Oaktree Capital Group's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Oaktree Capital (OAK)

Oaktree Capital Group (NYSE:OAK)

Q2 2013 Earnings Conference Call

August 06, 2013 11:00 am ET

Executives

Andrea D. Williams – Head of Investor Relations

John B. Frank – Director and Managing Principal

David Michael Kirchheimer – Director, Principal and Chief Financial and Administrative Officer

Analysts

Matt Kelley – Morgan Stanley

Michael Carrier – Bank of America Merrill Lynch

Howard Chen – Credit Suisse Securities

Christopher Harris – Wells Fargo

Marc Irizarry – Goldman, Sachs & Co.

Ken Worthington – JPMorgan

Robert Andrew Lee – Keefe, Bruyette & Woods, Inc.

Operator

Welcome and thank you for joining the Oaktree Capital Group Second Quarter 2013 Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode, but will be prompted 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 D. Williams

Thank you, Elon, and welcome to all of you who have joined us for today's call to discuss Oaktree's second 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 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 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 which was furnished to the SEC today on Form 8-K, 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 a quarterly distribution of $1.51 per Class A unit, payable on August 20 to holders of record as of the close of business on August 16. Finally, we plan to issue our Form 10-Q for the second quarter later this week.

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

John B. Frank

Thank you, Andrea. Hello everyone. The second quarter marked another period of exceptional financial performance. Continued favorable realization activity produced incentive income of $338 million, our highest quarterly total ever.

Combined contributions from our three sources of income, management fees, incentive income and investment income produce second quarter adjusted net income of $297 million or a $1.75 per Class A unit up 97% year-over-year.

Distributable earnings grew 90% year-over-year to reach a record high of $313 million or a $1.94 per Class A unit funding the upcoming record Class A distribution of a $1.51 per unit. Our distributions for the trailing four quarters will aggregate $452 million per Class A unit.

Our strong results in the second quarter were a product of our enduring focus on generating superior risk adjusted returns for our clients. We generated an aggregate gross return in our closed-end funds, up 4% for the quarter that brought the return for the last 12 months to 23%.

Distressed debt produced a 3% gross return in Q2 and 27% over the last 12 months. Real estate had a 4% gross return in Q2 and 23% in the last 12 months and global principal or control investing returned 6% growth in Q2 and 20% in the last 12 months.

As of June 30, all of our incentive creating closed-end funds more than a year old had positive growth IRR since inception and 39 of those funds were at or above the 8% net IRR level, which is you know is generally the return threshold we must exceed in return incentive allocations. We are very proud of this consistent record and of our colleagues who generated it.

As most of you know, we’ve been very focused over the last year or so on building new products specifically intended to address our clients need for risk controlled strategies that can generate consistent high single-digit or low double-digit net returns in this low interest rate environment.

One of the first new products we developed to address that need is our new Strategic Credit strategy, which we began marketing less than a year ago. Strategic Credit is a step out from our distressed debt strategy and targets stress securities that are too risky for our high yield bond and senior loans strategies, but which have insufficient perspective return for a distressed debt team.

Today the fund has attracted approximately $1.5 billion in committed capital and generated strong returns. By year-end, I anticipate it will be close to $2 billion income in committed capital.

Strategic Credit is a great example of the organic growth we favor. It affords our clients acces to a new and attractive investment strategy, while allowing us to leverage our expertise, expanse of credit platform, proprietary deal flow and experienced investment professionals.

Across the firm in the first six months of the year we have raised gross capital of $4.8 billion of which almost to a third was raised for strategies that didn’t even exist, 18 months ago. Together with Strategic credit, the newest step outs are enhanced income, a modestly levered bank loan product, emerging markets opportunities, which is our new strategy for emerging markets stressed and distressed debt.

Our real estate debt fund and most recently a European Dislocation Fund, but we’re focused on lending opportunities resulting from the retrenchment by European banks. As with Strategic Credit, all of our newest products represent organic step outs from our existing strategies and investment teams.

Our enhanced income fund which is a step up from senior loans has reached total fund size of $2.3 billion, well exceeding our initial target of $1.5 billion. Emerging market opportunities, an extension of the distressed debt strategy into emerging market debt currently it’s approximately $200 million income in committed capital. We anticipate that number were raised over $600 million or more in the next few months.

Real estate debt which a step up from our real estate strategy and the successor to our PPIP mandate, that’s had a first close of just under a $100 million bringing the total committed capital for the strategy to approximately $300 million, and will expect that will be more than $500 million by year-end.

Our European dislocation fund which is a step up from our European principle bonds will target non-control oriented investment opportunities created by the prolonged dislocation of the European lending markets. Our European control investing team is the largest such group in the region as far as we know and they have significant experience with capital in terms of industries, where lack of bank financing has created opportunities to make attractively priced loans. This fund had a first close in July and we expect the fund to eventfully reach more than €250 million. Taken together, including some post June 30 closed activity, these new strategies which again didn’t exist 18 months ago accounted for $4.3 billion of AUM.

In terms of our existing strategies, fund raising continues to go well for Real Estate Fund VI, which has reached $1.2 billion in committed capital. We expect to exceed our target of $1.5 billion for this fund prior to year end. We are excited to see the growth of our real estate strategy. Remember, we only finished raising Fund V, the predecessor funds $1.2 billion in capital about a year ago and we continue to feel this will be an increasingly important part of our business going forward.

You should know that we’ve pushed back the timetable of our newest control fund, Principal Fund VI debt, we have delayed the first clause since we still have about $800 million to deploy from our existing fund and today’s environment requires a disciplined approach. We haven’t scheduled the first clause yet, but we expect it to be later this year.

Now notwithstanding all of our fund raising, you will note that our AUM is down just slightly from year end to just over $76 billion, owing to almost $5 billion in distributions from closed-end funds in the second quarter and about $8 billion for the year-to-date.

Given our strength in distressed debt, most of you know that it’s been typical for our AUM to stay flat or to shrink in the recovery phase of the cycle as we tend to realize investments and distribute capital and profits to our LPs at a pace that exceeds our capital raising. My sense is that many of you are concerned this phenomenon could be particularly acute in this cycle, given the unusually large size of Opportunities Fund VIIb.

As most of you know, Opps VIIb was raised before the last financial crisis with about $11 billion of committed capital was invested very quickly, grew rapidly to more than $18 billion and has been liquidating very quickly as well. We have been conscious of this pig in the python, if you will, effect and pipeline of dual effect and I think we have done a very good job of managing through it.

