UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 2012
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to .
Commission File Number 001-35500
Oaktree Capital Group, LLC
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
26-0174894
(I.R.S. Employer
Identification Number)
333 South Grand Avenue, 28th Floor
Los Angeles, CA 90071
Telephone: (213) 830-6300
(Address, zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Class A units representing limited liability company interests
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and
will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the Class A units of the registrant held by non-affiliates as of June 30, 2012 was approximately $1,065.6 million.
As of March 11, 2013, there were 30,189,441 Class A units and 120,763,876 Class B units of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
Page
Business .................................................................................................................................... 6
PART I.
Item 1.
Item 1A. Risk Factors ............................................................................................................................... 20
Item 1B. Unresolved Staff Comments ...................................................................................................... 55
Properties .................................................................................................................................. 55
Item 2.
Legal Proceedings ..................................................................................................................... 56
Item 3.
Item 4. Mine Safety Disclosures ............................................................................................................ 56
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ................................................................................................................. 56
Item 6.
Selected Financial Data ............................................................................................................. 58
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ...... 61
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...................................................... 105
Financial Statements and Supplementary Data ......................................................................... 108
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 160
Item 9A. Controls and Procedures ........................................................................................................... 160
Item 9B. Other Information ....................................................................................................................... 160
PART III.
Item 10. Directors, Executive Officers and Corporate Governance ......................................................... 161
Item 11. Executive Compensation ........................................................................................................... 167
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .................................................................................................................................... 181
Item 13. Certain Relationships and Related Transactions, and Director Independence .......................... 184
Item 14. Principal Accounting Fees and Services .................................................................................... 190
PART IV.
Item 15. Exhibits, Financial Statement Schedules ................................................................................... 191
Signatures
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of Section 27A of the U.S.
Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of
1934, as amended (the “Exchange Act”), which reflect our current views with respect to, among other things, our
future results of operations and financial performance. In some cases, you can identify forward-looking statements
by words such as “anticipate,” “approximately,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “outlook,” “plan,” “potential,” “predict,” “seek,” “should,” “will” and “would” or the negative version of these
words or other comparable or similar words. These statements identify prospective information. Important factors
could cause actual results to differ, possibly materially, from those indicated in these statements. Forward-looking
statements are based on our beliefs, assumptions and expectations of our future performance, taking into account
all information currently available to us. Such forward-looking statements are subject to risks and uncertainties and
assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy
and liquidity, including, but not limited to, changes in our anticipated revenue and income, which are inherently
volatile; changes in the value of our investments; the pace of our raising of new funds; the timing and receipt of and
impact of taxes on carried interest; distributions from and liquidation of our existing funds; changes in our operating
or other expenses; the degree to which we encounter competition; and general economic and market conditions.
The factors listed in the item captioned “Risk Factors” in this annual report provide examples of risks, uncertainties
and events that may cause our actual results to differ materially from the expectations described in our forward-
looking statements.
Forward-looking statements speak only as of the date of this annual report. Except as required by law, we
do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of
new information, future developments or otherwise.
MARKET AND INDUSTRY DATA
This annual report includes market and industry data and forecasts that are derived from independent
reports, publicly available information, various industry publications, other published industry sources and our
internal data, estimates and forecasts. Independent reports, industry publications and other published industry
sources generally indicate that the information contained therein was obtained from sources believed to be reliable.
We have not commissioned, nor are we affiliated with, any of the sources cited herein.
Our internal data, estimates and forecasts are based upon information obtained from investors in our funds,
partners, trade and business organizations and other contacts in the markets in which we operate and our
management's understanding of industry conditions.
3
In this annual report, unless the context otherwise requires:
“Oaktree,” “OCG,” “we,” “us,” “our” or “our company” refers to Oaktree Capital Group, LLC and, where
applicable, its predecessor, Oaktree Capital Management, LLC, and the respective subsidiaries and affiliates of
such entities.
“Oaktree Operating Group,” or “Operating Group,” refers collectively to the entities that control the general
partners and investment advisors of our funds in which we have a minority economic interest and indirect control.
“OCGH” refers to Oaktree Capital Group Holdings, L.P., a Delaware limited partnership, which holds an
interest in the Oaktree Operating Group and all of our Class B units.
“OCGH unitholders” refers collectively to our principals, current and former employees and certain other
investors who hold their interest in the Oaktree Operating Group through OCGH.
“2007 Private Offering” refers to the sale completed on May 25, 2007 of 23,000,000 of our Class A units to
Goldman, Sachs & Co., as initial purchaser, as more fully described in “Management's Discussion and Analysis of
Financial Condition and Results of Operations—The May 2007 Restructuring and The 2007 Private Offering—The
2007 Private Offering.”
“assets under management,” or “AUM,” generally refers to the assets we manage and equals the NAV (as
defined below) of the assets we manage, the fund-level leverage on which management fees are charged and the
undrawn capital that we are entitled to call from investors in our funds pursuant to their capital commitments. Our
AUM amounts include AUM for which we charge no fees. Our definition of AUM is not based on any definition
contained in our operating agreement or the agreements governing the funds that we manage. Our calculation of
AUM and the two AUM-related metrics described below may not be directly comparable to the AUM metrics of other
investment managers.
•
•
“management fee-generating assets under management,” or “management fee-generating AUM,”
reflects the AUM on which we will earn management fees in the following quarter, as more fully
described in “Management's Discussion and Analysis of Financial Condition and Results of Operations
—Segment and Operating Metrics—Management Fee-Generating Assets Under Management.”
“incentive-creating assets under management,” or “incentive-creating AUM,” refers to the AUM that may
eventually produce incentive income, as more fully described in “Management's Discussion and
Analysis of Financial Condition and Results of Operations—Segment and Operating Metrics—
Incentive-Creating Assets Under Management.”
“consolidated funds” refers to those funds that Oaktree consolidates through a majority voting interest or
otherwise, including those funds in which Oaktree as the general partner is presumed to have control.
“funds” refers to investment funds and, where applicable, separate accounts that are managed by us or our
subsidiaries.
“Intermediate Holding Companies” collectively refers to the subsidiaries wholly owned by us.
“May 2007 Restructuring” refers to the series of transactions that occurred immediately prior to the 2007
Private Offering whereby OCGH contributed our business to the Oaktree Operating Group in exchange for limited
partnership interests in each Oaktree Operating Group entity, as more fully described in “Management's Discussion
and Analysis of Financial Condition and Results of Operations—The May 2007 Restructuring and The 2007 Private
Offering—The May 2007 Restructuring.”
“net asset value,” or “NAV,” refers to the value of all the assets of a fund (including cash and accrued
interest and dividends) less all liabilities of the fund (including accrued expenses and any reserves established by
us, in our discretion, for contingent liabilities) without reduction for accrued incentives (fund level) because they are
reflected in the partners’ capital of the fund.
“Relevant Benchmark” refers, with respect to:
•
•
our U.S. high yield bond strategy, to the Citigroup U.S. High Yield Cash-Pay Capped Index;
our European high yield bond strategy, to the BofA Merrill Lynch Global Non-Financial High Yield
European Issuers excluding Russia 3% Constrained Index (USD Hedged);
4
•
•
•
•
•
•
our U.S. senior loan strategy (with the exception of the closed-end funds), to the Credit Suisse
Leveraged Loan Index;
our European senior loan strategy, to the Credit Suisse Western European Leveraged Loan Index
(EUR Hedged);
our U.S. convertible securities strategy, to an Oaktree custom convertible index that represents the
Credit Suisse Convertible Securities Index from inception through December 31, 1999, the Goldman
Sachs/Bloomberg Convertible 100 Index from January 1, 2000 through June 30, 2004 and the BofA
Merrill Lynch All U.S. Convertibles Index thereafter;
our non-U.S. convertible securities strategy, to the JACI Global ex-U.S. (Local) Index;
our high income convertible securities strategy, to the Citigroup U.S. High Yield Market Index; and
our emerging markets equity strategy, to the Morgan Stanley Capital International Emerging Markets
Index (Net).
“Sharpe Ratio” refers to a metric used to calculate risk-adjusted return. The Sharpe Ratio is the ratio of
excess return to volatility, with excess return defined as the return above that of a riskless asset (based on the
three-month U.S. Treasury bill, or for our European senior loan strategy, the Euro Overnight Index Average) divided
by the standard deviation of such return. A higher Sharpe Ratio indicates a return that is higher than would be
expected for the level of risk compared to the risk-free rate.
This annual report and its contents do not constitute and should not be construed as an offer of securities of
any Oaktree funds.
5
Part I.
Item 1. Business
Overview
Oaktree is a leader among global investment managers specializing in alternative investments, with $77.1
billion in AUM as of December 31, 2012. Over more than a quarter-century we have developed a large and growing
client base through our ability to identify and capitalize on opportunities for attractive investment returns in less
efficient markets. Our investment approach, based on the primacy of risk control, and the strong risk-adjusted
performance record it has produced appeal to the many investors who seek attractive returns with less-than-
commensurate risk. Oaktree's growth and success are byproducts of our proven investment approach and our
policy of putting clients' interests first.
Our founding principals were pioneers in the management of high yield bonds, convertible securities and
distressed debt. From those roots we have developed an array of specialized credit- and equity-oriented strategies.
Our 229 investment professionals include 119 senior investment professionals with an average 17 years of industry
experience. These individuals possess the broad cross-section of investing, research, analytical, legal, trading and
other skills, relationships and experience that are necessary for success in our complex markets. Additionally, our
compensation and other personnel practices foster a collaborative culture that facilitates complementary investment
strategies benefiting from shared knowledge and insights.
We manage assets on behalf of many of the most significant institutional investors in the world. Our
clientele has nearly doubled over the past decade, to over 1,750, including 75 of the 100 largest U.S. pension
plans, 38 states in the United States, approximately 400 corporations, over 300 university, charitable and other
endowments and foundations, 10 sovereign wealth funds and over 250 other non-U.S. institutional investors. Our
25 largest clients participate in an average of four different investment strategies, reflecting the confidence
engendered by our consistent firm-wide investment approach. Over 10% of our AUM represents high-net-worth
individuals or sub-advisory relationships with mutual funds, indicating both the broadening appeal of alternatives to
individual investors and our heightened focus on that market.
Since Oaktree's founding in 1995, our AUM has grown significantly, even as we have distributed more than
$55 billion from our closed-end funds. Although we limit our AUM when appropriate in order to better position us to
generate superior risk-adjusted returns, we have a long-term track record of organically growing our investment
strategies, increasing our AUM and expanding our client base. Over the past six years, we have raised gross assets
of $76.3 billion, with no single calendar year below $9.8 billion.
As shown in the chart below, our AUM grew to $77.1 billion as of December 31, 2012 from $25.4 billion a
decade earlier. Over the same period, management fee-generating AUM grew from $24.1 billion to $66.8 billion,
and incentive-creating AUM increased from $11.6 billion to $34.0 billion.
Year-end AUM
6
We have systematically broadened employee ownership since our founding to help align interests among
employees, our clients and other stakeholders, as well as to facilitate a smooth generational transfer of
management and ownership. We have over 700 employees, including over 170 employee-owners, who operate out
of 13 offices in 10 countries, of which the largest offices are in Los Angeles (headquarters), London, New York and
Hong Kong.
Oaktree Capital Group, LLC is a Delaware limited liability company that was formed in 2007. Please see
“Management's Discussion and Analysis of Financial Condition and Results of Operations—The May 2007
Restructuring and The 2007 Private Offering” for additional information.
Structure and Operation of Our Business
Our business is comprised of one segment, our investment management segment, which consists of the
investment management services that we provide to our clients. Our segment revenue flows from the management
fees and incentive income generated by the funds that we manage, as well as the investment income from the
funds we manage and other third-party funds and companies in which we invest. The management fees that we
receive are based on the contractual terms of the relevant fund and are typically calculated as a fixed percentage of
the capital commitments (as adjusted for distributions during a fund's liquidation period) or NAV of the particular
fund. Incentive income represents our share (typically 20%) of the investors' profits in most of the closed-end and
evergreen funds. Investment income refers to the investment return on a mark-to-market basis on the amounts that
we invest in Oaktree and third-party funds, as well as our equity income participation from investments in other
companies.
Structure of Funds
Closed-End Funds
Our closed-end funds are typically structured as limited partnerships that have a 10- or 11-year term and
have a specified period during which clients can subscribe for limited partnership interests in the fund. Once a client
is admitted as a limited partner, that client is required to contribute capital when called by us as the general partner,
and generally cannot withdraw its investment. Closed-end funds have a three-, four- or five-year investment period,
during which we are permitted to invest the committed capital. As closed-end funds liquidate their investments, we
typically distribute the proceeds to the clients, although during the investment period we have the ability to retain or
recall such proceeds to make additional investments. Once we have committed to invest approximately 80% of the
capital in a particular fund, we typically raise a new fund in the same strategy, generally ensuring that we always
have capital to invest in new opportunities.
Open-End Funds
Our commingled open-end funds are typically structured as limited partnerships that are designed to admit
clients as new limited partners (or accept additional capital from existing limited partners) on an ongoing basis
during the fund's life. Clients in commingled open-end funds typically contribute all of their committed capital upon
being admitted to the fund. These funds do not have an investment period and do not distribute proceeds of
realized investments to clients. We are permitted to commit the fund's capital (including realized proceeds) to new
investments at any time during the fund's life. Clients in commingled open-end funds generally have the right to
withdraw their capital from the fund at any time on a monthly basis (quarterly for our senior loan strategy).
We also provide discretionary management services for clients through separately managed accounts within
the open-end fund strategies. Clients establish accounts with us by depositing funds or securities into accounts
maintained by qualified independent custodians and granting us discretionary authority to invest such funds
pursuant to their investment needs and objectives, as stated in an investment management agreement. Separate
account clients generally may terminate our services at any time by providing us with prior notice of 30 days or less.
Evergreen Funds
We use the term evergreen funds to describe funds that invest in marketable securities on a long and short
basis. As with open-end funds, evergreen funds are designed to accept new capital on an ongoing basis and
generally do not distribute proceeds of realized investments to clients. Clients in evergreen funds are generally
subject to a lock-up, which restricts their ability to withdraw their entire capital for a certain period of time after their
initial subscription.
7
Management Fees
We receive management fees monthly or quarterly based on annual fee rates. While we typically earn
management fees for each of the funds that we manage, the contractual terms of those management fees vary by
certain factors, such as fund structure. During the investment period of closed-end funds, the management fee is a
fixed percentage, generally in the range of 1.25% to 1.75% per year of total committed capital (through the final
close, these fees are earned on a retroactive basis to the start of the fund's investment period). During the
liquidation period, the management fee remains the same fixed percentage, applied against the lesser of the total
funded capital and the cost basis of assets remaining in the fund, provided that our right to receive management
fees typically ends after 10 or 11 years from the start of the investment period, even if assets remain to be
liquidated. For open-end and evergreen funds, the management fee is generally based on the NAV of the fund.
Open-end funds generally pay management fees of 0.50% of NAV per year, paid monthly or quarterly. Evergreen
funds pay a management fee quarterly, ranging from 1.5% to 2.0% per year based on NAV.
Incentive Income and Accrued Incentives (Fund Level)
We have the potential to earn incentive income from most of the closed-end and evergreen funds. Most of
our closed-end funds follow the so-called European-style waterfall, whereby we receive 20% of the investors' profits
after the fund first distributes all contributed capital plus an annual preferred return, typically 8%. Once this occurs,
we receive as incentive income 80% of all distributions otherwise attributable to our investors, and the fund's
investors (including us as general partner) receive the remaining 20%, until we have received, as incentive income,
20% of all such distributions in excess of the contributed capital from the inception of the fund. Thereafter, all such
future amounts are distributed 80% to the fund's investors (including us as general partner) and 20% to us with
respect to incentive income. As a result, we generally receive incentive income, if any, in the latter part of a fund's
life, although earlier in a fund's term we may receive tax distributions, which we recognize as incentive income, to
cover our allocable share of income taxes until we are otherwise entitled to payment of incentive income.
Each of the active evergreen funds pays annual incentive income equal to 20% of the year's profits, subject
to a high-water mark. The high-water mark refers to the highest historical NAV attributable to a limited partner's
account. We do not earn annual incentive income with respect to a limited partner if its year-end NAV is lower than
any prior year's NAV, excluding any contributions or redemptions.
We recognize incentive income when it becomes fixed or determinable, all related contingencies have been
removed and collection is reasonably assured, which generally occurs either in or immediately before the quarter in
which we receive the cash attributable to the incentive income. Although we do not recognize incentive income until
we are entitled to it, we track the amounts we would be paid as incentive income if our funds' assets were liquidated
at their reported values as of the date of our financial statements and the proceeds from such liquidations were
distributed in accordance with the funds' respective partnership agreements. We call this amount “accrued
incentives (fund level).”
Investment Income
We earn segment investment income from our corporate investments in funds and companies. We typically
invest the greater of 2.5% of committed capital or $20 million in each Oaktree closed-end or evergreen fund, not to
exceed $100 million per fund. For strategic purposes, we also invest in a handful of third-party managed funds. Of
our investments in companies, the most significant is our one-fifth equity stake in DoubleLine Capital LP and its
affiliates (collectively, “DoubleLine”), an investment manager that sought our start-up consulting and financial
involvement shortly after its founding in December 2009.
Our Investment Approach
At our core, we are contrarian, value-oriented investors focused on buying securities and companies at
prices below their intrinsic value and selling or exiting those investments when they become fairly or fully valued.
We believe we can do this best by investing in markets where specialization and superior analysis can offer an
investing edge.
In our investing activities, we adhere to the following fundamental tenets:
• Focus on Risk-Adjusted Returns. Our primary goal is not simply to achieve superior investment
performance, but to do so with less-than-commensurate risk. We believe that the best long-term records
are built more through the avoidance of losses in bad times than the achievement of superior relative
returns in good times. Thus, our overriding belief is that “if we avoid the losers, the winners will take care
of themselves.”
8
• Focus on Fundamental Analysis. We employ a bottom-up approach to investing, based on proprietary,
company-specific research. We seek to generate outperformance from in-depth knowledge of companies
and their securities, not from macro-forecasting. Our 229 investment professionals have developed a
deep and thorough understanding of a wide number of companies and industries, providing us with a
significant institutional knowledge base.
• Specialization. We offer a broad array of specialized investment strategies. We believe this offers the
surest path to the results we and our clients seek. Clients interested in a single investment strategy can
limit themselves to the risk exposure of that particular strategy, while clients interested in more than one
investment strategy can combine investments in our funds to achieve their desired mix. Our focus on
specific strategies has allowed us to build investment teams with extensive experience and expertise. At
the same time, our teams access and leverage each other's expertise, affording us both the benefits of
specialization and the strengths of a larger organization.
Our Asset Classes and Investment Strategies
We manage investments in a number of strategies within six asset classes: distressed debt, corporate debt,
control investing, convertible securities, real estate and listed equities. The diversity of our investment strategies
allows us to meet a wide range of investor needs suited for different market environments globally and, for certain
strategies, targeted regions, while providing us with a long-term diversified revenue base. Nearly all of our largest
investment strategies and most of our smaller strategies (as measured by AUM) invest on an unlevered basis at the
fund level. Our AUM by asset class and investment strategy is shown below:
Strategy
Inception
Date
AUM
(in billions)
Strategy
Inception
Date
AUM
(in billions)
Distressed Debt:
Convertible Securities:
Distressed debt .........................................
Value opportunities ...................................
$
1988
2007
23.2
1.7
24.9
U.S. convertible securities ........................
Non-U.S. convertible securities ................
High income convertible securities ...........
1987
1994
1989
$
Corporate Debt:
U.S. high yield bonds ................................
European high yield bonds .......................
U.S. senior loans ......................................
European senior loans ..............................
Mezzanine finance ....................................
1986
1999
2007
2009
2001
Others ....................................................... Various
17.3
Real Estate:
1.4
2.7
1.0
2.0
0.1
Real estate opportunities ..........................
1994
Listed Equities:
Emerging markets absolute return ............
1997
24.5
Others ....................................................... Various
4.3
2.2
1.1
7.6
3.6
3.6
0.3
0.2
0.5
Control Investing:
Global principal investments .....................
European principal investments................
Asia principal investments ........................
Power opportunities ..................................
1994
2006
2006
1999
7.2
7.1
0.5
1.2
16.0
Our main investment strategies are described below:
Distressed Debt
Total .........................................................
$
77.1
The distressed debt team has been one of the industry's pioneers and leaders since the inception of the
strategy in 1988. The team focuses primarily on investments in distressed companies that are perceived to have
substantial asset values or business franchises, are in sound industries and have competent management. We take
an opportunistic approach to investing, with the flexibility and expertise to choose from a broad range of
investments, including leveraged loans, bonds, equity securities, companies or hard assets. Building on our
distressed debt team's experience in the U.S., we have established a significant presence in Europe to capitalize on
opportunities in that region.
9
Value Opportunities
We launched Value Opportunities (“VOF”) in September 2007 for investors who had expressed interest in a
more liquid version of the distressed debt strategy. The fund is managed by the distressed debt team and invests
mainly in distressed debt and other value-oriented investments for which there is a liquid market. Inasmuch as this
strategy is intended to be opportunistic, the composition of the portfolio may change with market conditions. In
general, this strategy employs similar strategies and tactics with regard to distressed investments as the distressed
debt strategy, but it may be more aggressive and more oriented to short-term trading (and may make greater use of
leverage, shorting and derivatives) with respect to its non-distressed investments.
U.S. and European High Yield Bonds
We view high yield bond investing as the conscious bearing of credit risk for potential profit, and we follow a
defensive, credit-intensive strategy focused on gauging credit risk. Rather than stretching for higher yields, our
primary focus is avoiding defaults. Since the inception of the U.S. strategy in 1986, our holdings have experienced
an average default rate equal to approximately one-third the high yield bond market as a whole. Our team's
analytical and investment skills also are evidenced by the fact that in each of our strategy's 27 years, its portfolio
holdings have garnered a larger percentage of rating-agency upgrades than downgrades. We launched the
European high yield bond strategy in 1999 in order to provide our clients increased diversification and to capitalize
on our expertise and leadership in high yield bond management.
U.S. and European Senior Loans
In September 2007 we formed the U.S. senior loan strategy to capitalize on the backlog of unsold or “hung”
bridge loans held by investment banks near the start of the financial crisis. As the market environment subsequently
changed, we expanded the strategy to include investing in senior bank loans. Investments include bank loans and
senior debt from the middle- and upper-quality tiers of the non-investment grade debt market. In most instances,
these instruments constitute the most senior position in the capital structure of the borrower. In May 2009, we
capitalized on our experience in senior loans and European high yield bonds by forming a European senior loan
strategy to take advantage of opportunities in the primary and secondary loan markets.
Mezzanine Finance
In 2001 we created the mezzanine finance strategy to capitalize on our expertise in credit analysis after we
observed a gap in the availability of mezzanine capital to many attractive companies that were considered too small
for the high yield bond market. The strategy's targeted investment size is $20 million to $100 million, where we
believe many attractive opportunities exist to help finance leveraged buyouts, recapitalizations, acquisitions and
corporate growth. The mezzanine finance strategy seeks to earn a high current return and achieve long-term capital
appreciation without subjecting principal to undue risk.
Principal Investments
The global and European principal investment strategies typically target investments through capital
infusions into distressed or “stressed” companies, acquisition of distressed securities with an expected outcome of
a debt for equity conversion (“distress-for-control”), or private equity investments in targeted industries. Our team's
private equity and distressed debt experience allows us a competitive advantage in accessing distressed debt,
negotiating through the bankruptcy process for control of a business and maximizing the value of an investment
once we obtain control. Our European investments have focused on complex business restructurings and industries
in which we have particular expertise. We have experienced in-house portfolio enhancement teams in both the U.S.
and Europe that are dedicated to identifying and implementing operational, strategic and financial enhancements at
portfolio companies.
Power Opportunities
Beginning in 1996, the control investing strategy made a number of power infrastructure investments jointly
with an independent firm, GFI Energy Ventures (“GFI”). In 2009, GFI personnel joined us and, starting with Oaktree
Power Opportunities Fund III, L.P. (“Power Fund III”), we became the sole manager of the strategy. The power
opportunities funds seek to make controlling equity investments in companies providing equipment, software and
services used in marketing, distribution, transmission, trading or consumption of power and other similar services.
The strategy invests in proven performers and market leaders, not start-up ventures or turnarounds.
10
Convertible Securities
Convertible securities are part debt and part equity. Applying our risk-control investment approach to these
securities, we attempt to capture most of the performance of equities in rising markets and to outperform equities in
flat or down markets. Our goal is to capture the vast majority of the performance of equities over full market cycles
with reduced volatility and/or substantially outperform straight bonds with similar levels of volatility. To reduce risk,
we broadly diversify and focus on convertibles that provide pronounced downside protection. High income, or
“busted,” convertibles offer a unique combination of high current yield and yield-to-maturity, plus the potential for
significant equity-driven capital appreciation. As a neglected niche within the convertible universe, high income
convertibles are often available at attractive prices.
Real Estate
Sometimes in partnership with certain other strategies, the real estate team targets a diverse range of global
investments, including direct property investments, investments in companies with extensive real estate assets,
undervalued debt and equity securities, and opportunities to develop and re-position properties in association with
aligned, high-quality partners. In recent years we have developed strategic business relationships with third-party
servicing companies for commercial and residential mortgage pools, which have enabled us to acquire and
profitably manage portfolios of non-performing mortgage loans sold at discounted prices by banks.
Emerging Markets Absolute Return
The emerging markets absolute return strategy is based on our belief that certain countries have non-
mainstream financial markets where companies are often poorly analyzed and securities mispriced. Moreover, we
believe that emerging markets tend to possess attractive investment environments on a fundamental basis given
their generally higher rates of economic growth (as compared to developed countries). This strategy utilizes long
and, to a lesser extent, short positions in the equity and other securities of companies based in emerging and
growing countries, without significant leverage, in its effort to achieve substantial absolute total returns while
reducing exposure to macro factors.
Development of New Investment Strategies
We add to Oaktree's list of investment strategies when we identify a market with potential for attractive
returns that we believe can be exploited in a limited-risk fashion, and where we have access to the investment
talent capable of producing the results we seek. Because of the high priority we place on assuring that these
requirements are met, we prefer that new products represent “step-outs” from our current investment strategies into
highly related fields with people with whom we have had extensive experience or for whom we can validate
qualifications. New products launched or developed in 2012 included the following:
Enhanced Income Fund. Oaktree Enhanced Income Fund, L.P. (“EIF”) was launched in 2012 to access
the senior standing and floating interest rates on U.S. senior loans with a moderate level of up to 2x leverage. EIF
utilizes the same investment approach as our U.S. senior loan strategy in a closed-end fund structure. EIF began its
three-year investment period in September 2012.
Global High Yield Bonds. Capitalizing on our leadership in U.S. and European high yield bond
management, this new product invests in credits from those and other global markets. In doing so, we provide
investors with an additional means of diversifying and adding value to their portfolios.
Strategic Credit. Strategic Credit, introduced in 2012, invests in stressed credits and seeks returns above
those on high yield bonds but below those on more distress-oriented strategies. It also targets an attractive level of
current income. For now, the strategy is pursued through separate accounts.
Real Estate Debt. Oaktree PPIP Fund, L.P. (“PPIP”), organized pursuant to the U.S Treasury
Department's program to address troubled real estate-related assets during the financial crisis, ended its
investment period in December 2012, spurring us to offer real estate debt as a successor strategy. This strategy will
invest primarily in performing commercial mortgage-backed securities (“CMBS”), first mortgages, junior secured
debt, unsecured debt and mezzanine debt.
11
Emerging Markets Distressed Debt. We began to assemble the team for Oaktree Emerging Market
Opportunities Fund, L.P. (“EMOF”) in 2012 and expect to start managing assets by mid-2013. EMOF will focus on
distressed and dislocated corporate debt in emerging markets. We believe that the potential supply of emerging
market opportunities far outweighs the demand in those regions. This strategy is managed in the U.S. by a
dedicated group, in conjunction with leveraging our distressed debt team's experience and expertise in the U.S. and
Europe.
Emerging Markets Equities. In June 2011, our emerging markets team became one of four sub-advisers
for a new long-only emerging markets equity fund managed by The Vanguard Group. In May 2012 non-Vanguard
clients began investing in this strategy as well. We believe emerging market equities present opportunities not
present in more developed markets.
Our Investment Performance
Our investment professionals have generated impressive investment performance through multiple market
cycles, almost entirely without the use of fund-level leverage. As of December 31, 2012, our closed-end funds had
produced an aggregate gross IRR of 19.8% on over $57 billion of drawn capital.
All 48 of the closed-end funds we have managed that commenced prior to 2012 had positive gross and net
IRRs as of December 31, 2012, an achievement that reflects, among many factors, our practice of sizing funds in
proportion to our view of the supply of potential attractive investment opportunities. Our oldest and largest closed-
end fund strategy is distressed debt, whose performance by fund is shown below:
Gross IRRs of Oaktree Distressed Debt Funds as of December 31, 2012
Performance of our open-end funds is measured in relation to applicable benchmark returns. We have a
long track record of achieving competitive returns in up markets and substantial relative outperformance in down
markets. We believe this pattern of results leads to significant outperformance over full market cycles. Our oldest
and largest open-end fund strategy is U.S. high yield bonds, whose performance is shown below in comparison to
its Relevant Benchmark.
12
Cumulative Gross Returns of U.S. High Yield Bond Strategy
and Relevant Benchmark through December 31, 2012
The outperformance by our investment team was achieved with relatively less risk, as demonstrated by the
fact that our U.S. high yield bond strategy had a Sharpe Ratio of 0.81, as compared to 0.54 for its Relevant
Benchmark. The consistency of our strong relative performance is evidenced by the fact that of the 86 rolling 5-year
calendar periods across the entirety of our open-end funds that started before 2008, our 5-year returns
outperformed the respective Relevant Benchmark 85% of the time.
Synergies
We emphasize cross-group cooperation and collaboration among our investment professionals. Many of our
investment strategies are complementary, and our investment professionals often identify and communicate
potential opportunities to other groups, allowing our funds to benefit from the synergies created by the scale of our
business and our proprietary research. The high yield bond group, for instance, sometimes alerts the distressed
debt group to issuers facing financial difficulties, and the distressed debt group sometimes identifies investment
opportunities for the control investing group.
This cross-pollination among our investment groups occurs both formally and informally. For example,
members of the distressed debt, principal investments and real estate groups attend each other's meetings in order
to ensure that each group keeps abreast of the others’ activities and has ready access to specialized expertise for
more informed investment decisions. These groups periodically invest jointly, permitting us to make larger or more
specialized investments than we could undertake in the absence of such collaboration. Our investment
professionals also cooperate informally, consulting each other on a regular basis with respect to existing and
proposed investments. Our culture encourages such cooperation, as does the broad ownership by all of our senior
investment professionals, which gives each of them an indirect stake in the success of all of our investment
strategies.
We have a shared trading desk in the U.S. for the distressed debt, high yield bond, senior loan, principal
investments and real estate strategies. The shared trading desk provides all of these strategies the benefit of our
traders’ deep experience with both performing and distressed securities, facilitates communication among the
groups, and allows us to combine trades for larger orders with the preferential access and pricing that sometimes
comes with larger orders. Additionally, the shared nature of the trading desk allows us to pursue individual
opportunities without revealing to the broader market which of our strategies may be purchasing the targeted
security, providing an advantage over our competitors who invest exclusively in distressed or distress-for-control
strategies, thus revealing their expectations for their investments.
13
The scale of our investing activities makes us a significant client of many investment banks, brokers and
consultants, and thus helps each group access opportunities that might not be available were it not part of our
larger organization. Finally, the scale of our activities has permitted us to create significant shared resources.
Marketing and Client Relations
Our client relationships are fundamental to our business. We strive to act with professionalism and integrity
and believe our success flows from the success of our clients. We have developed a loyal following among many of
the nation's most significant institutional investors. We believe their loyalty flows from our superior investment
record, our reputation for integrity and the fairness and transparency of our fee structures. In recent years, many
sovereign wealth funds and other large investors outside the U.S. have committed significant capital to us.
As of December 31, 2012, the $77.1 billion of AUM was divided by client type and geographic origin as
follows:
AUM by Client Type
AUM
%
AUM by Client Location
AUM
%
(in millions)
(in millions)
Public funds ......................................... $ 22,985
29.8%
United States .............................. $ 52,925
68.7%
Corporate and corporate pension .........
21,242
27.4
Europe .......................................
11,762
Asia/Pacific .................................
Americas, excluding U.S. ...........
Middle East ................................
8,932
2,528
904
Total ........................................... $ 77,051
100.0%
15.3
11.6
3.2
1.2
Insurance companies ...........................
Sovereign wealth funds ........................
Endowments/foundations .....................
Private – high net worth/family office ....
Sub-advisory – mutual funds ................
Fund of funds .......................................
Unions ..................................................
Oaktree and other ................................
6,575
6,574
5,874
4,849
3,252
2,453
954
2,293
8.6
8.6
7.6
6.3
4.2
3.2
1.2
3.1
Total ..................................................... $ 77,051
100.0%
Our extensive in-house global marketing and client relations group, comprised of over 40 individuals
dedicated to relationship management and sales, client service or sales strategy in Europe, the Middle East, Asia/
Pacific and the Americas, appropriately reflects the increasingly global composition of our client base. This team is
augmented by over 30 dedicated marketing support, portfolio analytics and client reporting professionals. The
marketing and client relations leadership team reports directly to our Managing Principal. In addition, our Chairman
devotes a significant amount of time in representing our company and meeting with clients and prospects.
We have devoted considerable resources to augmenting our marketing and client relations efforts. We
created two new groups within marketing and client relations in 2009, one dedicated exclusively to servicing
existing clients, and another focused on providing clients analytics regarding their Oaktree investments to better
serve their own reporting and portfolio management needs.
New distribution channels cultivated in 2012 represented the continuation of efforts to broaden our reach with
respect to both non-U.S. and individual investors. For example, in December 2012 the RiverNorth/Oaktree High
Income mutual fund was launched, which allows individual investors and advisors to access a combination of three
income-generating strategies that includes our senior loan and high yield strategies. We also introduced a group of
European-based SICAV vehicles, which provides an opportunity for us to market our high yield bond and
convertible strategies in many non-U.S. jurisdictions.
14
Employees
We strive to maintain a work environment that fosters integrity, professionalism, excellence, candor and
collegiality among our employees. We consider our labor relations to be good. As of December 31, 2012, we had
726 employees, as follows:
Investment professionals .........................................................................................
Other professionals .................................................................................................
Support staff ............................................................................................................
Total .........................................................................................................................
All
Employees
229
357
140
726
Employee
Owners (1)
109
63
—
172
Employees
Located
Outside
the U.S.
85
48
25
158
(1)
Represents employees that hold OCGH units.
Competition
We compete with many other firms in every aspect of our business, including raising funds, seeking
investments and hiring and retaining professionals. Many of our competitors are substantially larger than us and
have considerably greater financial, technical and marketing resources. Certain of these competitors periodically
raise significant amounts of capital in investment strategies that are similar to ours. Some of these competitors also
may have a lower cost of capital and access to funding sources that are not available to us, which may create
further competitive disadvantages for us with respect to investment opportunities. In addition, some of these
competitors may have higher risk tolerances or make different risk assessments than we do, allowing them to
consider a wider variety of investments and establish broader networks of business relationships. In short, we
operate in a highly competitive business and many of our competitors may be better positioned than we are to take
advantage of opportunities in the marketplace. For additional information regarding the competitive risks that we
face, please see “Risk Factors—Risks Relating to Our Business—The investment management business is
intensely competitive.”
Regulatory Matters and Compliance
Our business, as well as the financial services industry generally, is subject to extensive regulation in the
United States and elsewhere. Our indirect subsidiary, Oaktree Capital Management, L.P., is registered as an
investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registered investment advisers
are subject to the requirements and regulations of the U.S. Investment Advisers Act of 1940, as amended (the
“Advisers Act”). These requirements relate to, among other things, fiduciary duties to clients, maintaining an
effective compliance program, solicitation agreements, conflicts of interest, recordkeeping and reporting, disclosure,
limitations on agency cross and principal transactions between an adviser and advisory clients and general anti-
fraud prohibitions. In addition, Oaktree Capital Management, L.P. is registered as a commodity pool operator and a
commodity trading adviser with the U.S. Commodity Futures Trading Commission. Registered commodity pool
operators and commodity trading advisers are each subject to the requirements and regulations of the U.S.
Commodity Exchange Act, as amended (the “Commodity Exchange Act”). These requirements relate to, among
other things, maintaining an effective compliance program, recordkeeping and reporting, disclosure, business
conduct and general anti-fraud prohibitions.
One of our indirect subsidiaries, OCM Investments, LLC, is registered as a broker-dealer with the SEC and in
all 50 states, the District of Columbia and Puerto Rico, and is a member of the U.S. Financial Industry Regulatory
Authority (“FINRA”). As a broker-dealer, this subsidiary is subject to regulation and oversight by the SEC and state
securities regulators. In addition, FINRA, a self-regulatory organization that is subject to oversight by the SEC,
promulgates and enforces rules governing the conduct of, and examines the activities of, its member firms. Due to
the limited authority granted to our subsidiary in its capacity as a broker-dealer, it is not required to comply with
certain regulations covering trade practices among broker-dealers and the use and safekeeping of customers’ funds
and securities. As a registered broker-dealer and member of a self-regulatory organization, we are, however,
subject to the SEC’s uniform net capital rule. Rule 15c3-1 of the Exchange Act specifies the minimum level of net
capital a broker-dealer must maintain and also requires that a significant part of a broker-dealer’s assets be kept in
relatively liquid form. The SEC and FINRA impose rules that require notification when net capital falls below certain
predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker
15
dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally,
the SEC’s uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-
dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of
capital.
Another of our subsidiaries, Oaktree Capital Management (UK) LLP, is authorized and regulated by the U.K.
Financial Services Authority (“FSA”) as an investment manager in the United Kingdom. The U.K. Financial Services
and Markets Act 2000 (“FSMA”) and rules promulgated thereunder govern all aspects of the U.K. investment
business, including sales, research and trading practices, the provision of investment advice, the use and
safekeeping of client funds and securities, regulatory capital, record keeping, margin practices and procedures, the
approval standards for individuals, anti-money laundering, periodic reporting and settlement procedures.
The SEC and other regulators have in recent years aggressively increased their regulatory activities in
respect of asset management firms. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act, among other things,
imposes significant new regulations on nearly every aspect of the U.S. financial services industry, including
oversight and regulation of systemic market risk (including the power to liquidate certain institutions); authorizing the
Federal Reserve to regulate nonbank institutions that are deemed systemically important; generally prohibiting
insured depository institutions and their affiliates from conducting proprietary trading and investing in private equity
funds and hedge funds; and imposing new registration, recordkeeping and reporting requirements on private fund
investment advisers. Many of these provisions are subject to further rulemaking and to the discretion of regulatory
bodies. The Dodd-Frank Act also prohibits investments in private equity and hedge funds by certain banking entities
and covered nonbank companies. Although we do not currently anticipate that such prohibition will adversely affect
our fundraising to any significant extent, there is uncertainty regarding its implementation and practical implications,
and there could be adverse implications on our ability to raise funds from such entities and companies. While
certain of our subsidiaries are already registered investment advisers and registered broker-dealers and subject to
SEC and FINRA examinations, compliance with any additional legal or regulatory requirements, including the need
to register other subsidiaries as investment advisers, could make compliance more difficult and expensive and
affect the manner in which we conduct business.
Certain of our activities are subject to compliance with laws and regulations of U.S. federal, state and
municipal governments, non-U.S. governments, their respective agencies and/or various self-regulatory
organizations or exchanges relating to, among other things, antitrust laws, anti-money laundering laws, anti-bribery
laws relating to foreign officials, and privacy laws with respect to client information, and some of our funds invest in
businesses that operate in highly regulated industries. Any failure to comply with these rules and regulations could
expose us to liability and/or reputational damage. Our business has operated for many years within a legal
framework that requires our being able to monitor and comply with a broad range of legal and regulatory
developments that affect our activities. However, additional legislation, changes in rules or changes in the
interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect
our mode of operation and profitability. Please see “Risk Factors—Risks Relating to Our Business—Regulatory
changes in the United States, regulatory compliance failures and the effects of negative publicity surrounding the
financial industry in general could adversely affect our reputation, business and operations.”
Fund Data
Information regarding our closed-end, open-end and evergreen funds, together with benchmark data where
applicable, is set forth below. For purposes of the information set forth below, our funds’ investments were valued in
accordance with our valuation methodology as set forth in “Management’s Discussion & Analysis of Financial
Condition and Results of Operations—Critical Accounting Policies—Investments, at Fair Value.”
16
Closed-end Funds
Investment Period
Start Date
End Date
Total
Committed
Capital
Drawn
Capital (1)
Fund Net
Income
Since
Inception
Distri-
butions
Since
Inception
Net
Asset
Value
As of December 31, 2012
Manage-
ment
Fee-
Gener-
ating
AUM
Oaktree
Segment
Incentive
Income
Recog-
nized
Accrued
Incentives
(Fund
Level) (2)
Unreturned
Drawn
Capital Plus
Accrued
Preferred
Return (3)
Oct. 1991
$
97
$
97
$
Distressed Debt
TCW Special Credits Fund I, L.P. (6) .................................................. Oct. 1988
TCW Special Credits Fund II, L.P. (6) .................................................
Jul. 1990
TCW Special Credits Fund IIb, L.P. (6) ............................................... Dec. 1990
TCW Special Credits Fund III, L.P. (6) ................................................ Nov. 1991
TCW Special Credits Fund IIIb, L.P. (6) .............................................. Apr. 1992
TCW Special Credits Fund IV, L.P. (6) ................................................
Jun. 1993
Jul. 1993
Dec. 1993
Nov. 1994
Apr. 1995
Jun. 1996
OCM Opportunities Fund, L.P. .......................................................... Oct. 1995
Oct. 1998
OCM Opportunities Fund II, L.P. ....................................................... Oct. 1997
Oct. 2000
OCM Opportunities Fund III, L.P. ...................................................... Sep. 1999
Sep. 2002
OCM Opportunities Fund IV, L.P. ...................................................... Sep. 2001
Sep. 2004
OCM Opportunities Fund IVb, L.P. .................................................... May 2002
May 2005
OCM Opportunities Fund V, L.P. .......................................................
Jun. 2004
Jun. 2007
OCM Opportunities Fund VI, L.P. ......................................................
Jul. 2005
Jul. 2008
OCM Opportunities Fund VII, L.P. ..................................................... Mar. 2007
Mar. 2010
261
153
329
447
394
771
1,550
2,077
2,125
1,339
1,179
1,773
3,598
OCM Opportunities Fund VIIb, L.P. ................................................... May 2008
May 2011
10,940
Special Account A ............................................................................. Nov. 2008
Oct. 2012
Oaktree Opportunities Fund VIII, L.P. ................................................ Oct. 2009
Oct. 2012
Special Account B ............................................................................. Nov. 2009
Nov. 2012
Oaktree Opportunities Fund VIIIb, L.P. .............................................. Aug. 2011
Aug. 2014
Oaktree Opportunities Fund IX, L.P. ..................................................
TBD
—
Global Principal Investments
TCW Special Credits Fund V, L.P. (6) .................................................
Apr. 1994
Apr. 1997
$
OCM Principal Opportunities Fund, L.P. ............................................
Jul. 1996
Jul. 1999
OCM Principal Opportunities Fund II, L.P. ......................................... Dec. 2000
Dec. 2005
OCM Principal Opportunities Fund III, L.P. ........................................ Nov. 2003
Nov. 2008
OCM Principal Opportunities Fund IV, L.P. ........................................ Oct. 2006
Oct. 2011
Oaktree Principal Fund V, L.P. ..........................................................
Feb. 2009
Feb. 2014
Special Account C ............................................................................. Dec. 2008
Feb. 2014
253
4,507
1,031
2,692
4,964
401
625
1,275
1,400
3,328
2,827
505
$
Asia Principal Investments
121
505
323
470
459
462
568
989
1,287
1,727
1,260
917
1,155
1,379
8,555
271
1,179
294
143
—
349
282
1,208
952
1,041
318
202
$
$
218
766
476
799
906
856
1,339
2,539
3,335
3,845
2,596
1,905
2,073
3,442
12,804
260
489
155
1
—
750
907
2,455
1,762
1,642
84
65
(in millions)
$ — $
— $
— $
— $
—
—
—
—
—
—
—
28
7
3
191
855
1,535
5,595
264
5,198
1,199
2,161
—
—
—
—
—
—
—
—
—
—
—
254
920
1,588
4,963
203
4,403
1,163
2,625
—
—
—
—
—
—
74
197
248
340
248
142
76
9
530
5
—
—
—
—
—
—
—
—
—
—
—
6
1
1
38
149
61
1,132
48
230
13
27
—
$ — $
— $
— $
— $
—
27
590
2,728
2,257
550
—
—
574
2,339
2,756
355
—
231
42
—
—
9
—
5
144
—
16
31
—
—
—
—
—
—
—
—
—
—
—
—
638
1,461
—
55
4,799
1,112
2,121
—
—
—
—
200
3,068
2,235
432
261
153
329
447
394
771
1,550
2,077
2,125
1,339
1,179
1,773
3,598
9,844
253
4,507
1,060
2,019
—
401
625
1,275
1,400
3,328
2,021
414
$
IRR Since
Inception (4)
Gross
Net
Multiple
of Drawn
Capital (5)
29.0%
24.7%
2.3x
41.6
44.0
26.2
21.2
21.1
12.4
11.0
15.4
35.0
57.8
18.6
11.8
10.8
23.7
31.9
14.7
15.9
16.9
—
35.7
37.9
22.1
17.9
17.3
10.2
8.5
11.9
28.1
47.3
14.2
8.5
8.1
18.0
25.7
9.7
14.9
9.0
—
3.1
3.1
2.5
2.1
2.2
1.8
1.7
1.7
1.9
2.0
1.9
1.7
1.5
1.9
2.1
1.3
1.3
1.1
—
22.9%
17.5%
17.2%
14.6%
1.9x
6.4
23.3
15.0
8.8
15.2
21.7
5.4
17.8
10.5
6.3
8.1
15.9
13.3%
9.8%
1.5
2.0
1.8
1.4
1.3
1.5
OCM Asia Principal Opportunities Fund, L.P. .................................... May 2006
May 2011
$
578
$
503
$
13
$
60
$ 456
$
361
$
— $
— $
622
5.1%
0.6%
1.2x
European Principal Investments (7)
OCM European Principal Opportunities Fund, L.P. ............................ Mar. 2006
Mar. 2009
$
495
$
460
$
OCM European Principal Opportunities Fund II, L.P. ......................... Dec. 2007
Dec. 2012
Oaktree European Principal Fund III, L.P. ......................................... Nov. 2011
Nov. 2016
1,759
3,164
1,685
1,186
330
318
25
$
159
245
$ 632
$
370
$
€ 1,759
3
€ 1,208
1,545
3,083
Power Opportunities
OCM/GFI Power Opportunities Fund, L.P. ........................................ Nov. 1999
Nov. 2004
$
449
$
OCM/GFI Power Opportunities Fund II, L.P. ...................................... Nov. 2004
Nov. 2009
Oaktree Power Opportunities Fund III, L.P. .......................................
Apr. 2010
Apr. 2015
1,021
1,062
383
541
303
$
251
$
634
$ — $
— $
1,460
49
1,888
5
113
347
39
1,036
17
1
12
— €
23
93
—
$
45
$
573
10.8%
8.3%
1.8x
— €
— €
1,868
1,255
10.5
12.1
6.3
2.7
1.3
1.1
10.8%
6.6%
$
— $
7
9
—
—
325
20.1%
13.1%
1.8x
76.4
31.1
59.2
11.7
35.3%
27.4%
3.9
1.3
€
€
€
€
€
€
€
€
€
€
€
€
€
Investment Period
Start Date
End Date
Total
Committed
Capital
Drawn
Capital (1)
Fund Net
Income
Since
Inception
Distri-
butions
Since
Inception
Net
Asset
Value
As of December 31, 2012
Manage-
ment
Fee-
Gener-
ating
AUM
(in millions)
Oaktree
Segment
Incentive
Income
Recog-
nized
Accrued
Incentives
(Fund
Level) (2)
Unreturned
Drawn
Capital Plus
Accrued
Preferred
Return (3)
IRR Since
Inception (4)
Gross
Net
Multiple
of Drawn
Capital (5)
Real Estate
TCW Special Credits Fund VI, L.P. (6) ......................... Aug. 1994
Aug. 1997
$
OCM Real Estate Opportunities Fund A, L.P. .............
Feb. 1996
Feb. 1999
OCM Real Estate Opportunities Fund B, L.P. ............. Mar. 1997
Mar. 2000
OCM Real Estate Opportunities Fund II, L.P. ............. Dec. 1998
Dec. 2001
OCM Real Estate Opportunities Fund III, L.P. ............ Sep. 2002
Sep. 2005
Oaktree Real Estate Opportunities Fund IV, L.P......... Dec. 2007
Dec. 2011
Special Account D ...................................................... Nov. 2009
Nov. 2012
$
506
379
285
464
707
450
256
$
506
379
285
440
707
450
262
Oaktree Real Estate Opportunities Fund V, L.P.......... Mar. 2011
Oaktree Real Estate Opportunities Fund VI, L.P. (8) .... Aug. 2012
Mar. 2015
Aug. 2016
1,283
255
1,283
178
666
295
172
266
651
232
107
167
(2)
$
1,172
$ — $
665
455
705
1,223
183
119
23
—
9
2
1
135
499
250
1,427
176
—
—
—
—
—
353
166
1,251
235
$
— $
56
—
52
102
6
—
—
—
—
4
—
—
27
37
11
32
—
Asia Real Estate
Oaktree Asia Special Situations Fund, L.P. ................ May 2008
Apr. 2009
$
50
$
19
$
10
$
— $
29
$
—
PPIP
Oaktree PPIP Fund, L.P. (9) ........................................ Dec. 2009
Dec. 2012
$
2,322
$
1,113
$
412
$
672
$ 852
$
565
(10)
Mezzanine Finance
OCM Mezzanine Fund, L.P. (12) .................................. Oct. 2001
Oct. 2006
$
808
$
773
$
OCM Mezzanine Fund II, L.P. ....................................
Jun. 2005
Oaktree Mezzanine Fund III, L.P. (13) .......................... Dec. 2009
Jun. 2010
Dec. 2014
1,251
1,592
1,107
1,097
U.S. Senior Loans
Oaktree Loan Fund, L.P. ............................................ Sep. 2007
Sep. 2012
$
2,193
$
2,193
$
Oaktree Loan Fund, 2x, L.P. ....................................... Sep. 2007
Oaktree Enhanced Income Fund, L.P. (8) .................... Sep. 2012
Sep. 2015
Aug. 2015
1,722
362
1,722
205
280
411
46
95
98
6
$
1,038
$
15
$
1,125
234
393
910
—
541
1,552
$
2,288
$ — $
1,653
—
167
211
Other (16)
—
165
549
35,428
322
(14)
(15)
$
$
$
— $
1
— $
(11)
48
$
32
—
—
N/A
N/A
N/A
3
—
—
N/A
N/A
N/A
2,126
(15)
1
Total closed-end funds
$ 35,750
$
2,127
$
$
$
$
—
—
52
—
—
402
211
1,379
182
21.1%
17.4%
2.4x
10.5
8.2
15.2
15.9
17.4
16.8
15.2
nm
8.4
7.1
11.1
11.9
11.2
15.0
9.5
nm
15.4%
11.9%
1.9
1.7
1.7
2.0
1.6
1.4
1.2
1.0
27
16.1%
8.4%
1.8x
(11)
229
30.2%
N/A
1.4x
—
444
982
N/A
N/A
N/A
14.3% 10.7% /10.1%
1.4x
10.5
10.2
7.3
9.4 / (12.7)
1.5
1.1
11.8%
7.9%
2.5%
1.9%
2.7
nm
1.9
nm
1.1x
1.1
1.0
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Reflects the capital contributions of investors in the fund, net of any distributions to such investors of uninvested capital.
Excludes Oaktree segment incentive income recognized since inception.
Reflects the amount the fund needs to distribute to its investors as a return of capital and a preferred return (as applicable) before Oaktree is entitled to receive incentive income (other than tax distributions) from the fund.
The internal rate of return ("IRR") is the annualized implied discount rate calculated from a series of cash flows. It is the return that equates the present value of all capital invested in an investment to the present value of all returns of capital, or the discount rate that will provide
a net present value of all cash flows equal to zero. Fund-level IRRs are calculated based upon the actual timing of cash distributions to investors and the residual value of such investor's capital accounts at the end of the applicable period being measured. Gross IRRs reflect
returns before allocation of management fees, expenses and any incentive allocation to the fund's general partner. Net IRRs reflect returns to non-affiliated investors after allocation of management fees, expenses and any incentive allocation to the fund's general partner.
Calculated as Drawn Capital plus gross income before fees and expenses divided by Drawn Capital.
The fund was managed by certain Oaktree investment professionals while employed at the Trust Company of the West prior to Oaktree's founding in 1995. When these employees joined Oaktree upon, or shortly after, its founding, they continued to manage the fund through the
end of its term pursuant to a sub-advisory relationship between the Trust Company of the West and Oaktree.
Aggregate IRRs based on conversion of OCM European Principal Opportunities Fund II, L.P. and Oaktree European Principal Fund III, L.P. cash flows from Euros to USD at the December 31, 2012 spot rate of $1.3184.
The IRR is not considered meaningful (“nm”) as the period from the initial contribution through December 31, 2012 is less than one year.
Due to the differences in allocations of income and expenses to this fund's two primary limited partners, the United States Treasury and Oaktree PPIP Private Fund, L.P., a combined net IRR is not presented. Of the $2,322 million in capital commitments, $1,161 million relates to
the Oaktree PPIP Private Fund, L.P. The gross and net IRR for the Oaktree PPIP Private Fund, L.P. were 27.1% and 19.8%, respectively, as of December 31, 2012.
(10) The United States Treasury incurs management fees for the Oaktree PPIP Fund, L.P., paid quarterly in arrears, based on their Interest Value as of December 31, 2012. Limited Partners of the Oaktree PPIP Private Fund, L.P. incur management fees based on Invested Capital
as of December 31, 2012 totaling $210.4 million, paid quarterly in advance.
(11) Represents amounts related to the Oaktree PPIP Private Fund, L.P. only.
(12) The fund's partnership interests are divided into Class A and Class B interests, with the Class A interests having priority with respect to the distribution of current income and disposition proceeds. Net IRR for Class A interests is 10.7% and Class B interests is 10.1%. Combined
net IRR for the Class A and Class B interests is 10.4%.
(13) The fund's partnership interests are divided into Class A and Class B interests, with the Class A interests having priority with respect to the distribution of current income and disposition proceeds. Net IRR for Class A interests is 9.4% and Class B interests is (12.7)%. Combined
net IRR for Class A and Class B interests is 4.2%.
(14) Represents gross assets, including leverage of $353 million.
(15) Euro amounts were translated at 1.3184 U.S. dollars to 1 Euro in calculating totals.
(16)
Includes separate accounts and a non-Oaktree fund.
18
Open-end Funds
Composite
Inception
Management
Fee-Gener-
ating AUM
as of
December 31,
2012
(in millions)
Annualized Rates of Return (1)
Sharpe Ratio
Year Ended December 31, 2012
Since Inception through December 31, 2012
Oaktree
Gross
Net
Rele-
vant
Bench-
mark
Oaktree
Gross
Net
Rele-
vant
Bench-
mark
Rele-
vant
Bench-
mark
Oaktree
Gross
U.S. High Yield Bonds ..... Jan. 1986
$
17,263
14.0% 13.4%
14.7% 10.1%
9.5%
8.9% 0.81
0.54
European High Yield
Bonds .......................... May 1999
U.S. Convertibles ............ Apr. 1987
Non-U.S. Convertibles .... Oct. 1994
High Income
Convertibles ................ Aug. 1989
U.S. Senior Loans ........... Sep. 2008
European Senior Loans .. May 2009
Emerging Markets
Equity ..........................
Jul. 2011
1,424
4,273
2,239
1,053
1,737
1,028
21.8
14.8
13.7
10.6
8.7
14.0
21.2
14.2
13.2
10.1
8.1
13.3
22.9
15.0
14.7
15.2
9.4
10.4
8.3
9.7
8.9
11.9
8.6
12.8
7.7
9.2
8.2
11.1
8.0
12.1
6.2
7.8
5.8
8.8
6.3
13.8
0.60
0.45
0.74
1.00
1.20
1.91
0.33
0.28
0.34
0.58
0.56
1.91
39
25.1
24.1
18.2
1.0
0.2
(3.0)
0.04
(0.12)
Total open-end funds
$
29,056
(1) Represents Oaktree’s time-weighted rates of return, including reinvestment of income, net of commissions and transaction costs.
Returns for Relevant Benchmarks are presented on a gross basis.
Evergreen Funds
As of December 31, 2012
Manage-
ment
Fee-
Gener-
ating
AUM
Accrued
Incen-
tives
(Fund
Level)
(in millions)
Inception
Value Opportunities ................................... Sep. 2007
$ 1,657
$
Emerging Markets Absolute Return ........... Apr. 1997
Restructured funds (1)
321
1,978
—
Total evergreen funds
$ 1,978
$
— (2)
— (2)
—
11
11
Annualized Rates of Return
Year Ended
December 31, 2012
Since Inception through
December 31, 2012
Gross
Net
Gross
Net
20.2%
11.6
15.0%
9.1
13.3%
16.0
8.5%
11.0
(1) Oaktree manages three restructured evergreen funds that are in liquidation: European Credit Opportunities Fund, L.P., Oaktree
High Yield Plus Fund, L.P. and OCM Japan Opportunities Fund, L.P. (Yen class). As of December 31, 2012, these funds had gross
and net IRRs since inception of (2.0)% and (4.5)%, 8.0% and 5.6%, and (8.8)% and (9.9)%, respectively, and in the aggregate had
AUM of $202.7 million. Additionally, Oaktree High Yield Plus Fund, L.P. had accrued incentives (fund level) of $10.8 million as of
December 31, 2012.
(2) For the year ended December 31, 2012, segment incentive income recognized by Oaktree totaled $40.5 million and $1.1 million for
Value Opportunities and Emerging Markets Absolute Return, respectively.
19
Item 1A. Risk Factors
We are subject to a number of significant risks inherent in our business. You should carefully consider the
risks and uncertainties described below and other information included in this annual report. If any of the events
described below occur, our business and financial results could be seriously harmed. The trading price of our
Class A units could decline as a result of any of these risks, and you could lose all or part of your investment.
Risks Relating to Our Business
Given our focus on achieving superior investment performance with less-than-commensurate risk, and the
priority we afford our clients' interests, we may reduce our AUM, restrain its growth, reduce our fees or
otherwise alter the terms under which we do business when we deem it appropriate—even in
circumstances where others might deem such actions unnecessary. Our approach could adversely affect
our results of operations.
One of the means by which we seek to achieve superior investment performance in each of our strategies is
by limiting the AUM in our strategies to an amount that we believe can be invested appropriately in accordance with
our investment philosophy and current or anticipated economic and market conditions. Thus, in the past we have
often taken affirmative steps to limit the growth of our AUM. For example:
•
•
from time to time, we have suspended marketing our U.S. high yield bond strategy for long periods and
have declined to participate in searches aggregating billions of dollars since 1998;
from time to time, we have ceased general marketing of our funds in our convertible securities strategy
and have asked The Vanguard Group to close its Convertible Securities Fund, which we sub-advise, to
new money from investors for certain periods of time;
• we returned $5.0 billion from our 2001 and 2002 distressed debt funds prior to the end of their respective
investment periods and $4.4 billion from OCM Opportunities Fund VIIb, L.P. (“Opps VIIb”) prior to the end
of its investment period;
• we deferred raising a new distressed debt fund by a year from 2003 to 2004, even though a significant
amount of capital had already been offered;
• we intentionally sized Oaktree Opportunities Fund VIII, L.P. (“Opps VIII”) and Oaktree Opportunities Fund
VIIIb, L.P. (“Opps VIIIb”) smaller than their predecessors even though we could have raised additional
capital (i.e., we capped Opps VIII at $4.5 billion and Opps VIIIb at $2.7 billion); and
• we have often turned away substantial amounts of capital offered to us for management.
Additionally, we may voluntarily reduce management fee rates and terms for certain of our funds or
strategies when we deem it appropriate, even when doing so may reduce our short-term revenue. For example, we
decided to reduce our maximum annual management fee for Opps VIII and Oaktree Principal Fund V, L.P. (“PF V”)
from 1.75% to 1.60%. We also, on our own initiative, waived management fees for Opps VIII with respect to capital
commitments in excess of $4.0 billion and reduced the management fee rate to 1.0% with respect to capital
commitments in excess of $2.0 billion for Opps VIIIb. We made these changes not because they were necessary to
raise the capital we wanted, but because we deemed it important to demonstrate to our clients that we were not
financially incentivized to raise more capital than appropriate for the opportunity set. Additionally, we reserve the
right in our sole discretion to afford certain clients more favorable economic terms, including with respect to
management fee rates and carried interest rates, in cases where such clients have committed a certain amount of
capital to our funds or strategies that in the aggregate exceed certain threshold amounts, if any.
Our practice of putting our clients' interests first and forsaking short-term advantage by, for example,
reducing assets under management or management fee or carried interest rates may reduce the profits we could
otherwise realize in the short term and adversely affect our business and financial condition and therefore conflict
with the short-term interests of our Class A unitholders. In addition, to protect our current clients' interests, we may
not accept all of the capital offered to us, which may damage our relationships and prospects with potential
investors in our funds and may reduce the value of our business and therefore conflict with our Class A unitholders'
short-term interests. Our Class A unitholders should thus understand that in instances in which our clients' interests
diverge from the short-term interests of our Class A unitholders, we intend to act in the interests of our clients.
However, it is our fundamental belief that prioritizing our clients' interests in such instances will maximize the long-
term value of our business, which, in turn, will benefit the Class A unitholders.
20
Our business is materially affected by conditions in the global financial markets and economies, and any
disruption or deterioration in these conditions could materially reduce our revenues and cash flow and
adversely affect our overall performance, ability to raise or deploy capital, financial condition and liquidity
position.
Our business is materially affected by conditions in the global financial markets and economic conditions
throughout the world that are outside our control, such as interest rates, availability and cost of credit, inflation rates,
economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices,
currency exchange rates and controls and national and international political circumstances (including wars,
terrorist acts or security operations). Ongoing developments in the U.S. and global financial markets following the
unprecedented turmoil in the global capital markets and the financial services industry in late 2008 and early 2009
continue to illustrate that the current environment is still one of uncertainty and instability for investment
management businesses. While there has been significant recovery in the capital markets since then, such
recovery has been slow and uneven as the global economy grew at a modest pace in 2012. High unemployment
rates in the United States and elsewhere, a sluggish recovery in some real estate markets, continued economic
weakness in the eurozone, concern over growth prospects in China and emerging markets, growing debt loads for
certain countries and uncertainty about the consequences of governments eventually withdrawing monetary
stimulus measures, all highlight the fact that economic conditions remain unpredictable. These and other conditions
in the global financial markets and economy have resulted in, and may continue to result in, adverse consequences
for many of our funds, each of which could adversely affect the business of such funds, restrict such funds'
investment activities and impede such funds' ability to effectively achieve their investment objectives. For example,
in 2008 and 2009 we initiated or completed restructurings of three of our evergreen funds as a result of the
disruption in the global capital markets, and these restructurings resulted in some combination of the elimination or
suspension of investor redemption rights, renegotiation of terms and interest rates on borrowing, investment of
additional capital as the general partner and waiver or suspension of management fees.
The economic environment in recent years has resulted in and may continue to result in decreases in the
market value of certain publicly traded securities held by some of our funds. Illiquidity in certain portions of the
financial markets could adversely affect the pace of realization of our funds' investments or otherwise restrict the
ability of our funds to realize value from their investments, thereby adversely affecting our ability to generate
incentive or investment income. There can be no assurance that conditions in the global financial markets will not
worsen and/or further adversely affect our investments and overall performance.
Our profitability may also be adversely affected by our fixed costs, such as the base salaries and expenses
of our staff, lease payments on our office space and maintenance on our information technology, and the possibility
that we would be unable to scale back other costs and otherwise redeploy our resources within a time frame
sufficient to match changes in market and economic conditions to take advantage of the opportunities that may be
presented by these changes. As a result, a specific market dislocation may result in lower investment returns for
certain of our funds, which would adversely affect our revenues, and we may not be able to adjust our resources to
take advantage of new investment opportunities that may be created as a result of such dislocation.
Our business depends in large part on our ability to raise capital from investors. If we were unable to raise
such capital, we would be unable to collect management fees or deploy such capital into investments,
which would materially reduce our revenues and cash flow and adversely affect our financial condition.
Our ability to raise capital from investors depends on a number of factors, including many that are outside
our control, such as the general economic environment or the number of other investment funds being raised at the
same time by our competitors that are focused on the same investment strategies as our funds. Additionally,
investors may downsize their investment allocations to alternative investments, including private funds and hedge
funds, to rebalance a disproportionate weighting of their overall investment portfolio among asset classes. Poor
performance of our funds could also make it more difficult for us to raise new capital. Investors in our closed-end
funds may decline to invest in future closed-end funds we raise, and investors in our open-end and evergreen funds
may withdraw their investments in the funds (on specified withdrawal dates) as a result of poor performance. Our
investors and potential investors continually assess our funds' performance independently and relative to market
benchmarks and our competitors, and our ability to raise capital for existing and future funds and avoid excessive
redemptions depends on our funds' performance. To the extent economic and market conditions deteriorate, we
may be unable to raise sufficient amounts of capital to support the investment activities of future funds. If we were
unable to successfully raise capital, our revenue and cash flow would be reduced, and our financial condition would
be adversely affected.
21
Clients may withdraw their capital from our funds or be unwilling to commit new capital to our funds as a
result of our decision to become a public company, which could have a material adverse effect on our
business and financial condition.
Some of our clients may view negatively the fact that we became a public company, including concerns that
as a public company we may shift our focus from the interests of our clients to those of our public unitholders. Some
of our clients may believe that we will strive for near-term profit instead of superior risk-adjusted returns for our
clients over time or grow our AUM for the purpose of generating additional management fees without regard to
whether we believe there are sufficient investment opportunities to effectively deploy the additional capital. There
can be no assurance that we will be successful in our efforts to address such concerns or to convince clients that
being a public company does not affect our longstanding priorities or the way we conduct our business. A decision
by a significant number of our clients to withdraw capital from our funds, not to commit additional capital to our
funds or to cease doing business with us altogether could inhibit our ability to achieve our investment objectives and
may have a material adverse effect on our business and financial condition.
We depend on a number of key personnel, and our ability to retain them and attract additional qualified
personnel is critical to our success and our growth prospects.
We depend on the diligence, skill, judgment, reputation and business contacts of our key personnel. Our
future success will depend upon our ability to retain our key personnel and our ability to recruit additional qualified
personnel. Our key personnel possess substantial experience and expertise in investing, are responsible for
locating and executing our funds' investments, have significant relationships with the institutions that are the source
of many of our funds' investment opportunities and in certain cases have strong relationships with our investors.
Therefore, if our key personnel join competitors or form competing companies, it could result in the loss of
significant investment opportunities and certain existing investors.
We have experienced departures of key investment professionals in the past and will do so in the future. Any
of those departures could have a negative impact on our ability to achieve our investment objectives. Indeed, the
departure for any reason of any of our most senior professionals, such as Howard Marks or Bruce Karsh, or a
significant number of our other investment professionals, could have a material adverse effect on our ability to
achieve our investment objectives, cause certain of our investors to withdraw capital they invest with us or elect not
to commit additional capital to our funds or otherwise have a material adverse effect on our business and our
prospects. The departure of some or all of those individuals could also trigger certain “key man” provisions in the
documentation governing certain of our closed-end funds, which would permit the limited partners of those funds to
suspend or terminate the funds' investment periods or, in the case of Oaktree Emerging Markets Absolute Return
Fund, L.P. (“EMAR”), permit investors to withdraw their capital prior to expiration of the applicable lock-up date. Our
key man provisions vary by both strategy and fund and, with respect to each strategy and fund, are typically tied to
multiple individuals, meaning that it would require the departure of more than one individual to trigger the key man
provisions. In the event that our key man provisions were triggered for all of our closed-end funds, the investment
period for these funds would be terminated, and as of December 31, 2012, this would result in an $11.2 billion
decrease in AUM. In addition, if the key man provision for EMAR were triggered, investors in EMAR would be
allowed to withdraw all of their capital, which represents 0.4% of our AUM as of December 31, 2012. As a part of
our May 2007 Restructuring, our senior employees exchanged their direct or indirect ownership interest in OCM for
a new interest in OCGH that vested over time. Because 100% of these interests have vested, affected employees
may be less motivated to remain at Oaktree.
We anticipate that it will be necessary for us to add investment professionals both to grow our team and to
replace those who depart. However, the market for qualified investment professionals is extremely competitive, both
in the United States and internationally, and we may not succeed in recruiting additional personnel or we may fail to
effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain and
attract investment professionals may also result in significant additional expenses, which could adversely affect our
profitability or result in an increase in the portion of our incentive income that we grant to our investment
professionals.
Our revenues are highly volatile due to the nature of our business, we do not expect steady earnings
growth and we do not intend to provide earnings guidance, each of which may cause the value of interests
in our business to be variable.
Our segment revenues and cash flow are highly volatile, primarily due to the fact that the incentive income
we receive from our funds and the investment income we recognize on our corporate investments in funds and
companies, which individually and collectively account for a substantial portion of our income, is highly volatile. In
22
the case of our closed-end funds, our incentive income is recognized only when it is fixed or determinable, which
typically occurs in a sporadic and unpredictable fashion. In addition, we are entitled to incentive income (other than
tax distributions, which are treated as incentive income) only after all contributed capital and profits representing,
typically, an 8% annual preferred return on that capital have been distributed to our funds' limited partners. In the
case of our evergreen funds, we are generally entitled to receive an annual incentive payment based upon the
increase in NAV attributable to each limited partner during a particular calendar year, subject to a high-water mark.
Given that the investments made by our funds may be illiquid or volatile and that our investment results and the
pace of realization of our investments will vary from fund to fund and period to period, our incentive income likely
will vary materially from year to year.
We may also experience fluctuations in our operating results, from quarter to quarter or year to year, due to a
host of other factors, including changes in the values of our investments, changes in the operating results of
DoubleLine or its funds or other companies in which we have corporate investments, changes in the amount of
distributions from our funds or companies in which we have corporate investments, the pace of raising new funds
and liquidation of our old funds, dividends or interest paid in respect of investments, changes in our operating or
other expenses, the degree to which we encounter competition and general economic and market conditions. This
variability may cause our results for a particular period not to be indicative of our performance in a future period.
As noted above, the timing and amount of incentive income generated by our closed-end funds are uncertain
and will contribute to the volatility of our net income. Incentive income depends on our closed-end funds' investment
performance and opportunities for realizing gains, which may be limited. In addition, it takes a substantial period of
time to identify attractive investment opportunities, to raise all the funds needed to make an investment and then to
realize the cash value of an investment through resale, recapitalization or other exit event. Even if an investment
proves to be profitable, it may be several years or longer before those profits can be realized in cash or other
manner of payment. We cannot predict when, or if, any realization of investments will occur. If we have a realization
event in a particular quarter, it may have a significant impact on our revenues and profits for that particular quarter,
which may not be replicated in subsequent quarters.
A small number of our open-end funds also generate performance-based revenues based on their
investment returns as compared with a specified market index or other benchmark. As a result, we may not earn a
performance fee in a particular period even if the fund had a positive return. The incentive income and performance
fee revenues we earn are therefore dependent on, among other factors, the NAV of the fund and, in certain cases,
its performance relative to its market, which may lead to volatility in our quarterly or annual financial results.
Finally, we do not plan to provide any guidance regarding our future quarterly or annual financial results.
The historical financial information included in this annual report is not necessarily indicative of our future
performance.
The historical financial information included in this annual report is not necessarily indicative of our future
financial results. This financial information does not purport to represent or predict the results of any future periods.
The results of future periods are likely to be materially different as a result of:
•
future growth that does not follow our historical trends;
• changes in the economic environment, competitive landscape and financial markets;
• new and additional costs and expenses attributable to our operations as a public company;
•
increases in non-cash compensation charges primarily related to the vesting of OCGH units issued after
our initial public offering in April 2012; and
• a provision for corporate income taxes on the income of two of our Intermediate Holding Companies that
are taxed as corporations for U.S. federal income tax purposes.
Our funds depend on investment cycles, and any change in such cycles could have an adverse effect on
our investment prospects.
Cyclicality is important to our business. Weak economic environments have tended to afford us our best
investment opportunities and our best relative investment performance. For example, the relative performance of
our high yield bond strategy has typically been strongest in difficult times when default rates are highest, and our
distressed debt and control investing funds have historically found their best investment opportunities during
downturns in the economy when credit is not as readily available. Conversely, we tend to realize value from our
23
investments in times of economic expansion, when opportunities to sell investments may be greater. Thus, we
depend on the cyclicality of the market in order to sustain our business and generate superior risk-adjusted returns
over extended periods. Any prolonged economic expansion or recession could have an adverse impact on certain
of our funds and materially affect our ability to deliver superior investment returns or generate incentive or other
income.
Our failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect
our business.
As we have expanded the number and scope of our strategies, we increasingly confront potential conflicts of
interest that we need to manage and resolve. These conflicts take many forms. For example, the investment focus
of a number of our funds overlap, meaning that we occasionally confront issues as to how a particular investment
opportunity should be allocated. Though we believe we have appropriate means to resolve these conflicts, our
judgment on any particular allocation could be challenged, particularly in instances (as is sometimes the case)
where the affected funds have different fee structures or our employees have invested more heavily in one fund
than another. Additionally, different funds that we manage may invest in different parts of the capital structure of the
same company, and thus the interests of two or more funds may be adverse to each other when the company
experiences financial distress, undergoes a restructuring or files for bankruptcy. While we have developed general
guidelines regarding when two or more funds can invest in different parts of the same company's capital structure
and created a process that we employ to handle such conflicts if they arise, our judgment to permit the investments
to occur in the first instance or our judgment on how to minimize the conflict could be challenged. Another example
involves our receipt of material non-public information regarding a potential investment. Normally, our receipt of
such information restricts all of our investment strategies. Occasionally, one investment group will want to obtain
such information, but another will want to remain free to trade the securities of that issuer and will not want to
become restricted. In such circumstances, we sometimes have to choose which group's preference will prevail. In
these and other circumstances, we seek to resolve the conflict in good faith and with a view to the best interests of
all of our clients, but there can be no assurance that we will make the correct judgment in hindsight or that our
judgment will not be questioned or challenged.
Our compliance and legal groups seek to monitor and manage our actual and potential conflicts of interest.
We maintain internal controls and various policies and procedures, including oversight, codes of conduct, systems
and communication tools to identify, prevent, mitigate or resolve any conflicts of interest that may arise. Our
compliance policies and procedures address a variety of regulatory and compliance risks, such as the handling of
material non-public information, personal securities trading and the allocation of investment opportunities. Our
compliance and legal groups also monitor information barriers that we may establish on a limited basis from time to
time between our different investment groups. Notwithstanding the foregoing, it is possible that perceived or actual
conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately
dealing with conflicts of interest is complex and difficult, and any mistake could potentially create liability or damage
our reputation. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material
adverse effect on our reputation, which in turn could materially adversely affect our business in a number of ways,
such as causing investors to redeem their capital (to the degree they have that right), making it harder for us to
raise new funds and discouraging others from doing business with us.
The investment management business is intensely competitive.
The investment management business is intensely competitive, with competition based on a variety of
factors, including investment performance, the quality of service provided to clients, brand recognition and business
reputation. Our investment management business competes for clients, personnel and investment opportunities
with a large number of private equity funds, specialized investment funds, hedge funds, corporate buyers, traditional
investment managers, commercial banks, investment banks, other investment managers and other financial
institutions. Numerous factors serve to increase our competitive risks:
• a number of our competitors have more personnel and greater financial, technical, marketing and other
resources than we do;
• many of our competitors have raised, or are expected to raise, significant amounts of capital, and many of
them have investment objectives similar to ours, which may create additional competition for investment
opportunities and reduce the size and duration of pricing inefficiencies that we seek to exploit;
• some of our competitors may have a lower cost of capital and access to funding sources that are not
available to us, which may create competitive disadvantages for us with respect to our funds, particularly
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our funds that directly use leverage or rely on debt financing of their portfolio companies to generate
superior investment returns;
• some of our competitors have higher risk tolerances, different risk assessments or lower return thresholds,
which could allow them to consider a wider variety of investments and to bid more aggressively than us for
investments;
• our competitors may be able to achieve synergistic cost savings in respect of an investment that we
cannot, which may provide them with a competitive advantage in bidding for an investment;
•
there are relatively few barriers to entry impeding new investment funds, and the successful efforts of new
entrants into our various lines of business, including major commercial and investment banks and other
financial institutions, have resulted in increased competition;
• some investors may prefer to invest with an investment manager whose equity securities are not traded
on a national securities exchange; and
• other industry participants will from time to time seek to recruit our investment professionals and other
employees away from us.
We may find it harder to raise funds, and we may lose investment opportunities in the future, if we do not
match the fees, structures and terms offered by competitors to their fund clients. Alternatively, we may experience
decreased profitability, rates of return and increased risk of loss if we match the prices, structures and terms offered
by competitors. This competitive pressure could adversely affect our ability to make successful investments and
limit our ability to raise future funds, either of which would adversely impact our business, revenues, results of
operations and cash flow.
The increasing number of investment managers dedicated to our markets and the increasing amount of
capital available to them have made it more difficult to identify markets in which to invest, and this could
lead to a decline in our returns on investments.
The asset management market has grown at a very rapid pace during the last several years, leading to
substantial growth in AUM in our industry. Our success in the past has largely been a result of our ability to identify
and exploit non-mainstream markets with the potential for attractive returns. Although investment managers
worldwide have expanded the range of their investments in terms of transaction sizes, industries and geographical
regions, there is a finite number of available investment opportunities at any given time. Particularly in strong
economic times, the most attractive opportunities generally are pursued by an increasing number of managers with
increasing amounts to invest and, as a result, it is sometimes difficult for us to identify markets that are capable of
generating attractive investment returns. If we are unable to identify a sufficient number of attractive investment
opportunities in the future, our returns will decline. This development would have an adverse impact on our AUM
and on our results of operations.
Poor performance of our funds would cause a decline in our revenues, net income and cash flow and could
adversely affect our ability to raise capital for future funds.
When any of our funds perform poorly, either by incurring losses or underperforming benchmarks or our
competitors, our investment record suffers. In addition, our incentive income is adversely affected and, all else
being equal, the value of our AUM might decrease, resulting in a reduction of our management fees. Moreover, we
experience losses on our investments of our own capital as a result of poor investment performance by our funds. If
a fund performs poorly, we will receive little or no incentive income with regard to the fund and little income or
possibly losses from our own principal investment in the fund. Poor performance of our funds could also make it
more difficult for us to raise new capital. Investors in our closed-end funds may decline to invest in future closed-
end funds we raise, and investors in our open-end and evergreen funds may withdraw their investments in the
funds (on specified withdrawal dates) as a result of poor performance. Our investors and potential investors
continually assess our funds' performance independently and relative to market benchmarks and our competitors,
and our ability to raise capital for existing and future funds and avoid excessive redemption levels depends on our
funds' performance.
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We may not be able to maintain our current fee structure as a result of industry pressure from limited
partners to reduce fees, which could have an adverse effect on our profit margins and results of
operations.
We may not be able to maintain our current fee structure as a result of industry pressure from limited
partners to reduce fees. Although our investment management fees vary among and within asset classes,
historically we have competed primarily on the basis of our performance and not on the level of our investment
management fees relative to those of our competitors. In recent years, however, there has been a general trend
toward lower fees in the investment management industry. For example, we reduced our maximum annual
management fee for Opps VIII from 1.75% to 1.60% and continued to maintain that same fee rate for Opps VIIIb
and Oaktree Opportunities Fund IX, L.P. (“Opps IX”). Additionally, we reserve the right in our sole discretion to afford
certain clients more favorable economic terms, including with respect to management fee rates and carried interest
rates, in cases where such clients have committed a certain amount of capital to our funds or strategies that in the
aggregate exceed certain threshold amounts, if any. In order to maintain our fee structure in a competitive
environment, we must be able to continue to provide clients with investment returns and service that incentivize our
investors to pay our current fee rates. We cannot assure you that we will succeed in providing investment returns
and service that will allow us to maintain our current fee structure. Fee reductions on existing or future new
business could have an adverse effect on our profit margins and results of operations. For more information about
our fees please see “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
We have experienced significant growth in our operations outside the United States, which may place
significant demands on our administrative, operational and financial resources.
