in cash at the time when the risk of call back is minimal.

Second of same rising markets that’s per asset sales from the closed-end funds benefit management fees and strategies where fees are based on NAV. That’s it’s not a co-incidence but in a year-over-year basis management fees from our open-end funds rose 18% mitigating a decline in fees from closed-end funds.

While we are very comfortable with this pattern which has been characteristic about business and interception we are focused on further developing a new sweeter products and in turn they will help for investors to achieve the returns they need well also affording Oaktree attractive opportunities to grow throughout the cycle.

We are managing money today for institutional clients in three areas that we did in just 12 months ago one is enhanced income and second is strategic credit and the third is real estate debt. We believe that each of these successfully addresses our client needs for strategies that can deliver high single digit net returns with manageable risk and I am pleased to say that the initial response for these new strategies has been quite positive.

We exceeded our fund raising goal for our enhanced income fund which will total over 2 billion with leverage and we’ve already attracted 900 million for strategic credit which targets stress securities there are distress debt team historically in orders offering insufficient return.

We anticipate adding another billion or so to this strategy before year end. In another week or so we will begin managing money in a fourth new strategy. Emerging market opportunities for stressed and distressed emerging market debt. We expect to meet or exceed our 500 million target for this within the next few months.

I have said before this new strategy won’t move the needle overnight but the opportunities here is amidst at 2.8 trillion and growing at the compounded annual growth of 21%. The size the emerging market corporate debt market it’s fast approaching that of 3.5 trillion US and European high yield and leveraged loan market.

At the same time as we pursuing these new strategies, we continue to make good progress with respect to our established businesses. Fund raising is going well for our new real estate fund, Real Estate Fund VI and we expect to achieve our target of 1.5 billion prior to year end. We have raised about half of that already.

We have also had a good response for initial marketing of Principal Fund VI and don’t anticipate difficulty reaching its 3 billion targets over the next 12 months. Over the past year, we have raised 10.7 billion which together with our strong returns has kept AUM essentially unchanged at 78.8 billion despite the 13.3 billion distributions from our closed-end funds over the same period.

Overall, we feel very good about state of our business. We enjoy the confidence and support of our clients and we are reaping the benefit of the capital we put to work through in the financial crisis and its aftermath. Our investment teams are continuing to generate good performance. We are far along in both stream of infrastructure to meet the demands of our clients and regulatory authorities and to support the new products and strategies and we were seeing sustainable organic growth that’s focused on our clients’ needs.

Looking ahead we anticipate continue strong incentive realizations and fund raising success still we know we can never be complacent and that’s all of us at Oaktree remain focused on doing all we can to justify our client’s trust and yours.

And with that I will turn the call over to David.

David Kirchheimer

Thanks john well as you previewed 2013 definitely picked up with the record setting 2012 left off. For the first quarter of 2013 record incentive income and a 40% year-over-year increase in investment income proceeds offset many times over the draft and fee related earnings that’s typical for this phase of the cycle. The result the distributable earnings of $295 million and total distributable earnings revenues of $554 million with profit margin of 53%.

Over the past four quarters, the margin was 51% yielding distributable earnings of $813 million. Those cash earnings are what fueled the aggregate $3.80 distribution per Class A unit over the last four quarters representing a payout ratio of about 80%. No four quarter period in our 18-year history has generated as much in earnings or equity distributions.

Moreover, we expect there is much more cash flow to come speaking of which I would like to share what we know about incentive income and therefore distributable earnings to be recognized in the current second quarter ending June 30th, This Friday up VIIb will make its first distribution to investors since February 7th in the gross amount of $1.4 billion. That distribution is expected to result in gross incentive income in the second quarter of approximately $272 million or $178 million net of incentive income compensation expense.

Together with activity to date for other funds that will put the second quarters’ running total for distributable earnings from all funds net incentive income and investment income proceeds at an estimated $226 million.

A higher total than the comparable full quarter amount for any quarter in our history saved the just completed first quarters $231 million at an estimated $226 million this running total equals about $1.50 of distributable earnings per operating group unit.

Two other comments about the current second quarter, first $5 billion Opportunities Fund IX our new distressed debt fund had its first draw down of 5% on March 26th and will draw an additional 5% on May 14th. However, as John mentioned for now we have elected to not start the fund’s investment period. As long as that’s the case the funds management fees will be based on drawn capital not its full committed capital.

The second item relates to our 20% equity interest in DoubleLine which recently rates an impressive $2.3 billion of equity capital before over allotment option for just its second retail closed-end fund. That $2.3 billion plus the funds upcoming half turned off leverage will DoubleLine’s assets under management over $60 billion double as year ago leveled and up from zero early three years after we made our strategic investment and they started managing assets.