Our AUM is up roughly $25 billion or over 50% since 2008, even as we have distributed over $40 billion to our limited partners over the same period. A big part of that of course has been our success in establishing new strategies.

While we are very focused on growing our business through the step-up strategies we described, we recognize there is an inherent cyclicality of our business that we cannot eliminate without compromising the best interest of our clients. Thus, we would rather live with some lumpiness than do something contrary to our long-term interest to moderate it in the short-term, such as raising excessive amounts of capital or engaging them in acquisition simply to add AUM.

Before turning the call over to David, I imagine you would like to here a bit about some of the specific events that drove the $4.7 billion in closed-end fund distributions in the second quarter.

Significant realizations included the sale of positions in Clear Channel Communications, Cyanko, Taylor Morrison Homes, LNR Property, Countrywide PLC, which is the UK’s largest real estate agency and specialty retailer, Claire Stores. Cyanko was an interesting example. It’s a specialty chemical producer that our Global Principal Funds acquired in 2008.

Our team worked closely with management to improve operations and increase capacity, resulting in several new long-term contracts at attractive margins. Today, Cyanco is the world’s largest supplier of a key chemical used in the gold mining industry.

In the second quarter, the Global Principal Funds realized over three times their invested cost through a dividend recap without selling any of the Funds majority equity stake.

Another significant realization event in the second quarter was our real estate teams’ opportunistic sale of the remaining holdings in our PPIP Fund. You will recall that this program is an outgrowth of the financial crisis, in which the U.S. Treasury hired a select group of asset managers to buy mortgage backed securities.

We are proud of the fact that Oaktree’s fund emerged to the top IRR among the eight managers with a gross return of 28%. Our team’s investing skill produced gross incentive income to Oaktree from PPIP, a $47 million of which $32 million we saw in the second quarter, the remainder will fall in the current third quarter.

Moreover the expertise the real estate team gained in underwriting CMBS securities coupled with our leading track record has jump started the fund raising for our real estate debt part. This is yet another example of the kind of organic growth we favor.

Our activity on sales and refinancing has continued into the current third quarter. Already in the quarter, our closed-end funds have closed the sale of R&R Ice Cream and announced the sale of Chesapeake’s paper based packaging business.

As we have noted many times on these calls, it’s rarely possible to make bargain purchases and eye popping sales at the same time. Today, the generous financing markets that have facilitated so many of our realizations are making it harder for our distressed oriented strategies to find attractive buying opportunities.

Now that’s not to state are (inaudible) there are and we’re pursuing them, but as of today, we don’t foresee triggering the three year for our newest $5 billion distressed debt fund, Opportunities FormIX at least for remainder of 2013. That could change of course, but for now we’ve elected to take management fees only on the funds drawn capital which today stands at about 10% of committed capital.

The market's reaction in June to Chairman Bernanke's comments regarding a possible tapering of the Feds monetary stimulus reminds us that markets go both ways. We have no doubt the future market dislocations will create investment opportunities for our distressed debt team. In the mean time, we continue to find attractive risk adjusted returns in pockets of dislocations, such as in the real estate shipping and power industries, and more generally in Europe.

Looking ahead, our focus will main on delivering the three things we’ve always emphasized; superior investment performance, measured and thoughtful product innovation, responsive to our clients needs; and not least, doing all we can to justify our clients trust and rewards.

With that I will turn the call over to David.

David Michael Kirchheimer

Thank you, John. Creating value in the cash flow that follows has become an Oaktree hallmark for LPs and unitholders alike. Indeed, just as our fund investors rightly place a premium under cash returns. Cash earnings are Oaktree's prepared gage of corporate profitability. That’s why, for example, we’ve always followed the method of accounting for incentive income that is closest to a cash basis, instead of the mark-to-market alternative. More broadly, that’s also why we focus on distributable earnings, a cash based measurable earnings that serves as the primary basis for our quarterly distribution.

While we manage our business for the focus on long-term performance, we are pleased with our results in the most recent second quarter. Our value creation cash flow cycle was on full display in the quarter as our distributable earnings reached record highs for the quarter, year-to-date and trailing twelve month periods.

Meanwhile incentives created fund level reached $1.3 billion that is nearly $400 million more than gross incentive income realized in the same period boding well for fund realizations and the distributions that follow. Quarterly incentive income increased 162% versus the second quarter 2012 to a record $338 million. That incentive income in turn grew quarterly adjusted net income to $1.75 per Class A unit, nearly twice the year ago level.

At Oaktree, incentive income on the income statement represents actual or eminent cash receipts with minimal risk of clawback. Thus the quarter’s incentive income drew distributable earnings of $1.94 per Class A unit, 90% higher than last year second quarter. In addition to funding the quarter's upcoming $1.51 per unit distribution, this substantial cash flow boosted our net cash balance to a record high level.

Most of the second quarters incentive income arose from realizations by Opportunities Fund VIIb which as of June 30 had a multiple on its $9.8 billion of drawn capital of two times and a gross IRR of 23.8%. But Opps VIIb was hardly a loan with its impressive returns. Gross IRRs with the other Closed-End Funds that generated the bulk of the incentive income in the second quarter included Principal Fund II at 23.3%, the PPIP Fund, 28.2%, Opportunities Fund V at 18.7% and a distressed debt separate account at 33.5%.

Altogether the quarter’s incentive income arose from eight funds of six different vintage years spanning six different strategies. It's that type of broad-based performance that has generated incentive income for Oaktree for 38 consecutive quarters and counting. Meanwhile those and other funds strong returns created the prospect of more incentive income in the future, something we label incentives created fund level. We call the period and balance of this asset, accrued incentives fund level, which can be part of as an off balance sheet receivable, subject to of course the fluctuations in market value.

Over the past four quarters, this asset grew 14% to $1.2 billion net of compensation or over $8 per unit as of June 30. This is noteworthy considering that during that same time, we recognized our aggregate net incentive income of $542 million, a record for any four quarter period.

How did the unrecognized balance of potential future incentive income still manage to grow to $1.2 billion. It was thanks to $723 million of incentives created net of compensation in the last 12 months. It’s noteworthy that this $723 million arose from Oaktree funds across nine different strategies and in 16 different fund vintage years, again reflecting the consistency and breadth of our fund performance, which was particularly strong over this period.