In recent years, the scope and relative share of our non-U.S. operations have grown significantly. We or our
fund affiliates now have offices in 10 cities outside the United States, housing over one fifth of our personnel. This
rapid growth has placed and may continue to place significant demands on our business infrastructure. Pursuing
investment opportunities outside the United States presents challenges not faced by U.S. investments, such as
different legal and tax regimes and currency fluctuations, which require additional resources to address. In addition,
in conducting business in these jurisdictions, we are often faced with the challenge of ensuring that our activities are
consistent with U.S. or other laws with extraterritorial application, such as the USA PATRIOT Act and the U.S.
Foreign Corrupt Practices Act (“FCPA”). Moreover, actively pursuing international investment opportunities may
require that we increase the size or number of our international offices. Pursuing non-U.S. clients means that we
must comply with international laws governing the sale of interests in our funds, different investor reporting and
information processes and other requirements. As a result, we are required to continuously develop our systems
and infrastructure in response to the increasing complexity and sophistication of the investment management
market and legal, accounting and regulatory situations. Moreover, this growth has required, and will continue to
require, us to incur significant additional expenses and to commit additional senior management and operational
resources. There can be no assurance that we will be able to manage our expanding international operations
effectively or that we will be able to continue to grow this part of our business, and any failure to do so could
adversely affect our ability to generate revenues and control our expenses.
We may enter into new lines of business, make strategic investments or acquisitions or enter into joint
ventures, each of which may result in additional risks and uncertainties for our business.
Our operating agreement permits us to enter into new lines of business, make future strategic investments or
acquisitions and enter into joint ventures. As we have in the past, and subject to market conditions, we may grow
our business by increasing AUM in existing investment strategies, pursue new investment strategies, which may be
similar or complementary to our existing strategies or be wholly new initiatives, or enter into strategic relationships,
such as our current relationship with DoubleLine, or joint ventures. In addition, opportunities may arise to acquire
other alternative or traditional investment managers.
To the extent we make strategic investments or acquisitions, enter into strategic relationships or joint
ventures or enter into new lines of business, we will face numerous risks and uncertainties, including risks
associated with the required investment of capital and other resources and with combining or integrating operational
and management systems and controls and managing potential conflicts. Entry into certain lines of business may
subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and
may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues, or produces
investment losses, or if we are unable to efficiently manage our expanded operations, our results of operations will
be adversely affected, and our reputation and business may be harmed. In the case of joint ventures, we are
26
subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or
reputational damage relating to, systems, controls and personnel that are not under our control.
We may not be successful in expanding into new investment strategies, markets and lines of business.
We actively consider the opportunistic expansion of our business, both geographically and into new
investment strategies. For example, we have focused on expanding into products for real estate, senior loans,
emerging market credit and direct lending and broadening our distribution, including strategic partnerships,
subadvisory and retail and high net worth offerings. Such expansion would result in adding personnel and growing
investment teams. We may not be successful in any such attempted expansion. Attempts to expand our business
involve a number of special risks, including some or all of the following:
•
•
the diversion of management's attention from our existing business;
the disruption of our existing business;
• entry into markets or lines of business in which we may have limited or no experience;
•
increasing demands on our operational systems;
• potential increase in investor concentration; and
•
increasing the risks associated with conducting operations in foreign jurisdictions.
Because we continuously evaluate potential new investment strategies, geographic markets and lines of
business, we cannot identify for you all the risks we may face and the potential adverse consequences on us and
your investment that may result from any attempted expansion.
We often pursue investment opportunities that involve business, regulatory, legal or other complexities.
We often pursue unusually complex investment opportunities involving substantial business, regulatory or
legal complexity that would deter other investment managers. Our tolerance for complexity presents risks, as such
transactions can be more difficult, expensive and time-consuming to finance and execute; it can be more difficult to
manage or realize value from the assets acquired in such transactions; and such transactions sometimes entail a
higher level of regulatory scrutiny or a greater risk of contingent liabilities. Any of these risks could harm the
performance of our funds.
Extensive regulation in the United States and abroad affects our activities and creates the potential for
significant liabilities and penalties that could adversely affect our business and results of operations.
Potential regulatory action poses a significant risk to our reputation and our business. Our business is
subject to extensive regulation in the United States and in the other countries in which our investment activities
occur. The SEC oversees the activities of our subsidiary Oaktree Capital Management, L.P. as a registered
investment adviser under the Advisers Act. Additionally, the U.S. Commodity Futures Trading Commission (the
“CFTC”) oversees the activities of Oaktree Capital Management, L.P. as a registered commodity pool operator
(“CPO”) and commodity trading adviser (“CTA”) under the Commodity Exchange Act. FINRA oversees the activities
of our subsidiary OCM Investments, LLC as a registered broker-dealer. In addition, we regularly rely on exemptions
from various requirements of the Securities Act, the Exchange Act, the Investment Company Act, the Commodity
Exchange Act and the U.S. Employee Retirement Income Security Act of 1974 (“ERISA”). These exemptions are
sometimes highly complex and may in certain circumstances depend on compliance by third parties who we do not
control. If for any reason these exemptions were to be revoked or challenged or otherwise become unavailable to
us, we could be subject to regulatory action or third-party claims, and our business could be materially and
adversely affected.
Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of
financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on
particular activities. A failure to comply with the obligations imposed by the Advisers Act, including recordkeeping,
advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, could result
in investigations, sanctions and reputational damage. Similarly, a failure to comply with the obligations imposed by
the Commodity Exchange Act, including recordkeeping, reporting requirements, disclosure obligations and
prohibitions on fraudulent activities, could also result in investigations, sanctions and reputational damage. We are
involved regularly in trading activities that implicate a broad number of U.S. securities law regimes, including laws
governing trading on inside information, market manipulation and a broad number of technical trading requirements
27
that implicate fundamental market regulation policies. Violation of these laws could result in severe restrictions on
our activities and damage to our reputation.
Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of
personnel or other sanctions, including revocation of the registration of our relevant subsidiary as an investment
adviser, commodity pool operator, commodity trading adviser or registered broker-dealer. The regulations to which
our business is subject are designed primarily to protect investors in our funds and to ensure the integrity of the
financial markets. They are not designed to protect our Class A unitholders. Even if a sanction imposed against us,
one of our subsidiaries or our personnel by a regulator is for a small monetary amount, the adverse publicity related
to the sanction could harm our reputation, which in turn could materially adversely affect our business in a number
of ways, such as causing investors to redeem their capital (to the degree they have that right), making it harder for
us to raise new funds and discouraging others from doing business with us.
Some of our funds invest in businesses that operate in highly regulated industries, including in businesses
that are regulated by the U.S. Federal Communications Commission, the U.S. Federal Energy Regulatory
Commission, U.S. federal and state banking authorities and U.S. state gaming authorities. The regulatory regimes
to which such businesses are subject may, among other things, condition our funds' ability to invest in those
businesses upon the satisfaction of applicable ownership restrictions or qualification requirements or, absent any
applicable exemption, require us or our subsidiaries to comply with registration, reporting or other requirements.
Moreover, our failure to obtain or maintain any regulatory approvals necessary for our funds to invest in such
industries may disqualify our funds from participating in certain investments or require our funds to divest
themselves of certain assets.
The recently enacted Iran Threat Reduction and Syrian Human Rights Act of 2012 (“ITRSHRA”) expands
the scope of U.S. sanctions against Iran. Notably, ITRSHRA prohibits foreign entities that are majority owned or
controlled by U.S. persons from engaging in transactions with Iran that would be contrary to the sanctions
regulations if undertaken by a U.S. person. In addition, Section 219 of ITRSHRA amended the Exchange Act to
require public reporting companies to disclose in their annual or quarterly reports any dealings or transactions the
company or its affiliates engaged in during the previous reporting period involving Iran or other individuals and
entities targeted by certain OFAC sanctions. In some cases, ITRSHRA requires companies to disclose these types
of transactions even if they were permissible under U.S. law or were conducted outside of the United States by a
foreign affiliate. Disclosure of such activity, even if such activity is not subject to sanctions under applicable law, and
any sanctions actually imposed on us or our affiliates as a result of these activities, could harm our reputation and
have a negative impact on our business.
Regulatory changes in the United States, regulatory compliance failures and the effects of negative
publicity surrounding the financial industry in general could adversely affect our reputation, business and
operations.
As a result of market disruption as well as highly publicized financial scandals in recent years, regulators and
investors have exhibited concerns over the integrity of the U.S. financial markets, and the business in which we
operate both in the United States and outside the United States will be subject to new or additional regulations. We
may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, the CFTC or
other U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets.
We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by
these governmental authorities and self-regulatory organizations.
On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act, among other
things, imposes significant new regulations on nearly every aspect of the U.S. financial services industry, including
oversight and regulation of systemic market risk (including the power to liquidate certain institutions); authorizing the
Federal Reserve to regulate nonbank institutions that are deemed systemically important; generally prohibiting
insured depository institutions, insured depository institution holding companies and their subsidiaries and affiliates
from conducting proprietary trading and investing in or sponsoring private equity funds and hedge funds; and
imposing new registration, recordkeeping and reporting requirements on private fund investment advisers.
Importantly, while several key aspects of the Dodd-Frank Act have been defined through final rules, many aspects
will be implemented by various regulatory bodies over the next several years. While we already have one subsidiary
registered as an investment adviser subject to SEC examinations and as a CPO and CTA subject to CFTC
regulation and another subsidiary registered as a broker-dealer subject to FINRA examinations, the imposition of
any additional legal or regulatory requirements could make compliance more difficult and expensive, affect the
manner in which we conduct our business and adversely affect our profitability.
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The Dodd-Frank Act established a ten-member Financial Stability Oversight Council (the “Council”), an
interagency body chaired by the Secretary of the Treasury, to identify and manage systemic risk in the financial
system and improve interagency cooperation. Under the Dodd-Frank Act, the Council has the authority to review
the activities of certain nonbank financial firms engaged in financial activities that are designated as “systemically
important,” meaning, among other things, that the distress of the financial firm would threaten the stability of the
U.S. economy. If we were designated as such, it would result in increased regulation of our business, including
higher standards regarding capital, leverage, liquidity, risk management, credit exposure reporting and
concentration limits, restrictions on acquisitions and annual stress tests by the Federal Reserve.
On October 11, 2011, the Federal Reserve and other federal regulatory agencies issued a proposed rule
implementing a section of the Dodd-Frank Act that has become known as the “Volcker Rule.” The Volcker Rule
generally prohibits depository institution holding companies (including foreign banks with U.S. branches and
insurance companies with U.S. depository institution subsidiaries), insured depository institutions and subsidiaries
and affiliates of such entities from investing in or sponsoring private equity funds or hedge funds. The Volcker Rule
became effective on July 21, 2012 and is subject to a two-year transition period (ending July 21, 2014) and
exceptions for certain “permitted activities” that would enable certain institutions subject to the Volcker Rule to
continue investing in private equity funds under certain conditions. Although we do not currently anticipate that the
Volcker Rule will adversely affect our fundraising to any significant extent, there is uncertainty regarding the
implementation of the Volcker Rule and its practical implications, and there could be adverse implications on our
ability to raise funds from the types of entities mentioned above as a result of this prohibition.
The SEC has adopted a new rule requiring investment advisers registered or required to register with the
SEC under the Advisers Act that advise one or more private funds and have at least $150 million in private fund
AUM to periodically file reports on a new Form PF. Under the rule, large private fund investment advisers, or
advisers with at least $1.5 billion in AUM attributable to hedge funds and advisers with at least $2.0 billion in AUM
attributable to private equity funds, are subject to more detailed and in certain cases more frequent reporting
requirements. As a result of this new rule, we have filed, and will continue to file, quarterly reports on Form PF,
which has resulted in increased administrative costs and requires a significant amount of attention and time to be
spent by our personnel.
In addition, the CFTC adopted new rules eliminating CFTC Rule 4.13(a)(4), an exemption from registration
as a CPO on which we previously relied in operating our funds. As a result, one of our subsidiaries, Oaktree Capital
Management, L.P., has registered with the CFTC as a CPO and CTA with respect to the management of our funds.
In connection with such registrations, we also rely on the CFTC Rule 4.7 exemption, which provides a CPO and a
CTA relief from a majority of the Commodity Exchange Act's disclosure, reporting and recordkeeping requirements
imposed on CPOs and CTAs. The operators of funds relying upon the exemption provided by CFTC Rule 4.7,
unlike a fully-registered CPO, will not be required to file any offering memorandum with the CFTC, and the CFTC
will not pass upon the merits of participating in a pool or upon the adequacy of accuracy of an offering
memorandum. Nonetheless, CPOs and CTAs that qualify for relief under Rule 4.7 remain subject to certain
disclosure, reporting and recordkeeping requirements that could adversely affect our ability to implement our
investment program, conduct our operations and/or achieve our objectives and subject us to certain additional
costs, expenses and administrative burdens.
For a few of our other funds that trade in commodity interests, we rely on the limited trading exemption
provided by CFTC Rule 4.13(a)(3). For those funds that rely upon the exemption provided by CFTC Rule 4.13(a)(3),
unlike a registered CPO, the general partners or managing members of such funds are not required to provide
prospective investors with a CFTC compliant disclosure document, nor are the general partners or managing
members required to provide limited partners with periodic account statements or certified annual reports that
satisfy the requirements of CFTC rules applicable to registered CPOs.
In the event we determine to cease or to limit investing in swaps or other assets rather than subjecting
ourselves to all of the regulations of the CFTC, our ability to implement our investment objectives for our funds and
to hedge risks associated with our funds' investments and operations may be materially impaired. Furthermore, the
CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction,
including their anti-fraud and anti-manipulation provisions. Among other things, the CFTC may suspend or revoke
the registration of a person who fails to comply, prohibit such a person from trading or doing business with
registered entities, impose civil money penalties, require restitution and seek fines or imprisonment for criminal
violations. Additionally, a private right of action exists against those who violate the laws over which the CFTC has
jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event our
registration with the CFTC as a CPO or CTA is rescinded or restricted and we are unable to rely on an exemption
29
from registration or we otherwise fail to comply with the regulatory requirements of these rules, we may be unable
to use certain types of hedging instruments or may be subject to significant fines, penalties and other civil or
governmental actions or proceedings, any of which could have a materially adverse effect on our business, financial
condition and results of operations.
It is difficult to determine the full extent of the impact on us of the Dodd-Frank Act or any other new laws,
regulations or initiatives that may be proposed or whether any of the proposals will become law. Any changes in the
regulatory framework applicable to our business, including the changes described above, may impose additional
costs on us, require the attention of our senior management or result in limitations on the manner in which we
conduct our business. Moreover, as calls for additional regulation have increased, there may be a related increase
in regulatory investigations of the trading and other investment activities of alternative asset management funds,
including our funds. In addition, we may be adversely affected by changes in the interpretation or enforcement of
existing laws and rules by these governmental authorities and self-regulatory organizations. Compliance with any
new laws or regulations could make compliance more difficult and expensive, affect the manner in which we
conduct our business and adversely affect our profitability.
Regulatory changes in jurisdictions outside the United States could adversely affect our business.
Certain of our subsidiaries operate outside the United States. In the United Kingdom, Oaktree Capital
Management (UK) LLP is subject to regulation by the FSA. In Hong Kong, Oaktree Capital (Hong Kong) Limited is
subject to regulation by the Hong Kong Securities and Futures Commission. In Singapore, Oaktree Capital
Management Pte. Ltd. is subject to regulation by the Monetary Authority of Singapore. In Japan, Oaktree Japan, GK
is subject to regulation by the Kanto Local Finance Bureau. Our other European and Asian operations and our
investment activities worldwide are subject to a variety of regulatory regimes that vary by country. In addition, we
regularly rely on exemptions from various requirements of the regulations of certain foreign countries in conducting
our asset management activities.
Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of
financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on
particular activities. We are involved regularly in trading activities that implicate a broad number of foreign (as well
as U.S.) securities law regimes, including laws governing trading on inside information and market manipulation and
a broad number of technical trading requirements that implicate fundamental market regulation policies. Violation of
these laws could result in severe restrictions or prohibitions on our activities and damage to our reputation, which in
turn could materially adversely affect our business in a number of ways, such as causing investors to redeem their
capital (to the degree they have that right), making it harder for us to raise new funds and discouraging others from
doing business with us.
Alternative Investment Fund Managers Directive
The European Union Alternative Investment Fund Managers Directive (the “Directive”) was enacted in July
2011 and will take effect beginning July 22, 2013. The Directive applies to (a) alternative investment fund managers
(“AIFM”) established in the European Union (the “EU”) that manage EU or non-EU alternative investment funds
(“AIF”), (b) non-EU AIFMs that manage EU AIFs and (c) non-EU AIFMs that market their AIFs to professional
investors within the EU. Individual EU member states must now adopt rules and regulations implementing the
Directive into domestic law.
Beginning July 22, 2013, the Directive will impose new operating requirements on EU AIFMs. There will be a
one-year transitional period after which EU AIFMs must comply with the requirements of the Directive and be
appropriately authorized or have submitted an application for authorization. EU AIFMs and non-EU AIFMs seeking
to market an AIF within the EU will need to comply with the Directive's disclosure and transparency requirements
and (in the case of non-EU AIFMs) jurisdiction specific private placement regimes (which may change as a result of
the Directive) from the implementation date.
The full scope of the Directive may also, from October 2015 at the earliest, be extended to non-EU AIFMs
that wish to market an AIF within the EU pursuant to a pan-European marketing passport instead of under national
private placement regimes.
The operating requirements imposed by the Directive include, among other things, rules relating to the
remuneration of certain personnel, minimum regulatory capital requirements, restrictions on use of leverage,
restrictions on early distributions relating to portfolio companies (so-called “asset stripping” rules), disclosure and
reporting requirements to both investors and home state regulators, the independent valuation of an AIF's assets
and the appointment of an independent depository to hold assets. As a result, the Directive could in the future have
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an adverse effect on our business by, among other things, increasing the regulatory burden and costs of doing
business in or relating to EU member states, imposing extensive disclosure obligations on, and asset stripping rules
with respect to, companies, if any, in which any of our fund(s) invest that are located in EU member states,
significantly restricting marketing activities within the EU, potentially requiring our fund(s) to change their
compensation structures for key personnel, thereby affecting our ability to recruit and retain these personnel, and
potentially disadvantaging our funds as investors in private companies located in EU member states when
compared to non-AIF/AIFM competitors that may not be subject to the requirements of the Directive, thereby
potentially restricting our funds' ability to make investments in such companies.
The Directive could also limit our operating flexibility and our investment opportunities, as well as expose us
and/or our funds to conflicting regulatory requirements in the United States (and elsewhere) and the EU. The final
scope and requirements of the Directive remain uncertain and are subject to change as a result of enactment both
of EU secondary legislation and national implementing legislation in EU member states.
Solvency II
Solvency II is an EU directive that sets out stronger capital adequacy and risk management requirements for
European insurers and reinsurers and, in particular, dictates how much capital such firms must hold against their
liabilities. Solvency II is currently scheduled to be implemented into domestic law by EU member states as early as
January 2014, although continuing delays in the adoption of “Omnibus II,” a related EU directive that will amend
Solvency II, is likely to result in a revised timetable for the implementation of, and compliance with, Solvency II.
Solvency II will impose, among other things, substantially greater quantitative and qualitative capital requirements
for insurers and reinsurers as well as other supervisory and disclosure requirements. We are not subject to
Solvency II; however, many of our European insurer or reinsurer fund investors will be subject to this directive, as
applied under applicable domestic law. Solvency II may impact insurers' and reinsurers' investment decisions and
their asset allocations. In addition, insurers and reinsurers will be subject to more onerous data collation and
reporting requirements. As a result, Solvency II could in the future have an adverse indirect effect on our business
by, among other things, restricting the ability of European insurers and reinsurers to invest in our funds and
imposing on us extensive disclosure and reporting obligations for those insurers and reinsurers that do invest in our
funds. The final details and requirements of the Solvency II directive remain uncertain and are subject to change as
a result of enactment both of related EU legislation and national implementing legislation in EU member states.
Failure to comply with “pay to play” regulations implemented by the SEC and certain states, and changes
to the “pay to play” regulatory regimes, could adversely affect our business.
In recent years, the SEC and several states have initiated investigations alleging that certain private equity
firms and hedge funds or agents acting on their behalf have paid money to current or former government officials or
their associates in exchange for improperly soliciting contracts with state pension funds. The SEC has also initiated
a similar investigation into contracts awarded by sovereign wealth funds. In June 2010, the SEC approved Rule 206
(4)-5 under the Advisers Act regarding “pay to play” practices by investment advisers involving campaign
contributions and other payments to government officials able to exert influence on potential government entity
clients. Among other restrictions, the rule prohibits investment advisers from providing advisory services for
compensation to a government entity for two years, subject to very limited exceptions, after the investment adviser,
its senior executives or its personnel involved in soliciting investments from government entities make contributions
to certain candidates and officials in a position to influence the hiring of an investment adviser by such government
entity. Advisers are required to implement compliance policies designed, among other matters, to track contributions
by certain of the adviser's employees and engagements of third parties that solicit government entities and to keep
certain records in order to enable the SEC to determine compliance with the rule. Additionally, California enacted
legislation in September 2010 that requires placement agents (including in certain cases employees of investment
managers) who solicit funds from California state retirement systems, such as the California Public Employees'
Retirement System and the California State Teachers' Retirement System, to register as lobbyists, thereby
becoming subject to increased reporting requirements and prohibited from receiving contingent compensation for
soliciting investments from California state retirement systems. There has also been similar rule-making in New
York. Such investigations may require the attention of senior management and may result in fines if any of our
funds are deemed to have violated any regulations, thereby imposing additional expenses on us. Any failure on our
part to comply with these rules could cause us to lose compensation for our advisory services or expose us to
significant penalties and reputational damage.
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The derivatives that we or our funds use to hedge against interest rate and foreign currency exposure are
volatile and may adversely affect our results of operations.
From time to time, we and our funds enter into various hedging instruments such as swaps, options,
forwards and futures as part of managing risks related to interest rates and foreign currency exchange rates. In the
future, we and our funds may enter into additional hedging instruments as part of these or other risk management
strategies. Our hedging activity varies in scope based on the level of interest rates, the type of portfolio investments
held and other changing market conditions. These hedging instruments may fail to protect us or our funds from
interest rate or foreign currency volatility or could adversely affect us or our funds because, among other things:
• hedging instruments can be expensive, particularly during periods of volatility in interest rates and foreign
currency;
• available hedging instruments may not correspond directly with the risk for which protection is sought;
•
•
the duration of the hedge may be significantly different than the duration of the related liability or asset;
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it
impairs or makes economically unattractive our ability to sell or assign our side of the hedging
transaction; and
•
the party owing money in the hedging transaction may default on its obligation to pay.
The cost of using certain hedging instruments increases as the period covered by the instrument increases
and, with respect to interest rate hedges, during periods of rising and volatile interest rates and, with respect to
foreign currency hedges, during periods of volatile foreign currencies. We or our funds may increase hedging
activity and thus increase hedging costs during such periods when hedging costs have increased.
Any hedging activity we or our funds engage in may adversely affect our results of operations, which could
adversely affect our cash available for distribution to holders of our units. Therefore, while we or our funds may
enter into such transactions to seek to reduce interest rate and foreign currency risks, unanticipated changes in
interest rates and foreign currency exchange rates may result in poorer overall investment performance than if we
had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements
of the instruments used in a hedging strategy and price movements in the portfolio positions or liabilities being
hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation
between such hedging instruments and the portfolio holdings or liabilities being hedged. Any such imperfect
correlation may expose us or our funds to risk of loss.
Hedging instruments often involve counterparty risks and costs.
The business failure of a hedging counterparty with whom we or our funds enter into a hedging transaction
will most likely result in a default. Default by a party with whom we or our funds enter into a hedging transaction
may result in the loss of unrealized profits, leave us or our funds with unsecured exposure and force us or our funds
to cover resale commitments, if any, at the then current market price. It may not always be possible to dispose of or
close out a hedging position without the consent of the hedging counterparty, and we or our funds may not be able
to enter into an offsetting contract in order to cover the risk. We cannot assure our unitholders that a liquid
secondary market will exist for hedging instruments purchased or sold, and we or our funds may be required to
maintain a position until exercise or expiration, which could result in losses.
Regulatory changes could occur and may adversely affect our or our funds' ability to pursue hedging
strategies and/or increase the costs of implementing such strategies.
The enforceability of agreements underlying hedging transactions may depend on compliance with
applicable statutory and other regulatory requirements and, depending on the identity of the counterparty,
applicable international requirements. New or amended regulations may be imposed by the CFTC, the SEC, the
U.S. Federal Reserve or other financial regulators, other governmental regulatory authorities or self-regulatory
organizations that supervise the financial markets that could adversely affect us and our funds. In particular, these
agencies are empowered to promulgate a variety of new rules pursuant to recently enacted financial reform
legislation in the United States. We and our funds also may be adversely affected by changes in the enforcement or
interpretation of existing statutes and rules by these governmental regulatory authorities or self-regulatory
organizations.
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In addition, the securities and futures markets are subject to comprehensive statutes, regulations and margin
requirements. For example, the Dodd-Frank Act provides for new regulation of the derivatives markets, including
clearing, margin, reporting, recordkeeping and registration requirements. Although the CFTC has released final
rules relating to clearing, reporting, recordkeeping and registration requirements under the Dodd-Frank Act, many of
the provisions are subject to further final rulemaking, and thus the Dodd-Frank Act's ultimate impact remains
unclear. New regulations could, among other things, restrict our or our funds' ability to engage in derivatives
transactions (for example, by making certain types of derivatives transactions no longer available to us or our funds)
and/or increase the costs of such derivatives transactions (for example, by increasing margin or capital
requirements), and we or our funds may be unable to execute hedging strategies as a result. It is unclear how the
regulatory changes will affect counterparty risk.
For entities designated by the CFTC or the SEC as swap dealers, security-based swaps dealers, major swap
participants or major security-based swap participants, the Dodd-Frank Act imposes new regulatory, reporting and
compliance requirements. On May 23, 2012, a joint final rulemaking by the CFTC and the SEC defining these key
terms was published in the Federal Register. Based on those definitions, we do not believe that we would be a
swap dealer, security-based swap dealer, major swap participant or security-based major swap participant at this
time. If we are later designated as a swap dealer, security-based swap dealer, major swap participant or major
security-based swap participant, our business will be subject to increased regulation, including registration
requirements, additional recordkeeping and reporting obligations, external and internal business conduct standards,
position limits monitoring and capital and margin thresholds.
Our participation in the Public-Private Investment Program could adversely affect our business, operations
and reputation because of the increased regulation, compliance requirements and public exposure that
such participation entails.
On March 23, 2009, the U.S. Department of the Treasury (“UST”), in conjunction with the Federal Deposit
Insurance Corporation and the Federal Reserve, announced the Public-Private Investment Program. This program
is a part of the UST Financial Stability Plan, which was announced on February 10, 2009. The Financial Stability
Plan outlined a broad approach to address the problem of troubled real estate-related assets via the formation of
Public-Private Investment Funds. In July 2009, we were pre-qualified by the UST to manage a Public-Private
Investment Fund. Participation in the Public-Private Investment Program entails increased levels of oversight of our
business, and specifically of our PPIP, by the UST, the Office of the Special Inspector General for the Troubled
Asset Relief Program (“SIGTARP”) and the Government Accountability Office (“GAO”). Additionally, our PPIP is
subject to a number of reporting obligations with respect to various types of information that need to be delivered to
the UST, SIGTARP and the GAO, and our PPIP is also required to comply with additional conflicts of interest
policies for Public-Private Investment Fund managers that will govern certain of our affiliates and their interaction
with the UST and SIGTARP. As a result of the heightened scrutiny and additional regulations from these
government agencies, we face an increased risk of governmental involvement and intervention in our business that
may affect or impede the manner in which we conduct our business. Furthermore, complying with the Public-Private
Investment Program’s reporting requirements and additional conflicts of interest policies requires a significant
amount of attention and time to be spent by our personnel, which may adversely impact our ability to manage our
business. A material violation of these requirements could damage our reputation and constitute grounds for
removing us as the manager of the PPIP. As a participant in a government-sponsored program, we run the risk that
we may become the target of adverse publicity or become subject to adverse Congressional or administrative
action. Any alleged violation or contravention of the terms and policies of the Public-Private Investment Program
brought by UST or SIGTARP against us could result in severe restrictions on our activities, adversely affect our
profitability or damage our reputation.
The requirements of being a public company and sustaining growth may strain our resources.
As a public company, we are subject to the reporting requirements of the Exchange Act and requirements of
the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These requirements may strain our systems and
resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business
and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and
procedures and internal controls over financial reporting, which are discussed below. In order to maintain and
improve the effectiveness of our disclosure controls and procedures, significant resources and management
oversight are required. We have implemented and continue to implement additional procedures and processes for
the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining
our growth also requires us to commit additional management, operational and financial resources to identify new
professionals to join the firm and to maintain appropriate operational and financial systems to adequately support
33
expansion. These activities may divert management's attention from other business concerns, which could have a
material adverse effect on our business, financial condition, results of operations and cash flows. We have incurred
and will continue to incur costs that we had not previously incurred as a private company before our initial public
offering in April 2012 as part of our compliance with the Sarbanes-Oxley Act and rules of the SEC and New York
Stock Exchange (“NYSE”), including hiring additional accounting, legal and administrative personnel and various
other costs related to being a public company.
We are subject to substantial litigation risks and may face significant liabilities and damage to our
professional reputation as a result.
In recent years, the volume of claims and amount of damages claimed in litigation and regulatory
proceedings against investment managers have been increasing. We make investment decisions on behalf of our
clients that could result in substantial losses. This may subject us to the risk of legal liabilities or actions alleging
negligent misconduct, breach of fiduciary duty or breach of contract. Further, we may be subject to third-party
litigation arising from allegations that we improperly exercised control or influence over portfolio investments. In
addition, we and our affiliates that are the investment managers and general partners of our funds, our funds
themselves and those of our employees who are our, our subsidiaries' or the funds' officers and directors are each
exposed to the risks of litigation specific to the funds' investment activities and portfolio companies and, in the case
where our funds own controlling interests in public companies, to the risk of shareholder litigation by the public
companies' other shareholders. Moreover, we are exposed to risks of litigation or investigation by investors or
regulators relating to our having engaged, or our funds having engaged, in transactions that presented conflicts of
interest that were not properly addressed. Substantial legal liability could materially adversely affect our business,
financial condition or results of operations or cause significant reputational harm to us, which could seriously harm
our business. We depend to a large extent on our business relationships and our reputation for integrity and high-
caliber professional services to attract and retain investors. As a result, allegations of improper conduct by private
litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity
and press speculation about us, our investment activities or the investment industry in general, whether or not valid,
may harm our reputation, which may be more damaging to our business than to other types of businesses.
Employee misconduct, which is difficult to detect and deter, could harm us by impairing our ability to
attract and retain clients and subject us to significant legal liability and reputational harm.
There have been a number of highly publicized cases involving fraud or other misconduct by employees in
the financial services industry, and there is a risk that our employees could engage in misconduct that adversely
affects our business. We are subject to a number of obligations and standards arising from our investment
management business and our authority over the assets we manage. The violation of any of these obligations or
standards by any of our employees could adversely affect our clients and us. Our business often requires that we
deal with confidential matters of great significance to companies in which we may invest or to our advisory clients. If
our employees improperly use or disclose confidential information, we could be subject to regulatory sanctions and
suffer serious harm to our reputation, financial position and current and future business relationships. It is not
always possible to deter employee misconduct, and the precautions we take to prevent this activity may not be
effective in all cases. If our employees engage in misconduct, or if they are accused of misconduct, our business
and our reputation could be adversely affected.
In recent years, the U.S. Department of Justice and the SEC have devoted greater resources to enforcement
of the FCPA. In addition, the United Kingdom has recently significantly expanded the reach of its anti-bribery laws.
While we have developed and implemented policies and procedures designed to ensure strict compliance by us
and our personnel with the FCPA, such policies and procedures may not be effective in all instances to prevent
violations. Any determination that we have violated the FCPA or other applicable anti-corruption laws could subject
us to, among other things, civil and criminal penalties, material fines, profit disgorgement, injunctions on future
conduct, securities litigation and a general loss of investor confidence, any one of which could adversely affect our
business, financial condition or results of operations.
Operational risks may disrupt our business, result in losses or limit our growth.
We rely heavily on our financial, accounting and other data processing systems. If any of these systems do
not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to our
funds, regulatory intervention or reputational damage.
In addition, we operate in a business that is highly dependent on information systems and technology. Our
information systems and technology may not continue to be able to accommodate our growth, particularly our
growth internationally, and the cost of maintaining the systems may increase from its current level. Such a failure to
34
accommodate growth, or an increase in costs related to the information systems, could have a material adverse
effect on our business and results of operations.
Furthermore, we depend on our headquarters in Los Angeles, where a substantial portion of our personnel
are located, for the continued operation of our business. An earthquake or other disaster or a disruption in the
infrastructure that supports our business, including a disruption involving electronic communications or other
services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could
have a material adverse impact on our ability to continue to operate our business without interruption. While we
have implemented disaster recovery programs to lessen the risk of any material adverse impact, our disaster
recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In
addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.
Finally, we rely on third-party service providers for certain aspects of our business, including software
vendors for portfolio management and accounting software, outside financial institutions for back office processing
and custody of securities and third-party broker-dealers for the execution of trades. Any interruption or deterioration
in the performance of these third parties or failures of their information systems and technology could impair the
quality of the funds' operations and could impact our reputation and hence adversely affect our business.
We are subject to risks in using prime brokers, custodians, counterparties, administrators and other
agents.
Many of our funds depend on the services of prime brokers, custodians, counterparties, administrators and
other agents to carry out certain securities and derivatives transactions. The terms of these contracts are often
customized and complex, and many of these arrangements occur in markets or relate to products that are not
subject to regulatory oversight, although the Dodd-Frank Act provides for new regulation of the derivatives market.
In particular, some of our funds utilize prime brokerage arrangements with a relatively limited number of
counterparties, which has the effect of concentrating the transaction volume (and related counterparty default risk)
of these funds with these counterparties.
Our funds are subject to the risk that the counterparty to one or more of these contracts defaults, either
voluntarily or involuntarily, on its performance under the contract. Any such default may occur suddenly and without
notice to us. Moreover, if a counterparty defaults, we may be unable to take action to cover our exposure, either
because we lack contractual recourse or because market conditions make it difficult to take effective action. This
inability could occur in times of market stress, which is when defaults are most likely to occur.
In addition, our risk-management models may not accurately anticipate the impact of market stress or
counterparty financial condition, and as a result, we may not have taken sufficient action to reduce our risks
effectively. Default risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In
addition, concerns about, or a default by, one large participant could lead to significant liquidity problems for other
participants, which may in turn expose us to significant losses.
In the event of a counterparty default, particularly a default by a major investment bank, one or more of our
funds could incur material losses, and the resulting market impact of a major counterparty default could harm our
business, results of operation and financial condition.
In the event of the insolvency of a prime broker, custodian, counterparty or any other party that is holding
assets of our funds as collateral, our funds might not be able to recover equivalent assets in full as they will rank
among the prime broker's, custodian's or counterparty's unsecured creditors in relation to the assets held as
collateral. In addition, our funds' cash held with a prime broker, custodian or counterparty generally will not be
segregated from the prime broker's, custodian's or counterparty's own cash, and our funds may therefore rank as
unsecured creditors in relation thereto. To the extent that our derivatives transactions are cleared through a
derivatives clearing organization, the CFTC has issued final rules to segregate and protect collateral posted by
customers of cleared swaps. The CFTC also issued proposed rules to implement segregation rules for uncleared
swaps.
The counterparty risks that we face have increased in complexity and magnitude as a result of the disruption
in the financial markets in recent years. For example, the consolidation and elimination of counterparties has
increased our concentration of counterparty risk and decreased the universe of potential counterparties, and our
funds are generally not restricted from dealing with any particular counterparty or from concentrating any or all of
their transactions with one counterparty. In addition, counterparties have generally reacted to recent market volatility
35
by tightening their underwriting standards and increasing their margin requirements for all categories of financing,
which has the result of decreasing the overall amount of leverage available and increasing the costs of borrowing.
Risks Relating to Our Funds
Our results of operations are dependent on the performance of our funds. Poor fund performance will result
in reduced revenues. Poor performance of our funds will also make it difficult for us to retain and attract investors to
our funds, to retain and attract qualified professionals and to grow our business. The performance of each fund we
manage is subject to some or all of the following risks.
The historical returns attributable to our funds should not be considered indicative of the future results of
our funds or of our future results or of any returns expected on an investment in our Class A units.
The historical returns attributable to our funds should not be considered indicative of the future results of our
funds, nor are they directly linked to returns on our Class A units. Therefore, Class A unitholders should not
conclude that positive performance of our funds will necessarily result in positive returns on an investment in our
Class A units. However, poor performance of the funds we manage will cause a decline in our revenues and would
therefore have a negative effect on our operating results and returns on our Class A units.
Moreover, with respect to the historical returns of our funds:
•
the rates of return of our closed-end funds reflect unrealized gains as of the applicable measurement date
that may never be realized, which may result in a lower internal rate of return and ultimate return for some
closed-end funds from those presented in this annual report;
• our funds' returns have previously benefited from investment opportunities and general market conditions
that may not repeat themselves, and there can be no assurance that our current or future funds will be
able to avail themselves of profitable investment opportunities;
• our funds' historical investments were made over a long period of time and over the course of various
market and macroeconomic cycles, and the circumstances under which our current or future funds may
make future investments may differ significantly from those conditions prevailing in the past;
• our funds may not be able to successfully identify, make and realize upon any particular investment or
generate returns for their investors; and
• any material increase in the size of our funds could result in materially different rates of returns.
In addition, future returns will be affected by the applicable risks described elsewhere in this annual report.
Investors in some of our funds may be unable to fulfill their capital commitment obligations, and such
failure could have an adverse effect on the affected funds.
Investors in our closed-end funds make capital commitments that we are entitled to call from those investors
at any time during certain prescribed periods. We depend on investors fulfilling and honoring their commitments
when we call capital from them in order for our closed-end funds to consummate investments and otherwise pay
their obligations when due. Any investor that does not fund a capital call is subject to having a meaningful amount of
its existing capital account forfeited in that fund. However, if investors were to fail to honor a significant amount of
capital calls for any particular fund or funds, the affected funds' ability to make new or follow-on investments, and to
otherwise satisfy their liabilities when due, could be materially and adversely affected.
Certain of our funds invest in relatively high-risk, illiquid, non-publicly traded assets, and we may fail to
realize any profits from these activities ever or for a considerable period of time.
Our closed-end funds often invest in securities that are not publicly traded. In many cases, our funds may be
prohibited by contract or by applicable securities laws from selling these securities for a period of time. Our funds
generally cannot sell these securities publicly unless either their sale is registered under applicable securities laws
or an exemption from registration is available. The ability of many of our funds, particularly our control investing
funds, to dispose of investments is heavily dependent on the public equity markets. For example, the ability to
realize any value from an investment may depend upon the ability to complete an initial public offering of the
portfolio company in which the investment is held. Even if securities are publicly traded, large holdings of securities
often can be sold only over a substantial length of time, exposing investment returns to risks of downward
movement in market prices.
36
We make distressed debt investments that involve significant risks and potential additional liabilities.
Our distressed debt funds and certain of our control investing funds invest in obligors and issuers with weak
financial conditions, poor operating results, substantial financing needs, negative net worth or significant
competitive issues. These funds also invest in obligors and issuers that are involved in bankruptcy or reorganization
proceedings. In these situations, it may be difficult to obtain full information as to the exact financial and operating
conditions of these obligors and issuers. Furthermore, some of our funds' distressed debt investments may not be
widely traded or may have no recognized market. Depending on the specific fund's investment profile, a fund's
exposure to the investments may be substantial in relation to the market for those investments, and the acquired
assets are likely to be illiquid and difficult to transfer. As a result, it may take a number of years for the market value
of the investments to ultimately reflect their intrinsic value as we perceive it.
A central strategy of our distressed debt funds is to anticipate the occurrence of certain corporate events,
such as debt or equity offerings, restructurings, reorganizations, mergers, takeover offers and other transactions. If
the relevant corporate event that we anticipate is delayed, changed or never completed, the market price and value
of the applicable fund's investment could decline sharply.
In addition, these investments could subject a fund to certain potential additional liabilities that may exceed
the value of its original investment. Under certain circumstances, payments or distributions on certain investments
may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, a
preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In addition, under
certain circumstances, a lender that has inappropriately exercised control of the management and policies of a
debtor may have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a
result of such actions. In the case where the investment in securities of troubled companies is made in connection
with an attempt to influence a restructuring proposal or plan of reorganization in bankruptcy, the fund may become
involved in substantial litigation.
Certain of our funds are subject to the fiduciary responsibility and prohibited transaction provisions of
ERISA and the Code, and our business could be adversely affected if certain of our other funds fail to
satisfy an exemption under the “plan assets” regulation under ERISA.
Some of our funds are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA
and Section 4975 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). For example, we currently
manage some of our funds as “plan assets” under ERISA. With respect to these funds, this results in the application
of the fiduciary responsibility standards of ERISA to investments made by such funds, including the requirement of
investment prudence and diversification, and the possibility that certain transactions that we enter into, or may have
entered into, on behalf of these funds, in the ordinary course of business, might constitute or result in non-exempt
prohibited transactions under Section 406 of ERISA or Section 4975 of the Code. A non-exempt prohibited
transaction, in addition to imposing potential liability upon fiduciaries of an ERISA plan, may also result in the
imposition of an excise tax under the Code upon a “party in interest” (as defined in ERISA) or “disqualified
person” (as defined in the Code) with whom we engaged in the transaction. Some of our other funds currently
qualify as venture capital operating companies (“VCOCs”) or rely on another exception under ERISA and therefore
are not subject to the fiduciary requirements of ERISA with respect to their assets. However, if these funds fail to
satisfy the VCOC requirements for any reason, including an amendment of the relevant regulations by the U.S.
Department of Labor, or another exception under ERISA, such failure could materially interfere with our activities in
relation to these funds or expose us to risks related to our failure to comply with the requirements.
Poor investment performance during periods of adverse market conditions may result in relatively high
levels of investor redemptions, which can exacerbate the liquidity pressures on the affected funds, force
the sale of assets at distressed prices or reduce the funds' returns.
Poor investment performance during periods of adverse market conditions, together with investors' increased
need for liquidity given the state of the credit markets, can prompt relatively high levels of investor redemptions at
times when many funds may not have sufficient liquidity to satisfy some or all of their investor redemption requests.
During times when market conditions are deteriorating, many funds may face additional redemption requests and/or
compulsory investor withdrawals or redemptions, which will exacerbate the liquidity pressures on the affected funds.
If they cannot satisfy their current and future redemption requests, they may be forced to sell assets at distressed
prices or cease operations. Various measures taken by funds to improve their liquidity profiles (such as the
implementation of “gates” or the suspension of redemptions, which we had implemented for three of our evergreen
funds in 2008) that reduce the amounts that would otherwise be paid out in response to redemption requests may
have the effect of incentivizing investors to “gross up” or increase the size of the future redemption requests they
37
make, thereby exacerbating the cycle of redemptions. The liquidity issues for such funds are often further
exacerbated by their fee structures, as a decrease in NAV decreases their management fees.
Certain of our funds have agreements that create debt or debt-like obligations with one or more
counterparties. Such agreements in many instances contain covenants or “triggers” that require the fund to maintain
a certain level of NAV over certain testing periods or to post additional margin on a daily basis when prices of our
funds' derivative contracts move against the fund. In addition, there may be guidelines in total return swap facilities
that require reference obligations to be above a certain price level. Decreases in such funds' NAV (whether due to
performance, redemption or both) that breach such covenants, the failure to make any margin calls or meaningful
decreases in the price of the underlying reference loan or security may result in defaults under such agreements
and such defaults could permit the counterparties to take various actions that would be adverse to the funds,
including terminating the financing arrangements, increasing the amount of margin or collateral that the funds are
required to post (so-called “supercollateralization” requirements) or decreasing the aggregate amount of leverage
that such counterparty is willing to provide to our funds. In particular, many such covenants to which our funds are
party are designed to protect against sudden and pronounced drops in NAV over specified periods, so if our open-
end or evergreen funds were to receive larger-than-anticipated redemption requests during a period of poor
performance, such covenants may be breached. Defaults under any such covenants would likely result in the
affected funds being forced to sell financed assets (which sales would likely occur in suboptimal or distressed
market conditions) or being forced to restructure a swap facility with more onerous terms or otherwise raise cash by
reducing other leverage, which would reduce the funds' returns and our opportunities to produce incentive and
investment income from the affected funds.
Valuation methodologies for certain assets in our funds can be subject to significant subjectivity, and the
values of assets established pursuant to the methodologies may never be realized.
Our funds make investments for which market quotations are not readily available, and thus the process by
which we value such investments involves inherent uncertainties. We are required by generally accepted
accounting principles in the United States (“GAAP”) to make good faith determinations as to the fair value of these
investments on a quarterly basis in connection with the preparation of our funds' financial statements.
There is no single standard for determining fair value in good faith. The types of factors that may be
considered when determining the fair value of an investment in a particular company include acquisition price of the
investment, discounted cash flow valuations, historical and projected operational and financial results for the
company, the strengths and weaknesses of the company relative to its comparable companies, industry trends,
general economic and market conditions, information with respect to offers for the investment, the size of the
investment (and any associated control) and other factors deemed relevant. Fair values may also be assessed
based on the enterprise value of a company established using a market multiple approach that is based on a
specific financial measure (such as earnings before interest, taxes, depreciation and amortization (“EBITDA”),
adjusted EBITDA, free cash flow, net income, book value or net asset value) or, in some cases, a cost basis or a
discounted cash flow or liquidation analysis. Because valuations, and in particular valuations of investments for
which market quotations are not readily available, are inherently uncertain, may fluctuate over short periods of time
and may be based on estimates, determinations of fair value may differ materially from the values that would have
resulted if a ready market had existed. Even if market quotations are available for our investments, the quotations
may not reflect the value that we would actually be able to realize because of various factors, including the possible
illiquidity associated with a large ownership position, subsequent illiquidity in the market for a company's securities,
future market price volatility or the potential for a future loss in market value based on poor industry conditions or
the market's view of overall company and management performance.
Because there is significant uncertainty in the valuation of, or in the stability of the value of, illiquid
investments, the fair values of such investments as reflected in a fund's NAV do not necessarily reflect the prices
that would actually be obtained by us on behalf of the fund when such investments are sold. Sales at values
significantly lower than the values at which investments have previously been reflected in a fund's NAV may result
in losses for the applicable fund, a decline in management fees and the loss of incentive income that may have
been accrued by the applicable fund. Changes in values attributed to investments from quarter to quarter may result
in volatility in the NAV and results of operations that we report. Also, a situation where a fund's NAV turns out to be
materially different from the NAV previously reported for the fund could cause investors to lose confidence in us,
which could in turn result in difficulty in raising additional funds or investors requesting redemptions from certain of
our funds.
38
We make investments in companies that are based outside the United States, which exposes us to
additional risks not typically associated with investing in companies that are based in the United States.
Many of our funds invest a portion of their assets in the equity, debt, loans or other securities of issuers
located outside the United States, while certain of our funds invest substantially all of their assets in these types of
securities. Investments in non-U.S. securities involve certain factors not typically associated with investing in U.S.
securities, including risks relating to:
• our funds' abilities to exchange local currencies for U.S. dollars and other currency exchange matters,
including fluctuations in currency exchange rates and costs associated with conversion of investment
principal and income from one currency into another;
• controls on, and changes in controls on, foreign investment and limitations on repatriation of invested
capital;
•
•
less developed or less efficient financial markets than exist in the United States, which may lead to price
volatility and relative illiquidity;
the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure
requirements and less government supervision and regulation;
• differences in legal and regulatory environments, particularly with respect to bankruptcy and
reorganization, less developed corporate laws regarding fiduciary duties and the protection of investors
and less reliable judicial systems to enforce contracts and applicable law;
•
less publicly available information in respect of companies in non-U.S. markets;
• certain economic and political risks, including potential exchange control regulations and restrictions on
our non-U.S. investments and repatriation of capital, potential political, economic or social instability, the
possibility of nationalization or expropriation or confiscatory taxation and adverse economic and political
developments; and
•
the possible imposition of non-U.S. taxes or withholding on income and gains recognized with respect to
the securities.
There can be no assurance that adverse developments with respect to these risks will not adversely affect
our funds that invest in securities of non-U.S. issuers.
Certain of our funds and all of our separate account agreements contain provisions that allow investors to
withdraw their capital.
Our separate account agreements generally can be terminated by our separate account clients upon notice
of 30 days or less. Similarly, our commingled open-end funds permit the withdrawal of capital by our investors
during certain open periods that generally occur on the first business day of each calendar month. Our active
evergreen funds have withdrawal rights that, depending on the specific fund, can be exercised in intervals ranging
from three months to three years. Any significant number of terminations or withdrawals could have a material
adverse effect on our business and results of operations.
We have made and expect to continue to make significant principal investments in our current and future
funds, and we may lose money on some or all of our investments.
Since our inception in 1995, we have increased the minimum level of our principal investments in our closed-
end and evergreen funds from 0.2% of the fund's aggregate committed capital to 1.0% starting with funds that held
their initial closings in late 1998, to 2.0% starting with funds that held their initial closings in mid-2004. Subsequent
to the 2007 Private Offering, we decided to further increase our principal investments in such funds that have initial
closings after May 2007 to the greater of 2.5% of the funds' aggregate committed capital or $20 million. Although
we are not limited in the amount we choose to invest, in 2009 we decided that we will generally not invest more
than $100 million in any one fund. We expect to continue to make significant principal investments in our funds and
may choose to increase the percentage amount we invest at any time. Contributing capital to these funds is risky,
and we may lose some or all of the principal amount of our investments. Any such loss could have a material
adverse impact on our financial condition and results of operations.
Our funds make investments in companies that we do not control.
Investments by many of our funds include debt instruments and equity securities of companies that we do
not control. These instruments and securities may be acquired by our funds through trading activities or through
39
purchases of securities from the issuer. In addition, our control investing funds may acquire minority equity interests
and may also dispose of a portion of their majority equity investments in portfolio companies over time in a manner
that results in the funds retaining a minority investment. Those investments will be subject to the risk that the
company in which the investment is made may make business, financial or management decisions with which we
do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act
in a manner that does not serve our interests. If any of the foregoing were to occur, the values of the investments
held by our funds could decrease and our financial condition, results of operations and cash flow could suffer as a
result.
Investments by our funds will in many cases rank junior to investments made by others.
In many cases, the companies in which our funds invest have indebtedness or equity securities, or may be
permitted to incur indebtedness or to issue equity securities, that rank senior to our investment. By their terms,
these instruments may provide that their holders are entitled to receive payments of dividends, interest or principal
on or before the dates on which payments are to be made in respect of our investment. Also, in the event of
insolvency, liquidation, dissolution, reorganization or bankruptcy of a company in which we hold an investment,
holders of securities ranking senior to our investment would typically be entitled to receive payment in full before
distributions could be made in respect of our investment. After repaying senior security holders, the company may
not have any remaining assets to use for repaying amounts owed in respect of our investment. To the extent that
any assets remain, holders of claims that rank equally with our investment would be entitled to share on an equal
and ratable basis in distributions that are made out of those assets. Also, during periods of financial distress or
following an insolvency, the ability of our funds to influence a company's affairs and to take actions to protect their
investment may be substantially less than that of those holding senior interests.
The due diligence process that we undertake in connection with investments by some of our funds may not
reveal all facts that may be relevant in connection with an investment.
Before making investments in companies that we expect to control, we undertake a due diligence
investigation of the target company. In conducting these investigations, we may be required to evaluate important
and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal
advisers, accountants and investment banks are often involved in the due diligence process in varying degrees
depending on the type of investment. Nevertheless, the due diligence investigation that we carry out with respect to
an investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in
evaluating the investment opportunity. Moreover, such an investigation will not necessarily result in the investment
being successful.
Market values of publicly traded securities that are held as investments may be volatile.
The market prices of publicly traded securities held by some of our funds may be volatile and are likely to
fluctuate due to a number of factors beyond our control, including actual or anticipated changes in the profitability of
the issuers of such securities, general economic, social or political developments, changes in industry conditions,
changes in government regulation, shortfalls in operating results from levels forecast by securities analysts, inflation
and rapid fluctuations in inflation rates, the general state of the securities markets and other material events, such
as significant management changes, financings, refinancings, securities issuances, acquisitions and dispositions.
Changes in the values of these investments may adversely affect our investment performance and our results of
operations.
Volatility in the structured credit, leveraged loan and high yield bond markets may adversely affect our
funds' investments.
To the extent that companies in which our funds invest participate in the structured credit, leveraged loan
and high yield bond markets, the results of their operations may suffer if such markets experience dislocations,
illiquidity and volatility. In addition, to the extent that such marketplace events occur, this may have an adverse
impact on the availability of credit to businesses generally and could lead to an overall weakening of the U.S. and
global economies. Any economic downturn could adversely affect the financial resources of our funds' investments
(in particular those investments that depend on credit from third parties or that otherwise participate in the credit
markets) and their ability to make principal and interest payments on, or refinance, outstanding debt when due. In
the event of such defaults, our funds could lose both invested capital in, and anticipated profits from, the affected
portfolio companies.
40
We enter into a significant number of side letter agreements with limited partners of certain of our funds,
and the terms of these agreements could expose the general partners of the funds to additional risks and
liabilities.
We regularly enter into side letter agreements with particular limited partners in the course of raising our
funds. These side letters typically afford the affected limited partners assurance with respect to particular aspects of
the operation of the fund. Given that these assurances often elaborate upon the provisions of the relevant fund's
partnership agreement, our affiliates could be exposed to additional risks, liabilities and obligations not
contemplated in our funds' partnership agreements.
Our funds may invest in companies that are highly leveraged, a fact that may increase the risk of loss
associated with the investments.
Our funds may invest in companies whose capital structures involve significant leverage. These investments
are inherently more sensitive to declines in revenues and to increases in expenses and interest rates. The
leveraged capital structure of these companies places significant burdens on their cash flows and increases the
exposure of our funds to adverse economic factors such as downturns in the economy or deterioration in the
condition of the portfolio company or its industry. Additionally, the securities acquired by our funds may be the most
junior in what could be a complex capital structure and thus subject us to the greatest risk of loss.
The use of leverage by our funds could have a material adverse effect on our financial condition, results of
operation and cash flow.
Some of our funds use leverage (including through swaps and other derivatives) as part of their respective
investment programs and may borrow a substantial amount of capital. The use of leverage poses a significant
degree of risk and can enhance the magnitude of a significant loss in the value of the investment portfolio. To the
extent that any fund leverages its capital structure, it is subject to the risks normally associated with debt financing,
including the risk that its cash flows will be insufficient to meet principal and interest payments, which could
significantly reduce or even eliminate the value of such fund's investments. In addition, the interest expense and
other costs incurred in connection with such leverage may not be recovered by the appreciation in the value of any
associated securities or bank debt and will be lost – and the timing and magnitude of such losses may be
accelerated or exacerbated – in the event of a decline in the market value of such securities or bank debt. In
addition, such funds may be subject to margin calls in the event of a decline in the value of the posted collateral.
Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of
operations and cash flow.
Changes in the debt financing markets may negatively impact the ability of our funds and their portfolio
companies to obtain attractive financing for their investments and may increase the cost of such financing
if it is obtained, leading to lower-yielding investments and potentially decreasing our incentive income and
investment income.
The markets for debt financing are subject to retrenchment, resulting in more restrictive covenants or other
more onerous terms (including posting additional collateral) in order to provide financing, and in some cases
lenders may refuse to provide any financing that would have been readily obtained under credit conditions present
several years ago.
If our funds are unable to obtain committed debt financing or can only obtain debt at an increased interest
rate or on other less advantageous terms, such funds' investment activities may be restricted and their profits may
be lower than they would otherwise have achieved, either of which could lead to a decrease in the incentive and
investment income earned by us. Similarly, the portfolio companies owned by our funds regularly utilize the
corporate debt markets to obtain efficient financing for their operations. To the extent that credit markets render
such financing difficult or more expensive to obtain, the operating performance of those portfolio companies and
therefore the investment returns on our funds may be negatively impacted. In addition, to the extent that the then-
current markets make it difficult or impossible to refinance debt that is maturing in the near term, the relevant
portfolio company may be unable to repay such debt at maturity and may be forced to sell assets, undergo a
recapitalization or seek bankruptcy protection. Any of the foregoing circumstances could have a material adverse
effect on our financial condition, results of operations and cash flow.
Our funds may face risks relating to undiversified investments.
We cannot give assurance as to the degree of diversification, if any, that will be achieved in any fund
investments. Difficult market conditions or slowdowns affecting a particular asset class, geographic region or other
41
category of investment could have a significant adverse impact on a fund if its investments are concentrated in that
area, which would result in lower investment returns. This lack of diversification may expose a fund to losses
disproportionate to market declines in general if there are disproportionately greater adverse price movements in
the particular investments. To the extent a fund holds investments concentrated in a particular issuer, security, asset
class or geographic region, such fund may be more susceptible than a more widely diversified investment
partnership to the negative consequences of a single corporate, economic, political or regulatory event. Accordingly,
a lack of diversification on the part of a fund could adversely affect a fund's performance and, as a result, our
financial condition and results of operations.
Risk management activities may adversely affect the returns on our funds' investments.
When managing our exposure to market risks, we may (on our own behalf or on behalf of our funds) from
time to time use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other
forms of derivative instruments to limit our exposure to changes in the relative values of investments that may result
from market developments, including changes in prevailing interest rates, currency exchange rates and commodity
prices. The success of any hedging or other derivative transactions generally will depend on our ability to correctly
predict market changes, the degree of correlation between price movements of a derivative instrument and the
position being hedged, the creditworthiness of the counterparty and other factors. As a result, while we may enter
into a transaction in order to reduce our exposure to market risks, the transaction may result in poorer overall
investment performance than if it had not been executed. Such transactions may also limit the opportunity for gain if
the value of a hedged position increases.
The hedging of currency risk exposes our funds to other risks.
Although it is impossible to hedge against all currency risk, certain of our funds enter into hedging
transactions in order to reduce the substantial effects of currency fluctuations on our cash flow and financial
condition. These instruments may include foreign currency forward contracts, currency swap agreements and
currency option contracts. Certain of our funds have entered into, and expect to continue to enter into, such hedging
arrangements. While such hedging arrangements may reduce certain risks, such arrangements themselves may
entail certain other risks. These arrangements may require the posting of cash collateral at a time when a fund has
insufficient cash or illiquid assets such that the posting of the cash is either impossible or requires the sale of assets
at prices that do not reflect their underlying value. Moreover, these hedging arrangements may generate significant
transaction costs that reduce the returns generated by a fund. Thus, while our funds may benefit from the use of
these hedging arrangements, changes in currency exchange rates (particularly unanticipated or significant
changes) may result in poorer overall performance for those funds that hedge than if they had not entered into such
hedging arrangements. Those funds are also exposed to the risk that their counterparties to hedging contracts will
default on their obligations.
Risks Relating to Our Class A Units
The market price of our Class A units may decline due to the large number of units eligible for future sale
and issuable pursuant to our 2011 Equity Incentive Plan.
The market price of our Class A units could decline as a result of sales of a large number of our Class A units
in the market or the perception that these sales could occur. As of March 11, 2013, there are 30,189,441 Class A
units outstanding, which may be resold immediately in the public market, unless they are held by our affiliates, as
that term is defined in Rule 144 under the Securities Act. In addition, our directors and executive officers (which
includes our principals), other employees and certain other investors hold Oaktree Operating Group units through
OCGH and, subject to certain restrictions, have the right to exchange their vested OCGH units for, at the option of
our board of directors, newly issued Class A units on a one-for-one basis, an equivalent amount of cash based on
then-prevailing market prices, other consideration of equal value or any combination of the foregoing in accordance
with the terms of the exchange agreement. Please see “Certain Relationships and Related Transactions, and
Director Independence—Exchange Agreement.” The market price of our Class A units could decline as a result of
an exchange, or the perception that an exchange may occur, of a large number of OCGH units for our Class A units.
As of March 11, 2013, there are 116,486,598 vested OCGH units outstanding. Such sales or exchanges could also
cause the price of our Class A units to fall and make it more difficult for our Class A unitholders to sell their units.
We may issue our Class A units from time to time as consideration for future acquisitions and investments. If
any such acquisition or investment is significant, the number of Class A units that we issue may in turn be
significant. We may also grant registration rights covering Class A units issued in connection with any such
acquisitions and investments. In addition, we may issue 19,573,536 Class A units or OCGH units from time to time
under our 2011 Oaktree Capital Group, LLC Equity Incentive Plan (the “2011 Plan”) as well as Class A units or
42
OCGH units that become available under our 2011 Plan pursuant to provisions in the 2011 Plan that automatically
increase the Class A units or OCGH units available for future issuance. The units granted under the 2011 Plan may
be subject to vesting and forfeiture provisions. Any vesting terms are set by a committee appointed by our board of
directors in its discretion. Additional issuances of Class A units or OCGH units under the 2011 Plan may dilute the
holdings of our existing unitholders, reduce the market price of our Class A units or both.
The market price and trading volume of our Class A units has been and may continue to be volatile, which
could result in rapid and substantial losses for our Class A unitholders.
The market price of our Class A units may be highly volatile and could be subject to wide fluctuations. In
addition, the trading volume in our Class A units may fluctuate and cause significant price variations to occur. If the
market price of our Class A units declines significantly, you may be unable to sell your Class A units at an attractive
price, if at all. The market price of our Class A units may fluctuate or decline significantly in the future. Some of the
factors that could negatively affect the price of our Class A units or result in fluctuations in the price or trading
volume of our Class A units include:
• variations in our quarterly operating results or distributions, which may be substantial;
• our policy of taking a long-term perspective on making investment, operational and strategic decisions,
which is expected to result in significant and unpredictable variations in our quarterly returns;
•
failure to meet analysts' performance estimates;
• publication of research reports about us or the investment management industry or the failure of securities
analysts to cover our Class A units;
• additions or departures of key management or investment personnel;
• adverse market reaction to any indebtedness we may incur or securities we may issue in the future;
• changes in market valuations of similar companies;
• speculation in the press or investment community;
• changes or proposed changes in laws or regulations or differing interpretations thereof affecting our
business or enforcement of these laws and regulations or announcements relating to these matters;
• a lack of liquidity in the trading of our Class A units;
• adverse publicity about the asset management industry generally or individual scandals, specifically; and
• general market and economic conditions.
If we fail to maintain effective internal controls over our financial reporting in the future, the accuracy and
timing of our financial reporting may be adversely affected.
The Sarbanes-Oxley Act requires, among other things, that as a public company we maintain effective
internal control over financial reporting and disclosure controls and procedures. We were not required to comply
with these requirements before our initial public offering in April 2012, including the internal control evaluation and
certification requirements of Section 404 of that statute, and we will not be required to comply with all of those
requirements until after we have been subject to the reporting requirements of the Exchange Act for a specified
period of time. Accordingly, we have not determined whether or not our existing internal controls over financial
reporting systems comply with Section 404. Commencing with the filing of our annual report for the year ending
December 31, 2013, we will be required under Section 404 to provide an annual management assessment of the
effectiveness of our internal controls over financial reporting and the inclusion of an opinion from our independent
registered public accounting firm addressing such assessment. The internal control evaluation required by
Section 404 will divert internal resources and will take a significant amount of time, effort and expense to complete.
If it is determined that we are not in compliance with Section 404, we will be required to implement remedial
procedures and re-evaluate our internal control over financial reporting. We will experience higher than anticipated
operating expenses as well as higher independent auditor and consulting fees during the implementation of these
changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to comply with
Section 404.
If we are unable to implement any necessary changes effectively or efficiently, our operations, financial
reporting or financial results could be adversely affected, and we could receive an adverse report on internal
controls from our independent registered public accountants. In particular, if we are not able to implement the
requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public
43
accountants may not be able to certify as to the effectiveness of our internal control over financial reporting. Matters
impacting our internal controls may cause us to be unable to report our financial information on a timely basis and
thereby subject us to adverse regulatory consequences, including sanctions by the SEC, or violations of applicable
stock exchange listing rules. Moreover, if a material misstatement occurs in the future, we may need to restate our
financial results and there could be a negative reaction in the financial markets due to a loss of investor confidence
in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also
likely to suffer if our independent registered public accounting firm reports a material weakness in our internal
control over financial reporting. This could materially adversely affect us and lead to a decline in the market price of
our Class A units.
Preparing our consolidated financial statements involves a number of complex manual and automated
processes, which are dependent on individual data input or review and require significant management judgment.
One or more of these elements may result in errors that may not be detected and could result in a material
misstatement of our consolidated financial statements.
In August 2011 and in November 2011, we determined that, for certain reporting periods in 2009, 2010 and
2011, our consolidated statement of cash flows needed to be corrected for amounts related to distributions to non-
controlling redeemable interests in consolidated funds, purchases of securities and proceeds from maturities and
sale of securities. These revisions had no impact on the net change in cash and cash-equivalents as previously
reported. The errors arose from accrual and elimination adjustments that were made in consolidating the cash flows
of the funds. The errors were mechanical in nature and not the result of a misapplication of accounting guidance. In
connection with making these revisions, we determined in August 2011 that we had a significant deficiency related
to policies, procedures and controls associated with the reporting and classification of the consolidated funds' cash
activities in our consolidated cash flow statement. A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important
enough to merit attention by those responsible for oversight of a company's financial reporting. In the third quarter
of 2011, we developed and implemented a remediation plan designed to address this deficiency. The remediation
plan includes a reconciliation control between the distributions to non-controlling redeemable interests as reflected
in our consolidated cash flow statement to the overall rollforward of non-controlling redeemable interests in
consolidated funds. We also enhanced and formalized our overall reconciliation between the consolidated cash flow
statement and the consolidating files used to aggregate the individual fund activities. The deficiency was fully
remediated based on testing of the revised internal control procedures as part of the preparation and review of the
consolidated statement of cash flows for the financial year ended December 31, 2011.
The tax attributes of our Class A units may cause mutual funds to limit or reduce their holdings of Class A
units.
U.S. mutual funds that are treated as regulated investment companies (“RICs”) for U.S. federal income tax
purposes are required, among other things, to distribute at least 90% of their taxable income to their shareholders in
order to maintain their favorable U.S. income tax status. RICs are required to meet this distribution requirement
regardless of whether their investments generate cash distributions equal to their taxable income. Accordingly,
these investors have a strong incentive to invest in securities in which the amount of cash generated approximates
the amount of taxable income recognized. Our Class A unitholders, however, are frequently allocated an amount of
taxable income that exceeds the amount of cash we distribute to them. This may make it difficult for RICs to
maintain a meaningful portion of their portfolio in our Class A units and may force those RICs that do hold our
Class A units to sell all or a portion of their holdings. These actions could increase the supply of, and reduce the
demand for, our Class A units, which could cause the price of our Class A units to decline.
The market price of our Class A units may decline due to the large number of Class A units eligible for
future issuance upon the exchange of OCGH units.
In connection with the consummation of our May 2007 Restructuring, each of our owners prior to the May
2007 Restructuring exchanged his, her or its interests in our business for units in OCGH. Subject to certain
restrictions, each holder of units in OCGH has the right to exchange his or her vested units for, at the option of our
board of directors, newly issued Class A units on a one-for-one basis, an equivalent amount of cash based on then-
prevailing market prices, other consideration of equal value or any combination of the foregoing. The Class A units
issued upon such exchanges would be “restricted securities,” as defined in Rule 144 under the Securities Act,
unless we register such issuances. The units in OCGH that our employees received through the May 2007
Restructuring and that are held by certain institutional investors that owned interests in OCM before the 2007
Private Offering have fully vested. In addition, the OCGH units that we grant under the 2011 Plan contain vesting
44
provisions, the length of which has been and will continue to be determined by us at our discretion. OCGH units
granted under our 2007 Oaktree Capital Group, LLC Equity Incentive Plan (the “2007 Plan”) in January 2008 are
also fully vested; however, 20% of such units remain subject to a lock-up that expires on July 10, 2013. Accordingly,
subject to the exchange agreement described under “Certain Relationships and Related Transactions, and Director
Independence—Exchange Agreement,” a substantial number of additional units are expected to be available to be
sold in the future by the OCGH unitholders. OCGH has the right to waive any such vesting and lock-up periods in its
discretion at any time.
The market price of our Class A units could decline as a result of sales of a large number of Class A units
issuable upon exchange of OCGH units. These sales, or the possibility that these sales may occur, may also make
it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
Additional issuances of units under our 2011 Plan may dilute the holdings of our existing unitholders, reduce
the market price of our Class A units or both. Additionally, our operating agreement authorizes us to issue an
unlimited number of additional units and options, rights, warrants and appreciation rights relating to such units for
consideration or for no consideration and on terms and conditions established by our board of directors in its sole
discretion without the approval of Class A unitholders. These additional securities may be used for a variety of
purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans.
We are a “controlled company” within the meaning of the NYSE listing standards and, as a result, qualify
for, and rely on, exemptions from certain corporate governance requirements.
Because our principals own units representing more than 50% of our voting power, we are considered a
“controlled company” for purposes of the NYSE listing requirements. As such, we have elected, and intend to
continue to elect, not to comply with certain NYSE corporate governance requirements, which may include one or
more of the following: that a majority of our board of directors consist of independent directors, that we have a
compensation committee that is composed entirely of independent directors with a written charter addressing the
committee's purpose and responsibilities and that we have a nominating and corporate governance committee that
is composed entirely of independent directors with a written charter addressing the committee's purpose and
responsibilities. In addition, we are not required to hold annual meetings of our unitholders. Accordingly, our Class A
unitholders do not have the same protections afforded to shareholders of companies that are subject to all of the
NYSE corporate governance requirements. Please see “Directors, Executive Officers and Corporate Governance—
Controlled Company Exemption.”
We cannot assure you that our intended quarterly distributions will be paid each quarter or at all.
We intend to distribute substantially all of the excess of our share of distributable earnings, net of income
taxes, as determined by our board of directors after taking into account factors it deems relevant, such as, but not
limited to, working capital levels, known or anticipated cash needs, business and investment opportunities, general
economic and business conditions, our obligations under our debt instruments or other agreements, our compliance
with applicable laws, the level and character of taxable income that flows through to our Class A unitholders, the
availability and terms of outside financing, the possible repurchase of our Class A units in open market transactions,
in privately negotiated transactions or otherwise, providing for future distributions to our Class A unitholders and
growing our capital base.
We are not currently restricted by any contract from making distributions to our unitholders, although certain
of our subsidiaries are bound by credit agreements that contain certain restricted payment or other covenants,
which may have the effect of limiting the amount of distributions that we receive from our subsidiaries. In addition,
we are not permitted to make a distribution under Section 18-607 of the Delaware Limited Liability Company Act
(the “Act”) if, after giving effect to the distribution, our liabilities would exceed the fair value of our assets.
Distributions to our Class A unitholders are funded by our share of the Oaktree Operating Group's
distributions. To measure our earnings for purposes of, among other things, assisting in the determination of
distributions from the Oaktree Operating Group entities to us, we utilize distributable earnings, a non-GAAP
performance measure derived from our segment results, which excludes the effects of the consolidated funds.
The declaration, payment and determination of the amount of our quarterly distribution, if any, is at the sole
discretion of our board of directors, which may change our distribution policy at any time. Our operating agreement
provides that so long as our principals, or their successors or affiliated entities (other than us or our subsidiaries),
including OCGH, collectively hold, directly or indirectly, at least 10% of the aggregate outstanding Oaktree
Operating Group units (the “Oaktree control condition”), our manager, which is 100% owned by our principals, is
45
entitled to designate all the members of our board of directors. As a result, Class A unitholders do not have the
power to elect the board of directors as long as the Oaktree control condition is satisfied. Moreover, our board of
directors may have interests that conflict with the interests of the Class A unitholders because the persons who
control our manager and most of the members of our board of directors hold the vast majority of their economic
interests in the Oaktree Operating Group through OCGH rather than through OCG. We cannot assure you that any
distributions, whether quarterly or otherwise, will or can be paid.
If we reduce or cease to make distributions on our Class A units, the value of our Class A units may
significantly decrease.
Risks Relating to Our Organization and Structure
If we or any of our funds were deemed an investment company under the Investment Company Act,
applicable restrictions could make it impractical for us to continue our business or such funds as
contemplated and could have a material adverse effect on our business.
A person will generally be deemed to be an “investment company” for purposes of the Investment Company
Act if:
•
it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of
investing, reinvesting or trading in securities; or
• absent an applicable exemption, it owns or proposes to acquire investment securities having a value
exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on
an unconsolidated basis.
We believe that we are engaged primarily in the business of providing asset management services and not
primarily in the business of investing, reinvesting or trading in securities. We also believe that the primary source of
income from our business is properly characterized as income earned in exchange for the provision of services. We
hold ourselves out as an asset management firm and do not propose to engage primarily in the business of
investing, reinvesting or trading in securities. Further, because we believe that the capital interests of the general
partners of our funds in their respective funds are neither securities nor investment securities for purposes of the
Investment Company Act, we believe that less than 40% of our total assets (exclusive of U.S. government securities
and cash items) on an unconsolidated basis are comprised of assets that could be considered investment
securities. Accordingly, we do not believe that we are an investment company under the Investment Company Act.
The Investment Company Act and the rules thereunder contain detailed parameters for the organization and
operation of investment companies. Among other things, the Investment Company Act and the rules thereunder
limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities,
generally prohibit the issuance of options and impose certain governance requirements. We intend to conduct our
operations so that we will not be deemed to be an investment company under the Investment Company Act.
Furthermore, we operate our funds so that they are not deemed to be investment companies that are required to be
registered under the Investment Company Act. If anything were to happen that would cause us to be deemed to be
an investment company under the Investment Company Act or that would require us to register our funds under the
Investment Company Act, requirements imposed by the Investment Company Act, including limitations on capital
structure, ability to transact business with affiliates and ability to compensate senior employees, could make it
impractical for us to continue our business or the funds as currently conducted, impair the agreements and
arrangements between and among OCGH, us, our funds and our senior management, or any combination thereof,
and materially adversely affect our business, financial condition and results of operations. In addition, we may be
required to limit the amount of investments that we make as a principal or otherwise conduct our business in a
manner that does not subject us to the registration and other requirements of the Investment Company Act.
Our Class A unitholders do not elect our manager and have limited ability to influence decisions regarding
our business, and our principals are able to determine the outcome of any matters submitted to a vote of
unitholders.
Our operations and activities are managed by our board of directors. So long as the Oaktree control
condition is satisfied, our manager, Oaktree Capital Group Holdings GP, LLC, which is owned by our principals, is
entitled to designate all the members of our board of directors and to remove or replace any director (or our entire
board of directors) at any time. Accordingly, our principals control our management and affairs. Our Class A
unitholders do not elect our manager.
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While our Class A units and Class B units generally vote together as a single class on the limited matters
submitted to a vote of unitholders, including certain amendments of our operating agreement, our operating
agreement does not obligate us to hold annual meetings. Accordingly, our Class A unitholders have only limited
voting rights on matters affecting our business and therefore limited ability to influence decisions regarding our
business. In addition, through their control of our Class B units held by OCGH, our principals, with a 97.6% voting
interest as of March 11, 2013, are able to determine the outcome of any matter that our board of directors does
submit to a vote.
Our principals' control of our manager and of the combined voting power of our units and certain
provisions of our operating agreement could delay or prevent a change of control.
As of March 11, 2013, our principals control 97.6% of the combined voting power of our units through their
control of OCGH. In addition, our principals have the ability to determine the composition of our board of directors
through their control of our manager. Our principals are able to appoint and remove our directors and change the
size of our board of directors, are able to determine the outcome of all matters requiring unitholder approval, are
able to cause or prevent a change of control of our company and can preclude any unsolicited acquisition of our
company. In addition, provisions in our operating agreement make it more difficult and expensive for a third party to
acquire control of us even if a change of control would be beneficial to the interests of our Class A unitholders. For
example, our operating agreement provides that only our board of directors may call meetings and authorizes the
issuance of preferred units in us that could be issued by our board of directors to thwart a takeover attempt. The
control of our manager and voting power by our principals and these provisions of our operating agreement could
delay or prevent a change of control and thereby deprive Class A unitholders of an opportunity to receive a premium
for their Class A units as part of a sale of our company and might ultimately affect the market price of our Class A
units.
Our principals and executive officers hold only a nominal amount of their economic interest in the Oaktree
Operating Group through us, which may give rise to conflicts of interest, and it is difficult for a Class A
unitholder to successfully challenge a resolution of a conflict of interest by us.
As of March 11, 2013, our principals are entitled to approximately 46.3% of the economic returns of the
Oaktree Operating Group. Because they only hold a nominal amount of this economic interest through us, our
principals may have interests that conflict with those of the holders of Class A units. For example, our principals
may have different tax positions from us, which could influence their decisions regarding whether and when to
dispose of assets and whether and when to incur new or refinance existing indebtedness, especially in light of the
existence of the tax receivable agreement. In addition, the structuring of future transactions may take into
consideration the principals' and employees' tax considerations even where no similar benefit would accrue to us
and the Class A unitholders.
Any resolution or course of action taken by our directors or their affiliates with respect to an existing or
potential conflict of interest involving OCGH, our directors or their respective affiliates is permitted and deemed
approved by the Class A unitholders and does not constitute a breach of our operating agreement or any duty
(including any fiduciary duty) if the course of action is (a) approved by the vote of unitholders representing a
majority of the total votes that may be cast by disinterested parties, (b) on terms no less favorable to us, our
subsidiaries or our unitholders than those generally being provided to or available from unrelated third parties,
(c) fair and reasonable to us, taking into account the totality of the relationships among the parties involved, or
(d) approved by a majority of our directors who are not employees of us, our subsidiaries or any of our affiliates
controlled by our principals, who we refer to as our “outside directors.” If our board of directors determines that any
resolution or course of action satisfies either (b) or (c) above, then it will be presumed that such determination was
made in good faith and a Class A unitholder seeking to challenge our directors' determination would bear the
burden of overcoming such presumption. This is different from the situation with Delaware corporations, where a
conflict resolution by an interested party would be presumed to be unfair and the interested party would have the
burden of demonstrating that the resolution was fair.
As noted above, if our board of directors obtains the approval of a majority of our outside directors for any
given action, the resolution will be conclusively deemed not a breach by our board of directors of any duties it may
owe to us or our Class A unitholders. This is different from the situation with Delaware corporations, where the
approval of outside directors may, in certain circumstances, merely shift the burden of demonstrating unfairness to
the plaintiff. Potential conflicts of interest may be resolved by our outside directors even if they hold interests in us
or our funds or are otherwise affected by the decision or action that they are approving. If an investor chooses to
purchase a Class A unit, the investor is treated as having consented to the provisions set forth in our operating
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agreement, including provisions regarding conflicts of interest situations that, in the absence of such provisions,
might be considered a breach of fiduciary or other duties under applicable state law. As a result, Class A
unitholders, as a practical matter, are not able to successfully challenge an informed decision by our outside
directors.
Our operating agreement contains provisions that substantially limit remedies available to our Class A
unitholders for actions that might otherwise result in liability for our officers, directors, manager or Class B
unitholder.
While our operating agreement provides that our officers and directors have fiduciary duties equivalent to
those applicable to officers and directors of a Delaware corporation under the Delaware General Corporation Law
(“DGCL”), the agreement also provides that our officers and directors are liable to us or our unitholders for an act or
omission only if such act or omission constitutes a breach of the duties owed to us or our unitholders, as applicable,
by any such officer or director and such breach is the result of willful malfeasance, gross negligence, the
commission of a felony or a material violation of law, in each case, that has, or could reasonably be expected to
have, a material adverse effect on us or fraud. Moreover, we have agreed to indemnify each of our directors and
officers, to the fullest extent permitted by law, against all expenses and liabilities (including judgments, fines,
penalties, interest, amounts paid in settlement with our approval and counsel fees and disbursements) arising from
the performance of any of their obligations or duties in connection with their service to us, including in connection
with any civil, criminal, administrative, investigative or other action, suit or proceeding to which any such person
may be made party by reason of being or having been one of our directors or officers, except for any expenses or
liabilities that have been finally judicially determined to have arisen primarily from acts or omissions that violated the
standard set forth in the preceding sentence. Furthermore, our operating agreement provides that OCGH does not
have any liability to us or our other unitholders for any act or omission and is indemnified in connection therewith.
Our manager, whose only role is to appoint members of our board of directors so long as the Oaktree control
condition is satisfied, does not owe any duties to us or our Class A unitholders. We have agreed to indemnify our
manager in the same manner as our directors and officers described above.
