Oaktree Capital Group's (OAK) Jay Wintrob Q2 2016 Results - Earnings Call Transcript

| About: Oaktree Capital (OAK)

Oaktree Capital Group LLC (NYSE:OAK)

Q2 2016 Earnings Conference Call

July 28, 2016 11:00 AM ET

Executives

Andrea Williams - Managing Director, Head of Corporate Communications and IR

Jay Wintrob - Chief Executive Officer & Director

Bruce Karsh - Co-Chairman and Chief Investment Officer

David Kirchheimer - Chief Financial Officer, Director & Principal

Howard Marks - Co-Chairman

Analysts

Michael Carrier - Bank of America Merrill Lynch

Michael Cyprys - Morgan Stanley

Ann Dai - KBW

Chris Harris - Wells Fargo

Operator

Welcome, and thank you for joining the Oaktree Capital Group Second Quarter 2016 Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode that will be prompted for a question-and-answer session following the prepared remarks.

Now, I would like to introduce Andrea Williams, Oaktree's Head of Corporate Communications and Investor Relations, who will host today's conference call. Ms. Williams, you may begin.

Andrea Williams

Thank you, Laura. Welcome to all of you, who have joined us for today's call to discuss Oaktree's second quarter 2016 financial results. Our earnings release issued this morning detailing these results may be accessed through the Unitholder section of our website.

Our speakers today are Oaktree's Chief Executive Officer, Jay Wintrob, Co-Chairman and Chief Investment Officer Bruce Karsh; and Chief Financial Officer, David Kirchheimer. Howard Marks, our Co-Chairman has also joined us and will participate in the question-and-answer segment of the call following the 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 the statements. Please refer to our 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. Investors and others should note that Oaktree uses the Unitholders section of its corporate website to announce material information. Accordingly, Oaktree encourages investors, the media and others to review the information that it shares on its corporate website at ir.oaktreecapital.com.

During our call today, we will be making reference to certain non-GAAP financial measures. 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, also at ir@oaktreecapital.com.

Today, we announced a quarterly distribution of $0.58 per Class A unit payable on August12 to holders of record as of the close of business on August 8. Finally, we plan to issue our second quarter 10-Q at the end of next week.

With that, I will now turn the call over to Jay.

Jay Wintrob

Thank you, Andrea, and good morning to everyone. Shocking [ph] concerns over Brexit and a lackluster global economy, the stock in fixed income markets stayed surprisingly strong rallies in the second quarter. U.S. high yield bonds ranked as one of the top performing asset categories, returning 5.9%, the best quarterly performance in 4.5 years. Equities didn’t keep pace with fixed income in this environment, although the S&P 500 still managed to post a respectable 2.5% return on its way to a new record high.

Despite the end of the quarter volatility due to Brexit, Oaktree posted solid second quarter financial results, highlighted by year-over-year growth in all earnings metrics: fee related earning, adjusted net income and distributable earnings. We deployed $2.4 billion of capital in the quarter, the most in the last five quarters.

Gross capital raised was $3 billion for the second quarter and $10 billion for the last 12 months. In terms of closed-end fund raising, in the second quarter we closed on additional capital commitments for Opps Xa and Xb, bringing their total commitments to $11.2 billion. We raised additional capital for real estate opportunities Fund VII bringing its total committed capital to $2.4 billion.

European principal Fund IV had its first close at €840 million and European Capital Solutions had an interim close that brought its total commitments to approximately €300 million. Over the balance of this year, we expect additional closes for Opps Xb, real estate opportunities Fund VII, European principal Fund IV and European Capital Solutions. We also anticipate first closes for infrastructure Fund I, real estate debt Fund II and one or more separate accounts for our new real estate value added strategy.

Finally, later this year, we will begin raise capital for comingled emerging markets debt total return fund, a strategy where we have been amassing a solid track record over the last year and a half. We also remain quite active fundraising for open-end funds, even though the net flow environment has been challenging in strategies, such as convertibles and senior notes, given the market headwinds for these asset classes.