Also of note is the fact that as of June 30, about 60% of the holdings in our incentive creating funds were in private so called Level 3 securities for which historically margins have often been lower than ultimate realizations.

Now what’s gratifying is the record levels of incentive realization and creation are the profitability of our non-incentive revenue streams is equally important. To see what their profitability is, we look at distributable earnings excluding net incentive income, which is to say management fees, investment income proceeds and all operating group income and expenses other than incentive income or its directly associated compensation expense.

Over the past four quarters, this non-incentive portion of our distributable earnings grew to $425 million. The level of non-incentive based cash earnings over this period demonstrates two important and valuable characteristics of Oaktree's business. First, its core profitability and second, it's ability to prosper throughout the cycle.

For the latter point, note that our growth in non-incentive distributed earnings occurred despite both a decline in management fees from large asset sales by closed-end funds and their liquidation period and our decision to wait to start the investment period for Opportunities Fund IX. What served to offset those two forces, the fund raising John described and growth at DoubleLine in which we have a one-fifth equity interest, certainly helped.

But the two factors on which I would like to focus are fund returns and realizations. First, our strong returns boosted revenues that are tied to asset values. Second, our funds large realizations generated substantial investment income proceeds because of Oaktree’s own investment in each fund.

It’s not a fluke that those two factors along with incentive income were big positives at the same time that the investing environment caused us to slow the start of Opps IX and to hasten asset sales from older funds causing their management fees to drop. The complementary nature of our cash flow sources along with other aspects of our business model serves to reduce volatility of our financial results while providing a profitable foundation for our business.

One final topic before getting to your questions. First, with respect to Opps VIIb, since the funds last distribution of $1.4 billion on May 14, our distressed debt team has continued to sell assets though at a lower aggregate level than previously what was the markets gyration in June and the natural tendency for closed end funds to generally slow their pace of selling over their liquidation period. Form these asset sales, including those that have yet to settle, we currently expect that Opps VIIb will make a distribution to its limited partners of approximately $500 million within the next month or so.

Together with the incentive income John mentioned as falling in this quarter from the PPIP fund, that distribution by Opps VIIb would put the running total for the current third quarters incentive income, net of compensation expense at about $70 million, and investment income proceeds at about $14 million.

Others in that incentive income, the asset realizations in the third quarter mentioned by John are currently not expected to generate additional incentive income, so of course they convey the other benefits of fund distributions.

And with that, I’m delighted to turn the call back to Andrea, for your questions.

Andrea D. Williams

Elon, we are ready to open the line.

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 morning, guys. Thanks for taking the question. So first, you talked a little bit about the cash balance growing. So I would just be curious how you guys think about the cash balance, you're ceding newer strategies. So as that balance grows and you have got some of these other funds in the distressed debt area for you guys that are nearing paying out performance fees in the next couple of years how do you think about that in terms of what you want to do with the cash? Is it potentially taking more stakes, ceding newer strategies, increasing the payout ratio or how do you think about it?

David Michael Kirchheimer

Yeah, thanks Matt, David here. Well we think about it as you’ve already just described in terms of being an ongoing source of capital for our new products as well as the 2.5% stake that we always take in any of the closed-end or evergreen funds, but we are also cognizant obviously of the growing balance of cash as we have gone to this realization phase of the cycle. And so that’s why we grew our payout ratio about year and a half ago from what had been about 75% of what in recent quarters has been roughly about 80% of distributing earnings. So we are happy to have the liquidity to fund the development activities that John described and to continue investing in new funds, but we also take a look at the payout ratio periodically if there is more cash than we think we can profitably deploy.

Matt Kelley – Morgan Stanley

Okay. And then you talked a little bit about the distribution pace and I think you were referring mainly to Opps VIIb, but during the quarter it looks like a couple of your funds, maybe Opps VI kind of sped up a little bit. Opps VII seems somewhat steady in the pace of realization here. So as we think about the distressed debt fund specifically, anything you would expect to change outside of VIIb that you already talked about? Anything you expect to change either up or down in terms of pace of realizations going forward?

David Michael Kirchheimer

Well, let me talk specifically about the quarter and then I may as John if he has any comments about looking forward. Our crystal ball of course is not better than yours or anybody else’s. But you are right, I mean in terms of other funds, other than VIIb that I specifically talked about, having realizations and so between Opportunities Fund VI and Principal Fund III, they are among the funds that are getting closer, thanks to those realizations to the point at which they will be paying out their accrued incentives and in fact, I would note in that vein that I think almost something like 90%, not quite, but about almost 90% of the accrued incentives are in funds that are in their liquidation period and so that certainly a noteworthy aspect of the realizations that we have had and the impact on that important part of future cash flow.

John B. Frank

Hey, Matt, it’s John. I would just say, the real deal generally speaking environment utilization is very positive, financing markets are generous and equity markets are off, but I don’t have anything specific to say about the particular pace for the distressed debt funds.

Matt Kelley – Morgan Stanley

Okay. And then last one from me and then I will jump back in. But I think that one of the kind of misperceptions with the funds that you manage, it is harder to see publicly traded benchmarks or anything like that versus some of your peers. So you had some nice appreciation in the distressed debt funds. Could you kind of walk us through some of what you saw at kind of at a portfolio level, whatever you can kind of disclose on certain segments or investment types of debt performed particularly well during the quarter, just so we can get a sense for going forward what some of the triggers could be?

David Michael Kirchheimer

Well, let me throw a few statistics that I think you might be sort of fine to drive that. John obviously cited some specific examples of realizations. A lot of the gains we saw in the quarter were in the level 1 or more public securities. For example I think Level 3 went up something like a little over 2% for the quarter and as I mentioned in my remarks, I think its commonly accepted that sometimes those particular securities can have further gains when they are solved and also remember that the distressed debt funds because the nature of their investing process go through restructuring where they start off heavily in debt, I think VIIb started to something like 80% to 90% in debt and VIIb specifically is now about 43% equities and so that’s a natural evolution during the recovery Phase of a cycle, you go through restructuring bankruptcy and the like, and so those funds then become participants and for the rising markets which of course are proven parcel of this phase of the cycle. So John, if you want to add anything to that?