Under our operating agreement, each of our board of directors, our manager and us is entitled to take
actions or make decisions in its “sole discretion” or “discretion” or that it deems “necessary or appropriate” or
“necessary or advisable.” In those circumstances, each of our board of directors, our manager or us is entitled to
consider only such interests and factors as it desires, including our own or our directors' interests, and neither it nor
our board of directors has any duty or obligation (fiduciary or otherwise) to give any consideration to any interest of
or factors affecting us or any Class A unitholders, and neither we nor our board of directors is subject to any
different standards imposed by our operating agreement, the Act or under any other law, rule or regulation or in
equity, except that we must act in good faith at all times. These modifications of fiduciary duties are expressly
permitted by Delaware law. These modifications are detrimental to the Class A unitholders because they restrict the
remedies available to Class A unitholders for actions that without those limitations might constitute breaches of duty
(including fiduciary duty).
The control of our manager may be transferred to a third party without unitholder consent.
Our manager may transfer its manager interest to a third party in a merger or consolidation, in a transfer of
all or substantially all of its assets or otherwise without the consent of our unitholders. Furthermore, our principals
may sell or transfer all or part of their interests in our manager without the approval of our unitholders. A new
manager could have a different investment philosophy or use its control of our board of directors to make changes
to our business that materially affect our funds, our results of operations or our financial condition.
Our ability to make distributions to our Class A unitholders may be limited by our holding company
structure, applicable provisions of Delaware law, contractual restrictions and the terms of any senior
securities we may issue in the future.
We are a limited liability holding company and have no material assets other than the ownership of our
interests in the Oaktree Operating Group held through the Intermediate Holding Companies. We have no
independent means of generating revenues. Accordingly, to the extent we decide to make distributions to our
Class A unitholders, we will cause the Oaktree Operating Group to make distributions to its unitholders, including
the Intermediate Holding Companies, to fund any distributions we may declare on the Class A units. When the
Oaktree Operating Group makes such distributions, all holders of Oaktree Operating Group units are entitled to
receive pro rata distributions based on their ownership interests in the Oaktree Operating Group.
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The declaration and payment of any future distributions is at the sole discretion of our board of directors, and
we may at any time modify our approach with respect to the proper metric for determining cash flow available for
distribution. Our board of directors will take into account factors it deems relevant, such as, but not limited to,
working capital levels, known or anticipated cash needs, business and investment opportunities, general economic
and business conditions, our obligations under our debt instruments or other agreements, our compliance with
applicable laws, the level and character of taxable income that flows through to our Class A unitholders, the
availability and terms of outside financing, the possible repurchase of our Class A units in open market transactions,
in privately negotiated transactions or otherwise, providing for future distributions to our Class A unitholders and
growing our capital base. Under the Act, we may not make a distribution to a member if, after the distribution, all our
liabilities, other than liabilities to members on account of their limited liability company interests and liabilities for
which the recourse of creditors is limited to specific property of the limited liability company, would exceed the fair
value of our assets. If we were to make such an impermissible distribution, any member who received a distribution
and knew at the time of the distribution that the distribution was in violation of the Act would be liable to us for three
years for the amount of the distribution. In addition, the Oaktree Operating Group's cash flow may be insufficient to
enable it to make required minimum tax distributions to holders of its units, in which case the Oaktree Operating
Group may have to borrow funds or sell assets and thus our liquidity and financial condition could be materially
adversely affected. Our operating agreement contains provisions authorizing the issuance of preferred units in us
by our board of directors at any time without unitholder approval.
Furthermore, by paying cash distributions rather than investing that cash in our business, we risk slowing the
pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or
unanticipated capital expenditures, should the need arise.
We are required to pay the OCGH unitholders for most of the tax benefits we realize as a result of the tax
basis step-up we receive in connection with the sales by the OCGH unitholders of interests held in OCGH.
Subject to certain restrictions, each OCGH unitholder has the right to exchange his or her vested OCGH
units for, at the option of our board of directors, Class A units, an equivalent amount of cash based on then-
prevailing market prices, other consideration of equal value or any combination of the foregoing. In the event of an
exchange, our Intermediate Holding Companies will deliver, at the option of our board of directors, our Class A units
on a one-for-one basis, an equivalent amount of cash based on then-prevailing market prices, other consideration
of equal value or any combination of the foregoing in exchange for the applicable OCGH unitholder's OCGH units
pursuant to an exchange agreement. These exchanges are expected to result in increases in the tax depreciation
and amortization deductions, as well as an increase in the tax basis of other assets, of certain of the Oaktree
Operating Group entities that otherwise would not have been available. These increases in tax depreciation and
amortization deductions, as well as the tax basis of other assets, may reduce the amount of tax that Oaktree
Holdings, Inc. and Oaktree AIF Holdings, Inc. would otherwise be required to pay in the future, although the Internal
Revenue Service (“IRS”) may challenge all or part of the increased deductions and tax basis increase, and a court
could sustain such a challenge.
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. have entered into a tax receivable agreement with the
OCGH unitholders that provides for the payment by Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. to the
OCGH unitholders of 85% of the amount of tax savings, if any, that they actually realize (or are deemed to realize in
the case of an early termination payment by Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. or a change of
control, as discussed below) as a result of these increases in tax deductions and tax basis of entities owned by
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. The payments that Oaktree Holdings, Inc. and Oaktree AIF
Holdings, Inc. may make to the OCGH unitholders could be material in amount.
Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, the
OCGH unitholders will not reimburse Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. for any payments that
have been previously made under the tax receivable agreement. As a result, in certain circumstances, payments
could be made to the OCGH unitholders under the tax receivable agreement in excess of Oaktree Holdings, Inc.'s
and Oaktree AIF Holdings, Inc.'s cash tax savings. Their ability to achieve benefits from any tax basis increase, and
the payments to be made under the tax receivable agreement, will depend upon a number of factors, including the
timing and amount of our future income.
In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business
combination or certain other changes of control, Oaktree Holdings, Inc.'s and Oaktree AIF Holdings, Inc.'s (or their
successors') obligations with respect to exchanged units (whether exchanged before or after the change of control)
would be based on certain assumptions, including that they would have sufficient taxable income to fully utilize the
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deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the
tax receivable agreement.
Risks Relating to United States Taxation
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or
authority may be available and is subject to potential legislative, judicial or administrative change and
differing interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of Class A unitholders depends in some instances on determinations
of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or
authority may be available. Our Class A unitholders should be aware that the U.S. federal income tax rules are
constantly under review by persons involved in the legislative process, the IRS and UST, frequently resulting in
revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications
and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships. The present
U.S. federal income tax treatment of an investment in our Class A units may be modified by administrative,
legislative or judicial interpretation at any time, and any such action may affect investments and commitments
previously made. Changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or
impossible to meet the qualifying income exception for us to be treated as a partnership for U.S. federal income tax
purposes that is not taxable as a corporation, cause us to change our investments and commitments, affect the tax
considerations of an investment in us and adversely affect an investment in our Class A units. For example, the
U.S. Congress recently considered various legislative proposals to treat all or part of the capital gain and dividend
income that is recognized by an investment partnership and allocable to a partner affiliated with the sponsor of the
partnership (i.e., a portion of the incentive income) as ordinary income to such partner for U.S. federal income tax
purposes. Please see “—The U.S. Congress has considered legislation that would have taxed certain income and
gains at increased rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any
similar legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as well
as the market price of our Class A units, could be reduced.”
Our operating agreement permits our board of directors to modify our operating agreement from time to time,
without the consent of our Class A unitholders, to address certain changes in U.S. federal income tax regulations,
legislation or interpretation. In some circumstances, the revisions could have a material adverse impact on some or
all Class A unitholders. Moreover, we apply certain assumptions and conventions in an attempt to comply with
applicable rules and to report income, gain, deduction, loss and credit to Class A unitholders in a manner that
reflects such Class A unitholders' beneficial ownership of partnership items, taking into account variation in
ownership interests during each taxable year because of trading activity. However, those assumptions and
conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will
assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of
the Code or UST regulations and could require that items of income, gain, deductions, loss or credit, including
interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects Class A unitholders.
If we were treated as a corporation for U.S. federal income tax or state tax purposes, then our distributions
to our Class A unitholders would be substantially reduced and the value of our Class A units would be
adversely affected.
The value of our Class A unitholders' investment in us depends to a significant extent on our being treated as
a partnership for U.S. federal income tax purposes, which requires that 90% or more of our gross income for every
taxable year consist of qualifying income, as defined in Section 7704 of the Code, and that we not be required to be
registered under the Investment Company Act. Qualifying income generally includes dividends, interest, capital
gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We
may not meet these requirements or current law may change so as to cause us, in either event, to be treated as a
corporation for U.S. federal income tax purposes or otherwise subject to U.S. federal income tax. Moreover, the
anticipated after-tax benefit of an investment in our Class A units depends largely on our being treated as a
partnership for U.S. federal income tax purposes. We have not requested, and do not plan to request, a ruling from
the IRS on this or any other matter affecting us.
If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income
tax on our taxable income at the corporate tax rate. Distributions to Class A unitholders would generally be taxed
again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to them.
Because a tax would be imposed upon us as a corporation, our distributions to Class A unitholders would be
substantially reduced, likely causing a substantial reduction in the value of our Class A units.
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Current law may change, causing us to be treated as a corporation for U.S. federal or state income tax
purposes or otherwise subjecting us to entity-level taxation. Please see “—The U.S. Congress has considered
legislation that would have taxed certain income and gains at increased rates and may have precluded us from
qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to us, the
after-tax income and gain related to our business, as well as the market price of our Class A units, could be
reduced.” For example, certain states are evaluating ways to subject partnerships to entity-level taxation through
the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an
entity, our distributions to our Class A unitholders would be reduced.
Our Class A unitholders may be subject to U.S. federal income tax on their share of our taxable income,
regardless of whether they receive any cash distributions from us.
As long as 90% of our gross income for each taxable year constitutes qualifying income as defined in
Section 7704 of the Code and we are not required to register as an investment company under the Investment
Company Act on a continuing basis, and assuming there is no change in law (please see “—The U.S. Congress has
considered legislation that would have taxed certain income and gains at increased rates and may have precluded
us from qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to
us, the after-tax income and gain related to our business, as well as the market price of our Class A units, could be
reduced.”), we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a
publicly traded partnership taxable as a corporation. As a result, our Class A unitholders may be subject to U.S.
federal, state, local and possibly, in some cases, foreign income taxation on their allocable share of our items of
income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we
invest that is treated as a partnership or is otherwise subject to tax on a flow-through basis) for each of our taxable
years ending with or within their taxable year, regardless of whether or not our Class A unitholders receive cash
distributions from us.
Our Class A unitholders may not receive cash distributions equal to their allocable share of our net taxable
income or even the tax liability that results from that income. In addition, certain of our holdings, including holdings,
if any, in a controlled foreign corporation (“CFC”) or a passive foreign investment company (“PFIC”), may produce
taxable income prior to the receipt of cash relating to such income, and Class A unitholders may be required to take
that income into account in determining their taxable income. In the event of an inadvertent termination of our
partnership status, for which limited relief may be available, each holder of our Class A units may be obligated to
make such adjustments as the IRS may require to maintain our status as a partnership. These adjustments may
require persons holding our Class A units to recognize additional amounts in income during the years in which they
hold such units.
A portion of our interest in the Oaktree Operating Group is held through Oaktree Holdings, Inc. and Oaktree
AIF Holdings, Inc., which are treated as corporations for U.S. federal income tax purposes and may be
liable for significant taxes that could potentially adversely affect the value of our Class A units.
In light of the publicly traded partnership rules under U.S. federal income tax law and other requirements, we
hold a portion of our interest in the Oaktree Operating Group through Oaktree Holdings, Inc. and Oaktree AIF
Holdings, Inc., which are treated as corporations for U.S. federal income tax purposes. Oaktree Holdings, Inc. and
Oaktree AIF Holdings, Inc. could be liable for significant U.S. federal income taxes and applicable state, local and
other taxes that would not otherwise be incurred, which could adversely affect the value of our Class A units. Those
additional taxes did not apply to the OCGH unitholders in OCM's organizational structure in effect before the 2007
Private Offering and do not apply to the OCGH unitholders following the 2007 Private Offering to the extent they
own equity interests in the Oaktree Operating Group entities through OCGH.
The U.S. Congress has considered legislation that would have taxed certain income and gains at increased
rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any similar
legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as
well as the market price of our Class A units, could be reduced.
Over the past several years, a number of legislative and administrative proposals have been introduced and,
in certain cases, have been passed by the U.S. House of Representatives. The U.S. House of Representatives in
May 2010 passed legislation (the “May 2010 House Bill”) that would have, in general, treated income and gains,
including gain on sale, attributable to an investment services partnership interest (“ISPI”) as income subject to a
new blended tax rate that is higher than under current law, except to the extent such ISPI would have been
considered under the legislation to be a qualified capital interest. Your interest in us, our interest in Oaktree
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Holdings, LLC and the interests that Oaktree Holdings, LLC holds in entities that are entitled to receive incentive
income may have been classified as ISPIs for purposes of this legislation. The U.S. Senate considered but did not
pass similar legislation. More recently, Representative Sander Levin and Senator Harkin separately introduced
similar legislation (the “2012 bills”) that would tax carried interest at ordinary income tax rates, which would be
higher than the proposed blended rate under the May 2012 House bill. It is unclear when or whether the U.S.
Congress will pass such legislation or what provisions will be included in any final legislation, if enacted.
Each of the May 2010 House bill and the 2012 bills provides that, for taxable years beginning ten years after
the date of enactment, income derived with respect to an ISPI that is not a qualified capital interest and that is
subject to the rules discussed above would not meet the qualifying income requirements under the publicly traded
partnership rules. Therefore, if similar legislation is enacted, following such ten-year period, we would be precluded
from qualifying as a partnership for U.S. federal income tax purposes or be required to hold all such ISPIs through
corporations, possibly U.S. corporations. If we were taxed as a U.S. corporation or required to hold all ISPIs through
corporations, our effective income tax rate would increase significantly. The federal statutory rate for corporations is
currently 35%. In addition, we could be subject to increased state and local taxes. Furthermore, you could be
subject to tax on our conversion into a corporation or any restructuring required in order for us to hold our ISPIs
through a corporation.
On September 12, 2011, the Obama administration submitted similar legislation to Congress in the American
Jobs Act that would tax income and gain, including gain on sale, attributable to an ISPI at ordinary rates, with an
exception for certain qualified capital interests. The proposed legislation would also characterize certain income and
gain in respect of ISPIs as non-qualifying income under the publicly traded partnership rules after a ten-year
transition period from the effective date, with an exception for certain qualified capital interests. This proposed
legislation follows several prior statements by the Obama administration in support of changing the taxation of
carried interest. Furthermore, in its published revenue proposal for 2013, the Obama administration proposed that
current law regarding the treatment of incentive income be changed to subject such income to ordinary income tax.
The Obama administration's published revenue proposals for 2010, 2011 and 2012 contained similar proposals.
States and other jurisdictions have also considered legislation to increase taxes with respect to incentive
income. For example, New York considered legislation under which Class A unitholders could be subject to New
York state income tax on income in respect of our Class A units as a result of certain activities of our affiliates in
New York. This legislation would have been retroactive to January 1, 2010. It is unclear when or whether similar
legislation will be enacted.
Additional proposed changes in the U.S. taxation of businesses could adversely affect us.
On February 22, 2012, the Obama administration announced its “framework” of key elements to change the
U.S. federal income tax rules for businesses. Few specifics were included, and it is unclear what any actual
legislation would provide, when it would be proposed or what its prospects for enactment would be. Several parts of
the framework if enacted could adversely affect us. First, the framework would reduce the deductibility of interest for
corporations in a manner not yet specified. A reduction in interest deductions could increase our tax rate and
thereby reduce cash available for distribution to investors or for other uses by us. Such a reduction could also
increase the effective cost of financing by companies in which we invest, which could reduce the value of our
carried interest in respect of such companies. The framework would also reduce the top marginal tax rate on
corporations from 35% to 28%. The framework suggests some entities currently treated as partnerships for tax
purposes should be subject to an entity-level income tax similar to the corporate income tax. If such a proposal
caused us to be subject to additional entity-level taxes, it could reduce cash available for distribution to investors or
for other uses by us. Finally, the framework reiterates President Obama's support for treatment of carried interest as
ordinary income, as provided in the Obama administration's revenue proposal for 2013 described above. Because
the framework did not include specifics, its effect on us is unclear, but the framework reflects a commitment by the
Obama administration to try to change the tax law in ways that could be adverse to us.
Complying with certain tax-related requirements may cause us to invest through foreign or domestic
corporations subject to corporate income tax or enter into acquisitions, borrowings, financings or
arrangements we may not have otherwise entered into.
In order for us to be treated as a partnership for U.S. federal income tax purposes and not as an association
or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed
above on a continuing basis and we must not be required to register as an investment company under the
Investment Company Act. In order to effect such treatment, we (or our subsidiaries) may be required to invest
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through foreign or domestic corporations subject to corporate income tax or enter into acquisitions, borrowings,
financings or other transactions we may not have otherwise entered into. This may adversely affect our ability to
operate solely to maximize our cash flow.
Changes in U.S. tax law could adversely affect our ability to raise funds from certain foreign investors.
Under the U.S. Foreign Account Tax Compliance Act (“FATCA”), a broadly defined class of foreign financial
institutions are required to comply with a complicated and expansive reporting regime following the expiration of an
initial phase-in period or be subject to certain U.S. withholding taxes. The reporting obligations imposed under
FATCA require these foreign financial institutions to enter into agreements with the IRS to obtain and disclose
information about certain investors to the IRS. Additionally, certain non-U.S. entities that are not foreign financial
institutions are required to provide certain certifications or other information regarding their U.S. beneficial
ownership or be subject to certain U.S. withholding taxes. In addition, the administrative and economic costs of
compliance with FATCA may discourage some foreign investors from investing in U.S. funds, which could adversely
affect our ability to raise funds from these investors.
Taxable gain or loss on disposition of our Class A units could be more or less than expected.
If a unitholder sells its Class A units, it will recognize a gain or loss equal to the difference between the
amount realized and the adjusted tax basis in those Class A units. Prior distributions to such unitholder in excess of
the total net taxable income allocated to it, which decreased the tax basis in its Class A units, will in effect become
taxable income to such unitholder if the Class A units are sold at a price greater than its tax basis in those Class A
units, even if the price is less than the original cost. A substantial portion of the amount realized, whether or not
representing gain, may be ordinary income to such selling unitholder.
We may hold or acquire certain investments through entities classified as a PFIC or CFC for U.S. federal
income tax purposes.
Certain of our funds' investments may be in foreign corporations or may be acquired through a foreign
subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an entity may be a
PFIC or a CFC for U.S. federal income tax purposes. Class A unitholders indirectly owning an interest in a PFIC or
a CFC may experience adverse U.S. tax consequences. For example, a portion of the amount a unitholder realizes
on a sale of their Class A units may be recharacterized as ordinary income. In addition, Oaktree Holdings, Ltd. is
treated as a CFC for U.S. tax purposes, and, as such, each Class A unitholder that is a U.S. person is required to
include in income its allocable share of Oaktree Holdings, Ltd.'s “Subpart F” income reported by us.
Non-U.S. persons face unique U.S. tax issues from owning Class A units that may result in adverse tax
consequences to them.
We intend to use reasonable efforts to structure our investments in a manner such that non-U.S. holders do
not incur income that is effectively connected with a U.S. trade or business (“ECI”) with respect to an investment in
our Class A units. However, we may invest in flow-through entities that are engaged in a U.S. trade or business and,
in such case, we and non-U.S. holders of Class A units would be treated as being engaged in a U.S. trade or
business for U.S. federal income tax purposes, even if we do not recognize ECI from such investments. Current
UST regulations provide that non-U.S. holders that are deemed to be engaged in a U.S. trade or business are
required to file a U.S. federal income tax return even if such holders do not recognize any ECI. In addition, although
we intend to take the position that income allocated to us from our investments is not ECI, if the IRS successfully
challenged certain of our methods of allocation of income for U.S. federal income tax purposes, it is possible non-
U.S. holders could recognize ECI with respect to their investment in our Class A units.
To the extent our income is treated as ECI, non-U.S. holders generally would be subject to withholding tax on
their allocable shares of such income, would be required to file U.S. federal income tax returns for such year
reporting their allocable shares of income effectively connected with such trade or business and any other income
treated as ECI and would be subject to U.S. federal income tax at regular U.S. tax rates on any such income (state
and local income taxes and filings may also apply in that event). Non-U.S. holders that are corporations may also
be subject to a 30% branch profits tax on their allocable share of such income. In addition, certain income from U.S.
sources that is not ECI allocable to non-U.S. holders will be reduced by withholding taxes imposed at the highest
effective applicable tax rate. A portion of any gain recognized by a non-U.S. holder on the sale or exchange of Class
A units could also be treated as ECI.
53
Tax-exempt entities face unique tax issues from owning Class A units that may result in adverse tax
consequences to them.
In light of our intended investment activities, we may derive income that constitutes unrelated business
taxable income (“UBTI”). Consequently, a holder of Class A units that is a tax-exempt entity (including an individual
retirement account or a 401(k) plan participant) may be subject to unrelated business income tax to the extent that
its allocable share of our income consists of UBTI. A tax-exempt partner of a partnership could be treated as
earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function of
the tax-exempt partner, if the partnership derives income from debt-financed property or if the partnership interest
itself is debt-financed.
We will adopt certain income tax accounting positions that may not conform with all aspects of applicable
tax requirements. The IRS may challenge this treatment, which could adversely affect the value of our
Class A units.
We will adopt depreciation, amortization and other tax accounting positions that may not conform with all
aspects of existing UST regulations. A successful IRS challenge to those positions could adversely affect the
amount of tax benefits available to our Class A unitholders. It also could affect the timing of these tax benefits or the
amount of gain on the sale of Class A units and could have a negative impact on the value of our Class A units or
result in audits of and adjustments to our Class A unitholders' tax returns.
The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our
partnership for U.S. federal income tax purposes.
We will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or
exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Our
termination would, among other things, result in the closing of our taxable year for all Class A unitholders and could
result in a deferral of depreciation deductions allowable in computing our taxable income.
Class A unitholders may be subject to foreign, state and local taxes and return filing requirements as a
result of investing in our Class A units.
In addition to U.S. federal income taxes, our Class A unitholders may be subject to other taxes, including
foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are
imposed by the various jurisdictions in which we do business or own property now or in the future, even if our
Class A unitholders do not reside in any of those jurisdictions. Our Class A unitholders may be required to file
foreign, state and local income tax returns and pay foreign, state and local income taxes in some or all of these
jurisdictions. Furthermore, Class A unitholders may be subject to penalties for failure to comply with those
requirements. It is the responsibility of each Class A unitholder to file all U.S. federal, foreign, state and local tax
returns that may be required of such Class A unitholder.
Although we expect to provide estimates by February 28 of each year, we do not expect to be able to
furnish definitive Schedule K-1s to IRS Form 1065 to each unitholder prior to the deadline for filing U.S.
income tax returns, which means that holders of Class A units who are U.S. taxpayers may want to file
annually a request for an extension of the due date of their income tax returns.
It may require a substantial period of time after the end of our fiscal year to obtain the requisite information
from all lower-tier entities to enable us to prepare and deliver Schedule K-1s to IRS Form 1065. Notwithstanding the
foregoing, we expect to provide estimates of such tax information (including a Class A unitholder's allocable share
of our income, gain, loss and deduction for our preceding year) by February 28 of the year following each year;
however, there is no assurance that the Schedule K-1s, which will be provided after the estimates, will be the same
as our estimates. For this reason, holders of Class A units who are U.S. taxpayers may want to file with the IRS
(and certain states) a request for an extension past the due date of their income tax returns.
Tax consequences to the OCGH unitholders may give rise to conflicts of interests.
As a result of an unrealized built-in gain attributable to the value of our assets held by the Oaktree Operating
Group entities at the time of the 2007 Private Offering and unrealized built-in gain attributable to OCGH at the time
of our initial public offering in April 2012, upon the taxable sale, refinancing or disposition of the assets owned by
the Oaktree Operating Group entities, the OCGH unitholders may incur different and significantly greater tax
liabilities as a result of the disproportionately greater allocations of items of taxable income and gain to the OCGH
unitholders upon a realization event. As the OCGH unitholders will not receive a corresponding greater distribution
54
of cash proceeds, they may, subject to applicable fiduciary or contractual duties, have different objectives regarding
the appropriate pricing, timing and other material terms of any sale, refinancing or disposition, or whether to sell
such assets at all. Decisions made with respect to an acceleration or deferral of income or the sale or disposition of
assets may also influence the timing and amount of payments that are received by an exchanging or selling OCGH
unitholder under the tax receivable agreement. Decisions made regarding a change of control also could have a
material influence on the timing and amount of payments received by the OCGH unitholders pursuant to the tax
receivable agreement. Because our principals hold their economic interest in our business primarily through OCGH
and control both us and our manager (which is entitled to designate all the members of our board of directors),
these differing objectives may give rise to conflicts of interest. We will be entitled to resolve these conflicts as
described elsewhere in this annual report. Please see “—Risks Relating to Our Organization and Structure—Our
principals and executive officers hold only a nominal amount of their economic interest in the Oaktree Operating
Group through us, which may give rise to conflicts of interest, and it is difficult for a Class A unitholder to
successfully challenge a resolution of a conflict of interest by us.”
Due to uncertainty in the proper application of applicable law, we may over-withhold or under-withhold on
distributions to Class A unitholders.
For each calendar year, we will report to Class A unitholders and the IRS the amount of distributions we
made to Class A unitholders and the amount of U.S. federal income tax (if any) that we withheld on those
distributions. The proper application to us of rules for withholding under Section 1441 of the Code (applicable to
certain dividends, interest and similar items) is unclear. Because the documentation we receive may not properly
reflect the identities of Class A unitholders at any particular time (in light of possible sales of Class A units), we may
over-withhold or under-withhold with respect to a particular holder of Class A units. For example, we may impose
withholding, remit that amount to the IRS and thus reduce the amount of a distribution paid to a non-U.S. Holder. It
may turn out, however, that the corresponding amount of our income was not properly allocable to such holder, and
the withholding should have been less than the actual withholding. Such holder would be entitled to a credit against
the holder's U.S. tax liability for all withholding, including any such excess withholding, but if the withholding
exceeded the holder's U.S. tax liability, the holder would have to apply for a refund to obtain the benefit of the
excess withholding. Similarly, we may fail to withhold on a distribution, and it may turn out that the corresponding
income was properly allocable to a non-U.S. Holder and withholding should have been imposed. In that event, we
intend to pay the under-withheld amount to the IRS, and we may treat such under-withholding as an expense that
will be borne by all holders of Class A units on a pro rata basis (since we may be unable to allocate any such
excess withholding tax cost to the relevant non-U.S. holder).
Certain U.S. holders of common units are subject to additional tax on “net investment income.”
U.S. holders that are individuals, estates or trusts are subject to a Medicare tax of 3.8% on “net investment
income” (or undistributed “net investment income,” in the case of estates and trusts) for each taxable year, with
such tax applying to the lesser of such income or the excess of such person's adjusted gross income (with certain
adjustments) over a specified amount. Net investment income includes net income from interest, dividends,
annuities, royalties and rents and net gain attributable to the disposition of investment property. It is anticipated that
net income and gain attributable to an investment in our Class A units will be included in a U.S. holder's “net
investment income” subject to this Medicare tax.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Properties
Our principal executive offices are located in leased office space at 333 South Grand Avenue, 28th Floor, Los
Angeles, California 90071. We also lease the space for our offices in New York, Stamford, London, Frankfurt, Paris,
Beijing, Hong Kong, Seoul, Singapore and Tokyo. Certain affiliates of our managed funds lease office space in
Amsterdam and Luxembourg. We do not own any material real property. We consider our facilities to be suitable
and adequate for the management and operation of our business.
55
Item 3. Legal Proceedings
For a discussion of legal proceedings, please see the section entitled “Legal actions” in note 12 to our
consolidated financial statements included elsewhere in this annual report, which section is incorporated herein by
reference.
Item 4. Mine Safety Disclosures
None.
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our Class A units are traded on the NYSE under the symbol “OAK” and began trading on the NYSE on April
12, 2012. The following table sets forth the high and low intra-day sales prices per unit of our Class A units, for the
periods indicated, as reported by the NYSE:
2012
First Quarter ............................................................................................................................
N/A
Second Quarter ....................................................................................................................... $ 42.55
41.26
Third Quarter ...........................................................................................................................
47.14
Fourth Quarter ........................................................................................................................
High
Low
N/A
$ 34.00
34.98
39.50
Sales Price
The number of holders of record of our Class A units as of March 11, 2013 was 7. This does not include the
number of Class A unitholders that hold units in “street-name” through banks or broker-dealers.
Cash Distribution Policy
We intend to make distributions to our Class A unitholders quarterly, following the respective quarter end.
Distributions to our Class A unitholders are funded by our share of the Oaktree Operating Group’s distributions. We
use distributable earnings, a non-GAAP performance measure derived from our segment results, to measure our
earnings at the Oaktree Operating Group level without the effects of the consolidated funds for purposes of, among
other things, assisting in the determination of equity distributions from the Oaktree Operating Group. By excluding
the results of our consolidated funds and segment investment income (loss), which are not directly available to fund
our operations or make equity distributions, and including the portion of distributions from Oaktree and non-Oaktree
funds and companies to us that is deemed the profit or loss component of the distributions and not a return of our
capital contributions, distributable earnings aids us in measuring amounts that are actually available to meet our
obligations under the tax receivable agreement and our liabilities for expenses incurred at OCG and the
Intermediate Holding Companies, as well as for distributions to Class A and OCGH unitholders.
We intend to distribute substantially all of the excess of our share of distributable earnings, net of income
taxes, as determined by our board of directors after taking into account factors it deems relevant, such as, but not
limited to, working capital levels, known or anticipated cash needs, business and investment opportunities, general
economic and business conditions, our obligations under our debt instruments or other agreements, our compliance
with applicable laws, the level and character of taxable income that flows through to our Class A unitholders, the
availability and terms of outside financing, the possible repurchase of our Class A units in open market transactions,
in privately negotiated transactions or otherwise, providing for future distributions to our Class A unitholders and
growing our capital base. We are not currently restricted by any contract from making distributions to our
unitholders, although certain of our subsidiaries are bound by credit agreements that contain certain restricted
payment and/or other covenants, which may have the effect of limiting the amount of distributions that we receive
from our subsidiaries. In addition, we are not permitted to make a distribution under Section 18-607 of the Delaware
Limited Liability Company Act if, after giving effect to the distribution, our liabilities would exceed the fair value of our
assets.
56
The declaration, payment and determination of the amount of equity distributions, if any, is at the sole
discretion of our board of directors, which may change our distribution policy at any time. Please see “Risk Factors
—We cannot assure you that our intended quarterly distributions will be paid each quarter or at all.”
Class A unitholders receive their share of these distributions by the Oaktree Operating Group, net of
expenses that we and our Intermediate Holding Companies bear directly, such as income taxes or payment
obligations under the tax receivable agreement. Our quarterly distributable earnings may be affected by potential
seasonal factors that may, in turn, affect the level of the cash distributions applicable to a particular quarter. For
example, we generally receive tax-related incentive distributions from certain closed-end funds in the first quarter of
the year, which if received generate distributable earnings in that period. The distribution amounts as between any
given periods are likely to vary materially due to this and other factors.
With respect to upcoming distributions applicable to fiscal year 2013, we currently estimate that the
aggregate deductions taken in arriving at the cash distribution payable per Class A unit will include approximately
25 cents for payment obligations under the tax receivable agreement, to be deducted proportionately from each of
the four remaining quarterly distributions. These deductions, which are subject to change as the year progresses,
will be in addition to deductions for income taxes and other expenses that Oaktree or its Intermediate Holding
Companies bear directly.
In each of the 2007 Private Offering and our initial public offering in April 2012, the exchange of OCGH units
increased the tax basis of the tangible and intangible assets of the Oaktree Operating Group. Assuming no material
changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the
increased amortization of our assets, we expect that payments under the tax receivable agreement will aggregate
to $47.2 million over the period ending in approximately 2029 with respect to the 2007 Private Offering and $87.8
million over the period ending in approximately 2034 with respect to our initial public offering.
Set forth below are the distributions per Class A unit that were paid on the indicated payment dates to the
holders of record as of a date that was two to four business days prior to the payment date.
Payment Date
March 1, 2013
November 20, 2012
August 21, 2012
May 25, 2012
Applicable to Quarterly
Period Ended
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
Total fiscal year 2012 .................................................................................................................................. $
March 7, 2012
October 28, 2011
July 29, 2011
April 29, 2011
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
$
Total fiscal year 2011 .................................................................................................................................. $
Distribution
per Unit
$
1.05
0.55
0.79
0.55
2.94
0.42
0.29
0.51
0.64
1.86
Unregistered Sales of Equity Securities and Purchases of Equity Securities in the Fourth Quarter of 2012
None.
57
Item 6. Selected Financial Data
The following sets forth selected historical consolidated financial and other data of Oaktree Capital Group,
LLC as of and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008. The following data should be
read together with “—Management's Discussion and Analysis of Financial Condition and Results of Operations” and
the historical financial statements and related notes included elsewhere in this annual report.
We derived the selected historical consolidated statements of operations data for the years ended December
31, 2012, 2011 and 2010, and the selected historical consolidated statements of financial condition data for the
years ended December 31, 2012 and 2011, from our audited consolidated financial statements, which are included
elsewhere in this annual report. We derived the selected historical consolidated statements of operations and
financial condition data for all other periods from our audited consolidated financial statements, which are not
included in this annual report.
The selected historical financial data are not necessarily indicative of the expected future operating results of
Oaktree.
As of or for the Year Ended December 31,
2012
2011
2010
2009
2008
(in thousands, except per unit data or as otherwise indicated)
Consolidated Statements of Operations Data:
Total revenues .......................................................................... $
144,983
$
155,770
$
206,181
$
153,132
$
97,524
Total expenses .........................................................................
(790,603)
(1,644,864)
(1,580,651)
(1,426,318)
(1,364,009)
Total other income (loss) ..........................................................
7,348,895
1,201,537
6,681,658
13,165,717
(6,354,205)
Income (loss) before income taxes ..........................................
6,703,275
(287,557)
5,307,188
11,892,531
(7,620,690)
Income taxes ............................................................................
(30,858)
(21,088)
(26,399)
(18,267)
(17,341)
Net income (loss) .....................................................................
6,672,417
(308,645)
5,280,789
11,874,264
(7,638,031)
Less:
Net (income) loss attributable to non-controlling
redeemable interests in consolidated funds .................
Net (income) loss attributable to OCGH non-controlling
interest .........................................................................
(6,016,342)
(233,573)
(5,493,799)
(12,158,635)
6,885,433
(548,265)
446,246
163,555
227,313
625,285
Net income (loss) attributable to OCG ...................................... $
107,810
Distributions declared per Class A unit ..................................... $
Net income (loss) per Class A unit ........................................... $
2.31
3.83
$
$
$
(95,972)
2.34
(4.23)
$
$
$
(49,455)
2.17
(2.18)
$
$
$
(57,058)
0.65
(2.50)
$
$
$
(127,313)
0.76
(5.53)
Weighted average number of Class A units outstanding ..........
28,170
22,677
22,677
22,821
23,002
58
As of or for the Year Ended December 31,
2012
2011
2010
2009
2008
(in thousands, except as otherwise indicated)
Consolidated Statements of Financial Condition Data:
Total assets .............................................................................. $ 43,869,998
$ 44,294,156
$ 47,843,660
$ 43,195,731
$ 31,797,278
Debt obligations .......................................................................
1,106,804
702,260
494,716
700,342
536,849
Non-controlling redeemable interests in consolidated funds ....
39,670,831
41,048,607
44,466,116
39,419,906
26,872,769
Segment Statements of Operations: (1)
Management fees .................................................................... $
747,440
$
724,321
$
750,031
$
636,260
$
544,520
Incentive income ......................................................................
Investment income (loss) .........................................................
461,116
202,392
303,963
23,763
413,240
149,449
175,065
289,001
Total segment revenues ...................................................
1,410,948
1,052,047
1,312,720
1,100,326
173,876
(151,249)
567,147
Compensation and benefits ......................................................
Incentive income compensation expense .................................
General and administrative expenses ......................................
Depreciation and amortization expense ...................................
(330,059)
(222,594)
(102,685)
(7,397)
(308,115)
(179,234)
(94,655)
(6,583)
(287,067)
(159,243)
(81,121)
(6,481)
(268,241)
(218,128)
(65,639)
(70,996)
(6,792)
(64,845)
(63,721)
(6,738)
Total expenses .................................................................
Interest expense, net of interest income (2) ...............................
Other income (expense) ...........................................................
(662,735)
(588,587)
(533,912)
(411,668)
(353,432)
(31,730)
767
(33,867)
(1,209)
(26,173)
11,243
(13,071)
—
(6,437)
—
Adjusted net income ................................................................. $
717,250
$
428,384
$
763,878
$
675,587
$
207,278
Segment Statements of Financial Condition Data: (1)
Cash and cash-equivalents ...................................................... $
458,191
$
297,230
$
348,502
$
433,769
$
141,590
U.S. Treasury and government agency securities ....................
370,614
Corporate investments, at equity ..............................................
1,115,952
Total assets ..............................................................................
2,359,548
Debt obligations .......................................................................
Total liabilities ...........................................................................
615,179
965,655
381,697
1,159,287
2,083,908
652,143
959,908
170,564
1,108,690
1,944,801
403,571
708,085
Total unitholders' capital ...........................................................
1,393,893
1,124,000
1,236,716
74,900
909,329
1,702,403
425,000
742,570
959,833
Operating Metrics:
Assets under management (in millions):
Assets under management .............................................. $
77,051
$
74,857
$
82,672
$
73,278
$
Management fee-generating assets under management .
Incentive-creating assets under management ..................
Uncalled capital commitments (3) ......................................
66,784
33,989
11,201
66,964
36,155
11,201
66,175
39,385
14,270
62,677
33,339
11,055
Accrued incentives (fund level): (4)
—
606,478
913,757
196,429
424,182
489,575
49,866
50,234
22,197
7,205
Incentives created (fund level) .........................................
911,947
(75,916)
889,721
1,239,314
(223,328)
Incentives created (fund level), net of associated
incentive income compensation expense .....................
522,800
(30,600)
516,183
699,664
Accrued incentives (fund level) ........................................
2,137,798
1,686,967
2,066,846
1,590,365
(122,822)
526,116
Accrued incentives (fund level), net of associated
incentive income compensation expense .....................
1,282,194
1,027,711
1,166,583
879,879
285,279
(1)
(2)
(3)
Our business is comprised of one segment, our investment management segment, which consists of the investment management
services that we provide to our clients. The components of revenues and expenses used in determining adjusted net income do not give
effect to the consolidation of the funds that we manage. In addition, adjusted net income excludes the effect of: (a) non-cash equity
compensation charges related to OCGH units issued prior to our initial public offering, (b) income taxes, (c) expenses that OCG or its
Intermediate Holding Companies bear directly and (d) the adjustment for the OCGH non-controlling interest. Adjusted net income is
calculated at the Oaktree Operating Group level. For additional information regarding these reconciling adjustments, as well as
reconciliations of segment total assets to consolidated total assets, please see the “Segment Reporting” note to our consolidated
financial statements included elsewhere in this annual report.
Interest income was $2.6 million, $2.3 million, $1.9 million, $0.7 million and $6.5 million for the years ended December 31, 2012, 2011,
2010, 2009 and 2008, respectively.
Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as general partner) of our closed-
end funds in their investment periods. If a fund distributes capital during its investment period, that capital is typically subject to possible
recall, in which case it is included in uncalled capital commitments.
59
(4)
Our funds record as accrued incentives the incentive income that would be paid to us if the funds were liquidated at their reported
values as of the date of the financial statements. Incentives created (fund level) refers to the amount of potential incentives generated
by the funds during the period. We refer to the amount of incentive income recognized as revenue by us as segment incentive income.
We recognize incentive income when it becomes fixed or determinable, all related contingencies have been removed and collection is
reasonably assured. Amounts recognized by us as incentive income no longer are included in accrued incentives (fund level), the term
we use for remaining fund-level accruals. Incentives created (fund level), incentive income and accrued incentives (fund level) are
presented gross, without deduction for direct compensation expense that is owed to our investment professionals associated with the
particular fund when we earn the incentive income. We call that charge “incentive income compensation expense.” Incentive income
compensation expense varies by the investment strategy and vintage of the particular fund, among other factors, but generally equals
between 40% to 55% of segment incentive income revenue.
60
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial
statements of Oaktree Capital Group, LLC and the related notes included within this annual report. This discussion
contains forward-looking statements that are subject to risks and uncertainties and assumptions relating to our
operations, financial results, financial condition, business prospects, growth strategy and liquidity. The factors listed
under “Risk Factors” and “Forward-Looking Statements” in this annual report provide examples of risks,
uncertainties and events that may cause our actual results to differ materially from the expectations described in
any forward-looking statements.
Business Overview
Oaktree is a leader among global investment managers specializing in alternative investments, with $77.1
billion in AUM as of December 31, 2012 across a broad array of sophisticated investment strategies that we
categorize into six asset classes: distressed debt, corporate debt, control investing, convertible securities, real
estate and listed equities. Over more than a quarter-century we have developed a large and growing client base
through our ability to identify and capitalize on opportunities for attractive investment returns in less efficient
markets. Our investment approach, based on the primacy of risk control, and the strong risk-adjusted performance
record it has produced appeal to the many investors who seek attractive returns with less-than-commensurate risk.
Oaktree's growth and success are byproducts of our proven investment approach and always putting our clients'
interests first.
We manage assets on behalf of many of the most significant institutional investors in the world, including 75
of the 100 largest U.S. pension plans, 38 states in the United States, approximately 400 corporations, over 300
university, charitable and other endowments and foundations, 10 sovereign wealth funds and over 250 other non-
U.S. institutional investors. We serve these clients with over 700 employees, including 229 investment professionals
in 13 offices in 10 countries, of which the largest offices are in Los Angeles (headquarters), London, New York and
Hong Kong.
Our business is comprised of one segment, our investment management segment, which consists of the
investment management services that we provide to our clients. Our segment revenue flows from the management
fees and incentive income generated by the funds that we manage, as well as the investment income from the
funds we manage and other third-party funds and companies in which we invest. The management fees that we
receive are based on the contractual terms of the relevant fund and are typically calculated as a fixed percentage of
the capital commitments (as adjusted for distributions during a fund's liquidation period) or NAV of the particular
fund. Incentive income represents our share (typically 20%) of the investors' profits in most of the closed-end and
evergreen funds. Investment income refers to the investment return on a mark-to-market basis on the amounts that
we invest in Oaktree and third-party funds, as well as our equity income participation from investments in other
companies.
2012 Business Environment and Developments
As a global investment manager, we are affected by myriad factors, including the conditions of the economy
and financial markets, the relative attractiveness of our investment strategies and investors' demand for them, and
regulatory or other governmental policies or actions. The diversified nature of both our array of investment
strategies and revenue mix historically has allowed us to perform in both strong and weak economies. Weak
economies and the declining financial markets that typically accompany them tend to dampen our revenues from
investment realizations or price appreciation, but their prospect can result in our raising relatively large amounts of
capital for certain strategies, especially distressed debt. Additionally, during weak financial markets there often is
expanded availability of bargain investments, and our risk-control investment approach generally excels on a
relative basis. Conversely, the strong phase of the economic cycle generally increases the value of our investments
and creates favorable exit opportunities, while motivating us to be more restrained in sizing funds in distress-
oriented strategies.
In general, 2012 was characterized by continuing recoveries in financial markets and economies from the
global financial crisis, a “search for yield” on the part of investors facing historically low interest rates fueled by
central banks' support of the nascent economic recovery, and anxiety about the prospects of Europe slipping back
into recession or emerging market economies experiencing a slowdown in growth. The economic recovery in the
U.S. and elsewhere was uneven, largely bypassing, for example, certain sub-sectors of the commercial real estate
market. In Europe, monetary measures forestalled long-anticipated fire-sales by banks of their troubled assets, but
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the banks’ weakened financial condition created a partial void in the availability of debt capital for many of their
traditional corporate borrowers. Investors’ hunger for yield, coupled with low interest rates, drove corporate bond
issuance to record levels in the U.S. and Europe, while the generally positive economic and liquidity environments
kept corporate default rates low. As rising equity markets neared pre-crisis highs, new issuance of convertible
securities slowly restarted after residing at historically low levels since the onset of the crisis.
We capitalized on 2012's rising market prices and improving capital market conditions to continue selling
appreciated closed-end fund holdings. Even though we had distributed in 2011 a record amount of $10.5 billion
from liquidating closed-end funds, approximately 60%, or $21.4 billion, of our closed-end funds' aggregate NAV at
the start of 2012 remained in those liquidating closed-end funds. During 2012, we generated a new record of $12.7
billion in liquidating closed-end fund distributions. In an environment conducive to selling securities in our distress-
oriented strategies at full prices, bargain purchases in this specific sector naturally were relatively scarce.
Conversely, attractive investing opportunities continued to exist for our real estate, principal investing, power
opportunities and mezzanine strategies.
Across our open-end funds, NAVs were boosted by the year's strong credit and equity markets. Yields on
fixed-rate debt, such as that held in our high yield bond strategies, fell to historic lows, although yield spreads over
U.S. Treasury notes were roughly in line with historic averages. As yields on high yield bonds and other debt fell to
historic lows, many investors turned to floating-rate debt, such as that held in our senior loan and enhanced income
funds, for protection in the event interest rates turn upward.
Our fundraising activities in 2012 centered on closed-end fund strategies, primarily distressed debt and real
estate; ongoing marketing of our open-end and evergreen funds; and a number of new initiatives surrounding
investment products and distribution channels. We increased the size of our next distressed debt fund, Opps IX, to
nearly double the capital of its predecessor fund, in anticipation of buying opportunities that ultimately may arise
from the current period's liberal lending practices and/or the next economic downturn. Conversely, in the case of
convertible securities, the paucity of new issuance and resulting shrinkage of the market in recent years has caused
us to periodically decline to accept new capital, a condition that would likely change if the recent increase in new
issuance is sustained.
The May 2007 Restructuring and The 2007 Private Offering
The May 2007 Restructuring
Our business was previously operated through Oaktree Capital Management, LLC, a California limited
liability company, formed in April 1995, which was owned by our principals, certain third-party investors and senior
employees. Prior to completion of the 2007 Private Offering, Oaktree Capital Management, LLC caused all of our
business to be contributed to the Oaktree Operating Group.
In addition to the contribution and assignment of OCM's business to the Oaktree Operating Group entities,
in the May 2007 Restructuring the owners who held interests in OCM exchanged those interests for units in OCGH.
Each OCGH unit represents a limited partnership interest in OCGH. In exchange for the assignment and
contribution of OCM's business to the Oaktree Operating Group, OCGH received limited partnership interests in
each Oaktree Operating Group entity. We collectively refer to the interests in the Oaktree Operating Group as the
“Oaktree Operating Group units.” Each Oaktree Operating Group unit represents one limited partnership interest in
each of the Oaktree Operating Group entities. An Oaktree Operating Group unit is not a separate legal interest.
The 2007 Private Offering
On May 21, 2007, we sold 23,000,000 Class A units to qualified institutional buyers (as defined in the
Securities Act) in a transaction exempt from the registration requirements of the Securities Act, and these Class A
units began to trade on a private over-the-counter market developed by Goldman, Sachs & Co. for Tradable
Unregistered Equity Securities (the “GSTrUE OTC market”).
Upon the consummation of the 2007 Private Offering, we contributed the net offering proceeds to the
Intermediate Holding Companies. The Intermediate Holdings Companies enable us to maintain our partnership
status for tax purposes and to meet the qualifying income exception.
Immediately after the May 2007 Restructuring and other transactions associated with the 2007 Private
Offering, we became the owner of, and our Class A unitholders therefore had, a minority indirect economic interest
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in the Oaktree Operating Group, while OCGH retained a majority direct economic interest in the Oaktree Operating
Group.
Initial Public Offering
On April 12, 2012, Oaktree Capital Group, LLC listed its Class A units on the NYSE. In connection with the
listing, Oaktree sold 7,888,864 Class A units and selling unitholders sold 954,159 Class A units. Upon the
completion of the initial public offering, we owned approximately 20% of the Oaktree Operating Group, and our
principals controlled 98% of the total combined voting power of our units entitled to vote. We did not receive any of
the proceeds from the sale of Class A units by the selling unitholders, and we used the offering proceeds from our
issuance to acquire interests in our business from Oaktree's principals, current and former employees and other
investors.
Understanding Our Results - Consolidation of Oaktree Funds
GAAP requires that we consolidate substantially all of our closed-end, commingled open-end and
evergreen funds in our financial statements, notwithstanding the fact that our equity investments in those funds do
not typically exceed 2.5% of any fund’s interests. Consolidated funds consist of those funds in which we hold a
general partner interest that gives us substantive control rights over such funds. With respect to our consolidated
funds, we generally have operational discretion and control over the funds, and investors do not hold any
substantive rights that would enable them to impact the funds’ ongoing governance and operating activities. The
funds that we manage that were not consolidated, primarily separately managed accounts, represented 32.0% of
our AUM as of December 31, 2012, and 18.0% and 10.4% of our segment management fees and segment
revenues, respectively, for the year ended December 31, 2012.
When a fund is consolidated, we reflect the assets, liabilities, revenues, expenses and cash flows of the
consolidated fund on a gross basis, subject to eliminations from consolidation. Those eliminations have the effect of
reclassifying from consolidated revenues to consolidated non-controlling interests the management fees and other
revenues that we earn from consolidated funds, because interests in the consolidated funds held by third-party
investors are treated as non-controlling interests. Conversely, the presentation of incentive income compensation
expense and other expenses associated with generating such reclassified revenue is not affected by the
consolidation process. The assets, liabilities, revenues and expenses attributable to non-controlling interests are
presented as non-controlling redeemable interests in consolidated entities in the consolidated statements of
financial condition and as net income attributable to non-controlling redeemable interests in consolidated entities in
the consolidated statements of operations.
The elimination of consolidated funds from our consolidated revenues means that going forward
consolidated revenues are expected to be significantly impacted by fund flows and fluctuations in the market-value
of our separately managed accounts, as well as the revenues earned from one of our power opportunities funds
which we do not consolidate. The “Segment Reporting” note to our consolidated financial statements included
elsewhere in this annual report includes information regarding our segment on a stand-alone basis. For a more
detailed discussion of the factors that affect the results of operations of our segment, please see “—Segment
Analysis.”
Revenues
Our business generates three types of segment revenue: management fees, incentive income and
investment income. Management fees are billed monthly or quarterly based on annual rates. While we typically
earn management fees for each of the funds that we manage, the contractual terms of those management fees
vary by fund structure. We also have the opportunity to earn incentive income from most of our closed-end funds
and evergreen funds. Our closed-end funds generally provide that our incentive allocation is equal to 20% of our
investors’ profits, after the investors (including us, as general partner) receive the return of all of their contributed
capital plus an annual preferred return, typically 8%. Once this occurs, we receive 80% of all distributions otherwise
attributable to our investors and the investors receive the remaining 20% until we have received, in the aggregate,
20% of all such distributions in excess of contributed capital from the inception of the fund. Thereafter, all such
future distributions are distributed 80% to the investors and 20% to us. Our third segment revenue source,
investment income, represents our pro rata share of income or loss from our investments, generally in our capacity
as general partner in our funds and third-party managed funds and businesses. Our consolidated revenues exclude
investment income, which is presented within the other income (loss) section of our consolidated statements of
operations. Please see “Business—Structure and Operation of Our Business—Structure of Funds” for a detailed
discussion of the structure of our funds.
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Expenses
Compensation and Benefits
Compensation and benefits reflects all compensation-related items not directly related to incentive income
or the vesting of OCGH and Class A units, including salaries, bonuses, compensation based on management fees
or a definition of profits and employee benefits.
Incentive Income Compensation Expense
Incentive income compensation expense includes compensation directly related to incentive income, which
generally consists of percentage interests (sometimes referred to as “points”) that we grant to our investment
professionals associated with the particular fund that generated the incentive income. There is no fixed percentage
for this compensation expense, either by fund or strategy. In general, within a particular strategy more recent funds
have a higher percentage of aggregate incentive compensation expense than do older funds. The percentage that
consolidated incentive income compensation expense represents of the particular period’s consolidated incentive
income is not meaningful because of the fact that most incentive income is eliminated in consolidation, whereas no
incentive income compensation expense is eliminated in consolidation. For a meaningful percentage relationship,
please see “—Segment Analysis” below. Additionally, note 12 to our consolidated financial statements contains the
estimated incentive income compensation expense related to accrued incentives (fund level).
Equity-Based Compensation
Equity-based compensation expense reflects the non-cash charge associated with the OCGH units held by
our principals and employees at the time of the 2007 Private Offering and as a result of subsequent grants of Class
A and OCGH units. Starting with the year ended December 31, 2007, the non-cash compensation expense for units
held at the time of the 2007 Private Offering was charged equally over the five-year vesting period that ended
January 2, 2012, based on the units’ value as of the 2007 Private Offering. The remaining $5.1 million of
unrecognized compensation expense relating to the 2007 Private Offering as of December 31, 2011 was
recognized in the first quarter of 2012. As of December 31, 2012, we had $102.5 million of unrecognized
compensation expense relating to unit grants subsequent to the 2007 Private Offering that we expect to recognize
in our consolidated financial statements over their weighted average remaining vesting period of 5.3 years.
General and Administrative Expenses
General and administrative expenses include costs related to occupancy, accountants, tax professionals,
legal advisors, consultants, travel, communications and information services, foreign exchange activity, depreciation
and amortization and other general and operating items. These expenses are not borne by fund investors and are
not offset by credits attributable to fund investors’ non-controlling redeemable interests in consolidated funds. In
addition, until April 2012 we operated as a private company. As we have incurred additional expenses associated
with being a public company, general and administrative expenses have increased as compared with periods before
we became a public company. Examples of such expenses include insurance for our directors and officers and
costs to comply with SEC reporting requirements, stock exchange listing standards, the Dodd-Frank Act and the
Sarbanes-Oxley Act. We anticipate that these insurance and compliance costs will substantially increase certain of
our general and administrative expenses as compared with periods prior to our becoming a public company,
although the overall percentage of revenues represented by this expense category will depend upon a variety of
factors, including those described above.
Consolidated Fund Expenses
Consolidated fund expenses consists primarily of costs incurred by our consolidated funds, including travel
expenses, professional fees, research expenses and other costs associated with administering these funds.
Inasmuch as most of these fund expenses are borne by third-party fund investors, they are offset by credits
attributable to the fund investors’ non-controlling redeemable interests in consolidated funds.
Other Income (Loss)
Interest Expense
Interest expense reflects the interest expense of Oaktree and its operating subsidiaries, as well as interest
expense of the consolidated funds.
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Interest and Dividend Income
Interest and dividend income consists of interest and dividend income earned on the investments held by
our consolidated funds, the consolidated funds’ net operating income from real estate-related activities and interest
income earned by Oaktree and its operating subsidiaries.
Net Realized Gain on Consolidated Funds’ Investments
Net realized gain on consolidated funds’ investments consists of realized gains and losses arising from
dispositions of investments held by our consolidated funds.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments reflects, for our
consolidated funds, both unrealized gains and losses on investments and the reversal upon disposition of
investments of unrealized gains and losses previously recognized for those investments.
Investment Income
Represents our pro rata share of income or loss from our investments, generally in our capacity as general
partner in our funds and as an investor in other third-party managed funds and businesses.
Other Income (Expense), Net
Other income (expense), net primarily reflects the settlement of an arbitration award we received relating to
a former principal and portfolio manager of our real estate group who left us in 2005. Additionally, in the year ended
December 31, 2012, other income (expense), net also reflected (a) the impact of a reduction to the tax receivable
agreement liability as a result of a remeasurement of the deferred tax asset associated with the 2007 Private
Offering, (b) the write-off of unamortized debt issuance costs related to the refinancing of our credit facility and (c)
the write-off of certain receivables related to our corporate investments.
Income Taxes
In connection with the May 2007 Restructuring, Oaktree was established as a publicly traded partnership
that meets the qualifying income exception, allowing it to be treated as a partnership for U.S. federal income tax
purposes that is not taxable as a corporation. Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., two of our five
Intermediate Holding Companies, which were established as our wholly owned subsidiaries, are subject to U.S.
federal and state income taxes. The remainder of Oaktree’s income is generally not subject to corporate-level
taxation.
Oaktree’s effective tax rate is directly impacted by the proportion of Oaktree’s income subject to tax
compared to income not subject to tax. Oaktree’s non-U.S. income (loss) before taxes is generally not significant in
relation to total pre-tax income (loss), and is generally more predictable, because unlike U.S. pre-tax income, it is
not significantly impacted by unrealized gains (losses). Non-U.S. tax expense typically comprises a
disproportionately large percentage of total income tax expense, because nearly all of our non-U.S. income (loss) is
subject to corporate-level income tax, whereas a substantial portion of our U.S. income (loss) is not subject to
corporate-level taxes. In addition, changes in the proportion of non-U.S. pre-tax income to total pre-tax income
impact Oaktree’s effective tax rate to the extent non-U.S. rates differ from the combined U.S. federal and state tax
rate.
Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax
assets and liabilities are recognized for the expected future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on
deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is
enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Net Income (Loss) Attributable to Non-Controlling Interests
Net income (loss) attributable to non-controlling interests represents the ownership interests that third
parties hold in entities that are consolidated in our financial statements. These interests fall into two categories:
• Net income or loss attributable to non-controlling redeemable interests in consolidated funds: This
represents the non-controlling interests that third-party investors hold in consolidated funds, which
interests are primarily driven by the investment performance of the consolidated funds. In comparison
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to net income or loss, this measure excludes segment results, income taxes, expenses that OCG or its
Intermediate Holding Companies bear directly and the impact of equity-based compensation expense;
and
• Net income or loss attributable to OCGH non-controlling interest in consolidated subsidiaries: This
represents the economic interest in the Oaktree Operating Group owned by OCGH, which interest is
determined at the Oaktree Operating Group level, based on the weighted average proportionate share
of Oaktree Operating Group units held by the OCGH unitholders. Inasmuch as the number of
outstanding Oaktree Operating Group units corresponds with the total number of outstanding OCGH
units and Class A units, changes in the economic interest held by the OCGH unitholders are driven by
our additional grants of OCGH units and our issuance, if any, of additional Class A units, as well as
repurchases of OCGH units and Class A units. Certain of our expenses, such as income tax and
related administrative expenses of Oaktree Capital Group, LLC and its Intermediate Holding
Companies, are solely attributable to the Class A unitholders. Please see note 8 to our consolidated
financial statements included elsewhere in this annual report for additional information on the economic
interest in the Oaktree Operating Group owned by OCGH.
Segment and Operating Metrics
Our business is comprised of one segment, our investment management segment, which consists of the
investment management services that we provide to our clients. Management makes operating decisions and
assesses the performance of our business based on financial and operating metrics and data that are presented
without the consolidation of any funds. For a detailed reconciliation of the segment results of operations to our
consolidated results of operations, please see “—Segment Analysis” below and the “Segment Reporting” note to
our consolidated financial statements included elsewhere in this annual report. The data most important to our chief
operating decision maker in assessing our performance are adjusted net income, adjusted net income-OCG, fee-
related earnings and fee-related earnings-OCG.
We monitor certain operating metrics that are either common to the alternative asset management industry
or that we believe provide important data regarding our business. As described below, these operating metrics
include assets under management, management fee-generating assets under management, incentive-creating
assets under management, incentives created (fund level), accrued incentives (fund level) and uncalled capital
commitments.
Adjusted Net Income
Our chief operating decision maker uses adjusted net income (“ANI”) to evaluate the financial performance
of, and make resource allocations and other operating decisions for, our segment. The components of revenues
and expenses used in determining ANI do not give effect to the consolidation of the funds that we manage. In
addition, ANI excludes the effect of (a) non-cash equity-based compensation charges related to OCGH units issued
prior to our initial public offering, (b) income taxes, (c) expenses that OCG or its Intermediate Holding Companies
bear directly and (d) the adjustment for the OCGH non-controlling interest. ANI is calculated at the Oaktree
Operating Group level.
Among other factors, our accounting policy for recognizing incentive income and inclusion of non-cash
equity-based compensation charges for unit grants made after our initial public offering will likely make our
calculations of ANI not directly comparable to economic net income (“ENI”) or other similarly named measures for
other asset managers.
We calculate adjusted net income-OCG, a non-GAAP measure, to provide Class A unitholders with a
measure that shows the portion of ANI attributable to their ownership. Adjusted net income-OCG represents ANI
including the effect of (a) the OCGH non-controlling interest, (b) expenses, such as income tax expense, that OCG
or its Intermediate Holding Companies bear directly and (c) any Oaktree Operating Group income taxes attributable
to Oaktree Capital Group, LLC. Two of our Intermediate Holding Companies incur U.S. federal and state income
taxes for their share of Oaktree Operating Group income. Generally, those two corporate entities hold an interest in
the Oaktree Operating Group’s management fee-generating assets and a small portion of its incentive and
investment income-generating assets. As a result, historically our fee-related earnings generally have been subject
to corporate-level taxation, and most of our incentive income and investment income generally has not been subject
to corporate-level taxation. Thus, the blended effective income tax rate has generally tended to be higher to the
extent that fee-related earnings represented a larger proportion of our ANI. Myriad other factors affect income tax
expense and the effective income tax rate, and there can be no assurance that this historical relationship will
continue going forward.
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Fee-Related Earnings
Fee-related earnings is a non-GAAP measure that we use to monitor the baseline earnings of our business.
Fee-related earnings is comprised of segment management fees less segment operating expenses other than
incentive income compensation expense. This calculation is considered baseline because it applies all bonus and
other general expenses to management fees, even though a significant portion of those expenses is attributable to
incentive and investment income. Fee-related earnings include non-cash equity-based compensation charges
related to unit grants made after our initial public offering. Fee-related earnings is presented before income taxes.
Fee-related earnings-OCG is a non-GAAP measure that shows the portion of fee-related earnings
attributable to Class A unitholders. Fee-related earnings-OCG represents fee-related earnings including the effect of
(a) the OCGH noncontrolling interest, (b) expenses, such as income tax expense, that OCG or its Intermediate
Holding Companies bear directly and (c) any Oaktree Operating Group income taxes attributable to Oaktree Capital
Group, LLC. Fee-related earnings-OCG income taxes are calculated excluding any segment incentive or
investment income (loss).
Among other factors, the inclusion of non-cash equity-based compensation charges for unit grants made
after our initial public offering may make our calculations of fee-related earnings and fee-related earnings-OCG not
directly comparable to similarly named measures for other asset managers.
Distributable Earnings
Distributable earnings is a non-GAAP performance measure derived from our segment results that we use
to measure our earnings at the Oaktree Operating Group level without the effects of the consolidated funds for
purposes of, among other things, assisting in the determination of equity distributions from the Oaktree Operating
Group. However, the declaration, payment and determination of the amount of equity distributions, if any, is at the
sole discretion of our board of directors, which may change our distribution policy at any time.
In accordance with GAAP, certain of our funds are consolidated into our consolidated financial statements,
notwithstanding the fact that we have only a minority economic interest in these funds. Consequently, our
consolidated financial statements reflect the results of our consolidated funds on a gross basis. In addition, our
segment results include investment income (loss), which under the equity method of accounting represents our pro
rata share of income or loss from our investments, generally in our capacity as general partner in our funds and as
an investor in other third-party managed funds and businesses, and which is largely non-cash in nature. By
excluding the results of our consolidated funds and segment investment income (loss), which are not directly
available to fund our operations or make equity distributions, and including the portion of distributions from Oaktree
and non-Oaktree funds to us that represents the income or loss component of the distributions and not a return of
our capital contributions, as well as distributions from our investments in companies, distributable earnings aids us
in measuring amounts that are actually available to meet our obligations under the tax receivable agreement and
our liabilities for expenses incurred at OCG and the Intermediate Holding Companies, as well as for distributions to
Class A and OCGH unitholders.
Distributable earnings differs from ANI in that it is net of Oaktree Operating Group income taxes, excludes
segment investment income (loss) and includes the receipt of investment income or loss from distributions by our
investments in funds and companies. As compared to the most directly comparable GAAP measure of net income
(loss) attributable to OCG, distributable earnings also excludes the effect of: (a) non-cash equity-based
compensation charges related to OCGH units issued prior to our initial public offering, (b) income taxes and
expenses that OCG or its Intermediate Holding Companies bear directly and (c) the adjustment for the OCGH non-
controlling interest.
Assets Under Management
AUM generally refers to the assets we manage and equals the NAV of the assets we manage, the fund-
level leverage on which management fees are charged and the undrawn capital that we are entitled to call from
investors in our funds pursuant to their capital commitments.
Our AUM amounts include AUM for which we charge no fees. Our definition of AUM is not based on any
definition contained in our operating agreement or the agreements governing the funds that we manage. Our
calculation of AUM and the two AUM-related metrics below may not be directly comparable to the AUM metrics of
other asset managers.
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Management Fee-Generating Assets Under Management
Management fee-generating AUM reflects the AUM on which we will earn management fees in the following
quarter. Our closed-end funds typically pay management fees based on committed capital during the investment
period, without regard to changes in NAV or the pace of capital drawdowns, and during the liquidation period on the
lesser of (a) total funded capital and (b) the cost basis of assets remaining in the fund. The annual management fee
rate remains unchanged from the investment period through the liquidation period. Our open-end and evergreen
funds pay management fees based on their NAV.
Incentive-Creating Assets Under Management
Incentive-creating AUM refers to the AUM that may eventually produce incentive income. It represents the
NAV of our funds for which we are entitled to receive an incentive allocation, excluding investments made by us and
our employees and directors (which are not subject to an incentive allocation). All funds for which we are entitled to
receive an incentive allocation are included in incentive-creating AUM, regardless of whether or not they are
currently generating incentives. Incentive-creating AUM does not include undrawn capital commitments because
they are not part of the NAV.
Accrued Incentives (Fund Level)
Our funds record as accrued incentives the incentive income that would be paid to us if the funds were
liquidated at their reported values as of the date of the financial statements. Incentives created (fund level) refers to
the amount of potential incentives generated by the funds during the period. We refer to the amount of incentive
income recognized as revenue by us as segment incentive income. We recognize incentive income when it
becomes fixed or determinable, all related contingencies have been removed and collection is reasonably assured.
Amounts recognized by us as incentive income no longer are included in accrued incentives (fund level), the term
we use for remaining fund-level accruals.
The same performance and market risks inherent in incentives created (fund level) affect the ability to
ultimately realize accrued incentives (fund level). One consequence of the accounting method we follow for
incentives created (fund level) is that accrued incentives (fund level) is an off-balance sheet metric, rather than
being an on-balance sheet receivable that could require reduction if fund performance suffers. We track accrued
incentives (fund level) because it provides an indication of potential future value, though the timing and ultimate
realization of that value are uncertain.
Incentives Created (Fund Level)
Incentives created (fund level), incentive income and accrued incentives (fund level) are presented gross,
without deduction for direct compensation expense that is owed to our investment professionals associated with the
particular fund when we earn the incentive income. We call that charge “incentive income compensation expense.”
Incentive income compensation expense varies by the investment strategy and vintage of the particular fund,
among other factors, but generally equals 40% to 55% of segment incentive income revenue. In addition to
incentive income compensation expense, the magnitude of the annual bonus pool is indirectly affected by the level
of incentive income, net of its associated incentive income compensation expense. The total charge related to the
annual bonus pool, including the portion attributable to our incentive income, is reflected in the financial statement
line item “compensation and benefits expense.”
Incentives created (fund level) often reflects investments measured at fair value and therefore is subject to
risk of substantial fluctuation by the time the underlying investments are liquidated. We earn the incentive income, if
any, that the fund is then obligated to pay us with respect to our incentive interest (generally 20%) in the limited
partner investors’ profits, subject to an annual preferred return of typically 8%. Although GAAP allows the equivalent
of incentives created (fund level) to be recognized as revenue by us under Method 2, we have always followed the
Method 1 approach offered by GAAP that is dependent on additional factors, including the incentive allocations
becoming fixed or determinable, so as to reduce by a substantial degree the possibility that revenue recognized by
us would be reversed in a subsequent period. Consequently, during the active life of a fund, the amounts of
incentives created and incentives we receive or recognize are not expected to move in tandem because of the
disparity, inherent in the method of accounting we utilize under GAAP, between the time that potential incentives are
created at the fund level and the time that the revenue recognition criteria is met. We track incentives created (fund
level) because it provides an indication of the value for us currently being created by our investment activities and
facilitates comparability with those companies in our industry that utilize the alternative accrual-based Method 2 for
recognizing incentive income in their financial statements.
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Uncalled Capital Commitments
Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as
general partner) of our closed-end funds in their investment periods. If a fund distributes capital during its
investment period, that capital is typically subject to possible recall, in which case it is included in uncalled capital
commitments.
Consolidated Results of Operations
The following table sets forth our audited consolidated results of operations for the years ended
December 31, 2012, 2011 and 2010:
Year Ended December 31,
2012
2011
2010
(in thousands)
Consolidated Statement of Operations:
Revenues:
Management fees .......................................................................... $
Incentive income ............................................................................
Total revenues .........................................................................
134,568
10,415
144,983
$
140,715
15,055
155,770
$
162,051
44,130
206,181
Expenses:
Compensation and benefits ...........................................................
Incentive income compensation expense ......................................
Equity-based compensation ...........................................................
Total compensation and benefits expense ...............................
General and administrative expenses ............................................
Consolidated fund expenses ..........................................................
(330,018)
(222,594)
(36,342)
(588,954)
(108,814)
(92,835)
(308,194)
(179,234)
(948,746)
(1,436,174)
(103,617)
(105,073)
(287,092)
(159,243)
(949,376)
(1,395,711)
(90,432)
(94,508)
Total expenses ........................................................................
(790,603)
(1,644,864)
(1,580,651)
Other income (loss):
Interest expense ............................................................................
Interest and dividend income .........................................................
Net realized gain on consolidated funds’ investments ...................
Net change in unrealized appreciation (depreciation) on
consolidated funds’ investments .................................................
Investment income .........................................................................
Other income (expense), net .........................................................
Total other income ...................................................................
Income (loss) before income taxes .......................................................
Income taxes .................................................................................
Net income (loss) .................................................................................
Less:
Net income attributable to non-controlling redeemable interests
in consolidated funds ..................................................................
Net (income) loss attributable to OCGH non-controlling interest in
consolidated subsidiaries ............................................................
(45,773)
1,966,317
4,560,782
835,160
25,382
7,027
7,348,895
6,703,275
(30,858)
6,672,417
(50,943)
2,565,630
1,744,135
(3,064,676)
8,600
(1,209)
1,201,537
(287,557)
(21,088)
(308,645)
(55,921)
2,369,590
2,583,676
1,766,450
6,620
11,243
6,681,658
5,307,188
(26,399)
5,280,789
(6,016,342)
(233,573)
(5,493,799)
(548,265)
446,246
163,555
Net income (loss) attributable to Oaktree Capital Group, LLC ............. $
107,810
$
(95,972) $
(49,455)
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
Management Fees
Management fees decreased $6.1 million, or 4.3%, to $134.6 million for the year ended December 31,
2012, from $140.7 million for the year ended December 31, 2011. The decrease primarily resulted from $9.4 million
in lower advisory, director and certain other transaction fees for the benefit of our consolidated funds. We reduce
our management fees by the amount of such ancillary fees so that our funds' investors share pro rata in the
69
economic benefit of the ancillary fees. Thus, in our consolidated financial statements they are treated as being
attributable to non-controlling redeemable interests in consolidated entities and have no impact on net income (loss)
attributable to OCG. Partially offsetting the increase in ancillary fees was a non-recurring charge of $2.1 million
related to a change in the management fee arrangement for the U.S. Treasury portion of PPIP incurred in 2011.
Incentive Income
Incentive income decreased $4.7 million, or 31.1%, to $10.4 million for the year ended December 31, 2012,
from $15.1 million for the year ended December 31, 2011. The decline was the net result of a decrease in
realizations attributable to the unconsolidated OCM/GFI Power Opportunities Fund II, L.P. (“Power Fund II”) and
higher incentive income from a separately managed account.
Expenses
Compensation and Benefits
Compensation and benefits increased $21.8 million, or 7.1%, to $330.0 million for the year ended
December 31, 2012, from $308.2 million for the year ended December 31, 2011. The increase reflected $23.8
million in higher bonus expense and a decrease of $4.9 million in phantom equity expense (to $2.3 million in 2012).
The higher bonus expense in 2012 reflected both increased headcount and higher profitability. The lower phantom
equity expense resulted from a smaller rise in the Class A unit trading price in 2012, as compared with 2011.
Headcount, primarily in non-investment areas, grew 11.2% between December 31, 2011 and December 31, 2012.
Incentive Income Compensation Expense
Incentive income compensation expense increased $43.4 million, or 24.2%, to $222.6 million for the year
ended December 31, 2012, from $179.2 million for the year ended December 31, 2011. Included in 2011’s incentive
income compensation expense was a charge of $55.5 million, reflecting the acquisition of a small portion of certain
investment professionals’ carried interest in Opps VIIb. Excluding the impact of that transaction, incentive income
compensation expense increased $98.9 million, or 80.0%, principally as a result of the $157.1 million increase in
segment incentive income, as well as differences in the compensation percentages among the funds that generated
such segment incentive income for the two periods. The proportion of segment incentive income derived from
principal investing and real estate funds increased, as compared with distressed debt and power opportunities
funds. Historically, principal investing and real estate funds typically have had higher associated incentive income
compensation expense than distressed debt and power opportunities funds.
Equity-Based Compensation
Equity-based compensation expense decreased $912.4 million, or 96.2%, to $36.3 million for the year
ended December 31, 2012, from $948.7 million for the year ended December 31, 2011. The decrease reflected the
fact that the OCGH units held at the time of our 2007 Private Offering became fully vested as of January 2, 2012.
General and Administrative Expenses
General and administrative expenses increased $5.2 million, or 5.0%, to $108.8 million for the year ended
December 31, 2012, from $103.6 million for the year ended December 31, 2011. Excluding the impact of foreign
currency-related items, general and administrative expenses increased $5.2 million, or 5.1%, to $107.3 million in
2012, primarily reflecting $10.5 million in higher costs associated with corporate growth, enhancements to our
operational infrastructure, heightened industry regulatory demands and being a public company. Partially offsetting
this increase was a $5.3 million decline in costs (to $2.1 million in 2012) associated with our initial public offering.
Consolidated Fund Expenses
Consolidated fund expenses decreased $12.3 million, or 11.7%, to $92.8 million for the year ended
December 31, 2012, from $105.1 million for the year ended December 31, 2011. The decrease primarily reflected
lower professional fees and administrative costs related to managing the funds.
Other Income (Loss)
Interest Expense
Interest expense decreased $5.1 million, or 10.0%, to $45.8 million for the year ended December 31, 2012,
from $50.9 million for the year ended December 31, 2011. Interest expense related to Oaktree and its operating
subsidiaries decreased $1.8 million, reflecting scheduled repayments of certain long-term debt. The remainder of
the decrease was due to a $3.3 million decline in aggregate interest expense from our consolidated funds.
70
Interest and Dividend Income
Interest and dividend income decreased $599.3 million, or 23.4%, to $1,966.3 million for the year ended
December 31, 2012, from $2,565.6 million for the year ended December 31, 2011. The decrease reflected a $599.6
million decline in interest and dividend income related to the consolidated funds, partially offset by a $0.3 million
increase in interest income for Oaktree and its operating subsidiaries. The $599.6 million decline related to the
consolidated funds was primarily due to the inclusion of $454.9 million of aggregate income in 2011 attributable to
(a) a restructured evergreen fund and (b) a large dividend that resulted from the recapitalization of a portfolio
company. Excluding these 2011 items, interest and dividend income for the consolidated funds decreased
$144.4 million, largely due to lower interest and dividend income from distressed debt funds, reflecting a cyclical
shift across the consolidated funds from distressed debt to equity and real estate-oriented investments.
Net Realized Gain on Consolidated Funds’ Investments
Net realized gain on consolidated funds’ investments increased $2,816.7 million, or 161.5%, to $4,560.8
million for the year ended December 31, 2012, from $1,744.1 million for the year ended December 31, 2011. Of the
$4,560.8 million net realized gain in 2012, $3,189.3 million was attributable to distressed debt funds, including
$1,890.2 million from Opps VIIb, $926.3 million to control investing funds and $286.6 million to real estate funds. Of
the $1,744.1 million net realized gain in 2011, $1,536.3 million was attributable to distressed debt funds, including
$1,162.1 million from Opps VIIb.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
The net change in unrealized appreciation (depreciation) on consolidated funds’ investments improved by
$3,899.9 million, to a gain of $835.2 million for the year ended December 31, 2012, from a loss of $3,064.7 million
for the year ended December 31, 2011. Excluding the $2,816.7 million increase in net realized gain on consolidated
funds’ investments, the net change in unrealized appreciation (depreciation) on consolidated funds’ investments
increased $6,716.6 million, to a gain of $5,396.0 million for the year ended December 31, 2012, from a loss of
$1,320.6 million for the year ended December 31, 2011. The improvement reflected generally higher fund returns
attributable to rising financial markets in 2012, as compared to the generally negative performance by most major
financial markets in 2011. Of the $5,396.0 million net gain in 2012, $3,446.5 million was attributable to distressed
debt funds, including $1,499.5 million from Opps VIIb. Of the remaining $1,949.5 million net gain, $894.3 million
was attributable to control investing funds, $557.5 million to real estate funds and $285.0 million to the high yield
bond strategy. Of the $1,320.6 million net loss in 2011, $859.2 million was attributable to distressed debt funds,
including $402.7 million from Opps VIIb, and $163.7 million to control investing funds.
Investment Income
Investment income increased $16.8 million, or 195.3%, to $25.4 million for the year ended December 31,
2012, from $8.6 million for the year ended December 31, 2011. The $25.4 million of income in 2012 included $22.9
million of income from our investment in DoubleLine, of which $8.0 million related to performance fees, $6.2 million
of income from our investment in the DoubleLine Opportunistic Income LP fund, and a $5.3 million loss resulting
from our investment in Apson Global Fund L.P. The $8.6 million of income in 2011 included income of $1.9 million
from unconsolidated Power Fund II, $1.8 million from our investment in DoubleLine, of which $2.2 million related to
performance fees, and $5.4 million from our investment in the DoubleLine Opportunistic Income LP fund.
Other Income (Expense), Net
Other income (expense), net increased to income of $7.0 million for the year ended December 31, 2012,
from expense of $1.2 million for the year ended December 31, 2011. The income of $7.0 million in 2012 included a
$6.3 million reduction to the tax receivable agreement liability as a result of a remeasurement of the deferred tax
asset associated with the 2007 Private Offering. Please see “—Income Taxes” below. Additionally, in 2012 there
was $3.1 million of income attributable to the sale of a real estate property and other proceeds received as part of
an arbitration award in 2010 related to a former principal and portfolio manager of our real estate group who left us
in 2005, a $0.8 million write-off of debt issuance costs associated with the refinancing of our credit facility and a
$1.7 million write-off of certain receivables related to corporate investments. Please see note 6 to our consolidated
financial statements included elsewhere in this annual report for a further discussion of the refinancing of our credit
facility. The expense of $1.2 million in 2011 reflected an adjustment to the carrying value of one of the properties
received as part of the 2010 arbitration award.
Income Taxes
Income taxes increased $9.8 million, or 46.4%, to $30.9 million for the year ended December 31, 2012,
from $21.1 million for the year ended December 31, 2011. The increase in taxes was due to an increase in income
71
attributable to Class A unitholders in 2012 as compared to 2011, as well as a one-time tax expense of $7.1 million in
2012 stemming from a remeasurement of our deferred tax assets. The amount of the deferred tax asset under the
tax receivable agreement associated with the 2007 Private Offering was reduced due to a decrease in the future
effective tax rate applied to income subject to tax, which also reduced the tax receivable agreement liability payable
to OCGH unitholders, resulting in income of $6.3 million in 2012. The effective tax rate applicable to Class A
unitholders was 15% for 2012, excluding the impact of the one-time tax expense, as compared with the effective
income tax rate applicable to Class A unitholders of 26% for 2011. If the one-time tax expense were to be included,
the effective tax rate applicable to Class A unitholders for 2012 would increase to 19%. Applied against the OCG
portion of income after adjusting for the non-deductible compensation expense, the effective income tax rate is a
function of the mix of income and other factors that often vary significantly within or between years, each of which
factor can have a material impact on the particular year’s income tax expense. Please see “—Understanding Our
Results—Consolidation of Oaktree Funds.”