Moving on to investment performance, our closed end funds had a blended gross return in the second quarter of 1.4%, bringing the year-to-date return to 3.4%. Distressed debt had a 2% gross return in the quarter, and a 4% return year-to-date, reflecting mixed performance in private assets, and strength in some public equities and energies related debt securities. Our strongest quarterly gross returns were in real estate debt at 14%, Global Principal at 6%, European private debt at 5% and emerging markets opportunities and mezzanine finance both at 3%.

Given the impact of Brexit on both valuations and currencies at June 30, it’s not surprising that our European principal funds had a negative 3% return in the quarter. Low interest rates, ample liquidity and a search for yield continue to sustain the credit markets and boo the equity markets, creating a somewhat challenging investment environment for our countercyclical investment strategies. That being said, the overall deployment environment has been decent, and we are finding opportunities in both developed and emerging markets and across private and publicly traded asset classes, which we will elaborate in just a few minutes.

At Oaktree, we consider these opportunities without attempting to time markets, instead focusing our efforts on volume up analysis. The past year validated this approach, the short term market durations, triggered by China growth concerns, energy and commodity prices, Brexit, and easy monetary policies of Central Banks including negative interest rates confounded forecasters. While it’s impossible to know what the future will bring in any of these regards, it appears we are back to an environment that should reward credit selection and risk management rather than aggressive behavior.

And with that, I’ll hand it over to Bruce to cover the investment landscape.

Bruce Karsh

Thanks Jay and hello everyone. The second quarter began with the continuation of the first quarter market rally that was driven by commodity prices stabilizing and subsiding investor concern over global slowdown. As anxiety about the global economy waned, investors again began to focus on the search per yield. Biggest news of the second quarter came in its final week. The surprising Brexit vote led initially to a sharp reprising of risk across financial markets. British Pound fell to a 31 year low against the U.S. dollar, and European equity markets stumbled.

However the reaction of the credit markets was relatively muted. In the European leverage loan market, spreads widened in the immediate aftermath of the vote but then quickly stabilized as buyers stepped in. The falls continue to track historical lows in Europe and remain a rare occurrence, not at least because QE is supporting credit fundamentals and providing cheap funding to the regional banks.

At quarter end, where we did take some mark-to-market losses related to our UK exposure, which was about 8% worldwide, we believe our investments in the UK will perform well over the medium to long term, given the Sovereign State’s poor control of its monetary and fiscal policy. While the U.S. credit market showed some weakness immediately after the Brexit vote, it rebounded rapidly in the last few days of the quarter as treasury yields declined. The rally was particularly pronounced in Triple C rated and commodity related bonds including those in the energy, metals and mining industries.

Brexit did not generate the buying opportunity we thought it might from our distress related strategies, but it’s relatively early in this less positive part of the credit cycle. We still see European non-performing loan pools as an important part of the opportunities at and we continue to be active purchasers as banks look to rebuild our balance sheets.

The recovery from February’s lows had tampered buying opportunities in the public debt markets. While we are pleased to see multiple continental European banks sale processes ongoing. In our view, given the strong recovery, it’s only natural that the pace of capital deployment may slow as the market goes earlier. We believe patience will generally be rewarded in this environment, and then our approach is leading distressed debt bonds between an A and B structure as the right one.

While we are closing in on 60% committed in Opps Xa and of several deals in the works that could take us above that number, we believe the current environment suggests we may not began investing in Opps Xb until 2017. On the realization front, we have recently been quite productive, particularly with respect to real estate and principal investing. I’d like to share details on one realization.

Earlier this month in the phase of post-Brexit market volatility, our Global Principal Group achieved a very successful initial public offering for AdvancePierre Foods Holdings, leading U.S. producer and distributor of ready-to-eat sandwiches, entrees and snacks. Consistent with our mandate, the legacy company Pierre Foods was a classic distressful controlled situation. Our roughly $100 million investment was initiated in 2008 when we bought the bank debt in bonds and contemplation of the company going into bankruptcy and restructuring, which of course occurred.