John B. Frank

I'm not really. I mean, Matt, some regard to the distressed debt funds are quite broadly diversified. So what you’ve seen as well, with significant increase from all the public marks and a less significant increase in the securities that are privately marked that are not Level I securities. And hopefully we will see, hopefully good things will happen.

Matt Kelley – Morgan Stanley

Okay, great. Thanks for taking my questions guys.

Operator

Thank you our next question is from Michael Carrier from Bank of America.

Michael Carrier – Bank of America Merrill Lynch

Thanks guys. It maybe the first one, you guys talked about just the cyclicality of the business and based on the fund raising you guys have been doing a pretty good job on of setting some of that. But, just kind of wanted to get your sense when you think about the environment we are in and you have some strong distributions, what portion of the expense base is on the variable side where we can see some of that pullback versus it seems like you're very busy, whether it’s on the product innovation side or the distribution side to do the obviously longer-term investments that you don't want to pull back on it. So just wanted to trying to get the sense of that and granted its short-term in nature, but just trying to see how it’s going to impact the business may be within the next couple of quarters versus over the next one to two years?

David Michael Kirchheimer

Sure, thanks Mike for the question. First off, the most significant variable expense of ours is incentive income compensation expense which is directly variable, and so over the last 12 months when we’ve had all this record incentive income, and in fact as impressive as the $225 million was that I discussed in terms of the non-incentive portion of our distributable earnings.

The incentive portion was over $500 million over the same period, and so it’s important and it’s quite a benefit to our business model that all of that compensation is directly variable, another large portion of our other compensation or base compensation is a discretionary annual bonus score, we have capped base salaries for example at the same generally low level since 1995, since our start and so the annual bonus will in fact represents significantly more in the aggregate than any fixed compensation.

So, that’s something that we revisit each year end, I would also say that our business model is such that we benefit from being able to achieve scale in these new products, you know John described a number of step outs, and not specific to your comment about variability of expenses, but just in general. In terms of how we look at our income statement distributable earnings, that there is the scale has lot to do with our business as you know and so it’s very exciting to us as we leverage the existing cost base to add these new assets and new investment strategies.

John B. Frank

But Michael, I would say that everything David said is true, but you’ve heard us ad nauseam, we’re very focused on the long-term and to the degree we need to invest in new people, new systems whatever it is, in order to preserve an enhance and develop the business going forward, we do what we will.

Michael Carrier – Bank of America Merrill Lynch

Yes, that makes sense. And then maybe just during the quarter, yeah just given the volatility that we saw, it seems like things have held up very well, meaning from a performance standpoint. The only area where it looks like you had a little bit of pressure was on the open-end funds based on what we can see in terms of whether it is performance or net flows. But when you think about like the outlook in your rising rate environment, it seems like on the fixed income side on the institutional part of the business, there is a shift going on, more money going out of rate products and into credit or into alternative strategies and the Strategic Credit product seems like a good fit for that. So just wanted to kind of get a sense when you look at the overall business on some of the more core products that you have, what is the outlook because it seems like there is definitely some parts of the business on the institution side that are going in your favor and then you might have a little bit of volatility on the open-end funds, but that might have been just a quarterly issue just given the volatility that we saw in Q2?

David Michael Kirchheimer

Yeah. I feel great about where we are. Ironically, in high yield where we do have fixed rate exposure and the record as I understand it at least, record redemption from retail funds in June. The truth is, as the rates have gone up a bit, spreads have come up a bit, it’s actually becoming more attractive to our institutional clients and we have more inbound inquiries. So the rising interest rates I think actually doesn’t have quite the impact of maybe people would assume. We have seen a little bit of rotation out of our open-end funds, particular high yields and a little bit convertibles into our strategic credit product that probably accounted for about $200 million of shift, which for us, of course, was very favorable from a lower fee product to a higher fee product.

The reception of two strategic credit as you suggested has been very, very strong. And I think our bank loan products, our enhanced income fund will do anyone of those someday. Our strategic credit offering, all of these have been very favorably received in the marketplace.

Our real estate debt fund has received more positive response than we initially anticipated. So I think everything you said is correct about the attractiveness of some of the new products we are developing. At the same time, I feel pretty good about where we are with respect to our existing open-end products.

John B. Frank

I will share in anecdote on this topic Mike, that means you will appreciate. I was talking with Desmond Shirazi the other day, our Portfolio Manager and Senior Loan Product and Enhanced Income. And he had just come from a meeting with a large institutional investor who said, all he wanted and I was really focused on was “contractual income”. We talked from time to time about the power of credit and all the benefits it conveys. And as leaders in that portion of the alternative asset industry, we are feeling very good as John said about the attractiveness of those strategies to our institutional investors.

Michael Carrier – Bank of America Merrill Lynch

Okay, it’s helpful. And then maybe last one. Just on the distribution outlook. There has been a lot of focus on VIIb for obvious reasons, but if you look at that the net accrued incentive, it is pretty diverse now and if we look at VIIb, I think it’s about a third and two-thirds are in other funds. So I guess when we think about just the exit environment and some of the other strategies, it seems like its still a pretty favorable environment, but just I guess any granularity in terms of where some of those exits, whether its sectors, whether its types of exit that you would expect meaning, if there is more than you can IPO or if its more a pickup in M&A activity in sales, just a little bit more granularity on that area because its been something that we probably focus less on over the past year or so.

John B. Frank

Well, Michael its Don strategy pointed out, the accrued in percentage are represented by a host now, a host of funds, I think the last distributions we paid out this quarter were generated by non funds, what did you say in your report.

David Michael Kirchheimer

Yeah, I think so yeah.

John B. Frank

Of nine funds, so I don’t want to not give you more granularity but to do so I think would be almost misleading to you, there is a broad array of investments and strategies that underlay these accrued incentives, the general environment as I mentioned earlier in this you know well, its very, very good realizations whether it be the divided recap, a journal was writing about this morning in the paper or whether its M&A activity and we’ve announced the sale of our portfolio companies, IPO activity, we had a substantial IPO and I think it was in the second quarter [indiscernible].

That our portfolios are filled with company’s that can do any one of the number of these things so, if the environment remains positive I imagine we will see more of that and that will be good in terms of the creation or the realization of incentive fees. And for some reason the environment changes we will – we think we will do fine too and we will have more opportunities to put money to work and sow the seeds of future profits, so we are prepared whatever comes

David Michael Kirchheimer

Yeah, and I would just add that as to the space of that in each quarter I would just remind you that that’s why we disclose in that fund table, the amount of remaining capital and preferred return that each fund still has to deploy and that’s why I said in my remarks that those other realizations that John described for the third quarter are not expected to generate incentive income.