Net Income (Loss) Attributable to Oaktree Capital Group, LLC
Net income (loss) attributable to Oaktree Capital Group, LLC increased $203.8 million, to net income of
$107.8 million for the year ended December 31, 2012, from a net loss of $96.0 million for the year ended
December 31, 2011. The increase resulted primarily from lower equity-based compensation expense and higher
segment revenues, partially offset by higher segment expenses. The decline in equity-based compensation
expense was primarily due to the final vesting of pre-2007 Private Offering units on January 2, 2012.
Net Income Attributable to Non-Controlling Redeemable Interests in Consolidated Funds
Net income attributable to non-controlling redeemable interests in consolidated funds increased $5,782.7
million, to $6,016.3 million for the year ended December 31, 2012, from $233.6 million for the year ended
December 31, 2011, as a result of higher net gains on investments, partially offset by a decrease in interest and
dividend income in 2012. These effects are described in more detail above under “—Other Income (Loss).”
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Management Fees
Management fees decreased $21.4 million, or 13.2%, to $140.7 million for the year ended December 31,
2011, from $162.1 million for the year ended December 31, 2010. The decrease reflected $10.4 million in lower
advisory, director and certain other transaction fees for the benefit of our consolidated funds. We reduce
management fees by the amount of such ancillary fees so that our funds' investors share pro rata in the economic
benefit of the ancillary fees. Thus, in our consolidated financial statements they are treated as being attributable to
non-controlling redeemable interests in consolidated entities and have no impact on net income (loss) attributable to
OCG. Adding to the decrease in management fees were $5.0 million in lower fees attributable to the convertible
securities asset class and $2.8 million in lower fees from PPIP. The $5.0 million decline in fees attributable to the
convertible securities asset class was primarily attributable to lower performance-based management fees. The
$2.8 million decline in fees from PPIP was largely related to the retroactive application of the fund’s new
management fee arrangement with the U.S. Treasury in which we changed the basis on which we charge
management fees from committed capital to drawn capital.
Incentive Income
Incentive income decreased $29.0 million, or 65.8%, to $15.1 million for the year ended December 31,
2011, from $44.1 million in the year ended December 31, 2010. The decline was primarily attributable to a decrease
in realizations attributable to the unconsolidated Power Fund II.
Expenses
Compensation and Benefits
Compensation and benefits increased $21.1 million, or 7.3%, to $308.2 million for the year ended
December 31, 2011, from $287.1 million for the year ended December 31, 2010. The increase was primarily
attributable to $27.3 million in higher bonus expense and $4.1 million in higher base salaries, reflecting increased
headcount and, in the case of bonuses, individual performance and market factors. Partially offsetting this increase
was a $10.2 million reduction in compensation paid to certain portfolio managers based on their funds’ gross
management fees, in lieu of salary and bonus.
72
Incentive Income Compensation Expense
Incentive income compensation expense increased $20.0 million, or 12.6%, to $179.2 million for the year
ended December 31, 2011, from $159.2 million for the year ended December 31, 2010. Included in 2011’s incentive
income compensation expense was a charge of $55.5 million, reflecting the acquisition of a small portion of certain
investment professionals’ carried interest in Opps VIIb. Excluding the impact of that transaction, incentive income
compensation expense decreased $35.5 million, or 22.3%, principally as a result of the $109.2 million decrease in
segment incentive income, as well as differences in the compensation percentages among the funds that generated
the segment incentive income for the two periods. The proportion of segment incentive income derived from
principal investing funds increased, as compared with power opportunities funds. Historically, principal investing
funds typically have had higher associated incentive income compensation expense than power opportunities
funds.
General and Administrative Expenses
General and administrative expenses increased $13.2 million, or 14.6%, to $103.6 million for the year
ended December 31, 2011, from $90.4 million for the year ended December 31, 2010. Excluding the impact of
foreign currency-related items, general and administrative expenses rose $13.7 million, or 15.5%. The increase of
$13.7 million reflected $7.4 million in professional fees and other costs related to our initial public offering, with the
remainder of the increase primarily reflecting software, consulting and other costs associated with corporate growth
and ongoing enhancements to our operational infrastructure.
Consolidated Fund Expenses
Consolidated fund expenses increased $10.6 million, or 11.2%, to $105.1 million for the year ended
December 31, 2011, from $94.5 million for the year ended December 31, 2010. The increase was primarily
attributable to $5.6 million in higher expenses as a result of the ongoing liquidation of one of the restructured
evergreen funds and $5.0 million in higher professional fees and administrative costs associated with managing the
closed-end funds.
Other Income (Loss)
Interest Expense
Interest expense decreased $5.0 million, or 8.9%, to $50.9 million for the year ended December 31, 2011,
from $55.9 million for the year ended December 31, 2010. The decrease was primarily attributable to $13.1 million
in lower aggregate interest expense from the consolidated funds. This decline was partially offset by $8.1 million of
higher interest expense related to Oaktree and its operating subsidiaries, resulting primarily from our $300.0 million
amortizing bank term loan that closed on January 7, 2011.
Interest and Dividend Income
Interest and dividend income increased $196.0 million, or 8.3%, to $2,565.6 million for the year ended
December 31, 2011, from $2,369.6 million for the year ended December 31, 2010. Of the increase, $195.6 million
related to the consolidated funds, while the remaining $0.4 million related to Oaktree and its operating subsidiaries.
The $195.6 million increase related to the consolidated funds reflected $225.4 million of higher interest and dividend
income from a restructured evergreen fund.
Net Realized Gain on Consolidated Funds’ Investments
Net realized gain on consolidated funds’ investments decreased $839.6 million, or 32.5%, to
$1,744.1 million for the year ended December 31, 2011, from $2,583.7 million for the year ended December 31,
2010. Of the $1,744.1 million net realized gain in 2011, $1,162.1 million was attributable to Opps VIIb, $374.2
million to other distressed debt funds and $85.2 million to the high yield bond strategy. Of the $2,583.7 million net
realized gain in 2010, distressed debt funds contributed $2,218.5 million, with $1,777.3 million attributable to Opps
VIIb.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
The net change in unrealized appreciation (depreciation) on consolidated funds’ investments decreased
$4,831.2 million, to a loss of $3,064.7 million for the year ended December 31, 2011, from a gain of $1,766.5 million
for the year ended December 31, 2010. Excluding the $839.6 million decrease in net realized gain on consolidated
funds’ investments, the net change in unrealized appreciation (depreciation) on consolidated funds’ investments
decreased $5,670.8 million, to a loss of $1,320.6 million for the year ended December 31, 2011, from a gain of
$4,350.2 million for the year ended December 31, 2010, reflecting generally lower fund returns in 2011. Of the
73
$1,320.6 million loss in 2011, $859.2 million was attributable to distressed debt funds, including $402.7 million from
Opps VIIb, and $163.7 million to control investing funds. Of the $4,350.2 million gain in 2010, $2,897.1 million was
attributable to distressed debt funds, including $1,688.2 million from Opps VIIb, and $804.9 million to control
investing funds.
Investment Income
Investment income increased $2.0 million, to $8.6 million for the year ended December 31, 2011, from $6.6
million for the year ended December 31, 2010. The $8.6 million of income in 2011 included income of $1.9 million
from unconsolidated Power Fund II, $1.8 million from our investment in DoubleLine, and $5.4 million from our
investment in the DoubleLine Opportunistic Income LP fund. The $6.6 million of income in 2010 reflected income of
$5.0 million from Power Fund II and income of $1.9 million from investments in non-Oaktree entities.
Other Income (Expense), Net
Other income (expense), net was expense of $1.2 million for the year ended December 31, 2011 and
income of $11.2 million for the year ended December 31, 2010. The income of $11.2 million in 2010 reflected the
settlement of an arbitration award related to a former principal and portfolio manager of our real estate group who
left us in 2005. The expense of $1.2 million in 2011 reflected an adjustment to the carrying value of one of the
properties.
Income Taxes
Income taxes decreased $5.3 million, or 20.1%, to $21.1 million for the year ended December 31, 2011,
from $26.4 million for the year ended December 31, 2010. The decrease was principally the result of lower income
during 2011 as compared with 2010. Partially offsetting this impact was 2011’s higher annual income tax rate of
26%, as compared with 17% for 2010. Applied against the OCG portion of income after adjusting for the non-
deductible compensation expense, the effective income tax rate is a function of the mix of income and other factors
that often vary significantly within or between years, each of which factor can have a material impact on the
particular year’s ultimate income tax expense. Portions of Oaktree’s income are subject to U.S. federal and state
income taxes while other portions are not subject to corporate-level taxation. When the portion of income not
subject to tax decreases, the effective tax rate increases. The increase in the effective tax rate from 2010 compared
to 2011 was the result of a decrease in income not subject to tax – largely due to a decrease in incentive and
investment income – relative to other income between 2010 and 2011.
Net Loss Attributable to Oaktree Capital Group, LLC
Net loss attributable to Oaktree Capital Group, LLC increased $46.5 million, or 93.9%, to a loss of
$96.0 million for the year ended December 31, 2011, from a loss of $49.5 million for the year ended December 31,
2010. The increase in loss resulted primarily from lower segment revenues and higher segment expenses. The
recognition of losses for each year was the result of equity-based compensation expense related to the vesting of
OCGH units held at the time of the May 2007 Private Offering.
Net Income Attributable to Non-Controlling Redeemable Interests in Consolidated Funds
Net income attributable to non-controlling redeemable interests in consolidated funds decreased
$5,260.2 million, or 95.7%, to $233.6 million for the year ended December 31, 2011, from $5,493.8 million for the
year ended December 31, 2010, as a result of lower net gains on investments. These effects are described in more
detail above under “—Other Income (Loss).”
74
Segment Financial Data
The following table presents segment financial data as of or for the years ended December 31, 2012, 2011
and 2010:
Segment Statements of Operations Data: (1)
Revenues:
As of or for the Year Ended December 31,
2012
2011
2010
(in thousands, except per unit data or as otherwise
indicated)
Management fees ........................................................................... $
Incentive income .............................................................................
Investment income ..........................................................................
747,440
461,116
202,392
$
724,321
303,963
23,763
$
750,031
413,240
149,449
Total revenues ..........................................................................
1,410,948
1,052,047
1,312,720
Expenses:
Compensation and benefits ............................................................
Incentive income compensation expense .......................................
General and administrative expenses .............................................
Depreciation and amortization expense ..........................................
Total expenses ..........................................................................
Adjusted net income before interest and other income (expense) .........
Interest expense, net of interest income (2) ......................................
Other income (expense), net ...........................................................
(330,059)
(222,594)
(102,685)
(7,397)
(662,735)
748,213
(31,730)
767
Adjusted net income .............................................................................. $
717,250
Adjusted net income-OCG ..................................................................... $
Adjusted net income-OCG per Class A unit ....................................
Fee-related earnings .............................................................................
Fee-related earnings-OCG ....................................................................
Fee-related earnings-OCG per Class A unit ....................................
Distributable earnings ............................................................................
Weighted average number of Operating Group units outstanding.........
Weighted average number of Class A units outstanding .......................
114,395
4.06
307,299
45,587
1.62
672,181
150,539
28,170
Operating Metrics:
Assets under management (in millions):
Assets under management ............................................................. $
Management fee-generating assets under management................
Incentive-creating assets under management ................................
Uncalled capital commitments ........................................................
77,051
66,784
33,989
11,201
Accrued incentives (fund level):
(308,115)
(179,234)
(94,655)
(6,583)
(588,587)
463,460
(33,867)
(1,209)
428,384
48,777
2.15
314,968
33,397
1.47
488,535
148,633
22,677
74,857
66,964
36,155
11,201
$
$
$
(287,067)
(159,243)
(81,121)
(6,481)
(533,912)
778,808
(26,173)
11,243
763,878
95,930
4.23
375,362
39,713
1.75
635,680
148,128
22,677
82,672
66,175
39,385
14,270
$
$
$
Incentives created (fund level) ........................................................
Incentives created (fund level), net of associated incentive
compensation expense ................................................................
Accrued incentives (fund level) .......................................................
Accrued incentives (fund level), net of associated incentive
income compensation expense ...................................................
911,947
(75,916)
889,721
522,800
2,137,798
(30,600)
1,686,967
516,183
2,066,846
1,282,194
1,027,711
1,166,583
(1) Our business is comprised of one segment, our investment management segment, which consists of the
investment management services that we provide to our clients. The components of revenues and expenses
used in determining adjusted net income do not give effect to the consolidation of the funds that we manage.
In addition, adjusted net income excludes the effect of: (a) non-cash equity compensation charges related to
75
OCGH units issued prior to our initial public offering, (b) income taxes, (c) expenses that OCG or its
Intermediate Holding Companies bear directly and (d) the adjustment for the OCGH non-controlling interest.
Adjusted net income is calculated at the Operating Group level. For a detailed description of our segment and
operating metrics, please see “—Segment and Operating Metrics” above.
Interest income was $2.6 million, $2.3 million and $1.9 million for the years ended December 31, 2012, 2011
and 2010, respectively.
(2)
76
Operating Metrics
We monitor certain operating metrics that are either common to the alternative asset management industry
or that we believe provide important data regarding our business. These operating metrics include assets under
management, management fee-generating assets under management, incentive-creating assets under
management, incentives created (fund level), accrued incentives (fund level) and uncalled capital commitments.
Assets Under Management
AUM as of December 31, 2012, 2011 and 2010 are set forth below:
As of December 31,
2012
2011
2010
(in millions)
Assets Under Management:
Closed-end funds ................................................................................................ $ 45,700
29,092
Open-end funds ...................................................................................................
2,259
Evergreen funds ..................................................................................................
$ 47,425
25,042
2,390
$ 53,381
26,122
3,169
Total ..................................................................................................................... $ 77,051
$ 74,857
$ 82,672
The change in AUM for the years ended December 31, 2012, 2011 and 2010 is set forth below:
Year Ended December 31,
2012
2011
2010
(in millions)
Change in Assets Under Management:
Beginning balance ............................................................................................... $ 74,857
Closed-end funds:
$ 82,672
$ 73,278
New capital commitments .............................................................................
Distributions for a realization event/other ......................................................
Uncalled capital commitments at end of investment period ..........................
Foreign currency translation .........................................................................
Change in market value (1) ............................................................................
Change in applicable leverage ......................................................................
6,456
(12,663)
(1,634)
99
5,810
207
Open-end funds:
Contributions .................................................................................................
Redemptions .................................................................................................
Foreign currency translation .........................................................................
Change in market value (1) ............................................................................
4,394
(3,869)
65
3,460
Evergreen funds:
Contributions .................................................................................................
Redemptions .................................................................................................
Distributions from restructured funds ............................................................
Foreign currency translation .........................................................................
Change in market value (1) ............................................................................
140
(548)
(57)
1
333
5,734
(10,547)
(1,227)
(260)
394
(50)
3,702
(5,039)
(93)
350
345
(531)
(537)
20
(76)
8,590
(5,399)
(32)
(169)
5,531
(179)
2,798
(4,183)
(144)
3,064
154
(213)
(780)
(56)
412
Ending balance .................................................................................................... $ 77,051
$ 74,857
$ 82,672
(1) Change in market value represents the change in NAV of our funds resulting from current income and realized
and unrealized gains/losses on investments, less management fees and other fund expenses.
77
Management Fee-Generating Assets Under Management
Management fee-generating AUM as of December 31, 2012, 2011 and 2010 are set forth below:
As of December 31,
2012
2011
2010
(in millions)
Management Fee-Generating Assets Under Management:
Closed-end funds ................................................................................................ $ 35,750
29,056
Open-end funds ...................................................................................................
1,978
Evergreen funds ..................................................................................................
$ 39,867
25,025
2,072
$ 37,710
26,105
2,360
Total ..................................................................................................................... $ 66,784
$ 66,964
$ 66,175
The change in management fee-generating AUM for the years ended December 31, 2012, 2011 and 2010
is set forth below:
Change in Management Fee-Generating Assets Under Management:
Beginning balance ............................................................................................. $ 66,964
Closed-end funds:
New capital commitments to funds that pay fees based on committed
$ 66,175
$ 62,677
Year Ended December 31,
2012
2011
2010
(in millions)
capital ......................................................................................................
Capital drawn by funds that pay fees based on drawn capital or NAV........
Change for funds that pay fees based on the lesser of funded capital or
cost basis during liquidation (1)
.......................................................................
Change in fee basis from committed capital to drawn capital .....................
Uncalled capital commitments at end of investment period for funds that
pay fees based on committed capital ......................................................
Distributions by funds that pay fees based on NAV ....................................
Foreign currency translation .......................................................................
Change in market value (2) ..........................................................................
Change in applicable leverage ....................................................................
Open-end funds:
Contributions ...............................................................................................
Redemptions ...............................................................................................
Foreign currency translation .......................................................................
Change in market value ..............................................................................
Evergreen funds:
Contributions ...............................................................................................
Redemptions ...............................................................................................
Distributions from restructured funds ..........................................................
Foreign currency translation .......................................................................
Change in market value ..............................................................................
486
968
(5,457)
—
(57)
(512)
148
125
182
4,380
(3,869)
65
3,455
140
(548)
—
—
314
7,997
1,034
(4,285)
(978)
(1,066)
(460)
(23)
(12)
(50)
3,701
(5,039)
(93)
351
345
(527)
—
—
(106)
5,826
578
(2,053)
—
—
(1,657)
(122)
152
(178)
2,849
(4,184)
(144)
3,062
154
(201)
(861)
(90)
367
Ending balance ................................................................................................. $ 66,784
$ 66,964
$ 66,175
(1)
For most closed-end funds, management fees are charged during the liquidation period on the lesser of
(a) total funded capital and (b) the cost basis of assets remaining in the fund, with the cost basis of assets
generally calculated by excluding cash balances. Thus, changes in fee basis during the liquidation period are
not dependent on distributions made from the fund; rather, they are tied to the cost basis of the fund’s
investments, which generally declines as the fund sells assets.
78
(2)
The change in market value reflects certain funds that pay management fees based on NAV and leverage,
as applicable.
As compared with AUM, management fee-generating AUM generally excludes the following:
• Differences between AUM and either committed capital or cost basis for closed-end funds, other than
for closed-end funds that pay management fees based on NAV and leverage, as applicable;
• Undrawn capital commitments to funds for which management fees are based on NAV or drawn
capital;
• Capital commitments to closed-end funds that have not yet commenced their investment periods;
•
The investments we make as general partner;
• Closed-end funds that are beyond the term during which they pay management fees; and
• AUM in three restructured and liquidating evergreen funds for which management fees were waived
commencing in 2009.
A reconciliation of AUM to management fee-generating AUM as of December 31, 2012, 2011 and 2010 is
set forth below:
As of December 31,
2012
2011
2010
(in millions)
Reconciliation of Assets Under Management to Management Fee-
Generating Assets Under Management:
Assets under management ................................................................................... $ 77,051
$ 74,857
$ 82,672
Difference between assets under management and committed capital or
cost basis for closed-end funds (1) ...............................................................
(3,164)
(4,031)
(9,374)
Capital commitments to funds that have not yet begun to generate
management fees .......................................................................................
(5,016)
(85)
(2,947)
Undrawn capital commitments to funds for which management fees are
based on drawn capital or NAV ...................................................................
Oaktree’s general partner investments in management fee-generating
funds ...........................................................................................................
Closed-end funds that are no longer paying management fees .....................
Funds for which management fees were permanently waived.......................
(584)
(1,981)
(1,989)
(1,041)
(231)
(231)
(1,052)
(472)
(272)
(955)
(471)
(761)
Management fee-generating assets under management ..................................... $ 66,784
$ 66,964
$ 66,175
(1)
Not applicable to closed-end funds that pay management fees based on NAV or leverage, as applicable.
The period-end weighted average annual management fee rates applicable to the respective management
fee-generating AUM balances above are set forth below:
Weighted Average Annual Management Fee Rates:
Closed-end funds .................................................................................................
Open-end funds ....................................................................................................
Evergreen funds ...................................................................................................
Overall ..................................................................................................................
As of December 31,
2012
2011
2010
1.51%
0.49
1.82
1.07
1.48%
0.47
1.79
1.11
1.46%
0.51
1.85
1.10
79
Incentive-Creating Assets Under Management
Incentive-creating AUM as of December 31, 2012, 2011 and 2010 are set forth below:
As of December 31,
2012
2011
2010
(in millions)
Incentive-Creating Assets Under Management:
Closed-end funds .................................................................................................. $ 32,058
1,931
Evergreen funds ....................................................................................................
$ 34,062
2,093
$ 36,589
2,796
Total ....................................................................................................................... $ 33,989
$ 36,155
$ 39,385
As of December 31, 2012, of the $34.0 billion in incentive-creating AUM, $25.6 billion, or 75.3%, was
generating incentives at the fund level. Incentive-creating AUM does not include undrawn capital commitments
because they are not part of the NAV.
Year Ended December 31, 2012
AUM increased $2.2 billion, or 2.9%, from $74.9 billion as of December 31, 2011, to $77.1 billion as of
December 31, 2012. The increase was primarily attributable to $9.6 billion in market-value gains and $6.5 billion in
new capital commitments, including $5.0 billion for Opps IX. These increases were partially offset by $12.7 billion in
distributions by closed-end funds in their liquidation periods and $1.6 billion in aggregate uncalled capital
commitments across closed-end funds reaching the end of their investment periods. Opps VIIb accounted for $5.7
billion of the $12.7 billion in aggregate distributions. Of the $1.6 billion in uncalled capital commitments, $1.2 billion
was attributable to PPIP. The increase in market values and the pace of fund realizations reflected the generally
strong performance of the financial markets during the year. Net inflows across open-end funds contributed $0.5
billion to the overall increase, driven by $1.0 billion in net inflows to U.S. high yield bonds.
Management fee-generating AUM decreased $0.2 billion, or 0.3%, from $67.0 billion as of December 31,
2011, to $66.8 billion as of December 31, 2012. The decrease reflected a $5.5 billion decline attributable to asset
sales by closed-end funds in liquidation, largely offset by $3.9 billion in market-value gains in funds for which
management fees are based on NAV and $1.0 billion from closings for Oaktree Real Estate Opportunities Fund V,
L.P. (“ROF V”) and Oaktree Real Estate Opportunities Fund VI, L.P. (“ROF VI”) and drawdowns by PPIP and EIF,
including leverage. Opps VIIb accounted for $2.6 billion of the $5.5 billion decline from asset sales by closed-end
funds in liquidation. Opps IX, with total capital commitments of $5.0 billion, was not included in management fee-
generating AUM as of December 31, 2012, as it has not commenced its investment period.
Incentive-creating AUM decreased $2.2 billion, or 6.1%, from $36.2 billion as of December 31, 2011, to
$34.0 billion as of December 31, 2012. The decrease reflected $12.1 billion in distributions by closed-end funds,
partially offset by $5.4 billion in market-value gains and $4.5 billion in drawn capital. Opps VIIb represented
$5.5 billion of the $12.1 billion in distributions. Of the $34.0 billion and $36.2 billion in incentive-creating AUM as of
December 31, 2012 and 2011, respectively, 75.3% and 48.9% was in funds that were creating incentives at the fund
level.
Year Ended December 31, 2011
AUM decreased $7.8 billion, or 9.4%, from $82.7 billion as of December 31, 2010, to $74.9 billion as of
December 31, 2011. The decrease was primarily attributable to $6.0 billion of net outflows by closed-end funds,
reflecting $10.5 billion of distributions and $1.2 billion of uncalled capital commitments at the end of the respective
funds’ investment periods, partially offset by $5.7 billion in new capital commitments. Opps VIIb, which commenced
its liquidation period in May 2011, accounted for $8.0 billion of the $11.7 billion in aggregate distributions and
uncalled capital commitments. Of the $5.7 billion in new capital commitments, $3.9 billion was attributable to
Oaktree European Principal Fund III, L.P. (“EPF III”) and $1.0 billion to ROF V. In a year of generally negative
performance by most major financial markets, aggregate market-value gains contributed $668 million. For open-end
funds, AUM decreased by $1.1 billion, reflecting net outflows of $1.3 billion, principally in our corporate debt and
convertible securities asset classes. For evergreen funds, AUM decreased by $0.8 billion, reflecting $0.5 billion of
distributions from certain restructured evergreen funds and net outflows of $0.2 billion from the two active evergreen
funds.
80
Management fee-generating AUM increased $0.8 billion, or 1.2%, from $66.2 billion as of December 31,
2010, to $67.0 billion as of December 31, 2011. The increase reflected the net effect of $8.0 billion in new capital
commitments, $1.0 billion in drawdowns for closed-end funds on which management fees are based on drawn
capital or NAV, $5.8 billion of declines from asset sales by closed-end funds in liquidation and $1.5 billion in net
outflows across open-end and evergreen funds. Of the $8.0 billion in new capital commitments, EPF III, Opps VIIIb
and ROF V accounted for $4.0 billion, $2.6 billion and $1.0 billion, respectively. Of the $5.8 billion of declines from
asset sales by closed-end funds in liquidation, the largest contributor was Opps VIIb, whose management fee-
generating AUM decreased from $10.6 billion to $7.5 billion. Management fee-generating AUM for open-end funds
fell $1.1 billion, reflecting $1.3 billion of net outflows, partially offset by $0.4 billion of market-value gains. For
evergreen funds, management fee-generating AUM fell $0.3 billion, reflecting $0.1 billion of net market depreciation
and $0.2 billion of net outflows from the two active evergreen funds.
Incentive-creating AUM decreased $3.2 billion, or 8.1%, from $39.4 billion as of December 31, 2010, to $36.2
billion as of December 31, 2011. Closed-end funds accounted for $2.5 billion of the $3.2 billion decrease, as $9.9
billion in distributions outpaced $6.9 billion in drawn capital and $0.5 billion in market-value gains. Opps VIlb
accounted for $6.7 billion of the $9.9 billion in distributions, while Opps VIII represented the largest single source of
drawn capital, with $2.2 billion. Evergreen funds accounted for $0.7 billion of the overall decline, reflecting the
activity described above in the discussion of AUM. Of the $36.2 billion and $39.4 billion in incentive-creating AUM
as of December 31, 2011 and 2010, respectively, 48.9% and 81.8% was in funds that were creating incentives at
the fund level.
Year Ended December 31, 2010
AUM increased $9.4 billion, or 12.8%, from $73.3 billion as of December 31, 2009, to $82.7 billion as of
December 31, 2010. The increase was primarily due to $9.0 billion in aggregate market-value gains and $8.6 billion
in new capital commitments. Those increases were partially offset by $5.4 billion in distributions by closed-end
funds in liquidation, $1.4 billion of net outflows in open-end funds, principally in our corporate debt and convertible
securities asset classes, and $0.8 billion of distributions from certain restructured evergreen funds. Of the $8.6
billion in new capital commitments, an aggregate $4.0 billion was from Opps VIII and VIIIb, $1.4 billion from PPIP
and $1.2 billion from Oaktree Mezzanine Fund III, L.P. (“Mezz III”).
Management fee-generating AUM increased $3.5 billion, or 5.6%, from $62.7 billion as of December 31,
2009, to $66.2 billion as of December 31, 2010. The increase was primarily due to $5.8 billion in new capital
commitments and $0.6 billion in drawdowns for closed-end funds on which management fees are based on drawn
capital or NAV. Partially offsetting these increases was a $2.1 billion decline caused by closed-end funds in
liquidation and $1.7 billion in distributions by funds that pay fees based on NAV. Of the $5.8 billion in new capital
commitments, $1.5 billion was attributable to each of Opps VIII and Mezz III and $1.2 billion to PPIP. Management
fee-generating AUM for open-end funds increased $1.6 billion, reflecting $3.1 billion in market-value gains and $1.3
billion in net outflows, principally in our corporate debt and convertible securities asset classes. For evergreen
funds, management fee-generating AUM declined $0.6 billion primarily as a result of the cancellation of $0.9 billion
in management fee-generating AUM from a restructured evergreen fund.
Incentive-creating AUM increased $6.1 billion, or 18.3%, from $33.3 billion as of December 31, 2009, to
$39.4 billion as of December 31, 2010. The increase was primarily due to $5.5 billion in market-value gains and
$5.0 billion in drawn capital, partially offset by $3.7 billion in distributions by closed-end funds and $0.7 billion in
distributions from certain restructured evergreen funds.
81
Accrued Incentives and Incentives Created (Fund Level)
Accrued incentives (fund level), gross and net of incentive income compensation expense, as of December
31, 2012, 2011 and 2010, as well as changes in accrued incentives (fund level) for the periods presented are set
forth below.
As of or for the Year Ended December 31,
2012
2011
2010
(in thousands)
Accrued Incentives (Fund Level):
Beginning balance .................................................................................. $ 1,686,967
$ 2,066,846
$ 1,590,365
Incentives created (fund level):
Closed-end funds .............................................................................
Evergreen funds ...............................................................................
Total incentives created (fund level) ..........................................
869,557
42,390
911,947
(81,216)
5,300
(75,916)
836,384
53,337
889,721
Less: segment incentive income recognized by us ................................
(461,116)
(303,963)
(413,240)
Ending balance ....................................................................................... $ 2,137,798
Accrued incentives (fund level), net of associated incentive income
compensation expense ....................................................................... $ 1,282,194
$ 1,686,967
$ 2,066,846
$ 1,027,711
$ 1,166,583
Year Ended December 31, 2012
Incentives created (fund level) amounted to $911.9 million for the year ended December 31, 2012, reflecting
both the weighted-average gross return of 19.5% across our incentive-creating funds, in part due to the generally
strong performance of the financial markets during the year, and the large share of our incentive-creating AUM that
was creating incentives. Of the $911.9 million, $351.1 million was attributable to Opps VIIb, $374.6 million to other
closed-end distressed debt funds and $117.8 million to real estate funds.
Year Ended December 31, 2011
Incentives created (fund level) amounted to negative $75.9 million for the year ended December 31, 2011,
reflecting the sharp decline in financial markets in the third quarter of 2011, and the large share of our incentive-
creating AUM that was creating incentives. The largest negative contributors were EPOF II at negative $71.4 million
and Opps VIII at negative $50.3 million. The largest single positive contributor was Opps VIIb, at $39.1 million.
Year Ended December 31, 2010
Incentives created (fund level) amounted to $889.7 million for the year ended December 31, 2010, of which
$470.3 million resulted from investments held by Opps VIIb and $234.1 million from other distressed debt funds, as
credit markets exhibited post-crisis rally.
Uncalled Capital Commitments
As of December 31, 2012, 2011 and 2010, uncalled capital commitments were $11.2 billion, $11.2 billion
and $14.3 billion, respectively.
82
Segment Analysis
Our business is comprised of one segment, our investment management segment, which consists of the
investment management services that we provide to our clients. Management makes operating decisions and
assesses the performance of our business based on financial and operating metrics and data that are presented
without the consolidation of any funds. For a detailed reconciliation of the segment results of operations to our
consolidated results of operations, please see “—Fee-Related Earnings” and “—Distributable Earnings” below and
the “Segment Reporting” note to our consolidated financial statements included elsewhere in this annual report. The
data most important to our chief operating decision maker in assessing our performance are adjusted net income,
adjusted net income-OCG, fee-related earnings and fee-related earnings-OCG.
Adjusted Net Income
ANI and adjusted net income-OCG, as well as per unit data, for the years ended December 31, 2012, 2011
and 2010 are set forth below:
Year Ended December 31,
2012
2011
2010
(in thousands, except per unit data)
Revenues:
Management fees .......................................................................... $ 747,440
461,116
Incentive income ............................................................................
202,392
Investment income .........................................................................
$ 724,321
303,963
23,763
$ 750,031
413,240
149,449
Total revenues .........................................................................
1,410,948
1,052,047
1,312,720
Expenses:
Compensation and benefits ...........................................................
Incentive income compensation expense ......................................
General and administrative expenses ............................................
Depreciation and amortization expense .........................................
(330,059)
(222,594)
(102,685)
(7,397)
Total expenses ........................................................................
(662,735)
Adjusted net income before interest and other income (expense) .......
Interest expense, net of interest income (1) ........................................
Other income (expense), net .........................................................
Adjusted net income .............................................................................
748,213
(31,730)
767
717,250
Adjusted net income attributable to OCGH non-controlling
interest ........................................................................................
Non-Operating Group other income ...............................................
Non-Operating Group expenses ....................................................
Adjusted net income-OCG before income taxes ..................................
Income taxes-OCG ........................................................................
(582,746)
6,260 (2)
(553)
140,211
(25,816) (2)
(308,115)
(179,234)
(94,655)
(6,583)
(588,587)
463,460
(33,867)
(1,209)
428,384
(363,068)
—
(768)
64,548
(15,771)
(287,067)
(159,243)
(81,121)
(6,481)
(533,912)
778,808
(26,173)
11,243
763,878
(646,910)
—
(1,113)
115,855
(19,925)
Adjusted net income-OCG ................................................................... $ 114,395
Adjusted net income-OCG per Class A unit .......................................... $
4.06
Weighted average number of Class A units outstanding ......................
28,170
$
$
48,777
2.15
22,677
$
$
95,930
4.23
22,677
(1)
Interest income was $2.6 million, $2.3 million, and $1.9 million for the years ended December 31, 2012, 2011
and 2010, respectively.
(2) A one-time adjustment in 2012 had the effect of increasing income taxes-OCG by $(7,134) and increasing
non-Operating Group other income by $6,260, for a net effect of additional after-tax OCG expense of $(874).
This adjustment stemmed from reductions in deferred tax assets and the liability for amounts due to affiliates.
The effective income tax rate applicable to adjusted net income-OCG before income taxes for the year ended
December 31, 2012 was 14% without the $(7,134) one-time expense and 18% with it.
83
Fee-Related Earnings
Fee-related earnings and fee-related earnings-OCG, as well as per unit data, for the years ended
December 31, 2012, 2011 and 2010 are set forth below:
Year Ended December 31,
2012
2011
2010
(in thousands, except per unit data)
Management fees:
Closed-end funds ............................................................................. $ 580,636
128,821
Open-end funds ...............................................................................
37,983
Evergreen funds ...............................................................................
$ 555,014
126,014
43,293
$ 583,320
124,651
42,060
Total management fees .............................................................
747,440
724,321
750,031
Expenses:
Compensation and benefits .............................................................
General and administrative expenses ..............................................
Depreciation and amortization expense ...........................................
(330,059)
(102,685)
(7,397)
Total expenses ...........................................................................
(440,141)
Fee-related earnings ..............................................................................
307,299
Fee-related earnings attributable to OCGH non-controlling
interest ..........................................................................................
Non-Operating Group other income .................................................
Non-Operating Group expenses ......................................................
Fee-related earnings-OCG before income taxes ....................................
Fee-related earnings-OCG income taxes .........................................
Fee-related earnings-OCG ..................................................................... $
(250,014)
6,260 (1)
(551)
62,994
(17,407) (1)
45,587
Fee-related earnings-OCG per Class A unit ........................................... $
1.62
Weighted average number of Class A units outstanding ........................
28,170
(308,115)
(94,655)
(6,583)
(409,353)
314,968
(266,917)
—
(770)
47,281
(13,884)
(287,067)
(81,121)
(6,481)
(374,669)
375,362
(317,897)
—
(1,119)
56,346
(16,633)
$
$
33,397
1.47
22,677
$
$
39,713
1.75
22,677
(1) A one-time adjustment in 2012 had the effect of increasing income taxes-OCG by $(7,134) and increasing
non-Operating Group other income by $6,260, for a net effect of additional after-tax OCG expense of $(874).
This adjustment stemmed from reductions in deferred tax assets and the liability for amounts due to affiliates.
The effective income tax rate applicable to fee-related earnings-OCG before income taxes for the year ended
December 31, 2012 was 18% without the $(7,134) one-time expense and 28% with it.
84
The following table reconciles fee-related earnings and ANI to net income (loss) attributable to Oaktree
Capital Group, LLC:
Year Ended December 31,
2012
2011
2010
Fee-related earnings (1)
Incentive income ................................................................................
Incentive income compensation expense ..........................................
Investment income .............................................................................
Interest expense, net of interest income (2) .........................................
Other income (expense), net ..............................................................
.................................................................................... $ 307,299
461,116
(222,594)
202,392
(31,730)
767
Adjusted net income .................................................................................
Equity-based compensation expense (3) .............................................
Income taxes (4) ..................................................................................
Non-Operating Group other income (5) ...............................................
Non-Operating Group expenses (5) .....................................................
OCGH non-controlling interest (5) ........................................................
717,250
(36,024)
(30,858)
6,260
(553)
(548,265)
(in thousands)
$ 314,968
303,963
(179,234)
23,763
(33,867)
(1,209)
428,384
(948,746)
(21,088)
—
(768)
446,246
$ 375,362
413,240
(159,243)
149,449
(26,173)
11,243
763,878
(949,376)
(26,399)
—
(1,113)
163,555
Net income (loss) attributable to Oaktree Capital Group, LLC .................. $ 107,810
$
(95,972) $
(49,455)
(1) Fee-related earnings is a component of adjusted net income and is comprised of segment management fees
(2)
less segment operating expenses other than incentive income compensation expense.
Interest income was $2.6 million, $2.3 million and $1.9 million for the years ended December 31, 2012, 2011
and 2010, respectively.
(3) This adjustment adds back the effect of equity-based compensation charges for OCGH units issued prior to
our initial public offering, which is excluded from adjusted net income and fee-related earnings because it is a
non-cash charge that does not affect our financial position.
(4) Because adjusted net income and fee-related earnings are pre-tax measures, this adjustment adds back the
effect of income tax expense, which is not included in the calculation of adjusted net income and fee-related
earnings.
(5) Because adjusted net income and fee-related earnings are calculated at the Operating Group level, this
adjustment adds back the effect of items applicable to OCG, its Intermediate Holding Companies or the
OCGH non-controlling interest.
85
The following table reconciles fee-related earnings-OCG and adjusted net income-OCG to net income
(loss) attributable to Oaktree Capital Group, LLC:
Year Ended December 31,
2012
2011
2010
Fee-related earnings-OCG (1) .............................................................................. $
Incentive income attributable to OCG ....................................................
Incentive income compensation expense attributable to OCG ..............
Investment income attributable to OCG ................................................
Interest expense, net of interest income, attributable to OCG ...............
Other income (expense) attributable to OCG ........................................
Non-fee-related earnings income taxes attributable to OCG (2) ...............
Adjusted net income-OCG (1) .......................................................................
Equity-based compensation expense attributable to OCG (3) ................
45,587
88,809
(43,001)
37,293
(5,924)
40
(8,409)
114,395
(6,585)
(in thousands)
$
33,397
46,353
(27,342)
3,607
(5,166)
(186)
(1,886)
$
39,713
63,293
(24,386)
22,886
(4,006)
1,722
(3,292)
48,777
(144,749)
95,930
(145,385)
Net income (loss) attributable to Oaktree Capital Group, LLC ..................... $ 107,810
$ (95,972) $ (49,455)
(1) Fee-related earnings-OCG and adjusted net income-OCG are calculated to evaluate the portion of adjusted
net income and fee-related earnings attributable to Class A unitholders. These measures are net of income
taxes and expenses that OCG or its Intermediate Holding Companies bear directly.
(2) This adjustment adds back income taxes associated with segment incentive income, incentive income
compensation expense or investment income (loss), which are not included in the calculation of fee-related
earnings-OCG.
(3) This adjustment adds back the effect of equity-based compensation charges attributable to OCG for unit
grants issued prior to our initial public offering, which is excluded from adjusted net income-OCG and fee-
related earnings-OCG because it is a non-cash charge that does not affect our financial position.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Segment Revenues
Management Fees
A summary of our management fees for the years ended December 31, 2012 and 2011 is set forth below:
Year Ended December 31,
2012
2011
(in thousands)
Management Fees:
Closed-end funds ............................................................................................................... $ 580,636
128,821
Open-end funds ..................................................................................................................
37,983
Evergreen funds .................................................................................................................
$ 555,014
126,014
43,293
Total .................................................................................................................................... $ 747,440
$ 724,321
Management fees increased $23.1 million, or 3.2%, to $747.4 million for the year ended December 31,
2012, from $724.3 million for the year ended December 31, 2011, for the reasons described below.
• Closed-end funds. Management fees attributable to closed-end funds increased $25.6 million, or
4.6%, to $580.6 million for the year ended December 31, 2012, from $555.0 million for the year ended
December 31, 2011. The increase reflected $94.6 million of new capital commitments to closed-end
funds in their investment periods and a decline of $67.8 million attributable to closed-end funds in their
liquidation periods. Investment-period funds included EPF III, Opps VIIIb and ROF V, each of which
commenced in 2011, and ROF VI, which started in August 2012. Of the $67.8 million decline in
management fees arising from asset sales by funds in liquidation, Opps VIIb accounted for $40.7
million, declining from $142.6 million in 2011, to $101.9 million in 2012. The period-end weighted
average annual management fee rate for closed-end funds increased to 1.51% as of December 31,
86
2012, from 1.48% as of December 31, 2011, reflecting differences in the composition of fee rates
among the funds that contributed to management fees at the end of each year, with a greater weight
toward principal investing funds in 2012, as compared to 2011.
• Open-end funds. Management fees attributable to open-end funds increased $2.8 million, or 2.2%, to
$128.8 million for the year ended December 31, 2012, from $126.0 million for the year ended
December 31, 2011. The increase was primarily attributable to $10.0 million in higher management fees
from the U.S. high yield bond and U.S. senior loan strategies, reflecting market-value appreciation and
net inflows. Partially offsetting these increases were $7.3 million of lower management fees from the
convertible securities and European high yield bond strategies, reflecting net outflows and, in the case
of convertible securities, lower performance-based fees. The period-end weighted average annual
management fee rate for open-end funds increased to 0.49% as of December 31, 2012, from 0.47% as
of December 31, 2011, primarily as a result of higher performance-based fees.
• Evergreen funds. Management fees attributable to evergreen funds decreased $5.3 million, or 12.2%,
to $38.0 million for the year ended December 31, 2012, from $43.3 million for the year ended
December 31, 2011. The decrease was primarily attributable to net outflows from EMAR and
secondarily to lower weighted average management fee rates for VOF due to the creation of a separate
class of interests in the fourth quarter of 2011 that provided a reduction from 2.00% to 1.50% in the
annual management fee rate for capital commitments of three years. The period-end weighted average
annual management fee rate for evergreen funds increased to 1.82% as of December 31, 2012, from
1.79% as of December 31, 2011, reflecting the decline in AUM for EMAR, whose management fee rate
is lower than VOF’s blended rate.
Incentive Income
A summary of our incentive income for the years ended December 31, 2012 and 2011 is set forth below:
Year Ended December 31,
2012
2011
(in thousands)
Incentive Income:
Closed-end funds ................................................................................................................. $ 419,530
41,586
Evergreen funds ...................................................................................................................
$ 295,505
8,458
Total ..................................................................................................................................... $ 461,116
$ 303,963
Incentive income increased $157.1 million, or 51.7%, to $461.1 million for the year ended December 31,
2012, from $304.0 million for the year ended December 31, 2011. Tax-related incentive distributions accounted for
$200.7 million and $202.2 million of total incentive income in 2012 and 2011, respectively, of which $193.6 million
and $127.6 million was attributable to Opps VIIb. Non-tax-related incentive distributions grew from $101.8 million in
2011 to $260.4 million in 2012, principally reflecting realizations and related distributions in five different real estate
and control investing funds. Annual incentive fees from evergreen funds in 2012 included $40.5 million from VOF,
up from $2.3 million in 2011, primarily as a result of improved performance, and $1.1 million from EMAR, which had
ended 2011 below its high-water mark. In 2011, there was $6.1 million of incentive fees from restructured funds,
compared to none in 2012.
87
Investment Income (Loss)
A summary of investment income (loss) for the years ended December 31, 2012 and 2011 is set forth
below:
Year Ended December 31,
2012
2011
(in thousands)
Income (loss) from investments in funds:
Oaktree funds:
Distressed debt .............................................................................................................. $ 106,810
28,322
Control investing .............................................................................................................
14,670
Corporate debt ...............................................................................................................
19,927
Real estate .....................................................................................................................
8,307
Listed equities ................................................................................................................
141
Convertible securities .....................................................................................................
1,526
Non-Oaktree .........................................................................................................................
$ 11,857
2,226
2,507
3,417
(2,962)
(78)
5,006
Income from investments in companies:
DoubleLine and other ...........................................................................................................
22,689
1,790
Total investment income ....................................................................................................... $ 202,392
$ 23,763
Investment income increased $178.6 million, or 750.4%, to $202.4 million for the year ended December 31,
2012, from $23.8 million for the year ended December 31, 2011. Oaktree’s investments in funds contributed $157.7
million of the increase, largely reflecting the considerably stronger financial markets in 2012 compared to 2011. The
remainder was primarily attributable to Oaktree’s share of DoubleLine’s income, which increased from $1.8 million
in 2011 to $22.9 million in 2012, with the latter including $8.0 million related to performance fees. The average
invested balance for investments in funds increased 6.0%, to $1,153.3 million for the year ended December 31,
2012, from $1,088.4 million for the year ended December 31, 2011.
Segment Expenses
Compensation and Benefits
Compensation and benefits increased $22.0 million, or 7.1%, to $330.1 million for the year ended
December 31, 2012, from $308.1 million for the year ended December 31, 2011. The increase reflected $23.8
million in higher bonus expense and a decrease of $4.9 million in phantom equity expense (to $2.3 million in 2012).
The higher bonus expense in 2012 reflected both increased headcount and higher profitability. The lower phantom
equity expense resulted from a smaller rise in the Class A unit trading price in 2012, as compared with 2011.
Headcount, primarily in non-investment areas, grew 11.2% between December 31, 2011 and December 31, 2012.
Incentive Income Compensation Expense
Incentive income compensation expense increased $43.4 million, or 24.2%, to $222.6 million for the year
ended December 31, 2012, from $179.2 million for the year ended December 31, 2011. Included in 2011’s incentive
income compensation expense was a charge of $55.5 million, reflecting the acquisition of a small portion of certain
investment professionals’ carried interest in Opps VIIb. Excluding the impact of that transaction, incentive income
compensation expense increased $98.9 million, or 80.0%, principally as a result of the $157.1 million increase in
incentive income, as well as differences in the compensation percentages among the funds that generated such
incentive income for the two periods. The proportion of incentive income derived from principal investing and real
estate funds increased, as compared with distressed debt and power opportunities funds. Historically, principal
investing and real estate funds typically have had higher associated incentive income compensation expense than
distressed debt and power opportunities funds.
General and Administrative Expenses
General and administrative expenses increased $8.0 million, or 8.4%, to $102.7 million for the year ended
December 31, 2012, from $94.7 million for the year ended December 31, 2011. Excluding the impact of foreign
currency-related items, general and administrative expenses increased $4.8 million, or 5.0%. The $4.8 million
increase was primarily due to $10.1 million in higher costs associated with corporate growth, enhancements to our
88
operational infrastructure, heightened industry regulatory demands and being a public company. Partially offsetting
this increase was a $5.3 million decline in costs (to $2.1 million in 2012) associated with our initial public offering.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.8 million, or 12.1%, to $7.4 million for the year ended
December 31, 2012, from $6.6 million for the year ended December 31, 2011. The increase primarily reflected office
leasehold improvements stemming from corporate growth.
Interest Expense, Net
Interest expense, net, decreased $2.2 million, or 6.5%, to $31.7 million for the year ended December 31,
2012, from $33.9 million for the year ended December 31, 2011. The decline primarily reflected scheduled
repayments of certain long-term debt.
Other Income (Expense), Net
Other income (expense), net increased to income of $0.8 million for the year ended December 31, 2012,
from an expense of $1.2 million for the year ended December 31, 2011. The income of $0.8 million in 2012 reflected
the net effect of $3.1 million of income attributable to the sale of a real estate property and other proceeds received
as part of an arbitration award in 2010 related to a former principal and portfolio manager of our real estate group
who left us in 2005, a $0.8 million write-off of debt issuance costs associated with the refinancing of our credit
facility and a $1.7 million loss related to the write-off of certain receivables related to our corporate investments.
Please see note 6 to our consolidated financial statements included elsewhere in this annual report for a further
discussion of the refinancing of our credit facility. The expense of $1.2 million in 2011 reflected an adjustment to the
carrying value of one of the properties received as part of the 2010 arbitration award.
Adjusted Net Income
Adjusted net income increased $288.9 million, or 67.4%, to $717.3 million for the year ended December 31,
2012, from $428.4 million for the year ended December 31, 2011. The increase principally reflected higher
investment income of $178.6 million and net incentive income of $113.7 million, partially offset by a decrease of
$7.7 million in fee-related earnings.
Income Taxes-OCG
Income taxes increased $10.0 million, or 63.3%, to $25.8 million for the year ended December 31, 2012,
from $15.8 million for the year ended December 31, 2011. The increase in taxes was due to an increase in adjusted
net income-OCG before income taxes in 2012 compared to 2011, as well as a one-time tax expense of $7.1 million
in 2012 stemming from a remeasurement of our deferred tax assets. The amount of the deferred tax asset under
the tax receivable agreement associated with the 2007 Private Offering was reduced due to a decrease in the future
effective tax rate applied to income subject to tax, which also reduced the tax receivable agreement liability payable
to OCGH unitholders, resulting in income of $6.3 million in 2012. The effective tax rate applied against adjusted net
income-OCG before income taxes was 14% for 2012, excluding the impact of the one-time tax expense, as
compared with the effective income tax rate of 24% for 2011. If the one-time tax expense were to be included, the
effective tax rate applied against adjusted net income-OCG for 2012 would increase to 18%. The effective income
tax rate is a function of the mix of income and other factors that often vary significantly within or between years,
each of which factor can have a material impact on the particular year’s income tax expense.
89
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Segment Revenues
Management Fees
A summary of our management fees for the years ended December 31, 2011 and 2010 is set forth below:
Year Ended December 31,
2011
2010
(in thousands)
Management Fees:
Closed-end funds ................................................................................................................ $ 555,014
126,014
Open-end funds ...................................................................................................................
43,293
Evergreen funds ..................................................................................................................
$ 583,320
124,651
42,060
Total ..................................................................................................................................... $ 724,321
$ 750,031
Management fees decreased $25.7 million, or 3.4%, to $724.3 million for the year ended December 31,
2011, from $750.0 million for the year ended December 31, 2010, for the reasons described below.
• Closed-end funds. Management fees attributable to closed-end funds decreased $28.3 million, or
4.9%, to $555.0 million for the year ended December 31, 2011, from $583.3 million for the year ended
December 31, 2010. The decrease reflected reduced management fees of $61.1 million resulting from
asset sales by funds in liquidation, the inclusion of $12.6 million in retroactive management fees in
2010 upon the final closes of Opps VIII and PF V, and a $7.5 million reduction in fees from Mezz III.
Partially offsetting these decreases were aggregate gains of $55.7 million, comprised of $23.7 million in
management fees from new capital commitments, $7.9 million from special accounts for which
management fees are based on NAV and $24.1 from the start of investment periods for Opps VIIIb and
EPF III in 2011. The reduction in fees from Mezz III primarily resulted from the fact that the fund
reached the stage of its term whereby two-thirds of its 1.50% management fee rate became contingent
on the fund achieving certain return levels. Funds with new capital commitments included Power Fund
III and ROF V.
• Open-end funds. Management fees attributable to open-end funds increased $1.3 million, or 1.0%, to
$126.0 million for the year ended December 31, 2011, from $124.7 million for the year ended
December 31, 2010. The increase reflected $7.1 million of higher management fees from the high yield
bond and non-U.S. convertible securities strategies resulting from market-value appreciation. Partially
offsetting this increase was $5.8 million of lower management fees from the U.S. convertible and high
income securities strategies as a result of lower performance-based management fees. The 1.0%
increase in management fees rose less than the 5.7% increase in average management fee-generating
AUM over the same period due to a $7.8 million decline in performance-based management fees.
Excluding the effect of performance-based management fees, management fees increased 7.9%. The
period-end weighted average annual management fee rate decreased to 0.47% as of December 31,
2011, from 0.51% as of December 31, 2010, as a result of the lower performance-based management
fees.
• Evergreen funds. Management fees attributable to evergreen funds increased $1.2 million, or 2.9%,
to $43.3 million for the year ended December 31, 2011, from $42.1 million for the year ended
December 31, 2010. The increase resulted primarily from market-value appreciation in VOF during the
first half of 2011, partially offset by lower weighted average management fee rates. The period-end
weighted average annual management fee rate for evergreen funds declined to 1.79% as of December
31, 2011, from 1.85% as of December 31, 2010, due to the creation in the fourth quarter of 2011 of a
separate class of interests in VOF that provided a reduction from 2.00% to 1.50% in the annual
management fee rate for capital commitments of three years.
90
Incentive Income
A summary of our incentive income for the years ended December 31, 2010 and 2011 is set forth below:
Year Ended December 31,
2011
2010
(in thousands)
Incentive Income:
Closed-end funds ................................................................................................................. $ 295,505
8,458
Evergreen funds ...................................................................................................................
$ 326,688
86,552
Total ..................................................................................................................................... $ 303,963
$ 413,240
Incentive income decreased $109.2 million, or 26.4%, to $304.0 million for the year ended December 31,
2011, from $413.2 million for the year ended December 31, 2010. The decrease reflected $78.1 million in reduced
incentive income from evergreen funds and $31.1 million in reduced incentive income from closed-end funds. The
reduction in evergreen funds consisted of $41.0 million from active funds and $37.1 million from liquidating funds.
The decrease in active evergreen funds reflected negative returns for VOF and EMAR in 2011, as compared to
positive returns in 2010. As a result, VOF and EMAR each entered 2012 with high-water marks. The reduction in
closed-end funds reflected $43.8 million of reduced tax-related incentive income, largely from Opps VIIb, and $12.7
million in higher non-tax related incentive income.
Investment Income (Loss)
A summary of investment income for the years ended December 31, 2010 and 2011 is set forth below:
Year Ended December 31,
2011
2010
(in thousands)
Income (loss) from investments in funds:
Oaktree funds:
Distressed debt ............................................................................................................. $ 11,857
2,226
Control investing ...........................................................................................................
2,507
Corporate debt ..............................................................................................................
3,417
Real estate ....................................................................................................................
(2,962)
Listed equities ...............................................................................................................
(78)
Convertible securities ....................................................................................................
5,006
Non-Oaktree ........................................................................................................................
$ 102,333
25,568
10,117
6,502
2,873
154
3,283
Income from investments in companies:
DoubleLine and other ..........................................................................................................
1,790
(1,381)
Total investment income ...................................................................................................... $ 23,763
$ 149,449
Investment income decreased $125.6 million, or 84.1%, to $23.8 million for the year ended December 31,
2011, from $149.4 million for the year ended December 31, 2010. The decrease primarily reflected lower average
fund returns in 2011 on the year’s weaker financial market performance, as compared with 2010. The average
invested balance rose 11.9%, to $1,108.0 million for the year ended December 31, 2011, from $990.2 million for the
year ended December 31, 2010.
Segment Expenses
Compensation and Benefits
Compensation and benefits increased $21.0 million, or 7.3%, to $308.1 million for the year ended
December 31, 2011, from $287.1 million for the year ended December 31, 2010. The increase was primarily
attributable to $27.3 million in higher bonus expense and $4.1 million in higher base salaries, reflecting increased
headcount and, in the case of bonuses, individual performance and market factors. Partially offsetting this increase
was a $10.2 million reduction in compensation paid to certain portfolio managers based on their funds’ gross
management fees, in lieu of salary and bonus.
91
Incentive Income Compensation Expense
Incentive income compensation expense increased $20.0 million, or 12.6%, to $179.2 million for the year
ended December 31, 2011, from $159.2 million for the year ended December 31, 2010. Included in 2011’s incentive
income compensation expense was a charge of $55.5 million, reflecting the acquisition of a small portion of certain
investment professionals’ carried interest in Opps VIIb. Excluding the impact of that transaction, incentive income
compensation expense decreased $35.5 million, or 22.3%, principally as a result of the $109.2 million decrease in
incentive income, as well as differences in the compensation percentages among the funds that generated such
incentive income for the two periods. The proportion of incentive income derived from principal investing funds
increased, as compared with power opportunities funds. Historically, principal investing funds typically have had
higher associated incentive income compensation expense than power opportunities funds.
General and Administrative Expenses
General and administrative expenses increased $13.6 million, or 16.8%, to $94.7 million for the year ended
December 31, 2011, from $81.1 million for the year ended December 31, 2010. Excluding the impact of foreign
currency-related items, general and administrative expenses rose $14.0 million, or 17.3%. The increase of
$14.0 million reflected $7.4 million in professional fees and other costs related to the initial public offering, with the
remainder of the increase primarily reflecting software, consulting and other costs associated with corporate growth
and ongoing enhancements to our operational infrastructure.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.1 million, or 1.5%, to $6.6 million for the year ended
December 31, 2011, from $6.5 million for the year ended December 31, 2010.
Other Income (Expense), Net
Other income (expense), net was an expense of $1.2 million for the year ended December 31, 2011 and
income of $11.2 million for the year ended December 31, 2010. The income of $11.2 million in 2010 reflected the
settlement of an arbitration award related to a former principal and portfolio manager of our real estate group who
left us in 2005. The expense of $1.2 million in 2011 reflected an adjustment to the carrying value of one of the
properties.
Interest Expense, Net
Interest expense, net increased $7.7 million, or 29.4%, to $33.9 million for the year ended December 31,
2011, from $26.2 million for the year ended December 31, 2010. The increase was primarily the result of the $300.0
million amortizing bank term loan that closed on January 7, 2011.
Adjusted Net Income
ANI decreased $335.5 million, or 43.9%, to $428.4 million for the year ended December 31, 2011, from
$763.9 million for the year ended December 31, 2010. Excluding the $55.5 million impact caused by the acquisition
of a small portion of certain investment professionals’ carried interest in the fourth quarter of 2011, ANI decreased
$280.0 million, or 36.7%. The $280.0 million decrease principally reflected lower investment income of $125.6
million, lower net incentive income of $73.7 million and a decline in fee-related earnings of $60.4 million.
Income Taxes - OCG
Income taxes decreased $4.1 million, or 20.6%, to $15.8 million for the year ended December 31, 2011,
from $19.9 million for the year ended December 31, 2010. The decrease in taxes was the result of a decrease in
adjusted net income-OCG before income taxes in 2011 compared to 2010, partially offset by a higher effective
income tax rate applied against adjusted net income-OCG in 2011 of 24%, as compared to 17% in 2010. The
effective income tax rate is a function of the mix of income and other factors that often vary significantly within or
between years, each of which can have a material impact on the particular year’s income tax expense.
92
Distributable Earnings
A reconciliation of net income (loss) attributable to OCG to adjusted net income and of adjusted net income
to distributable earnings for the years ended December 31, 2012, 2011 and 2010 is set forth below:
Year Ended December 31,
2012
2011
2010
Net income (loss) attributable to OCG ........................................................... $ 107,810
36,024
30,858
(6,260)
553
548,265
Equity-based compensation expense (1) ..................................................
Income taxes (2) ........................................................................................
Non-Operating Group other income (3) .....................................................
Non-Operating Group expenses (3) ..........................................................
OCGH non-controlling interest (3) .............................................................
Adjusted net income ......................................................................................
Investment income (4) ...............................................................................
Receipts of investment income from funds (5) ..........................................
Receipts of investment income from DoubleLine and other companies ..
Operating Group income taxes ................................................................
717,250
(202,392)
129,621
33,838
(6,136)
(in thousands)
$ (95,972) $ (49,455)
949,376
26,399
—
1,113
(163,555)
948,746
21,088
—
768
(446,246)
428,384
(23,763)
88,693
1,496
(6,275)
763,878
(149,449)
28,891
—
(7,640)
Distributable earnings .................................................................................... $ 672,181
$ 488,535
$ 635,680
(1) This adjustment adds back the effect of equity-based compensation charges for OCGH units issued prior to
our initial public offering, which is excluded from adjusted net income and distributable earnings because it is a
non-cash charge that does not affect our financial position.
(2) Because adjusted net income and distributable earnings are pre-tax measures, this adjustment eliminates the
effect of income tax expense which is not included in the calculation of adjusted net income and distributable
earnings.
(3) Because adjusted net income and distributable earnings are calculated at the Operating Group level, this
adjustment adds back the effect of items applicable to OCG, its Intermediate Holding Companies or the
OCGH non-controlling interest.
(4) This adjustment eliminates our segment investment income, which with respect to investment in funds is
initially largely non-cash in nature and is thus not available to fund our operations or make equity distributions.
(5) This adjustment characterizes a portion of the distributions received from Oaktree and non-Oaktree funds as
receipts of investment income or loss. In general, the income or loss component of a distribution from a fund is
calculated by multiplying the amount of the distribution by the ratio of our investment’s undistributed income or
loss to our remaining investment balance. In addition, if the distribution is made during the investment period,
it is generally not reflected in distributable earnings until after the investment period ends.
For the years ended December 31, 2012, 2011 and 2010, our net income (loss) attributable to OCG was
net income of $107.8 million, a net loss of $96.0 million and a net loss of $49.5 million, respectively. Distributable
earnings for the years ended December 31, 2012, 2011 and 2010 were $672.2 million, $488.5 million and
$635.7 million, respectively. Total distributions made during the years ended December 31, 2012, 2011 and 2010
were $424.1 million, $470.6 million and $453.2 million, respectively, of which distributions to our Class A unitholders
were $66.8 million, $53.1 million and $49.2 million, respectively, and distributions to our OCGH unitholders were
$357.3 million, $417.5 million and $404.0 million, respectively.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Distributable earnings increased $183.7 million, or 37.6%, to $672.2 million for the year ended December
31, 2012, from $488.5 million for the year ended December 31, 2011. The increase was the net result of $113.7
million in higher net incentive income, $73.3 million in higher receipts of investment income, and a $7.7 million
decline in fee-related earnings. For 2012, receipts of investment income totaled $163.5 million and reflected $129.6
million from fund liquidations and $33.8 million from Oaktree’s one-fifth equity ownership in DoubleLine, of which
the latter included $8.7 million attributable to performance fees and $2.4 million related to 2011's operations.
93
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Distributable earnings decreased $147.2 million, or 23.2%, to $488.5 million for the year ended
December 31, 2011, from $635.7 million for the year ended December 31, 2010. The decrease reflected $129.3
million of lower net incentive income and $60.4 million in lower fee-related earnings, partially offset by $61.3 million
of higher receipts of investment income. The remaining $18.8 million decrease was attributable to a net decrease in
interest expense, operating group income taxes and other income.
Segment Statement of Financial Condition
The following table presents our segment statement of financial condition as of December 31, 2012 and
2011. Since our founding, we have managed our financial condition in a way that builds our capital base and
maintains sufficient liquidity for known and anticipated uses of cash. We have issued debt largely to help fund our
corporate investments in funds and companies. We believe that debt maturities should generally match the
anticipated sources of repayments. Because the largest share of our corporate investments in funds has been in
closed-end funds with 10- to 11-year terms, we have often issued debt with 10-year terms, as augmented by bank
term loans with shorter multi-year terms to capitalize on historically low interest rates. Our segment’s receivables do
not include accrued incentives (fund level), an off-balance sheet metric. For a reconciliation of segment total assets
to our consolidated total assets, please see the “Segment Reporting” note to our consolidated financial statements
included elsewhere in this annual report.
As of December 31,
2012
2011
(in thousands)
Assets:
Cash and cash-equivalents ............................................................................................ $ 458,191
370,614
U.S. Treasury and government agency securities ..........................................................
27,351
Management fees receivable .........................................................................................
Incentive income receivable ...........................................................................................
82,182
1,115,952
Corporate investments, at equity ....................................................................................
159,171
Deferred tax assets ........................................................................................................
146,087
Other assets ...................................................................................................................
$ 297,230
381,697
23,207
28,892
1,159,287
72,986
120,609
Total assets .............................................................................................................. $ 2,359,548
$ 2,083,908
Liabilities and Capital:
Liabilities:
Accounts payable and accrued expenses ................................................................ $ 214,311
136,165
Due to affiliates ........................................................................................................
615,179
Debt obligations .......................................................................................................
$ 250,191
57,574
652,143
Total liabilities ....................................................................................................
965,655
959,908
Capital:
OCGH non-controlling interest in consolidated subsidiaries ....................................
Unitholders’ capital attributable to Oaktree Capital Group, LLC ...............................
1,087,491
306,402
935,858
188,142
Total capital .......................................................................................................
1,393,893
1,124,000
Total liabilities and capital .................................................................................. $ 2,359,548
$ 2,083,908
94
Corporate Investments, at Equity
A summary of corporate investments, at equity as of December 31, 2012 and 2011 is set forth below:
As of December 31,
2012
2011
(in thousands)
Investments in funds:
Oaktree funds:
Distressed debt ......................................................................................................... $ 475,476
264,186
Control investing .......................................................................................................
115,250
Corporate debt ..........................................................................................................
107,408
Real estate ...............................................................................................................
69,222
Listed equities ...........................................................................................................
1,392
Convertible securities ...............................................................................................
53,591
Non-Oaktree ...................................................................................................................
$ 542,539
239,706
141,972
81,502
39,262
1,251
91,520
Investments in companies:
DoubleLine and other ......................................................................................................
29,427
21,535
Total corporate investments, at equity ............................................................................. $ 1,115,952
$ 1,159,287
Liquidity and Capital Resources
We have managed our historical liquidity and capital requirements by focusing on our cash flows before the
consolidation of our funds and the effect of normal changes in short-term assets and liabilities. Our primary cash
flow activities on an unconsolidated basis involve: (a) generating cash flow from operations, (b) generating income
from investment activities, including strategic investments in certain third parties, (c) funding capital commitments
that we have made to our funds, (d) funding our growth initiatives, (e) distributing cash flow to our owners and (f)
borrowings, interest payments and repayments under credit agreements, our senior notes and other borrowing
arrangements. As of December 31, 2012, we had an available cash balance of $458.2 million, or $828.8 million
when including investments in U.S. Treasury and government agency securities, and $615.2 million in outstanding
debt. Additionally, we had a $500 million revolving credit facility available to us, which was undrawn as of December
31, 2012. Oaktree’s investments in funds and companies had a carrying value of $1.1 billion as of December 31,
2012. While all of these investments in funds and companies follow the equity method of accounting, whereby
original cost is adjusted for Oaktree’s share of income/loss and distributions, investments in funds reflect each
fund’s holdings at fair value, whereas investments in DoubleLine and other companies are not adjusted to reflect
the fair value of the underlying companies.
Ongoing sources of cash, or distributable earnings, include (a) management fees, which are collected
monthly or quarterly, (b) incentive income, which is volatile and largely unpredictable as to amount and timing and
(c) distributions related to our corporate investments in funds and companies. As of December 31, 2012, corporate
investments, at equity of $1.1 billion, included unrealized investment income of $287.4 million. We primarily use
cash flow from operations and distributions from our corporate investments to pay compensation and related
expenses, general and administrative expenses, income taxes, debt service, capital expenditures and distributions.
This same cash flow, together with proceeds from equity and debt issuances, also is used to fund corporate
investments, fixed assets and other capital items. If cash flow from operations were insufficient to fund distributions,
we expect that we would suspend paying such distributions.
Our quarterly distributable earnings may be affected by potential seasonal factors that may, in turn, affect
the level of the cash distributions applicable to a particular quarter. For example, we generally receive tax-related
incentive distributions from certain closed-end funds in the first quarter of the year, which if received generate
distributable earnings in that period. The distribution amounts as between any given periods are likely to vary
materially due to this and other factors.
Tax distributions are not required in respect of the Class A units and are only required from the Oaktree
Operating Group entities if and to the extent that there is sufficient cash available for distribution. Accordingly, if
there were insufficient cash flow from operations to fund quarterly or tax distributions by the Oaktree Operating
Group entities, we expect that these distributions would not be made. We believe that we have sufficient access to
cash from existing balances, our operations and the revolving credit facility described below to fund our operations
and commitments.
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Consolidated Cash Flows
The accompanying consolidated statements of cash flows include our consolidated funds, despite the fact
that we have only a minority economic interest in those funds. The assets of consolidated funds, on a gross basis,
are substantially larger than the assets of our business and, accordingly, have a substantial effect on the cash flows
reflected in our consolidated statements of cash flows. The primary cash flow activities of our consolidated funds
involve:
• raising capital from third-party investors;
• using the capital provided by us and third-party investors to fund investments and operating expenses;
• financing certain investments with indebtedness;
• generating cash flows through the realization of investments, as well as the collection of interest and
dividend income; and
• distributing net cash flows to fund investors and to us.
Because our consolidated funds are treated as investment companies for accounting purposes, investing
cash flow amounts are included in our cash flows from operations. We believe that each of the consolidated funds
and Oaktree has sufficient access to cash to fund their respective operations in the near term.
Significant amounts from our consolidated statements of cash flows for the years ended December 31,
2012, 2011 and 2010 are discussed below.
Operating Activities
Net cash provided by operating activities was $7.0 billion, $1.1 billion and $3.4 billion for the years ended
December 31, 2012, 2011 and 2010, respectively. These amounts included (a) $5.8 billion of net proceeds from
maturities and sales of investments of the consolidated funds in 2012, $0.7 billion of net purchases of investments
of the consolidated funds in 2011 and $1.8 billion of net proceeds from maturities and sales of investments of the
consolidated funds in 2010; (b) net realized gains on investments of the consolidated funds of $4.6 billion, $1.7
billion and $2.6 billion in 2012, 2011 and 2010, respectively; and (c) changes in unrealized gains on investments of
the consolidated funds of $0.8 billion in 2012, unrealized losses of $3.1 billion in 2011 and unrealized gains of $1.8
billion in 2010.
Investing Activities
Net cash provided by (used in) investing activities was $55.0 million, $(262.5) million and $(127.2) million
for the years ended December 31, 2012, 2011 and 2010, respectively. Investing activities were primarily driven by
net U.S. Treasury and other U.S. government agency investment activities and net corporate investments in non-
consolidated funds and companies. In 2012, net proceeds from maturities and sales of U.S. Treasury and
government agency securities were $11.1 million, while 2011 and 2010 reflected net purchases of $211.1 million
and $95.7 million, respectively. Corporate investments in funds and companies of $16.6 million, $53.5 million and
$44.1 million in 2012, 2011 and 2010, respectively, consisted of the following:
Investments in funds ...............................................................
Investments in consolidated funds eliminated in
consolidation .......................................................................
Investments in unconsolidated companies .............................
Corporate investments in funds and companies .....................
Year Ended December 31,
2012
2011
2010
(in millions)
$ 187.2
$ 311.6
$ 166.0
(173.9)
(260.7)
(141.9)
3.3
2.6
$
16.6
$
53.5
$
20.0
44.1
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Distributions from corporate investments in funds and companies of $63.7 million, $12.5 million and $15.5 million in
2012, 2011 and 2010, respectively, consisted of the following:
Cash distributions received from investments in funds ...........
Cash distributions received from consolidated funds
eliminated in consolidation ..................................................
Cash distributions received from unconsolidated companies .
Distributions from corporate investments in funds and
companies ...........................................................................
Year Ended December 31,
2012
2011
2010
(in millions)
$ 418.1
$ 285.9
$ 136.1
(371.4)
(274.9)
(120.6)
17.0
1.5
—
$
63.7
$
12.5
$
15.5
Purchases of fixed assets were $5.2 million, $10.4 million and $2.9 million in 2012, 2011 and 2010, respectively.
Financing Activities
Net cash used in financing activities was $7.6 billion, $3.7 billion and $0.9 billion for the years ended
December 31, 2012, 2011 and 2010, respectively. Financing activities included (a) net distributions from
consolidated funds to non-controlling interests of $7.6 billion, $3.4 billion and $0.2 billion in 2012, 2011 and 2010,
respectively; (b) net borrowings on revolving credit facilities of the consolidated funds of $438.2 million in 2012 and
net repayments of $41.1 million and $184.2 million in 2011 and 2010, respectively; (c) distributions to unitholders of
$424.1 million, $469.7 million and $453.2 million in 2012, 2011 and 2010, respectively; (d) repayment of debt
obligations of $287.0 million, $51.4 million and $21.4 million in 2012, 2011 and 2010, respectively; and
(e) purchases of Oaktree Operating Group units, net of issuance of Class A units, of $0.7 million, $39.6 million and
$7.1 million in 2012, 2011 and 2010, respectively. In 2012, there was $250.0 million in proceeds from issuance of
debt, $2.4 million for the payment of issuance costs and $14.1 million used to repurchase our Class A units. In
2011, there was $300.0 million in proceeds from the issuance of debt and $2.6 million for the payment of debt
issuance costs.
Future Sources and Uses of Liquidity
We expect to continue to make distributions to our Class A unitholders pursuant to our distribution policy. In
the future, we may also issue additional units or debt and other equity securities with the objective of increasing our
available capital. In addition, we may, from time to time, repurchase our Class A units in open market or privately
negotiated purchases or otherwise or redeem our Class A units pursuant to the terms of our operating agreement.
In addition to our ongoing sources of cash that include management fees, incentive income and fund
distributions related to our corporate investments in funds and companies, we also have access to liquidity through
our debt financings and credit agreements. We believe that the sources of liquidity described below will be sufficient
to fund our working capital requirements for at least the next twelve months.
In December 2012, our subsidiaries Oaktree Capital Management, L.P., Oaktree Capital II, L.P., Oaktree
AIF Investments, L.P. and Oaktree Capital I, L.P. entered into a credit agreement (the "New Credit Facility") with a
bank syndicate for senior unsecured credit facilities, consisting of a $250 million fully-funded term loan (the "New
Term Loan") and a $500 million revolving credit facility (the "New Revolver"), each with a 5-year term. The New
Credit Facility replaced the previous credit facility (the "Old Credit Facility") and the New Term Loan replaced the
prior amortizing term loan (the "Old Term Loan"), which had a principal balance of $247.5 million. The New Term
Loan amortizes quarterly in an amount equal to 2.5% of the original principal amount of $250 million, with principal
payments due in March, June, September and December of each year, and the remaining principal payable upon
maturity in December 2017. Borrowings under the New Credit Facility generally bear interest at a spread to either
LIBOR or an alternative base rate. Based on the current credit ratings of Oaktree Capital Management, L.P., the
interest rate on borrowings is LIBOR plus 1.00% per annum and the commitment fee on the unused portions of the
New Revolver is 0.125% per annum. Utilizing interest-rate swaps, the bulk of the first four years of the New Term
Loan’s annual interest rate is fixed at 2.60%, based on our current credit ratings. The New Credit Facility contains
customary financial covenants and restrictions, including ones regarding a maximum leverage ratio of 3.0-to-1.0,
minimum fixed charge coverage ratio of 2.5-to-1.0 and minimum required levels of assets under management and
net worth (as defined in the credit agreement) of $50 billion and $600 million, respectively. As of December 31,
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2012, we were in compliance with each of these covenants and were able to draw the full amount available under
the New Revolver without violating any financial covenants.
In January 2011, our subsidiaries Oaktree Capital Management, L.P., Oaktree Capital II, L.P., Oaktree AIF
Investments, L.P. and Oaktree Capital I, L.P. entered into the Old Credit Facility with a bank syndicate, consisting of
the $300 million fully-funded Old Term Loan and a $250 million three-year revolving credit facility. We were required
to make principal payments in respect of the Old Term Loan of $7.5 million in each of March, June, September and
December of every year, with the final payment of $150 million, constituting the remainder of the term loan, due on
January 7, 2016. The Old Credit Facility was terminated and replaced by the New Credit Facility in December 2012.
Proceeds from the New Term Loan were used to pay off the remaining outstanding balance on the Old Term Loan in
December 2012.
In November 2009, our subsidiary Oaktree Capital Management, L.P. issued $250 million in aggregate
principal amount of senior notes due December 2, 2019 (the “2019 Notes”). The indenture governing the 2019
Notes contains customary financial covenants and restrictions that, among other things, limit Oaktree Capital
Management, L.P. and the guarantors' ability, subject to certain exceptions, to incur indebtedness secured by liens
on voting stock or profit-participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or
lease assets. The 2019 Notes do not contain financial maintenance covenants.
In addition to the 2019 Notes, as of December 31, 2012, we had three other series of senior notes
outstanding, with an aggregate remaining principal balance of $121.4 million. These notes have aggregate principal
repayments due of $10.7 million in June 2013 and June 2014, with the remaining $100 million payable in 2016.
Note purchase agreements underlying these notes contain customary financial covenants and restrictions, that,
among other things, restrict our subsidiaries from incurring additional indebtedness and our subsidiaries and us
from merging, consolidating, transferring, leasing or selling assets, incurring certain liens and making restricted
payments, subject to certain exceptions. In addition, the agreements contain the following financial covenants: (a) a
maximum consolidated leverage ratio covenant that requires us and our subsidiaries to maintain a ratio, calculated
by dividing consolidated total debt (for us and our subsidiaries) by Consolidated EBITDA (as defined in each
agreement) for the last four fiscal quarters, below 3.0 to 1.0; (b) a maximum interest coverage ratio covenant that
requires us and our subsidiaries to maintain a ratio, calculated by dividing Consolidated EBITDA for the last four
fiscal quarters by consolidated interest expense (for us and our subsidiaries), below 4.0 to 1.0; and (c) an assets
under management covenant that requires us to maintain assets under management above $20 billion ($15 billion
under one agreement). As of December 31, 2012, we were in compliance with each of these covenants.
On October 7, 2011, Oaktree Finance, LLC (“Oaktree Finance”), our indirect wholly-owned subsidiary
focused on providing financing for larger middle-market companies, entered into a senior secured revolving credit
facility with a consortium of lenders. The senior secured revolving credit facility provided for an initial borrowing
capacity of $75 million and the ability to borrow an additional $150 million if certain specified conditions were met,
including the completion of a public offering by Oaktree Finance. On July 20, 2012, Oaktree Finance terminated the
undrawn senior secured revolving credit facility.
We are required to maintain minimum net capital balances for regulatory purposes in certain international
jurisdictions in which we do business, which are met in part by retaining cash and cash-equivalents in those
jurisdictions. As a result, we may be restricted in our ability to transfer cash between different jurisdictions. As of
December 31, 2012, we were required to maintain approximately $14.0 million in net capital at these subsidiaries
and were in compliance with all regulatory minimum net capital requirements as of such date.
In connection with the 2007 Private Offering, two of our Intermediate Holding Companies, Oaktree
Holdings, Inc. and Oaktree AIF Holdings, Inc., entered into a tax receivable agreement with the OCGH unitholders
in 2007 that, as amended, provides for the payment to an exchanging or selling OCGH unitholder of 85.0% of the
amount of cash savings, if any, in U.S. federal, state, local and foreign income taxes that they actually realize (or
are deemed to realize in the case of an early termination payment by Oaktree Holdings, Inc. or Oaktree AIF
Holdings, Inc. or a change of control) as a result of an increase in the tax basis of the assets owned by the Oaktree
Operating Group. These payments are expected to occur over the period ending approximately in 2029. A
$77.6 million liability to the OCGH unitholders was recorded with respect to the tax receivable agreement. In 2008,
we revised our estimate of the liability relating to the tax receivable agreement downward by $9.7 million, as a result
of further analysis of the valuations relating to future taxable deductions, resulting in a revised liability of $67.9
million. Aggregate payments of $4.8 million were made to pre-2007 Private Offering OCGH unitholders in 2009
related to tax benefits that Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. recognized, including interest
thereon, with respect to the 2007 and 2008 taxable years, respectively. In connection with the tax returns filed for
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2009 and 2010, an aggregate of $6.3 million was paid to the pre-2007 Private Offering OCGH unitholders by
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., further lowering the estimated liability to $56.8 million as of
December 31, 2011.
As a result of a change in state tax law that reduced the combined federal and state tax rate applicable to
income from Oaktree Holdings, Inc. from 41% to 38%, the existing deferred tax assets and liabilities of Oaktree
Holdings, Inc. were remeasured. The remeasurement reduced the deferred tax asset under the tax receivable
agreement associated with the 2007 Private Offering from $64.4 million to $56.6 million, consequently reducing the
related tax receivable agreement liability payable to OCGH unitholders by $6.3 million. The $6.3 million reduction in
the tax receivable agreement payable is reflected in other income (expense), net in the consolidated statements of
operations for the year ended December 31, 2012. The tax receivable agreement liability was further reduced by
$3.3 million as a result of payments made under the tax receivable agreement in November 2012, resulting in a tax
receivable agreement liability payable to OCGH unitholders of $47.2 million as of December 31, 2012.
The exchange of OCGH units in connection with our initial public offering increased the tax basis of the
tangible and intangible assets of the Oaktree Operating Group. As a result, we recorded a deferred tax asset of
$103.3 million and an associated liability of $87.8 million for payments to OCGH unitholders under the tax
receivable agreement, which had the effect of increasing capital by $15.5 million. These payments are expected to
occur over the period ending approximately in 2034.