Fast forward through several acquisitions and extensive management and operational improvements, all directed by our team, and by the time of its IPO the company had nearly tripled revenues and grown EBITDA eight fold. At its IPO price AdvancePierre had an enterprise value of over $2.7 billion compared to our effective purchase price of around $170 million in 2008.

Including multiple dividends over the period of our ownership, our Global Principal fund has already received in cash over five times its initial investment. More impressively, the residual value of our holdings stood at over $1.1 billion at the end of its first trading day, implying an IRR of 92% and nearly 17 times our invested capital. We are excited about the further potential for this investment due to our still owning a majority of public equity following the IPO.

AdvancePierre is the hallmark to some of our most successful investments. First, the ability to identify and capitalize on distress for control opportunities at attracted entry multiples and create highly asymmetric risk return potential. Second, the ability to add value of the portfolio company to enhance on a financial and operational expertise, while attracting a best in class management team throughout deep industry networks.

And third, the ability to access the capital markets by opportunistic recapping debt for low cost acquisition financing, refinancing and distributions. While the profitability of this particular investment makes it extraordinary in our experience, the process approached we used for the Global Principal group is a typical insured as an excellent example of our distress oriented investment teams due to work.

I look forward to answering your questions, but now, I’m delighted to turn the call over to David.

David Kirchheimer

Thanks, Bruce, and hello, everyone. The second quarter produced solid income and cash flow with both adjusted net income and distributable earnings posting strong gains on a year-over-year basis.

Adjusted net income grows to $143 million, up 67% over the year ago quarter due to growth in all three income categories, fee-related earnings, incentive income and investment income. ANI per Class A unit increased to $0.79 in this year’s second quarter from $0.44 last year.

Distributable earnings grows to 15% to $128 million. The second quarter’s distribution followed suite rising 16% to $0.58 per Class A unit. On a year-over-year basis, fee-related earnings grew $12 million or 22% to $64.6 million in the second quarter. For the first half of FRE rose $24 million or 24% to a $127 million. A big portion of our record $23 billion in uncalled capital commitments is not yet generating management fee.

That sub set is commonly referred to us shadow AUM. As of June 30, shadow AUM stood at about $13 billion with a blended annual fee raise of straightly over 1.3%. AUM already generating management fees stood at $80 billion with a blended fee rate of just under 1%. Future closes for funds in marketing will of course add more capital commitments. Given those and other relevant items, I want to share my current expectation for the near term trajectory of management fees.

To start, I want to highlight that of the $13 billion in shadow AUM, Opps Xb represents nearly $8 million. Our best guess is that we will begin earning management fees from Opps Xb based on its total committed capital as opposed to the amount that has been drawn in late 2017. In the current environment we expect the remaining $5 billion of shadow AUM as well as some of the upcoming capital raises to transfer into fee-generating AUM only gradually.

Thus for the third quarter, I expect management fees to remain roughly flat compared to the second quarter. Looking further out and subject to all the usual caveats about the future, I wouldn’t be surprised the quarterly management fees remained roughly around current levels until we begin earning full management fees from Opps Xb.

At Oaktree investment income proceeds are a reliable generator of cash, thanks to distributions from among our large number of closed-end funds as well as our 20% equity stake in DoubleLine Capital. Indeed the second quarter was the 18th consecutive quarters for which the trailing 12 month investment income proceeds topped $100 million.

Speaking of DoubleLine, growth continues at that asset manager and thus it’s the FRE type income and cash flow. DoubleLine’s AUM grew to $102 billion as of June 30, up 34% from a year earlier and almost double the level of just two years ago. Growth also occurred in our accrued incentives despite the second quarter solid incentive income and headwinds from Brexit affected evaluations.

The quarter’s gross incentive income of $88 million rose from 5 funds in four strategies. New gross incentives created for almost twice as large at $171 million. Thus our net accrued incentives balance grew 3% to $771 million as of June 30. And finally with respect to the current third quarter, currently known incentive income, net compensation expense and fund related investment income proceeds are estimated to be about $30 million and $3 million respectively.