As you may know, marketing our retail closed-end fund and placement fees incurred by the asset management firm that are merely expensed. DoubleLine has told us to expect that expense to largely eliminate its profits and cash distribution for the current second quarter. That’s the price that they and directly we are happy to pay for what comes next from this fund namely Perpetual Annual Management fees at a 1% of gross assets.

We call that we carry DoubleLine based on equity method accounting at just $19 million on our balance sheet vastly under stating the true economic value of our 1/5th ownership interest. Finally, looking not just at the second quarter but also further ahead, its informative that the first quarter’s record $327 billion of gross incentive income realized was easily eclipsed by the $460 million of incentives created during the quarter.

As testament to our diversification, those incentives were generated by 29 different funds in five strategies and 16 fund vintages and as testament to our returns the $460 million brought over $1.1 billion the amount of gross incentives created over just the past three quarters were nearly twice the amount of incentive income we recognized over the same period and thus even though our funds have produced record levels of current incentive income and distributable earnings that only just hints at what may lay ahead.

To get a sense of that potential our off balance sheet receivable called accrued incentives fund level accrued during the first quarter to $2.3 billion up 20% versus a year ago. Net of associated incentive income and compensation expense at March 31st that balanced at $1.35 billion or $8.92 per operating group unit.

You have to add up our net incentive income over the past six plus years to reach a comfortable total of $1.35 billion and well of course to the timing and level of future incentive income realizations are inertly unknowable. There is reason to believe that much or whatever we ultimately earned of the current accrued balance will be realized over far less than six plus years.

After all 93% of the $1.35 billion represented closed-end funds in liquidation or evergreen funds and 57% of the underlying holding were in the more liquid level I or II securities. Additionally, income recognized also exceeded distributable earnings in the case of investment income from funds boosting the aggregate amount of unrealized investment income proceeds to about $319 million or roughly $2.12 per operating group unit at March 31st.

Taking together that $2.12 and $8.92 of net accrued incentives equals over a $11 per operating group unit of potential future distributable earnings or triple the comparable total recognized over the past four quarters itself a record.

With that I am delighted to turn the call back to Andrea for your questions.

Andrea Williams

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

Question-and-Answer Session

Operator

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

Matt Kelley – Morgan Stanley

Good morning guys. Thanks for taking my question. I was hoping to ask a little bit more on the strategic credit initiative, hope it’s already given a billion or so more by year end, as we think about that are there any constraints on this or this kind of go anywhere and also fund raise as you go through the opportunity of interesting clients that goes beyond the billion dollars, there is no capacity on this if I am thinking of it, is that right?

John Frank

So strategic credit is targeting high single digit net returns by investing in what we call distress securities which historically are distressed debt team ignored is not offering sufficient for distressed debt strategy. As we talked about it on the call already, we got about $900 million in that our strategy already and substantial interest from other clients. Now we are only managing this right now for on a separate accountable basis for significant clients that can put $100 million or more into a separate account. In terms of our capacity I am not sure there is any strategy with the capacity is unconstrained what we would comfortable managing a couple billion in the strategy to start and then we would probably pause see where we are there and go from there but there is very enthusiastic client demand for the strategy.

Matt Kelley – Morgan Stanley

And on the emerging markets debt opportunity to a $2.8 billion asset class that you guys are raising – sorry – thank you –

John Frank

Million, billion, trillion whatever --

Matt Kelley – Morgan Stanley

Correct, so – but as we think about that have you guys kind of look at the relationship as to how long it takes for a kind of growth area in credit, issuer is to get a lot more credit and then there is sweet spot for your opportunity to come in behind that investing, what the typical – I know it’s going to vary – but what kind of sweet spot, is that a couple of years after the boom in that market?

John Frank

I am not sure there is any easy answer to that question. It depend – somebody said history does not repeat – but it ruins and there is similar characteristics that show what you have and in fact we are seeing some of them in the Western world too. You see a tremendous enthusiasm for credit today and you see people beginning to lower the credit standards and eventually that will lead to an opportunity for distressed debt team.

Similarly, in emerging markets you probably didn’t’ have in many markets the same sort of standards you have in the Western world to start with. So whatever something will happen whether it’s political instability or whether it is an economic set back or something to do with sorbent issues. You have an issue and all of sudden confidence in the market will subside and both the opportunities.

So to your clear what we are focused right now on the distressed opportunity in emerging markets. We also intend to pursue the opportunity in corporate emerging markets for performing corporate credits.