So I will just caution in terms of the timing on that. But yeah, you are absolutely right in noting that. I think it was a year ago that VIIb represented over 60% of the accrued incentives and today as of June 30, rather it’s less than 40%. So yes, we’re much more diversified there.

Michael Carrier – Bank of America Merrill Lynch

Okay, thanks guys.

David Michael Kirchheimer

Thanks, Michael.

Operator

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

Michael S. Kim – Sandler O'Neill + Partners, L.P

Hey, guys, good afternoon. So first, as you talked about earlier, your assets have remained relatively flat for a few years even as you worked your way through a pretty powerful distribution phase. So just curious how you’re thinking about the outlook for AUM growth going forward?

So as your newer strategies continue to scale, they feel like the fund raising levels can hold relatively steady in that sort of $10 billion per year run rate since 2007, I guess could actually suggest you see AUM growth reaccelerate particularly assuming the pace of distributions from Opps VIIb slows?

John B. Frank

Hey Michael, it’s John. Look, we don’t have a particular AUM goal. We don’t have a chart that we’re looking out on the walls and we got to get to that point. But we’re very, very excited about the new strategies we talked about and the reason we’re excited about them is we think we’re filling a real need for our clients. We think we’re uniquely well situated to help them fill that need and the clients have been responsive, and at least thus far today we’ve done a very good job in terms of the investing that we’ve been doing. So if all that remains true, I would imagine we will continue to see further assets into these strategies. One of causes for enthusiasm are these are almost all strategies where we feel like we can manage more money, and so that we’re not capacity constrained as we were in some of our more historic products.

So we’re very excited about the growth that we will see over the years ahead, but obviously it depends on what the environment is, it depends on us continuing to do a good job.

At the same time, one of the things we love about our business is, if for some reason, the economy doesn’t hold up or things change, we think we are well positioned to deal with that change. We still have Opps IX, more or less on the shelf, and a lot of capital available there to deploy, and given our reputation and distress if for some reason that should be a change in the environment, we think we could raise more money as well. So we’re trying to position ourselves to prosper whatever happens.

Michael S. Kim – Sandler O'Neill + Partners, L.P

Okay, that’s helpful. And then as you continue to build out your investment management capabilities, any plans to put together a dedicated sort of a multi-asset class fund that can maybe capitalize on some of these more opportunistic investments a bit quicker, particularly given, it seems like there is a fair amount of demand out there for these types of more flexible strategies?

David Michael Kirchheimer

Sure. Michael, that’s a good question. We refer to those as sort of under the general rule breakup multi-strategy assignments. We’re talking to a number, and you’re right, there is some demand in the marketplace for those sorts of strategies, which will be uninitiated or more mandates, which are more general in nature affording the manager or us, some discretion to allocate and reallocate capital amongst our strategies in response to real time conditions, we are pursuing various ways of those strategies there is some demand and I would imagine that over time, we do add to assets in that area and we think that will be accretive to us as well.

Michael S. Kim – Sandler O'Neill + Partners, L.P

Okay, that’s it from me, thanks for taking my questions.

John B. Frank

Thanks, Michael.

Operator

Thank you, our next question is from Howard Chen from Credit Suisse.

Howard Chen – Credit Suisse Securities

Hi, good morning everyone.

John B. Frank

Hi, Howard.

Howard Chen – Credit Suisse Securities

Raising money is never been an issue for you all, but do you believe there is a meaningful portion of LPEs that have been on the side lines, given the near zero rate environment and it so how do you think about maximizing that opportunity vis-à-vis being disciplined about asset growth?

John B. Frank

Well. I don’t know if I necessarily buy the premise, but that there were lot of LPEs, were in the side lines. All of our clients more or less have the same problem. They are charged with the custody and the growing of a capital base and even with no interest rates they enforced Howard some times refers to them has been core stuff, [coursed volunteers] that with or hand cuff volunteers to try find some return in this low interest rate environment.

So I think they’ve all been doing something or not. I don’t know if I look at as you said, we have been very, very fortunate and the reception we get from our LPEs and we continue to seek to grow our LPE base, we are now up to over 1800 clients and we are actively pursuing new clients in new regions as in Latin America, have some regions in Asia and where we haven’t historically been very active continuing in Europe. So, we are looking for LPEs for whom we can help.

Howard Chen – Credit Suisse Securities

That’s helpful, thanks John and my second question in an environment like the back half of May and during June did your funds get call down in a lot of debt holdings and how much that contribute to realizations and how do you think about managing that recycling process historically and going forward?

John B. Frank

Well, we love the fact that most of our funds if not all – most of the funds allow us to recycle and that we are able to take advantage of realizations and then find new opportunities. So that’s very good. In terms of the level of refinancing activity or buyouts, I don’t have a data on that. But I’m not sure what we do.

David Michael Kirchheimer

(Inaudible). We can handle that offline, Howard, when we talk.

Howard Chen – Credit Suisse

Great, thanks David. And then final one from me for you David. You touched on double line, you can expand on your thoughts on the investment growth has been phenomenal but our retail investors behaving any differently than your institutional investors during this transitional period we experience? Thanks.

David Michael Kirchheimer

Sure, well I don’t report of any insight as to the behavior of retail investors, we know our flows and what not and so it is credit investor double line certainly had some outflows, I think it’s informative though that for the first six months of the year. there is a positive flows in a very challenging environment because of the June rate raise of something like $1.3 billion in their flagship bond and over that same period their return was something like almost not quite I think 200 basis points over the benchmark.

So, we couldn’t happier now as we’ve always been for last several years since we made that investment in double-line, there are asset growth year-over-year was substantial and as you saw they took (Inaudible) last quarter and the second quarter because of the placement fee they incurred. So that’s why you don’t see much of an impact under distributable earnings in the second quarter. But we certainly expect that to resume in the third quarter and so all things are very good and exciting about our double line investment and we are very proud of them.

Howard Chen – Credit Suisse

Great, thanks. And then maybe just a quick final one. On the European Dislocations Fund that you’ve launched, just curious how do you think about the opportunities set, and why a specific strategy versus what is in this that may not fit within some of the other broader bigger funds that you may have? Thanks.