With that, we’re delighted to take your questions. So, Laura, please open up the lines.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from Michael Carrier of Bank of America Merrill Lynch.

Michael Carrier

Thanks a lot guys. Hi, David, maybe just a few questions on the financial. So one is - it looks like on a core compensation expenses things were pretty low relative to where they - you have been running. And then also the incentive comp ratio is lower. I know you guys mentioned mix on products but maybe just shed a little light on that. And the last one is on tax rate that also came in and just given the lower tax rate for the year just what’s driving that?

David Kirchheimer

Sure, thanks Mike. Take them in order, so for a compensation - you’re right, year-over-year headcount grew just by five or six people and so that’s why you see the main compensation line leveling up. There’s always some noise as explained in the earnings release. For example, we had a favorable swing in this kind of equity expense something like $2.5 million. So you should be looking at an approximate run rate, but you’re right about that amount, that line item roughly leveling up. Moving on to incentive income compensation expense, again, you are actually right about the mix. We had a fund –opportunity fund six was a significant contributor to the incentive income in the quarter and that is an over fund and therefore has a lower compensation rate. So this quarters approximate compensation percentage is not representative, instead as always I would guide you to looking at the balance of net accrued incentives where as you can see it’s running around 50% as that blended compensation rate. Third, on the tax rate as we go through the year, the full year rate becomes more representative each year as we saw in the first quarter given how tax rates are determined, which in the interest of time I will spare you - happy to - the type of growth line that - it came very significantly from the full year rate and so as we get deep into the year, we have more represented full year rate. And so this year we get a true amount effect, so as always Mike, I would guide you and others to look at the full year rates for ANI and FRE and not extrapolate from that current quarter’s rate where it can bounce around as we have this two ups and downs as we go through the year.

Michael Carrier

Okay. Thanks a lot.

David Kirchheimer

Thank you.

Operator

The next question comes from Alex Blostein of Goldman Sachs. Mr. Blostein, your line is open. Is that possibly you have your phone on mute.

Andrea Williams

You can take the next question, Laura.

Operator

The next question comes from Michael Cyprys with Morgan Stanley.

Michael Cyprys

Hi, good morning, thanks for taking the question. So I just wanted to follow up on the deployment certainly strong quarter $2.4 billion I think it was unified I just curious if you could push out a bit more in terms of where that’s being put to work geographically, sectors, opportunities and then if you could also touch upon some of the areas that you are most excited about as you look at over the next 12 months in terms of funding capital to work and maybe overlay that with what’s happening from a geopolitical perspective as well that makes you less excited about Europe in some respects.

David Kirchheimer

Okay. I’ll take it correct with that Michael. The areas that we’re deploying are largely energy related opportunities we’ve been seeing, power and then I mentioned the European NPL opportunity and while we continue to see those real estate also you’re seeing some interesting opportunities and also on the emerging market debt side there are some interesting things. Across all our strategies, there is some decent levels of deployment. It’s not an Oaktree type market, life with opportunities everywhere but we are seeing selected pockets and sectors that look interesting. As to Europe, we have invested in Europe and we will keep doing so. We understand the risks that Brexit has raised to in terms of the EU but we are going to plow ahead. We haven’t seen immediate rate opportunities in the aftermath of Brexit as I mentioned earlier, but it’s early days and I think we will start to see some that will be more interesting, and we won’t hesitate to continue to commit capital to the UK and/or Europe.

Michael Cyprys

Okay great. If I could just speak a little bit on infrastructure, I know you are wasting a fund there, if you could just remind us the returns that you are targeting, I think it’s maybe 1.5 in ‘20 but just curious how do you think about getting huge returns that can past those and maybe you can talk a little bit about the investment opportunities within infrastructure and how that is relative to the market there.