So none of this as I said is going to be a huge strategy overnight but over time I think it will be a big area for Oaktree.

Matt Kelley – Morgan Stanley

Excellent and then one last one from me and I will join back in the queue just on your opps funds on the VIID so you were thinking about other existing here from public or private investments that could make the IRR or even higher going forward, is there some potential unlocking of additional value and then just quickly as a second part of Opps IX how much do your LPs really appreciate here again you are doing that the right thing by not starting investment period and discharge the management fees on the joint capital? Thanks guys.

John Frank

Sure Matt, thank you. So on the second issue which is with a line of receiving of management fees on the full Opps IX and how much do our clients appreciate that? Look, I can’t give you a scientific explanation, it’s all part and parcel of how we manage our business and I think the fact that we have 1800 clients and 45% of them are more than one strategy and generally speaking we enjoy a very positive response for fund raising efforts and I think we held in great step by our clients and have a lot of good will.

It’s all kind of seamless web with how we go about managing our business and not overcharging the clients is a big part of that so you know I think we talked Matt you and I about this key prove a survey that survey chief investment officers and much how scientific it is but if the survey chief investment officers of some of the larger pension plans around the country and asked what investment manager would you be interested giving more assets too and we typically come out at the top and near the top of the pack I think in the most recent one we are number one and again this is necessarily the gallop or whatever. But I do think that it is all part of the same thing if you treat the clients right good things will happen for your business but I can’t formally quantify it.

Now the first part of your question related to Opps VIIB and the IRR calculation clearly we have seen opportunities to realize it’s a great time to see debt it’s even a great time to sell stocks so that’s what we are doing but I am going to refer to David right now to talk about the IRR.

David Kirchheimer

And also I think to your point about the future of site available from equity math as of March 31st about 44% of the fund was still in equity. There still remains meaningful opps site from that particular avenue.

Operator

Thank you. Our next question is from Michael Carrier.

Michael Carrier – Bank of America Merrill Lynch

Good morning guys. We are going actually filling in for Mike. First question, just in terms of investment opportunities, Howard mentioned on the last call that real estate and real estate debt offers what he said described as the best combination of quality and quantity, just wondering if you guys still feel that well currently given valuation than it is not, what I will assume my point to?

John Frank

So, as I made reference too, there is not surface of fantastic investment opportunities but there are pockets of opportunities and it has been our experience that in every investment claim no matter how hot the markets there are always pockets of opportunity. We still feel good about real estate opportunity, most of you are going to talk about this before but well while Class A properties and major markets have substantially recovered from the crisis there are enormous number of properties and situation outside the major markets are not involved in a Class A property where there are remains opportunity in distress and those are the opportunities we are seeking particularly those that are not the largest properties in the market.

We are seeing great opportunities in the loan portfolios, real estate related loan portfolios non-performing loan portfolios but there are also other industries who are pursuing within with made no secret of the fact that with pursued opportunities and shipping any number of liaison that’s an industry that’s suffering today, we loved this located industry but we still feel very good about the real estate opportunity.

I think one team I think that were observing this playing out through this phase of the cycle even though some of the traditional investment opportunities may be scarce now that there are this big pocket where capital is just not available or easily accessible by many companies such as middle market companies and so in many areas such as Europe we are really capitalizing on that as a provider of capital through a very innovative type investing platform investments we call them, so you as much and other firms in this business as providers of capital as much as we are asset managers at periods like this?

Michael Carrier – Bank of America Merrill Lynch

Okay, that’s helpful and then may be just quick query up for you David on the deployment front, could you provide the level of drawn incentive capital for the quarter?

David Kirchheimer

I think we had as I recall, you can compute this from the fund table itself but I think little over a billion dollars of drawn committed capital during the first quarter and so I don’t have the precise number handy but a little over billion dollars.

Michael Carrier – Bank of America Merrill Lynch

Okay that’ great.

David Kirchheimer

That’s just an closed end funds. Obliviously it doesn’t included open-end and evergreen funds.

Michael Carrier – Bank of America Merrill Lynch

Right, okay, great thanks.

Operator

Thank you. Our next question is from Michael Kim.

James Tally - Sandler O’Neill

I know that every LP is different but broadly speaking what are the performance measures that look out multi-monetize this capital or IRR and kind of second is got further, did they give you credit for unrealized gains or they are more focused on the actual cash returns.

