Oaktree Capital’s Biggest Opportunity is in Real Estate

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Oaktree Capital Group LLC has attracted some attention since it went public. The value based, distressed debt asset manager, was founded by Howard Marks. David Einhorn’s Greenlight Capital invested in the firm almost immediately after the IPO. York Capital Management, Farallon Capital Management, and Maverick Capital, also are large shareholders. Real Estate might be the biggest opportunity for the fund as explained below.

Oaktree Capital's Biggest Opportunity is in Real Estate

As a public company, more information can now be ascertained about Oaktree Capital Group LLC (NYSE:OAK) (PINK:OKCMZ). When the firm was private, it was much harder to find information, as it is with any private company. Additionally, aside from Oaktree, there are very few funds where value investors can invest alongside the managers. The only exceptions I can think of besides Oaktree are; Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (BRK.B) and Prem Watsa’s Fairfax Financial Holdings Limited (TSE:FFH)

Morgan Stanley (NYSE:MS) met with Oaktree Capital Management and provided some interesting notes on the value based asset manager. One thing that Morgan Stanley did not note, and most people fail to realize, is a very valuable asset which Oaktree owns. Oaktree owns a stake in one of the fastest growing asset managers. Jeff Gundlach’s Doubleline currently has over $40 billion in assets under management (AUM) (although that could change if the Apple Inc. (NASDAQ:AAPL) short does not work out, assuming it is company assets not Gundlach’s personal assets). OAK owns 22% of Doubleline, the stake could be worth $180 million according to the Brooklyn Investor.

Below are some of their key notes summarized:

Recently hosted management meetings confirm that OAK’s distressed funds are in a strong realization cycle. Also, the fund is increasingly optimistic on fundraising diversification to real estate, emerging markets, and senior loans.  Oaktree’s John Frank (Managing Principal) and Andrea Williams (Senior Vice President, Investor Relations) took part in the conversations. The discussion with Morgan Stanley analysts focused mainly on the realization outlook, fundraising efforts (with focus on distressed & real estate), investment opportunities, and paths to realizations for the Opps VIIb fund.

Valuation and potentional catalysts

Key Value Drivers
• Morgan Stanley estimate 3% avg fee-paying AuM CAGR in 2011-15, driven by 11% growth
in open-end funds, 8% in Evergreen (Hedge Fundss), and flattish closed end.
• They expect OAK to remain an industry leading value credit manager, while expanding platforms in real estate, Europe, and open-end funds.
• Increasing allocations to alternatives by pensions and SWFs, as well as consolidation of GP relationships, key for driving alternatives/OAK AuM growth.
• Opps VIIb paying cash carry; they estimate $4.10 per share, beginning in 2Q13.
• Market dislocation resulting in outsized fundraising in distressed, real estate, and European credit.


Real Estate is a Small Portion of OAK AuM, but Strong Performance Track Record

Oaktree Capital's Biggest Opportunity is in Real Estate

Oaktree Capital Group LLC (NYSE:OAK) (PINK:OKCMZ) consistently mentioned real estate as a significant opportunity for future AUM growth, and an area in which it does not turn away potential capital in fundraising. OAK manages $5B in dedicated real estate AUM (just 6% of firm total), plus another ~$2B in real estate investments made through its distressed debt funds. Oaktree Capital Group LLC (NYSE:OAK) (PINK:OKCMZ) has experience across a wide variety of real estate deals, including non-performing loans (both residential and commercial), raw land, student housing, single family homes, hotels, and homebuilding, just to name but a few. Despite its strong track record (15% avg gross IRR across fully invested funds), OAK still is just a fraction the size of The Blackstone Group L.P. (NYSE:BX)’s platform. Management points to clients being burned by other real estate investment firms during the financial crisis, as well as the relative newness of its own team, as main obstacles to AUM growth to date.

 (DIsclosure: No position, but may initiate one in the future)

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