Jay Wintrob

Yeah I will make a couple of comments on that Michael. First of all, in terms of the opportunity that we are believers in the infrastructure investing opportunities that really for the long term, and in fact the deal there is good. At this point, as you know our main focus is the fundraising of Oaktree Infrastructure Fund I. The final Highstar Fund IV is basically fully committed. Our infrastructure’s Fund I, fundraisers are taking a little bit longer than we initially expected. In retrospect, we probably came to market a little bit early. We found that respective clients have wanted to see more performance emerge from the $2 billion Highstar Fund IV, their last fund prior to joining Oaktree. Unfortunately, that performance has steadily improved over the last year as we move to the [indiscernible] and we believe we will have our first infrastructure Fund I closed this quarter or next. And I think the mandate for the infrastructure fund group is as it was when they joined Oaktree, it’s they are looking across several different sectors and geographies also.

Howard Marks

The other thing I’d like to add, this is Howard, is that our infrastructure is not purchase or commoditized playing the assets and then levering them up, but rather it’s entrepreneurial and creative, and a good example of that is that we have a contract for the expansion of the Puerto Rico airport, which is modernization, which is completed, and it looks good, Highstar fund, but now we have a contract more recently to do the same thing in the Boston Airport. If you fly around this country, Mike just as I do you see that our airports are thoroughly unique, and we are unique in having the license as a private organizations to do these things. And so that’s just one example of the areas in which we think we can do this and it is probably more akin to private equity in many ways than it is to the traditional client infrastructure which is something we had no interest of doing.

Bruce Karsh

To expand on that just a little bit further, our infrastructure group had an excellent quarter in terms of deployment, investing over, committing over 300 million in the second quarter of this year, and then precisely the kinds of opportunities that Howard described, they were - happened to be in the energy and power sector, but unusual off the beat track kind of opportunities. So we are optimistic that that group will achieve the target of returns.

Howard Marks

And justify their fate.

Bruce Karsh

Correct.

Michael Cyprys

Okay thank you.

Bruce Karsh

Thanks Mike.

Operator

[Operator Instructions] Our next question will come from Ann Dai of KBW.

Ann Dai

Hi good morning. Thanks for taking my question. Just had a question for you around direct lending, so it’s been a bit of a hard topic in the light of banks pulling back under lending activities and a number of your peers have come out with dedicated funds or - are doing more in the space. So it hasn’t really come up too much in the context of your business. I was just wondering if you could give some color and your thoughts around the strategy and whether that’s something you would be interested in doing more of?

Jay Wintrob

Yes thanks Ann for the question. It is something we are doing more of, we believe there is an opportunity there for the reasons that most people do, which is the banks not being as aggressive always involved in the small middle market space. And in fact direct lending adultery is nothing new. Basically the way, they think about us and we are having a separate dedicated direct lending fund, we actually engage in that through a number of our current strategies, certainly strategic credit looking well down in the capital structure, and also higher up in our middle market sponsored driven mezzanine strategy will be the two biggest. And then in Europe we have our initial European dislocation fund, which was a middle market direct lending fund and as I mentioned during my comments we were in the process of releasing European capital solutions. Although the name is different, it’s really our second generation fund dedicated to direct lending in Europe. And so we will continue to engage there, we will continue to look at whether there are other more focused ways to engaging direct lending. But in this scenario, we are interested in and engaged in, but historically and currently we do it through our existing strategies as mentioned.

Bruce Karsh

Jay mentioned strategic credit, that’s a $3 billion pool of capital that increasingly is focused and is emphasizing direct lending. It’s not at historic rate from inception but given the attractiveness as you and Jay pointed out, we are seeing more and more emphasis and focus out of strategic credit, and more interest on the part of clients as well.

Ann Dai

Great, I appreciate the color. Is there anyways across strategies that what you are doing in direct lending?

Jay Steven Wintrob

I guess the answer is probably if we had enough time and wanted to walk through it. That’s not something, I don’t think that’s something we are prepared to do here, there will be a lot of judgment calls about where direct lending ends something that you would consider other than direct lending begins. But it is a significant activity at Oaktree, not an immaterial activity.

Ann Dai

Okay, I understand. Thank you.

Jay Steven Wintrob

Thank you.

Operator

And next we have a question from Chris Harris of Wells Fargo.