John Frank

James as you said in your introduction all clients are different and are every LP is different and it’s really true it somewhat depends on the strategy it somewhat depends on the goal whether they are more focused on IRR whether they are more focused on multiple capital, whether they are focused on unrealized gains, whether they are really focused on cash now we are very focused on cash and we are very proud of the fact one of the things we thing we do well is invest capital relatively quickly and return it to clients relatively quickly. You can affect our IRR calculations and multiple capital calculation depending on how you deploy the capital and how you harvest it, I think the vast majority of our clients are very -- very sophisticated and I think I reasonably fast hold with all of the different measures and their deployable and reasonably sophisticated about watching of what we are doing so I am not giving a very good answer but I am not sure whether it is a good answer. Except for the fact that I think at the end of the day they wanted to know how much money did you make?

David Kirchheimer

Is that John and I said in all lot of LP. I think the common theme the reason the reason why we have now built our LP based things over 1800 and consider among the preempt it once to industry the common theme is telling the clients what you are going to do for them and then do it and by that I mean sticking to the area of investments focusing on risk control, exercising the discipline we have so far and not starting opportunities for IX if don’t think investments environment supports that. It’s just telling somebody what you gonna do and then you do it and you don’t stray from that and you don’t give them any bad surprises and seeking to that is harder than you might think but our investment teams have managed to do that for all these many years.

James Tally - Sandler O’Neill

I appreciate that’s helpful. I just then turn to retail. I know that obviously RR and try to up that earlier and some appears manage closed-end funds or ETS and obviously you got some advice in initial funds but just curious to get your thoughts on may be fully cap in the retail market and any evolution of thoughts and on approach f in the market would be great?

John Frank

So James, that’s our major focus of us for this year. We’ve actually just hired a new head of retail within our marketing group and our focus this year is to as you know we already have a substantial presence in the retail market place both between our advising mutual funds and sub-advising of mutual funds and our high network business which is more of a retail oriented business through various esteem investment banks. But most of it has been a tiny bit of a afterthought to us thus far and our focus now is how we can expand all our modes of distribution we’ve been focused over the last year making our products more available to non-US investors through a series of European C-cap that are now set up in Oaktree branded but our goal for this year is really to develop a full retail program admittedly we are still at beginning stage of that. We are organized ourselves to do that.

James Tally - Sandler O’Neill

Great thanks taking my question.

Operator

Thank you our next question is from Marc Irizarry.

John Frank

Hey Marc.

Marc Irizarry - Goldman Sachs

Hey guys, so on the performance returns this quarter which been distressed in same particular way very strong in real estate has been controlled investing as well, is there any way you can give us some color just on the distress peace and maybe we can do this on a day if you want to give us a sense of what the change or may be the percentage of different of the different level I, II and III assets or if you are fund world but how disperse was the performance amongst investments so was just a couple of investments that really drove with the big hands or there was a sort of more broad based?

John Frank

First of all Marc I am going to refer to David and he can be thinking about what to say but first of all we don’t have that many substantial positions particularly in the stressed debt. We are quite diverse so these results are not being driven by any one investments seconds of all as you know it has been extraordinary time for credit, the price of all credit instruments has been paid up so it has been a terrific time to sell that and the stressed team has been selling both equities and stocks but it really hasn’t been any one position. David do you have something do you want to say?

David Kirchheimer

Its exactly consistent with what you just said John it’s the benefit of diversification.

John Frank

Because you were just desperately turning the page.

David Kirchheimer

Sorry to distract and sorry to let you down if you expecting some profound answer and sorry marc except the answer is in fact difficult to broke I mean there is lot of broad diversification a little less so inevitably for fund line VIIB sell down obviously and so there are few more prominent investments. Historically we have never cited any individual investments I think we like to stick to that for the marked to market contribution but to get to the essence of your question marc, no, the nature of Oaktree is that we are not dependent on any single or couple of investments to drive results and that was certainly true again in the first quarter.

Marc Irizarry - Goldman Sachs

Do you have any insights of level I level II level III as such?

David Kirchheimer

No, I don’t have the data handy obviously that’s the public remarks that the public market did quite well in the first quarter and we benefited from that participated in that they tend to outperform usually to private market’s margin rate

Marc Irizarry - Goldman Sachs

Was it making distressed funds majority for sure for public right?

David Kirchheimer

Yes.

Marc Irizarry - Goldman Sachs

I am just guessing.

David Kirchheimer

You are pressing me, I will come up with answer here that why don’t we go on with another question.

John Frank

Marc will come back on that but it’s going to be same as the number as public.