Contractual Obligations, Commitments and Contingencies
In the ordinary course of business, we and our consolidated funds enter into contractual arrangements that
may require future cash payments. The following table sets forth information relating to anticipated future cash
payments as of December 31, 2012:
2013
2014-2015
2016-2017
Thereafter
Total
(in thousands)
Oaktree and Operating Subsidiaries:
Operating lease obligations (1) ........................ $
Debt obligations payable ..............................
Interest obligations on debt (2) .........................
Tax receivable agreement ............................
Commitments to Oaktree and third-party
funds (3) ...........................................................
Sub-total ................................................
$
15,401
35,715
29,937
6,284
$
25,454
60,714
56,263
15,320
265,401
352,738
—
157,751
13,812
268,750
43,592
16,543
—
342,697
$
9,640
250,000
33,750
96,806
$
64,307
615,179
163,542
134,953
—
390,196
265,401
1,243,382
Consolidated funds:
Debt obligations payable ..............................
Interest obligations on debt ..........................
Commitments to fund investments (4) ............
491,625
3,155
912,001
Total ....................................................... $1,759,519
—
—
—
$ 157,751
—
—
—
$ 342,697
—
—
—
$ 390,196
491,625
3,155
912,001
$2,650,163
(1) We lease our office space under agreements that expire periodically through 2020. The table includes only
guaranteed minimum lease payments for these leases and does not project other lease-related payments.
These leases are classified as operating leases for financial statement purposes and as such are not recorded
as liabilities in our consolidated financial statements.
Interest obligations include accrued interest on outstanding indebtedness. Where applicable, current interest
rates are applied to estimate future interest obligations on variable-rate debt.
(2)
(3) These obligations represent commitments by us to provide general partner capital funding to our funds and
limited partner capital funding to funds managed by unaffiliated third parties. These amounts are generally due
on demand and are therefore presented in the 2013 column. Capital commitments are expected to be called
over the next five years.
(4) These obligations represent commitments by our funds to make investments or fund uncalled contingent
commitments. These amounts are generally due either on demand or by various contractual dates that vary by
investment and are therefore presented in the 2013 column. Capital commitments are expected to be called
over a period of several years.
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In some of our service contracts or management agreements, we have agreed to indemnify third-party
service providers or separate account clients under certain circumstances. The terms of the indemnities vary from
contract to contract and the amount of indemnification liability, if any, cannot be determined and has neither been
included in the above table nor recorded in our consolidated financial statements as of December 31, 2012.
As of December 31, 2012, none of the incentive income we had received was subject to clawback by the
funds.
General Partner and Other Capital Commitments
As of December 31, 2012, our capital commitments to our funds (as general partner) and certain non-
Oaktree investment vehicles for which a portion of the commitment remained undrawn were as follows:
Capital
Commitments
Undrawn
Commitments
as of
December 31,
2012
(in millions)
Distressed Debt:
Oaktree Opportunities Fund VIIIb, L.P. .......................................................................
Oaktree Opportunities Fund IX, L.P. ...........................................................................
Special accounts ........................................................................................................
$ 67
100
5
$ 17
100
3
Control Investments:
Oaktree Principal Fund V, L.P. ...................................................................................
Oaktree European Principal Fund III, L.P. ..................................................................
Oaktree Power Opportunities Fund III, L.P. ................................................................
Special account ..........................................................................................................
Real Estate:
Oaktree Real Estate Opportunities Fund VI, L.P. .......................................................
Mezzanine Finance:
Oaktree Mezzanine Fund III, L.P. ...............................................................................
U.S. Senior Loans:
Oaktree Enhanced Income Fund, L.P. .......................................................................
Non-Oaktree .....................................................................................................................
71
100
27
5
20
40
20
42
22
65
19
1
6
12
6
14
Total ..................................................................................................................................
$ 497
$ 265
Off-Balance Sheet Arrangements
We lease a corporate airplane for business purposes. We are responsible for any unreimbursed costs and
expenses incurred in connection with the operation, crew, registration, maintenance, service and repair of the
airplane. An unaffiliated third party manages the airplane and coordinates its use. The lease contains a buyout
provision that would allow us to purchase the plane at the lease’s termination in February 2015. If we do not
exercise that option, we would be responsible for any shortfall, up to $10.0 million, in sale proceeds the lessor might
incur below an expected sale value of $12.3 million.
Critical Accounting Policies
We prepare consolidated financial statements in accordance with GAAP. In applying many of these
accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of
assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and
judgments on historical experience and other assumptions that we believe are reasonable under the circumstances.
These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual
results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates,
the revisions are included in our results of operations for the period in which the actual amounts become known.
We believe the following critical accounting policies could potentially produce materially different results if we were
to change underlying assumptions, estimates or judgments. Please see the notes to our consolidated financial
statements for a summary of our significant accounting policies.
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Principles of Consolidation
We consolidate all entities that we control through a majority voting interest or otherwise, including our
funds in which we, as the general partner, are presumed to have control. Although we have a small single-digit
equity percentage in the funds, the third-party limited partners do not have the right to dissolve the partnerships or
substantive kick-out rights or participating rights that would overcome the presumption of control by the general
partner. Accordingly, we consolidate the limited partnerships and record non-controlling interests to reflect the
economic interests of the unaffiliated limited partners. Because limited partners in consolidated funds have been
granted redemption rights exercisable in certain circumstances, amounts relating to third-party interests in
consolidated funds are presented as non-controlling redeemable interests in consolidated funds within the
consolidated statements of financial condition, outside of the permanent capital section. All intercompany
transactions and balances have been eliminated in consolidation.
Our consolidated financial statements reflect the assets, liabilities, investment income, expenses and cash
flows of the consolidated funds on a gross basis, and the majority of the economic interests in those funds, which
are held by third-party investors, are attributed to non-controlling redeemable interests in consolidated entities.
Substantially all of the management fees and incentive income earned by us from those funds are eliminated in
consolidation. However, because the eliminated amounts are earned from, and funded by, non-controlling interests,
our attributable share of the net income from those funds is increased by the amounts eliminated. Accordingly, the
elimination in consolidation of such amounts has no effect on net income (loss) attributable to us.
Investments in unconsolidated funds and companies are recorded using the equity method of accounting
and reflect our ownership interest in each such fund that we do not control. Investment income represents our pro
rata share of income or loss from these funds or companies. Our general partnership interests are substantially
illiquid. While all of these investments follow the equity method of accounting, whereby the original cost is adjusted
for Oaktree’s share of income or loss and distributions, investments in funds also reflect the fund’s holdings at fair
value, whereas investments in DoubleLine and other companies are not adjusted to reflect the fair value of the
underlying companies. Fair value of the underlying investments in funds is based on our assessment, which takes
into account expected cash flows, earnings multiples and/or comparisons to similar market transactions, among
other factors. Valuation adjustments reflecting consideration of credit quality, concentration risk, sales restrictions
and other liquidity factors are integral to valuing these instruments.
Revenue Recognition
Management Fees
We recognize management fees over the period in which the investment advisory services are performed.
While we typically earn management fees for each of the funds that we manage, the contractual terms of
management fees vary by fund structure. During the investment period of our closed-end funds, the management
fee is generally a fixed percentage, typically in the range of 1.25% to 1.75% per year of total committed capital (up
through the final close, these fees are generally earned on a retroactive basis to the fund’s first closing date).
During the liquidation period, the management fee remains the same fixed percentage, applied against the lesser of
the total funded capital and the cost basis of assets remaining in the fund, provided that our right to receive
management fees typically ends after 10 or 11 years from the initial closing date or the start of the investment
period, even if certain assets remain to be liquidated. For open-end and evergreen funds, the management fee is
generally based on the NAV of the fund. Our open-end funds generally charge management fees of 0.50% of NAV
per year, paid monthly or quarterly. Our evergreen funds pay a management fee quarterly, based on a fixed
percentage of the NAV of the relevant fund.
Fee calculations that consider committed capital or cost basis are each objective in nature and therefore do
not require the use of significant estimates or assumptions. Management fees related to our open-end and
evergreen funds, by contrast, are typically based on NAV as defined in the respective partnership or investment
management agreements. NAV is typically based on the current fair value of the underlying investments within the
funds. Estimates and assumptions are made when determining the fair value of the underlying investments within
the funds and could vary depending on the valuation methodology that is used. Please see “—Investments, at Fair
Value” below for further discussion related to significant estimates and assumptions used for determining fair value
of the underlying investments in our funds.
We do not recognize incremental income for transaction, advisory, director and other ancillary fees received
in connection with providing services to portfolio companies or potential investees of the funds; rather, any such
fees are offset against management fees earned from the applicable fund. Inasmuch as these fees are not paid
101
directly by the consolidated funds, such fees do not eliminate in consolidation; accordingly, there is no impact to our
net income (loss) as the amounts are included in income attributable to OCG.
Incentive Income
In calculating incentive income, we have elected to adopt “Method 1” from GAAP guidance applicable to
accounting for revenues based on a formula. Under this method, we recognize incentive income when amounts are
fixed or determinable, all related contingencies have been removed and collection is reasonably assured, which
generally occurs in the quarter of, or the quarter immediately prior to, the distribution of the income by the fund to
us.
Other Income (Loss)
Other income (loss) consists primarily of the unrealized and realized gains (losses) on consolidated funds’
investments (including the impact of foreign currency on non-dollar denominated investments), dividend and
interest income received from investments and interest expense incurred in connection with investment activities.
Unrealized gains or losses result from changes in the fair value of our funds’ investments during a period as well as
the reversal of unrealized gains or losses in connection with realization events. Upon disposition of an investment,
previously recognized unrealized gains or losses are reversed and a corresponding realized gain or loss is
recognized in the current period. While this reversal generally does not significantly impact the net amounts of gains
and losses that we recognize from investment activities, it affects the manner in which we classify our gains and
losses for reporting purposes.
Investments, at Fair Value
GAAP establishes a hierarchal disclosure framework which prioritizes the inputs used in measuring
investments at fair value into three levels based on their market observability. Market price observability is affected
by a number of factors, such as the type of instrument and the characteristics specific to the instrument. Financial
instruments with readily available quoted prices from an active market or for which fair value can be measured
based on actively quoted prices generally will have a higher degree of market price observability and a lesser
degree of judgment inherent in measuring fair value.
Non-publicly traded debt and equity securities and other securities or instruments for which reliable market
quotations are not available, are valued by management using valuation methodologies applied on a consistent
basis. These securities may initially be valued at the acquisition price as the best indicator of fair value. Subsequent
valuations will depend on facts and circumstances known as of the valuation date and the application of valuation
methodologies further described below under “—Non-Publicly Traded Equity and Real Estate Investments.”
Exchange-Traded Investments
Securities listed on one or more national securities exchanges are valued at their last reported sales price
on the date of valuation. If no sale occurred on the valuation date, the security is valued at the mean of the last “bid”
and “ask” prices on the valuation date. Securities that are not marketable due to legal restrictions that may limit or
restrict transferability are generally valued at a discount from quoted market prices. The discount would reflect the
amount market participants would require due to the risk relating to the inability to access a public market for the
security for the specified period and would vary depending on the nature and duration of the restriction and the risk
and volatility of the underlying securities. Securities with longer duration restrictions or higher volatility are generally
valued at a higher discount. Such discounts are generally estimated based on put option models or analysis of
market studies. Instances where we have applied discounts to quoted prices of restricted listed securities have
been infrequent. The impact of such discounts is not material to our consolidated statements of financial condition
and results of operations for all periods presented.
Credit-Oriented Investments
Investments in corporate and government debt which are not listed or admitted to trading on any securities
exchange are valued at the mean of the last bid and ask prices on the valuation date based on quotations supplied
by recognized quotation services or by reputable broker-dealers.
The market-yield approach is considered in the valuation of non-publicly traded debt securities, utilizing
expected future cash flows, discounted using estimated current market rates. Discounted cash flow calculations
may be adjusted to reflect current market conditions and/or the perceived credit risk of the borrowers. Consideration
is also given to a borrower’s ability to meet principal and interest obligations; this may include an evaluation of
102
collateral and/or the underlying value of the borrower utilizing techniques described below under “—Non-Publicly
Traded Equity and Real Estate Investments.”
Non-Publicly Traded Equity and Real Estate Investments
The fair values of equity and real estate investments are determined by using a cost approach, market
approach or an income approach. A market approach utilizes valuations of comparable public companies and
transactions and generally seeks to establish the enterprise value of the portfolio company or investment property
using a market-multiple methodology. This approach takes into account a specific financial measure (such as
EBITDA, adjusted EBITDA, free cash flow, net operating income, net income, book value or net asset value)
believed to be most relevant for the given company or investment property. Consideration may also be given to
such factors as acquisition price of the security or investment property, historical and projected operational and
financial results for the portfolio company, the strengths and weaknesses of the portfolio company or investment
property relative to its comparable companies or properties, industry trends, general economic and market
conditions and other factors deemed relevant. The income approach is typically a discounted cash flow method that
incorporates expected timing and level of cash flows. It incorporates assumptions in determining growth rates,
income and expense projections, discount and capitalization rates, capital structure, terminal values and other
factors. The applicability and weight assigned to market and income approaches are determined based on the
availability of reliable projections and comparable companies and transactions.
The valuation of securities may be impacted by expectations of investors’ receptiveness to a public offering
of the securities, the size of the holding of the securities and any associated control, information with respect to
transactions or offers for the securities (including the transaction pursuant to which the investment was made and
the period of time elapsed from the date of the investment to the valuation date) and applicable restrictions on the
transferability of the securities.
These valuation methodologies involve a significant degree of management judgment. Accordingly,
valuations by us do not necessarily represent the amounts which may eventually be realized from sales or other
dispositions of investments. Fair values may differ from the values that would have been used had a ready market
for the investment existed, and the differences could be material to the financial statements.
Investments measured and reported at fair value are classified and disclosed in one of the following
categories:
•
•
•
Level I – Quoted unadjusted prices for identical instruments in active markets to which we have
access at the date of measurement. The types of investments in Level I include exchange-traded
equities, debt and derivatives with quoted prices.
Level II – Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs
are directly or indirectly observable. Level II inputs include prices in markets for which there are few
transactions, the prices are not current, little public information exists or prices vary substantially over
time or among brokered market makers. Other inputs include interest rates, yield curves, volatilities,
prepayment risks, loss severities, credit risks and default rates. The types of investments in Level II
generally include corporate bonds and loans, government and agency securities, less liquid and
restricted equity investments, over-the-counter traded derivatives and other investments where the
fair value is based on observable inputs.
Level III – Model-derived valuations for which one or more significant inputs are unobservable. These
inputs reflect our assessment of the assumptions that market participants use to value the investment
based on the best available information. The types of investments in Level III include non-publicly
traded equity, debt, real estate and derivatives.
In some instances, an investment may fall into multiple levels of the fair-value hierarchy. In such instances,
the investment’s level within the fair-value hierarchy is based on the lowest of the three levels (with Level III being
the lowest) that is significant to the value measurement. Our assessment of the significance of an input requires
judgment and considers factors specific to the instrument. We account for the transfer of assets into or out of each
fair-value hierarchy level as of the beginning of the reporting period.
In the absence of observable market prices, we value Level III investments using valuation methodologies
applied on a consistent basis. The quarterly valuation process for Level III investments begins with each portfolio
company or security being valued by the investment and valuation teams. The valuations are then reviewed by the
valuation committee of each investment strategy, which consists of senior members of the investment team. All
103
Level III investment values are ultimately approved by the valuation committees and designated investment
professionals, as well as the valuation officer, who is independent of the investment teams and reports directly to
our Managing Principal. For certain investments, the valuation process also includes a review by independent
valuation parties, at least annually, to determine whether the fair values determined by management are
reasonable. Results of the valuation process are evaluated each quarter, including an assessment of whether the
underlying calculations should be adjusted or recalibrated. In connection with this process, we evaluate changes in
fair-value measurements from period to period for reasonableness, considering items such as industry trends,
general economic and market conditions, and factors specific to the investment.
The table below summarizes the valuation of investments and other financial instruments, by fund type and
fair-value hierarchy levels, for each period presented in our consolidated statements of financial condition (in
thousands):
As of December 31, 2012
Closed-end funds ...................................................... $ 2,710,883
32,714
Open-end funds ........................................................
Evergreen funds .......................................................
497,158
Total .......................................................................... $ 3,240,755
Level I
Level II
$ 9,371,995
4,773,838
902,531
$ 15,048,364
Level III
$ 19,509,888
19,002
379,000
$ 19,907,890
Total
$ 31,592,766
4,825,554
1,778,689
$ 38,197,009
As of December 31, 2011
Closed-end funds ...................................................... $ 3,681,162
1,869
Open-end funds ........................................................
Evergreen funds .......................................................
500,619
Total .......................................................................... $ 4,183,650
$ 13,477,732
4,120,264
993,033
$ 18,591,029
$ 15,426,807
18,374
228,205
$ 15,673,386
$ 32,585,701
4,140,507
1,721,857
$ 38,448,065
Hedging and Other Derivatives
Oaktree is exposed to risks associated with fluctuations in interest rates and foreign currency exchange
rates in the normal course of our business. We address these risks as part of our overall risk management strategy
that may include the use of derivative financial instruments to economically hedge or reduce these exposures. To
mitigate the risk associated with fluctuations in interest rates, we may enter into interest-rate swaps to manage all or
a portion of the interest-rate risk associated with our variable-rate borrowings. Our corporate investments in funds
include investments denominated in currencies other than the U.S. dollar, which is Oaktree’s functional currency
and, consequently, are subject to fluctuations in foreign currency exchange rates. We also receive management
fees and pay expenses in currencies other than the U.S. dollar for certain funds. To manage the risks associated
with foreign currency exchange gains and losses generated by the remeasurement of our corporate investments,
management fees and expenses denominated in non-functional currencies, we may enter into currency option and
forward contracts to offset some of the foreign-exchange risk on expected future cash flows.
As a result of the use of derivative contracts, we are exposed to the risk that counterparties will fail to fulfill
their contractual obligations. To mitigate such counterparty risk, we enter into contracts with certain major financial
institutions that have investment-grade ratings. Counterparty credit risk is evaluated in determining the fair value of
derivative instruments.
We recognize all derivatives as assets or liabilities on our consolidated statements of financial condition at
fair value. When we enter into a derivative contract, we may elect to designate the derivative as a hedging
instrument and apply hedge accounting as part of our overall risk management strategy. In other situations, when a
derivative does not qualify for hedge accounting or when the derivative and the hedged item are both recorded in
current-period earnings and thus deemed to be economic hedges, hedge accounting is not applied.
Derivatives that are designated as hedging instruments are classified as either (a) a hedge of a recognized
asset or liability ("fair-value hedge"); (b) a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash-flow hedge"); or (c) a hedge of a net investment in a
foreign operation. For a fair-value hedge, we record changes in the fair value of the derivative and, to the extent that
it is highly effective, changes in the fair value of the hedged asset or liability attributable to the hedged risk in
current-period earnings in the same caption in the consolidated statements of operations as the hedged item.
Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a cash-flow
hedge, to the extent that the hedge is effective, are recorded in other comprehensive income (loss) until earnings
104
are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is recorded in
current-period earnings. Changes in the fair values of derivatives designated as hedging instruments caused by
factors other than changes in the risk being hedged, which are excluded from the assessment of hedge
effectiveness, are recognized in current-period earnings. For derivatives not designated as hedging instruments,
hedge accounting is not applied, and we record changes in fair value in current-period earnings.
We formally document at inception the hedge relationships, including identification of the hedging
instruments and the hedged items, as well as its risk management objectives, strategy for undertaking the hedge
transaction and evaluation of effectiveness of the hedged transaction. On a quarterly basis, we formally assesses
whether the derivative we designated in each hedging relationship is expected to be, and has been, highly effective
in offsetting changes in estimated fair values or cash flows of the hedged items. If it is determined that a derivative
is not highly effective at hedging the designated exposure, hedge accounting is discontinued and remaining
amounts in other comprehensive income are released to earnings.
Equity-Based Compensation
Equity-based compensation expense is calculated based on the fair value of a unit at the time of grant,
adjusted annually or more frequently, as necessary, for actual forfeitures to reflect expense only for those units that
ultimately vest. We utilize a contemporaneous valuation report which, among other factors, incorporates market
comparables for restricted stock liquidity discounts in determining fair value of OCGH units. Before our initial public
offering, fair value was typically determined using the latest available closing price of our Class A units on the
GSTrUE OTC market, discounted for a lack of marketability. Subsequent to our initial public offering, fair value is
determined using the closing price of our Class A units on the NYSE, discounted for a lack of marketability where
applicable. Equity-based awards that do not require future service (i.e., awards vested at grant) are expensed
immediately. Equity-based employee awards that require future service are recognized on a straight-line basis over
the requisite service period.
Recent Accounting Developments
Please see note 2 to our consolidated financial statements included elsewhere in this annual report for
information regarding recent accounting developments.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to a broad range of risks inherent in the financial markets
in which we participate, including price risk, interest rate risk, access to and cost of financing risk, liquidity risk,
counterparty risk and foreign exchange rate risk. Potentially negative effects of these risks may be mitigated to a
certain extent by those aspects of our investment approach, investment strategies, fundraising practices or other
business activities that are designed to benefit, either in relative or absolute terms, from periods of economic
weakness, tighter credit or financial market dislocations.
Our predominant exposure to market risk is related to our role as general partner or investment adviser to
our funds and the sensitivities to movements in the fair value of their investments on management fees, incentive
income and investment income. The fair value of the financial assets and liabilities of our funds may fluctuate in
response to changes in, among many factors, the value of securities, foreign exchange, commodities and interest
rates.
Price Risk
Impact on Net Change in Unrealized Appreciation on Consolidated Funds’ Investments
As of December 31, 2012, we had investments at fair value of $38.4 billion related to our consolidated
funds. We estimate that a 10% decline in market values would result in a negative change in unrealized
appreciation on the consolidated funds’ investments of $3.8 billion. Inasmuch as this effect would be attributable to
non-controlling interests, net income attributable to Oaktree Capital Group, LLC would be unaffected.
Impact on Segment Management Fees
Management fees are generally assessed in the case of: (a) our open-end funds and evergreen funds,
based on NAV; and (b) our closed-end funds, based on committed capital during the investment period and, during
the liquidation period, based on the lesser of: (i) the total funded committed capital; and (ii) the cost basis of assets
remaining in the fund. Management fees are affected by short-term changes in market values to the extent they are
based on NAV, in which case the effect is prospective. We estimate that for the year ended December 31, 2012, an
incremental 10% decline in market values of the investments held in our funds would have caused an approximate
105
$18.7 million decrease in management fees. These estimated effects are without regard to a number of factors that
would be expected to increase or decrease the magnitude of the change to degrees that are not readily
quantifiable, such as the use of leverage facilities in certain of our funds or the timing of fund flows.
Impact on Segment Incentive Income
Incentive income is recognized only when it is fixed or determinable, which in the case of: (a) our closed-
end funds generally occurs only after all contributed capital and an annual preferred return on that capital (typically
8%) have been distributed to the fund’s investors; and (b) our active evergreen funds occurs generally as of
December 31, based on the increase in the fund’s NAV during the year, subject to any high-water marks. In the
case of closed-end funds, the link between short-term fluctuations in market values and a particular period’s
incentive income is indirect at best and, in certain cases, non-existent. Thus, the effect on incentive income of an
incremental 10% decline in market values for the year ended December 31, 2012 is not readily quantifiable. Over a
number of years, a decline in market values would be expected to cause a decline in incentive income. In the case
of evergreen funds, we estimate the incentive income of $41.6 million recognized during the year ended December
31, 2012 would have been reduced by $30.2 million had fair values declined an incremental 10% during the year.
Impact on Segment Investment Income
Investment income arises from our investments in funds managed by us or non-affiliated third parties. This
income is directly affected by changes in market risk factors. We estimate that for the year ended December 31,
2012, an incremental 10% decline in fair values of the investments held in our funds and other holdings would have
reduced our investment income by $128.7 million. These estimated effects are without regard to a number of
factors that would be expected to increase or decrease the magnitude of the change to degrees that are not readily
quantifiable, such as the use of leverage facilities in certain of our funds, the timing of fund flows or the timing of
new investments or realizations.
Exchange Rate Risk
Our business is affected by movements in the rate of exchange between the U.S. dollar and non-U.S. dollar
currencies in the case of: (a) management fees that vary based on the NAV of our funds that hold investments
denominated in non-U.S. dollar currencies; (b) management fees received in non-U.S. dollar currencies;
(c) operating expenses for our foreign offices that are denominated in non-U.S. dollar currencies; and (d) cash
balances we hold in non-U.S. dollar currencies. We manage our exposure to exchange rate risks through our
regular operating activities and, when appropriate, through the use of derivative financial instruments.
We estimate that for the year ended December 31, 2012, a 10% decline in the average rate of exchange of
the U.S. dollar would have had the following approximate effects on our segment results:
•
•
•
•
our management fees (relating to (a) and (b) above) would have increased by $9.3 million;
our operating expenses would have increased by $13.6 million;
OCGH interest in net income of consolidated subsidiaries would have decreased by $3.5 million; and
our income tax expense would have decreased by $0.3 million.
These movements would have decreased our net income attributable to OCG by $0.5 million.
At any point in time, some investments held in the closed-end funds and evergreen funds are carried in
non-U.S. dollar currencies on an unhedged basis. Changes in currency rates could affect incentive income,
incentives created (fund level) and investment income for evergreen funds and closed-end funds, although the
degree of impact is not readily determinable because of the many indirect effects that currency movements may
have on individual investments.
Credit Risk
We are party to agreements providing for various financial services and transactions that contain an
element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such
agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally
endeavor to minimize our risk of exposure by limiting to reputable financial institutions the counterparties with which
we enter into financial transactions. In other circumstances, availability of financing from financial institutions may
be uncertain due to market events, and we may not be able to access these financing markets.
106
Interest Rate Risk
As of December 31, 2012, Oaktree and its operating subsidiaries had $615.2 million in debt obligations
consisting of four senior notes issuances and a funded term loan. Each senior notes issuance accrues interest at a
fixed rate. The funded term loan accrues interest at a variable rate; however, we have entered into interest-rate
swaps that effectively converted the bulk of the term loan interest rate to a fixed rate for the first four years. As a
result, we estimate that there would be no material impact to interest expense of Oaktree and its operating
subsidiaries resulting from a 100-basis point increase in interest rates. Of the $828.8 million of aggregate segment
cash and cash-equivalents and investments in U.S. Treasury and government agency securities as of
December 31, 2012, we estimate Oaktree and its operating subsidiaries would generate an additional $8.3 million in
interest income on an annualized basis as a result of a 100-basis point increase in interest rates.
Our consolidated funds have debt obligations that include revolving credit agreements and certain other
investment financing arrangements. These debt obligations accrue interest at variable rates, and changes in these
rates would affect the amount of interest payments that we would have to make, impacting future earnings and cash
flows. As of December 31, 2012, $491.6 million was outstanding under these credit facilities. We estimate that
interest expense relating to variable rates would increase on an annual basis by $4.9 million in the event interest
rates were to increase by 100 basis points.
As credit-oriented investors, we are also subject to interest rate risk through the securities we hold in our
consolidated funds. A 100-basis point increase in interest rates would be expected to negatively affect prices of
securities that accrue interest income at fixed rates and therefore negatively impact net change in unrealized
appreciation on the consolidated funds’ investments. The actual impact is dependent on the average duration of
such holdings. Conversely, securities that accrue interest at variable rates would be expected to benefit from a 100-
basis point increase in interest rates because these securities would generate higher levels of current income and
therefore positively impact interest and dividend income. Inasmuch as these effects are attributable to non-
controlling interests, net income attributable to OCG would be unaffected. In the cases that our funds pay
management fees based on NAV, we would expect our segment management fees to experience a change in
direction and magnitude corresponding to that experienced by the underlying portfolios.
107
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements:
Page
Report of Independent Registered Public Accounting Firm ........................................................................ 109
Consolidated Statements of Financial Condition as of December 31, 2012 and 2011 ............................... 110
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 .......... 111
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2012,
2011 and 2010 ........................................................................................................................................ 112
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 ......... 113
Consolidated Statements of Changes in Unitholders' Capital for the Years Ended December 31, 2012,
2011 and 2010 ........................................................................................................................................ 115
Notes to Consolidated Financial Statements ............................................................................................. 116
108
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Unitholders of
Oaktree Capital Group, LLC
In our opinion, the accompanying consolidated statements of financial condition and the related consolidated
statements of operations, comprehensive income (loss), cash flows and changes in unitholders’ capital present
fairly, in all material respects, the financial position of Oaktree Capital Group, LLC and its subsidiaries (the
“Company”) at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2012 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 14, 2013
109
Oaktree Capital Group, LLC
Consolidated Statements of Financial Condition
($ in thousands)
Assets
Cash and cash-equivalents ........................................................................................................... $
U.S. Treasury and government agency securities .........................................................................
Corporate investments, at equity ..................................................................................................
Due from affiliates .........................................................................................................................
Deferred tax assets .......................................................................................................................
.................................................................................................................................
Other assets
Assets of consolidated funds:
As of December 31,
2012
2011
$
458,191
370,614
98,950
44,589
159,171
127,244
297,230
381,697
121,825
31,826
72,986
110,181
Cash and cash-equivalents ...........................................................................................................
Investments, at fair value ..............................................................................................................
Dividends and interest receivable .................................................................................................
Due from brokers ..........................................................................................................................
Receivable for securities sold .......................................................................................................
Derivative assets, at fair value ......................................................................................................
Other assets .................................................................................................................................
2,470,335
38,372,626
177,746
405,143
501,199
107,560
576,630
Total assets ............................................................................................................................ $ 43,869,998
3,208,429
38,614,226
268,162
903,685
59,678
115,980
108,251
$ 44,294,156
Liabilities and Unitholders’ Capital
Liabilities:
Accrued compensation expense ............................................................................................ $
Accounts payable, other accrued expenses and other liabilities .............................................
Due to affiliates ......................................................................................................................
Debt obligations .....................................................................................................................
Liabilities of consolidated funds:
Accounts payable, accrued expenses and other liabilities ......................................................
Payables for securities purchased .........................................................................................
Securities sold short, at fair value ..........................................................................................
Derivative liabilities, at fair value ............................................................................................
.............................................................................................................
Distributions payable
Borrowings under credit facilities ...........................................................................................
$
118,921
95,390
136,165
615,179
104,744
629,627
126,530
156,647
330,446
491,625
185,597
63,108
57,574
652,143
52,600
398,714
213,727
68,414
379,555
50,117
Total liabilities .................................................................................................................
2,805,274
2,121,549
Commitments and contingencies (Note 12)
Non-controlling redeemable interests in consolidated funds .........................................................
Unitholders’ capital:
39,670,831
41,048,607
Class A units, no par value, unlimited units authorized, 30,180,933 and 22,664,100 units
issued and outstanding as of December 31, 2012 and 2011, respectively ..........................
Class B units, no par value, unlimited units authorized, 120,267,503 and 125,847,115 units
issued and outstanding as of December 31, 2012 and 2011, respectively ..........................
Class C units, no par value, unlimited units authorized, 0 and 13,000 units issued and
—
—
—
—
outstanding as of December 31, 2012 and 2011, respectively ............................................
Paid-in capital ........................................................................................................................
Accumulated deficit
................................................................................................................
Accumulated other comprehensive loss .................................................................................
.............................................................................................
OCGH non-controlling interest in consolidated subsidiaries ...................................................
..................................................................................................
—
645,053
(336,903)
(1,748)
306,402
1,087,491
1,393,893
............................................................................ $ 43,869,998
Total unitholders’ capital
Total liabilities and unitholders’ capital
Class A unitholders’ capital
—
634,739
(444,713)
(1,884)
188,142
935,858
1,124,000
$ 44,294,156
Please see accompanying notes to consolidated financial statements.
110
Oaktree Capital Group, LLC
Consolidated Statements of Operations
(in thousands, except per unit amounts)
Year Ended December 31,
2012
2011
2010
Revenues:
Management fees .......................................................................................... $
Incentive income ............................................................................................
Total revenues .........................................................................................
134,568
$
140,715
$
162,051
10,415
144,983
15,055
155,770
44,130
206,181
Expenses:
Compensation and benefits ............................................................................
Incentive income compensation expense .......................................................
Equity-based compensation ...........................................................................
Total compensation and benefits expense ...............................................
General and administrative expenses ............................................................
Consolidated fund expenses ..........................................................................
Total expenses ........................................................................................
(330,018)
(222,594)
(36,342)
(308,194)
(179,234)
(948,746)
(287,092)
(159,243)
(949,376)
(588,954)
(1,436,174)
(1,395,711)
(108,814)
(92,835)
(103,617)
(105,073)
(90,432)
(94,508)
(790,603)
(1,644,864)
(1,580,651)
Other income (loss):
Interest expense .............................................................................................
Interest and dividend income ..........................................................................
Net realized gain on consolidated funds’ investments ....................................
(45,773)
(50,943)
(55,921)
1,966,317
4,560,782
2,565,630
1,744,135
2,369,590
2,583,676
Net change in unrealized appreciation (depreciation) on consolidated funds’
investments ................................................................................................
Investment income .........................................................................................
Other income (expense), net ..........................................................................
Total other income ...................................................................................
Income (loss) before income taxes ........................................................................
Income taxes ..................................................................................................
835,160
(3,064,676)
1,766,450
25,382
7,027
7,348,895
6,703,275
8,600
(1,209)
6,620
11,243
1,201,537
6,681,658
(287,557)
5,307,188
(30,858)
(21,088)
(26,399)
Net income (loss)
..................................................................................................
6,672,417
(308,645)
5,280,789
Less:
Net income attributable to non-controlling redeemable interests in
consolidated funds ......................................................................................
(6,016,342)
(233,573)
(5,493,799)
Net (income) loss attributable to OCGH non-controlling interest in
consolidated subsidiaries ............................................................................
(548,265)
Net income (loss) attributable to Oaktree Capital Group, LLC ............................... $
Distributions declared per Class A unit (1) ............................................................... $
Income (loss) per unit (basic and diluted):
107,810
2.31
Net income (loss) per Class A unit .................................................................. $
3.83
446,246
(95,972)
2.34
(4.23)
$
$
$
163,555
(49,455)
2.17
(2.18)
$
$
$
Weighted average number of Class A units outstanding .................................
28,170
22,677
22,677
(1) All references to Class A units in these financial statements give effect to the conversion of previously outstanding 13
Class C units into Class A units on a one-for-one basis in April 2012.
Please see accompanying notes to consolidated financial statements.
111
Oaktree Capital Group, LLC
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended December 31, 2012
OCGH Non-
Controlling
Interest in
Consolidated
Subsidiaries
Non-
Controlling
Redeemable
Interests in
Consolidated
Funds
Oaktree
Capital
Group, LLC
Total
Net income ......................................................................................... $ 107,810
Other comprehensive income (loss), net of tax:
$ 548,265
$ 6,016,342
$ 6,672,417
Foreign currency translation adjustments ....................................
Unrealized loss on interest-rate swap designated as cash-flow
hedge .......................................................................................
Other comprehensive income, net of tax ..............................
Total comprehensive income ..............................................................
Less: Comprehensive income attributable to non-controlling
interests ...................................................................................
205
(69)
136
988
(264)
724
—
—
—
1,193
(333)
860
107,946
548,989
6,016,342
6,673,277
—
(548,989)
(6,016,342)
(6,565,331)
Comprehensive income attributable to Oaktree Capital Group, LLC... $ 107,946
$
— $
— $ 107,946
Year Ended December 31, 2011
Net income (loss)
............................................................................... $
(95,972)
$ (446,246)
$ 233,573
$ (308,645)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments ....................................
(112)
(601)
Unrealized loss on interest-rate swap designated as cash-flow
hedge .......................................................................................
Other comprehensive loss, net of tax ...................................
Total comprehensive income (loss) .....................................................
Less: Comprehensive (income) loss attributable to non-
controlling interests ..................................................................
—
—
—
(713)
(9,168)
(9,881)
(1,400)
(1,512)
(7,768)
(8,369)
(97,484)
(454,615)
233,573
(318,526)
—
454,615
(233,573)
221,042
Comprehensive loss attributable to Oaktree Capital Group, LLC ........ $
(97,484)
$
— $
— $
(97,484)
Year Ended December 31, 2010
Net income (loss)
............................................................................... $
(49,455)
$ (163,555)
$ 5,493,799
$ 5,280,789
Other comprehensive income, net of tax:
Foreign currency translation adjustments ....................................
(107)
(600)
Unrealized gain on interest-rate swap designated as cash-flow
hedge .......................................................................................
Other comprehensive income, net of tax ..............................
Total comprehensive income (loss) .....................................................
Less: Comprehensive (income) loss attributable to non-
controlling interests ..................................................................
240
133
1,330
730
—
—
—
(707)
1,570
863
(49,322)
(162,825)
5,493,799
5,281,652
—
162,825
(5,493,799)
(5,330,974)
Comprehensive loss attributable to Oaktree Capital Group, LLC ........ $
(49,322)
$
— $
— $
(49,322)
Please see accompanying notes to consolidated financial statements.
112
Oaktree Capital Group, LLC
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2012
2011
2010
Cash flows from operating activities:
Net income (loss) ....................................................................................... $ 6,672,417
$
(308,645)
$ 5,280,789
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Investment income .............................................................................
Depreciation and amortization expense ..............................................
Equity-based compensation expense .................................................
(Gain) loss related to arbitration award settlement ..............................
Net realized and unrealized (gains) losses from consolidated funds'
investments .....................................................................................
Amortization of original issue and market discount of consolidated
funds' investments ..........................................................................
(25,382)
7,397
36,342
—
(8,600)
6,583
948,746
1,800
(6,620)
6,481
949,376
(11,730)
(5,395,942)
1,320,541
(4,350,126)
(119,922)
(118,363)
(298,296)
Cash flows due to changes in operating assets and liabilities:
(Increase) decrease in other assets ....................................................
Increase in net due from affiliates .......................................................
(454,325)
(21,952)
(33,911)
(14,980)
35,687
(30,857)
Increase (decrease) in accounts payable, other accrued expenses
and other liabilities ..........................................................................
45,077
(5,653)
(65,611)
Cash flows due to changes in operating assets and liabilities of
consolidated funds:
(Increase) decrease in dividends and interest receivable ...................
Decrease in due from brokers ............................................................
(Increase) decrease in receivables for securities sold .........................
Increase (decrease) in payables for securities purchased ..................
Purchases of securities ......................................................................
90,416
498,542
(441,521)
230,913
(39,624)
88,418
96,925
102,327
306,430
257,362
(81,545)
(628,752)
(15,266,419)
(15,000,195)
(18,207,462)
Proceeds from maturities and sales of securities ................................
Net cash provided by operating activities ............................................
21,101,717
14,278,113
20,041,317
6,957,358
1,129,610
3,380,315
Cash flows from investing activities:
Purchases of U.S. Treasury and government agency securities ................
(258,922)
(306,133)
(180,664)
Proceeds from maturities and sales of U.S. Treasury and government
agency securities ...................................................................................
Corporate investments in funds and companies ........................................
Distributions from corporate investments in funds and companies.............
Purchases of fixed assets ..........................................................................
Other
.........................................................................................................
Net cash provided by (used in) investing activities ..............................
270,005
(16,635)
63,704
(5,218)
2,113
55,047
95,000
(53,488)
12,461
(10,383)
—
85,000
(44,090)
15,503
(2,949)
—
(262,543)
(127,200)
(continued)
Please see accompanying notes to consolidated financial statements.
113
Oaktree Capital Group, LLC
Consolidated Statements of Cash Flows - (Continued)
(in thousands)
Year Ended December 31,
2012
2011
2010
Cash flows from financing activities:
Proceeds from issuance of debt obligations ............................................... $
Payment of debt issuance costs ................................................................
Repayments of debt obligations .................................................................
Issuance of Class A units ...........................................................................
Purchase of Oaktree Operating Group units ..............................................
Repurchase and cancellation of Class A units ...........................................
Distributions to Class A unitholders ............................................................
Distributions to OCGH unitholders .............................................................
250,000
$
300,000
$
(2,351)
(286,964)
322,260
(322,935)
(14,132)
(66,789)
(357,278)
(2,611)
(51,429)
—
(39,623)
—
(53,063)
(416,677)
—
—
(21,429)
—
(7,132)
—
(49,209)
(404,005)
Cash flows from financing activities of consolidated funds:
6,441,090
Contributions from non-controlling interests ...............................................
Distributions to non-controlling interests ....................................................
Borrowings on credit facilities ....................................................................
Repayments on credit facilities ..................................................................
Net cash used in financing activities ...................................................
Effect of exchange rate changes on cash .........................................................
Net increase (decrease) in cash and cash-equivalents .....................................
Cash and cash-equivalents, beginning balance ................................................
Cash and cash-equivalents, ending balance ..................................................... $ 2,928,526
1,458,825
3,505,659
3,240
(13,993,859)
(7,592,778)
(1,020,645)
(577,133)
8,305,880
6,559,325
(11,668,028)
(6,751,999)
512,950
(554,033)
(3,666,634)
(528)
(2,800,095)
6,305,754
422,947
(607,144)
(858,646)
(11,228)
2,383,241
3,922,513
$ 3,505,659
$ 6,305,754
Supplemental cash flow disclosures:
* * *
Fair value of properties received in connection with
arbitration award (non-cash) .................................................................. $
— $
— $
Cash paid for interest
................................................................................
Cash paid for income taxes .......................................................................
37,738
18,524
34,670
18,918
11,680
31,783
23,050
Please see accompanying notes to consolidated financial statements
114
Oaktree Capital Group, LLC
Consolidated Statements of Changes in Unitholders' Capital
(in thousands)
Unitholders' capital as of December 31, 2009 ...................................................................
Activity for the year ended December 31, 2010:
Issuance of Class B units .........................................................................................
Forfeitures of Class B units .......................................................................................
Cancellation of Class B units ....................................................................................
Repurchase and cancellation of OCGH units ...........................................................
Equity reallocation between controlling and non-controlling interests ......................
Capital increase related to equity-based compensation expense.............................
Distributions declared ...............................................................................................
Net loss .....................................................................................................................
Foreign currency translation adjustment, net of tax ..................................................
Unrealized gain on interest rate-swap designated as cash-flow hedge, net of tax ...
Unitholders' capital as of December 31, 2010 ...................................................................
Activity for the year ended December 31, 2011:
Issuance of Class B units .........................................................................................
Forfeitures of Class B units .......................................................................................
Cancellation of Class B units ....................................................................................
Repurchase and cancellation of OCGH units ...........................................................
Equity reallocation between controlling and non-controlling interests ......................
Capital increase related to equity-based compensation expense.............................
Contributions .............................................................................................................
Distributions declared ...............................................................................................
Net loss.. ...................................................................................................................
Foreign currency translation adjustment, net of tax ..................................................
Unrealized loss on interest-rate swap designated as cash-flow hedge, net of tax ...
Unitholders' capital as of December 31, 2011....................................................................
Activity for the year ended December 31, 2012:
Issuance of Class A units ..........................................................................................
Issuance of Class B units .........................................................................................
Forfeitures of Class B units .......................................................................................
Conversion of Class C units into Class A units .........................................................
Repurchase and cancellation of Class A units ..........................................................
Cancellation of Class B units ....................................................................................
Purchase of Oaktree Operating Group units from OCGH unitholders ......................
Deferred tax effect resulting from the purchase of Oaktree Operating Group units..
Repurchase and cancellation of OCGH units ...........................................................
Equity reallocation between controlling and non-controlling interests ......................
Capital increase related to equity-based compensation expense.............................
Distributions declared ...............................................................................................
Net income ................................................................................................................
Foreign currency translation adjustment, net of tax ..................................................
Unrealized loss on interest-rate swap designated as cash-flow hedge, net of tax ...
Unitholders' capital as of December 31, 2012 ...................................................................
Oaktree Capital Group, LLC
Class A
Units
Class B
Units
Class C
Units
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
OCGH Non-
Controlling
Interest in
Consolidated
Subsidiaries
Total
Unitholders'
Capital
22,664
124,327
13
$ 455,305
$
(299,286) $
(505) $
804,319
$
959,833
—
—
—
—
—
—
—
—
—
—
22,664
—
—
—
—
—
—
—
—
—
—
—
22,664
7,904
—
—
13
(400)
—
—
—
—
—
—
—
—
—
—
30,181
1,357
(15)
(238)
—
—
—
—
—
—
—
125,431
1,523
(32)
(1,075)
—
—
—
—
—
—
—
—
125,847
—
2,358
(33)
—
—
(7,904)
—
—
—
—
—
—
—
—
—
120,268
—
—
—
—
—
—
—
—
—
—
13
—
—
—
—
—
—
—
—
—
—
—
13
—
—
—
—
(2,015)
145,385
(49,209)
—
—
—
549,466
—
—
—
—
(6,413)
144,749
—
(53,063)
—
—
—
634,739
322,260
—
—
—
—
—
—
(13)
(14,132)
—
—
—
(322,260)
—
15,490
—
—
—
69,097
—
6,648
—
(66,789)
—
—
—
—
—
—
—
— $ 645,053
—
—
—
—
—
—
—
(49,455)
—
—
(348,741)
—
—
—
—
—
—
—
—
(95,972)
—
—
(444,713)
—
—
—
—
—
—
—
—
—
—
—
—
107,810
—
—
$
(336,903) $
—
—
—
—
—
—
—
—
(107)
240
(372)
—
—
—
—
—
—
—
—
—
(112)
(1,400)
(1,884)
—
—
—
—
—
—
—
—
—
—
—
—
—
205
(69)
(1,748) $
—
—
—
(7,132)
2,015
803,991
(404,005)
(163,555)
(600)
1,330
1,036,363
—
—
—
(39,623)
6,413
803,997
848
(417,525)
(446,246)
(601)
(7,768)
935,858
—
—
—
—
—
—
—
—
(675)
(69,097)
29,694
(357,278)
548,265
988
(264)
1,087,491
—
—
—
(7,132)
—
949,376
(453,214)
(213,010)
(707)
1,570
1,236,716
—
—
—
(39,623)
—
948,746
848
(470,588)
(542,218)
(713)
(9,168)
1,124,000
322,260
—
—
—
(14,132)
—
(322,260)
15,490
(675)
—
36,342
(424,067)
656,075
1,193
(333)
$ 1,393,893
Please see accompanying notes to consolidated financial statements.
115
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements
($ in thousands, except where noted)
1. ORGANIZATION AND BASIS OF PRESENTATION
Oaktree Capital Group, LLC (together with its subsidiaries, “Oaktree” or the “Company”) is a leader among
global investment managers specializing in alternative investments. Oaktree manages funds (the “Oaktree funds”)
across a broad array of sophisticated investment strategies categorized into six asset classes: distressed debt,
corporate debt, control investing, convertible securities, real estate and listed equities. Funds managed by Oaktree
include both separate accounts and commingled funds. The commingled funds include open-end and closed-end
limited partnerships in which the Company makes an investment and for which it serves as the general partner or,
in certain limited cases, co-general partner.
Reorganization of Oaktree Capital Management, LLC
Oaktree Capital Group, LLC was formed on April 13, 2007 for the purpose of effecting a private over-the-
counter equity offering. On May 21, 2007, the Company sold 23,000,000 Class A Units to qualified institutional
buyers, as such term is defined under Rule 144A of the U.S. Securities Act of 1933 as amended, (the “2007 Private
Offering”) for net proceeds of $944.2 million, of which $243.0 million represented primary proceeds. Prior to the
2007 Private Offering, our business was operated through Oaktree Capital Management, LLC (“OCM” or the
“Predecessor Company”), formed in April 1995, which was owned by its principals, senior employees and certain
other investors. In connection with the 2007 Private Offering, OCM caused all of its business to be contributed to a
group of operating entities collectively referred to as the Oaktree Operating Group. In addition to the contribution
and assignment of OCM’s business to the Oaktree Operating Group, the owners who held interests in OCM
immediately prior to the 2007 Private Offering exchanged those interests for units of Oaktree Capital Group
Holdings, L.P. (“OCGH”) and became limited partners of OCGH (together with any subsequently admitted limited
partners, the “OCGH unitholders”). In exchange for the assignment and contribution of OCM’s business to the
Oaktree Operating Group, OCGH received limited partnership units in each Oaktree Operating Group entity. These
series of transactions are collectively referred to as the May 2007 Restructuring. An Oaktree Operating Group unit
is not a legal interest but represents one limited partnership interest in each of the Oaktree Operating Group
entities.
As a result of the May 2007 Restructuring and other transactions associated with the 2007 Private Offering,
the Company became the owner of, and our Class A unitholders therefore had, a 15.86% indirect economic interest
in the Oaktree Operating Group, while OCGH retained an 84.14% direct economic interest in the Oaktree Operating
Group. Additionally, the Company issued all of its outstanding Class B units to OCGH. The Class B units are
entitled to 10 votes per unit whereas the Class A units are only entitled to one vote per unit. Therefore, the Class B
units initially held 98.15% of the voting interest of the Company.
OCM is considered the predecessor of the Company for accounting purposes and its financial statements
are the historical financial statements of the Company. The May 2007 Restructuring was accounted for as a
reorganization of entities under common control. Accordingly, the value of assets and liabilities recognized in OCM’s
financial statements were unchanged when those assets and liabilities were carried forward into the Company’s
financial statements. When the Company indirectly purchased Oaktree Operating Group units from OCGH and
directly from the Oaktree Operating Group, it recorded the proportion of Oaktree Operating Group net assets
acquired at their historical carrying value and proportionately reduced the OCGH non-controlling interest in
consolidated subsidiaries. Subsequent to the completion of the May 2007 Restructuring, the OCGH unitholders’
economic interest in the Oaktree Operating Group is reflected as OCGH non-controlling interest in consolidated
subsidiaries in the accompanying consolidated financial statements.
Initial public offering
On April 12, 2012, the Company listed its Class A units on the New York Stock Exchange (“NYSE”). In
connection with the listing, the Company and selling unitholders sold 7,888,864 and 954,159 Class A units,
respectively. Upon the completion of the initial public offering, the Company owned approximately 20% of the
Oaktree Operating Group and the Company’s principals controlled 98% of the total combined voting power of the
Company’s units entitled to vote. The Company did not receive any of the proceeds from the sale of Class A units
by the selling unitholders, and used the offering proceeds from the issuance of units to acquire interests in the
Company’s business from its principals, employees (including former employees) and other investors.
116
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Basis of presentation
The accompanying consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements
include the accounts of the Company, its wholly-owned or majority-owned subsidiaries, the consolidated entities
that are considered to be variable interest entities and for which the Company is considered the primary beneficiary,
and certain entities that are not considered variable interest entities but in which the Company has a controlling
financial interest. All intercompany accounts and transactions have been eliminated through consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The Company consolidates those entities where it has a direct or indirect controlling financial interest based
on either a variable interest model or voting interest model. This includes one entity determined to be a variable
interest entity (“VIE”), for which the Company is considered the primary beneficiary, and substantially all of
Oaktree's closed-end, commingled open-end and evergreen funds for which the Company acts as the sole general
partner and is deemed to control through a voting interest model.
Variable interest model. The Company consolidates entities determined to be VIEs for which it is
considered the primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling
financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most
significantly impact the entity's business and (b) the obligation to absorb losses of the entity or the right to receive
benefits from the entity that could potentially be significant to the VIE. The consolidation rules, which were revised
effective January 1, 2010, require an analysis to (a) determine whether an entity in which the Company holds a
variable interest is a VIE and (b) whether the Company's involvement, through holding interests directly or indirectly
in the entity or contractually through other variable interests (e.g., management and performance-related fees),
would give it a controlling financial interest. The consolidation rules may be deferred for VIEs if the VIE and the
reporting entity's interest in the VIE meet the deferral conditions set forth in Accounting Standards Codification
(“ASC”) 810-10-65-2(aa). Where a VIE has qualified for the deferral of the consolidation rules, the analysis is based
on consolidation rules prior to January 1, 2010. These rules require an analysis to (a) determine whether an entity
in which the Company holds a variable interest is a VIE and (b) whether the Company's involvement, through
holding interests directly or indirectly in the entity or contractually through other variable interests (e.g.,
management and performance-related fees), would be expected to absorb a majority of the variability of the entity.
Under either guideline, the Company determines whether it is the primary beneficiary of a VIE at the time it
becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the
Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly
by the Company or indirectly through related parties. The consolidation analysis can generally be performed
qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative
analysis may also be performed. Investments and redemptions (either by the Company, affiliates of the Company or
third parties) or amendments to the governing documents of the respective Oaktree funds could affect an entity's
status as a VIE or the determination of the primary beneficiary.
While the Company holds variable interests in the Oaktree funds, these funds do not meet the
characteristics of a VIE. As of December 31, 2012 and 2011, the Company consolidated one entity as a VIE for
which it is the primary beneficiary, Oaktree AIF Holdings, Inc. (“AIF”) and there are no VIEs for which the Company
was not the primary beneficiary. AIF was formed to hold certain assets for regulatory and other purposes and is
immaterial to the Company.
Voting interest model. For entities that do not meet the criteria for consolidation under a variable interest
model, the Company evaluates those entities that it controls through a majority voting interest, including those
Oaktree funds in which the Company as the sole general partner is presumed to have control (the “consolidated
funds”). Although as general partner the Company typically has only a small, single-digit equity interest in each
fund, the funds' third-party limited partners do not have the right to dissolve the partnerships or have substantive
kick-out or participating rights that would overcome the presumption of control by the Company.
Accordingly, Oaktree's consolidated financial statements reflect the assets, liabilities, investment income,
expenses and cash flows of the consolidated funds on a gross basis, and the majority of the economic interests in
those funds, which are held by third-party investors, are attributed to non-controlling redeemable interests in
117
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
consolidated funds in the accompanying consolidated financial statements. Substantially all of the management
fees and incentive income earned by Oaktree from those funds are eliminated in consolidation. However, because
the eliminated amounts are earned from and funded by non-controlling interests, Oaktree's attributable share of the
net income from those funds is increased by the amounts eliminated. Thus, the elimination in consolidation of such
amounts has no effect on net income (loss) attributable to the Company. Potential incentive allocations at the
consolidated fund level that have not yet been recognized by the Company are included in non-controlling
redeemable interests in consolidated funds.
The Company records non-controlling interests to reflect the economic interests of the unaffiliated limited
partners. These interests are presented as non-controlling redeemable interests in consolidated funds within the
consolidated statements of financial condition, outside of the permanent capital section. Limited partners in open-
end and evergreen funds generally have the right to withdraw their capital, subject to the terms of the respective
limited partnership agreements, over periods ranging from one month to three years. While limited partners in
consolidated closed-end funds generally have not been granted redemption rights, they do have such rights in
certain limited circumstances that are beyond the control of the Company, such as instances in which retaining the
limited partnership interest could cause the limited partner to violate a law, regulation or rule.
All intercompany transactions and balances have been eliminated in consolidation.
Certain funds for which the Company shares general partner responsibilities or where the Company has no
general partner responsibility but has the ability to exert significant influence through other means are accounted for
using the equity method of accounting.
Use of estimates
The preparation of the consolidated financial statements in accordance with GAAP requires the Company
to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the
consolidated financial statements, as well as the reported amounts of income and expenses during the period then
ended. Actual results could differ from these estimates.
Fair value of financial instruments
GAAP establishes a hierarchal disclosure framework which prioritizes the inputs used in measuring
financial instruments at fair value into three levels based on their market observability. Market price observability is
affected by a number of factors, such as the type of instrument and the characteristics specific to the instrument.
Financial instruments with readily available quoted prices from an active market or for which fair value can be
measured based on actively quoted prices generally will have a higher degree of market price observability and a
lesser degree of judgment inherent in measuring fair value.
•
•
•
Financial assets and liabilities measured and reported at fair value are classified as follows:
Level I – Quoted unadjusted prices for identical instruments in active markets to which the Company has
access at the date of measurement. The types of investments in Level I include exchange-traded equities,
debt and derivatives with quoted prices.
Level II – Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs are
directly or indirectly observable. Level II inputs include prices in markets for which there are few
transactions, the prices are not current, little public information exists or prices vary substantially over time
or among brokered market makers. Other inputs include interest rates, yield curves, volatilities, prepayment
risks, loss severities, credit risks and default rates. The types of investments in Level II generally include
corporate bonds and loans, government and agency securities, less liquid and restricted equity
investments, over-the-counter traded derivatives and other investments where the fair value is based on
observable inputs.
Level III – Model-derived valuations for which one or more significant inputs are unobservable. These
inputs reflect the Company's assessment of the assumptions that market participants use to value the
investment based on the best available information. The types of investments in Level III include non-
publicly traded equity, debt, real estate and derivatives.
In some instances, an instrument may fall into multiple levels of the fair-value hierarchy. In such instances,
the instrument's level within the fair-value hierarchy is based on the lowest of the three levels (with Level III being
118
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
the lowest) that is significant to the fair-value measurement. The Company's assessment of the significance of an
input requires judgment and considers factors specific to the instrument. The Company accounts for the transfer of
assets into or out of each fair-value hierarchy level as of the beginning of the reporting period.
In the absence of observable market prices, the Company values Level III investments using valuation
methodologies applied on a consistent basis. The quarterly valuation process for Level III investments begins with
each portfolio company or security being valued by the investment and valuation teams. The valuations are then
reviewed by the valuation committee of each investment strategy, which consists of senior members of the
investment team. All Level III investment values are ultimately approved by the valuation committees and
designated investment professionals, as well as the valuation officer, who is independent of the investment teams
and reports directly to the Company's Managing Principal. For certain investments, the valuation process also
includes a review by independent valuation parties, at least annually, to determine whether the fair values
determined by management are reasonable. Results of the valuation process are evaluated each quarter, including
an assessment of whether the underlying calculations should be adjusted or recalibrated. In connection with this
process, the Company evaluates changes in fair-value measurements from period to period for reasonableness,
considering items such as industry trends, general economic and market conditions, and factors specific to the
investment.
Corporate Investments, at Equity
Corporate investments, at equity consist of investments in unconsolidated funds and companies that the
Company does not control but has significant influence over. These investments are recorded using the equity
method of accounting and reflect Oaktree's ownership interest in each fund or company. Investment income
represents Oaktree's pro-rata share of income or loss from these funds or companies. Oaktree's general
partnership interests are substantially illiquid. While all of these investments follow the equity method of accounting,
whereby the original cost is adjusted for Oaktree's share of income or loss and its contributions and distributions,
investments in funds also reflect the fund's investment holdings at fair value, whereas investments in DoubleLine
Capital LP and other companies do not reflect the fair value of the underlying companies.
Cash and cash-equivalents
Cash and cash-equivalents include demand deposit accounts, as well as money market funds and short-
term investments with maturities of three months or less at the date of acquisition.
U.S. Treasury and government agency securities
Includes holdings of U.S. Treasury bills and other securities issued by U.S. government agencies with
maturities greater than three months at the date of acquisition. These securities, classified as available-for-sale, are
recorded at fair value with changes in fair value included in other comprehensive income (loss). Changes in fair
value were not material for all years presented.
Foreign currency
Assets and liabilities of the foreign subsidiaries of Oaktree having non-U.S. dollar functional currencies are
translated at exchange rates prevailing at the end of each reporting period. Results of foreign operations are
translated at the weighted average exchange rate for each reporting period. Translation adjustments are included
as a component of accumulated other comprehensive income (loss) until realized. Gains or losses resulting from
foreign currency transactions are included in general and administrative expenses.
Hedging and other derivatives
The Company is exposed to risks associated with fluctuations in interest rates and foreign currency
exchange rates in the normal course of its business. The Company addresses these risks as part of its overall risk
management strategy that may include the use of derivative financial instruments to economically hedge or reduce
these exposures. To mitigate the risk associated with fluctuations in interest rates, the Company may enter into
interest-rate swaps to manage all or a portion of the interest-rate risk associated with its variable-rate borrowings.
The Company's corporate investments in funds include investments denominated in currencies other than the U.S.
dollar, which is the Company's functional currency and, consequently, are subject to fluctuations in foreign currency
exchange rates. The Company also receives management fees from certain funds and pays expenses in currencies
other than the U.S. dollar. To manage the risks associated with foreign currency exchange gains and losses
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Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
generated by the remeasurement of the Company's corporate investments, management fees and expenses
denominated in non-functional currencies, the Company may enter into currency option and forward contracts to
offset some of the foreign-exchange risk on expected future cash flows.
As a result of the use of derivative contracts, the Company is exposed to the risk that counterparties will fail
to fulfill their contractual obligations. To mitigate such counterparty risk, the Company enters into contracts with
certain major financial institutions that have investment-grade ratings. Counterparty credit risk is evaluated in
determining the fair value of derivative instruments.
The Company recognizes all derivatives as assets or liabilities on its consolidated statements of financial
condition at fair value. When the Company enters into a derivative contract, the Company may elect to designate
the derivative as a hedging instrument and apply hedge accounting as part of its overall risk management strategy.
In other situations, when a derivative does not qualify for hedge accounting or when the derivative and the hedged
item are both recorded in current-period earnings and thus deemed to be economic hedges, hedge accounting is
not applied.
Derivatives that are designated as hedging instruments are classified as either (a) a hedge of a recognized
asset or liability (“fair-value hedge”); (b) a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability (“cash-flow hedge”); or (c) a hedge of a net investment in a
foreign operation. For a fair-value hedge, the Company records changes in the fair value of the derivative and, to
the extent that it is highly effective, changes in the fair value of the hedged asset or liability attributable to the
hedged risk, in current-period earnings in the same caption in the consolidated statements of operations as the
hedged item. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a
cash-flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income (loss) until
earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is
recorded in current-period earnings. Changes in the fair values of derivatives designated as hedging instruments
caused by factors other than changes in the risk being hedged, which are excluded from the assessment of hedge
effectiveness, are recognized in current-period earnings. For a derivative that is not designated as a hedging
instrument (“freestanding derivative”), the Company records changes in fair value in current-period earnings.
The Company formally documents at inception its hedge relationships, including identification of the
hedging instruments and the hedged items, as well as its risk management objectives, strategy for undertaking the
hedge transaction and evaluation of effectiveness of its hedged transaction. On a quarterly basis, the Company
formally assesses whether the derivative it designated in each hedging relationship is expected to be, and has
been, highly effective in offsetting changes in estimated fair values or cash flows of the hedged items. If it is
determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is
discontinued and remaining amounts in other comprehensive income are released to earnings.
Depreciation and amortization
Depreciation of furniture and equipment is provided using the straight-line method over the estimated useful
life of the asset, generally three-to-five years, beginning in the first full month after the asset is placed in service.
The cost of leasehold improvements is amortized using the straight-line basis over the shorter of the respective
estimated useful life or the lease term.
Comprehensive income (loss)
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting
unitholders' capital that, under GAAP, are excluded from net income (loss). Other gains and losses result from
unrealized gains and losses on cash-flow hedges and foreign currency cumulative translation adjustments, net of
tax.
Management fees
Management fees are recognized over the period in which the investment advisory services are performed.
The contractual terms of management fees vary by fund structure. Management fees for closed-end funds are paid
quarterly, generally in the range of 1.25% to 1.75% per year, of total committed capital during the investment period.
During the liquidation period, the management fee remains the same fixed percentage, applied against the lesser of
the total funded capital and the cost basis of assets remaining in the fund. For open-end and evergreen funds,
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Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
management fees are based on the net asset value ("NAV") of the respective fund, with annual management fee
rates generally 0.50% for open-end funds and 1.5% to 2.0% for evergreen funds.
The Company does not recognize incremental income for transaction, advisory, director and other ancillary
fees received in connection with providing services to portfolio companies or potential investees of the funds; rather,
any such fees are offset against management fees earned from the applicable fund. These fees are typically
recognized as revenue in the period in which they are offset against the quarterly management fees that would
otherwise be paid by the applicable fund, which is generally the quarter following the period in which the fees are
received. Inasmuch as these fees are not paid directly by the consolidated funds, such fees do not eliminate in
consolidation and may impact the presentation of gross consolidated management fees; however, there is no
impact to the Company's net income as the amounts are included in net income (loss) attributable to non-controlling
redeemable interests in consolidated funds. Ancillary fees recognized in management fees for the years ended
December 31, 2012, 2011 and 2010 were $25.9 million, $35.3 million and $46.2 million, respectively.
Incentive income
Incentive income generally represents 20% of each closed-end fund's profits, subject to a preferred return
of typically 8% per annum, and 20% of each evergreen fund's annual profits, subject to high-water marks. The
Company has elected to adopt “Method 1” for revenue recognition based on a formula. Under this method,
incentive income is recognized when fixed or determinable, all related contingencies have been removed and
collection is reasonably assured, which generally occurs in the quarter of, or the quarter immediately prior to, the
distribution of the income by the fund to Oaktree. The Method 1 criteria for revenue recognition is typically met (a)
for closed-end funds, only after all contributed capital and the preferred return on that capital have been distributed
to the fund's investors, and (b) for evergreen funds, at the conclusion of each annual measurement period.
Incentives received by Oaktree before the above criteria are met are deferred and recorded as a deferred incentive
income liability within accounts payable, other accrued expenses and other liabilities on the consolidated
statements of financial condition. There was no incentive income deferred as of December 31, 2012, while $1.5
million was deferred as of December 31, 2011. The Company may receive tax distributions related to taxable
income allocated by funds, which are treated as an advance of incentive income and subject to the same
recognition criteria, which generally results in income recognized when received. Tax distributions are contractually
not subject to clawback.
Incentive income compensation expense
The Company has an obligation to pay a fixed percentage of the incentive income earned from a particular
fund, including income from consolidated funds that is eliminated in consolidation, to specified investment
professionals responsible for the management of the fund. Such professionals' participation in incentive income
generated by our funds is subject to forfeiture upon departure and to vesting provisions (generally over a period of
five years), in each case, under certain circumstances set forth in the applicable governing documents. These
provisions are generally only applicable to incentive income compensation that has not yet been recognized as an
expense by the Company or paid to the participant. Incentive income compensation is generally expensed in the
same period as the underlying income is recognized and is paid in that same period or in the next period. Incentive
income compensation also is expensed if the Company acquires an individual's participation interest in a fund's
incentive income, thereby eliminating any contingency related to the Company's obligation to pay the
compensation. In December 2011, the Company acquired a small portion of certain investment professionals'
participations in the possible future incentive income from OCM Opportunities Fund VIIb, L.P. (“Opps Vllb”), in the
aggregate amount of $55.5 million. The acquisition price was based on Opps VIIb's unpaid potential incentive
income allocation to the Company as of September 30, 2011. The related incentive income was not recognized in
2011 because as of December 31, 2011 its recognition criteria had not been satisfied. The Company did not acquire
any incentive income participation interest in the years ended December 31, 2012 and 2010.
Other income (expense)
In 2010, the Company gained control of a partnership through an arbitration award settlement agreement
and recognized a gain of $11.7 million, included in other income on the consolidated statements of operations,
which represented the fair value of assets contributed to the partnership. Pursuant to the terms of the agreement,
additional contributions could be received subsequent to 2010. Gains or losses that result from the operations of the
partnership are recognized as they occur. The Company has accounted for this transaction as a business
combination. In 2011, the Company recorded an expense of $1.2 million, reflecting an adjustment to the carrying
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Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
value of one of the properties received as part of the 2010 arbitration award. In 2012, the Company recorded
income of $3.1 million attributable to the sale of a real estate property and other proceeds received as part of the
same 2010 arbitration award.
Equity-based compensation
Equity-based compensation expense is calculated based on the fair value of a unit at the time of grant,
adjusted annually or more frequently, as necessary, for actual forfeitures to reflect expense only for those units that
ultimately vest. Equity-based compensation expense is recognized on a straight-line basis over the requisite service
period, with a corresponding increase in capital.
Income taxes
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., two of the Company's Intermediate Holding
Companies which were established as wholly-owned corporate subsidiaries in connection with the May 2007
Restructuring, are subject to U.S. federal and state income taxes. The remainder of Oaktree's income is generally
not subject to U.S. corporate-level taxation.
Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax
assets and liabilities are recognized for the expected future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on
deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is
enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Oaktree analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions
where it is required to file income tax returns, for all open tax years in these jurisdictions. If the Company
determines that uncertainties in tax positions exist, a reserve is established. Oaktree recognizes accrued interest
and penalties related to uncertain tax positions in income tax expense within the consolidated statements of
operations.
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental
taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions,
including evaluating uncertainties under GAAP. Oaktree reviews its tax positions quarterly and adjusts its tax
balances as new information becomes available.
The Oaktree funds are exempt from federal and state income taxes and, consequently, no income tax
provision has been made in the accompanying consolidated financial statements because individual partners are
responsible for their proportionate share of the taxable income.
Reclassifications
Certain amounts reported in the prior year have been reclassified to conform to the current-year's
presentation.
Accounting policies of consolidated funds
Although as general partner the Company typically only has a small minority economic interest in the
consolidated funds, the third-party limited partners neither have the right to dissolve the partnerships nor possess
substantive kick-out or participating rights that would overcome the presumption of control by the Company.
Accordingly, the Company consolidates the consolidated funds and records non-controlling interests to reflect the
economic interests of the unaffiliated limited partners.
Investment transactions and income recognition
The consolidated funds record investment transactions at cost on trade date for publicly traded securities or
when they have an enforceable right to acquire the security, which is generally on the closing date if not publicly
traded. Realized gains and losses on investments are recorded on a specific identification basis. The consolidated
funds record dividend income on the ex-dividend date and interest income on an accrual basis, unless the related
investment is in default or if collection of the income is otherwise considered doubtful. The consolidated funds may
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Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
hold investments that provide that interest is payable in-kind rather than in cash, in which case the related income is
recorded at its estimated net realizable amount.
Cash and cash-equivalents
Cash and cash-equivalents held at consolidated funds represents cash that, although not legally restricted,
is not available to support general liquidity needs of Oaktree, as the use of such amounts is generally limited to the
investment activities of the consolidated funds.
Foreign currency
Investments denominated in non-U.S. currencies are recorded in the consolidated financial statements after
translation into U.S. dollars utilizing rates of exchange on the last business day of the period. Interest and dividend
income is recorded net of foreign withholding taxes and calculated using the exchange rate in effect when the
income is recognized. The effects of changes in exchange rates on assets and liabilities, income and realized gains
or losses are included as part of net realized gain (loss) on consolidated funds' investments and net change in
unrealized appreciation (depreciation) on consolidated funds' investments in the consolidated statements of
operations.
Investments, at fair value
The consolidated funds are primarily investment companies that reflect their investments, including
majority-owned and controlled investments (the “portfolio companies”), at fair value. The Company has retained the
specialized investment company accounting guidance under GAAP for the consolidated funds with respect to
consolidated investments. Thus, the consolidated investments are reflected on the consolidated statements of
financial condition at fair value, with unrealized gains and losses resulting from changes in fair value reflected as a
component of net change in unrealized appreciation (depreciation) on consolidated funds' investments in the
consolidated statements of operations. Fair value is the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit
price).
Non-publicly traded debt and equity securities and other securities or instruments for which reliable market
quotations are not available, are valued by management using valuation methodologies applied on a consistent
basis. These securities may initially be valued at the acquisition price as the best indicator of fair value. Subsequent
valuations will depend on facts and circumstances known as of the valuation date and the application of valuation
methodologies further described below under “—Non-publicly traded equity and real estate investments.”
Exchange-traded investments
Securities listed on one or more national securities exchanges are valued at their last reported sales price
on the date of valuation. If no sale occurred on the valuation date, the security is valued at the mean of the last “bid”
and “ask” prices on the valuation date. Securities that are not marketable due to legal restrictions that may limit or
restrict transferability are generally valued at a discount from quoted market prices. The discount would reflect the
amount market participants would require due to the risk relating to the inability to access a public market for the
security for the specified period and would vary depending on the nature and duration of the restriction and the risk
and volatility of the underlying securities. Securities with longer duration restrictions or higher volatility are generally
valued at a higher discount. Such discounts are generally estimated based on put option models or analysis of
market studies. Instances where the Company has applied discounts to quoted prices of restricted listed securities
have been infrequent. The impact of such discounts is not material to the Company's consolidated statements of
financial condition and results of operations for all periods presented.
Credit-oriented investments
Investments in corporate and government debt which are not listed or admitted to trading on any securities
exchange are valued at the mean of the last bid and ask prices on the valuation date based on quotations supplied
by recognized quotation services or by reputable broker-dealers.
The market-yield approach is considered in the valuation of non-publicly traded debt securities, utilizing
expected future cash flows, discounted using estimated current market rates. Discounted cash flow calculations
may be adjusted to reflect current market conditions and/or the perceived credit risk of the borrowers. Consideration
is also given to a borrower's ability to meet principal and interest obligations; this may include an evaluation of
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Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
collateral and/or the underlying value of the borrower utilizing techniques described below under “—Non-Publicly
Traded Equity and Real Estate Investments.”
Non-publicly traded equity and real estate investments
The fair values of equity and real estate investments are determined by using a cost approach, market
approach or an income approach. A cost approach is based upon the current cost of reproducing a real estate
investment less deterioration and functional and economic obsolescence. A market approach utilizes valuations of
comparable public companies and transactions and generally seeks to establish the enterprise value of the portfolio
company or investment property using a market-multiple methodology. This approach takes into account a specific
financial measure (such as EBITDA, adjusted EBITDA, free cash flow, net operating income, net income, book
value or net asset value) believed to be most relevant for the given company or investment property. Consideration
may also be given to such factors as acquisition price of the security or investment property, historical and projected
operational and financial results for the portfolio company, the strengths and weaknesses of the portfolio company
or investment property relative to its comparable companies or properties, industry trends, general economic and
market conditions and other factors deemed relevant. The income approach is typically a discounted cash flow
method that incorporates expected timing and level of cash flows. It incorporates assumptions in determining
growth rates, income and expense projections, discount and capitalization rates, capital structure, terminal values
and other factors. The applicability and weight assigned to market and income approaches are determined based
on the availability of reliable projections and comparable companies and transactions.
The valuation of securities may be impacted by expectations of investors' receptiveness to a public offering
of the securities, the size of the holding of the securities and any associated control, information with respect to
transactions or offers for the securities (including the transaction pursuant to which the investment was made and
the period of time elapsed from the date of the investment to the valuation date) and applicable restrictions on the
transferability of the securities.
These valuation methodologies involve a significant degree of management judgment. Accordingly,
valuations by the Company do not necessarily represent the amounts which may eventually be realized from sales
or other dispositions of investments. Fair values may differ from the values that would have been used had a ready
market for the investment existed, and the differences could be material to the consolidated financial statements.
Securities sold short
Securities sold short represent obligations of the consolidated funds to make a future delivery of a specific
security and, correspondingly, create an obligation to purchase the security at prevailing market prices (or deliver
the security, if owned by the consolidated funds) as of the delivery date. As a result, these short sales create the
risk that the funds' obligations to satisfy the delivery requirements may exceed the amount recorded in the
accompanying consolidated statements of financial condition.
Securities sold short are recorded at fair value, with the resulting change in value reflected as a component
of net change in unrealized appreciation (depreciation) on consolidated funds' investments. When the securities are
delivered, any gain or loss is included in net realized gain (loss) on consolidated funds' investments. The funds
maintain cash deposits with prime brokers in order to cover their obligations on short sales. These amounts are
included in due from brokers in the consolidated statements of financial condition.
Options
The purchase price of a call option or a put option is recorded as an investment, which is carried at fair
value. If a purchased option expires, a loss in the amount of the cost of the option is realized. When there is a
closing sale transaction, a gain or loss is realized if the proceeds are greater or less than, respectively, the cost of
the option. When a call option is exercised, the cost of the security purchased upon exercise is increased by the
premium originally paid.
When a consolidated fund writes an option, the premium received is recorded as a liability and is
subsequently adjusted to the current fair value of the option written. If a written option expires, a gain is realized in
the amount of the premium received. The difference between the premium and the amount paid on effecting a
closing purchase transaction, including brokerage commissions, is also treated as a realized gain or loss. The writer
of an option bears the market risk of an unfavorable change in the price of the security underlying the written option.
Options written are included in accounts payable, accrued expenses and other liabilities in the consolidated
statements of financial condition.
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Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Credit default swaps
A credit default swap (“CDS”) is a financial instrument used to transfer the credit risk of a reference entity
from one party to another for a specified period of time. In a standard CDS contract, one party (the “protection
buyer”) agrees to pay a premium (commonly based on a rate of a notional principal amount) to another party (the
“protection seller”) in exchange for a contingent payment in the event of a pre-defined credit event that relates to an
obligation of a reference entity. The reference entity of the swap can be a single issuer, a basket of issuers, or an
index. Types of underlying referenced obligations can be, but are not limited to, corporate bonds, bank loans,
sovereign debt and asset-backed securities. When a credit event is triggered, the protection seller is obligated to
pay the contingent payment to the buyer, which is typically the par value (full notional value) of the reference
obligation, though the actual payment may be mitigated by terms of the International Swaps and Derivatives
Association Master Agreement allowing for netting arrangements and collateral. The contingent payment may be a
cash settlement or a physical delivery of the reference obligation in return for payment of the face amount of the
obligation. These contingent amounts are partially offset by any recovery values of the respective referenced
obligations, upfront payments received upon entering into the agreement, if any, or net amounts received from the
settlement of buy protection agreements entered into by the consolidated funds for the same referenced entity or
entities. If a consolidated fund is a protection buyer and no credit event occurs, the fund may lose its investment
and recover nothing. However, if a credit event occurs, the protection buyer typically receives full notional value for
a reference obligation that may have little or no value. Based on the complex nature of these settlement process
and volatility of the market, the Company is generally unable to reasonably estimate the amount of potential future
recovery values.
In addition to general market risks, CDS contracts are subject to liquidity and counterparty risk. A CDS may
entail greater risks than those of other instruments, including the risk of mispricing due to limited availability of
pricing sources and the risk that changes in the value of the swap may not correlate with the underlying asset. A
CDS may be highly illiquid because such instruments typically are entered into over the counter and are not
exchange traded. When a fund is a protection buyer, the fund is exposed to credit risk relating to whether the
counterparty will meet its obligation upon the occurrence of a credit event. When a fund is a protection seller, it is
exposed to off-balance sheet risk to the extent that its ultimate obligation to the counterparty upon the occurrence of
a credit event may be significantly higher than the fair value reflected in the consolidated statements of financial
condition.
CDS contracts are valued by the Company based in part on quotations provided by an independent pricing
service, with changes in value recorded as unrealized appreciation (depreciation). Upfront payments received or
paid by the consolidated funds are reflected as an asset or liability on the consolidated statements of financial
condition. For further information regarding CDS contracts, please see note 5.
Total return swaps
A total return swap is an agreement to exchange cash flows based on an underlying asset. Pursuant to
these agreements, a fund may deposit collateral with the counterparty and may pay a swap fee in cash equal to a
fixed percentage of the value of the underlying security (notional amount). A fund earns interest on cash collateral
held on account with the counterparty and may be required to deposit additional collateral equal to the unrealized
appreciation or depreciation on the underlying asset. Changes in the underlying value of the swaps recorded as
unrealized gains or losses are based on changes in the underlying value of the security. All amounts exchanged
with the swap counterparty representing capital appreciation or depreciation, dividend income and expense, items
of interest income on short proceeds, borrowing costs on short sales, and commissions are recorded as realized
gains or losses. Dividend income and expense on the underlying assets are accrued as unrealized gains or losses
on the ex-date. The average notional amounts of total return swap contracts outstanding during 2012 were
$487,706 long and $33,891 short. The average notional amounts of total return swaps outstanding during 2011
were $933,430 long and $55,081 short.
Due from brokers
Due from brokers represents cash owned by the consolidated funds and on deposit with brokers and
counterparties, which is used as collateral for the consolidated funds' securities and swaps.
125
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Risks and uncertainties
Certain consolidated funds invest primarily in the securities of entities that are undergoing, or are
considered likely to undergo, reorganization, debt restructuring, liquidation or other extraordinary transactions.
Investments in such entities are considered speculative and involve substantial risk of principal loss. Certain of the
consolidated funds' investments may also consist of securities that are thinly traded, securities and other assets for
which no market exists and securities which are restricted as to their transferability. Additionally, investments are
subject to concentration and industry risks, reflecting numerous factors, including political, regulatory or economic
issues that could cause the investments and their markets to be relatively illiquid and their prices relatively volatile.
Investments denominated in non-U.S. currencies or involving non-U.S. domiciled entities are subject to risks and
special considerations not typically associated with U.S. investments. Such risks may include, but are not limited to,
investment and repatriation restrictions, currency exchange rate fluctuations, adverse political, social and economic
developments, less liquidity, smaller capital markets and certain local tax law considerations.
Credit risk is the potential loss that may be incurred from the failure of a counterparty or an issuer to make
payments according to the terms of a contract. Some consolidated funds are subject to additional credit risk due to
strategies of investing in debt of financially distressed issuers or derivative instruments, as well as involvement in
privately negotiated structured notes and structured credit transactions. Counterparties include custodian banks,
major brokerage houses and their affiliates. The Company monitors the creditworthiness of the financial institutions
with which it conducts business.