David Michael Kirchheimer

So Howard, the European Dislocations Fund is really a – what we see it as, it’s an opportunity. And maybe a permanent strategy or maybe a one-time thing, we’re not sure yet. But there is clearly an opportunity in Europe where a lot of the banks have re-trenched and there’s a lot of demand for capital, particularly in capital intensive industries, we have a very large team on the ground in Europe, based in London. But also with offices around the continent, where we see opportunities to do original loan initiations, and in industries where we’re already familiar with players to make loans and attractive where structured investments of both equity and loan at attractive rates.

So I’m not being very articulate here, but what I’m trying to convey to you Howard is that, what we see is, this is a particular opportunity that we think we’re particularly well positioned to access by virtue of our team on the ground and their familiarity with particular industries and industry players.

And given that there is a lack of capital availability due to the pullback of the banks. And that’s what’s caused us to raise the fund. That is why I think clients have been responsive, how big an opportunity this will be, how long will it last, we really don’t know.

Howard Chen – Credit Suisse Securities

Great. Thanks for that additional color.

David Michael Kirchheimer

All right Howard.

Operator

Thank you. Our next question is from Chris Harris from Wells Fargo.

Christopher Harris – Wells Fargo

Hey, guys. So the economics on your newer strategies, any different from what you have in your legacy portfolio today?

John B. Frank

Yes, and Chris, it’s John. That’s a good point. In our typical closed end fund strategy you might have a management fee of 1.6%, say just to pick a number of 1.65% and a 20% carry in strategic credit. We offer clients an option of a flat fee, what is that – do you remember?

David Michael Kirchheimer

Yeah, about 1.5%

John B. Frank

1.5%, a flat fee of 1.5% or a management fee of 1% plus a carry of 10%. So there is some, so on the one hand that’s less than distressed out and other hand it’s higher than high yield, which is a flat 50b. So there is some variance in these new products.

On the other hand, European dislocation fund is that I think 15% carry and anybody know 1.5%, so that’s 1.25%?

David Michael Kirchheimer

1.25%.

John B. Frank

1.25%, I don’t mind.

David Michael Kirchheimer

And that’s a contributed capital.

John B. Frank

Yeah, a contributed capital. So there is some variance as you go forward Chris, they aren’t all at the same pricing.

Christopher Harris – Wells Fargo

Okay, yeah, it’s helpful.

David Michael Kirchheimer

And Chris, do you want to jump back? The fact that the perspective returns for some of these strategies as well or obviously it has an impact on what you can charge for them, that obviously won’t surprise you.

Christopher Harris – Wells Fargo

Okay. I think you guys addressed some of this in your prepared remarks, but as we think about the growth of those strategies, do you guys feel like you’ve got the employee footprint at this point to really capitalize on incremental AUM that starts flowing through there or might we need to see a little bit more on the infrastructure build out side of things as those strategies grow from here?

John B. Frank

I’ll let David chime in, but I would say we are adding – the great thing about all of our step up strategies is with the exception of our emerging market strategy, where we did hire a new team, a great team, I think. Mostly, we are doing this with folks we’ve already had and we’re redeploying them. And that’s really very powerful, because these are very skilled people who we know well and they know what’s well, and the investors know them, so that’s very powerful. At the same time, we are hiring new investment professionals to supplement the folks we already have, and my sense is that we had to do a little bit of hiring on the investment side, probably less so on the infrastructure side and the back office side, but of course, the back office side, we’ve been investing in heavily in both people and systems over the last four, five years anyway, but David what’s your take?

David Michael Kirchheimer

Yeah, well, all I could add to that John is, you are right, since 2008, as you know, Chris that we started this big initiative and building out our global platform. And so a lot of that is in place in terms of people and systems. But yes, we are continuing to grow in particular areas there. Look, I mean, some of the way that these new strategies are executed in terms of strategic sub accounts and what not, require us to add another accountant here and another compliance person there. So you should expect the growth in headcount to continue, but over the last year, the 9% headcount growth that we saw was more skewed to the investment site, as John described, than to the non-investment reflecting the previous build out of the non-investment team. And so, but I would caution that you should expect continued growth in headcount as we grow the business.

John B. Frank

We’ve talked about this in a number of calls, but if I can just expand for a second. This business has become more complicated and more difficult over time. The clients’ demands for transparency, for responsiveness, for clarity are greater than they’ve ever been. The regulations that we are subject to are much more intrusive, intensive and difficult to comply with. The nature of the transactions we engage in, the level of tax planning that’s done is more complicated than it’s ever been. Clients are more demanding in terms of the structures that they want to invest through. We had an audit committee yesterday and we were reflecting upon the fact that our valuation team is not nine people.

David Michael Kirchheimer

Seven people.

John B. Frank

Seven people whereas five years ago or actually seven years ago was zero people. So it’s a more complicated business, it requires more infrastructure, more overhead. The good news is there are real benefits to scale and there are real barriers to entry.

Christopher Harris – Wells Fargo

Okay, guys. Just a final question from me on the returns this quarter. You had mentioned 4% in your closed-end funds, equity like returns. We saw credit indices really take a bath in the second quarter. I mean obviously interest rates had an impact there. Wondering if higher interest rates had any kind of impact on your portfolio returns in the quarter and if they didn't, why is that?

John B. Frank

Well, one thing, I don’t think the higher interest rates really took effect in most of that period. But higher interest rates over time, we think would be good for our business in a lot of different ways. Obviously, we own a lot of debt securities that are floating and the rates would go up. The perspective yield going up would make the classes – our investment classes more appealing to investors and it would probably be an indication of the strength in the economy, which would be good for our holdings well good.

David Michael Kirchheimer

I would also just put a finer point on the 4% that is for the closed-end funds as John described it and therefore, it wouldn’t reflect the open-end funds including high yield bonds. Yeah, I think, it seems the most profound impact because of the rate rise in the latter part of the second quarter.

John B. Frank

Well, also Chris, today, I think roughly 50% of our holdings across our closed-end funds are equities. So obviously, a lot of that increase, it was equity like because they were equities because of the equity type being that you alluded to.

Christopher Harris – Wells Fargo

Okay, that will make sense. Thanks guys.

John B. Frank

Thanks for the question.

Operator

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

John B. Frank

Hey Marc.

Marc Irizarry – Goldman, Sachs & Co.