Marc Irizarry - Goldman Sachs

Okay, we will follow up offline on that one. Then John for the new sweeter products that you guys are introducing to grow throughout the cycle you mentioned for listed out for when you think about the strength of balance sheet now, are you likely should we expect that you guys will continue to proliferate new products and growing to areas have seen or may be more the listed equity or if you will and are deals may be part of that or setting the strategic investments in as a management firm as that may be part of the opportunity and I want to think about just how that amount of cash building up on your balance sheet, what seems to be liquidity coming in from investments as well?

John Frank

Well, Mark, you know what’s well enough to know, I suspect be answer to this going to be which is for us the most important thing for us is where we can do a good job for clients, we know that if we do a great job for clients everything else will take of itself, so we are very interesting in developing new products, we definitely would consider strategic transactions but the key for us is are we really is it really gonna enable us to do a better job for our clients. And the opportunity something we feel we have an edge we have an expertise other people don’t. The reason we are so proud of our organic growth it’s because in these areas in which we are grown us far in the four areas in which I cited, we feel that we have expertise, such that we have good base for thinking we can do a job that’s better than others in the market place or certainly at least this good.

We feel, we look for the areas we have an edge. So what we do is some sort of strategic transaction what we starting products I am sure will do something that our goal and our focus in there is to do something where when you hear about it and when you colleagues hear about it and when your clients hear about it people nod and say yeah that makes sense, that’s a good move for Oaktree.

So our goal and our corporate strategy is less figuring out how we could we possibly make more money and more how can we do a better job for a client confident at the end of the day that will help us to make more money and be good for all of us.

David Kirchheimer

And by the way thanks to John giving that very fulsome answer. It gave me time to come up with the data to support what we said earlier which is in the first quarter in distressed debt the level III had a gain of just a shade under 5% so because that’s lower than the average gains we can I think summarize levels I and II were larger than that.

Marc Irizarry - Goldman Sachs

Just a few quick couple of modeling questions if you look at the G&A I guess sequentially it was down and I guess it looks like it’s back it out at the run rate around 26 million or so anything going on there with G&A and also comp expense was also higher this quarter it’s that sort of ongoing or sort of some on time seasonal?

David Kirchheimer

Sure, first G&A I would closely Marc obviously look (inaudible) where we strip out the foreign currency affect and so that you see a sort of what I would suggest is true G&A but nonetheless to your point the G&A dropped from the fourth quarter but after you strip out the affects it actually went up not down versus the first quarter of 2012 which was expected and is consistent with our growing infrastructure the company and just the ongoing growth of Oaktree but certainly we managed to it and remains what we believe is an appropriate level for Oaktree second to compensation there again.

That’s reflect the growth of the company and in this case of head count about 10% year over year as we continued building out the teams especially in the non investment areas but also John mentioned we just brought a new head of retail and marketing and we certainly investing in the investment areas in the new products that John described so that compensation increase is consistent with that and it sticks out as a percent in the first quarter simply because of the maths because we elected to not start opportunities fund IX. Had we started on January 1 of course as a percent of management fees the compensations and benefits would remain the same but the percentage would have been meaningfully less than it is actually was reported so hopefully that helps.

Marc Irizarry - Goldman Sachs

Very much, okay thank guys.

David Kirchheimer

Thank you Marc.

Operator

Thank you our next question is from Howard Chen.

Howard Chen – Credit Suisse

Hi good morning everyone.

John Frank

Hey Howard.

Howard Chen – Credit Suisse

Congratulations on another strong set of results. John I just want to return to fund raising given that strong relationship you have with LPs as you just been with a few products and funds, can you just probably categorize what on limited part in our minds and is there anything that new and different may be year ago?

John Frank

I am not sure I have any great insight for you Howard. It’s LPs are all different they are very focused I think the overall thing concerned about LPs particularly as we talk to them with our credit focus is investors are looking for a yield that’s not a stock deal and they really just want at a minimum they want be able to make their actual return whatever they have said it our some 7%, 7.25% and 7.5% that was the motivation for us developing sweeter products design to help them meet that need. So that is overall change thing we see.

Like you know it is always hard to raise money no matter what you are relationships are our clients are very focused on enormous range of issues and that’s appropriate and I think we do better than our share and we are great full for that and you have keep doing in everyday so I would say in our clients the overall achieving thing I see is this focus on how did they how do they invest in credits to meet their actual returns and but obviously there are other teams they are concerned about fees they are concerned about complex like you know they are concerned about everything you think to careful for those would be concerned about.

Howard Chen – Credit Suisse

Great thanks John that’s helpful. And then specifically on Opps VIIB I know it’s just one part of your harvesting activity but you have asked roughly about billion dollars of gross distribution the quarter of a last year and half if market remains as they are do you think that’s a reasonable place for what you think is realistic and what the market can accommodate?