Bank debt has exposure to certain types of risk, including interest rate, market and the potential non-
payment of principal and interest as a result of default or bankruptcy of the issuer. Loans are generally subject to
prepayment risk, which will affect the maturity of such loans. The consolidated funds may enter into bank debt
participation agreements through contractual relationships with a third-party intermediary, causing the consolidated
funds to assume the credit risk of both the borrower and the intermediary.
The consolidated funds may invest in real property and real estate-related investments, including
commercial mortgage-backed securities (“CMBS”) and real estate loans, that entail substantial inherent risks. There
can be no assurance that such investments will increase in value or that significant losses will not be incurred.
CMBS are subject to a number of risks including credit, interest rate, prepayment and general market risks. These
risks can be affected by a number of factors, including general economic conditions, particularly those in the area
where the related mortgaged properties are located, the level of the borrowers' equity in the mortgaged properties
and the relative timing and rate of delinquencies and prepayments of mortgage loans bearing a higher rate of
interest. Real estate loans consist of those that are non-performing at the time of their acquisition or that become
non-performing following their acquisition. Non-performing real estate loans may require a substantial amount of
workout negotiations or restructuring, which may entail, among other things, a substantial reduction in the interest
rate and/or write-down of the principal balance. Moreover, foreclosure on collateral securing one or more real estate
loans held by the consolidated funds may be necessary, which may be lengthy and expensive.
Certain consolidated funds hold over-the-counter derivatives that may allow counterparties to terminate
derivative contracts prior to maturity under certain circumstances, thereby resulting in an accelerated payment of
any net liability owed to the counterparty.
Recent accounting developments
In May 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance on fair-value
measurements specifying that the concepts of highest and best use and valuation premise in a fair-value
measurement are only relevant when measuring the fair value of nonfinancial assets and are not relevant when
measuring the fair value of financial assets or of liabilities. The guidance clarified that a reporting entity should
disclose quantitative information about the unobservable inputs used in a fair-value measurement that is
categorized within Level III of the fair-value hierarchy and also required additional disclosure regarding the valuation
processes used by the reporting entity and the sensitivity of fair-value measurements to changes in unobservable
inputs and the interrelationships between those unobservable inputs, if any, for fair-value measurements
categorized within Level III. The guidance was effective for interim and annual periods beginning after
December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and determined that the
adoption did not have a material impact on its consolidated financial statements. Please see note 4 for additional
information.
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Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The
guidance allows an entity to present the components of net income, the components of other comprehensive
income and the total of comprehensive income either in a single continuous statement of comprehensive income or
in two separate but consecutive statements. Regardless of the option chosen, the entity is required to present items
that are reclassified between net income and other comprehensive income on the face of the financial statements
where the components of net income and the components of other comprehensive income are presented. This
amendment eliminated the option to present the components of other comprehensive income as part of the
statement of changes in stockholders' equity. The Company adopted this guidance in the first quarter of 2012 and
determined that the adoption did not have a material impact on its financial condition or results of operations,
because the guidance changes only the presentation of other comprehensive income and total comprehensive
income. No changes were made to the existing guidance regarding which items are reported in other
comprehensive income. Please see the consolidated statements of comprehensive income (loss) for the required
disclosures.
In December 2011, the FASB issued amended guidance requiring enhanced disclosures that will enable
users to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the
effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. In
January 2013, the FASB issued additional guidance to clarify that ordinary receivables and receivables are not in
the scope of the amended guidance. The amendments are effective for the Company beginning January 1, 2013.
The Company does not expect that adoption of this guidance will have a material impact on its consolidated
financial statements.
In February 2013, the FASB issued guidance on reporting amounts reclassified out of accumulated other
comprehensive income (“AOCI”), which requires entities to disclose additional information about reclassification
adjustments, including changes in AOCI balances by component and significant items reclassified out of AOCI. The
guidance is effective for the Company beginning January 1, 2013 and is to be applied prospectively. The adoption
of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
127
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
3. INVESTMENTS, AT FAIR VALUE
Investments held and securities sold short in the consolidated funds are summarized below:
Investments:
United States:
Fixed income securities:
Fair Value as of December 31,
Fair value as a
percentage of
investments of
consolidated funds
as of December 31,
2012
2011
2012
2011
Consumer discretionary ................................................. $ 5,072,283
697,300
Consumer staples ..........................................................
Energy ...........................................................................
565,151
1,013,230
Financials .......................................................................
Health care ....................................................................
658,932
1,957,259
Industrials ......................................................................
908,662
Information technology ...................................................
826,008
Materials ........................................................................
Telecommunication services ..........................................
282,101
1,717,978
Utilities ...........................................................................
$ 7,656,687
394,897
551,850
1,398,771
508,947
2,976,294
764,642
1,050,651
262,830
2,108,998
13.2%
1.8
1.5
2.6
1.7
5.1
2.4
2.2
0.7
4.5
19.9%
1.0
1.4
3.6
1.3
7.7
2.0
2.7
0.7
5.5
Total fixed income securities (cost: $13,320,475 and
$16,966,996 as of December 31, 2012 and 2011,
respectively) ...........................................................
Equity securities:
Consumer discretionary .................................................
Consumer staples ..........................................................
Energy ...........................................................................
Financials .......................................................................
Health care ....................................................................
Industrials ......................................................................
Information technology ...................................................
Materials ........................................................................
Telecommunication services ..........................................
Utilities ...........................................................................
Total equity securities (cost: $11,637,988 and
$10,088,110 as of December 31, 2012 and 2011,
respectively) ...........................................................
13,698,904
17,674,567
35.7
45.8
3,289,347
444,735
448,412
6,001,493
134,239
1,201,156
199,003
1,407,850
15,022
140,037
3,189,373
299,673
542,490
3,296,925
140,509
1,021,423
72,613
1,490,285
458,033
13,050
8.6
1.2
1.2
15.6
0.3
3.1
0.5
3.7
0.0
0.4
8.3
0.8
1.4
8.5
0.4
2.6
0.2
3.9
1.2
0.0
13,281,294
10,524,374
34.6
27.3
128
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Investments:
Europe:
Fixed income securities:
Fair Value as of December 31,
Fair value as a
percentage of
investments of
consolidated funds
as of December 31,
2012
2011
2012
2011
3.5%
1.0
0.2
1.2
0.1
1.4
0.1
1.8
0.1
0.1
9.5
0.6
3.3
—
2.3
0.0
—
1.8
Consumer discretionary ................................................. $ 1,607,822
486,037
Consumer staples ..........................................................
272,079
Energy ...........................................................................
627,161
Financials .......................................................................
19,585
Health care ....................................................................
531,770
Industrials ......................................................................
5,397
Information technology ...................................................
717,294
Materials ........................................................................
190,369
Telecommunication services ..........................................
28,561
Utilities ...........................................................................
Total fixed income securities (cost: $4,383,068 and
$3,723,747 as of December 31, 2012 and 2011,
respectively) ...........................................................
4,486,075
$ 1,369,006
366,268
68,689
458,177
52,098
550,122
40,348
697,314
28,835
48,093
4.2%
1.3
0.7
1.6
0.0
1.4
0.0
1.9
0.5
0.1
3,678,950
11.7
Equity securities:
Consumer discretionary .................................................
Consumer staples ..........................................................
Energy ...........................................................................
Financials .......................................................................
Industrials ......................................................................
Information technology ...................................................
Materials ........................................................................
Total equity securities (cost: $2,960,210 and
$2,352,879 as of December 31, 2012 and 2011,
respectively) ...........................................................
Asia and other:
Fixed income securities:
117,485
1,336,420
91,724
1,553,598
1,388
335
374,169
220,504
1,258,840
—
896,977
6,239
—
713,933
0.3
3.5
0.2
4.1
0.0
0.0
1.0
3,475,119
3,096,493
9.1
8.0
Consumer discretionary .................................................
Consumer staples ..........................................................
Energy ...........................................................................
Financials .......................................................................
Health care ....................................................................
Industrials ......................................................................
Information technology ...................................................
Materials ........................................................................
Telecommunication services ..........................................
Utilities ...........................................................................
Total fixed income securities (cost: $1,298,868 and
$1,789,520 as of December 31, 2012 and 2011,
respectively) ...........................................................
680,273
3,615
47,776
22,186
1,622
290,639
33,260
92,974
1,939
129,474
1,274,605
6,821
221,786
31,726
—
27,996
94,727
64,049
2,186
129,356
1.8
0.0
0.1
0.1
0.0
0.8
0.1
0.2
0.0
0.3
3.3
0.0
0.6
0.1
—
0.1
0.2
0.2
0.0
0.3
1,303,758
1,853,252
3.4
4.8
129
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Fair Value as of December 31,
Fair value as a
percentage of
investments of
consolidated funds
as of December 31,
2012
2011
2012
2011
Investments:
Asia and other:
Equity securities:
$
Consumer discretionary ................................................. $
Consumer staples ..........................................................
Energy ...........................................................................
Financials .......................................................................
Health care ....................................................................
Industrials ......................................................................
Information technology ...................................................
Materials ........................................................................
Telecommunication services ..........................................
Utilities ...........................................................................
99,527
42,688
213,490
973,745
71
613,020
75,583
51,296
6,044
52,012
125,039
80,728
55,973
801,538
76
491,080
63,949
54,714
16,073
97,420
0.3%
0.1
0.6
2.5
0.0
1.6
0.2
0.1
0.0
0.1
0.3%
0.2
0.1
2.1
0.0
1.3
0.2
0.1
0.0
0.3
Total equity securities (cost:
$1,726,145 and $1,607,983 as of
December 31, 2012 and 2011, respectively) ..........
Total fixed income securities ..............................................
Total equity securities.........................................................
2,127,476
19,488,737
18,883,889
Total investments, at fair value....................................... $ 38,372,626
1,786,590
23,206,769
15,407,457
$ 38,614,226
5.5
50.8
49.2
4.6
60.1
39.9
100.0% 100.0%
Securities sold short:
Fixed income securities ...................................................... $
Equity securities .................................................................
Total securities sold short, at fair value .......................... $
— $
(126,530)
(126,530) $
(12,450)
(201,277)
(213,727)
As of December 31, 2012 and 2011, no single issuer or investment, including derivative instruments, had a
fair value which exceeded 5% of Oaktree's total consolidated net assets.
Net gains (losses) from investment activities of consolidated funds
Net gains (losses) from investment activities in the consolidated statements of operations consist primarily
of the realized and unrealized gains and losses on the consolidated funds' investments (including foreign exchange
gains and losses attributable to foreign-denominated investments and related activities) and other financial
instruments. Unrealized gains or losses result from changes in the fair value of these investments and other
financial instruments during a period. Upon disposition of an investment, previously recognized unrealized gains or
losses are reversed and an offsetting realized gain or loss is recognized in the current period.
130
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The following table summarizes net gains (losses) from investment activities:
Year Ended December 31,
2012
2011
2010
Net realized
gain (loss) on
investments
Net change in
unrealized
appreciation
(depreciation)
on investments
Net realized
gain (loss) on
investments
Net change in
unrealized
appreciation
(depreciation)
on investments
Net realized
gain (loss) on
investments
Net change in
unrealized
appreciation
(depreciation)
on investments
Investments and other
financial instruments .......... $ 4,421,219
$
952,478
$ 2,008,111
$ (3,233,102)
$ 2,050,683
$ 1,899,616
Total return and credit default
swaps (1) ............................
Foreign currency forward
contracts (1) ........................
66,992
33,445
80,398
(60,023)
69,643
91,302
85,773
(148,791)
(307,681)
233,816
474,628
(234,366)
Options and futures (1) ...........
(13,202)
(1,972)
(36,693)
(5,367)
(11,278)
9,898
Total ............................... $ 4,560,782
$
835,160
$ 1,744,135
$ (3,064,676)
$ 2,583,676
$ 1,766,450
(1) Please see note 5 for additional information.
4. FAIR VALUE
Fair value of financial assets and liabilities
Carrying value approximates fair value for cash and cash-equivalents, U.S. Treasury and government
agency securities, receivables and accounts payable, due to the short-term nature of these items. The fair value of
the Company's debt obligations is a Level III valuation that is estimated based on the current rates offered to
Oaktree for debt of similar terms and maturities. The fair value of these debt obligations was $652.9 million and
$684.2 million as of December 31, 2012 and 2011, respectively, utilizing average borrowing rates of 3.1% and
3.5%, respectively. A 10% increase in the average borrowing rate assumption would lower the estimated fair value
as of December 31, 2012 to $644.3 million, while a 10% decrease would increase the estimated fair value to $661.9
million. The fair value of the Company's interest-rate swap, a Level II valuation, is included in accounts payable,
other accrued expenses and other liabilities, and was $7.9 million and $7.6 million as of December 31, 2012 and
2011, respectively.
131
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Fair value of financial instruments held by consolidated funds
The table below summarizes the valuation of investments and other financial instruments of the consolidated
funds by fair-value hierarchy levels:
As of December 31, 2012:
Level I
Level II
Level III
Total
Corporate debt-bank debt........................................ $
— $ 7,412,691
$ 2,253,476
$ 9,666,167
Corporate debt-all other ..........................................
—
Equities-common stock ...........................................
3,362,742
Equities-preferred stock ..........................................
2,520
Real estate ..............................................................
Real estate loan portfolio .........................................
—
—
6,663,519
1,055,465
2,133
—
—
Other .......................................................................
1,933
8,438
3,159,051
9,822,570
8,101,051
12,519,258
650,096
3,946,142
1,737,822
15,547
654,749
3,946,142
1,737,822
25,918
Total investments .............................................. $ 3,367,195
$ 15,142,246
$ 19,863,185
$ 38,372,626
Securities sold short-equities ............................ $
(126,530) $
— $
— $
(126,530)
Options written (net) .......................................... $
— $
5,520
$
— $
Swaps (net) .......................................................
Forward contracts (net) .....................................
Futures (net) .....................................................
—
—
90
(5,539)
(93,863)
—
44,705
—
—
5,520
39,166
(93,863)
90
As of December 31, 2011:
Level I
Level II
Level III
Total
Corporate debt-bank debt........................................ $
— $ 10,173,773
$ 1,978,637
$ 12,152,410
Corporate debt-all other ..........................................
—
7,899,118
3,155,241
11,054,359
Equities-common stock ...........................................
4,383,599
472,796
6,164,025
11,020,420
Equities-preferred stock ..........................................
1,869
3,608
Real estate ..............................................................
Real estate loan portfolio .........................................
—
—
—
—
Other .......................................................................
1,594
4,483
1,090,107
2,786,862
479,690
18,824
1,095,584
2,786,862
479,690
24,901
Total investments .............................................. $ 4,387,062
$ 18,553,778
$ 15,673,386
$ 38,614,226
Corporate debt ........................................................ $
— $
(12,450) $
— $
(12,450)
Equities ...................................................................
(201,277)
—
—
(201,277)
Total securities sold short.................................. $
(201,277) $
(12,450) $
— $
(213,727)
Options written (net) .......................................... $
— $
(2,468) $
— $
Swaps (net) .......................................................
Forward contracts (net) .....................................
—
—
Futures (net) .....................................................
(2,135)
(1,569)
53,738
—
—
—
—
(2,468)
(1,569)
53,738
(2,135)
132
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The following tables set forth a summary of changes in the fair value of the Level III investments:
Corporate
debt - bank
debt
Corporate
debt - all
other
Equities -
common
stock
Equities -
preferred
stock
Real estate
Real estate
loan
portfolio
Swaps
Other
Total
2012:
Beginning balance ...... $1,978,637
$3,155,241
$6,164,025
$1,090,107
$2,786,862
$ 479,690
$
— $18,824
$15,673,386
Transfers into
Level III...........
Transfers out of
Level III...........
476,034
688,299
785,470
6,884
39,199
(547,130)
(592,397)
(306,648)
(98,797)
(5,353)
—
—
Purchases ..........
1,667,292
953,076
1,009,258
53,788
1,361,920
2,104,577
2,317
—
1,998,203
—
—
— (1,550,325)
500
7,150,411
Sales ..................
(1,329,534)
(1,183,277)
(564,217)
(410,261)
(914,108)
(988,399)
— (7,835)
(5,397,631)
Realized gains,
net ..................
Unrealized
appreciation
(depreciation),
net ..................
50,938
112,396
178,115
318,498
249,933
35,650
—
5,404
950,934
(42,761)
25,713
835,048
(310,123)
427,689
106,304
42,388
(1,346)
1,082,912
Ending balance........... $2,253,476
$3,159,051
$8,101,051
$ 650,096
$3,946,142
$1,737,822
$44,705
$15,547
$19,907,890
Net change in
unrealized
appreciation
(depreciation)
attributable to
assets still held at
end of period .......... $ (45,214) $
2011:
23,779
$ 847,098
$
14,873
$ 531,768
$ 106,304
$42,388
$
(64) $ 1,520,932
Beginning balance ...... $1,330,000
$3,321,051
$5,727,353
$ 735,855
$ 916,456
$ 115,473
$
— $16,176
$12,162,364
Transfers into
Level III...........
Transfers out of
Level III...........
673,221
378,619
153,784
321,144
175,003
(529,811)
(450,996)
(622,181)
(68,080)
(1,203)
—
—
Purchases ..........
876,349
669,707
838,183
245,466
1,900,683
374,844
Sales ..................
(256,658)
(881,533)
(34,345)
(81,962)
(299,598)
(13,946)
15,481
(75,919)
38,236
(16,117)
15,878
3,319
—
—
—
—
—
—
1,701,771
— (1,672,271)
2,500
4,907,732
(908)
(1,568,950)
14
(19,108)
Realized gains
(losses), net....
Unrealized
appreciation
(depreciation),
net ..................
(129,945)
194,312
62,995
(46,199)
79,643
—
—
1,042
161,848
Ending balance........... $1,978,637
$3,155,241
$6,164,025
$1,090,107
$2,786,862
$ 479,690
$
— $18,824
$15,673,386
Net change in
unrealized
appreciation
(depreciation)
attributable to
assets still held at
end of period .......... $ (100,862) $ 311,204
$ 140,661
$ (90,319) $
89,114
$
— $
— $ 1,041
$
350,839
Total realized and unrealized gains and losses recorded for Level III investments are included in net
realized gain on consolidated funds' investments or net change in unrealized appreciation (depreciation) on
consolidated funds' investments in the consolidated statements of operations.
Transfers between Level I and Level II for positions that were held as of December 31, 2012 included $11.5
million from Level II to Level I, as certain securities began trading on an exchange. There were no transfers
between Level I and Level II for positions that were held as of December 31, 2011.
Transfers out of Level III were generally attributable to certain investments that experienced a more
significant level of market activity during the period and thus were valued using observable inputs. Transfers into
Level III were typically due to certain investments that experienced a less significant level of market activity during
the period or portfolio companies that undertook restructurings or bankruptcy proceedings and thus were valued in
the absence of observable inputs.
133
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The following table sets forth a summary of valuation techniques and quantitative information utilized in
determining the fair value of the Company's Level III investments as of December 31, 2012:
Investment Type
Fair Value
Valuation Technique
Significant Unobservable
Inputs (9)(10)(11)
Credit-oriented investments:
Equity investments:
$ 1,337,325
Discounted cash flow (1)
1,486,691
Market approach (comparable companies) (2)
196,169
Market approach (value of underlying assets) (2)(4)
1,499,433
Recent transaction price (5)
Discount rate
(range: 7% - 19%)
Earnings multiple (3)
(range: 5x - 12x)
Underlying asset multiple
(range: 0.9x - 1.1x)
Not applicable
937,614
Recent market information (6)
Broker quotations
6,079,259
Market approach (comparable companies) (2)
389,722
Market approach (value of underlying assets) (2)(4)
2,185,707
Recent transaction price (5)
Earnings multiple (3)(range: 4x -
14x)
Underlying asset multiple
(range: 1x - 1.2x)
Not applicable
96,459
Recent market information (6)
Broker quotations
Real estate-oriented
investments:
1,306,815
Discounted cash flow (1)(7)
Real estate loan portfolios:
844,610
Market approach (comparable companies) (2)
737,011
Market approach (value of underlying assets) (2)(4)
674,292
Recent transaction price (5)
243,791
Sales approach (8)
139,623
Recent market information (6)
1,245,538
Recent transaction price (5)
390,131
Discounted cash flow (1)
102,153
Recent market information (6)
Discount rate
(range: 8% - 28%)
Terminal capitalization rate
(range: 6% - 11%)
Direct capitalization rate
(range: 7% - 8%)
Net operating income growth rate
(range: 1% - 29%)
Absorption rate
(range: 14% - 33%)
Earnings multiple (3)
(range: 6x - 13x)
Underlying asset multiple
(range: 1.7x - 1.8x)
Not applicable
Market transactions
Broker quotations
Not applicable
Discount rate
(range: 14% - 20%)
Broker quotations
Other ...........................................
15,547
Total Level III investments...........
$ 19,907,890
(1) A discounted cash flow method is generally used to value performing credit-oriented investments in which the
consolidated funds do not have a controlling interest in the underlying issuer, certain real estate-oriented
investments and certain real estate loan portfolios.
134
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
(2) A market approach is generally used to value distressed investments and investments in which the
consolidated funds have a controlling interest in the underlying issuer.
(3) Earnings multiples are based on comparable public companies and transactions with comparable companies.
The Company typically utilizes multiples of EBITDA, however in certain cases the Company may use other
earnings multiples believed to be most relevant for the investment. The Company typically applies the multiple
to trailing twelve month EBITDA. However, in certain cases other earnings measures, such as pro forma
EBITDA, may be utilized if deemed to be more relevant.
(4) A market approach using the value of underlying assets utilizes a multiple, based on comparable companies,
of underlying assets or the net book value of the portfolio company. The Company typically obtains the value
of underlying assets from the underlying portfolio company's financial statements or from pricing vendors. In
some cases, the Company may value the underlying assets by using prices and other relevant information
generated by market transactions involving comparable assets.
(5) Certain investments are valued based on recent transactions, generally defined as investments purchased or
sold within six months of the valuation date, adjusted when appropriate based on consideration of any
changes in significant unobservable inputs, valuations of comparable companies and other similar
transactions. In other cases, the fair value may be based on a pending transaction expected to occur after the
valuation date.
(6) Certain investments are valued using broker quotes for the subject security and/or similar securities.
(7) The discounted cash flow model for certain real estate-oriented investments contains a sell-out analysis. In
these cases, the discounted cash flow is based on the expected timing and prices of sales of the underlying
properties. The Company's determination of the sales prices of these properties typically includes
consideration of prices and other relevant information generated by market transactions involving comparable
properties.
(8) The sales approach uses prices and other relevant information generated by market transactions involving
comparable assets. The significant unobservable inputs used in the sales approach generally include
adjustments to transactions involving comparable properties, adjustments to external or internal appraised
values and the Company's assumptions regarding market trends or other relevant factors.
(9) The significant unobservable input used in the fair-value measurement of performing credit-oriented
investments in which the consolidated funds do not have a controlling interest in the underlying issuer is the
discount rate. A significant increase (decrease) in the discount rate would result in a significantly lower (higher)
fair-value measurement.
(10) The significant unobservable input used in the market approach for the fair-value measurement of distressed
credit-oriented investments, credit-oriented investments in which the consolidated funds have a controlling
interest in the underlying issuer, equity investments, and certain real estate-oriented investments, is a multiple
of earnings or a multiple of underlying assets. A significant increase (decrease) in these multiples would result
in a significantly higher (lower) fair-value measurement.
(11) The significant unobservable inputs used in the fair-value measurement of real estate investments valued
using a discounted cash flow analysis can include a discount rate, terminal capitalization rate, direct
capitalization rate, net operating income growth rate and/or absorption rate. A significant increase (decrease)
in a discount rate, terminal capitalization rate or direct capitalization rate would result in a significantly lower
(higher) fair-value measurement. A significant increase (decrease) in a net operating income growth rate or
absorption rate would result in a significantly higher (lower) fair-value measurement. Generally, a change in a
net operating income growth rate or absorption rate would be accompanied by a directionally similar change in
the discount rate.
The use of unobservable inputs, including assessing the accuracy of source data, and the results of pricing
models, requires a significant degree of judgment. The Company assesses the accuracy and reliability of the
sources it uses to obtain unobservable inputs; these sources may include third-party vendors that the Company
believes are reliable and commonly utilized by other market place participants. In addition to the unobservable
inputs described above, other factors, as described in note 2, have a significant impact on investment valuations.
In 2012, the valuation technique for two investments changed from a discounted cash flow approach to a
market approach (based on comparable companies) as a result of a change in the composition of the underlying
investments.
135
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
5. HEDGES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to risks associated with fluctuations in interest rates and foreign currency
exchange rates in the normal course of business. The Company addresses these risks as part of its overall risk
management strategy that may include the use of derivative financial instruments to economically hedge or reduce
these exposures. From time to time, the Company may enter into (a) currency option and forward contracts to
reduce earnings and cash flow volatility associated with changes in foreign exchange rates or (b) interest-rate
swaps to manage all or a portion of the interest rate risk associated with its variable rate borrowings. As a result of
the use of derivative contracts, the Company is exposed to the risk that counterparties will fail to fulfill their
contractual obligations. To mitigate such counterparty risk, the Company enters into contracts with certain major
financial institutions that have investment-grade ratings. Counterparty credit risk is evaluated in determining the fair
value of derivative instruments.
The Company had one derivative designated as a cash-flow hedge as of December 31, 2012 and 2011. This
interest-rate swap had a notional value of $240.0 million and $270.0 million as of December 31, 2012 and 2011,
respectively. The hedge continued to be effective as of December 31, 2012.
In January 2013, the Company entered into an interest-rate swap with a notional value of $175.0 million, of
which $168.8 million was designated to hedge a portion of the interest-rate risk associated with its variable-rate
borrowings. In conjunction with the Company’s existing $240.0 million interest-rate swap, this effectively fixed the
annual interest rate at a blended rate of 2.60% on the bulk of the first four years of the Company's term loan facility
(please see note 6), based on the Company’s current credit ratings.
Freestanding derivatives are instruments that the Company enters into as part of its overall risk management
strategy but does not designate as hedging instruments for accounting purposes, such as foreign exchange
contracts, interest-rate swaps and other derivative contracts. The fair value of freestanding derivative assets and
liabilities is recorded within the same caption as the underlying hedged items in the consolidated statements of
financial condition.
The Company's freestanding derivatives consisted of the following net forward currency sell contracts:
As of December 31, 2012:
Contract
amount in
local currency
Contract
amount in
U.S. dollars
Market
value in
U.S. dollars
Net unrealized
appreciation
(depreciation)
Euro, expiring 1/7/13-10/31/13 ........................................................
Japanese Yen, expiring 2/28/13-5/31/13 ..........................................
93,500
$
104,155
$
105,997
1,330,000
16,418
15,379
Total
.........................................................................................
$
120,573
$
121,376
As of December 31, 2011:
Euro, expiring 1/31/12 .....................................................................
Japanese Yen, expiring 2/29/12 .......................................................
16,000
1,250,000
Total
.........................................................................................
$
$
22,720
16,073
38,793
$
$
20,733
16,241
36,974
$
$
$
$
(1,842)
1,039
(803)
1,987
(168)
1,819
The impact of freestanding derivative instruments (including both realized and unrealized gains and losses)
on the consolidated statement of operations was as follows:
Foreign currency forward contracts:
General and administrative expenses (1) .................................................................. $
For the Year Ended December 31,
2012
2011
2010
1,545
$
(1,688)
$
(2,150)
(1) To the extent that the Company's freestanding derivatives are utilized to hedge its exposure to investment
income and management fees earned from consolidated funds, the related hedged items are eliminated in
consolidation, with the derivative impact (a positive number reflects a reduction of expenses) reflected in
consolidated general and administrative expenses.
As of December 31, 2012 and 2011, the Company had not designated any derivatives as fair-value hedges
or hedges of net investments in foreign operations.
136
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Derivatives held by consolidated funds
Certain consolidated funds utilize derivative instruments in ongoing investment operations. These derivatives
primarily consist of foreign currency forward contracts utilized to manage currency risks, options and futures used to
hedge exposure for specific securities, and total return swaps and credit default swaps utilized mainly to obtain
exposure to leveraged loans or to participate in foreign markets not readily accessible to the consolidated funds.
None of the derivative instruments is accounted for as a hedging instrument utilizing hedge accounting.
The impact of derivative instruments held by the consolidated funds on the consolidated statements of
operations for the years ended December 31, 2012, 2011 and 2010 was as follows:
2012
2011
2010
Net realized
gain (loss) on
investments
Net change in
unrealized
appreciation
(depreciation)
on
investments
Net realized
gain (loss) on
investments
Net change in
unrealized
appreciation
(depreciation)
on
investments
Net realized
gain (loss) on
investments
Net change in
unrealized
appreciation
(depreciation)
on
investments
Total return and credit default
swaps ......................................... $
66,992
Foreign currency forward
contracts ....................................
Options and futures .......................
85,773
(13,202)
Total ........................................ $ 139,563
Foreign currency contracts
$
33,445
$
80,398
$ (60,023) $
69,643 $
91,302
(148,791)
(1,972)
(234,366)
9,898
$ (117,318) $ (263,976) $ 168,426 $ 532,993 $ (133,166)
(307,681)
(36,693)
474,628
(11,278)
233,816
(5,367)
Certain consolidated funds enter into foreign currency contracts to hedge foreign currencies utilized in certain
current investments or future purchase commitments, except for occasional unhedged changes in the market value
of the underlying investments. All commitments are valued using the applicable foreign exchange rate, with the
resulting unrealized gain or loss included in income. The consolidated funds realize gains or losses at the time
forward contracts are either extinguished or closed if entering into an offsetting contract.
Outstanding foreign currency contracts as of December 31, 2012 and 2011, which included $53,342 and
$89,743 of gross unrealized appreciation, and $147,205 and $36,005 of gross unrealized depreciation, respectively,
were as follows:
As of December 31, 2012:
Euro, expiring 1/7/13-6/27/14 .......................................
Pound Sterling, expiring 1/7/13-8/3/15 .........................
Canadian Dollar, expiring 1/10/13-3/14/13 ...................
Australian Dollar, expiring 1/10/13-3/14/13 ..................
Hong Kong Dollar, expiring 1/17/13 .............................
Japanese Yen, expiring 1/10/13-11/29/13....................
Swiss Franc, expiring 1/7/13-1/17/13 ...........................
Singapore Dollar, expiring 1/17/13 ...............................
Chinese Yuan, expiring 3/7/13 .....................................
New Zealand Dollar, expiring 1/10/13 ..........................
Korean Won, expiring 2/4/13-6/19/14...........................
Total .......................................................................
Contract amount
in local currency
Contract
amount in U.S.
dollars
(419,386)
(14,743)
(643,136)
(31,301)
(32,661,235)
(10,041)
(1,858)
—
(68,079)
(85,515,234)
(1,612,565) $ 2,030,641
666,362
15,056
654,139
4,038
413,138
10,803
1,520
—
54,573
74,002
$ 3,924,272
Market value in
U.S. dollars
$ 2,126,806
680,600
14,789
665,263
4,038
377,884
10,971
1,521
(55)
56,133
79,498
$ 4,017,448
137
Net unrealized
appreciation
(depreciation)
$
(96,165)
(14,238)
267
(11,124)
—
35,254
(168)
(1)
(632)
(1,560)
(5,496)
(93,863)
$
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
As of December 31, 2011:
Euro, expiring 1/6/12-10/11/13 .....................................
Pound Sterling, expiring 1/6/12-4/12/12 .......................
Canadian Dollar, expiring 1/19/12-2/16/12 ...................
Australian Dollar, expiring 1/19/12-4/12/12 ..................
Hong Kong Dollar, expiring 1/19/12 .............................
Japanese Yen, expiring 1/19/12-3/26/12 ......................
Swiss Franc, expiring 1/6/12-1/19/12 ...........................
Singapore Dollar, expiring 1/19/12 ...............................
Chinese Yuan, expiring 3/7/13 .....................................
Total .......................................................................
Contract amount
in local currency
Contract
amount in U.S.
dollars
(1,932,073) $ 2,599,010
443,258
16,510
530,025
4,858
304,287
5,969
1,507
(65,000)
$ 3,840,424
(284,982)
(16,495)
(545,330)
(37,760)
5,205,892
(4,869)
(1,910)
407,320
Market value in
U.S. dollars
$ 2,517,058
442,603
16,184
557,780
4,862
304,687
5,849
1,473
(63,810)
$ 3,786,686
Net unrealized
appreciation
(depreciation)
81,952
$
655
326
(27,755)
(4)
(400)
120
34
(1,190)
53,738
$
Credit default swaps
Changes in the value of CDSs are recorded as unrealized appreciation (depreciation). Upfront payments
received or paid by the consolidated funds are reflected as an asset or liability on the consolidated statements of
financial condition.
As of December 31, 2012, net payments in the amount of $4,350 had been received or paid as upfront
payments. Periodic premiums received or payments made by the consolidated funds are recorded as realized gains
or losses on consolidated funds' investments, respectively, in the consolidated statements of operations. Gains or
losses are realized upon early termination of the swap agreement. Collateral, in the form of cash or securities, may
be required to be held in segregated accounts with a custodian in compliance with the CDS contracts.
The consolidated funds have sold protection and bought protection on various single-name swaps and index
swaps. As of December 31, 2012, there was a maximum payout of approximately $269,800 on sell protection
contracts and maximum receipts of approximately $10,000 on buy protection contracts, with terms up to five years.
Maximum payout amounts could be offset by the subsequent sales, if any, of assets obtained via the execution of a
payout event. The net unrealized appreciation on these contracts was $7,692. The table below summarizes CDS
for which the consolidated funds were protection sellers as of December 31, 2012:
Reference asset type
Bank loan
Fair value of sell protection ................................................................................ $ 3,115
221,700
Maximum potential future payments ..................................................................
(20,503)
Collateral held at third party ...............................................................................
Corporate
bond
$
164
5,600
(196)
Bank loan
swap index
92
$
42,500
(3,040)
Single-name CDS
The credit spread on the underlying asset is generally indicative of the current status of the underlying risk of
these CDSs. Higher credit spreads with a shorter contract term could be indicative of a higher likelihood for the
protection seller to perform. The credit spreads as of December 31, 2012 for each contract term period where the
consolidated funds were protection sellers is summarized below:
Current credit spread (in basis points)
Maximum payout amounts
by contract term
0-1 year
1-3 years
0-1,000 ................................................................................................................................... $269,800
$
—
As of December 31, 2011, payments in the amount of $7,488 had been received or paid as upfront
payments. Periodic payments and premiums received or made by the consolidated funds are recorded in the
accompanying consolidated statements of operations as realized gains or losses on consolidated funds'
investments. Gains or losses are realized upon early termination of the swap agreement. Collateral, in the form of
138
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
cash or securities, may be required to be held in segregated accounts with a custodian in compliance with the CDS
contracts.
The consolidated funds sold protection and bought protection on various single-name swaps and index
swaps. As of December 31, 2011, there was a maximum payout of approximately $882,597 on sell protection
contracts and maximum receipt of approximately $10,000 on buy protection contracts, with terms up to five years.
Maximum payout amounts could be offset by the subsequent sales, if any, of assets obtained via the execution of a
payout event. The net unrealized appreciation on these contracts was $20,896. The table below summarizes CDS
for which the consolidated funds were protection sellers as of December 31, 2011:
Single-name CDS
Reference asset type
Fair value of sell protection ................................................................................ $ (1,079) $ 9,386
308,097
Maximum potential future payments ..................................................................
(41,599)
Collateral held at third party ...............................................................................
507,000
(46,342)
Bank loan
Corporate
bond
Bank loan
swap index
$ 3,018
67,500
(5,387)
The credit spread on the underlying asset is generally indicative of the current status of the underlying risk of
the CDS. Higher credit spreads with a shorter contract term could be indicative of a higher likelihood for the
protection seller to perform. The current credit spreads for each contract term period where the consolidated funds
were protection sellers is summarized below:
Current credit spread (in basis points)
Maximum payout amounts by contract terms
0-1 year
1-3 years
3-5 years
0-1,000 ............................................................................................................... $ 87,892
$784,705
$ 10,000
6. DEBT OBLIGATIONS AND CREDIT FACILITIES
The Company had the following debt obligations:
As of December 31,
2012
2011
$75,000, 5.03%, issued in June 2004, payable in seven equal annual installments starting
June 14, 2008 .................................................................................................................... $ 21,429
50,000
$50,000, 6.09%, issued in June 2006, payable on June 6, 2016 ..........................................
$50,000, 5.82%, issued in November 2006, payable on November 8, 2016 ........................
$250,000, 6.75%, issued in November 2009, payable on December 2, 2019 ......................
$300,000, rate as described below, term loan issued in January 2011, payable 2.5% per
50,000
$ 32,143
50,000
50,000
250,000
250,000
quarter through December 31, 2015, final $150,000 payment on January 6, 2016,
prepaid in December 2012 ................................................................................................
—
270,000
$250,000, rate as described below, term loan issued in December 2012, payable 2.5%
per quarter through September 2017, final $125,000 payment on December 21, 2017 ....
243,750
—
Total remaining principal ....................................................................................................... $ 615,179
$ 652,143
139
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
As of December 31, 2012, future principal payments of debt obligations were as follows:
2013 .......................................................................................................................................................... $ 35,715
35,714
2014 ..........................................................................................................................................................
25,000
2015 ..........................................................................................................................................................
125,000
2016 ..........................................................................................................................................................
143,750
2017 ..........................................................................................................................................................
Thereafter ..................................................................................................................................................
250,000
Total ........................................................................................................................................................... $ 615,179
As of December 31, 2012 and 2011, the Company was in compliance with all financial covenants associated
with its senior notes and credit facilities.
In December 2012, the Company's subsidiaries Oaktree Capital Management, L.P., Oaktree Capital II, L.P.,
Oaktree AIF Investments, L.P. and Oaktree Capital I, L.P. entered into a credit agreement (the "New Credit Facility")
with a bank syndicate for senior unsecured credit facilities, consisting of a $250 million fully-funded term loan (the
"New Term Loan") and a $500 million revolving credit facility (the "New Revolver"), each with a five-year term. The
New Credit Facility replaced the previous credit facility (the "Old Credit Facility") and the New Term Loan replaced
the prior amortizing term loan (the “Old Term Loan”), which had a principal balance of $247.5 million. The New Term
Loan amortizes quarterly in an amount equal to 2.5% of the original principal amount of $250 million, with principal
payments due in March, June, September and December of each year, and the remaining principal payable upon
maturity in December 2017. Borrowings under the New Credit Facility generally bear interest at a spread to either
LIBOR or an alternative base rate. Based on the current credit ratings of Oaktree Capital Management, L.P., the
interest rate on borrowings is LIBOR plus 1.00% per annum and the commitment fee on the unused portions of the
New Revolver is 0.125% per annum. Utilizing interest-rate swaps, the bulk of the first four years of the New Term
Loan's annual interest rate is fixed at 2.60%, based on the current credit ratings of Oaktree Capital Management,
L.P. The New Credit Facility contains customary financial covenants and restrictions, including ones regarding a
maximum leverage ratio of 3.0-to-1.0, minimum fixed charge coverage ratio of 2.5-to-1.0 and minimum required
levels of assets under management and net worth (as defined in the credit agreement) of $50 billion and $600
million, respectively. As of December 31, 2012, the Company was able to draw the full amount available under the
New Revolver without violating any financial covenants.
In January 2011, the Company's subsidiaries Oaktree Capital Management, L.P., Oaktree Capital II, L.P.,
Oaktree AIF Investments, L.P. and Oaktree Capital I, L.P. entered into the Old Credit Facility with a bank syndicate,
consisting of the $300 million five-year fully-funded Old Term Loan and a $250 million three-year revolving credit
facility. The Company was required to make principal payments in respect of the Old Term Loan of $7.5 million in
each of March, June, September and December of every year, with the final payment of $150 million, constituting
the remainder of the term loan, due on January 7, 2016. The Old Credit Facility was terminated and replaced by the
New Credit Facility in December 2012. Proceeds from the New Term Loan were used to pay off the remaining
outstanding balance on the Old Term Loan in December 2012.
On October 7, 2011, Oaktree Finance, LLC (“Oaktree Finance”), an indirect wholly-owned subsidiary
focused on providing financing for larger middle-market companies, entered into a senior secured revolving credit
facility with a consortium of lenders. The senior secured revolving credit facility provided for an initial borrowing
capacity of $75 million and the ability to borrow an additional $150 million if certain specified conditions were met,
including the completion of a public offering by Oaktree Finance. On July 20, 2012, Oaktree Finance terminated the
undrawn senior secured revolving credit facility.
Credit facilities of the consolidated funds
Certain of the consolidated funds maintain revolving credit facilities to fund investments between capital
drawdowns. These facilities generally: (a) are collateralized by the unfunded capital commitments of the
consolidated funds' limited partners, (b) bear an annual commitment fee based on unfunded commitments, and
(c) contain various affirmative and negative covenants and reporting obligations, including restrictions on additional
indebtedness, liens, margin stock, affiliate transactions, dividends and distributions, release of capital commitments,
and portfolio asset dispositions. The obligations of the consolidated funds are nonrecourse to the Company. For all
periods presented, carrying value approximates fair value of the credit facilities due to their short-term nature or
140
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
their recent issuance date. As of and for the years ended December 31, 2012 and 2011, the consolidated funds
were in compliance with all covenants.
The consolidated funds had the following revolving bank credit facilities and term loans outstanding:
Credit agreement
2012
2011
Facility
capacity
LIBOR
margin (1)
Maturity
Commitment
fee rate
L/C fee (2)
Outstanding amount
as of December 31,
Credit facility (3)(4) ..................... $
Variable rate notes (4) ...........
63,000
$
— $ 750,000
1.25%
8/28/2015
249,500
— $ 249,500
1.55% 10/20/2022
Multi-currency term loan (5) ....
Revolving credit facility.........
Revolving credit facility.........
Revolving credit facility (6).....
Revolving credit facility.........
Euro-denominated revolving
credit facility ......................
Revolving credit facility.........
49,158
38,000
8,625
19,400
—
63,942
—
50,117
$ 275,000
3.00% 12/23/2013
— $ 150,000
1.75% 12/15/2013
— $ 125,000
1.75%
5/20/2014
— $ 80,000
— $ 40,000
2.00%
9/15/2013
1.50% 12/11/2013
N.A.
N.A.
N.A.
0.35%
0.35%
0.35%
0.30%
N.A.
N.A.
N.A.
N.A.
N.A.
2.00%
1.50%
— € 100,000
1.75% 12/17/2015
0.30%
2.00%
— $ 10,000
2.25%
9/1/2013
0.38%
N.A.
$ 491,625
$ 50,117
(1)
(2)
(3)
(4)
(5)
(6)
The facilities bear interest, at the borrower's option, at (a) an annual rate of LIBOR plus the applicable margin
or (b) an alternate base rate, as defined in the respective credit agreement.
Certain facilities allow for the issuance of letters of credit at an applicable annual fee. As of December 31,
2012 and 2011, outstanding standby letters of credit totaled $76,975 and $75,884, respectively.
Libor margin equals 1.25% through August 28, 2013 and 2.50% thereafter.
The credit facility is collateralized by the portfolio investments of the fund.
A four-year $275,000 aggregate principal amount term loan that consists of (a) a U.S. Dollar-denominated
loan in an aggregate principal amount of $221,451, (b) a euro-denominated loan in an aggregate principal
amount of €26,492 and (c) an Australian dollar-denominated loan in an aggregate principal amount of AU
$17,660. The loan is guaranteed by the fund and, with certain limited exceptions, all of the subsidiaries of the
fund, and is collateralized by both the unfunded capital commitments of the partners and, with certain
exceptions, the portfolio investments of the fund and its subsidiaries. In connection with the term loan, $4,125
was paid to the administrative agent as a structuring fee and is being amortized over the 4-year life of the
term loan.
Effective November 29, 2012 through March 29, 2013, the credit facility was temporarily increased from
$55,000 to $80,000.
7. NON-CONTROLLING REDEEMABLE INTERESTS IN CONSOLIDATED FUNDS
The following table sets forth a summary of changes in the non-controlling redeemable interests in the
consolidated funds:
Year Ended December 31,
2012
Beginning balance ............................................................................. $ 41,048,607
6,441,090
(13,993,859)
6,016,342
49,109
41,000
68,542
Ending balance ................................................................................. $ 39,670,831
Contributions ..............................................................................
Distributions ................................................................................
Net income .................................................................................
Change in distributions payable ..................................................
Change in deferred contributions ................................................
Foreign currency translation and other .......................................
2011
$ 44,466,116
8,305,880
(11,668,028)
233,573
(151,645)
(41,000)
(96,289)
$ 41,048,607
2010
$ 39,419,906
6,559,325
(6,751,999)
5,493,799
(105,100)
—
(149,815)
$ 44,466,116
141
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
8. UNITHOLDERS’ CAPITAL
Set forth below are the distributions per Class A unit:
Payment date
November 20, 2012
August 21, 2012
May 25, 2012
March 7, 2012
Total 2012 .............................................................................................................................................
Record date
November 16, 2012
August 17, 2012
May 21, 2012
March 1, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
Applicable to quarterly period ended
October 28, 2011
July 29, 2011
April 29, 2011
January 31, 2011
Total 2011 .............................................................................................................................................
September 30, 2011
June 30, 2011
March 31, 2011
December 31, 2010
October 24, 2011
July 25, 2011
April 25, 2011
January 25, 2011
October 29, 2010
July 30, 2010
April 30, 2010
January 29, 2010
Total 2010 .............................................................................................................................................
September 30, 2010
June 30, 2010
March 31, 2010
December 31, 2009
October 25, 2010
July 26, 2010
April 26, 2010
January 25, 2010
Distribution
per unit
$
$
$
$
$
$
0.55
0.79
0.55
0.42
2.31
0.29
0.51
0.64
0.90
2.34
0.36
0.36
0.70
0.75
2.17
The OCGH unitholders’ economic interest in the Oaktree Operating Group is reflected as OCGH non-
controlling interest in consolidated subsidiaries and is based on the proportionate share of Oaktree Operating
Group units held by the OCGH unitholders. As of December 31, 2012 and 2011, respectively, OCGH units
represented 120,267,503 of the total 150,448,436 Oaktree Operating Group units and 125,847,115 of the total
148,524,215 Oaktree Operating Group units. Based on total Oaktree Operating Group capital of $1,360,331 and
$1,104,493, as of December 31, 2012 and 2011, respectively, the OCGH non-controlling interest was $1,087,491
and $935,858.
The net income (loss) attributable to OCGH non-controlling interest in consolidated subsidiaries is
determined at the Oaktree Operating Group level, based on the weighted average proportionate share of Oaktree
Operating Group units held by the OCGH unitholders. Certain expenses, such as income tax and related
administrative expenses of Oaktree Capital Group, LLC and its Intermediate Holding Companies are solely
attributable to the Class A unitholders.
142
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The following table sets forth a summary of the net income (loss) attributable to the OCGH non-controlling
interest and to the Class A unitholders:
Year Ended December 31,
2012
2011
2010
Weighted average Oaktree Operating Group units outstanding
(in thousands):
OCGH non-controlling interest ............................................................
Class A unitholders ..............................................................................
Total weighted average units outstanding ...........................................
122,369
28,170
150,539
125,956
22,677
148,633
125,451
22,677
148,128
Oaktree Operating Group net income (loss):
Net income (loss) attributable to OCGH non-controlling interest ......... $ 548,265
126,826
Net income (loss) attributable to Class A unitholders ..........................
Oaktree Operating Group net income (loss) ........................................ $ 675,091
$(446,246) $(163,555)
(80,391)
(29,583)
$(526,637) $(193,138)
Net income (loss) attributable to Oaktree Capital Group, LLC:
Oaktree Operating Group net income (loss) attributable to Class A
unitholders ....................................................................................... $ 126,826
6,260
Non-Operating Group other income ....................................................
Non-Operating Group expenses .........................................................
Income tax expense of Intermediate Holding Companies ...................
(24,723)
Net income (loss) attributable to Oaktree Capital Group, LLC ............ $ 107,810
(553)
$ (80,391) $ (29,583)
—
(768)
—
(1,113)
(14,813)
(18,759)
$ (95,972) $ (49,455)
Set forth below are the effects of changes in the Company’s ownership interest in the Oaktree Operating
Group on the Company’s capital:
Year Ended December 31,
2012
2011
2010
Net income (loss) attributable to Oaktree Capital Group, LLC ....................... $ 107,810
$ (95,972) $ (49,455)
Equity reallocation between controlling and non-controlling interests ............
Change from net income (loss) attributable to Oaktree Capital Group, LLC
69,097
(6,413)
(2,015)
and transfers (to) from non-controlling interest ........................................... $ 176,907
$(102,385) $ (51,470)
In June 2012, the Company repurchased and subsequently cancelled 400,000 Class A units from an
unrelated third party broker-dealer in a privately negotiated transaction. The aggregate purchase price was $14.1
million excluding commissions, which represented a per unit price of $35.30. The Company repurchased the Class
A units using cash on hand. The Company did not repurchase any Class A units in the years ended December 31,
2011 or 2010.
Please see notes 9, 10 and 11 for additional information regarding transactions that impacted unitholders’
capital.
143
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
9. EARNINGS PER UNIT
The computations of net income (loss) per Class A unit are set forth below:
Weighted average units outstanding:
Year Ended December 31,
2012
2011
2010
(in thousands, except per unit amounts)
Class A units outstanding .............................................................................
OCGH units exchangeable into Class A units (1) ...............................................
28,170
22,677
22,677
—
—
—
Total weighted average units outstanding ....................................................
28,170
22,677
22,677
Net income (loss) per Class A unit:
Net income (loss) ......................................................................................... $107,810
$ (95,972) $ (49,455)
Weighted average units outstanding ............................................................
28,170
22,677
22,677
Basic and diluted net income (loss) per Class A unit ................................... $
3.83
$
(4.23) $
(2.18)
(1)
Vested OCGH units are potentially exchangeable on a one-for-one basis into Class A units. As of December
31, 2012, there were 120,267,503 OCGH units outstanding, accordingly, the Company may cumulatively
issue up to 120,267,503 additional Class A units through March 1, 2022 if all such units were exchanged.
For all periods presented, OCGH units have been excluded from the calculation of diluted earnings per unit
given that the exchange of these units would proportionally increase Oaktree Capital Group, LLC’s interests
in the Oaktree Operating Group and may have an anti-dilutive effect on earnings per unit to the extent that
additional expenses, particularly tax-related expenses, are incurred by the Company as a result of the
exchange.
10. EQUITY-BASED COMPENSATION
As a part of the May 2007 Restructuring, the OCGH unitholders exchanged their interests in the
Predecessor Company for units in OCGH. As a result of the service requirement, the OCGH units subject to the risk
of forfeiture, equal to $4,644.8 million based on the fair value of Class A units sold in the 2007 Private Offering,
were charged to compensation expense over the service period from May 25, 2007 through January 2, 2012. These
units vested 20% on each of January 2, 2008, 2009, 2010, 2011 and 2012. When the Company recorded this
equity-based compensation expense, it also recorded a corresponding increase in capital.
Pursuant to the Company’s exchange agreement, as amended, the general partner of OCGH may elect at
its discretion to declare an open period during which an OCGH unitholder may exchange its unrestricted vested
OCGH units for, at the option of the Company’s board of directors, Class A units of the Company, an equivalent
amount of cash based on then-prevailing market prices, other consideration of equal value, or any combination of
the foregoing. The general partner determines the number of units eligible for exchange within a given open period
and, if the OCGH unitholders request to exchange a number of units in excess of the amount eligible for exchange,
the general partner determines which units to exchange taking into account such factors as appropriate. Upon
approval by the Company’s board of directors, OCGH units that are selected for exchange in accordance with the
foregoing will be exchanged, at the option of the board of directors, into Class A units of the Company, an
equivalent amount of cash based on then-prevailing market prices, other consideration of equal value or any
combination of the foregoing pursuant to the terms of the exchange agreement.
The exchange agreement generally provides that (a) such OCGH units will be acquired by the Intermediate
Holding Companies in exchange for, at the option of the Company’s board of directors, Class A units, an equivalent
amount of cash based on then-prevailing market prices, other consideration of equal value, or any combination of
the foregoing, (b) the OCGH units acquired by the Intermediate Holding Companies may then be redeemed by
OCGH in exchange for Oaktree Operating Group units, (c) the Intermediate Holding Companies may exchange
Oaktree Operating Group units with each other such that, immediately after such exchange, each Intermediate
Holding Company holds Oaktree Operating Group units only in the Oaktree Operating Group entity for which such
Intermediate Holding Company serves as the general partner and (d) the Company will cancel a corresponding
number of Class B units. The partnership agreement of OCGH generally provides that, in the event an employee’s
144
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
employment with the Oaktree Operating Group is terminated for any reason, the unvested portion of his or her
OCGH units will be forfeited, unless the termination is due to his or her death or disability.
The Company utilizes a contemporaneous valuation report in determining fair value at the date of grant for
awards of OCGH units. Each valuation report is based on the market price of Oaktree's Class A units, which were
traded on the Goldman, Sachs & Co. for Tradable Unregistered Equity Securities (the “GSTrUE OTC market”) prior
to listing on the NYSE. A discount is then applied to the Class A unit market price to reflect the lack of marketability
for the OCGH units. The determination of an appropriate discount for lack of marketability is based primarily on a
review of discounts on the sale of restricted shares of publicly traded companies. Factors that influence the size of
the discount for lack of marketability include: the estimated time it would take for an OCGH unitholder to exchange
shares into Class A units; the volatility of the Company's business; thin trading of the Class A units; and, prior to the
initial public offering in April 2012, restrictive trading of the Class A units. The estimated time to liquidity is influenced
primarily by the need for (a) the general partner of OCGH to elect in its discretion to declare an open period during
which an OCGH unitholder may exchange its unrestricted vested OCGH units for, at the option of the Company's
board of directors, Class A units on a one-for-one basis, an equivalent amount of cash based on then-prevailing
market prices, other consideration of equal value or any combination of the foregoing and (b) the approval of the
Company's board of directors to exchange such OCGH units into any of the foregoing. Board approval is based
primarily on the objective of maintaining an orderly market for Oaktree's units, but may take into account any other
factors that the board may deem appropriate in its sole discretion. The discount rate was 30% for units granted in
the three-year period ended December 31, 2012, except for those units granted in the first quarter of 2012, for
which the discount was 25%. The calculation of compensation expense assumes a forfeiture rate of up to 1.5%
annually, based on expected employee turnover. Compensation expense is revised annually or more frequently, as
necessary, to adjust for actual forfeitures and reflect expense only for those units that ultimately vest. In each period
presented, forfeitures were not materially different from the assumed rate.
A maximum of 22,278,632 OCGH units were authorized to be awarded pursuant to the 2007 Oaktree
Capital Group Equity Incentive Plan (the “2007 Plan”), and 4,954,976 units were awarded and issued as of
December 31, 2012 under the 2007 Plan. The Company’s board of directors has resolved that the administrator of
the 2007 Plan will no longer grant awards under the 2007 Plan. A maximum of 22,300,000 units have been
authorized to be awarded pursuant to the 2011 Oaktree Capital Group, LLC Equity Incentive Plan (the “2011 Plan”),
and 2,477,471 units (including 5,000 phantom units) have been awarded (of which 2,377,471 have been issued) as
of December 31, 2012 under the 2011 Plan. Units under the 2011 Plan can be awarded in the form of options, unit
appreciation rights, restricted unit awards, unit bonus awards, phantom equity awards or other unit-based awards.
Each unit, when issued, represents an indirect interest in one Oaktree Operating Group unit. Total vested and
unvested Class A and OCGH units issued and outstanding were 150,448,436 as of December 31, 2012.
As of December 31, 2012, the Company expected to recognize compensation expense on its non-vested
equity-based awards of $102.5 million over a weighted average recognition period of 5.3 years.
145
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
A summary of the status of the Company’s unvested equity-based awards as of December 31, 2012 and a
summary of changes for each of the three years then ended, are presented below (actual dollars per unit):
Class A Units
Class C Units
OCGH Units
Number of
Units
Balance, December 31, 2009.........................
Granted ....................................................
Vested......................................................
Exchanged ...............................................
Forfeited ..................................................
Balance, December 31, 2010.........................
Granted ....................................................
Vested......................................................
Exchanged ...............................................
Forfeited ..................................................
Balance, December 31, 2011.........................
Weighted
average
grant date
fair value
— $ —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Granted (1) ................................................ 14,969
43.14
(3,900)
44.00
Vested......................................................
24.75
600
Exchanged ...............................................
—
—
Forfeited ..................................................
Balance, December 31, 2012......................... 11,669
$ 41.91
Weighted
average
grant date
Number of
fair value
Units
$ 24.75
2,400
—
—
24.75
(600)
—
—
—
—
24.75
1,800
—
—
24.75
(600)
—
—
—
—
24.75
1,200
—
—
24.75
(600)
24.75
(600)
—
—
— $ —
Number of
Units
65,015,207
1,356,500
(21,488,900)
—
(15,000)
44,867,807
1,523,300
(22,229,038)
—
(31,500)
24,130,569
2,457,502
(21,652,473)
—
(33,250)
4,902,348
Weighted
average
grant date
fair value
$ 43.48
23.31
43.79
—
23.26
42.73
25.12
43.29
—
25.16
41.13
32.55
43.11
—
28.74
$ 28.17
(1)
As part of the year-end 2011 personnel and compensation review process, 1,966,302 restricted OCGH units
were issued with a grant date during the first quarter of 2012, subject to equal annual vesting over periods of
five or ten years. Additionally, 346,200 units were issued to replace phantom equity grants awarded in the
prior year that were subsequently cancelled. In January 2012, 13,546 Class A units were awarded of which
3,900 were vested upon grant, 4,546 vest in equal annual installments over five years and 5,100 vest in
increments over a four-year period. The aggregate grant date fair value of $76.3 million for all OCGH units
issued in the first quarter of 2012 was determined by applying a 25% discount to the Class A unit trading
price on the GSTrUE OTC market on which the Class A units traded before the Company's initial public
offering. In June 2012, 1,423 Class A units were awarded with a grant date fair value as determined by the
Class A unit trading price on the NYSE. In the third quarter of 2012, 45,000 restricted OCGH units were
issued subject to equal annual vesting over five years, and 100,000 deferred OCGH units were awarded
subject to equal annual vesting over 10 years, with such deferred OCGH units to be issued only upon each
annual vesting date. The aggregate grant date fair value of $3.7 million for all OCGH units awarded in the
third quarter of 2012 was determined by applying a 30% discount to the Class A unit trading price on the
NYSE.
As of December 31, 2012, unvested units were expected to vest as follows:
Class A units .....................................................................................................................
OCGH units ......................................................................................................................
Weighted
average
remaining
service term
(years)
3.5
Number of
Units
11,669
4,902,348
5.3
146
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
11. INCOME TAXES AND RELATED PAYMENTS
In connection with the 2007 Private Offering, Oaktree was established as a publicly traded partnership and
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., two of its Intermediate Holding Companies, were established
as wholly-owned corporate subsidiaries. Accordingly, income earned by these corporate subsidiaries is subject to
U.S. federal and state income taxation and taxed at prevailing rates. A change in state tax law reduced the
combined federal and state tax rate applicable to income from one of the corporate subsidiaries, Oaktree Holdings,
Inc., from 41% to 38%. Income earned by non-corporate subsidiaries is not subject to U.S. federal corporate
income tax and is allocated to the Oaktree Operating Group’s unitholders. For the periods beginning prior to
January 1, 2012, Oaktree incurred income tax expense despite reporting losses before income taxes for financial
reporting purposes, because the non-cash equity-based compensation expense arising from the 2007 Private
Offering that caused the reported losses was generally not deductible for income tax purposes. The final portion of
the non-cash equity-based compensation expense associated with the 2007 Private Offering was charged against
pre-tax income in the first quarter of 2012 and did not create a loss before taxes for financial reporting purposes for
the year ended December 31, 2012. The Company’s effective income tax rate is dependent on many factors,
including the estimated nature of many amounts and the mix of revenues and expenses between the two corporate
subsidiaries that are subject to income taxes and the three other subsidiaries that are not; consequently, the
effective income tax rate is subject to significant variation from period to period.
The May 2007 Restructuring involved Oaktree’s purchase of Oaktree Operating Group units from the OCGH
unitholders and an election by certain Oaktree Operating Group entities under Section 754 of the U.S. Internal
Revenue Code, as amended (the “Code”), resulting in an increase in the tax basis of the assets owned by the
Oaktree Operating Group. As of May 25, 2007, Oaktree established a deferred tax asset for the expected tax
benefit associated with the difference between the book value and tax basis of net assets, based on an estimated
combined marginal U.S. federal and state tax rate of approximately 41% and the expectation, based on an analysis
of expected future earnings, that it is probable that this benefit will be realized. The establishment of the deferred
tax asset increased additional paid-in capital because the transaction was between Oaktree and its unitholders. The
deferred tax asset reflects the tax impact of payments expected to be made under the tax receivable agreement
(described below), which further increase Oaktree’s deferred tax benefits and the estimated future payments due
under the tax receivable agreement.
As a result of a change in state tax law that reduced the combined federal and state tax rate applicable to
income from Oaktree Holdings, Inc. from 41% to 38%, the existing deferred tax assets and liabilities of Oaktree
Holdings, Inc. were remeasured in 2012. The remeasurement reduced the deferred tax asset under the tax
receivable agreement associated with the 2007 Private Offering from $64.4 million to $56.6 million, consequently
reducing the related tax receivable agreement liability payable to OCGH unitholders by $6.3 million. The $6.3
million reduction in the tax receivable agreement payable is reflected in other income (expense), net in the
consolidated statements of operations.
The exchange of OCGH units in connection with the Company’s initial public offering in April 2012
increased the tax basis of the tangible and intangible assets of the Oaktree Operating Group. As a result, the
Company recorded a deferred tax asset of $103.3 million and an associated liability of $87.8 million for payments to
OCGH unitholders under the tax receivable agreement, which had the effect of increasing capital by $15.5 million.
These payments are expected to occur over the period ending approximately in 2034.
147
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Income tax expense from operations consisted of the following:
Current:
U.S. federal income tax ...................................................................... $
State and local income tax .................................................................
Foreign income tax .............................................................................
$
Deferred:
U.S. federal income tax ...................................................................... $
State and local income tax .................................................................
$
Total:
U.S. federal income tax ...................................................................... $
State and local income tax .................................................................
Foreign income tax .............................................................................
Income tax expense ................................................................................. $
Year Ended December 31,
2012
2011
2010
11,232
3,737
3,351
18,320
7,432
5,106
12,538
18,664
8,843
3,351
30,858
$
$
$
$
$
$
8,869
4,786
3,588
17,243
3,285
560
3,845
12,154
5,346
3,588
21,088
$
$
$
$
$
$
13,665
5,573
4,984
24,222
1,907
270
2,177
15,572
5,843
4,984
26,399
The Company’s income before income taxes consisted of the following:
Year Ended December 31,
2012
2011
2010
Domestic income (loss) before income taxes ........................................... $6,710,286
(7,011)
Foreign income (loss) before income taxes ..............................................
$ (264,603) $5,289,742
17,446
(22,954)
Total income (loss) before income taxes................................................... $6,703,275
$ (287,557) $5,307,188
The Company’s effective income tax rate differed from the federal statutory rate for the following reasons:
Income tax expense at federal statutory rate ............................................
Income passed through ............................................................................
State and local taxes, net of federal benefit ..............................................
Foreign taxes ............................................................................................
Equity-based compensation expense .......................................................
Other, net ..................................................................................................
Total effective rate .....................................................................................
Year Ended December 31,
2012
35.00%
(34.78)
0.07
0.09
—
0.08
2011
35.00 %
(19.49)
(1.75)
(4.04)
(17.44)
0.39
2010
35.00%
(35.53)
0.11
(0.02)
0.94
—
0.46%
(7.33)%
0.50%
148
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The income tax effects of temporary differences that give rise to significant portions of deferred tax assets
and liabilities were as follows:
As of December 31,
2012
2011
2010
Deferred tax assets:
Investment in partnerships ................................................................. $ 157,999
3,994
Equity-based compensation expense ................................................
Other, net ...........................................................................................
1,697
163,690
Total deferred tax assets...........................................................................
Total deferred tax liabilities .......................................................................
4,519
159,171
Net deferred tax assets before valuation allowance .................................
Valuation allowance ..................................................................................
—
Net deferred tax assets ............................................................................ $ 159,171
$
$
67,918
3,703
1,365
72,986
4,548
68,438
—
68,438
$
$
72,177
3,010
1,432
76,619
4,336
72,283
—
72,283
In assessing the realizability of deferred tax assets, the Company considers whether it is probable that some
or all of the deferred tax assets will not be realized. In determining whether the deferred taxes are realizable, the
Company considers the period of expiration of the tax asset, historical and projected taxable income, and tax
liabilities for the tax jurisdiction in which the tax asset is located. Although the Company had recorded pre-tax losses
for financial reporting purposes in years prior to 2012, the entities that generate taxable income have generated
(and are expected to generate in subsequent years) substantial book and tax basis pre-tax income. The deferred
tax asset recognized by the Company, related to the higher tax basis in the carrying value of certain assets
compared to the book basis of those assets, will be recognized in future years by these taxable entities. The
deferred tax asset recognized is based on the amount of the asset that the Company’s management has
determined is more likely than not to be realized in future periods. In determining the realizability of this asset,
management has considered numerous factors which will give rise to pre-tax income in future periods. Among the
factors considered by management were the historical and expected future book and tax basis pre-tax income of
the Company and unrealized gains in the Company’s assets at the determination date. Based on these factors, the
Company has determined, as of December 31, 2012, that all deferred tax assets will be realizable in future periods.
On January 1, 2009, the Company adopted accounting guidance issued by the FASB that requires
companies to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to
be sustained assuming examination by tax authorities. Pursuant to the guidance, the Company analyzed its tax
filing positions in all of the federal, state and foreign tax jurisdictions where it is required to file income tax returns,
as well as for all open tax years in these jurisdictions. As of December 31, 2012, the total reserve balance, including
interest and penalties, was $13.3 million.
Oaktree accrues potential interest and penalties related to uncertain tax positions as income tax expense in
the consolidated statements of operations. The Company accrued $1.4 million, $1.1 million and $1.0 million in such
expense for the years ended December 31, 2012, 2011 and 2010, respectively, resulting in reserves for potential
interest and penalties of $3.9 million, $2.5 million and $1.4 million as of December 31, 2012, 2011 and 2010,
respectively.
149
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The following is a tabular reconciliation of unrecognized tax benefits (excluding interest and penalties
thereon):
Unrecognized tax benefits, January 1 ......................................................................... $ 8,594
72
806
—
—
—
Unrecognized tax benefits, December 31 ................................................................... $ 9,472
Additions for tax positions related to the current year ...........................................
Additions for tax positions related to prior years ...................................................
Reductions for tax positions related to prior years ................................................
Settlement of tax positions ...................................................................................
Lapse of statute of limitations ...............................................................................
2012
2011
$ 7,955
822
—
—
—
(183)
$ 8,594
2010
$ 6,142
1,813
—
—
—
—
$ 7,955
Year Ended December 31,
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the
normal course of business, Oaktree is subject to examination by federal, state, local and foreign tax regulators. With
limited exceptions, the Company is no longer subject to income tax audits by taxing authorities for the years before
2008. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any
current audit will have a material adverse effect on the Company’s consolidated cash flows, financial position or
results of operations. Oaktree does not believe that it is reasonably possible that unrecognized tax benefits will
significantly change within the next twelve months as a result of settlements or lapses of statutes of limitation.
Tax receivable agreement
Subject to certain restrictions, each holder of OCGH units has the right to exchange his or her vested units
for, at the option of the Company’s board of directors, Class A units, an equivalent amount of cash based on then-
prevailing market prices, other consideration of equal value, or any combination of the foregoing. Certain of the
Oaktree Operating Group entities made an election under Section 754 of the Code, which may result in an
adjustment to the tax basis of the assets owned by Oaktree Operating Group at the time of an exchange. These
exchanges may result in increases in tax deductions and tax basis that would reduce the amount of tax that
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. would otherwise be required to pay in the future.
In connection with the 2007 Private Offering, Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. entered
into a tax receivable agreement with the OCGH unitholders that, as amended, provides for the payment to an
exchanging or selling OCGH unitholder of 85.0% of the amount of cash savings, if any, in U.S. federal, state, local
and foreign income taxes that they actually realize (or are deemed to realize in the case of an early termination
payment by Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc., or a change of control) as a result of an increase
in the tax basis of the assets owned by the Oaktree Operating Group. These payments are expected to occur over
the period ending approximately in 2029. A $77.6 million liability to the OCGH unitholders was recorded with respect
to the tax receivable agreement. In 2008, the Company revised its estimate of the liability relating to the tax
receivable agreement downward by $9.7 million as a result of further analysis of the valuations relating to future
taxable deductions, resulting in a revised liability of $67.9 million. Aggregate payments of $4.8 million were made to
pre-2007 Private Offering OCGH unitholders in 2009 related to tax benefits that Oaktree Holdings, Inc. and Oaktree
AIF Holdings, Inc. recognized, including interest thereon, with respect to the 2007 and 2008 taxable years. In
connection with the tax returns filed for 2009 and 2010, an aggregate of $6.3 million was paid to the pre-2007
Private Offering OCGH unitholders by Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., further lowering the
estimated liability to $56.8 million as of December 31, 2011.
As a result of the aforementioned change in state tax law that reduced the combined federal and state tax
rate applicable to income from Oaktree Holdings, Inc. from 41% to 38%, the deferred tax asset under the tax
receivable agreement associated with the 2007 Private Offering was reduced from $64.4 million to $56.6 million,
consequently reducing the related tax receivable agreement liability payable to OCGH unitholders by $6.3 million.
The $6.3 million reduction in the tax receivable agreement payable is reflected in other income (expense), net in the
consolidated statements of operations. The tax receivable agreement liability was further reduced by $3.3 million as
a result of payments made under the tax receivable agreement in November 2012, resulting in a tax receivable
agreement liability payable to OCGH unitholders of $47.2 million as of December 31, 2012.
150
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The exchange of OCGH units in connection with the Company’s initial public offering in April 2012
increased the tax basis of the tangible and intangible assets of the Oaktree Operating Group. As a result, the
Company recorded a deferred tax asset of $103.3 million and an associated liability of $87.8 million for payments to
OCGH unitholders under the tax receivable agreement, which had the effect of increasing capital by $15.5 million.
These payments are expected to occur over the period ending approximately in 2034.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Oaktree enters into contracts that contain certain representations,
warranties and indemnifications. The Company’s exposure under these arrangements would involve future claims
that have not yet been asserted. Inasmuch as no such claims currently exist or are expected to arise, the Company
has not accrued any liability in connection with these indemnifications.
Legal actions
Periodically, the Company is a party to legal actions arising in the ordinary course of business. The Company
is currently not subject to any pending actions that either individually or in the aggregate are expected to have a
material impact on its results of operations, cash flows or financial condition.
On June 8, 2011, Kaplan Industry, Inc. v. Oaktree Capital Management, L.P. was filed in the U.S. District
Court for the Southern District of Florida. In Kaplan, the plaintiff alleges that Oaktree Capital Management, L.P.
tortiously interfered with a business relationship and engaged in a civil conspiracy through the actions of Gulmar
Offshore Middle East, LLC (“Gulmar”), a business recently acquired by subsidiaries of OCM European Principal
Opportunities Fund II, L.P. (“EPOF II”). Oaktree Capital Management, L.P. serves as investment manager to EPOF
II. The complaint alleges that Gulmar breached a consortium agreement between Gulmar and Kaplan Industry, Inc.
relating to the consortium’s performance of services to Petróleos de Venezuela, S.A., the state-owned oil producer
of Venezuela. The plaintiff alleges that Oaktree is responsible for these breaches by Gulmar. The complaint seeks
damages in excess of $800 million. The substance of the claim relates almost exclusively to actions by Gulmar prior
to EPOF II’s acquisition and the basis of the claim is currently subject to an ongoing arbitration in the United
Kingdom between Kaplan and Gulmar. On August 18, 2011, the court granted Oaktree Capital Management, L.P.’s
motion to stay pending the completion of a related arbitration proceeding in London. Oaktree Capital Management,
L.P. believes the case is without merit and that any exposure to loss is remote.
Incentive income
In addition to the incentive income recognized by the Company, certain of its funds have amounts recorded
as potentially allocable to the Company as its share of potential future incentive income, based on each fund’s NAV.
Inasmuch as this incentive income is contingent upon future investment activity and other factors, it is not
recognized by the Company until it is fixed or otherwise determinable. As of December 31, 2012, 2011 and 2010,
the aggregate of such amounts recorded at the fund level in excess of incentive income recognized by the
Company was $2,137,798, $1,686,967 and $2,066,846, respectively, for which related direct incentive income
compensation expense was estimated to be $855,604, $659,256 and $900,263, respectively.
Commitments to funds
As of December 31, 2012 and 2011, the Company, generally in the capacity as general partner, had undrawn
capital commitments of $265,401 and $266,541, respectively, including commitments to both non-consolidated and
consolidated funds.
Operating leases
Oaktree leases its main headquarters office in Los Angeles and offices in 10 other cities in the U.S., Asia and
Europe, pursuant to current lease terms expiring through 2020. Occupancy costs, including non-lease expenses, for
the years ended December 31, 2012, 2011 and 2010, were $18,084, $17,602 and $17,693, respectively.
Additionally, Oaktree leases a corporate plane pursuant to an agreement with a scheduled termination in February
2015.
151
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
As of December 31, 2012, aggregate estimated minimum commitments under Oaktree’s operating leases
were as follows:
2013 ......................................................................................................................................................... $
2014 .........................................................................................................................................................
2015 .........................................................................................................................................................
2016 .........................................................................................................................................................
2017 .........................................................................................................................................................
Thereafter ................................................................................................................................................
Total ......................................................................................................................................................... $
15,401
14,317
11,137
9,537
4,275
9,640
64,307
Investment commitments of consolidated funds
The consolidated funds are parties to certain credit agreements, providing for the issuance of letters of credit
and revolving loans, which may require the consolidated funds to extend additional loans to investee companies.
The consolidated funds use the same investment criteria in making these unrecorded commitments as they do for
investments that are included in the consolidated statements of financial condition. The unfunded liability associated
with these credit agreements is equal to the amount by which the contractual loan commitment exceeds the sum of
the amount of funded debt and cash held in escrow, if any. As of December 31, 2012 and 2011, these commitments
were $475,335 and $521,994, respectively.
As of December 31, 2012 and 2011, the consolidated funds had aggregate potential investment
commitments of $436,666 and $367,930, respectively. These commitments will be funded by the funds’ aggregate
cash balance, asset sales proceeds or drawdowns against existing capital commitments.
A consolidated fund may agree to guarantee the repayment obligations of certain investee companies. On
December 20, 2012, certain consolidated funds (“Funds”) entered into a £200 million revolving credit facility (the
“RCF”) pursuant to which certain portfolio companies of the Funds (“the borrowers”) will be able to draw under the
RCF during a three-year period. The RCF has an annual commitment fee on unused commitments of 1.0% and
bears interest at an annual rate equal to Libor or Euribor, as applicable, plus 2.0%. The Funds guarantee the
payment and other obligations of the borrowers under the RCF. The amounts borrowed, accrued interest and other
costs of the RCF will be paid by the portfolio companies. As of December 31, 2012, there were no borrowings
outstanding. The Funds, as guarantors, must maintain compliance with certain financial covenants at all times. As
of and for the year ended December 31, 2012, the Funds were in compliance with these financial covenants.
The aggregate amounts guaranteed in addition to those described for the RCF were not material to the
consolidated financial statements as of December 31, 2012 and 2011.
13. EMPLOYEE BENEFITS
Oaktree provides certain employee benefits, including a voluntary 401(k) savings plan for which the
Company makes an annual profit sharing contribution equal to up to 4% of total compensation for employees below
certain compensation levels and up to 12% of total compensation, subject to prescribed limits, for employees
meeting certain eligibility requirements. For the years ended December 31, 2012, 2011 and 2010, the Company
incurred expenses of $6.4 million, $5.2 million and $3.7 million, respectively, in connection with the plan. Oaktree
also has a discretionary annual bonus program for all employees, which is based, in part, on annual adjusted net
income.
152
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
14. RELATED PARTY TRANSACTIONS
The Company considers its principals, employees and non-consolidated Oaktree funds to be affiliates.
Amounts due from and to affiliates were comprised of the following:
As of December 31,
2012
2011
Due from affiliates:
Loans .............................................................................................................................. $ 38,091
$ 23,888
Amounts due from non-consolidated funds .....................................................................
Payments made on behalf of non-consolidated entities ..................................................
Non-interest bearing advances made to certain non-controlling interest holders and
employees ...................................................................................................................
661
3,444
1,014
4,091
2,393
2,833
Total due from affiliates ............................................................................................. $ 44,589
$ 31,826
Due to affiliates:
Due to OCGH unitholders in connection with the tax receivable agreement (please
see note 11) ................................................................................................................. $134,953
$ 56,787
Amounts due to principals, certain non-controlling interest holders and employees .......
1,212
787
Total due to affiliates ................................................................................................. $136,165
$ 57,574
Loans
Loans primarily consist of interest-bearing advances made to certain non-controlling interest holders,
primarily the Company’s employees, to meet tax obligations related to vesting of equity awards. The notes, which
are generally recourse to the borrower or secured by vested equity and other collateral, bear interest at the
Company’s cost of capital and generated interest income of $1,396, $939 and $1,068 for the years ended
December 31, 2012, 2011 and 2010, respectively.
Due from Oaktree funds and portfolio companies
In the normal course of business, the Company pays certain expenses on behalf of the Oaktree funds, for
which it is reimbursed. Amounts advanced on behalf of consolidated funds are eliminated in consolidation. Certain
expenses initially paid by the Company, primarily employee travel and other costs associated with particular
portfolio company holdings, are reimbursed by the portfolio companies.
Other investment transactions
The Company’s principals and senior professionals are permitted to invest their own capital in Oaktree funds,
for which they pay the particular fund’s full management fee but not its incentive allocation. The Company waives
any right to incentive income that would ordinarily be earned on such investments, but assesses the normal
management fee. To facilitate the funding of capital calls by funds in which certain employees are invested, the
Company advances on a short-term basis the capital calls on their behalves. These advances are generally
reimbursed toward the end of the calendar quarter in which the capital calls occurred. Amounts temporarily
advanced by the Company are included in non-interest bearing advances made to certain non-controlling interest
holders and employees.
Aircraft services
A subsidiary of the Company leases an airplane for business purposes. The Company’s Chairman may use
this aircraft for personal travel and, pursuant to a policy adopted by such subsidiary relating to such personal use,
the Company is reimbursed by the Company’s Chairman for the costs of using the aircraft for personal
travel. Additionally, the Company occasionally makes use of an airplane owned by one of its principals for business
purposes at a price to the Company that is based on market rates.
153
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Special allocations
Certain principals receive special allocations based on a percentage of profits of the Oaktree Operating
Group. These special allocations, which are recorded as compensation expense, are made on a current basis only
for so long as they remain principals of the Company.
Transactions with Meyer Memorial Trust
One of the Company’s directors, Mr. Pierson, is the Chief Financial and Investment Officer of Meyer
Memorial Trust. Meyer Memorial Trust invests in certain Oaktree funds on the same terms as the other investors in
those funds.
15. CAPITAL REQUIREMENTS OF REGULATED ENTITIES
One of the Company's indirect subsidiaries is a registered U.S. broker-dealer that is subject to the minimum
net capital requirements of the U.S. Securities and Exchange Commission and the U.S. Financial Industry
Regulatory Authority. Additionally, one of the Company's indirect subsidiaries based in London is subject to the
capital requirements of the U.K. Financial Services Authority, and another based in Hong Kong is subject to the
capital requirements of the Hong Kong Securities and Futures Ordinance. These entities operate in excess of their
respective regulatory capital requirements.
The regulatory capital requirements referred to above may restrict the Company’s ability to withdraw capital
from its entities for purposes such as paying cash distributions or advances to the Company. As of December 31,
2012 and 2011, there was approximately $14.0 million and $8.0 million, respectively, of such potentially restricted
amounts.
16. SEGMENT REPORTING
The Company’s business is comprised of one segment, the investment management segment. As a global
investment manager, the Company provides investment management services through funds and separate
accounts. Management makes operating decisions and assesses business performance based on financial and
operating metrics and data that are presented without the consolidation of any funds.
The Company conducts its investment management business primarily in the United States, where
substantially all of its revenues are generated.