Chris Harris

Thanks guys. We have got, as you guys know negative interest rates across much of the global rates in the U.S. seem to be or continuing to get lower and lower, I know we are hoping for some kind of dislocation in the markets. But if a situation stays like it is, how big of a headwind are these low rates as it relates to your future returns, and what we are just thinking about is if the rates stay down where they are, is it that much harder for your guys to hit your total rates?

David Kirchheimer

Well I think that clearly when the Central Banks take the risk for your rate to zero, all other rates kind of emanate from that in the capital markets line kind of phenomenon. So it’s all a function of that. Now we have adjusted downward our client’s expectations and our own expectations as to what our strategies can provide. As I recall Bruce, when we started off at 1988, we thought the stress could do 25 to 30, and then we’ve had occasions since then, when we said 30 or more. And we are not saying 30 anymore or 25 or 20, but we are hoping for example to get 15, and we are targeting 15 in the investment decisions that we make, and we still believe we can make 15 and we may fall a little short of that. But that’s a goal that’s what we are underwriting to. We still think, we will clear the hurdles and it would be perfectly logical to go to the clients and say look 10 years ago, five year yields a six, today it yields one, the hurdle should be lower but we don’t want to have that conversation, the client still need the levels of return in excess of our hurdles and that’s what they come to us for and we still think we can get it, but of course as the capital market line comes down, achievement of any given return gets harder and that’s the world we live in but you know I don’t know want to go in there saying well how about if we start getting incentives at five on this spread and so forth and I don’t think that’s a necessary conversation and we just haven’t had a desire or felt the need to have that conversation.

Chris Harris

A follow up question of that, thank you that was very helpful, is the situation causing you guys to consider look at investment opportunities that you wouldn’t have in prior cycles?

Jay Wintrob

Well I mean by definition will buy a 15 and in prior cycles we wouldn’t buy a 20. So you know back 15 or 18 years ago I wrote a memo called that is what it is, in which I said the investment environment is what it is, if we give in, we can’t change it and we can’t order up the new one, we have to work within it and this investment environment offers us lower prospects than ever but of course makes our products more important than ever to our clients and you know I dare say that most people have given up on getting the 7.5% that they require from main streams stalks and high grade box, well what does that leave? I think it leaves us in a pretty good position, plus we have adjusted to the change in the environment over the last I would say roughly six or seven years by continuing to bring out an increase or suite of products designed to produce returns around 10 which you know 10-15 years ago, 10 looked like a modest accomplishment, now it looks like nirvana and you know we have a number of products ranging from strategic credits which Bruce mentioned and direct lending to European Credit solutions to [indiscernible] to enhance income to real estate debt, all of which we think will produce high single digits or 10 or so if things break right and you know as I said before now people say I don’t 9% wouldn’t that thing right. So nobody stood up cheered for 9% 30 years ago but that’s the way things are today. It is what it is.

David Kirchheimer

Let me just expand a little further on this, our LPs don’t fully understand that Oaktree is not about to lower our quality standards or credit standards and incrementally we take on a whole lot more risks in order to achieve returns that are very difficult in this environment and as Howard says it is what it is, our clients understand how we feel about it and most important to them that we control managed risks as opposed to go way out of on the risk in order to try to achieve returns that are very difficult.

Jay Steven Wintrob

Yeah and so we adjust our activities, remember that Fund 7B was $11 billion and Fund 8 was $5.5 billion and Fund 10 is 3 and change, so we raised our standards and to have high standards in a low return world you have to be modest about your expected returns and modest about the amounts you can manage. The one thing you can’t do is say well, the capital market line is lower but I want the same returns I used to get with the same risk on the same amount of money.

Chris Harris

Understood, thank you very much.

Jay Wintrob

Thanks, Chris.

Operator

And next we have a question from Alex Blostein of Goldman Sachs.

Alex Blostein

Hi guys good morning, so wanted to follow up on your, on a discussion with regards to LP allocations generally for the alternative asset class, there is obviously been a lot of pressure and discussion around redemptions from hedge funds and I am just curious when you sit down in front of your LPs how are they thinking about their relative allocation to hedge funds strategies relative to other forms of alternatives and I guess what is [indiscernible] in that backdrop.