Great, thanks. Hey, how are you? On Fund VIII, if you can just give us a little perspective there in terms of maybe the investments that you have in that fund. Obviously, the IRRs on that fund are strong and there is I guess a decent portion on return drawn capital and pref in there that you have to burn through. Are you sort of in the process of liquidating some of the holdings there and maybe just a little color on Fund VIII if you could?

John B. Frank

So Fund VIII is through its investment period, so obviously, we are beginning to think about liquidation. Taylor Morrison, which did an IPO, is one of the holdings in Fund VIII. You know Marc, in our earnings calls, we have always resisted talking in great detail about our portfolio holdings. So I am not sure how much more color I can give you other than to say that we are always focused on trying to get the sweet spot of maximizing the return or optimizing the return for our LPs and at the same time, not holding on so long but we miss some opportunity. The other thing, I would say is our distressed group in particular is really terrifically disciplined about the velocity with which they both invest capital and liquidate capitals. So they’re very focused on that, but I don’t have anything more insightful to say. David has been spending the time while I’ve been talking thinking, so he may have something more insightful to say.

David Michael Kirchheimer

I’m sorry to disappoint. All I would do is just remind you Marc, as I’m sure you’ve noted or will note in the front table that that fund is exciting as it is and will be undoubtedly, so much ways to go to payoff all of its drawn capital in the preferred return.

Marc Irizarry – Goldman, Sachs & Co.

Right. Maybe I can just ask the question a different way. Do you have a sort of sense of the equity component? You mentioned I think Fund VIIb that you have, I think about 43% in equity positions? Is it less than that in Fund VIII, I take it?

John B. Frank

That actually is a little bit more.

David Michael Kirchheimer

Roughly 50/50 equities versus debt roughly.

Marc Irizarry – Goldman, Sachs & Co.

That's helpful. And then John, can you give your view on – there is a lot of talk about the growth of alternatives in retail investors' portfolios. Can you update us a little bit on your sort of business strategy to tap into that opportunity, if anything has changed in terms of how you’re thinking about distributing your product toward high net worth or retail?

John B. Frank

Sure. Well, thanks Marc. Just to put everybody on the same page, I’m not an expert on our peers, but my sense is that we started out maybe in a position of little bit advanced from where some others are. Today, roughly 10% maybe a little more of our assets are generally broadly defined either from high network sources or more retail sources.

As I know you know we sub-advise two mutual funds for Vanguard, as well as some mutual funds for others. And I’d said on prior calls, we’ve reasonably hired a gentleman John Sweeney, who is in the New York to head up distribution for us. We are very focused on continuing to build our distribution channels. We would like to find ways to or as many of our products are appropriate, are available to through various distribution channels, so that we can access investors beyond the roughly 1800 or so investors that we already have. Our strategy is still in development. What I can tell you is it see, it’s a long term process. We’re not trained; we aren’t interested in just selling a particular fund. We are not trying to do a one short placement of a closed-end fund or whatever. What we’re really focused on is building a sustained distribution network with strong partners, such that we can regularly access these distribution channels. So that’s our goal, we’re still in the process of developing both the overall strategy and the implementations steps.

But, I think we’re well on our way. One part of that, that I will mention is, we have developed a series of SICAVs, which are European’s legal structure which permits us now to sell almost all of our open-end products to investors throughout the world outside the United States, both directly and through various distribution channels like private banks et cetera. So that, that is an innovation that we’ve actually already implemented in or starting to rule out. But, this is a long-term strategy that we’re very focused on.

Marc Irizarry – Goldman, Sachs & Co.

Okay great.

John B. Frank

But nothing specific to report today.

Marc Irizarry – Goldman, Sachs & Co.

Good, and just one more on the strategic credit strategy? Can you give a sense of what we should expect sort of the pace of capital deployment to look like there, maybe the what types of the investments – you could be little more specific in terms of how that fits in between how your bond and distressed that maybe the nature or the geography of the investment that you’re planning to make there?

John B. Frank

So strategic credit has got a very broad mandate. We recently promoted one of our distressed debt management [rackers], it – really to be the portfolio manager of the strategy, and he and his folks working with the distressed debt guys have done a – he has done a great job, his results have been very strong thus far, and he acts as a broad range of investments and is able to both in the United States and abroad through initial issuances of lower rated securities that are higher yielding that he finds appealing given the risk return characteristics.

He can do loan initiations of various kinds if he want to, he can buy in the secondary market things that are – credits that were stressed, so he’s got a broad mandate, he has been putting money to work at a good rate – at a good cliff, and we think that, that strategy can be bigger over time, and given its broad mandate and it’s ability to go anywhere should have a reasonable amount of opportunity for the foreseeable future.

Marc Irizarry – Goldman, Sachs & Co.

Okay, great. Thanks.

John B. Frank

Thanks, Marc

David Michael Kirchheimer

Thanks, Marc.

Operator

And our next question is from Ken Worthington from JPMC.

Ken Worthington – JPMorgan

Hi, good afternoon. Thanks for taking my question. On the piece of investment picked up this quarter, it looks like really Europe in distressed what were the bigger areas of deployment this quarter. And it seems around the recent investment that might persist to be worth calling out particularly in Europe, where there’s been such great expectations for such a long time?

David Michael Kirchheimer

Hi, Ken. Well, so our folks have been active in real estate. They have been active in both residential and I am talking both the United States and Europe; active in real estate, active in purchasing, loan portfolios, both of commercial real estate loans and residential real estate loans. We’ve made no secret of the fact that shipping has been a big area focused for us. So those are some of the areas where the investments have been deployed.

John B. Frank

I think one other theme is that even though we haven’t seen the long anticipated big sell off by European banks that we certainly see them restricted in terms of providing capital and so I think across the industries that John described there is a theme of us and others filling that void. And providing capital through what we have long done in terms of platform investments and so student housing is an example of that. So we don’t – but we are certainly prepared for an increase in distress type of selling, we don’t require that in order to keep busy in terms of on the deployment front.

Ken Worthington – JPMorgan

Okay, thanks. And then on the competitive landscape, it seems like alternative and unconstrained credit seems to be of much greater interest to the traditional asset managers relative to where it has been in the past. To what extent are you bumping into new investors that maybe if you can even tell and maybe how does their behavior in these better times kind of act as a leading indicator on how they are going to act when the markets become legitimately more distressed?