Adjusted net income
The Company’s chief operating decision maker uses adjusted net income (“ANI”) to evaluate the financial
performance of, and make resource allocations and other operating decisions for, the investment management
segment. The components of revenues and expenses used in the determination of ANI do not give effect to the
consolidation of the funds that the Company manages. In addition, ANI excludes the effect of: (a) non-cash equity-
based compensation charges related to OCGH equity issued prior to the Company’s initial public offering,
(b) income taxes, (c) expenses that Oaktree Capital Group, LLC or its Intermediate Holding Companies bear
directly and (d) the adjustment for the OCGH non-controlling interest. ANI is calculated at the Oaktree Operating
Group level. ANI was as follows:
154
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
Year Ended December 31,
2012
2011
2010
Revenues:
Management fees .............................................................................. $ 747,440
461,116
Incentive income ................................................................................
202,392
Investment income .............................................................................
1,410,948
Total revenues .............................................................................
$ 724,321
303,963
23,763
1,052,047
$ 750,031
413,240
149,449
1,312,720
Expenses:
Compensation and benefits ................................................................
Incentive income compensation expense ..........................................
General and administrative expenses ................................................
Depreciation and amortization expense .............................................
Total expenses .............................................................................
Adjusted net income before interest and other income (expense) ............
Interest expense, net of interest income (1) .............................................
Other income (expense), net ..............................................................
(330,059)
(222,594)
(102,685)
(7,397)
(662,735)
748,213
(31,730)
767
Adjusted net income ................................................................................. $ 717,250
(308,115)
(179,234)
(94,655)
(6,583)
(588,587)
463,460
(33,867)
(1,209)
$ 428,384
(287,067)
(159,243)
(81,121)
(6,481)
(533,912)
778,808
(26,173)
11,243
$ 763,878
(1)
Interest income was $2.6 million, $2.3 million and $1.9 million for the years ended December 31, 2012, 2011
and 2010, respectively.
A reconciliation of net income (loss) attributable to Oaktree Capital Group, LLC to adjusted net income of the
investment management segment is presented below.
Year Ended December 31,
2012
2011
2010
Net income (loss) attributable to Oaktree Capital Group, LLC .................. $ 107,810
$
(95,972) $
(49,455)
Equity-based compensation expense (1) .............................................
Income taxes (2)
..........................................................................................
36,024
30,858
948,746
949,376
21,088
26,399
Non-Operating Group other income (3) ....................................................
(6,260)
Non-Operating Group expenses (3) ..........................................................
553
—
768
—
1,113
OCGH non-controlling interest (3) ........................................................
548,265
(446,246)
(163,555)
Adjusted net income ................................................................................. $ 717,250
$ 428,384
$ 763,878
(1)
(2)
(3)
This adjustment adds back the effect of equity-based compensation charges for OCGH units issued prior to
the Company’s initial public offering, which is excluded from adjusted net income because it is a non-cash
charge that does not affect our financial position.
Because adjusted net income is a pre-tax measure, this adjustment eliminates the effect of income tax
expense from adjusted net income.
Because adjusted net income is calculated at the Operating Group level, this adjustment adds back the
effect of items applicable to OCG, its Intermediate Holding Companies or the OCGH non-controlling interest.
155
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
The following tables reconcile the Company’s segment information to the consolidated financial statements:
................................................................................. $
...................................................................................
Management fees (1)
Incentive income (1)
Investment income (1) ................................................................................
Total expenses (2) ...............................................................................
Interest expense, net (3) ............................................................................
Other income, net (4) ..........................................................................
Other income of consolidated funds (5) ...................................................
Income taxes .....................................................................................
Net income attributable to non-controlling redeemable interests in
consolidated funds .........................................................................
Net income attributable to OCGH non-controlling interest in
consolidated subsidiaries ...............................................................
Adjusted net income/net income attributable to Oaktree Capital
Group, LLC .................................................................................... $
As of or for the Year Ended December 31, 2012
Segment
Adjustments
Consolidated
747,440
$
(612,872) $
134,568
461,116
202,392
(662,735)
(31,730)
767
(450,701)
(177,010)
(127,868)
(14,043)
6,260
10,415
25,382
(790,603)
(45,773)
7,027
—
—
—
—
7,362,259
7,362,259
(30,858)
(30,858)
(6,016,342)
(6,016,342)
(548,265)
(548,265)
717,250
$
(609,440) $
107,810
Corporate investments, at equity (6) ........................................................ $ 1,115,952
$ (1,017,002) $
98,950
Total assets(7) .................................................................................... $ 2,359,548
$ 41,510,450
$ 43,869,998
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The adjustment represents the elimination of amounts attributable to the consolidated funds.
The expense adjustment consists of: (a) equity-based compensation charges for OCGH units issued prior to
the Company’s initial public offering of $36,024, (b) consolidated fund expenses of $91,291 and (c) expenses
incurred by the Intermediate Holding Companies of $553.
The interest expense adjustment represents the inclusion of interest expense attributable to non-controlling
interests of the consolidated funds and the exclusion of segment interest income.
The other income, net adjustment represents other income or expenses of OCG or its Intermediate Holding
Companies. This amount is attributable to a reduction in the amount of the deferred tax asset associated with
the Company's tax receivable agreement, which reduced the tax receivable agreement liability payable to
OCGH unitholders.
The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend
and other investment income attributable to non-controlling interests of the consolidated funds.
The adjustment to corporate investments is to remove from segment assets the consolidated funds that are
treated as equity method investments for segment reporting purposes.
The total assets adjustment represents the inclusion of investments and other assets of the consolidated
funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds
and incentive income receivable.
156
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
...................................................................................
Management fees (1) .......................................................................... $
Incentive income (1)
Investment income (1) ................................................................................
Total expenses (2) ...............................................................................
Interest expense, net (3) .....................................................................
Other expense, net ............................................................................
Other income of consolidated funds (4) ..............................................
Income taxes .....................................................................................
Net income attributable to non-controlling redeemable interests in
consolidated funds .........................................................................
Net loss attributable to OCGH non-controlling interest in
consolidated subsidiaries ...............................................................
Adjusted net income/net loss attributable to Oaktree Capital
As of or for the Year Ended December 31, 2011
Segment
Adjustments
Consolidated
724,321
$
(583,606) $
140,715
303,963
23,763
(288,908)
(15,163)
15,055
8,600
(588,587)
(1,056,277)
(1,644,864)
(33,867)
(1,209)
(17,076)
—
(50,943)
(1,209)
—
—
—
—
1,245,089
1,245,089
(21,088)
(21,088)
(233,573)
(233,573)
446,246
446,246
Group, LLC .................................................................................... $
428,384
$
(524,356) $
(95,972)
Corporate investments, at equity (5) ........................................................ $ 1,159,287
$ (1,037,462) $
121,825
Total assets (6)
............................................................................................ $ 2,083,908
$ 42,210,248
$ 44,294,156
(1)
(2)
(3)
(4)
(5)
(6)
The adjustment represents the elimination of amounts attributable to the consolidated funds.
The expense adjustment consists of: (a) equity-based compensation charges for OCGH units issued prior to
the Company’s initial public offering of $948,746, (b) consolidated fund expenses of $106,763 and
(c) expenses incurred by the Intermediate Holding Companies of $768.
The interest expense adjustment represents the inclusion of interest expense attributable to non-controlling
interests of the consolidated funds and the exclusion of segment interest income.
The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend
and other investment income attributable to non-controlling interests of the consolidated funds.
The adjustment to corporate investments is to remove from segment assets the consolidated funds that are
treated as equity method investments for segment reporting purposes.
The total assets adjustment represents the inclusion of investments and other assets of the consolidated
funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds
and incentive income receivable.
157
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
...................................................................................
Management fees (1) .......................................................................... $
Incentive income (1)
Investment income (1) ................................................................................
Total expenses (2) ...............................................................................
Interest expense, net (3) .....................................................................
Other income, net ..............................................................................
Other income of consolidated funds (4) ..............................................
Income taxes .....................................................................................
Net income attributable to non-controlling redeemable interests in
consolidated funds .........................................................................
Net loss attributable to OCGH non-controlling interest in
consolidated subsidiaries ...............................................................
Adjusted net income/net loss attributable to Oaktree Capital
As of or for the Year Ended December 31, 2010
Segment
Adjustments
Consolidated
750,031
$
(587,980) $
162,051
413,240
149,449
(369,110)
(142,829)
44,130
6,620
(533,912)
(1,046,739)
(1,580,651)
(26,173)
11,243
(29,748)
—
(55,921)
11,243
—
—
—
—
6,719,716
6,719,716
(26,399)
(26,399)
(5,493,799)
(5,493,799)
163,555
163,555
Group, LLC .................................................................................... $
763,878
$
(813,333) $
(49,455)
Corporate investments, at equity (5) ........................................................ $ 1,108,690
$ (1,036,491) $
72,199
Total assets (6)
............................................................................................ $ 1,944,801
$ 45,898,859
$ 47,843,660
(1)
(2)
(3)
(4)
(5)
(6)
The adjustment represents the elimination of amounts attributable to the consolidated funds.
The expense adjustment consists of: (a) equity-based compensation charges for OCGH units issued prior to
the Company’s initial public offering of $949,376, (b) consolidated fund expenses of $96,250 and
(c) expenses incurred by the Intermediate Holding Companies of $1,113.
The interest expense adjustment represents the inclusion of interest expense attributable to non-controlling
interests of the consolidated funds and the exclusion of segment interest income.
The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend
and other investment income attributable to non-controlling interests of the consolidated funds.
The adjustment to corporate investments is to remove from segment assets the consolidated funds that are
treated as equity method investments for segment reporting purposes.
The total assets adjustment represents the inclusion of investments and other assets of the consolidated
funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds
and incentive income receivable.
17. SUBSEQUENT EVENTS
In January 2013, the Company issued 522,000 restricted OCGH units to its employees and 6,381 Class A
units to its directors. These issuances are subject to annual vesting typically over periods of five to 10 years and
were not eligible to participate in the distribution paid on March 1, 2013, which was related to the fourth quarter of
2012.
On February 14, 2013, the Company declared a distribution attributable to the fourth quarter of 2012 of
$1.05 per Class A unit, bringing the aggregate distributions for fiscal year 2012 to $2.94. The distribution of $1.05
was paid on March 1, 2013 to Class A unitholders of record at the close of business on February 25, 2013.
In March 2013, the Company issued 2,127 Class A units to one of its directors.
158
Oaktree Capital Group, LLC
Notes to Consolidated Financial Statements — (Continued)
($ in thousands, except where noted)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Revenues ..................................................................... $
Expenses ......................................................................
Other income ................................................................
March 31, 2012
37,068
Three Months Ended
June 30, 2012
29,207
$
September 30,
2012
31,906
$
December 31,
2012
46,802
$
(167,567)
(207,008)
(168,020)
(248,008)
2,416,536
1,015,349
2,356,217
1,560,793
Income before income taxes ......................................... $ 2,286,037
Net income ................................................................... $ 2,278,270
Net income attributable to Oaktree Capital
Group, LLC ................................................................ $
Income per unit (basic and diluted):
Net income per Class A unit .......................................... $
Distributions declared per Class A unit ......................... $
18,608
0.82
0.42
$
$
$
$
$
837,548
$ 2,220,103
$ 1,359,587
823,623
$ 2,214,302
$ 1,356,222
24,719
0.84
0.55
$
$
$
25,212
0.84
0.79
$
$
$
39,271
1.30
0.55
Three Months Ended
June 30, 2011
37,893
$
September 30,
2011
37,483
$
December 31,
2011
35,945
$
March 31, 2011
44,449
Revenues ..................................................................... $
Expenses ......................................................................
Other income (loss) ......................................................
(410,647)
(421,384)
(370,892)
(441,941)
2,162,612
568,781
(3,662,272)
2,132,416
Income (loss) before income taxes ............................... $ 1,796,414
Net income (loss) .......................................................... $ 1,789,404
$
$
185,290
$(3,995,681) $ 1,726,420
177,708
$(3,997,009) $ 1,721,252
Net loss attributable to Oaktree Capital Group, LLC..... $
Net loss per unit (basic and diluted):
Net loss per Class A unit ............................................... $
(10,127) $
(20,359) $
(36,543) $
(28,943)
(0.45) $
(0.90) $
(1.61) $
(1.28)
Distributions declared per Class A unit ......................... $
0.90
$
0.64
$
0.51
$
0.29
159
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Managing Principal and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the
period covered by this report. Based on that evaluation, our Managing Principal and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act), are effective at the reasonable assurance level to accomplish
their objectives of ensuring that information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms and that such information is accumulated and communicated to our management, including our Managing
Principal and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
This annual report does not include a report of management's assessment regarding internal control over
financial reporting or an attestation report of Oaktree's independent registered public accounting firm due to a
transition period established by the rules of the SEC for newly public companies.
Item 9B. Other Information
None.
160
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers and Directors
The following table sets forth information about our executive officers and directors as of March 14, 2013:
Name
Howard S. Marks ................. 66 Director, Chairman and Principal
Age Position
Bruce A. Karsh ..................... 57 Director, President and Principal
John B. Frank....................... 56 Director and Managing Principal
David M. Kirchheimer........... 56 Director, Chief Financial Officer, Chief Administrative Officer and Principal
Kevin L. Clayton ................... 50 Director and Principal
Stephen A. Kaplan ............... 54 Director and Principal
Larry W. Keele ..................... 55 Director and Principal
Sheldon M. Stone ................ 60 Director and Principal
Robert E. Denham ............... 67 Director
D. Richard Masson .............. 54 Director
Wayne G. Pierson ................ 62 Director
Marna C. Whittington ........... 65 Director
Jay S. Wintrob...................... 55 Director
Todd E. Molz ........................ 41 General Counsel, Managing Director and Secretary
B. James Ford...................... 44 Managing Director
Caleb S. Kramer .................. 43 Managing Director
Howard S. Marks is our Chairman and a co-founder and has been a director since May 2007. Since our
formation in 1995, Mr. Marks has been responsible for ensuring the firm's adherence to its core investment
philosophy, communicating closely with clients concerning products and strategies and managing the firm. From
1985 until 1995, Mr. Marks led the groups at The TCW Group, Inc. that were responsible for investments in
distressed debt, high yield bonds and convertible securities. He was also Chief Investment Officer for domestic
fixed income at TCW. Previously, Mr. Marks was with Citicorp Investment Management for 16 years, where from
1978 to 1985 he was Vice President and senior portfolio manager in charge of convertible and high yield securities.
Between 1969 and 1978, he was an equity research analyst and, subsequently, Citicorp's Director of Research.
Mr. Marks holds a B.S.Ec. degree cum laude from the Wharton School of the University of Pennsylvania with a
major in finance and an M.B.A. in accounting and marketing from the Booth School of Business of the University of
Chicago, where he received the George Hay Brown Prize. He is a CFA® charterholder and a Chartered Investment
Counselor. Mr. Marks serves on the Board of Trustees of the University of Pennsylvania and from 2000 to 2010 was
Chairman of its Investment Board. With over 40 years of investment experience, Mr. Marks's extensive expertise in
our industry, his perceptive market insights and his importance to our client development bring considerable value
to our board of directors and our overall business.
Bruce A. Karsh is our President and a co-founder and has been a director since May 2007. He serves as
portfolio manager for our distressed debt funds. In addition, he oversees substantially all of our closed-end funds.
Prior to co-founding us, Mr. Karsh was a Managing Director of TCW and the portfolio manager of the Special
Credits Funds from 1988 until 1995. Before joining TCW, Mr. Karsh worked as Assistant to the Chairman of
SunAmerica, Inc. Prior to that, he was an attorney with the law firm of O'Melveny & Myers. Before working at
O'Melveny & Myers, Mr. Karsh clerked for the Honorable Anthony M. Kennedy, then of the U.S. Court of Appeals for
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the Ninth Circuit and presently Associate Justice of the U.S. Supreme Court. Mr. Karsh holds an A.B. degree in
Economics summa cum laude from Duke University, where he was elected to Phi Beta Kappa. He went on to earn
a J.D. from the University of Virginia School of Law, where he served as notes editor of the Virginia Law Review
and was a member of the Order of the Coif. Mr. Karsh currently serves on the Board of Trustees of Duke University
and is Chairman of its investment management subsidiary, DUMAC, LLC. Mr. Karsh currently serves on the boards
of Charter Communications, Inc., Tribune Company and a number of privately held companies. He previously
served on the boards of Furniture Brands International, KinderCare Learning Centers, Inc. and Littelfuse Inc.
Mr. Karsh is highly respected as one of the leading portfolio managers in the area of distressed debt investing, one
of our flagship investment strategies. Additionally, Mr. Karsh's extensive leadership and management skills and his
current and past service on boards of other public companies add significant value to our board of directors and our
overall business.
John B. Frank is our Managing Principal and Principal Executive Officer and has been a director since May
2007. From July 2001 until early 2006, Mr. Frank was the General Counsel of Oaktree. Prior to joining Oaktree in
July 2001, Mr. Frank was a partner of the Los Angeles law firm of Munger, Tolles & Olson LLP. While at that firm,
Mr. Frank acted as principal lawyer in a number of notable merger and acquisition transactions; as primary outside
counsel to a number of public and privately held corporations; and as special counsel to various boards of directors
and special board committees. Prior to joining Munger, Tolles & Olson LLP in 1984, Mr. Frank served as a law clerk
to the Honorable Frank M. Coffin of the U.S. Court of Appeals for the First Circuit. Prior to attending law school,
Mr. Frank served as a Legislative Assistant to the Honorable Robert F. Drinan, Member of Congress. Mr. Frank
holds a B.A. degree with honors in history from Wesleyan University and a J.D. magna cum laude from the
University of Michigan Law School, where he was Managing Editor of the Michigan Law Review and a member of
the Order of the Coif. He is a member of the State Bar of California, and while in private practice, was listed in
Woodward & White's Best Lawyers in America. Mr. Frank is a trustee of Wesleyan University, Polytechnic School
and Good Samaritan Hospital of Los Angeles. Mr. Frank brings a deep knowledge of our business to our board of
directors, as well as many years of experience as a corporate lawyer. Mr. Frank has broad responsibility for our
business and his service on our board of directors will help ensure both that our board is well informed about our
operations and that the board's priorities are implemented.
David M. Kirchheimer has been our Chief Financial Officer and Chief Administrative Officer since our
founding, a principal since 2002 and a director since May 2007. Prior to joining us in 1995, Mr. Kirchheimer was a
Vice President and the Chief Administrative Officer of Ticketmaster Corporation, a leading ticket processing and
distribution company. Previously he was Executive Vice President and Chief Financial Officer of Republic Pictures
Corporation, a publicly held entertainment company. From 1979 to 1986, Mr. Kirchheimer was with Price
Waterhouse in Los Angeles, most recently serving as a Senior Audit Manager. Mr. Kirchheimer graduated Phi Beta
Kappa and summa cum laude with a B.A. degree in Economics from Colorado College and received an M.B.A. in
Accounting and Finance from the Booth School of Business of the University of Chicago. He is a Certified Public
Accountant (inactive). Mr. Kirchheimer serves on the Board of Trustees of Huntington Memorial Hospital. As our
Chief Financial and Administrative Officer, Mr. Kirchheimer has thorough knowledge of the day-to-day operations of
our business. Additionally, his extensive experience in financial reporting, accounting and controls adds a valuable
resource to our board of directors.
Kevin L. Clayton is a principal who is dedicated to developing and maintaining our key investor relationships
and has been a director since May 2007. Mr. Clayton is also Supervising Principal of OCM Investments, LLC,
Oaktree's registered broker-dealer entity and member of FINRA. Mr. Clayton founded the Marketing and Client
Services department at Oaktree in 1995 and managed the group until 2010. He spent five years in the marketing
and client relations area at TCW before joining Oaktree in 1995. Mr. Clayton's prior experience includes six years at
Chrysler Corporation where he held a number of assignments in the U.S. Automotive Sales and Marketing Division.
Mr. Clayton holds a B.A. degree from Lehigh University and an M.B.A. from Saint Joseph's University in
Philadelphia. He is a Corporate member of Lehigh's Board of Trustees and chairs the University's Advancement
Committee. Mr. Clayton also serves on the Executive Committee of the Board of Trustees at Blair Academy and
chairs the school's Investment Committee. Mr. Clayton's extensive experience and knowledge in developing and
maintaining client relationships enhance the breadth of experiences of our board of directors.
Stephen A. Kaplan is a principal and the former head of our control investing group and has been a director
since May 2007. Mr. Kaplan has been with us since our inception in 1995. Mr. Kaplan began his career as an
attorney at the law firm of Gibson, Dunn & Crutcher LLP from 1983 until 1993, rising to partner in charge of the East
Coast insolvency practice of that firm. In 1993, he joined TCW to spearhead a new effort in investing for control of
financially distressed companies. At TCW, Mr. Kaplan helped to establish TCW's private equity strategy and acted
as portfolio manager of an investment fund focused on control of distressed companies. At Oaktree, Mr. Kaplan has
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acted as portfolio manager or has overseen all of the Oaktree closed-end funds that have focused on control
investing. Mr. Kaplan graduated with a B.S. in Political Science summa cum laude from the State University of New
York at Stony Brook and a J.D. from the New York University School of Law. Mr. Kaplan presently serves on the
boards of Genco Shipping and Trading Ltd., MG Holdco and Regal Entertainment Group. He has previously served
on the boards of Alliance Healthcare Services, Inc. and General Maritime Corporation. In addition, he currently
serves on the boards of numerous private companies. Mr. Kaplan is also a trustee of numerous nonprofit boards of
directors, including the Jonsson Comprehensive Cancer Center Foundation and the New York University School of
Law. Mr. Kaplan has over 17 years of experience making and managing control investments. His knowledge of the
private equity markets and his experiences as a director of public companies broadens and diversifies the
experiences of our board of directors as he is very familiar with board responsibilities, oversight and control.
Larry W. Keele is a principal and a co-founder and has been a director since May 2007. Mr. Keele heads our
convertible securities group. In addition to managing our U.S. convertible securities portfolios, he oversees our non-
U.S. and high income convertible investments strategies. Earlier, he was a Managing Director of TCW in charge of
the firm's convertible value portfolios from 1986 until his departure to co-found us in 1995. Prior to joining TCW,
Mr. Keele organized and managed the NationsBank Equity Income Fund, a commingled fund specializing in
convertible securities and high yielding equities. He holds a B.B.A. in Finance from Tennessee Technological
University and an M.B.A. in Finance from the University of South Carolina. Mr. Keele is a CFA® charterholder. With
over 25 years of experience in investing and managing convertible securities, Mr. Keele has extensive experience
in that asset class. As one of our co-founders, he is also closely familiar with our business. His investment
background and insights to the convertible markets bring value to our board of directors and our business.
Sheldon M. Stone is a principal and a co-founder and has been a director since May 2007. Mr. Stone directs
our high yield bond group. In addition to managing our U.S. high yield bond strategy, Mr. Stone oversees the
European high yield bond, European senior loan, U.S. senior loans and mezzanine finance strategies. Before
joining us, Mr. Stone established TCW's high yield bond group with Mr. Marks in 1985 and headed it until leaving
TCW to co-found Oaktree. Earlier, he worked with Mr. Marks at Citicorp from 1983 until 1985, where he performed
credit analysis on high yield bonds. Mr. Stone worked at The Prudential Life Insurance Company as a Director of
Corporate Finance from 1978 to 1983, managing fixed income portfolios and instructing analysts in credit analysis.
Mr. Stone holds an A.B. from Bowdoin College and an M.B.A. in Accounting and Finance from Columbia University.
Mr. Stone is a trustee of Bowdoin College, the Natural History Museum of Los Angeles County and the California
Community Foundation. With over 30 years of experience in the fixed income markets, Mr. Stone brings a wealth of
knowledge. As one of our co-founders, he is also closely familiar with our business. His investment background and
insights into the fixed income markets bring value to our board of directors and our business.
Robert E. Denham has been a director since December 2007. Mr. Denham is a partner in the law firm of
Munger, Tolles & Olson LLP, having rejoined the firm as a partner in 1998 to advise clients on strategic and financial
issues, after serving as the Chairman and Chief Executive Officer of Salomon Inc. Mr. Denham joined Salomon in
late August 1991 as General Counsel of Salomon and its subsidiary, Salomon Brothers, and became Chairman and
CEO of Salomon in June 1992. Prior to joining Salomon, Mr. Denham had been at Munger, Tolles & Olson LLP for
twenty years, including five years as managing partner. Mr. Denham graduated magna cum laude from the
University of Texas, where he was elected to Phi Beta Kappa. He received a master's degree in Government from
Harvard University in 1968 and a J.D. from Harvard Law School in 1971, where he graduated magna cum laude
and was a Case and Developments Editor of the Harvard Law Review. Mr. Denham is a member of the California,
American and Los Angeles County Bar Associations. Mr. Denham serves on the board of directors of the Russell
Sage Foundation (Chair) and the James Irvine Foundation and is a trustee of the Good Samaritan Hospital of Los
Angeles (Vice Chairman). He is also a public member of the Professional Ethics Executive Committee of the
American Institute of Certified Public Accountants. Mr. Denham presently serves on the boards of the Chevron
Corporation, Fomento Economico Mexicano, S.A. de CV (FEMSA), The New York Times and UGL Limited. Mr.
Denham previously served on the board of Wesco Financial Corporation. Mr. Denham has served as a member of
the board of directors of a number of publicly traded companies and, therefore, is experienced with board
responsibilities, oversight and control which will benefit our board of directors and our business. Mr. Denham also
provides a broader range of expertise on the board of directors given his background as a corporate lawyer and a
former chief executive officer of a global financial services company, where among other responsibilities, he chaired
the risk management committee.
D. Richard Masson has been a director since May 2007. Prior to his retirement from Oaktree in 2009,
Mr. Masson was a co-founder and principal of Oaktree, where he served as head of analysis of distressed debt
strategy from 1995 to 2001 and as co-head of analysis from 2001 to 2009. Prior thereto, he was Managing Director
of TCW and its affiliate, TCW Asset Management Company, and head of the Special Credits Analytical Group. Prior
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to joining TCW in 1988, Mr. Masson worked for three years at Houlihan, Lokey, Howard and Zukin, Inc., where he
was responsible for the valuation and analysis of securities and businesses. Prior to Houlihan, Mr. Masson was a
Senior Accountant with the Comprehensive Professional Services Group at Price Waterhouse in Los Angeles.
Mr. Masson holds a B.S. in Business Administration from the University of California at Berkeley and an M.B.A. in
Finance from the University of California at Los Angeles. He is a Certified Public Accountant (inactive).
Mr. Masson's extensive experience in distressed debt investing and his knowledge of our company brings value to
our board of directors and our business.
Wayne G. Pierson has been a director since November 2007. Mr. Pierson is Chief Financial and Investment
Officer of Meyer Memorial Trust, a member of the original consortium of seven longstanding Oaktree clients who
became institutional investors in Oaktree in February, 2004. Mr. Pierson currently serves as President of Acorn
Investors, LLC, an investor in OCGH. Prior to joining Meyer Memorial Trust, Mr. Pierson served as Treasurer of
Gregory Affiliates from 1980 until 1982. From 1973 until 1980, he served as an audit supervisor with Ernst & Young.
Mr. Pierson initiated and continues to conduct a comprehensive investment survey for the Foundation Financial
Officers Group, representing more than 150 foundations with assets in excess of $200 billion. He serves on a
number of private equity fund advisory boards and is a trustee for several private trusts. In addition, he serves on
the board of directors of M Fund, Inc. Mr. Pierson received a B.S. in Business Administration cum laude from
California State University, Northridge and is a Certified Public Accountant and CFA charterholder. Mr. Pierson's
investment and finance expertise and his familiarity with our company add value to our board of directors and to our
business.
Marna C. Whittington, Ph.D. has been a director since June 2012. Ms. Whittington was the Chief Executive
Officer of Allianz Global Investors Capital from 2001 until her retirement in January 2012. From 2002 to 2011, she
was Chief Operating Officer of Allianz Global Investors, the parent company of Allianz Global Investors Capital.
Prior to that, she was Managing Director and Chief Operating Officer of Morgan Stanley Investment Management.
Ms. Whittington started in the investment management industry in 1992, joining Philadelphia-based Miller Anderson
& Sherrerd. Previously, she was Executive Vice President and CFO of the University of Pennsylvania, and earlier,
Secretary of Finance for the State of Delaware. Ms. Whittington currently serves as a director of Macy's, Inc. and
Phillips 66. She holds an M.S. degree and a Ph.D. from the University of Pittsburgh, both in Quantitative Methods,
and a B.A. degree in Mathematics from the University of Delaware. Ms. Whittington's twenty years of experience in
the investment management industry and her service on the board of other public companies enhance and
contribute to the range of experience and independence of our board of directors.
Jay S. Wintrob has been a director since September 2011. Mr. Wintrob has served as President and Chief
Executive Officer of AIG Life and Retirement, the U.S. based life and retirement services businesses of American
International Group, Inc. (“AIG”), and Executive Vice President – Life and Retirement of AIG since 2009.
Mr. Wintrob was Executive Vice President – Retirement Services of AIG from 2002 to 2009 and also served as a
director of AIG from 1999 to 2004. Mr. Wintrob joined SunAmerica Inc. in 1987 as Assistant to the Chairman, was
elected Senior Vice President in 1989, Executive Vice President in 1991 and Vice Chairman in 1995. Mr. Wintrob
also served as President of SunAmerica Investments, Inc., overseeing the company's invested asset portfolio, from
1994 through 2000. Following AIG's acquisition of SunAmerica, Mr. Wintrob served as Vice Chairman of AIG
Retirement Services, Inc. from 1998 to 2005, Chief Operating Officer from 1998 to 2001 and has served as
President since 2000 and Chief Executive Officer since 2001. Prior to joining SunAmerica, Mr. Wintrob was with the
law firm of O'Melveny & Myers. Mr. Wintrob received his B.A. from the University of California at Berkeley and a
J.D. from the Boalt Hall School of Law at the University of California at Berkeley. Mr. Wintrob is a member of the
board of the American Council of Life Insurers and is a board member of several non-profit organizations, including
The Broad Foundations, The J. Paul Getty Trust, the Skirball Cultural Center and the Board of Governors of
Cedars-Sinai Medical Center. Mr. Wintrob's investment and finance expertise and his service as chief executive
officer of one of the largest life insurance and retirement services organizations in the United States add value to
our board of directors and to our business.
Todd E. Molz is our general counsel and a Managing Director. Mr. Molz manages all aspects of our legal
activities, including fund formation, acquisitions and other special projects. Prior to joining Oaktree in March 2006,
Mr. Molz was a partner of the Los Angeles law firm of Munger, Tolles & Olson LLP, where his practice focused on
tax and structuring aspects of complex and novel business transactions. Prior to joining Munger, Tolles & Olson
LLP, Mr. Molz served as a law clerk to the Honorable Alfred T. Goodwin of the United States Court of Appeals for the
Ninth Circuit. Mr. Molz received a B.A. in Political Science cum laude from Middlebury College and a J.D. with
honors from the University of Chicago. While at Chicago, Mr. Molz served on the Law Review, received the John M.
Olin Student Fellowship and was a member of the Order of the Coif. Mr. Molz serves on the Board of Trustees of
the Children's Hospital of Los Angeles.
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B. James Ford is a Managing Director and portfolio manager of our global principal investments strategy.
Mr. Ford is responsible for overseeing all activities of this strategy, including investment commitments and
approvals, client relations and administrative and personnel-related matters. Since joining Oaktree in 1996, Mr. Ford
has been involved in sourcing and executing a number of the firm's most significant investments and led the group's
efforts in media and energy sectors prior to being named a portfolio manager in 2006. Mr. Ford currently serves on
the board of directors of Crimson Exploration, Inc., Exco Resources, Inc., Dial Global, Inc. and a number of private
companies. Mr. Ford earned a B.A. in Economics from the University of California at Los Angeles and an M.B.A.
from the Stanford University Graduate School of Business. Mr. Ford also serves as an active member of the
Children's Bureau Board of Directors.
Caleb S. Kramer is a Managing Director and the portfolio manager of our European principal investments
strategy. Prior to joining Oaktree in 2000, Mr. Kramer co-founded Seneca Capital Partners LLC, a private equity
investment firm. From 1994 to 1996, Mr. Kramer was employed by Archon Capital Partners, an investment
firm. Prior to 1994, Mr. Kramer was a mergers and acquisitions associate at Dillon Read and Co. Inc. and an analyst
at Merrill Lynch and Co. Inc. Mr. Kramer received a B.A. in Economics from the University of Virginia.
There are no family relationships among any of our executive officers and directors.
Board Structure and Governance
Composition of Our Board of Directors
Our operating agreement establishes a board of directors responsible for the oversight of our business and
operations. So long as the Oaktree control condition is satisfied, the number of directors that comprise our board of
directors is determined from time to time by our manager. Our board of directors consists of Messrs. Marks, Karsh,
Frank, Kirchheimer, Clayton, Kaplan, Keele, Stone, Masson, Denham, Pierson and Wintrob and Ms. Whittington (for
a total of 13 directors). Actions by our board of directors must be taken with the approval of a majority of its
members. So long as the Oaktree control condition is satisfied, our manager is entitled to designate all the
members of our board of directors.
Control of Oaktree Capital Group Holdings GP, LLC
Oaktree Capital Group Holdings GP, LLC acts as our manager and is the general partner of OCGH, which
owns 100% of our outstanding Class B units. Under its operating agreement, Oaktree Capital Group Holdings GP,
LLC is managed by an executive committee that is comprised of our eight principals. In general, the executive
committee seeks to act by consensus or, absent a consensus, by a vote of a majority of the voting percentage of
the executive committee members (or such higher threshold as may be determined from time to time by the
executive committee). The executive committee also, from time to time, delegates to one or more of its members or
to other persons such authority and duties as the executive committee may deem advisable. Oaktree Capital Group
Holdings GP, LLC has agreed that the admission of any member who is not a principal is prohibited.
The voting percentage of each member of the executive committee is equal to the fraction, expressed as a
percentage, the numerator of which is his percentage interest in OCGH and the denominator of which is the
aggregate percentage interest of all of the executive committee members in OCGH. Accordingly, members with
larger economic stakes in the Oaktree Operating Group (including Messrs. Marks, Karsh and Stone) are able to
exercise greater voting power than members with smaller economic stakes on any matter submitted to the
executive committee for a vote. The combined voting percentages of Messrs. Marks and Karsh by themselves are
sufficient, for the foreseeable future, to constitute a majority of the voting percentage of the executive committee
members.
Controlled Company Exemption
Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual,
group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate
governance standards. Because our principals represent more than 50% of our voting power, we are therefore a
“controlled company.” As a result, we have elected not to comply with certain NYSE corporate governance
standards, including the requirement that a majority of the board of directors consist of independent directors and
the requirement to have a compensation committee and a nominating/corporate governance committee that are
composed entirely of independent directors with written charters addressing the committee's purpose and
responsibilities. In addition, we are not required to hold annual meetings of our unitholders. Accordingly, our Class A
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unitholders do not have the same protections afforded to shareholders of companies that are subject to all of the
NYSE corporate governance requirements.
Audit Committee
The purpose of the audit committee is to assist our board of directors in overseeing and monitoring the
quality and integrity of our financial statements, our compliance with legal and regulatory requirements, the
performance of our internal audit function and our independent registered public accounting firm's qualifications,
independence and performance. Our audit committee is comprised of Messrs. Masson and Wintrob and Ms.
Whittington. Our board of directors has determined that Messrs. Masson and Wintrob and Ms. Whittington meet the
independence standards and financial literacy requirements for service on an audit committee of a board of
directors under Rule 10A-3 promulgated under the Exchange Act and the NYSE rules. In addition, our board of
directors has determined that each of Mr. Masson and Ms. Whittington is an “audit committee financial expert”
within the meaning of Item 407(d)(5) of Regulation S-K and has “accounting or related financial management
expertise” under applicable NYSE rules. The audit committee has a charter that is available on our website at
www.oaktreecapital.com under the “Unitholders” section.
Executive Committee
Our board of directors has established an executive committee that acts, when necessary, in place of our full
board of directors during intervals between meetings of our board of directors. The executive committee consists of
Messrs. Marks, Karsh and Frank.
Code of Ethics
We have a Code of Ethics, which applies to our directors, executive officers and employees and is available
on our website at www.oaktreecapital.com under the “Unitholders” section. We intend to disclose any amendment
to or waiver of the Code of Ethics on behalf of a director or executive officer either on our website or in a Current
Report on Form 8-K filing.
Corporate Governance Guidelines
Our board of directors has a governance policy, which addresses matters such as the board of directors'
responsibilities and duties, the board of directors' composition, policies and compensation and director
independence, and is available on our website at www.oaktreecapital.com under the “Unitholders” section.
Communications to the Board of Directors
The non-management members of our board of directors intend to meet regularly. The non-management
directors have currently selected Mr. Pierson, one of our non-management directors, to lead these meetings for
2013. All interested parties, including any employee or unitholder, may send communications to the non-
management members of our board of directors by writing to: Oaktree Capital Group, LLC, Attn: General Counsel,
333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more
than ten percent of a registered class of our equity securities to file initial reports of ownership and reports of
changes in ownership with the SEC and furnish us with copies of all Section 16(a) forms they file. To our
knowledge, based solely on our review of the copies of such reports furnished to us or written representations from
such persons that they were not required to file a Form 5 to report previously unreported ownership or changes in
ownership, we believe that, with respect to the year ended December 31, 2012, such persons complied with all
such filing requirements.
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Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview of Compensation Philosophy and Program
Our fundamental philosophy in compensating our key personnel has always been, and will continue to be, to
align their interests with the interests of our clients and unitholders. The alignment of interests is a defining
characteristic of our business and one that we believe best optimizes long-term sustainable value. As described
more fully below, two of our named executive officers (“NEOs”) receive fixed payments, and most of our founding
principals, including Howard S. Marks, our Chairman, receive no compensation and receive only distributions on the
OCGH units they have held since our inception. The remaining NEOs are compensated through a combination of
equity grants, equity distributions, quarterly payments, and profit and/or fee sharing.
We intend to continue our historical compensation practices, although we anticipate that in the future we may
find it appropriate to provide compensation to our founding principals in addition to their equity distributions.
Nonetheless, we expect that the substantial majority of their compensation as a whole will continue to come from
their indirect ownership of the Oaktree Operating Group for the foreseeable future.
Our NEOs consisted of the following individuals: (a) Bruce A. Karsh, our President; (b) David M. Kirchheimer,
our Chief Financial Officer and Chief Administrative Officer; (c) John B. Frank, our Managing Principal and Principal
Executive Officer; (d) Stephen A. Kaplan, who formerly managed our global principal investments strategy; (e)
Caleb S. Kramer, who manages our European principal investments strategy; and (f) B. James Ford, who now
manages our global principal investments strategy.
Compensation Elements for Named Executive Officers
As noted above, our NEOs have historically been compensated primarily or exclusively through a
combination of equity grants and profit and fee sharing. Rather than pay base salaries and annual bonuses that
would require us to adjust compensation each year in response to short-term factors, our NEOs' compensation
arrangements were designed as long-term arrangements that are structured to align our NEOs' interests with the
interests of our company and our clients, motivate and reward long-term performance, and reduce the need for
recurring and potentially distracting compensation negotiations.
Generally speaking, we do not review our NEOs' compensation arrangements on an annual basis. To the
extent that an NEO's compensation is modified, such decisions are based upon Messrs. Marks's and Karsh's, or
Mr. Frank's, as applicable, subjective assessment of a multitude of factors, including the scope and complexity of
the NEO's responsibilities, the NEO's individual performance, the alignment of interests between the NEO and our
clients and unitholders, and the NEO's historic and anticipated contributions to our business results and financial
performance. None of the factors considered by Messrs. Marks and Karsh, or Mr. Frank, as applicable, is assigned
any particular weighting in determining the amount of compensation to award. No compensation decisions were
made with respect to any of our NEOs in 2012, though decisions made towards the end of 2011 to grant OCGH
units to Messrs. Frank, Kirchheimer, Kramer and Ford (as discussed below), and to transition Mr. Kaplan from a
management fee sharing arrangement to fixed payments, were effected in 2012.
What We Reward and Why We Pay Each Pay Element
The compensation packages for our NEOs are intended to align their interests with our clients and
unitholders, reward risk mitigation and sustained financial and operational performance and to motivate these
individuals to remain with us for long and productive careers. Our compensation arrangements are intended to
attract, retain and motivate individuals of the highest level of quality and effectiveness. We are focused on
rewarding the types of sustained, longer-term performance that provides attractive risk-adjusted returns for clients
and increases long-term unitholder value.
Messrs. Kaplan and Ford receive fixed payments as compensation. For our other NEOs, our compensation
structure enables our NEOs to receive remuneration via distributions on their indirect ownership of the Oaktree
Operating Group and from various profit or fee sharing arrangements. Allowing our NEOs to participate in profit or
fee sharing arrangements enables us to align their interests with those of our unitholders and clients, eliminating the
need to pay salaries and discretionary bonuses that do not consistently correlate to our profitability, creating a
comprehensive approach to compensation for our NEOs and encouraging long-term retention. The indirect
ownership of the Oaktree Operating Group by our NEOs results in distributions to our NEOs that are by design
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performance-based since all of the distributions are determined based on our profits and in respect of the officers'
allocated shares of the carried interest or incentive fees payable in respect of our investment funds. Equity grants
under the 2007 Plan and the 2011 Plan further align the interests of our NEOs with those of our unitholders.
A portion of the compensation earned by Messrs. Kaplan, Kramer and Ford and all of the compensation
earned by Mr. Karsh consist of carried interest, which they each received as a member of the portfolio management
team for the funds for which they serve as the portfolio manager. Mr. Frank receives a share of the carried interest
from our largest closed-end strategy, distressed debt, both in recognition of his historic contributions to the
management of some of the strategy's investments and in lieu of other compensation, such as a greater profit
sharing percentage or additional OCGH units. In addition, a significant portion of the compensation earned by
Messrs. Kaplan, Kramer and Ford has consisted of their share of the management fees paid by the funds for which
they serve as portfolio manager, although as discussed under “—Asset Based Management Fees” below, beginning
in 2012, Mr. Kaplan stopped sharing in the management fees paid by the funds he co-manages. Instead, we paid
Mr. Kaplan a fixed sum of $9,000,000 in 2012 on a quarterly basis. We expect the amount of the annual payment to
Mr. Kaplan to be less in 2013 and possibly decline further in future years. In addition, as discussed under “—Asset-
Based Management Fees” below, we also ended Mr. Ford’s management fee sharing arrangement as of January 1,
2013 and now will pay him an annual amount of $9,250,000 on a quarterly basis.
Indirect Ownership of the Oaktree Operating Group
All of our executive officers, including our NEOs, have significant indirect equity stakes in the Oaktree
Operating Group through their holdings of OCGH units, which we believe provide a long-term incentive to improve
the value of our business without creating undue risk. This ownership entitles our NEOs to a portion of the
aggregate earnings of the Oaktree Operating Group, and allows our NEOs to realize appreciation in the value of our
units through their ability to exchange OCGH units for Class A units and then sell such units. For purposes of our
financial statements, we treat distributions paid on the Oaktree Operating Group units as distributions on equity
rather than as compensation, and therefore these payments are not reflected in the Summary Compensation Table
below. As described under “Certain Relationships and Related Transactions, and Director Independence—
Exchange Agreement,” subject to certain restrictions, each OCGH unitholder will have the right to exchange his or
her vested OCGH units into, at the option of our board of directors, Class A units, an equivalent amount of cash
based on then-prevailing market prices, other consideration of equal value or any combination of the foregoing
pursuant to the terms of an exchange agreement following the expiration of any applicable lock-up period.
Our NEOs will forfeit all unvested units in OCGH upon their departure from Oaktree for any reason unless
the departure is due to death or disability, in which case all unvested units automatically vest in full, or if the
forfeiture requirement is waived by us. All of our NEOs are subject to transfer restrictions in respect of their OCGH
units by virtue of the fact that each of our NEOs must obtain board approval to exchange their OCGH units for
Class A units, which may be sold, or the equivalent amount of cash as discussed above.
As of December 31, 2012, our NEOs each held the following number of OCGH units and Class A units:
Number of
OCGH Units
Name
Bruce A. Karsh................................................................ 21,788,226
1,786,575
David M. Kirchheimer .....................................................
John B. Frank .................................................................
Stephen A. Kaplan ..........................................................
Caleb S. Kramer .............................................................
B. James Ford ................................................................
2,512,377
2,193,335
1,202,444
1,439,860
Number of
Class A Units
1,826
Total Number
of Units
21,790,052
136
185
181
79
120
1,786,711
2,512,562
2,193,516
1,202,523
1,439,980
Percentage of
Beneficial
Ownership of
Oaktree
Operating
Group
14.40%
1.20%
1.70%
1.50%
0.80%
0.95%
Following the May 2007 Restructuring, the OCGH unitholders' interests in OCGH continued to take into
account any disproportionate sharing in historical incentive income in accordance with the terms of the OCGH
limited partnership agreement that were in effect prior to the May 2007 Restructuring. As a result, distributions to
the OCGH unitholders by OCGH that are attributable to historical incentive income are not made pro rata in
proportion to the OCGH unitholders' interest in OCGH units but instead will be adjusted to account for the
disproportionate sharing of historical incentive income.
168
Equity Grants
Our board of directors and the general partner of OCGH adopted the 2007 Plan as part of the May 2007
Restructuring (please see “—2007 Plan” below). Before the adoption of the 2011 Plan (please see “—2011 Equity
Incentive Plan” below), all grants of equity-based awards made to our NEOs were made under the 2007 Plan, and
since the adoption of the 2011 Plan all grants of equity-based awards to be made to our NEOs are being made
pursuant to the terms and conditions of the 2011 Plan. For approximately the last five years, Mr. Frank has made all
final recommendations regarding grants of equity-based awards to our NEOs (other than to himself), based on his
subjective assessment of such factors as he deems appropriate, such as the NEO's individual contribution,
importance to our business and the performance of the group that the NEO directs. In making his assessments, he
solicits the advice and input of Messrs. Marks and Karsh. Messrs. Marks and Karsh determine in their discretion the
amount of equity-based awards, if any, to be granted to Mr. Frank, based upon their subjective assessment of Mr.
Frank's past and anticipated contribution to the success of our business, the scope and complexity of his
responsibilities, his current equity ownership, his existing overall compensation and such other factors as they
deem appropriate. All equity-based awards were formally granted either by our board of directors or by a committee
composed of Messrs. Marks, Karsh and Frank. For all equity-based incentive awards granted to our executive
officers since our initial public offering, Mr. Frank recommended such grants to the board, subject to the input and
advice of Messrs. Marks and Karsh, and our entire board served as the Committee under the 2011 Plan for
purposes of making such grants. We intend to continue this practice with respect to all such grants in the future.
On January 19, 2012, we granted 100,000 OCGH units to Mr. Frank, 25,000 OCGH units to Mr. Kirchheimer
and 50,000 OCGH units to Mr. Ford. The foregoing equity grants will vest ratably over 10 years, beginning on
March 1, 2013. In addition, we made two equity awards to Mr. Kramer on January 19, 2012, as follows: (a) a grant
of 67,500 OCGH units, which will vest ratably over nine years beginning January 1, 2013, in connection with Mr.
Kramer's agreement with us to cancel the same amount of phantom units previously awarded to him in January
2011, and (b) a new grant of 209,302 OCGH units, of which 150,697 OCGH units will vest ratably over five years
and 58,605 OCGH units will vest ratably over 10 years, in each instance beginning on November 11, 2012. With
respect to each of the foregoing equity grants, vesting can accelerate on death or disability. None of our other
NEOs was granted OCGH units in 2012.
In assessing equity grants to our personnel, including our NEOs, Mr. Frank does not employ any formulaic
approach or utilize compensation consultants. Instead, Mr. Frank subjectively assesses factors such as the scope
and impact of the person's role, his or her historic and anticipated future contribution to our company's long term
success, the person's historic compensation (including equity grants) and overall level of compensation relative to
other personnel, and the vesting periods associated with the equity grants. Mr. Frank does not weigh these factors
in any particular way; rather, he uses his subjective judgment to determine the size of the OCGH unit grant. With
respect to the equity grants for Messrs. Kramer, Ford and Kirchheimer in 2012, Mr. Frank considered the factors
described above and, with respect to Messrs. Kramer and Ford, took into account the increasing importance of the
European principal investments strategy Mr. Kramer heads and the transition of responsibility for our global
principal investments strategy to Mr. Ford. For Mr. Frank's 2012 equity grants, Messrs. Marks and Karsh similarly
assessed the scope and impact of Mr. Frank's role, his historic and anticipated future contribution to our company,
his historic compensation (including equity grants) and his overall compensation, as compared to other senior
executives. In particular, Messrs. Marks and Karsh considered the scope of Mr. Frank's responsibilities as our
Managing Principal, the increase in those responsibilities resulting from the growth in the breadth and complexity of
our operations, and the additional responsibilities relating to managing a public company. In each case, no
particular weight was assigned to any of the factors considered. In addition to the factors described above, we
granted the 209,302 OCGH units described above to Mr. Kramer in recognition of Mr. Kramer's agreement to
reduce the asset-based management fees he would otherwise receive in respect of the funds he manages.
Components of Other Compensation
As described above, our NEOs' compensation arrangements were designed as long-term arrangements that
are structured to align our NEOs' interests with the interests of our company and our clients, motivate and reward
long-term performance and reduce the need for recurring and potentially distracting compensation negotiations. We
pay our NEOs a certain percentage of different revenues or profits, generally focused more on our overall
profitability in the case of Messrs. Karsh, Frank and Kirchheimer, and more on particular strategies we manage in
the case of Messrs. Karsh, Kaplan, Kramer and Ford, although in the case of Mr. Frank, a meaningful portion of his
compensation in a given year may relate to incentive income generated by our distressed debt funds, and in the
case of all of our NEOs, their equity ownership represents a very substantial portion of their participation in the
economics of our business. We attached little weight to the mix of compensation in any particular year as we focus
on the long-term nature of our business and compensation arrangements. Several years ago, Messrs. Marks and
169
Karsh set the percentages of profit sharing, incentive income and management fee income for our NEOs. When
doing so, they considered a variety of factors, including the projected amount of profit sharing, incentive income and
management fee income each NEO would receive relative to the other applicable compensation components.
Profit Sharing Arrangements
Each of Messrs. Frank and Kirchheimer is entitled to receive a quarterly profit sharing payment based on the
annual GAAP net income of the Oaktree Operating Group with adjustments (a) eliminating the compensation
expense relating to equity granted on or before the 2007 Private Offering, (b) representing a 50% reduction to the
compensation expense relating to all other equity grants and (c) for certain other minor items. Profit sharing
payments made in respect of a particular year are subject to a true-up or true-down after the close of that year to
reflect actual profits for the year. This profit sharing arrangement will terminate upon the termination of the
employment of Messrs. Frank and Kirchheimer, respectively, for any reason. When Messrs. Frank and Kirchheimer
became principals of our business in 2002, no principal had ever received a fixed salary and bonus, and Messrs.
Marks and Karsh concluded annual discussion of bonuses would be contrary to the nature of the status of
Messrs. Frank and Kirchheimer as principals. Instead, they determined an appropriate profit sharing percentage for
Messrs. Frank and Kirchheimer based in part on the compensation they would have received had they remained
employees compensated at the most senior level, taking into account that this profit sharing arrangement was
100% at risk and tied their compensation directly to the overall profitability of our business. Messrs. Kirchheimer
and Frank's profit sharing arrangement dates back to the beginning of 2003, when it was determined that
compensating them by reference to our profits would be preferable to continuing to afford them salary and bonus or
granting them equity sufficient to generate a comparable cash flow. Their profit sharing percentages were increased
in 2009 to reflect the growth in their responsibilities since 2003. Since Messrs. Frank and Kirchheimer are
responsible for the day to day operations of our business and for managing our overall business, the profit sharing
arrangements motivate them by tying their compensation to the success of our overall business. The amounts paid
to Messrs. Frank and Kirchheimer as annual profits participation interests are set forth under “All Other
Compensation” in the Summary Compensation Table below.
Carried Interest or Incentive Income
As noted above, Messrs. Karsh, Frank, Kaplan, Kramer and Ford (like many of our investment professionals)
have the right to receive a portion of the incentive income generated by our funds through their participation
interests in the carry pools generated by the general partners of these funds. The carry pools are the participation
interests in these funds set aside for the general partners of the funds, which in turn grant a portion of such interests
to our NEOs and other executives. Each of Messrs. Karsh and Frank receives a share of the incentive income we
receive with respect to certain of our distressed debt funds, and each of Messrs. Kaplan, Kramer and Ford receives
a share of the incentive income we receive from our control investing funds. We first awarded Mr. Karsh an interest
relating to the incentive income of our distressed debt funds commencing with our fund, OCM Opportunities Fund
VII, L.P., and have awarded him an interest in each subsequent distressed debt fund. His percentage is determined
by a formula that takes into account his indirect interest through his equity ownership and will increase as his equity
ownership decreases, subject to a cap. The carry pools (and Messrs. Karsh, Frank, Kaplan, Kramer and Ford's
participation therein) are referred to as our “Carry Plans.” Under the terms of our closed-end funds, we (and our
employees who share in our carried interest) are generally not entitled to carried interest distributions (other than
tax distributions) until the investors in our funds have received a return of all contributed capital plus a preferred
return, which is typically 8%. Because the aggregate amount of carried interest payable through our Carry Plans is
directly tied to the realized performance of the funds, we believe this fosters a strong alignment of interests among
the investors in those funds and Messrs. Karsh, Frank, Kaplan, Kramer and Ford, and therefore benefits both those
investors and our unitholders.
Participation in carried interest is a primary means of compensating and motivating many of our investment
professionals. We believe such participation is one of the most effective ways to align the interests of our
investment professionals with our clients and unitholders. Mr. Frank, or Messrs. Marks and Karsh, as applicable,
determine the amount of incentive income to grant in respect of a given fund based on our historical arrangements
with the NEO and our estimation of the NEO's current and projected role in the investment activities of the particular
fund. In making these determinations, we consider a multitude of factors, including the NEO's role in raising the
particular fund, sourcing and evaluating potential investment opportunities for the fund, managing and monitoring
existing investments within the fund, running the larger investment strategy and managing the investment and other
professionals involved in the fund's activities. None of these factors is assigned a particular weighting when
determining the amount of carried interest to grant to a particular NEO. We expect to continue to use participation in
carried interest as a cornerstone of compensation for our investment professionals who manage closed-end funds.
Grants of participation interests in incentive income for our closed-end funds are made in each specific fund and are
170
subject to vesting, which typically runs over five years, subject to acceleration for death, disability or termination
without cause. Vesting serves as an employment retention mechanism and thereby enhances the alignment of
interests between a participant and us. We believe that vesting of participation in incentive income motivates
participants to remain in our employ over the long term. For purposes of our financial statements, we treat the
income allocated to all of our personnel who have participation interests in the incentive income generated by our
funds as compensation, and the allocations of incentive income earned by Messrs. Karsh, Frank, Kaplan, Kramer
and Ford in respect of 2012 are accordingly set forth under “All Other Compensation” in the Summary
Compensation Table below, even though they may not have received such amounts in cash.
Asset-Based Management Fees
While all of our NEOs share indirectly in our management fees through their ownership of OCGH units, each
of Messrs. Kaplan, Kramer and Ford also historically received a direct share of the management fees paid by the
control investing funds for which he serves as portfolio or co-portfolio manager. During their investment periods,
these funds pay a management fee based on a percentage of limited partners' capital commitments. Thereafter, the
management fee is based on the lesser of a percentage of the portion of limited partners' capital contributions that
has been invested and not returned to such limited partners and the cost basis of the assets remaining in the fund.
The amount paid to Messrs. Kaplan, Kramer and Ford as distributions of asset-based management fees is set forth
under “All Other Compensation” in the Summary Compensation Table and is determined by reference to sharing
percentages we negotiated with Messrs. Kaplan, Kramer and Ford some years ago, taking into account Messrs.
Kaplan, Kramer and Ford's roles in fundraising, sourcing and evaluating potential investment opportunities,
managing and monitoring existing investments and managing the strategy and its investment and other
professionals, with none of these factors having any particular weighting. Starting in 2012, we began moving away
from these formulaic arrangements.
Mr. Kaplan has transitioned his responsibilities as head of our global principal investments strategy to Mr.
Ford as a part of an orderly succession process. In connection with Mr. Kaplan's transition, beginning in 2012, Mr.
Kaplan no longer receives a fixed direct share of asset-based management fees. Instead, Mr. Kaplan received four
quarterly payments in 2012 totaling $9,000,000 in the aggregate. We determined the $9,000,000 amount by
estimating the fixed management fees Mr. Kaplan would have otherwise earned in 2012, and reducing that amount
by 25% to account for the transitioning of Mr. Kaplan's responsibilities to others. For 2013, Mr. Kaplan will receive
four quarterly payments totaling $4,500,000 in the aggregate. No set amount has yet been determined with respect
to Mr. Kaplan's compensation after 2013. Mr. Kaplan continues to fulfill his responsibilities as a portfolio manager of
many of our control investing funds and continues to be a senior member of our global principal investments group.
Beginning in 2013, we have agreed to pay Mr. Ford the fixed annual amount of $9,250,000 in quarterly
installments, rather than a share of our asset-based management fees. This fixed amount represents approximately
what Mr. Ford has received annually for the last two years as his share of our management fees under his former
compensation arrangement, but is materially less than the amount we anticipate we would have paid Mr. Ford for
future years if the former arrangement had remained in effect.
Other Benefits
We provide an annual cost of living adjustment to Mr. Kramer to compensate him for the additional costs he
incurs by being stationed in London with his family. We also cover the cost of travel for Mr. Kramer and his family
from the United Kingdom to the United States. We agreed to provide this personal benefit in order to encourage Mr.
Kramer to relocate to London and believe that it has contributed to the success of that arrangement. We provide
minimal other perquisites to our executives and such perquisites form an insignificant element of our total
compensation structure.
Determination of Executive Compensation
Except in the case of the grants of OCGH units to Mr. Frank as discussed above under “—Equity Grants,”
the compensation of our senior professionals is determined by the relevant portfolio manager or department head
and by Mr. Frank, our Managing Principal. Mr. Frank, with the input of Messrs. Marks and Karsh, makes the final
decisions in his discretion, based on his subjective assessment of what will best advance the interests of our
company, but our compensation process is a collaborative and iterative effort. Our process is intended to
appropriately reward and incentivize our executives so as to secure their loyalty and motivate them to devote their
best efforts to the interests of our clients and unitholders. Our process is not formulaic. Rather, we seek to take into
account a range of largely subjective factors relating to the individual's historic and projected contribution to the
success of our business. The particular factors deemed most relevant to any particular compensation decision vary
widely depending upon individual circumstance, but typically include consideration of the individual's work ethic,
171
expertise, judgment, reputation, seniority, willingness and ability to work as part of a team and overall effectiveness.
None of these factors is assigned any particular weight in making any compensation decisions. No compensation
decisions were made with respect to any of our NEOs in 2012, though decisions made towards the end of 2011 to
grant OCGH units to Messrs. Frank, Kirchheimer, Kramer and Ford, and to transition Mr. Kaplan from a
management fee sharing arrangement to fixed payments, were effected in 2012. These equity grants, and the
subjective decision making process used to determine the size of these grants, are discussed above under “—
Equity Grants.” Mr. Kaplan’s fee sharing transition is discussed above under “—Asset-Based Management Fees.”
Risk Analysis of Our Compensation Programs
We strive to invest in a risk-controlled fashion and seek to ensure that our compensation policies are
consistent with that approach and discourage the incurrence of undue risk. Thus, we emphasize both the grant of
equity and-for senior investment professionals in our closed-end funds-carried interest subject to multi-year vesting
as key forms of compensation, particularly as employees become more senior in the organization and assume
more leadership. We believe this policy encourages long-term thinking, fosters a collaborative culture and reduces
any incentive to accept excessive risk in a search for short-term gain. With respect to participation in our incentive
income, our closed-end funds generally distribute incentive income only after we have returned all capital plus a
preferred return to our investors, meaning that in analyzing investments and making investment decisions, our
investment professionals are motivated to take a long-term view of their investments, given that short-term results
typically do not affect their compensation. Importantly, the amount of incentive income paid to these investment
professionals is determined by the performance of the fund as a whole, rather than specific investments, meaning
that they have a material interest in every investment. This approach discourages excessive risk taking, given that
even a hugely successful investment will result in incentive compensation payments only if the overall performance
of the fund exceeds the requisite hurdle.
Tax and Accounting Considerations
Beginning on May 25, 2007, we began accounting for share-based payments (i.e., OCGH units issued at the
time of the May 2007 Restructuring and equity-based awards granted under our 2007 Plan) in accordance with
Accounting Standards Codification Topic 718.
172
Summary Compensation Table for 2012
The following table provides summary information concerning the compensation of our current and former
principal executive officers (Mr. Frank assumed the role of principal executive officer from Mr. Karsh in May 2012),
our chief financial officer and each of our three other most highly compensated employees who served as executive
officers as of December 31, 2012, for services rendered to us during 2012, 2011 and 2010.
The distributions our NEOs receive in respect of their indirect ownership of the Oaktree Operating Group are
based on their respective holdings of OCGH units and are not reflected as cash compensation in the table below:
Name and Principal Position
Bruce A. Karsh,
President ........................
David M. Kirchheimer,
Chief Financial Officer
and Chief Administrative
Officer .............................
John B. Frank,
Managing Principal .........
Year
Salary ($) (1)
Bonus
($) (1)
Stock Awards
($) (2)
Non-Equity
Incentive Plan
Compensation
($)
All Other
Compensation
($) (3),(4)
Total ($)
2012
2011
2010
2012
2011
2010
2012
2011
2010
$
$
$
$
$
$
$
$
$
— $ — $
— $ — $
— $ — $
— $
— $
— $
— $ 12,195,475
$ 12,195,475
— $ 4,125,747
$ 4,125,747
— $ 8,254,547
$ 8,254,547
— $ — $ 825,000
— $ — $ 621,250
— $ — $ 582,000
— $ — $ 3,300,000
— $ — $ 2,485,000
— $ — $ 2,328,000
$
$
$
$
$
$
— $ 6,546,440
$ 7,371,440
— $ 4,798,723
$ 5,419,973
— $ 7,303,995
$ 7,885,995
— $ 13,549,896
$ 16,849,896
— $ 10,955,587
$ 13,440,587
— $ 14,819,956
$ 17,147,956
Stephen A. Kaplan,
Principal ..........................
2012
$ 9,000,000
$ — $
Caleb S. Kramer,
Managing Director ..........
B. James Ford,
Managing Director ..........
2011
2010
2012
2011
2010
2012
$
$
$
$
$
$
— $ — $
— $ — $
— $
— $
— $
— $ 11,404,815
$ 20,404,815
— $ 20,708,321
$ 20,708,321
— $ 22,031,295
$ 22,031,295
— $ — $ 9,134,466
— $ — $ 2,182,725
$
$
— $ 22,031,711
$ 31,166,177
— $ 16,780,115
$ 18,962,840
— $ — $
— $
— $ 15,185,125
$ 15,185,125
— $ — $ 1,650,000
$
— $ 13,152,204
$ 14,802,204
(1) We do not make fixed payments to any of our NEOs other than to Mr. Kaplan in 2012 and to Messrs. Kaplan
(2)
and Ford in 2013.
The reference to “stock” in this table refers to units in OCGH and phantom units of OCGH. The grant date fair
value of the units received by our NEOs during the years ended December 31, 2012, 2011 and 2010 is
reflected in the “Stock Awards” column in the Summary Compensation Table because we must account for
such units as compensation expense for financial statement reporting purposes. We recognize expense for
financial statement reporting purposes in respect of the unvested units in OCGH received by our NEOs on
the basis of the value of those units at the time of the grant pursuant to Financial Accounting Standards Board
Accounting Codification (ASC) Topic 718 or “ASC Topic 718,” Accounting for Stock Compensation. Please
see notes 2 and 10 to our consolidated financial statements for further information concerning the
assumptions underlying such expense.
(3) Amounts included for 2012, 2011 and 2010 reflect the total amount payable with respect to such NEO's right
to receive an allocation of the annual profits of the Oaktree Operating Group in respect of the years ended
December 31, 2012, 2011 and 2010, respectively (please see “—Compensation Elements for Named
Executive Officers—Profit Sharing Arrangements”).
(4) Please see the “All Other Compensation Supplemental Table” below.
173
All Other Compensation Supplemental Table
The following table provides additional information regarding each component of the All Other Compensation
column in the Summary Compensation Table:
Payments in
Respect of
Carried
Interest (1)
Asset Based
Management
Fees (2)
Profits
Participation (3)
Cost of
Living
Allowance (4)
Travel
Allowance (5)
Total
$ 12,195,475
$ 4,125,747
$ 8,254,547
$
$
$
$
$
$
— $
— $
— $
$ 4,997,285
$ 4,719,965
$ 5,601,494
$ 11,404,815
$
$
$
$
Name
Bruce A. Karsh .............
David M. Kirchheimer ...
John B. Frank ...............
Stephen A. Kaplan........
Caleb S. Kramer ...........
Year
2012
2011
2010
2012
2011
2010
2012
2011
2010
2012
2011
2010
2012
2011
2010
$ 5,759,561
$ 14,948,760
$ 5,442,372
$ 16,588,923
$ 6,190,783
$ 15,458,919
$ 3,624,617
$ 12,718,973
$ 1,309,493
$ 13,393,880
$
$
$
$
$
$
— $
— $
— $
— $
— $
— $
— $ 6,546,440
— $ 4,798,723
— $ 7,303,995
— $ 8,552,611
— $ 6,235,622
— $ 9,218,462
$
$
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $ 12,195,475
— $ 4,125,747
— $ 8,254,547
— $ 6,546,440
— $ 4,798,723
— $ 7,303,995
— $ 13,549,896
— $ 10,955,587
— $ 14,819,956
— $ 11,404,815
— $ 20,708,321
— $ 22,031,295
— $ 325,000
$
57,009
$ 22,031,711
— $ 325,000
$ 111,525
$ 16,780,115
— $ 327,952
$ 153,800
$ 15,185,125
— $
— $
— $ 13,152,204
B. James Ford .............
2012
$ 3,988,142
$ 9,164,062
(1) Amounts included for 2012, 2011 and 2010 represent amounts earned on an accrual basis in respect of
participation interests in incentive income generated by our funds with respect to the years ended December
31, 2012, 2011 and 2010, respectively. To the extent that timing differences may exist between when amounts
are earned on an accrual basis and paid in cash, these amounts do not reflect actual cash carried interest
distributions to the NEOs during such periods. Timing differences typically arise when cash is distributed in
the quarter immediately following the one in which the related income was earned.
(2) Amounts included for 2012, 2011 and 2010 represent management fees earned on an accrual basis in a
given year in respect of funds in which the NEO serves as a portfolio manager.
(3) Amounts included for 2012, 2011 and 2010 represent the amounts earned on an accrual basis in a given year
in respect of the NEO's annual profits participation interest.
(4) Amounts intended to compensate Mr. Kramer for the additional expenses incurred by being located in the
United Kingdom.
(5) Amounts needed to cover the actual cost of travel between the United States and the United Kingdom for Mr.
Kramer and his family.
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Non-Competition, Non-Solicitation and Confidentiality Restrictions
Pursuant to the terms of OCGH's partnership agreement, our executive officers (including our NEOs) are
subject to customary provisions regarding non-solicitation of our clients and employees and confidentiality,
intellectual property and nondisparagement obligations. In addition, during the term of employment and for the one-
year period immediately following the resignation or termination of employment (other than a termination by us
without cause), our executive officers may not, directly or indirectly:
engage in any business activity in which we operate, including any Competitive Business (as defined
below);
render any services to any Competitive Business; or
acquire a financial interest in or become actively involved with any Competitive Business (other than as a
passive investor holding a minimal percentage of the stock of a public company).
“Competitive Business” means any business which is competitive with the business of any member of the
Oaktree Operating Group or any of its affiliates (including raising, organizing, managing or advising any fund having
an investment strategy in any way competitive with any of the funds managed by any member of the Oaktree
Operating Group or any of its affiliates) anywhere in the United States or any other country where a member of the
Oaktree Operating Group or any of its affiliates conducts business. Additionally, during the term of employment and
for the two-year period immediately following the resignation or termination of employment, our executive officers
may not solicit our customers or clients for a Competitive Business, induce any employee to leave our employ or
hire or otherwise enter into any business affiliation with any person who was our employee during the twelve-month
period preceding such executive officer's termination of employment.
Incentive Income
Participation in incentive income generated by our funds is typically subject to a five-year vesting schedule,
under which a participating NEO's interest will vest in increments of 22% on each of the first through fourth
anniversaries of the closing date of the applicable fund, with the remaining 12% of the interest vesting on or after
the fifth anniversary of such closing date, subject to certain limitations as set forth in the applicable governing
documents. Under the terms of the applicable governing documents, NEOs are subject to various covenants
addressing confidentiality, intellectual property, non-solicitation, non-competition and non-disparagement. Pursuant
to the applicable fund agreements, a participating NEO's incentive income interest is subject to clawback in the
event that the general partner of the applicable fund is required to return any distributions (other than tax
distributions) received in respect of such NEO's interest in the applicable fund.
Grants of Plan-Based Awards in 2012
The following table provides information concerning the grant of equity-based awards made during the year
ended December 31, 2012. Other than the OCGH units granted to Messrs. Frank, Kirchheimer, Kramer and Ford,
we did not grant any OCGH units or other equity awards to any of our NEOs in 2012.
Name
Grant Date
David M. Kirchheimer .............................................................................. 1/19/2012
John B. Frank .......................................................................................... 1/19/2012
Caleb S. Kramer ...................................................................................... 1/19/2012
Caleb S. Kramer ...................................................................................... 1/19/2012
B. James Ford ......................................................................................... 1/19/2012
All Other Stock
Awards: Number
of Shares of
Stock or Units (1)
25,000
100,000
67,500
209,302
50,000
Grant Date Fair
Value of Stock
and Option
Awards (2)
$ 825,000
$ 3,300,000
$ 2,227,500
$ 6,906,966
$ 1,650,000
(1)
The awards of OCGH units granted to Messrs. Frank, Kirchheimer and Ford vest in 10 equal installments,
beginning on March 1, 2013 and thereafter on March 1 in each of the following nine years. The awards
granted to Mr. Kramer include (a) 209,302 OCGH units, of which 150,697 OCGH units vest in equal
installments over five years and 58,605 OCGH units vest in equal installments over 10 years, in each
instance beginning on November 11, 2012 and (b) 67,500 OCGH units that vest in equal installments over
nine years beginning on January 1, 2013 in connection with Mr. Kramer's agreement with us to cancel the
same amount of phantom units previously awarded to him in January 2011. Please see “—Equity Grants” for
additional information.
175
(2)
The grant date fair value of the unit awards was determined in accordance with ASC Topic 718. Please see
notes 2 and 10 to our consolidated financial statements for further information concerning the assumptions
underlying such expense.
2007 Equity Incentive Plan
Our board of directors and the general partner of OCGH adopted the 2007 Plan as part of the May 2007
Restructuring. As explained in more detail below, the 2007 Plan was a source of equity-based awards, permitting us
to grant to our investment professionals, other employees, directors and consultants options, unit appreciation
rights, restricted units, phantom restricted units and other awards based on the units of OCGH, each of which
represent an indirect interest in one Oaktree Operating Group unit. No more awards are being granted under the
2007 Plan.
Administration. The 2007 Plan is administered by our board of directors with the general partner of OCGH.
Our board of directors and the general partner of OCGH has delegated the authority to administer the 2007 Plan to
the Administrator, which is a committee consisting of Messrs. Marks, Karsh and Frank. For each OCGH unit granted
pursuant to an award under the 2007 Plan (the “Award Units”) we issue one Class B unit and one Oaktree
Operating Group unit to OCGH. For each OCGH unit granted under the 2007 Plan that is subsequently forfeited by
the employee, the 2007 Plan also provides for the automatic corresponding cancellation of one Class B unit and
one Oaktree Operating Group unit held by OCGH.
Units Subject to the 2007 Plan. As of March 11, 2013, 4,954,976 OCGH units have been issued under our
2007 Plan. As with the other OCGH units, pursuant to the exchange agreement and the terms of the OCGH
partnership agreement, vested Award Units may be exchanged for, at the option of our board of directors, our
Class A units, an equivalent amount of cash based on then-prevailing market prices, other consideration of equal
value or any combination of the foregoing, subject to approval of our board of directors.
2011 Equity Incentive Plan
In December 2011, we adopted the 2011 Plan. The purpose of the 2011 Plan is to provide a means for us
and our Affiliates (as defined in the 2011 Plan) to attract and retain key personnel and a means for current and
prospective principals, directors, officers, employees, consultants and advisors of us and our Affiliates to acquire
and maintain an equity interest in us and/or one or more of our Affiliates, thereby strengthening their commitment to
the welfare of us and our Affiliates and aligning their interests with those of our unitholders and clients.
Administration. A committee (the "Committee") established by our board of directors administers the 2011
Plan. The current members of the Committee are Messrs. Marks, Karsh and Frank. The Committee has broad
authority to designate participants of the 2011 Plan, determine the type of awards and terms and conditions of
awards granted under the 2011 Plan and adopt, alter and repeal rules, guidelines and practices relating to the 2011
Plan.
Eligibility. Employees, partners, directors, consultants, advisors and other individuals providing services to
us or our Affiliates are eligible to participate in the 2011 Plan. Participation in the 2011 Plan is limited to persons who
have entered into an award agreement or who have received written notification from the Committee (or its
designee) that they have been selected to participate in the 2011 Plan.
Awards. The Committee has the discretion to grant awards in respect of Oaktree Operating Group units,
Class A units, OCGH units, any type of unit or interest of any member of the Oaktree Operating Group or any class
or series of units or other ownership interests issued by us or one of our Affiliates (collectively, “Units”). The
Committee may grant options, unit appreciation rights (“UARs”), restricted Unit awards, Unit bonus awards and/or
phantom equity awards to eligible persons.
Number of Units Authorized. The 2011 Plan provides that the maximum number of Units that may be
delivered pursuant to awards under the 2011 Plan is 22,300,000, as increased on January 1 of each year beginning
in 2012 by a number of Units equal to the excess of (a) 15% of the number of outstanding Oaktree Operating Group
units on December 31 of the immediately preceding year over (b) the number of Oaktree Operating Group units that
have been issued or are issuable under the 2011 Plan as of such date, except that our board of directors may, in its
discretion, increase the number of Units covered by the 2011 Plan by a lesser amount. The issuance of Units or the
payment of cash upon the exercise of an award or in consideration of the cancellation or termination of an award
will reduce the total number of Units available under the 2011 Plan, as applicable. Units underlying awards under
the 2011 Plan that are forfeited, cancelled, expire unexercised or are settled in cash will be available again to be
176
used as awards under the 2011 Plan. However, Units used to pay the required exercise price or tax obligations, or
Units not issued in connection with the settlement of an award or that are used or withheld to satisfy tax obligations
of a participant, will not be available again for other awards under the 2011 Plan. Units delivered in settlement of
awards may be authorized and unissued Units, treasury Units, Units purchased on the open market or by private
purchase by us or one of our Affiliates, as applicable, or a combination of the foregoing. As of March 11, 2013,
3,032,979 Units have been issued under the 2011 Plan, and the Committee may issue 19,573,536 additional Units
under the 2011 Plan.
Options. The Committee may grant options to purchase Units under the 2011 Plan. Options will be granted
subject to such terms and conditions, including the option's exercise price and the conditions and timing of exercise,
as determined by the Committee and specified in the applicable award agreement. Unless otherwise provided in an
award agreement, an option will vest with respect to 20% of the Units subject to the option on each of the first five
anniversaries of the grant date. The maximum term of an option granted under the 2011 Plan is 10 years from the
date of grant.
Unless otherwise provided in an award agreement, the unvested portion of an option will expire upon
termination of employment or service of the participant, and the vested portion of such option will remain
exercisable for one year following termination of employment or service by reason of such participant's death or
disability (as determined by the Committee), but not later than the expiration of the option, or 90 days following
termination of employment or service for any reason other than death or disability or Cause (as defined in the 2011
Plan), but not later than the expiration of the option. Both the unvested and vested portion of an option will expire
upon the termination of a participant's employment or service by us or our Affiliates for Cause.
Unit Appreciation Rights. The Committee may grant UARs under the 2011 Plan. UARs will be subject to the
terms and conditions established by the Committee and set forth in the award agreement. Any UAR granted under
the 2011 Plan will expire no later than 10 years following the date of grant. Unless otherwise provided in an award
agreement, the UAR will vest with respect to 20% of the Units subject to the UAR on each of the first five
anniversaries of the date of grant. Any option granted under the 2011 Plan may include tandem UARs. A UAR
granted in connection with an option will become exercisable and will expire according to the same vesting
schedule and expiration provisions as the corresponding option. Unless otherwise provided in an award agreement,
upon termination of employment or service of the participant, the vested and unvested portion of a UAR will expire
upon similar terms as an option (as described above).
Restricted Units. The Committee may grant Restricted Units (as defined in the 2011 Plan) under the 2011
Plan. Restricted Units will be subject to the terms and conditions established by the Committee and set forth in the
award agreement. A Restricted Unit is a Unit that generally is non-transferable and is subject to other restrictions
determined by the Committee for a specified period. Unless otherwise provided in an award agreement, the
restricted period will lapse with respect to 20% of the Restricted Units on each of the first five anniversaries of the
date of grant and the unvested portion of the Restricted Units will terminate and be forfeited upon termination of
employment or service. Subject to the restrictions set forth in the 2011 Plan and the applicable award agreement, a
participant generally will have the rights and privileges of a unitholder as to such Restricted Units.
Unit Bonus Awards. The Committee may grant unrestricted Units, or other awards denominated in Units,
under the 2011 Plan to eligible persons, either alone or in tandem with other awards, in such amounts as the
Committee determines. The terms and conditions of each Unit bonus award granted under the 2011 Plan will be set
forth in an award agreement.
Phantom Equity Awards. The Committee may grant a phantom equity award to eligible persons under the
2011 Plan. A phantom equity award provides a participant with the right to receive cash payments in respect of the
award. The terms and conditions of each phantom equity award will be set forth in the applicable award agreement,
and such agreement will specify the Affiliate obligated to make payments in respect of the award, the number and
type of Units in respect of which the value and properties of the award are to be determined, the vesting and the
terms of any distributions to be made in respect of such award.
177
Outstanding Equity at 2012 Year End
The following table provides information regarding outstanding unvested equity held by our NEOs as of
December 31, 2012:
Name
Stock Awards (1)
Number of Units
That Have Not
Vested
Market Value of
Units That Have
Not Vested (2)
Bruce A. Karsh ..........................................................................................................
— $
—
David M. Kirchheimer ...............................................................................................
62,500
$ 1,990,188
John B. Frank ...........................................................................................................
270,000
$ 8,597,610
Stephen A. Kaplan ....................................................................................................
— $
—
Caleb S. Kramer .......................................................................................................
240,802
$ 7,667,858
B. James Ford ..........................................................................................................
50,000
$ 1,592,150
(1)
(2)
The references to Stock Awards or units in this table refer to OCGH units.
The fair market value of $31.84 per unit is based on the closing price for our Class A units on December 31,
2012, less a discount applied as detailed in notes 2 and 10 to our consolidated financial statements.
Stock Vested in 2012
The following table provides information regarding the number of outstanding equity units held by our NEOs
that vested during the year ended December 31, 2012:
Name
Stock Awards (1)
Number of Units
Acquired on
Vesting
Market Value of
Units Vesting (2)
Bruce A. Karsh ..........................................................................................................
5,019,598
$165,646,734
David M. Kirchheimer ...............................................................................................
356,700
$ 11,771,100
John B. Frank ...........................................................................................................
504,255
$ 16,640,415
Stephen A. Kaplan ....................................................................................................
465,215
$ 15,352,095
Caleb S. Kramer .......................................................................................................
249,975
$ 8,116,047
B. James Ford ..........................................................................................................
312,374
$ 10,308,342
(1) The references to Stock Awards or units in this table refer to OCGH units.
(2) The fair market value of $33.00, $33.00 or $29.30 per unit is based on the trading price for our Class A units
on applicable vesting dates of January 1, 2012, January 2, 2012 and November 11, 2012, respectively, less a
discount applied as detailed in notes 2 and 10 to our consolidated financial statements.
Potential Payments Upon Termination of Employment or Change in Control at 2012 Year End
We do not have any formal severance or change of control plans or agreements in place for any of our
NEOs. None of the OCGH units held by any of our executive officers is subject to accelerated vesting in connection
with a change in control or a termination of employment for any reason, except if termination is due to death or
disability, in which case all unvested units automatically accelerate in full.
In all cases, none of Messrs. Karsh, Kaplan, Kramer, Frank and Ford is entitled to any additional vesting of
their participation rights in the incentive income generated by our funds as a result of a change in control of us or
any of our affiliates. The impact of a termination of employment on the incentive income participation rights held by
each of Messrs. Karsh, Kaplan, Kramer, Frank and Ford is described below.