John Frank

Well you know as you get later in a funds life you sometimes get to a less liquid positions or you get the positions where you have substantial equity positions so I am hesitant to project a rate of liquidation presently because I am not the guy who is doing it or responsible for it but what I would say is as long as the markets remain strong as they have been I would imagine you would continue to see significant realizations because our focus and I realize a bit of broken record but it’s true is I am trying to do its best for the client and to the degree we can realize these positions that we’ve enjoyed significant gains and to the breather sufficient liquidity in the marketplace and we think the position has reached some approximation of fair value where the remaining upside is limited will look to exit those positions, so you will see continued realizations, now whether there’ll be an exact to the same rate either I can tell you.

Howard Chen – Credit Suisse

Yeah, now understood.

John Frank

We gave later into the funds life you typically get into the positions that are less liquid.

Howard Chen – Credit Suisse

I guess, that’s I’m asking John just qualitatively like what inning do you think Opps VIIB is in right now and at what point we’re hitting may be some you know later in life. Are we there yet?

John Frank

I think we are getting there. You wanted me be qualitative and I can’t tell you exactly where we are but we are getting the substantial equity positions in the fund where you have some liquidity, but you don’t have to say kind of liquidity you have with the small piece of debt that you can just unload so, I hesitate to say.

Howard Chen – Credit Suisse

Okay, thanks and then final question from me just you’ve done a phenomenal job of growing organically and with the partnership that you’ve mentioned by just update on strategic M&A and what the environment later. Thanks.

John Frank

It continues to be how does things would have been with said before to you on this call aren’t there a number of folks who got attractive businesses out there who they maybe a hedge fund manager, or there may have a small business of one kind or another and the asset management business we don’t see the actual liquidity so we are approached almost all the times by folks who think that combining with us in one way and the other would enable them to see a powerful liquidity for their position. So the challenge for us is we are opportunistic and more valued buyers, so one of these days I’m sure there’ll be an opportunity to acquire a business we admire on terms that we think are attractive and where the outcome would be positive for our clients, but I’m not you know I’m not predicting anything.

Howard Chen – Credit Suisse

Great, thanks for taking the questions.

Operator

Thank you, our next question is from Chris Harris from Wells Fargo.

Chris Harris – Wells Fargo

Thanks, good morning guys. You know the first quarter was great from our return perspectives. Just wondering you know as we sit here today and you guys workout across your various funds and your strategies, what you guys most excited about with respect to your future gains you know what are there your pockets or particular funds that you think it really take off as we kind of move on to the balance of 2013?

John Frank

If the market stay the way they are everything is going up, so we’re excited about everything we own and then it’s harder for the investment teams to find new place to deploy capital thankfully we have extraordinary talented investors here and they’re really good at their jobs and their natures so I have no doubt that they’ll find good places to deploy capital, but at the same time you have to operate in the environment you have so it could a more limited time as supposed to more expansive time, conversely if the market stay strong it’ll be great opportunities to ripen our control strategy and our distress strategy even in real estate in particular places and in fact we have seen realizations in all those areas. So, I wouldn’t specifically identify one area or another, but I would say this you know just is the markets are really strong today we’ve seen environments you know even within the last few years where great strengths going to periods of great weakness with more repeatedly or more suddenly than anybody would have anticipated. So, you know that’s fine with us we’ll adjust to whatever happens and while the market is strong, move self and if the market becomes less strong we’ve more opportunity to buy and we’re happy with whatever comes we’ll take advantage of whatever the opportunity is.

Chris Harris – Wells Fargo

Okay and then a quick follow-up on the decision here to a Opps IX definitely respect you guys a lot for doing that, but just wondering how patient you guys are going to be there let’s say if the market just continues to grant higher there’s no role dislocation and then it occurs, are you willing to just kind of delay indefinitely or is there a point where you just say you know what we just any dip to get this capital to work and then secondarily to that my Principal Fund VI also be delayed just because that’s I think it’s a distressed fund as well.

John Frank

Chris, sounds a great question. I don’t think we’ll ever get to a place where we’ll say to ourselves we’ve got the capital we got to do something with it. Now, I don’t think we’ll get to that as I said we’ve got skilled teams and even in the height of the dotcom crisis, we found good places to put capital where we can generate good results, so I’m sure we’ll find opportunities, but if we can’t find opportunities that allow us to invest the fund over a reasonable period and it’s $5 billion fund then we’ll do something one way or another to adjust it as I said, we’re in very early days so we don’t need to worry about that too much today and like the supreme core you don’t want to answer hypothetical questions , but as ever our focus will be on the clients and making sure that we do a good job of managing the money, so we’ll be patient if we need to be patient.

