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Buffett Favorite Beats Expectations

Shares in Oaktree Capital Group (NYSE: OAK  ) are up this week since the alternative assets company impressed analysts with solid second-quarter results.

Known on Wall Street as the world's largest distressed-debt investor, the firm has a wide following thanks to Warren Buffett's stated admiration for its founder, Howard Marks. "When I see memos from Howard Marks in my mail," says Buffett, "they're the first thing I open and read."

The lowdown on Oaktree's earnings
For the quarter, Oaktree posted net income of $24.7 million, or $0.84 a share. This handily beat the Market Watch consensus estimate of $0.62 a share and represented a dramatic improvement from the same period a year ago in which the firm posted a loss of $20.4 million, or $0.90 a share.

Because Oaktree invests in distressed debt, the fear and unease rocking world markets are a welcome development for the firm. According to its managing principal John Frank: "Given the macro environment, we are more confident about deploying capital. We think [we'll] be able to deploy more rather than less [of it]."

Along these lines, the firm has increased the size of its latest distressed-debt fund. With $3.4 billion in commitments during the quarter, the fund's current total of $4.6 billion far exceeds the original goal of $4 billion. By the time it closes, Frank expects it to total $4.9 billion, or 23% more than originally envisioned.

At the Morgan Stanley Financials Conference in June, Oaktree's Marks even went so far as to express hope for a further deterioration in confidence: "We still need the development of some events that are going to scare the hell out of people. That's what gives rise to that great environment where everybody wants to sell and nobody wants to buy. That's the raw material for our greatest returns."

A mixed bag for the industry
Oaktree's results come amid a mixed bag for the private equity industry.

The Blackstone Group (NYSE: BX  ) , the largest private equity firm and the first to report in the middle of July, recorded a 74% drop in second-quarter earnings, weighed down by a weak environment for equities, lagging IPO activity, and according to the firm's President Tony James "no [merger and acquisition] market to speak of." Shares in the private equity giant are roughly even for the year, but down nearly 60% since going public in the middle of 2007.

Meanwhile, Kohlberg Kravis Roberts (NYSE: KKR  ) beat analysts' estimates by reporting a 73.4% jump in second-quarter economic net income. The increase was due largely to the firm's 2007 investment in European-based pharmacy Alliance Boots. Walgreens (NYSE: WAG  ) announced in June that it would buy a 45% stake in the company for $6.7 billion. The agreement led KKR to increase the carrying value of Alliance Boots on its balance sheet from $391.7 million at the end of March to $650.6 million currently. Shares in KKR are up over 10% for the year, and up 46% since going public in 2010.

Finally, the most recent private equity company to go public, Carlyle Group (Nasdaq: CG  ) , reported an economic net loss of $57 million, compared to a profit of $237 million for the same quarter a year ago. Shares in the company are down on the news.

Foolish bottom line
While private equity firms are lucrative for the executives running the firms and sometimes to the funds' limited partners, they're still an untested product for the average retail investor. It's for this reason, as well as others that I noted in a three-part series earlier in the year, that I believe investors should tread carefully before investing in the industry. For investors looking for dividends, for instance, three much safer alternatives can be found in our free report "The 3 Dow Stocks Dividend Investors Need." To download this free report instantly, click here now.

Fool contributor John Maxfield does not have a financial stake in any company mentioned above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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