Oaktree Capital Group LLC (OAK), the world’s largest distressed-debt investor, said third-quarter profit rose 70 percent as it earned more fees for exceeding performance targets.
Net income increased to $42.9 million, or $1.12 a share, from $25.2 million, or 84 cents, a year earlier, Los Angeles-based Oaktree said in a statement today. Fee-related earnings, which exclude payments to Oaktree for its unrealized gains, fell 18 percent to $59.8 million.
Oaktree is targeting annualized returns of 15 percent in its distressed holdings, down from 20 percent in previous years, Chairman Howard Marks told a conference audience in September. The firm is seeking returns of about 10 percent by investing in companies that are under financial pressure and not considered distressed, as well as in real estate debt. Oaktree is on pace to raise at least $10 billion this year for investments after doing so for each of the past six years, according to Marks, 67, who co-founded Oaktree in 1995.
“We’ve raised about $3 billion this year for strategies that didn’t exist a year-and-a-half ago,” John Frank, Oaktree’s managing principal, said in a telephone interview today. “We’re still in the early wave of that. Here we are in a period in which there’s no distress and we’re growing very strongly.”
Oaktree fell 1.8 percent to close at $55.90 in New York. The stock has gained 30 percent since the firm’s initial public offering in April 2012, when the company raised $380 million selling shares for $43 each, and is up 23 percent this year.
Oaktree’s fee-related earnings fell as expenses climbed. Stockholders pay close attention to fee-related earnings as a method of evaluating the consistency of alternative-asset firms’ incomes. Other metrics typically reflect volatile earnings driven by the timing of asset sales.
Adjusted net income, a measure of profit excluding such costs as noncash equity compensation and income taxes, rose to $179.6 million, or $1.16 a share, from $157.7 million, or 88 cents, a year earlier. Analysts expected adjusted profit of $1 a share, according to the average of eight estimates in a Bloomberg survey.
Oaktree’s incentive income, which it earns for exceeding the performance thresholds it sets with clients, more than doubled to $122.4 million in the third quarter from $59.2 million a year ago. Through the first nine months of the year, the metric more than tripled to $788 million.
Fortress Investment Group LLC (FIG), KKR & Co. and Blackstone Group LP (BX) all reported third-quarter net income that increased from a year earlier as the values of their portfolios rose. Peter Briger, co-chairman of New York-based Fortress, said on a conference call yesterday that too much money has been raised to invest in distresses assets in Europe as companies there recover from the continent’s sovereign-debt crisis.
The environment is “not great” for distressed investing, said Oaktree’s Frank, and that will force the firm to ask clients for an extension of the investment period for its Principal Fund V, which seeks to take control positions in distressed companies. The firm is diversifying and expects to have raised $2.2 billion for strategic credit and $700 million for real estate debt by year-end, Frank said.
Oaktree’s assets under management rose to $79.8 billion from $76.4 billion at the end of the second quarter as the firm attracted $3.7 billion in new money and made distributions to investors. Oaktree said it has $12.3 billion in uninvested committed capital, known as dry powder.
The company plans to pay shareholders a dividend of 74 cents per Class A unit on Nov. 15.
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