Now, you’re expecting Principal Fund VI.

Chris Harris – Wells Fargo

Principal Fund VI.

John Frank

Oh Principal Fund VI that was a good question Chris and in cycle you’re right as the distressed opportunities have diminished somewhat the pace of our investment of Principal Fund V has slowed so we’re not quite and is bit of hurry for the Principal Fund VI capital as we thought would be a few months ago, so you know these things could change David and I have reminding ourselves yesterday that was only a couple of years ago when I think told everyone on one of these sorts of calls that we wouldn’t start drawing on Opportunities Fund VIIIb over at the time we predicted another six months or so and within three or four weeks we were in fact drawing on it, so our crystal bar is not terrific but to answer your question forthrightly, we’re not in this bigger hurry about Principal Fund VI as we anticipated today.

David Kirchheimer

I would just add for -- going back to distress debt and specifically Opportunities Fund IX, the fact that there are less investment opportunities, doesn’t mean that they are non-existent, I mean recall that a lot of the real estate opportunities still over to distress debt the predecessor fund, the Opportunities Fund VIIIb has now or were very shortly reach 90% drawn and as we said in the call it Opportunities Fund IX itself well week from today reached 10% drawn, so there are investment opportunities, our team is capitalizing on them and you know we just want to start full management fee and burn a deep hole in the return for the clients of that distressed debt fund but it’s being deployed.

Chris Harris – Wells Fargo

Alright, make sense. Thanks a lot guys.

Operator

Thank you, your next question is from Robert Lee from KBW.

Robert Lee – KBW

Thanks, good morning everyone.

David Kirchheimer

Rob.

John Frank

Hi Rob.

Robert Lee – KBW

Hey, quick question on, given your review -- you know the credit markets and there may be at somewhat better opportunity to harvest and you know up and investing opportunities are you know may be a slower, but surely not as robust, how does that influence are you thinking about your open-end products you know mean that you kind of closing some of those or it thinking about there may be a at least not in near term practical basis you need to kind of -- you know prevent insurgence to some of those strategies?

John Frank

Thanks Rob for the question. We do think about our open-end strategies and we do think a lot about our capacity in our open-end strategies and our convertible strategy we really generally speaking haven’t taken on any new capital in the last several years because there just hasn’t been any new issue, new issues in the convertible markets. In our high yield strategy for many -- many years we didn’t anticipate in the searches or generally speaking seeking new capital because we were concerned about our capacity there.

So, we are very conscious of the market and capacity and our ability to put capital to work in our open-end strategies at the same time however; typically our clients are very sophisticated in our high yield strategy as an example that made an allocation to high yield whether it’ll be U.S. domestic or global or European all of which we deal and once we’ve their capital on allocation we believe it’s our job to get it invested, so we do go ahead and invest at the market, now we’re not an index player, we are very conscious of risk and we got a very -- very great record over very long period of time 28 years or so of managing that capital with great care and exceeding the benchmark over that period.

So, we do deploy the capital on the open-end and it’s really not quite the same as it is on the closed-end side.

David Kirchheimer

And I’d like to add to that Rob is we’ve seen nice flows into the senior loan products which you know is floating rate debt and that’s certainly addresses lots of the investors’ anxiety over the prospect of rates rising and to joint point about the capacity management that we’ve always practiced in these funds including convertibles that one consequence of course of the rising equity markets is to give a rules further to you wish ones in convertibles which then allows us to loosen the bell in terms of accepting more capital, so again it’s just another illustration of the naturally complementary aspect of our business model.

John Frank

You know Rob I might add just one point to that which is because we’ve been careful about our of our capacity constraints over a long periods of time and because over a long periods of time we’ve declined to take the new capital from time to time each of these strategies, I think the result is many of our clients are reluctant to pull out of our strategies on any kind of tactical basis recognizing that you might not be able to get it again and again when they want to so I think that has dampened the volatility of however our client makes there.

Robert Lee – KBW

Okay, great and you know what if your competitors and creditors looking to expanding credit you know you’ve talked a lot about the CLO market and you have high expectations for issuance and you know sometimes you feel you may be the only alternative manager’s public fund that has you know doesn’t have a BDC or BDC underway and I know it’s things you looked at in the past, but you may be just sort of and I know the enhance thing come as your kind of version of you know CLO type of strategy to some extent, but can it be just up there so what it is about those markets of products you know for ‘03 use you find may be less attractive or this is not something that’s immediate on your drawing board right now?

