Seeking Alpha
, IPOpremium (659 clicks)
Value, IPOs, long only
Profile| Send Message|
( followers)  

Based in Los Angeles, California, Oaktree Capital Group (proposed OAK) scheduled a $495 million IPO with a market capitalization of $6.6 billion at a price range mid-point of $44 for Thursday, April 12, 2012. (S-1)

Eight IPOs are scheduled for this week. The full IPO calendar is here.

Manager, Joint Managers: Goldman, Sachs; Morgan Stanley.

SUMMARY
OAK is a leading global investment management firm focused on alternative markets. Since December 31, 2006. OAK more than doubled its Assets Under Management ("AUM"), to $74.9 billion as of December 31, 2011.

However, for the year ended December 2011 Assets Under Management declined 10% to $75 billion from $83 billion. Distributable earnings declined 23% to $489 million from $637 million.

The OAK IPO is a vehicle for OAK institutional and insiders to gain liquidity from the public market.

OAK specializes in distressed debt and its claim to fame in its road show is 'we do very well in bad times and average in good times, relative to our competition.' Their 'bad times' example is circa 2008.

The OAK public vehicle represents a 22% interest in distributable earnings. Based on distributable earnings for 2011 at the price range mid-point the payout rate would be have been 7.4%

COMPLICATED ORGANIZATIONAL STRUCTURE
Insiders have 97% of the votes. In the structure chart there are 13 names entities, six of which are named in the footnotes

OAK has made it clear they will not have an independent board of directors or a corporate governance committee. This approach is similar to other alternative investment managers.

COMMENTS
In general we do not like complicated organizational structures. They are, however, common in the alternative investment management business, see below.

The problem we have is OAK's proud declaration that 'we do very well in bad markets and average in other markets' (quote from the roadshow) because the chances of having a 2008 type meltdown do not seem particularly high. And their 2011 performance versus 2010 was not good, as mentioned above.

SECTOR
Four stocks have traded essentially flat the past month. They are Blackstone (BX), KKR (KKR), Apollo (APO) and Fortress Investment (FIG). See chart.

In terms of assets managed per employee OAK is near the top. The ratios for APO, OAK and BX respectively are $137 million, $115 million and $105 million.

Market capitalization per employee for BX and OAK are respectively $12.2 million and $10.3 million, three to four times higher than the others.

It seems to us that the OAK IPO will relatively flat in the IPO after market, and therefore there's no reason to chase after it.

BUSINESS
OAK is a leading global investment management firm focused on alternative markets. Since December 31, 2006. OAK more than doubled its Assets Under Management, to $74.9 billion as of December 31, 2011.

OAK manages six asset classes: distressed debt, corporate debt, control investing, convertible securities, real estate and listed equities.

CLIENTS
OAK manages assets on behalf of many of the most significant institutional investors in the world, including 73 of the 100 largest U.S. pension plans, 39 states in the United States, over 350 corporations, over 300 university, charitable and other endowments and foundations, and over 150 non-U.S. institutional investors, including six of the top 10 sovereign wealth fund nations.

DUAL STOCK STRUCTURE
OAK insiders will control 97% of the votes in the public vehicle.

CASH DISTRIBUTION POLICY
OAK intends to distribute substantially all of the excess of its share of distributable earnings (which is 22%) , net of income taxes and various other expenses, to Class A unitholders.

ORGANIZATIONAL STRUCTURE
13 named entities in the organizational structure chart plus principals

There are six named entities in the footnotes below, including the following:
Principals

  • Oaktree Capital Group Holdings L.P.
  • Oaktree Capital Group Holdings GP, LLC
  • Oaktree Capital Group Holdings GP, LLC
  • Oaktree Operating Group units (150mm)
  • Oaktree AIF Holdings, Inc.

Quote below is from page 9 of OAK's S-1:

(1) "Holds 100% of the Class B units and 0.04% of the Class A units, which together will represent 97% of the total combined voting power of our outstanding Class A and Class B units upon the consummation of this offering. The Class B units have no economic interest in us. The general partner of Oaktree Capital Group Holdings, L.P. is Oaktree Capital Group Holdings GP, LLC, which is controlled by our principals. Oaktree Capital Group Holdings GP, LLC also acts as our manager and in that capacity has the authority to designate all the members of our board of directors for so long as the Oaktree control condition is satisfied.
(2) "The percent economic interest represents the applicable number of Class A units as a percentage of the Oaktree Operating Group units outstanding after the completion of this offering. Upon completion of this offering, there will be 150,848,263 Oaktree Operating Group units outstanding. Assumes the conversion into Class A units on a one-for-one basis of all outstanding Class C units prior to completion of this offering.
(3) "The percent economic interest in Oaktree Operating Group represents the aggregate number of Oaktree Operating Group units held, directly or indirectly, as a percentage of the total number of Oaktree Operating Group units outstanding after the completion of this offering. Upon completion of this offering, there will be 150,848,263 Oaktree Operating Group units outstanding. Assumes no exercise by the underwriters of their option to purchase additional Class A units.
(4) "Oaktree Capital Group, LLC holds 1,000 shares of non-voting Class A common stock of Oaktree AIF Holdings, Inc., which are entitled to receive 100% of any dividends. Oaktree Capital Group Holdings, L.P. holds 100 shares of voting Class B common stock of Oaktree AIF Holdings, Inc., which do not participate in dividends or otherwise represent an economic interest in Oaktree AIF Holdings, Inc.
(5) "Owned indirectly by Oaktree Holdings, LLC through an entity not reflected on this structure diagram that is treated as a partnership for U.S. federal income tax purposes. Through this entity, each of Oaktree Holdings, Inc. and Oaktree Holdings, Ltd. owns a less than 1% indirect interest in Oaktree Capital I, L.P."

ORGANIZATION STRUCTURES IN THE SECTOR
OAK's organization structure is similar others in the sector including:

USE OF PROCEEDS
OAK expects to net $426 million from its IPO. The proceeds are allocated to buy Class A units from institutions and insiders.

Disclaimer: This OAK IPO report is based on a reading and analysis of OAK's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Oaktree Capital Group