Oaktree Long Thesis From Elevation Capital

Oaktree Long Thesis From Elevation Capital

VIa Elevation Capital


Oaktree Capital Group LLC (OAK: US, Market Capitalisation US$ 7.028) is a leading global alternative investment management firm with expertise in credit strategies. As at 31 December 2016, assets under management totalled US$ 101B. Oaktree has over 900 employees operating across 13 countries worldwide including the major financial centres of New York, London, Paris, Frankfurt, Hong Kong, Tokyo, Singapore and Sydney. The firm has a strong history of generating positive returns for its clients and is recognised as a distressed and corporate debt specialist. Similar to other asset managers, Oaktree generates revenue from asset management fees, incentive income, and from investments. In 2016, total revenue amounted to approximately -.US$ I.13B.

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Mr Market



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Oaktree emphasises a value-oriented and risk-controlled strategy across the primary asset classes of corporate debt (40%), distressed debt (27%), control investing (15%), real estate (8%), convertible securities (6%) and listed equities (4%). The firm's investment philosophy is based on six principles which have guided the firm to produce market-beating returns for its investors and unitholders, across multiple market cycles. The firm espouses - risk control, consistency, market inefficiency, specialisation, bottom-up analysis and a disavowal of market timing. As at December 31,2016.0aktree's incentive-creating closed-end funds had produced a since-inception (1988)aggregate gross IRR of+18.9% (well above the 8.0% hurdle rate for incentive income)on approximately US$75B of drawn capital. The firm's open-end funds have a similarly impressive track record with almost all of strategies outperforming their respective benchmarks.

Traditional investment managers tend to intensify capital deployment during times of prosperity and increased market liquidity. Oaktree's opportunistic investment philosophy opposes this, raisingcapital ahead of potential market dislocations, ready to deploy in in subsequent downturns. Downside protection is provided by entering the market at times when assets prices are depressed; conversely, upside is maximised as assets are disposed of during market upswings. One of Oaktree's largest capital raises occurred in 2008 (following thefinancial crises) for its 'Opportunities Fund VIII,' when the firm raised -US$ 11B off existing AUM of -US$ 36B. This opportunistic approach is embodied in all fund structures with the firm actively trimming fund sizes during buoyant markets so as not to overextend sizing beyond the opportunity set. As at 31 December 2016, Oaktree held uncalled capital commitments of USS 20.8B - we expect the deployment of this capital to aid future investment earnings growth.

An Incredibly Powerful Value Investing Framewor

Oaktree utilises three types of fund structures - Closed-end funds, Okpen-end funds and Evergreen funds. Oaktree's closed-end funds have a 10 or 11-year term and a specified period during which clients can subscribe for limited partnership interests in the fund. Once a client is admitted to the fund as a limited partner, that client is required to contribute capital when called by the firm; at which point they are (generally) unable to withdraw their investment until the fund is liquidated. This gives Oaktree a significant source of reliable (reoccurring) revenues. In 2016, Oaktree generated US$ 786M in management fees, 73% of which was generated from closed-end funds.

A combination of investment philosophy, market out-performance and client-first approach has earned Oaktree a supportive and loyal customer base. The firm manages assets on behalf of some of the most significant institutional investors in the world including 75 of the 100 largest US pension plans, over 400 corporations and/or their pension funds, over 350 universities, charitable and other endowments and foundations. 16 sovereign wealth funds and over 350 other non-U.S. institutional investors. The commitment and loyalty of Oaktree's clientele is highlighted through 25 of Oaktree's largest clients who participate, on average, in four investment strategies offered by the firm. A further 77% of all clients invest in more than one strategy. It is such confidence which has engendered the firm with an unprecedented ability to raise capital. In each of the past ten years, Oaktree has successfully raised US$ 10B or more, including —US$12B in 2016.

Co-Chairmen Howard Marks and Bruce Karsh are widely recognised for their extraordinaryskill and capability as investors. Howard Marks has often been compared to Warren Buffett for his astute investing ability while his memos have long been a source of consultation for leading value investors globally.
"When I see memos from Howard Marks in my mad, they're the first thing! open and read. I always learn something. and that goes double for his book"- Warren Buffet.

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Institutional Investors Becoming Increasingly Demanding, Want To Actually Understand Their Investments
Beyond Marks and Karsh, the firm has a deep pool of highly experienced talent including John Franks (vice-chairman), Jay Wintrob (CEO), and Daniel Levin (CFO). Wintrob joined Oaktree in 2014, moving from AIG where he acted as Head of Life & Retirement Services. Vaunting over 30 years of experience at AIG, Wintrob was considered for the position ofCE0 before his departure from the company. Unlike most alternative asset managers, investment decisions at Oaktree occur at a portfolio manager level substantially mitigating succession risk. The firm currently has 31 portfolio managers who average 23 years of investment experience.


Oaktree places a great emphasis on an alignmentof interests with client and unitholders. It is a fundamental characteristic of Oaktree's business and is viewed as a driving force toward the firm's long-term growth. Oaktree frequently co-invests alongside clients where sums invested range between USE 20M to US$ 100M. Furthermore, top executives do not take a salary and are instead incentivised through distributions received as unit holders. We believe such incentives encourage management to adopt sustainable and long-term investment decisions, to the benefit of clients and shareholders alike. We note that Oaktree has an extremely complicated ownership structure, where senior executives and senior employees control the firm.

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In 2009, Oaktree Capital committed an initial investment of US$ 20M for a one-fifth stake in Jeffrey Gundlach's upstart investment firm, DoubleLine Capital. Today, the firm is recognised asone of the fastest growing asset managers in the US, growing AUM by +20% over 2016, with total AUM reaching an excess of US$ 100B. Since 2011, Oaktree has received nearly a quarter-billion (US$ 224.1) from DoubleLine Capital in investment income, paying for its initial investment at least 11 times over.Oalctree holds DoubleLineCapitalon its books at a carrying value of —USS 31M, yet the 20% stake has an estimated value of between US$ 800M to US$ 1B at fair market value. Furthermore, due to the wayOaktree realised incentive fees (off balattee sheet) there is a significant amount of value which the market does not appear to be fully recognised. Accrued incentives (held at a fund level and net of associated incentive income

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