John Frank

Thanks Rob, the truth is we’ve looked at doing the BDC and you know we have an existing and continue to have strong existing Mezzanine business where number of our peers if not the BDC was a relatively we does established Mezzanine business before the BDC was a structured. People began to use for that sort of investing so our current position is important, historic accident it’s in part it was conscious early on in the CLO business or some folks at Oaktree were concerned about the risk profile of CLOs and of course we’re all about risk control, but I would say that you know one of our focuses in this new sweeter products is we’ve put almost all of our liquid credit strategies under new leadership one of our colleagues (inaudible) has been made our new head of credit strategies and one of the things she’s working at our CLOs and BDCs and how we can be a bigger participant in the marketplace either for our traditional institutional clients or for other sorts of investors, so we’re not gonna say anything diminishing about the CLOs phase and they wouldn’t surprise me that she has to do something there at some point.

Robert Lee – KBW

All right, great. And then just one last question it’s not a segment of your business that are really get some extensions pretty tiny if you look at the two evergreen funds and if I look at where you have on page 23 and it looks like performance in on a net basis and has been pretty competitive and you is just you know the products haven’t really grown much and in terms net new capital is there a reason for that or just come in somebody pulls in the air this is not something that is much of a focuses as the new strategies are you know how do you think about those types of structures those pops in particular?

John Frank

Thanks. Well, we really haven’t accepted or we don’t really market our value opportunities fund which is a more liquid version of our distress strategy as you know it’s got very good returns over few years now. So, we’re very proud of the product, I don’t have any doubt we could raise more money for that product if we attempted to do so, but I think the team is comfortable managing the fund that roughly the size it is now and we don’t prep them to take more capital if you’re comfortably running in the case of

of our Emerging Markets Absolute return Fund we would take more capital there, but that team is also been very focused on building our new emerging market long only equity strategy which is different than the debt strategy I talked about earlier on the call so we would take more capital there, but you know that they Hedge Funds phase, it’s a tough phase and I have to be candid about the fact that you know we’re not a good player on a Hedge Funds phase and you know it does to some degree will require a different marketing approach and different folks so we’re proud of what we have we would love to grow the area, but it’s not a major focus of our efforts right now.

Robert Lee – KBW

Great and thanks for taking my questions.

John Frank

Good.

Operator

Thank you and our final question today is from Ken Worthington from JP Morgan.

Ken Worthington – JPMC

Hi, good afternoon. So, not unexpectedly most of the my questions have been asked and answered so one maybe teeny tiny one, you mentioned that about there were about $113 million of tax related distributions during the quarter hopefully with that rate can you help us with any sort of outlook here it’s part of the process that I’m still trying to get rid, but any help would be appreciated?

John Frank

You bet Ken. So, it’s tax related and incentive distributions related to 2012 taxable income from those closed-end funds which is generated flow-through taxable income in 2012 that resulted in tax liabilities in excess of the incentives they had distributed, so that’s why in the earnings release you’ll see a comparison of that annual type incentive income to the prior first quarter in 2012 comparable number there was a big increase largely because the markets were up much more in 2012 than they were in 2011.

In both last couple or three years you’d have seen tax related incentive distributions show up in individual quarters and that was coming from Opportunities Funds VIIb which identical of its size and its income generation which creating similar such tax liabilities that we knew we’re not going to reverse by the end of the year. Now that Fund VIIb is past the so called crossover point of its fund waterfall those days are over for Funds VIIb now you’re just seeing what I will call normal incentive income is supposed to tax related so you shouldn’t expect anymore quarterly tax related incentive distribution certainly from that fund and from where is it today so it reached caveats about the future that there’s no fund that is in a comparable position now so I would not expect in and around tax related incentive distributions for the foreseeable future instead I’ve no reason to expect anything other than sort of the recurring pattern of wait till the first quarter of 2014 when if there are similar tax liabilities for 2013 to cover you’ll see another annual amount, so that helps?

Ken Worthington - JPMC

It helps a lot. So, basically it now gets really easy. It is seasonal.

Unidentified Company Representative

It’s yeah yes. I will leave it to you to decide whether it’s easier or not but yes it’s more straight forward I guess.

Ken Worthington - JPMC

Okay. Great. That’s it. Thank you very much.

Ken Worthington - JPMC

Thank you Ken, good question.

Operator

And I’m showing no further questions at this time.

Andrea Williams

Thank you again for joining us for our first quarter 2013 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 8888-293-8914 in the U.S., or 1-203-369-3603 outside of the U.S. That replay will be available beginning approximately one hour after this broadcast.

Operator

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

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