Generally, upon the earliest to occur of a participating NEO's death, “disability” (as defined in the applicable
governing documents) termination without “cause” (as defined in the applicable governing documents) or
resignation (each, a “termination event”), such NEO's incentive income interest will be converted into the right to
receive a residual percentage (which cannot exceed the NEO's interest prior to such termination event) of the
distributions the NEO otherwise would have received absent such termination event, as described below.
178
In the case of a termination event other than resignation, the residual percentage generally will equal the
product of:
the participating NEO's interest prior to such event; and
if the fund is in its investment period, a percentage equal to the applicable fund's aggregate committed
capital that had been contributed as of the date of the termination event.
•
In the event that a participating NEO resigns, the residual percentage generally will equal the product of:
the participating NEO's interest prior to such resignation;
the participating NEO's vested percentage as of the resignation date (as discussed above under “—
Summary Compensation Table for 2012—Incentive Income”); and
if the fund is in its investment period, a percentage equal to the applicable fund's aggregate committed
capital that had been contributed as of the resignation date.
If a participating NEO resigns and engages in competitive activity within two years following his resignation,
the NEO's residual percentage will be reduced further (by as much as 50%). However, with respect to certain funds,
Mr. Kramer may resign for “good reason” (as defined in the applicable governing documents) and his residual
interest in these funds will not be subject to any further reduction.
In the event that a participating NEO is terminated for cause, he immediately forfeits all rights to further
distributions of incentive income.
Accelerated Vesting of OCGH Units and Incentive Income Interests Upon Termination of Employment
The following table sets forth the estimated value of (a) the acceleration of all unvested OCGH units held by
each NEO, assuming a termination of employment due to death or disability on December 31, 2012 and (b) the
estimated incentive income distributions that would be made in respect of the NEO's unvested incentive income
interests under the Carry Plans, assuming those interests became fully vested on December 31, 2012 upon a
termination of employment without cause or for good reason (as applicable) or termination due to death, disability or
resignation. No amount is payable or accelerated in respect of an interest in the incentive income upon an
individual's termination, regardless of the reason for the termination. Rather, an individual who is terminated will
receive amounts payable as and when we receive the associated incentive income (which is expected to occur over
a number of years) in accordance with the same payment schedule as would have been in effect in the absence of
termination.
The values disclosed below in respect of the rights of participating NEOs to continue to participate in
distributions of incentive income, whether at the same level as before termination or at a reduced level as described
above under “—Potential Payments Upon Termination of Employment or Change in Control at 2012 Year End,”
have been determined assuming that each of the funds in respect of which the NEOs would have a right to
incentive income had been liquidated on December 31, 2012 and all of the funds' assets distributed in accordance
with their respective distribution provisions at a value equal to their book value as of December 31, 2012. We have
calculated the amounts set forth below using these assumptions because distributions made on a liquidation basis
would yield the maximum amounts potentially payable to each of the NEOs, had a termination of employment
actually occurred on December 31, 2012. We note, however, that the values set forth below were computed based
on assumptions that may not be accurate or applicable to a given circumstance of termination. The actual amounts
to be paid upon a particular termination of employment cannot be directly determined since such payments would
be based on several factors, including when termination of employment occurs, the circumstances of termination,
the time period for fund liquidation, the investment performance of the fund and the value at which such liquidations
actually occur, when Oaktree determines to make distributions from such funds, when income is realized from such
funds and the actual amounts so realized.
179
Acceleration of Unvested OCGH Units
OCGH Units (1)
Name
Bruce A. Karsh ..........................................................................................................
David M. Kirchheimer ...............................................................................................
John B. Frank ...........................................................................................................
Stephen A. Kaplan ....................................................................................................
Caleb S. Kramer .......................................................................................................
B. James Ford ..........................................................................................................
Number of Units
of Stock Subject
to Vesting
Acceleration
Market Value of
Accelerated
Vesting of Units (2)
—
— $
62,500
$ 1,990,188
270,000
$ 8,597,610
— $
—
240,802
$ 7,667,858
50,000
$ 1,592,150
(1) The references to Stock Awards or units in this table refer to OCGH units.
(2) The fair market value of $31.84 per unit is based on the closing price for our Class A units on December 31,
2012, less a discount applied as detailed in notes 2 and 10 to our consolidated financial statements.
Estimated Distributions in Respect of Acceleration of Unvested Incentive Income Interests
Name
Bruce A. Karsh ................................................................................................................................... $ 60,561,655
—
David M. Kirchheimer ......................................................................................................................... $
John B. Frank ..................................................................................................................................... $ 33,840,475
Stephen A. Kaplan .............................................................................................................................. $ 26,075,350
Caleb S. Kramer ................................................................................................................................. $ 15,522,631
B. James Ford .................................................................................................................................... $ 13,356,632
Liquidation Value
of Interests
Subject to Vesting
Acceleration
Incentive Income
Interests
Director Compensation Table for 2012
During 2012, we compensated our outside directors through an annual cash retainer and, for three of our
outside directors, the grant of our Class A units. Directors who are also principals do not receive any additional
compensation for serving on our board of directors. However, all members of our board of directors are reimbursed
for their reasonable out-of-pocket expenses incurred in attending board meetings.
The following table sets forth the cash and equity compensation paid to our non-employee directors for the
year ended December 31, 2012 and the number of unvested Class A units held by them at December 31, 2012:
Fees Earned or
Paid in Cash (1)
87,500
Name
Robert E. Denham ...................................... $
Wayne G. Pierson ....................................... $
Jay S. Wintrob ............................................ $ 100,000
40,000
D. Richard Masson ..................................... $
Marna C. Whittington .................................. $
50,000
Unit Awards (2)
$ 496,012
All Other
Compensation
$
Total
— $ 583,512
— $
— $
— $
—
$ 100,012
$
— $ 200,012
$
$
— $
49,805
$
— $
— $
40,000
99,805
Number of
Unvested Units
6,173
—
2,273
—
1,423
(1) Annual cash retainer and fees for supervision of audit-related activities. Mr. Pierson did not receive any fees
for his service as a member of our board of directors in 2012 because he serves as President of Acorn
Investors, LLC, which indirectly holds a minority interest in the Oaktree Operating Group units through
OCGH.
180
(2) On January 19, 2012, we granted 2,273 Class A Units to each of Messrs. Denham and Wintrob, which will
vest ratably over five years beginning on March 1, 2013, in consideration of their service as members of our
board of directors in 2012. Additionally, on January 19, 2012, we granted 9,000 Class A units to Mr. Denham
in consideration of his past service as a member of our board of directors. Of these 9,000 Class A units, 5,700
Class A units are fully vested as of the date of this filing, 1,800 Class A units will vest on January 1, 2014,
1,000 Class A units will vest on January 1, 2015 and 500 Class A units will vest on January 1, 2016. On June
28, 2012, we granted Ms. Whittington 1,423 Class A units, which will vest ratably over five years beginning on
August 1, 2013, in consideration of her service as a member of our board of directors for a portion of 2012.
We provide compensation to certain of our directors who are not principals for their services pursuant to the
following policy. For 2013, each of Messrs. Denham, Masson and Wintrob and Ms. Whittington will receive an
annual cash retainer of $75,000. Members of the audit committee will receive an additional annual retainer of
$25,000. The chair of the audit committee will receive an additional annual retainer of $15,000. In addition, each of
Messrs. Denham, Masson and Wintrob and Ms. Whittington will receive an annual grant of Class A units under the
2011 Plan, subject to five-year vesting at 20% per year on each anniversary date of the grant date. The number of
Class A units granted will typically be based on the number of Class A units with a fair market value at the time of
the grant equal to $100,000 or as otherwise determined by our board of directors. On January 24, 2013, we granted
2,127 Class A units to each of Messrs. Denham and Wintrob and Ms. Whittington, and on March 7, 2013, we
granted 2,127 Class A units to Mr. Masson. These grants will vest ratably over five years beginning on March 1,
2014, in consideration of their service as members of our board of directors in 2013.
Compensation Committee Interlocks and Insider Participation
As described under “Directors, Executive Officers and Corporate Governance—Board Structure and
Governance—Controlled Company Exemption,” we are a “controlled company” within the meaning of the NYSE
corporate governance standards and do not have a compensation committee. Messrs. Marks, Karsh and Frank
make all final determinations regarding executive officer compensation. For a description of certain transactions
involving us and our directors and executive officers, please see “Certain Relationships and Related Transactions,
and Director Independence.”
Compensation Committee Report
As described above, our board of directors does not have a compensation committee. The executive
committee of the board of directors identified below has reviewed and discussed with management the foregoing
Compensation Discussion and Analysis and, based on such review and discussion, has determined that the
Compensation Discussion and Analysis should be included in this annual report.
Howard S. Marks
Bruce A. Karsh
John B. Frank
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table sets forth information regarding the current beneficial ownership of our Class A units and
Class B units and the OCGH units by:
each person known to us to beneficially own more than 5% of any class of the outstanding voting
securities of Oaktree Capital Group, LLC;
each of our directors;
each of our named executive officers; and
all directors and executive officers as a group.
The applicable percentage ownership with respect to the Class A units and the Class B units beneficially
owned is based on 30,189,441 Class A units outstanding and 120,763,876 Class B units outstanding as of March
11, 2013. The applicable percentage ownership with respect to the OCGH units beneficially owned represents the
applicable unitholder's aggregate holdings of OCGH units and Class A units as a percentage of the 150,953,317
Oaktree Operating Group units outstanding as of March 11, 2013. This percentage represents the applicable
unitholder's aggregate economic interest in the Oaktree Operating Group. Although holders of OCGH units are
181
entitled, subject to vesting requirements and transfer restrictions, to exchange their OCGH units for, at the option of
our board of directors, our Class A units on a one-for-one basis, an equivalent amount of cash based on then-
prevailing market prices, other consideration of equal value or any combination of the foregoing, such exchanges
require board approval and thus holders of OCGH units are not deemed to beneficially own the equivalent number
of Class A units.
Beneficial ownership is determined in accordance with the rules of the SEC. Under these rules, more than
one person may be deemed a beneficial owner of the same securities, and a person may be deemed a beneficial
owner of securities as to which he has no economic interest. To our knowledge, each person named in the table
below has sole voting and investment power with respect to all of the interests shown as beneficially owned by such
person, except as otherwise set forth in the notes to the table and pursuant to applicable community property laws.
Unless otherwise specified, the address of each person named in the table is c/o Oaktree Capital Group, LLC, 333
South Grand Avenue, 28th Floor, Los Angeles, CA 90071.
Class A Units
Beneficially Owned
Class B Units
Beneficially Owned
OCGH Units
Beneficially Owned (1)
Executive Officers and Directors
Howard S. Marks...................
Bruce A. Karsh ......................
John B. Frank ........................
David M. Kirchheimer ............
B. James Ford .......................
Stephen A. Kaplan ................
Caleb S. Kramer....................
Kevin L. Clayton ....................
Larry W. Keele.......................
Sheldon M. Stone..................
Robert E. Denham ................
D. Richard Masson................
Wayne G. Pierson (3) .............
Marna C. Whittington ............
Jay S. Wintrob .......................
All executive officers and
directors as a group
(16 persons).......................
5% Unitholders
Hawkins Investment
Partnership L.P. (4)..............
Number
1,826
1,826
185
136
120
181
79
275
322
1,009
16,400
2,640
—
6,550
4,400
35,960
Percent
*
Number
*
*
*
*
*
*
*
*
*
*
*
—
*
*
*
3,000,000
9.9%
Davis Selected Advisers,
L.P. (5) .................................
Greenlight Capital, Inc. (6)......
Farallon Capital Partners,
L.P. (7) .................................
Baron Capital Group, Inc. (8)..
Acorn Investors, LLC.............
Oaktree Capital Group
2,161,236
1,851,812
1,669,460
1,658,467
884
Holdings, L.P. .....................
13,000
7.2
6.1
5.5
5.5
*
*
— (2)
— (2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Percent
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Number
21,788,226
Percent
14.4%
21,788,226
14.4
2,512,377
1,786,575
1,439,860
2,193,335
1,202,444
3,198,110
4,160,135
12,454,214
—
3,522,899
—
—
—
1.7
1.2
*
1.5
*
2.1
2.8
8.3
—
2.3
—
—
—
76,301,319
50.6
—
—
—
—
—
9,391,544
—
—
—
—
—
6.2
—
120,763,876
100%
—
*
(1)
Represents less than 1%.
Subject to certain restrictions, each OCGH unitholder has the right to exchange his or her vested units
following the expiration of any applicable lock-up period pursuant to the terms of an exchange agreement.
Pursuant to the exchange agreement and the terms of the OCGH partnership agreement, the OCGH units
will be exchanged for, at the option of our board of directors, our Class A units on a one-for-one basis, an
182
(2)
(3)
(4)
(5)
equivalent amount of cash based on then-prevailing market prices, other consideration of equal value or any
combination of the foregoing, and we will cancel a corresponding number of Class B units.
Excludes 13,000 Class A units and 120,763,876 Class B units held by OCGH. The general partner of OCGH
is Oaktree Capital Group Holdings GP, LLC. In their capacities as members of the executive committee of
Oaktree Capital Group Holdings GP, LLC holding more than 50% of the aggregate number of OCGH units
held by all of the members of the executive committee as a group, Mr. Marks and Mr. Karsh may be deemed
to be beneficial owners of the securities held by OCGH. Each of Mr. Marks and Mr. Karsh disclaims beneficial
ownership of such securities.
Excludes 884 Class A units and 9,391,544 OCGH units held by Acorn Investors, LLC and 20 Class A units
and 217,324 OCGH units held by Meyer Memorial Trust, which Mr. Pierson may be deemed to beneficially
own. Mr. Pierson is the President of Acorn Investors, LLC and the Chief Financial and Investment Officer of
Meyer Memorial Trust and disclaims beneficial ownership of the Class A units and OCGH units held by each
entity.
Reflects Class A units beneficially owned by Hawkins Capital L.P., the general partner and manager of
Hawkins Investment Partnership L.P. (“HIP”), and Russell B. Hawkins, the sole portfolio manager of HIP,
each of whom may be deemed to share voting and dispositive power with respect to the Class A units held
by HIP, based on a Schedule 13G filed with the SEC by Hawkins Capital L.P. on March 6, 2013. The address
of HIP, Hawkins Capital L.P. and Mr. Hawkins is 600 Travis Street, Suite 6650, Houston, TX 77002.
Reflects Class A units beneficially owned by Davis Selected Advisers, L.P. (“Davis”) based on a Schedule
13G filed with the SEC by Davis on February 13, 2013. Davis Investments, LLC (“DILLC”) serves as general
partner of Davis Selected Advisers, L.P. DILLC is controlled by Christopher Davis. The address of Davis
Selected Advisers, L.P., DILLC and Christopher Davis is 2949 East Elvira Road, Suite 101, Tucson, AZ
85706.
(6) Greenlight Capital, Inc. (“Greenlight Inc.”) is the investment manager for Greenlight Capital, L.P., Greenlight
Capital Qualified, L.P. and Greenlight Capital Offshore Partners and as such has voting and dispositive
power over 1,180,612 Class A Units held by Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and
Greenlight Capital Offshore Partners. Greenlight Capital, L.L.C. (“Greenlight L.L.C.”) is the sole general
partner of Greenlight Capital, L.P. and Greenlight Capital Qualified, L.P., and as such has voting and
dispositive power over 490,800 Class A Units held by Greenlight Capital, L.P. and Greenlight Capital
Qualified, L.P. DME Advisors, LP (“DME Advisors”) is the investment manager for Greenlight Reinsurance,
Ltd., and as such has voting and dispositive power over 256,500 Class A Units held by Greenlight
Reinsurance, Ltd. DME Management GP, LLC (“DME Management GP”) is the sole general partner of
Greenlight Capital (Gold), LP, and as such has voting and dispositive power over 208,700 Class A Units held
by Greenlight Capital (Gold), LP. DME Capital Management, LP (“DME Management”) is the investment
manager for Greenlight Capital (Gold), LP, and Greenlight Capital Offshore Master (Gold), Ltd., and as such
has voting and dispositive power over 414,700 Class A Units held by Greenlight Capital (Gold), LP and
Greenlight Capital Offshore Master (Gold), Ltd. DME Advisors GP, LLC (“DME GP”) is the general partner of
DME Advisors and DME Management, and as such has voting and dispositive power over 671,200 Class A
Units. David Einhorn is the principal of Greenlight Inc., Greenlight L.L.C., DME Advisors, DME Management
GP, DME Management and DME GP, and as such has voting and dispositive power over 1,851,812 Class A
Units held by them. Mr. Einhorn disclaims beneficial ownership of these Class A Units, except to the extent of
any pecuniary interest therein. The address of each of the Greenlight Reporting Persons is 140 East 45th
Street, 24th Floor, New York, New York 10017.
Reflects Class A units beneficially owned by Farallon Capital Partners, L.P. (“FCP”) based on a Schedule
13G filed with the SEC by FCP on February 13, 2013. Farallon Partners, L.L.C. (the “Farallon General
Partner”) is the general partner of FCP. Each of the following persons (the “Farallon Managing Members”) is
a managing member of the Farallon General Partner with the power to exercise investment discretion:
Richard B. Fried, Daniel J. Hirsch, Monica R. Landry, Michael G. Linn, Rajiv A. Patel, Thomas G. Roberts,
Jr., Andrew J.M. Spokes, John R. Warren and Mark C. Wehrly. Each of the Farallon General Partner and the
Farallon Managing Members disclaims beneficial ownership of the Class A units held by FCP. All of the
persons referenced in this footnote disclaim group attribution. The address of FCP, the Farallon General
Partner and the Farallon Managing Members is One Maritime Plaza, Suite 2100, San Francisco, CA 94111.
Reflects Class A units beneficially owned by Baron Capital Group, Inc. (“BCG”), BAMCO, Inc. (“BAMCO”),
Baron Capital Management, Inc. (“BCM”) and Ronald Baron (collectively, the “Baron Reporting Persons”)
based on a Schedule 13G filed with the SEC on February 14, 2013 by the Baron Reporting Persons.
BAMCO and BCM are subsidiaries of BCG, and Ronald Baron owns a controlling interest in BCG. The
address of each of the Baron Reporting Persons is 767 Fifth Avenue, 49th Floor, New York, New York 10153.
(7)
(8)
183
Equity Compensation Plan Information
The following table sets forth information concerning the awards that may be issued under the 2011 Plan as
of December 31, 2012.
Plan Category
Number of
Securities to
be Issued
Upon Exercise
of
Outstanding
Options,
Warrants and
Rights (1)
Weighted-
Average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights
Number of
Securities
Remaining
Available for
Future
Issuance
Under Equity
Compensation
Plans
(excluding
securities
reflected in
column (a)) (2)
(a)
(b)
(c)
Equity compensation plans approved by security holders ......................
Equity compensation plans not approved by security holders ................
Total (3) ....................................................................................................
2,333,252
—
2,333,252
— 19,846,779
—
—
— 19,846,779
(1) Reflects the aggregate number of OCGH units granted under the 2011 Plan as of December 31, 2012.
(2) The 2011 Plan provides that the maximum number of Units that may be delivered pursuant to awards under
the 2011 Plan is 22,300,000, as increased on January 1 of each year beginning in 2012 by a number of Units
equal to the excess of (a) 15% of the number of outstanding Oaktree Operating Group units on December 31
of the immediately preceding year over (b) the number of Oaktree Operating Group units that have been
issued or are issuable under the 2011 Plan as of such date, except that our board of directors may, in its
discretion, increase the number of Units covered by the 2011 Plan by a lesser amount. The issuance of Units
or the payment of cash upon the exercise of an award or in consideration of the cancellation or termination of
an award will reduce the total number of Units available under the 2011 Plan, as applicable. Units underlying
awards under the 2011 Plan that are forfeited, cancelled, expire unexercised or are settled in cash will be
available again to be used as awards under the 2011 Plan. However, Units used to pay the required exercise
price or tax obligations, or Units not issued in connection with the settlement of an award or that are used or
withheld to satisfy tax obligations of a participant, will not be available again for other awards under the 2011
Plan.
(3) As of December 31, 2012, 4,954,976 OCGH units have been granted under the 2007 Plan and 17,387,956
OCGH units were available for future issuance under the 2007 Plan. However, such amounts are not reflected
in this table because our board of directors has resolved that the administrator of the 2007 Plan will no longer
grant awards under the 2007 Plan. Please see note 10 to our consolidated financial statements included
elsewhere in this annual report for additional information.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Exchange Agreement
Under the terms of the OCGH limited partnership agreement, its general partner may elect in its discretion to
declare an open period during which an OCGH unitholder may exchange its unrestricted vested OCGH units for, at
the option of our board of directors, Class A units, an equivalent amount of cash based on then-prevailing market
prices, other consideration of equal value or any combination of the foregoing. The general partner determines the
number of units eligible for exchange within a given open period and, if the OCGH unitholders request to exchange
a number of units in excess of the amount eligible for exchange, which units to exchange taking into account such
factors as the general partner determines appropriate. Upon approval of our board of directors, OCGH units that are
selected for exchange in accordance with the foregoing will be exchanged, at the option of our board of directors,
into Class A units, an equivalent amount of cash based on then-prevailing market prices, other consideration of
equal value or any combination of the foregoing pursuant to the terms of the exchange agreement. The exchange
agreement provides that:
such OCGH units will be acquired by the Intermediate Holding Companies in exchange for, at the option
of our board of directors, Class A units, an equivalent amount of cash based on then-prevailing market
prices, other consideration of equal value or any combination of the foregoing;
184
the OCGH units acquired by the Intermediate Holding Companies may then be redeemed by OCGH in
exchange for Oaktree Operating Group units;
the Intermediate Holding Companies may exchange Oaktree Operating Group units with each other such
that, immediately after such exchange, each Intermediate Holding Company holds Oaktree Operating
Group units only in the Oaktree Operating Group entity for which such Intermediate Holding Company
serves as the general partner; and
we will cancel a corresponding number of Class B units.
Tax Receivable Agreement
As described above, subject to certain restrictions, each OCGH unitholder has the right to exchange his or
her vested OCGH units for, at the option of our board of directors, Class A units, an equivalent amount of cash
based on then-prevailing market prices, other consideration of equal value or any combination of the foregoing. Our
Intermediate Holding Companies will deliver, at the option of our board of directors, Class A units on a one-for-one
basis, an equivalent amount of cash based on then-prevailing market prices, other consideration of equal value or
any combination of the foregoing in exchange for the applicable OCGH unitholder's OCGH units pursuant to the
exchange agreement. These exchanges, including our purchase of Oaktree Operating Group units in connection
with the 2007 Private Offering and in connection with our initial public offering, resulted in, and are expected to
result in, increases in the tax basis of the tangible and intangible assets of the Oaktree Operating Group. These
increases in tax basis have increased and will increase (for tax purposes) depreciation and amortization deductions
and reduce gain on sales of assets, and therefore reduce the taxes of two of our Intermediate Holding Companies,
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc.
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. entered into a tax receivable agreement with the
OCGH unitholders that provides for the payment by Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. to the
OCGH unitholders of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that
Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. actually realizes (or is deemed to realize in the case of an early
termination payment by Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. or a change of control, as discussed
below) as a result of these increases in tax basis and of certain other tax benefits related to our entering into the tax
receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These
payment obligations are obligations of Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. and not of the Oaktree
Operating Group.
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. expect to benefit from the remaining 15% of cash
savings, if any, in income tax that they realize. For purposes of the tax receivable agreement, cash savings in
income tax will be computed by comparing the actual income tax liability of Oaktree Holdings, Inc. or Oaktree AIF
Holdings, Inc. to the amount of such taxes that Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. would have
been required to pay had there been no increase to the tax basis of the tangible and intangible assets of the
Oaktree Operating Group as a result of the exchanges and had Oaktree Holdings, Inc. and Oaktree AIF
Holdings, Inc. not entered into the tax receivable agreement. An OCGH unitholder may also elect to make a
charitable contribution of units. In such a case, the contribution will not result in an increase in the tax basis of the
assets of the Oaktree Operating Group, and no payments will be made under the tax receivable agreement.
The term of the tax receivable agreement commenced upon the consummation of the 2007 Private Offering
and continues until all such tax benefits have been utilized or expired, unless Oaktree Holdings, Inc. or Oaktree AIF
Holdings, Inc. exercises its right to terminate the tax receivable agreement for an amount based on the agreed
payments remaining to be made under the agreement. Estimating the amount of payments that may be made under
the tax receivable agreement is by its nature imprecise, as the calculation of amounts payable depends on a variety
of factors. The actual increase in tax basis, as well as the amount and timing of any payments under the tax
receivable agreement, will vary depending upon a number of factors, including:
the timing of the exchanges – for instance, the increase in any tax deductions will vary depending on the
fair market value, which may fluctuate over time, of the depreciable or amortizable assets of the Oaktree
Operating Group at the time of the transaction;
the price of our Class A units at the time of the exchanges – the increase in any tax deductions, as well as
the tax basis increase in other assets, of the Oaktree Operating Group, is directly proportional to the
market value of our Class A units at the time of the exchange;
the extent to which an exchange of OCGH units is taxable – if an exchange is not taxable for any reason
(for instance, in connection with a charitable contribution), increased deductions will not be available;
185
the amount and timing of our income – Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. will be
required to pay 85% of the tax savings as and when realized, if any; and
the corporate income tax rates (both U.S. federal and state and local) in effect at the time the tax
deductions are utilized to offset taxable income – since an increase in tax rates will generally result in
higher payments, and a decrease in tax rates will generally result in lower payments.
If Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. do not have taxable income, they are not required to
make payments under the tax receivable agreement for that taxable year because no tax savings will have been
actually realized. We expect that as a result of the size of the increases in the tax basis of the tangible and
intangible assets of the Oaktree Operating Group, the payments that we may make under the tax receivable
agreement will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient
taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that payments
under the tax receivable agreement in respect of our purchase of Oaktree Operating Group units in the 2007
Private Offering (“TRA payments”), which we began to make in January 2009, will aggregate to $47.2 million over
the period ending approximately in 2029. During the year ended December 31, 2012, we made TRA payments in
respect of the year ended December 31, 2011 of $648,060, $648,060, $358,084 and $187,540 to Howard Marks,
our Chairman, a principal and a director; Bruce Karsh, our President, a principal and a director; Sheldon Stone, a
principal and a director; and D. Richard Masson, a director, respectively, and $310,322 to Acorn Investors, LLC. In
addition, we expect that the TRA payments in connection with our initial public offering in April 2012 will aggregate
to $87.8 million, of which approximately $20.2 million, $20.3 million, $6.4 million, $2.8 million, $3.0 million, $1.4
million, $1.3 million, $1.0 million, $0.9 million and $0.1 million will be paid to Messrs. Marks, Karsh, Stone, Masson,
Clayton, Ford, Frank, Kaplan, Kramer and Molz, respectively, and $7.1 million will be paid to Acorn Investors, LLC.
Future payments under the tax receivable agreement in respect of subsequent exchanges of OCGH units would be
in addition to these amounts and are expected to be substantial. The payments under the tax receivable agreement
are not conditioned upon OCGH unitholders' continued ownership of interests in OCGH.
In addition, the tax receivable agreement provides that, upon certain mergers, asset sales, other forms of
business combinations or other changes of control, the obligations of Oaktree Holdings, Inc. and Oaktree AIF
Holdings, Inc. (or their successors) with respect to purchased interests would be based on certain assumptions,
including that Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. would have sufficient taxable income to fully
utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering
into the tax receivable agreement.
Decisions we make in the course of running our business, such as with respect to the realization of an
investment by one of our funds, may influence the timing and amount of payments made under the tax receivable
agreement. For example, if one of our funds disposes of assets, the disposition may accelerate payments under the
tax receivable agreement and increase the present value of such payments.
Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, Oaktree
Holdings, Inc. and Oaktree AIF Holdings, Inc. will not be reimbursed for any payments previously made under the
tax receivable agreement. As a result, in certain circumstances, payments could be made under the tax receivable
agreement in excess of Oaktree Holdings, Inc.'s and Oaktree AIF Holdings, Inc.'s cash tax savings. However, the
value of such excess payments may be recouped through reduced future payments of amounts otherwise payable
by Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. pursuant to the tax receivable agreement.
Oaktree Operating Group Partnership Agreements
Each of the Oaktree Operating Group partnerships either has as its sole general partner one of the
Intermediate Holding Companies or is indirectly controlled by the Intermediate Holding Companies. Accordingly,
Oaktree Capital Group, LLC operates and controls all of the business and affairs of the Oaktree Operating Group
and conducts our business through the Oaktree Operating Group and its subsidiaries.
Pursuant to the partnership agreements of the Oaktree Operating Group partnerships, the Intermediate
Holding Companies that are the general partners of those partnerships (or entities controlled by the Intermediate
Holding Companies) have the right to determine when distributions will be made to the holders of Oaktree
Operating Group units and the amounts of any such distributions. If a distribution is authorized, the distribution will
be made to the holders of Oaktree Operating Group units pro rata in accordance with the percentages of their
respective interests.
Each of the Oaktree Operating Group partnerships has an identical number of units outstanding, and we use
the term “Oaktree Operating Group unit” to refer, collectively, to a unit in each of the Oaktree Operating Group
186
partnerships. As of March 11, 2013, there were 150,953,317 Oaktree Operating Group units outstanding. The
holders of Oaktree Operating Group units, including the Intermediate Holding Companies, will incur U.S. federal,
state and local income taxes on their proportionate share of any net taxable income of the Oaktree Operating
Group. Net profits and net losses of Oaktree Operating Group units generally are allocated to the holders of such
units (including the Intermediate Holding Companies) pro rata in accordance with the percentages of their
respective interests. The partnership agreement of each Oaktree Operating Group partnership provides for cash
distributions, which we refer to as “tax distributions,” to the partners of such partnership if we determine that the
allocation of the partnership's income will give rise to taxable income for its partners. Generally, these tax
distributions are computed based on our estimate of the net taxable income of the relevant entity allocable to a
partner multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and
local income tax rate prescribed for an individual or corporate resident in Los Angeles, California or New York, New
York (taking into account the nondeductibility of certain expenses and the character of our income). Tax distributions
are made only to the extent that all distributions from the Oaktree Operating Group for the relevant year were
insufficient to cover such tax liabilities.
The partnership agreements of the Oaktree Operating Group partnerships also provide that substantially all
of our expenses will be borne by the Oaktree Operating Group (excluding, for example, obligations incurred under
the tax receivable agreement by the Intermediate Holding Companies, income tax expenses of the Intermediate
Holding Companies and payments on indebtedness incurred by the Intermediate Holding Companies).
Oaktree Capital Group Holdings, L.P. Units
OCGH unitholders hold OCGH units. OCGH, in turn, holds an equivalent number of Oaktree Operating
Group units. The units in OCGH held by the OCGH unitholders as of March 11, 2013 have vesting provisions (and
certain of these units also have lockup provisions). Upon expiration of the vesting period and, if relevant, any lock-
up period, OCGH unitholders may sell their OCGH units or exchange their OCGH units into, at the option of our
board of directors, Class A units, an equivalent amount of cash based on then-prevailing market prices, other
consideration of equal value or any combination of the foregoing and, subsequently, sell any such Class A units
received. As of March 11, 2013, the lock-up period for all but 128,600 OCGH units has expired, and associated
lock-ups for the remaining OCGH units will expire in 2013. OCGH and our board of directors may limit the number
of OCGH units that may be exchanged after expiration of the relevant lock-up, based on such factors as they deem
appropriate, including the market's ability to absorb sales of the exchanged Class A units. As of the date of this
annual report, sales of Class A units by our employees may only be effected during “open periods” authorized by
us. The amount of OCGH units vesting will vary year to year, sometimes materially, but as of March 11, 2013,
OCGH units due to vest after 2013 represented approximately 3% of the total outstanding number of Oaktree
Operating Group units.
OCGH unitholders that are employees will generally forfeit all unvested units in OCGH upon termination of
their employment for any reason unless the termination is due to death or disability or if the forfeiture requirement is
waived. Any of the OCGH units that were outstanding at the time of the 2007 Private Offering that are forfeited will
be reallocated among the remaining OCGH unitholders at the time of such offering. Any of the OCGH units issued
after the date of the 2007 Private Offering that are forfeited will result in a corresponding forfeiture of Oaktree
Operating Group units held by OCGH.
Our Manager
Our operating agreement provides that so long as the Oaktree control condition is satisfied, our manager will
control the membership of our board of directors. Our board of directors will manage all of our operations and
activities and will have discretion over significant corporate actions, such as the issuance of securities, payment of
distributions, sales of assets, making certain amendments to our operating agreement and other matters.
Holders of our Class A units and Class B units have no right to elect our manager, which is controlled by our
principals.
Aircraft Use
In January 2010, we exercised a buyout provision in our then aircraft lease agreement and thereafter sold
the acquired plane to Mr. Karsh for an aggregate purchase price of $11,080,000. We and Mr. Karsh agreed that we
would have the option of leasing this plane from him for business-related purposes on a non-exclusive basis
pursuant to a lease agreement. During the year ended December 31, 2012, we paid Mr. Karsh $747,673 in
connection with our use of his plane under this lease agreement. In addition, during the year ended December 31,
2012, Mr. Marks paid us $142,637 in reimbursement for operating costs of our corporate plane that we had incurred
on his behalf in connection with his personal use of such plane.
187
Investments in Funds
Our directors and executive officers are permitted to invest their own capital (or the capital of family trusts or
other estate planning vehicles they control) in our funds. These investment opportunities are available to all of our
professionals who we have determined have a status that reasonably permits us to offer them these types of
investments in compliance with applicable laws and regulations. These investment opportunities are available on
the same terms and conditions as those applicable to third-party investors in our funds and bear their share of
management fees, except that they are not subject to incentive fees. During the year ended December 31, 2012,
the following directors and executive officers invested their own capital (or the capital of family trusts or other estate
planning vehicles they control) in our funds and are expected to continue to invest such capital in our funds from
time to time: Mr. Clayton invested an aggregate of $877,365; Mr. Frank invested an aggregate of $3,236,587;
Mr. Kaplan invested an aggregate of $338,333; Mr. Karsh and an organization affiliated with Mr. Karsh invested an
aggregate of $2,823,750; Mr. Keele invested an aggregate of $4,364,946; Mr. Kirchheimer invested an aggregate of
$3,723,534; Mr. Kramer invested an aggregate of $1,500,000; Mr. Marks invested an aggregate of $27,600,000;
Mr. Masson invested an aggregate of $461,570; Mr. Stone invested an aggregate of $13,539,209; and Mr. Wintrob
invested an aggregate of $530,000, respectively. During the year ended December 31, 2012, the following directors
and executive officers (or family trusts or other estate planning vehicles they control) received net distributions from
our funds as a result of their invested capital: Mr. Clayton received $1,307,285; Mr. Ford received $226,265;
Mr. Frank received $527,229; Mr. Kaplan received $1,261,791; Mr. Karsh and an organization affiliated with
Mr. Karsh received an aggregate of $5,621,822; Mr. Keele received $14,577,964; Mr. Kirchheimer received
$1,401,344; Mr. Kramer received $1,594,188; Mr. Marks received $49,426,450; Mr. Masson received $1,524,572;
Mr. Stone received $6,425,668; and Mr. Wintrob received $159,584 from our funds, respectively.
Transactions with Meyer Memorial Trust
Mr. Pierson, one of our directors, is the Chief Financial and Investment Officer of Meyer Memorial Trust.
During the year ended December 31, 2012, Meyer Memorial Trust contributed in the aggregate $2,679,795 in
capital to our funds on substantially the same terms as the other investors in those funds.
Transactions with Kevin Clayton
Starting in 2011, we paid, and intend to continue to pay, Mr. Clayton, a director and one of our principals, a
salary and participation profits that we expect to total approximately $5,000,000 per year in which he remains
actively employed by Oaktree.
Offsets to Distributions in Respect of OCGH Units
Pursuant to an agreement between Mr. Marks, one of our directors and executive officers, and Oaktree
Capital Management (UK) LLP, a subsidiary of ours in the United Kingdom, we provide £150,000 ($242,784 based
on the average exchange rate for the 24-hour period ending December 31, 2012 as reported by www.oanda.com)
per year to Mr. Marks, which is offset by distributions in respect of OCGH units to which Mr. Marks is entitled. In
accordance with ASC Topic 718, the payment of future distributions in respect of OCGH units is factored into the
grant date fair value of the OCGH units (which value is used for determining the compensation expense for such
units under ASC Topic 718) and any distributions made with respect to such units are therefore not treated as an
additional compensation expense by such subsidiary in the year in which such distributions are paid.
Limitations on Liability; Indemnification of Directors, Officers and Manager
Our operating agreement provides that our directors and officers will be liable to us or our unitholders for an
act or omission only if such act or omission constitutes a breach of the duties owed to us or our unitholders, as
applicable, by any such director or officer and such breach is the result of (a) willful malfeasance, gross negligence,
the commission of a felony or a material violation of law, in each case, that has or could reasonably be expected to
have a material adverse effect on us or (b) fraud and that our manager will not be liable to us or our unitholders for
its actions.
Moreover, in our operating agreement we have agreed to indemnify our directors, officers and manager, to
the fullest extent permitted by law, against all expenses and liabilities (including judgments, fines, penalties, interest,
amounts paid in settlement with our approval and counsel fees and disbursements) arising from the performance of
any of their obligations or duties in connection with their service to us, including in connection with any civil,
criminal, administrative, investigative or other action, suit or proceeding to which any such person may hereafter be
made a party by reason of being or having been one of our directors or officers or our manager, except for any
expenses or liabilities that have been finally judicially determined to have arisen primarily from acts or omissions
that violated the standard set forth in the preceding paragraph.
188
The indemnification rights that we provide to our directors and officers are more expansive than those
provided to the directors and officers of a Delaware corporation.
In addition to the indemnity that exists in our operating agreement, our subsidiary Oaktree Capital
Management, L.P. has entered into separate indemnification agreements with each of our directors and our
executive officers, that indemnify them, to the fullest extent permitted by applicable law, against all expenses and
liabilities (including judgments, fines, penalties, interest and amounts paid in settlement) incurred by them in
connection with any proceeding in which any of them are made a party to or any claim, issue or matter, except to
the extent that it shall have been determined in a final non-appealable judgment by a court of competent jurisdiction
that such expenses and liabilities arose primarily from acts or omissions that constituted a breach of their duties and
such breach was the result of (a) willful malfeasance, gross negligence, the commission of a felony or a material
violation of applicable law (including any federal or state securities law), in each case, that resulted in, or could
reasonably be expected to result in, a material adverse effect on us or our affiliates or (b) fraud. Such
indemnification agreements will continue until and terminate upon the later of (a) 10 years after the indemnitee has
ceased to occupy any positions or have any relationships with us or any of our affiliates, (b) the final termination of
all proceedings pending or threatened during such period to which any indemnitee may be subject and (c) the
expiration of the applicable statute of limitations for any possible claim or threatened, pending or completed action,
suit or proceeding.
Statement of Policy Regarding Transactions with Related Persons
Our board of directors has adopted a written statement of policy for our company regarding transactions with
related persons. Our related person policy covers any “related person transaction” including, but not limited to, any
transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or series of
similar transactions, arrangements or relationships that is reportable by us under Item 404(a) of Regulation S-K in
which we were or are to be a participant and the amount involved exceeds $120,000 and in which any “related
person” (as defined in Item 404(a) of Regulation S-K) had or will have a direct or indirect material interest. With
certain limited exceptions, our related person policy requires that each related person transaction, and any material
amendment or modification to a related person transaction, be reviewed and approved or ratified by a committee or
subcommittee of our board of directors composed solely of disinterested directors, by a majority of the disinterested
members of our board of directors, by a majority of disinterested members of the executive committee of our board
of directors or as otherwise approved in accordance with our operating agreement.
Director Independence
Because our principals represent more than 50% of our voting power, we are a “controlled company” as
defined in the NYSE corporate governance standards, Accordingly, we have elected not to comply with certain
NYSE corporate governance standards, including the requirements that a majority of our board of directors consist
of independent directors and that we have a compensation committee and a nominating/corporate governance
committee with written charters addressing the committee's purpose and responsibilities that are composed entirely
of independent directors.
At such time that we are no longer deemed a controlled company, the board of directors will become
comprised of a majority of independent directors in accordance with the applicable standards set forth by the SEC
and NYSE for determining director independence. Presently, in applying such SEC and NYSE independence
standards and the independence standards described in our corporate governance guidelines, the board of
directors has determined that three of its members, namely Messrs. Masson and Wintrob and Ms. Whittington, are
each independent. Please see “Directors, Executive Officers and Corporate Governance—Board Structure and
Governance” and “—Corporate Governance Guidelines.”
189
Item 14. Principal Accounting Fees and Services
The following table sets forth the aggregate fees for professional services provided by our independent
registered public accounting firm, PricewaterhouseCoopers LLP, for the years ended December 31, 2012 and 2011:
For the Year Ended December 31,
2012
2011
Oaktree
Capital
Group, LLC
Oaktree
Funds
Oaktree
Capital
Group, LLC
Oaktree
Funds
(in thousands)
Audit fees (1) ............................................................................... $
Audit-related fees (2) ...................................................................
Tax fees (3) ..................................................................................
All other fees (4) ..........................................................................
2,881
$
3,558
$
3,784
$
774
1,611
34
920
4,277
—
—
1,974
149
1,886
2,112
3,035
—
(1)
(2)
(3)
(4)
Audit fees consisted of fees for services related to the annual audit of our consolidated financial statements,
reviews of our interim consolidated financial statements on Form 10-Q, SEC registration statements,
accounting consultations and services that are normally provided in connection with statutory and regulatory
filings and engagements.
Audit-related fees consisted of fees related to financial due diligence services in connection with acquisitions
of portfolio companies for investment by funds managed by Oaktree in its capacity as general partner,
internal controls readiness assessment as well as attestation services and agreed-upon procedures related
to PPIP under the U.S. Treasury program.
Tax fees consisted of fees related to tax compliance and tax advisory services.
All other fees consisted of advisory services related to regulatory matters.
In accordance with our audit committee charter, the audit committee is required to approve, in advance, all
audit and non-audit services to be provided by our independent registered public accounting firm,
PricewaterhouseCoopers LLP. All services reported in the Audit, Audit-related, Tax and All other categories above
were approved by the audit committee. Our audit committee charter is available on our website at
www.oaktreecapital.com under the “Unitholders” section.
190
PART IV.
Item 15. Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this report:
Financial statements: Please see Item 8 above.
(1)
Financial statement schedules: Schedules for which provision is made in the applicable accounting
(2)
regulations of the SEC are not required under the related instructions or are not applicable and
therefore have been omitted.
Exhibits: For a list of exhibits filed with this report, please refer to the Exhibits Index on the page
immediately preceding the exhibits, which Exhibit Index is incorporated herein by reference.
(3)
191
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 14, 2013
Oaktree Capital Group, LLC
By:
Name:
Title:
/s/ David M. Kirchheimer
David M. Kirchheimer
Principal, Chief Financial Officer and
Chief Administrative Officer and Authorized Signatory
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant in the capacities indicated on this 14th day of March 2013:
Signature
Title
/s/ Howard S. Marks
Howard S. Marks
/s/ Bruce A. Karsh
Bruce A. Karsh
/s/ John B. Frank
John B. Frank
/s/ David M. Kirchheimer
David M. Kirchheimer
/s/ Kevin L. Clayton
Kevin L. Clayton
/s/ Stephen A. Kaplan
Stephen A. Kaplan
/s/ Larry W. Keele
Larry W. Keele
/s/ Sheldon M. Stone
Sheldon M. Stone
/s/ Robert E. Denham
Director, Chairman and Principal
Director, President and Principal
Director and Managing Principal
(Principal Executive Officer)
Director, Chief Financial Officer, Chief Administrative Officer and Principal (Principal
Financial Officer and Principal Accounting Officer)
Director and Principal
Director and Principal
Director and Principal
Director and Principal
Robert E. Denham
Director
/s/ D. Richard Masson
D. Richard Masson
/s/ Wayne G. Pierson
Wayne G. Pierson
Director
Director
/s/ Marna C. Whittington
Marna C. Whittington
Director
/s/ Jay S. Wintrob
Jay S. Wintrob
Director
192
Exhibit No.
Description of Exhibit
EXHIBITS INDEX
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Restated Certificate of Formation of the Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, filed with the SEC on June 17, 2011).
Third Amended and Restated Operating Agreement of the Registrant dated as of August 31, 2011
(incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on September 2, 2011).
Amendment to Third Amended and Restated Operating Agreement of the Registrant dated as of
March 29, 2012 (incorporated by reference to Exhibit 3.3 to the Registrant's Registration Statement
on Form S-1, filed with the SEC on March 30, 2012).
Specimen Certificate evidencing the Registrant's Class A units (incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1, filed with the SEC on September 2,
2011).
Note Purchase Agreement, by and among Oaktree Capital Management, LLC and the purchasers
named therein, dated as of June 14, 2004, for $75,000,000 in aggregate principal amount of 5.03%
Senior Notes due June 14, 2014 (incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Amendment No. 1 to the June 14, 2004 Note Purchase Agreement, by and among Oaktree Capital
Management, LLC and the other parties thereto, dated as of March 15, 2006 (incorporated by
reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1, filed with the SEC
on August 1, 2011).
Amendment No. 2 and Waiver to the June 14, 2004 Note Purchase Agreement, by and among
Oaktree Capital Management, LLC and the other parties thereto, dated as of June 6, 2006
(incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on August 1, 2011).
Form of 5.03% Senior Note due June 14, 2014 (incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Assumption and Guaranty Agreement, by Oaktree Capital I, L.P., Oaktree Capital II, L.P. and Oaktree
Media Investments, L.P. in favor of the holders of the 5.03% Senior Notes due June 14, 2014
(incorporated by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on August 1, 2011).
Note Purchase Agreement, by and among Oaktree Capital Management, LLC and the purchasers
named therein, dated as of June 6, 2006, for $50,000,000 in aggregate principal amount of 6.09%
Senior Notes due June 6, 2016 (incorporated by reference to Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Form of 6.09% Senior Note due June 6, 2016 (incorporated by reference to Exhibit 4.8 to the
Registrant's Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Assumption and Guaranty Agreement, by Oaktree Capital I, L.P., Oaktree Capital II, L.P. and Oaktree
Media Investments, L.P. in favor of the holders of the 6.09% Senior Notes due June 6, 2016
(incorporated by reference to Exhibit 4.9 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on August 1, 2011).
Note Purchase Agreement, by and among Oaktree Capital Management, LLC and the purchasers
named therein, dated as of November 8, 2006, for $50,000,000 in aggregate principal amount of
5.82% Senior Notes due November 8, 2016 (incorporated by reference to Exhibit 4.10 to the
Registrant's Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Form of 5.82% Senior Note due November 8, 2016 (incorporated by reference to Exhibit 4.11 to the
Registrant's Registration Statement on Form S-1, filed with the SEC on September 2, 2011).
Assumption and Guaranty Agreement, by Oaktree Capital I, L.P., Oaktree Capital II, L.P. and Oaktree
Media Investments, L.P. in favor of the holders of the 5.82% Senior Notes due November 8, 2016
(incorporated by reference to Exhibit 4.12 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on August 1, 2011).
193
4.13
4.14
4.15
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Amendment and Waiver to the June 25, 2001 Note Purchase Agreement, the June 14, 2004 Note
Purchase Agreement, the June 6, 2006 Note Purchase Agreement and the November 8, 2006 Note
Purchase Agreement, by and among Oaktree Capital Management, LLC and the other parties
thereto, dated as of May 16, 2007 (incorporated by reference to Exhibit 4.13 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Second Amendment and Waiver to the June 25, 2001 Note Purchase Agreement, the June 14, 2004
Note Purchase Agreement, the June 6, 2006 Note Purchase Agreement and the November 8, 2006
Note Purchase Agreement, by and among Oaktree Capital Management, L.P., Oaktree Capital I,
L.P., Oaktree Capital II, L.P., Oaktree AIF Investments, L.P. and the other parties thereto, dated as of
July 6, 2010 (incorporated by reference to Exhibit 4.14 to the Registrant's Registration Statement on
Form S-1, filed with the SEC on August 1, 2011).
Indenture, dated as of November 24, 2009, by and among Oaktree Capital Management, L.P., as
Issuer, Oaktree Capital Group, LLC, Oaktree Capital Group Holdings, L.P., Oaktree Capital II, L.P.
and Oaktree AIF Investments, L.P., each an Initial Guarantor, and Wells Fargo Bank, National
Association, as Trustee, with respect to 6.75% Senior Notes Due 2019 (incorporated by reference to
Exhibit 4.15 to the Registrant's Registration Statement on Form S-1, filed with the SEC on August 1,
2011).
Amended and Restated Limited Partnership Agreement of Oaktree Capital I, L.P., dated as of
May 25, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement
on Form S-1, filed with the SEC on August 1, 2011).
Amended and Restated Limited Partnership Agreement of Oaktree Capital II, L.P., dated as of
May 25, 2007 (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement
on Form S-1, filed with the SEC on August 1, 2011).
Limited Partnership Agreement of Oaktree Capital Management, L.P., dated as of May 25, 2007
(incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on August 1, 2011).
Amended and Restated Limited Partnership Agreement of Oaktree Capital Management (Cayman),
L.P., dated as of May 25, 2007 (incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Second Amended and Restated Limited Partnership Agreement of Oaktree Investment Holdings,
L.P., dated as of May 25, 2011 (incorporated by reference to Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Second Amended and Restated Limited Partnership Agreement of Oaktree AIF Investments, L.P.,
dated as of October 29, 2008 (incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Second Amended and Restated Tax Receivable Agreement, dated as of March 29, 2012, by and
among Oaktree Holdings, Inc., Oaktree AIF Holdings, Inc., Oaktree Capital II, L.P., Oaktree Capital
Management, L.P., Oaktree Investment Holdings, L.P., Oaktree AIF Investments, L.P. and the other
parties from time to time party thereto (incorporated by reference to Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on March 30, 2012).
Second Amended and Restated Exchange Agreement, dated as of March 29, 2012, by and among
Oaktree Capital Group, LLC, OCM Holdings I, LLC, Oaktree Holdings, Inc., Oaktree AIF Holdings,
Inc., Oaktree Holdings, Ltd., Oaktree Capital Group Holdings, L.P. and the other parties from time to
time party thereto (incorporated by reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1, filed with the SEC on March 30, 2012).
Credit Agreement, dated as of December 21, 2012, by and among Oaktree Capital Management,
L.P., Oaktree Capital II, L.P., Oaktree AIF Investments, L.P., Oaktree Capital I, L.P., the Lenders party
thereto, Wells Fargo Bank, National Association, as Administrative Agent, L/C Issuer and Swing Line
Lender, and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Lead Bookrunner
(incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed with
the SEC on December 27, 2012).
10.10
Form of Indemnification Agreement by and between Oaktree Capital Management, L.P. and the
director or officer named therein (incorporated by reference to Exhibit 10.11 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on October 20, 2011).
194
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
21.1
31.1
31.2
32.1
32.2
2007 Oaktree Capital Group Equity Incentive Plan and forms of award agreements thereunder
(incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on August 1, 2011).
Summary Employment Agreement by and among Oaktree Capital Management Limited and Howard
Marks, dated as of September 26, 2006 (incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Summary Employment Agreement by and among Oaktree Capital Management, L.P. and Kevin
Clayton, dated as of April 26, 2011 (incorporated by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1, filed with the SEC on August 1, 2011).
Form of Management Fee Sharing Letter Agreement (incorporated by reference to Exhibit 10.16 to
the Registrant's Registration Statement on Form S-1, filed with the SEC on March 30, 2012).
Form of Profit Sharing Letter Agreement (incorporated by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-1, filed with the SEC on March 30, 2012).
Fifth Amended and Restated Limited Partnership Agreement of Oaktree Fund GP I, L.P., dated as of
July 28, 2011 (incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement
on Form S-1, filed with the SEC on August 1, 2011).
Fifth Amended and Restated Limited Partnership Agreement of Oaktree Fund GP II, L.P., dated as of
July 28, 2011 (incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement
on Form S-1, filed with the SEC on August 1, 2011).
Third Amended and Restated Limited Partnership Agreement of Oaktree Fund GP III, L.P., dated as
of July 28, 2011 (incorporated by reference to Exhibit 10.20 to the Registrant's Registration
Statement on Form S-1, filed with the SEC on August 1, 2011).
Form of Oaktree Capital Group, LLC 2011 Equity Incentive Plan (incorporated by reference to
Exhibit 10.24 to the Registrant's Registration Statement on Form S-1, filed with the SEC on
October 3, 2011).
Form of Grant Agreement under the Oaktree Capital Group, LLC 2011 Equity Incentive Plan
(incorporated by reference to Exhibit 10.27 to the Registrant's Registration Statement on Form S-1,
filed with the SEC on February 24, 2012).
Subsidiaries of the Registrant.
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS†
XBRL Instance Document.
101.SCH†
XBRL Taxonomy Extension Schema Document.
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document.
* Management contract or compensatory plan or arrangement.
195
†
In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not
filed for purposes of Section 18 of the Exchange Act and otherwise is not subject to liability under such
section.
196
List of Subsidiaries
Exhibit 21.1
Jurisdiction of
Incorporation or
Name
Organization
Oaktree AIF (Cayman) GP, Ltd............................................................................................... Cayman Islands
Oaktree AIF Holdings, Inc. ..................................................................................................... Delaware
Oaktree AIF Investments, L.P. ................................................................................................ Delaware
Oaktree Asia Special Situations Fund GP Ltd. ....................................................................... Cayman Islands
Oaktree Asia Special Situations Fund GP, L.P........................................................................ Cayman Islands
Oaktree Asia Special Situations Fund, L.P. ............................................................................ Cayman Islands
Oaktree Capital (Beijing) Ltd. ................................................................................................. China
Oaktree Capital (Hong Kong) Limited .................................................................................... Hong Kong
Oaktree Capital (Seoul) Limited ............................................................................................. South Korea
Oaktree Capital (Shanghai) Ltd. ............................................................................................. China
Oaktree Capital Group Holdings GP, LLC .............................................................................. Delaware
Oaktree Capital Group Holdings, L.P...................................................................................... Delaware
Oaktree Capital Group, LLC ................................................................................................... Delaware
Oaktree Capital I, L.P. ............................................................................................................ Delaware
Oaktree Capital II, L.P. ........................................................................................................... Delaware
Oaktree Capital Management (Cayman), L.P. ........................................................................ Cayman Islands
Oaktree Capital Management (UK) LLP ................................................................................. United Kingdom
Oaktree Capital Management Pte. Ltd. .................................................................................. Singapore
Oaktree Capital Management, L.P.......................................................................................... Delaware
Oaktree Capital UK Limited .................................................................................................... United Kingdom
Oaktree Emerging Market Opportunities Fund (Feeder) GP, L.P............................................ Cayman Islands
Oaktree Emerging Market Opportunities Fund (Feeder), L.P. ................................................ Cayman Islands
Oaktree Emerging Market Opportunities Fund GP Ltd. .......................................................... Cayman Islands
Oaktree Emerging Market Opportunities Fund GP, L.P.......................................................... Cayman Islands
Oaktree Emerging Market Opportunities Fund, L.P. ............................................................... Cayman Islands
Oaktree Emerging Markets Absolute Return (Cayman) Fund, Ltd. ........................................ Cayman Islands
Oaktree Emerging Markets Absolute Return Feeder Fund, L.P.............................................. Delaware
Oaktree Emerging Markets Absolute Return Fund, L.P.......................................................... Delaware
Oaktree Emerging Markets Equity Fund (Cayman), L.P......................................................... Cayman Islands
Oaktree Emerging Markets Equity Fund (Delaware), L.P. ...................................................... Cayman Islands
Oaktree Emerging Markets Equity Fund (Feeder) GP, L.P..................................................... Cayman Islands
Oaktree Emerging Markets Equity Fund GP L.P. ................................................................... Cayman Islands
Oaktree Emerging Markets Equity Fund GP Ltd. ................................................................... Cayman Islands
Oaktree Emerging Markets Equity Fund, L.P. ........................................................................ Cayman Islands
Oaktree Employee Investment Fund (Cayman), L.P. ............................................................. Cayman Islands
Oaktree Employee Investment Fund, L.P. .............................................................................. Delaware
Oaktree Enhanced Income Fund (Cayman), L.P. ................................................................... Cayman Islands
Oaktree Enhanced Income Fund (Parallel) Feeder, L.P. ........................................................ Cayman Islands
Oaktree Enhanced Income Fund (Parallel), L.P. .................................................................... Delaware
Oaktree Enhanced Income Fund GP, L.P............................................................................... Delaware
Oaktree Enhanced Income Fund GP, Ltd. .............................................................................. Cayman Islands
Jurisdiction of
Incorporation or
Organization
Name
Oaktree Enhanced Income Fund, L.P..................................................................................... Delaware
Oaktree Europe GP Limited ................................................................................................... United Kingdom
Oaktree European Credit Opportunities Fund (Cayman) Ltd. ................................................ Cayman Islands
Oaktree European Credit Opportunities Fund, L.P. ................................................................ United Kingdom
Oaktree European Credit Opportunities Holdings, Ltd. .......................................................... Cayman Islands
Oaktree European Credit Opportunities USD Fund (Cayman) Ltd. ........................................ Cayman Islands
Oaktree European Dislocation Fund (U.S.), L.P. .................................................................... Cayman Islands
Oaktree European Dislocation Fund GP Ltd. ......................................................................... Cayman Islands
Oaktree European Dislocation Fund GP, L.P.......................................................................... Cayman Islands
Oaktree European Dislocation Fund, L.P. .............................................................................. Cayman Islands
Oaktree European High Yield Fund, L.P................................................................................. Delaware
Oaktree European Holdings, LLC .......................................................................................... Delaware
Oaktree European Principal Fund III (Cayman), L.P............................................................... Cayman Islands
Oaktree European Principal Fund III (Delaware), L.P............................................................. Delaware
Oaktree European Principal Fund III (Feeder) GP, L.P........................................................... Cayman Islands
Oaktree European Principal Fund III (Parallel) Feeder, L.P.................................................... Cayman Islands
Oaktree European Principal Fund III (Parallel), L.P. ............................................................... Cayman Islands
Oaktree European Principal Fund III (U.S.), L.P. .................................................................... Cayman Islands
Oaktree European Principal Fund III GP, L.P.......................................................................... Cayman Islands
Oaktree European Principal Fund III GP, Ltd. ........................................................................ Cayman Islands
Oaktree European Principal Fund III Ltd. ............................................................................... Cayman Islands
Oaktree European Principal Fund III, L.P. .............................................................................. Cayman Islands
Oaktree Expanded High Yield Fund, L.P. ............................................................................... Delaware
Oaktree FF Investment Fund AIF (Delaware), L.P.................................................................. Delaware
Oaktree FF Investment Fund GP Ltd. .................................................................................... Cayman Islands
Oaktree FF Investment Fund GP, L.P..................................................................................... Cayman Islands
Oaktree FF Investment Fund, L.P........................................................................................... Cayman Islands
Oaktree Finance, LLC ............................................................................................................ Delaware
Oaktree France S.A.S. ........................................................................................................... France
Oaktree Fund AIF Series (Cayman), L.P. ............................................................................... Cayman Islands
Oaktree Fund AIF Series, L.P. ................................................................................................ Delaware
Oaktree Fund GP AIF, LLC..................................................................................................... Delaware
Oaktree Fund GP I, L.P. ......................................................................................................... Delaware
Oaktree Fund GP II, L.P. ........................................................................................................ Delaware
Oaktree Fund GP IIA, LLC ..................................................................................................... Delaware
Oaktree Fund GP III, L.P. ....................................................................................................... Delaware
Oaktree Fund GP IIIA, LLC .................................................................................................... Delaware
Oaktree Fund GP Ltd. ............................................................................................................ Cayman Islands
Oaktree Fund GP, LLC ........................................................................................................... Delaware
Oaktree GmbH ....................................................................................................................... Germany
Oaktree High Income Convertible Fund II, L.P. ...................................................................... Delaware
Oaktree High Income Convertible Fund, L.P. ......................................................................... Delaware
Oaktree High Yield Fund II, L.P. ............................................................................................. Delaware
Oaktree High Yield Fund, L.P. ................................................................................................ California
Jurisdiction of
Incorporation or
Name
Organization
Oaktree High Yield Plus (Cayman) Fund, Ltd. ........................................................................ Cayman Islands
Oaktree High Yield Plus Feeder Fund, L.P. ............................................................................ Delaware
Oaktree High Yield Plus Fund, L.P. ........................................................................................ Delaware
Oaktree Holdings, Inc. ............................................................................................................ Delaware
Oaktree Holdings, LLC ........................................................................................................... Delaware
Oaktree Holdings, Ltd. ............................................................................................................ Cayman Islands
Oaktree HSF, L.P.................................................................................................................... Delaware
Oaktree Huntington Investment Fund AIF (Delaware), L.P..................................................... Delaware
Oaktree Huntington Investment Fund GP Ltd. ....................................................................... Cayman Islands
Oaktree Huntington Investment Fund GP, L.P........................................................................ Cayman Islands
Oaktree Huntington Investment Fund, L.P.............................................................................. Cayman Islands
Oaktree International Holdings, LLC ...................................................................................... Delaware
Oaktree Investment Holdings, L.P. ......................................................................................... Delaware
Oaktree Japan Absolute Return Fund GP, L.P........................................................................ Delaware
Oaktree Japan Absolute Return Fund, L.P. ............................................................................ Delaware
Oaktree Japan GP, L.P. .......................................................................................................... Cayman Islands
Oaktree Japan Opportunities Fund, L.P. ................................................................................ Cayman Islands
Oaktree Japan Opportunities Value Fund, L.P........................................................................ Delaware
Oaktree Japan, GK ................................................................................................................ Japan
Oaktree Loan Fund 2x (Cayman) Ltd. .................................................................................... Cayman Islands
Oaktree Loan Fund 2x, L.P. .................................................................................................... Delaware
Oaktree Loan Fund GP, L.P.................................................................................................... Delaware
Oaktree Mezzanine Fund III (Cayman) Ltd. ........................................................................... Cayman Islands
Oaktree Mezzanine Fund III GP, L.P. ..................................................................................... Delaware
Oaktree Mezzanine Fund III, L.P. ........................................................................................... Delaware
Oaktree Non-U.S. Convertible Fund, L.P................................................................................ California
Oaktree Opportunities Advisors Europe Ltd. .......................................................................... United Kingdom
Oaktree Opportunities Advisors Holdings, LLC ...................................................................... Delaware
Oaktree Opportunities Fund IX (Cayman), L.P. ...................................................................... Cayman Islands
Oaktree Opportunities Fund IX (Feeder) GP, L.P. .................................................................. Cayman Islands
Oaktree Opportunities Fund IX (Parallel 2), L.P. .................................................................... Cayman Islands
Oaktree Opportunities Fund IX (Parallel), L.P. ....................................................................... Cayman Islands
Oaktree Opportunities Fund IX GP, L.P.................................................................................. Cayman Islands
Oaktree Opportunities Fund IX GP, Ltd. ................................................................................. Cayman Islands
Oaktree Opportunities Fund IX, L.P. ....................................................................................... Cayman Islands
Oaktree Opportunities Fund VIII (Cayman) Ltd. ..................................................................... Cayman Islands
Oaktree Opportunities Fund VIII (Parallel 2) AIF (Delaware), L.P........................................... Delaware
Oaktree Opportunities Fund VIII (Parallel 2), L.P. .................................................................. Cayman Islands
Oaktree Opportunities Fund VIII (Parallel) AIF (Cayman), L.P. .............................................. Cayman Islands
Oaktree Opportunities Fund VIII (Parallel) AIF (Delaware), L.P.............................................. Delaware
Oaktree Opportunities Fund VIII (Parallel), L.P. ..................................................................... Cayman Islands
Oaktree Opportunities Fund VIII AIF (Cayman), L.P............................................................... Cayman Islands
Oaktree Opportunities Fund VIII AIF (Delaware), L.P............................................................. Delaware
Oaktree Opportunities Fund VIII Delaware, L.P...................................................................... Delaware
Jurisdiction of
Incorporation or
Name
Organization
Oaktree Opportunities Fund VIII GP Ltd. ................................................................................ Cayman Islands
Oaktree Opportunities Fund VIII GP, L.P................................................................................ Cayman Islands
Oaktree Opportunities Fund VIII, L.P. ..................................................................................... Cayman Islands
Oaktree Opportunities Fund VIIIb (Cayman) Ltd. ................................................................... Cayman Islands
Oaktree Opportunities Fund VIIIb (Parallel) AIF (Cayman), L.P. ............................................ Cayman Islands
Oaktree Opportunities Fund VIIIb (Parallel) AIF (Delaware), L.P............................................ Delaware
Oaktree Opportunities Fund VIIIb (Parallel), L.P. ................................................................... Cayman Islands
Oaktree Opportunities Fund VIIIb AIF (Cayman), L.P............................................................. Cayman Islands
Oaktree Opportunities Fund VIIIb AIF (Delaware), L.P........................................................... Delaware
Oaktree Opportunities Fund VIIIb Delaware, L.P.................................................................... Delaware
Oaktree Opportunities Fund VIIIb GP Ltd. .............................................................................. Cayman Islands
Oaktree Opportunities Fund VIIIb GP, L.P.............................................................................. Cayman Islands
Oaktree Opportunities Fund VIIIb, L.P. ................................................................................... Cayman Islands
Oaktree Power Opportunities Fund III (Cayman) GP Ltd. ...................................................... Cayman Islands
Oaktree Power Opportunities Fund III (Cayman), L.P. ........................................................... Cayman Islands
Oaktree Power Opportunities Fund III (Parallel), L.P.............................................................. Delaware
Oaktree Power Opportunities Fund III AIF (Delaware), L.P. ................................................... Delaware
Oaktree Power Opportunities Fund III Delaware, L.P. ............................................................ Delaware
Oaktree Power Opportunities Fund III GP, L.P. ...................................................................... Delaware
Oaktree Power Opportunities Fund III, L.P. ............................................................................ Delaware
Oaktree PPIP Fund, L.P. ........................................................................................................ Delaware
Oaktree PPIP Private Fund (Cayman) GP Ltd. ...................................................................... Cayman Islands
Oaktree PPIP Private Fund (Cayman), L.P. ........................................................................... Cayman Islands
Oaktree PPIP Private Fund, L.P. ............................................................................................ Delaware
Oaktree Principal Advisors (Europe) Limited .......................................................................... United Kingdom
Oaktree Principal Fund V (Cayman) Ltd. ................................................................................ Cayman Islands
Oaktree Principal Fund V (Delaware), L.P. ............................................................................. Delaware
Oaktree Principal Fund V (Parallel) AIF (Cayman), L.P.......................................................... Cayman Islands
Oaktree Principal Fund V (Parallel) AIF (Delaware), L.P. ....................................................... Delaware
Oaktree Principal Fund V (Parallel), L.P. ................................................................................ Cayman Islands
Oaktree Principal Fund V AIF (Cayman), L.P. ........................................................................ Cayman Islands
Oaktree Principal Fund V AIF (Delaware), L.P. ...................................................................... Delaware
Oaktree Principal Fund V GP Ltd. .......................................................................................... Cayman Islands
Oaktree Principal Fund V GP, L.P........................................................................................... Cayman Islands
Oaktree Principal Fund V, L.P................................................................................................. Cayman Islands
Oaktree Principal Fund VI (Cayman), L.P............................................................................... Cayman Islands
Oaktree Principal Fund VI (Feeder) GP, L.P........................................................................... Cayman Islands
Oaktree Principal Fund VI (Parallel), L.P. ............................................................................... Cayman Islands
Oaktree Principal Fund VI GP Ltd. ......................................................................................... Cayman Islands
Oaktree Principal Fund VI GP, L.P.......................................................................................... Cayman Islands
Oaktree Principal Fund VI, L.P. .............................................................................................. Cayman Islands
Oaktree Private Investment Fund 2009 GP, L.P..................................................................... Delaware
Oaktree Private Investment Fund 2009, L.P. .......................................................................... Delaware
Oaktree Private Investment Fund 2010 GP, L.P..................................................................... Delaware
Jurisdiction of
Incorporation or
Organization
Name
Oaktree Private Investment Fund 2010, L.P. .......................................................................... Delaware
Oaktree Private Investment Fund 2012 GP, L.P..................................................................... Delaware
Oaktree Private Investment Fund 2012, L.P. .......................................................................... Delaware
Oaktree Real Estate Debt Fund (Cayman) GP Ltd. ................................................................ Cayman Islands
Oaktree Real Estate Debt Fund (Cayman) L.P....................................................................... Cayman Islands
Oaktree Real Estate Debt Fund GP, L.P................................................................................. Delaware
Oaktree Real Estate Debt Fund, L.P. ..................................................................................... Delaware
Oaktree Real Estate Fund VI (Cayman) GP Ltd. .................................................................... Cayman Islands
Oaktree Real Estate Fund VI (Cayman), L.P. ......................................................................... Cayman Islands
Oaktree Real Estate Fund VI GP, L.P..................................................................................... Delaware
Oaktree Real Estate Fund VI, L.P........................................................................................... Delaware
Oaktree Real Estate Opportunities Fund IV Delaware GP Inc. .............................................. Delaware
Oaktree Real Estate Opportunities Fund IV Delaware, L.P. ................................................... Delaware
Oaktree Real Estate Opportunities Fund IV GP Ltd. .............................................................. Cayman Islands
Oaktree Real Estate Opportunities Fund IV GP, L.P............................................................... Cayman Islands
Oaktree Real Estate Opportunities Fund IV, L.P..................................................................... Cayman Islands
Oaktree Real Estate Opportunities Fund V (Cayman) GP Ltd. .............................................. Cayman Islands
Oaktree Real Estate Opportunities Fund V (Cayman) L.P...................................................... Cayman Islands
Oaktree Real Estate Opportunities Fund V GP, L.P................................................................ Delaware
Oaktree Real Estate Opportunities Fund V, L.P...................................................................... Delaware
Oaktree Real Estate Opportunities Fund VI (Cayman) GP Ltd. ............................................. Cayman Islands
Oaktree Real Estate Opportunities Fund VI (Cayman), L.P.................................................... Cayman Islands
Oaktree Real Estate Opportunities Fund VI GP, L.P............................................................... Delaware
Oaktree Real Estate Opportunities Fund VI, L.P. ................................................................... Delaware
Oaktree Remington Investment Fund GP, L.P........................................................................ Delaware
Oaktree Remington Investment Fund, L.P.............................................................................. Delaware
Oaktree Senior Loan Fund (Cayman) Ltd. ............................................................................. Cayman Islands
Oaktree Senior Loan Fund GP, L.P. ....................................................................................... Delaware
Oaktree Senior Loan Fund, L.P. ............................................................................................. Delaware
Oaktree TT Multi-Strategy Fund GP, L.P. ............................................................................... Delaware
Oaktree TT Multi-Strategy Fund, L.P. ..................................................................................... Delaware
Oaktree Value Equities Fund GP, L.P..................................................................................... Delaware
Oaktree Value Equities Fund, L.P........................................................................................... Delaware
Oaktree Value Opportunities (Cayman) Fund, Ltd.................................................................. Cayman Islands
Oaktree Value Opportunities Feeder Fund, L.P...................................................................... Delaware
Oaktree Value Opportunities Fund AIF (Cayman), L.P........................................................... Cayman Islands
Oaktree Value Opportunities Fund AIF (Delaware), L.P. ........................................................ Delaware
Oaktree Value Opportunities Fund GP Ltd. ............................................................................ Cayman Islands
Oaktree Value Opportunities Fund GP, L.P............................................................................. Cayman Islands
Oaktree Value Opportunities Fund, L.P. ................................................................................. Cayman Islands
Oaktree/Arctic Slope PPIP Fund GP, L.P................................................................................ Delaware
Oaktree/Arctic Slope PPIP Private Fund GP, L.P. .................................................................. Delaware
Oaktree-TCDRS Strategic Credit, LLC ................................................................................... Delaware
OCM Asia Principal Opportunities Fund GP Ltd. .................................................................... Cayman Islands
Jurisdiction of
Incorporation or
Name
Organization
OCM Asia Principal Opportunities Fund GP, L.P.................................................................... Cayman Islands
OCM Asia Principal Opportunities Fund, L.P. ......................................................................... Cayman Islands
OCM China Holdings, L.P. ...................................................................................................... Delaware
OCM China Investor, L.P. ....................................................................................................... Delaware
OCM Convertible Trust ........................................................................................................... Massachusetts
OCM Disbursement Services, L.L.C. ..................................................................................... Delaware
OCM European Principal Opportunities Fund GP, L.P............................................................ Cayman Islands
OCM European Principal Opportunities Fund GP, Ltd............................................................ Cayman Islands
OCM European Principal Opportunities Fund II (Delaware), L.P............................................ Delaware
OCM European Principal Opportunities Fund II (U.S.), L.P. ................................................... Cayman Islands
OCM European Principal Opportunities Fund II AIF (Cayman), L.P. ...................................... Cayman Islands
OCM European Principal Opportunities Fund II GP Ltd. ........................................................ Cayman Islands
OCM European Principal Opportunities Fund II GP, L.P......................................................... Cayman Islands
OCM European Principal Opportunities Fund II, L.P. ............................................................. Cayman Islands
OCM European Principal Opportunities Fund, L.P. ................................................................ Cayman Islands
OCM FIE, LLC ........................................................................................................................ Delaware
OCM Group Trust ................................................................................................................... Massachusetts
OCM High Yield Plus Fund GP, L.P........................................................................................ Delaware
OCM High Yield Trust ............................................................................................................. Massachusetts
OCM Holdings I, LLC ............................................................................................................. Delaware
OCM Holdings II, LLC ............................................................................................................ Delaware
OCM Holdings III, LLC ........................................................................................................... Delaware
OCM Investments, LLC .......................................................................................................... Delaware
OCM Mezzanine Fund II (Cayman), Ltd. ................................................................................ Cayman Islands
OCM Mezzanine Fund II GP, L.P............................................................................................ Delaware
OCM Mezzanine Fund II, L.P. ................................................................................................ Delaware
OCM Mezzanine Fund, L.P. ................................................................................................... Delaware
OCM Opportunities Fund II, L.P.............................................................................................. Delaware
OCM Opportunities Fund III, L.P............................................................................................. Delaware
OCM Opportunities Fund IV, L.P. ........................................................................................... Delaware
OCM Opportunities Fund IVb (Cayman), Ltd. ........................................................................ Cayman Islands
OCM Opportunities Fund V (Cayman) Ltd. ............................................................................ Cayman Islands
OCM Opportunities Fund V Feeder, L.P. ................................................................................ Delaware
OCM Opportunities Fund V GP, L.P. ...................................................................................... Delaware
OCM Opportunities Fund V, L.P. ............................................................................................ Delaware
OCM Opportunities Fund VI (Cayman) Ltd. ........................................................................... Cayman Islands
OCM Opportunities Fund VI AIF (Cayman), L.P. .................................................................... Cayman Islands
OCM Opportunities Fund VI AIF (Delaware), L.P. .................................................................. Delaware
OCM Opportunities Fund VI GP, L.P. ..................................................................................... Delaware
OCM Opportunities Fund VI, L.P. ........................................................................................... Delaware
OCM Opportunities Fund VII (Cayman) Ltd. .......................................................................... Cayman Islands
OCM Opportunities Fund VII AIF (Delaware), L.P. ................................................................. Delaware
OCM Opportunities Fund VII Delaware GP Inc. ..................................................................... Delaware
OCM Opportunities Fund VII Delaware, L.P. .......................................................................... Delaware
Jurisdiction of
Incorporation or
Name
Organization
OCM Opportunities Fund VII GP Ltd. ..................................................................................... Cayman Islands
OCM Opportunities Fund VII GP, L.P. .................................................................................... Cayman Islands
OCM Opportunities Fund VII, L.P. .......................................................................................... Cayman Islands
OCM Opportunities Fund VIIb (Cayman) Ltd. ........................................................................ Cayman Islands
OCM Opportunities Fund VIIb (Parallel) AIF (Cayman), L.P................................................... Cayman Islands
OCM Opportunities Fund VIIb (Parallel) AIF (Delaware), L.P................................................. Delaware
OCM Opportunities Fund VIIb (Parallel), L.P. ......................................................................... Cayman Islands
OCM Opportunities Fund VIIb AIF (Cayman), L.P. ................................................................. Cayman Islands
OCM Opportunities Fund VIIb AIF (Delaware), L.P. ............................................................... Delaware
OCM Opportunities Fund VIIb Delaware, L.P. ........................................................................ Delaware
OCM Opportunities Fund VIIb GP Ltd. ................................................................................... Cayman Islands
OCM Opportunities Fund VIIb GP, L.P. .................................................................................. Cayman Islands
OCM Opportunities Fund VIIb, L.P. ........................................................................................ Cayman Islands
OCM Power Opportunities Fund II GP (Cayman) Ltd. ............................................................ Cayman Islands
OCM Power Opportunities Fund II GP, L.P............................................................................. Delaware
OCM Principal Opportunities Fund II, L.P. .............................................................................. Delaware
OCM Principal Opportunities Fund III (Cayman) Ltd. ............................................................. Cayman Islands
OCM Principal Opportunities Fund III Feeder L.P................................................................... Delaware
OCM Principal Opportunities Fund III GP, L.P........................................................................ Delaware
OCM Principal Opportunities Fund III, L.P. ............................................................................. Delaware
OCM Principal Opportunities Fund IIIA, L.P. .......................................................................... Delaware
OCM Principal Opportunities Fund IV (Cayman) Ltd. ............................................................. Cayman Islands
OCM Principal Opportunities Fund IV AIF (Delaware) GP, L.P............................................... Delaware
OCM Principal Opportunities Fund IV AIF (Delaware), L.P..................................................... Delaware
OCM Principal Opportunities Fund IV Delaware GP Inc. ....................................................... Delaware
OCM Principal Opportunities Fund IV Delaware, L.P. ............................................................ Delaware
OCM Principal Opportunities Fund IV GP, L.P........................................................................ Cayman Islands
OCM Principal Opportunities Fund IV GP, Ltd........................................................................ Cayman Islands
OCM Principal Opportunities Fund IV, L.P.............................................................................. Cayman Islands
OCM Real Estate Opportunities Fund A, L.P.......................................................................... Delaware
OCM Real Estate Opportunities Fund B, L.P.......................................................................... Delaware
OCM Real Estate Opportunities Fund II, L.P. ......................................................................... Delaware
OCM Real Estate Opportunities Fund III GP, L.P. .................................................................. Delaware
OCM Real Estate Opportunities Fund III, L.P. ........................................................................ Delaware
OCM Real Estate Opportunities Fund IIIA, L.P....................................................................... Delaware
OCM SSG Holdings GP, LLC ................................................................................................. Delaware
OCM SSG Holdings, L.P. ....................................................................................................... Delaware
OCM/GFI Power Opportunities Fund II (Cayman), L.P........................................................... Cayman Islands
OCM/GFI Power Opportunities Fund II Feeder, L.P. .............................................................. Delaware
OCM/GFI Power Opportunities Fund II, L.P. .......................................................................... Delaware
Pangaea Capital Management, L.P. ....................................................................................... Cayman Islands
Pangaea Holdings Ltd. ........................................................................................................... Cayman Islands
RBO GP Holdings, L.P. .......................................................................................................... Delaware
RBO LP Holdings, L.P. ........................................................................................................... Delaware
Name
Sabal Financial Group GP, LLC ............................................................................................. Delaware
Sabal Financial Group, L.P. .................................................................................................... Delaware
Jurisdiction of
Incorporation or
Organization
Exhibit 31.1
I, John B. Frank, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2012 of Oaktree Capital
Group, LLC;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
c)
[paragraph omitted in accordance with Exchange Act Rules 13a-14(a) and 15d-14(a)];
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 14, 2013
/s/ John B. Frank
John B. Frank
Managing Principal
(Principal Executive Officer)
Exhibit 31.2
I, David M. Kirchheimer, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2012 of Oaktree Capital
Group, LLC;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
c)
[paragraph omitted in accordance with Exchange Act Rules 13a-14(a) and 15d-14(a)];
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 14, 2013
/s/ David M. Kirchheimer
David M. Kirchheimer
Chief Financial Officer, Chief Administrative Officer
and Principal
(Principal Financial Officer and Principal
Accounting Officer)
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Oaktree Capital Group, LLC (the “Company”) for the
year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, John B. Frank, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company at the dates and for the periods presented.
Date: March 14, 2013
/s/ John B. Frank
John B. Frank
Managing Principal
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to the Company
and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
This Certification is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of
any general incorporation language contained in such filing.
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Oaktree Capital Group, LLC (the “Company”) for the
year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, David M. Kirchheimer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company at the dates and for the periods presented.
Date: March 14, 2013
/s/ David M. Kirchheimer
David M. Kirchheimer
Chief Financial Officer, Chief Administrative Officer
and Principal
(Principal Financial Officer and Principal
Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to the Company
and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
This Certification is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of
any general incorporation language contained in such filing.