Jay Wintrob

Well you know that very little of our capital is in the hedge fund form and we certainly are not considered you know primarily as a hedge fund manager and so I think that people have grown appropriately skeptical about well, I mean there was never anything about the term hedge fund that produced instant magic, you know hedge funds just a form of delivery and maybe a form of composition but all investment accomplishments still go back to superior judgment, you may not know Alex that I wrote a memo on hedge funds in 04 and you know what I said then is that when I first learned about hedge funds is probably in the 70s there were 10 hedge funds run by 10 geniuses and in 04 I said the day there are 5000 hedge funds and I don’t think they are run by 5000 geniuses and today we are up probably to 10000 and you know the performance of the greatest hedge funds run by geniuses and their closing created a huge umbrella over this industry which permitted the other 9990 hedge fund managers to start hedge fund and command hedge fund fees. But the I would - I dare say that the average hedge fund performance since I wrote that memo has not warranted the average hedge fund composition, I think it is fair to say that and by the way I said in a memo that I thought that the average hedge fund would make about 5% or 6% in the coming years and then eventually people would give up on paying 2 and 20 to get 5 or 6 and in the report on the 10th anniversary of that memo saying that the average return had been 5.2 but at that time assets were still screaming upwards and now people have caught up to the reality. I think and so you know at the margin the appetite for hedge funds has been correcting. That has no impact on us and in fact if you can’t do in stocks and bonds and you think less in hedge funds I think that bodes well for the kinds of things that we and our peers do.

Alex Blostein

Right I was kind of ask that’s where I was going, I was just curious whether you are seeing any shift from hedge funds in the form of alternatives into less liquid former alternative such as you know locked up closed end strategies.

Jay Wintrob

No, I think it is happening in a small at the margin, I don’t think it is, it is not a ground swell yet.

David Kirchheimer

And I just would add that to directly to respond to your question, you have to say that coinage, we are not experiencing any clients who are more ready to invest in all types of funds or longer terms locked up structures of our type of investment strategies stating the challenges in the hedge fund industry.

Jay Wintrob

And I think that given you know some recent experiences like the obvious decline in risk asset liquidity and the melt down of [indiscernible] and things like that, I think what they show is that you when you engage with risk asset you should do it in a closed end form and you know the fact that we fail along the closed end form when we started our cruises activity 28 years ago, has been one of our greatest advantages because we can do the right thing when the market is greater and the clients who are in for the long run don’t have to worry about other clients withdrawing, and screwing up the cash flow and the managers buying ability. When we raised fund VIIb which was $11 billion, everybody said, we have a lot of faith in Oaktree and we believing to stress that. But when the bargains become available the hedge funds run in scoop a more lot and guess what, when the hedge funds - when the bargains appeared the hedge funds grew having redemptions and they were sellers not buyers, adding to our opportunity and not competing against us. So we are very strong believers in the closed end form and I think that clients - if you want to get high returns in a low return environment you have to take some risk and the risk comes on a menu. And you can take data risk, you can take liquidity risk, you can take manager risk, you can take quality risk, there are many forms of risks to take and I think that clients are becoming - feeling better and better that if they have to risk they will just take it on the liquidity side. Coming out of our way and the crisis services, that’s it they’re never going into another liquid fund. I think that they’re smiling on liquidity at the present time. And the whole business they don’t do it to excess.

Alex Blostein

Right, makes sense. Thanks for the answer I guess.

David Kirchheimer

Thanks, Alex.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Andrea Williams for any closing remark.

Andrea Williams

Thank you, busy earnings day. Thanks everyone for joining us for our second quarter 2016 earnings conference call. A replay of this conference call will be available be available for 30 days on Oaktree's website in the Unitholders section or by dialing 877-344-7529 in the U.S., or 1-412-317-0088 outside of the U.S. That will begin approximately one hour after this broadcast.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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