Oaktree Capital IPO Doesn't Provide Excitement

Apr.11.12 | About: Oaktree Capital (OAK)

Oaktree Capital (NYSE:OAK) is set to price its initial price offering tonight before hitting the open market Thursday morning. Shares were originally set to price at the end of March but were delayed until tonight. Oaktree Capital remains the world's largest distressed debt investor. Here is a look at the company going public Thursday.

Oaktree Capital received revenue from three different sources:

  • Management Fees
  • Incentive Income
  • Investment Income

Oaktree offers closed-end funds, open-end funds, and its own Evergreen funds. The company's funds are used by company's pension funds, individual investors, and universities as part of endowments. Oaktree manages assets for 73 of the largest 100 American pension plans. Thirty-nine states have Oaktree investments as part of pension plans. A total of over 350 companies and 300 Universities and Charities count on Oaktree's managers to increase their assets under management.

The company manages $74.9 billion in assets (as of 12/31/11). Assets under management as of 12/31/2011 break down as follows:

  • Distressed Debt 32%
  • Corporate Debt 28%
  • Control Investing 23%
  • Convertible Securities 10%
  • Real Estate 6%
  • Listed Equities 1%

Adjusted net income for Oaktree Capital has been:

  • 2009 - $675.6 million, $3.88 per Class A share
  • 2010 - $763.9 million, $4.23 per Class A share
  • 2011 - $428.4 million, $2.15 per Class A share

The decrease was due to a lower amount in management fees. This shows the uncertainty of earnings that will be produced by this future public company. Adjusted net income has been consistently profitable for Oaktree. Oaktree's net income has been positive for the last sixteen years. There has only been one recorded quarter when Oaktree's net income was not a profit.

The main turnoff from the company is their corporate structure. Among the numerous risk factors listed in the S-1 are Oaktree will have "strong central control by our principals". This includes the placement of officers on the board of directors and the setting up of compensation payments by the board rather than the shareholders. Another key risk factor is, "the large number of Class A units eligible for public sale could depress the market price of our Class A units." In fact, the net tangible book value for Class A shares is $7.50 but if shares trade where the original IPO was set at ($44.50), it would dilute shares $37.06 each.

Class A shareholders will only have 3% of the company's voting power despite holding 22% of the Oaktree Operating Group. The company shows a drawing of the corporate structure in its S-1 filing.

Since 2006, the firm has doubled its assets under management. From 2006 to 2011, $65 billion was raised for Oaktree, with an amount over $9.5 billion each of the last five calendar years. The use of the IPO's proceeds will be to acquire Oaktree Capital units from existing shareholders.

Distributions paid to Class A shareholders were as followed:

  • 2008 - $0.79
  • 2009 - $1.37
  • 2010 - $2.32
  • 2011 - $1.86

Dividends for 2011 were as follows: $0.64, $0.51, $0.29, and $0.42. The company will pay quarterly dividends and give back the majority of the revenue earned to shareholders. The dividends will constantly vary depending on the amount of management fees and income earned during each three month period.

I will not be a buyer of Oaktree's IPO and cannot recommend it for anyone else. The dividends will be nice but the corporate structure is not shareholder friendly and the earnings are not guaranteed. Do your homework and find a better investment. Perhaps the recent selloff in last week's IPO Millennial Media (MM) (see my buy recommendation) offers a new buying opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.