David Michael Kirchheimer

I don’t think I’ve got any particular insights into, I mean one thing you do see in some of the commentaries has been about is, you do have, I don’t know who the participants in the marketplace are and I’m not speaking ill of anyone in particular. But to the degree, the people, to the degree these financing markets are robust and people are high yield managers for instance, by somewhere between 20% and 25% of the issues that are offered in the marketplace. Somebody is buying the three quarters of the issues that we are not buying and probably some of them are making a misjudgment and that will create an opportunity hopefully for us someday. So I’m not sure what all I can say.

Ken Worthington – JPMorgan

Okay, good enough. Thank you very much.

David Michael Kirchheimer

Thanks Ken.

Operator

Thank you. Our next question is from Robert Lee from KBW.

Robert Andrew Lee – Keefe, Bruyette & Woods, Inc.

Hi, good morning everyone.

David Michael Kirchheimer

Hi Rob.

Robert Andrew Lee – Keefe, Bruyette & Woods, Inc.

Hey. Just a lot of my questions have been asked, but I was just curious, going back to kind of fundraising and I mean understanding that you guys are very focused on sizing the fund to the opportunity, I am just kind of curious about, and the caveat that I know it is more art than science, but how does – if I think of the European Dislocation Fund you are raising, I mean a fair number of peers have talked about doing something kind of similar, direct lending in Europe and elsewhere. And to what degree do you have to take that into account when you are thinking about sizing a fund such as that?

And maybe also as part of that, given just the size of the market there and the maybe potential dislocation, it almost seemed like the size of the fund you were targeting was fairly modest. Is that just with the idea we will be conservative out of the gate and we'll see how it goes or just your thought process when you kind of set those initial targets, which sometimes can come across as seeming a little more modest in the potential.

David Michael Kirchheimer

So probably one wouldn’t accuse us typically of shooting for the stars. We tend to be kind of conservative and understated. Rob, first of all, to answer the beginning of your question, as we think about how much capital we can deploy, as we think about what’s an appropriate amount of capital to raise, of course, you’re right, it’s at best an art, it’s certainly not a science and sometimes, it’s as much a guess as an art.

We aren’t influenced by our perception of what our peers are doing directly. In other words, if we know somebody is trying to raise a fund of x size, we don’t tend to take that into account particularly. On the other hand, to the degree, there are other participants in the marketplace, doing whatever it is we’re trying to do that naturally influences our sense of what the opportunity is and what we could usefully or appropriately deploy.

So I would say our assessment of our peer’s behavior is more indirect than direct. In terms of the opportunity in Europe more specifically in the fact that which sort of cited €250 for our European Dislocation Fund, you are right, I mean that’s not a very big fund relative to what potentially the opportunity could be, obviously, if the banks truly have retrenched, I mean the amount of capital they’re not supplying towards that.

On the other hand, we think we’re uniquely well situated, because as I say, as best we know, we got the biggest team on the ground in the private equity space in Europe. and what we’re focused on is, making use of the team’s existing contacts, the team’s existing knowledge, the team’s existing expertise and deal flow in order to put this money to work. So we’re very confident – well, we’re as confident as we ever are that we can put this money to work at very attractive rates through our existing team. now, if we were to go out and raise a whole of money all of the sudden, you need more team and have to develop new deal flow et cetera. Sp we would rather start small and do a good job, assess the opportunity and see as I alluded to earlier whether it’s a one shot opportunity or something we can do for a long time rather than to raise too much capital and disappoint.

Robert Andrew Lee – Keefe, Bruyette & Woods, Inc.

Thanks. And one last question. Just kind of curious – I mean in terms of your own capital usage and on a strategic basis, clearly, you have grown organically over the years, although you have talked I guess on a couple of calls here or there are about looking at different opportunities that are out there. Just from your own take on things, given the challenges you have cited about increased regulatory scrutiny, increased needs for transparency, increased complexity, all those things usually point towards more acquisition opportunities from competitors who don't want to deal with those things or join forces or whatnot.

Is it your – just curious, your take that despite all the challenges for a lot of credit-oriented managers, capital raising has actually been okay and that kind of keeps people from thinking that maybe I need to partner up with someone and do you think that plays a role and do you think that, gee, maybe if things get tougher, we will have more opportunities to find decent assets or maybe even some decent managers who kind of throw their hands up?

John B. Frank

I guess I would say I think one of the – we are opportunistic investors and the way we manage our portfolios and the funds that our clients entrusted us with and we are opportunistic in terms of the way we run the business and one of the things that, that I think is a great strength is the fact that we do have a very strong balance sheet, we have a lot of cash and if an attractive opportunity arose, we would be in a position to be opportunistic. So as I have always said, we never say never about anything.

David Michael Kirchheimer

And the subtlety too in this whole phenomenon, Rob, of the greater regulatory scrutiny and all the other demands in our business is not just what you just alluded to in your question, but is also from clients where for many years now, we’ve been seeing this trend towards the consolidation by them, the large, I’m talking about the institutional investors here, with their outside managers, A, it reduces their costs and whatnot of monitoring, but they take obviously quite seriously the demands on this business and know that you need to have a very strong platform and infrastructure and all the back office expertise to do everything right on the non-investment side as well, and so as you know, a very large percentage of our AUM is thanks to cross-selling, and then that, of course, benefits these newer strategies, because we’ve got this great LP base. So it all sort of it’s a very nice sort of virtuous cycle there.

John B. Frank

At the end of the day this business is all about investment performance and without good investment performance, you aren’t anywhere, but I think what has changed is I think good investment performance used to be probably a sufficient. Now it’s a necessary, but it may not be a sufficient. You’ve also got to have all the robust systems and infrastructure around them.

Robert Andrew Lee – Keefe, Bruyette & Woods, Inc.

Great. I appreciate the added color. Thanks for taking my questions.

John B. Frank

Thank you, Rob.

David Michael Kirchheimer

Thanks. Rob

Operator

Thank you. And I am showing no further questions at this time.

Andrea D. Williams

Thank you again for joining us for our second quarter 2013 conference call. A reply of this conference call will be available for 30 days on Oaktree’s website in the Unitholder section or by dialing 800-839-8796 in the U.S., or 1-402-998-0578 outside of the U.S. That replay will start beginning approximately one hour after this broadcast. See you next quarter.

Operator

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

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