Investment managers rely on healthy financial markets, and Oaktree Capital (OAK +0.00%) routinely has to find ways to make the most of whatever market environment it faces. After dealing with turbulence throughout much of 2016, a healthy rebound during the fourth quarter lifted market sentiment and made many investors look more favorably on Oaktree's prospects for 2017.
Coming into Tuesday's fourth-quarter financial report, Oaktree investors looked forward to seeing substantial gains in its top and bottom lines. The investment manager did a good job of taking advantage of current conditions, and it's optimistic about its future. Let's look more closely at Oaktree Capital to see what it said about its future.
Image source: Oaktree Capital.
Oaktree builds momentum to finish the year
Oaktree Capital's fourth-quarter results kept up the investment manager's pace of growth. Total GAAP revenue soared to $298.3 million, easily topping the consensus forecast among investors, and segment revenue jumped by two-thirds to $351.4 million. Adjusted net income more than tripled to $172.8 million, and the portion attributable to the company's Class A units produced adjusted earnings of $0.91 per unit. That was considerably higher than the $0.57 per unit forecast among many investors.
Taking a closer look at Oaktree's report, some of the company's results showed even more progress. Oaktree calculates economic net income to make it easier to compare itself against other alternative asset managers, because it measures incentive income based on the market values of the holdings of its funds. Economic net income for the quarter was $246.6 million, reversing a loss of $29.1 million for the year-ago quarter. That worked out to $1.41 per Class A unit for the quarter.
In addition, Oaktree's fundamental metrics looked good as well. Assets under management climbed to $100.5 billion, which was up about 3% from where it stood a year ago. The portion of those assets that generated management fees for Oaktree rose 1% to $79.8 billion. Gains in incentive-creating assets were more pronounced, climbing more than 5% to $33.6 billion.
Still, Oaktree faced both pros and cons during the period. Over the past three months, market value gains produced $2 billion in increased assets under management, and closed-end and open-end funds brought in capital inflows of $1.9 billion and $800 million, respectively. However, the company had to make distributions of $2.5 billion to closed-end fund investors, and closed-end funds that have entered liquidation cost the company another $1.1 billion in uncalled capital commitments.
CEO Jay Wintrob was ecstatic with the company's results. "The fourth quarter of 2016 completed a strong year for Oaktree," Wintrob said, as "we had our best quarterly earnings results as expressed by adjusted net income in 11 quarters and grew ANI by 87% during the full year." The CEO called out strong investment performance that produced Oaktree's best quarterly and annual investment income totals since 2013.
Can Oaktree keep up the pace in 2017?
The financial markets have rebounded nicely, and Oaktree is well-positioned to take advantage of whatever opportunities it identifies in the markets in 2017. The company reported uncalled capital commitments of $20.8 billion as of the end of 2016, and that money represents dry powder that Oaktree can call on to allow it to make further investments as conditions warrant.
Moreover, Oaktree's balance sheet and liquidity position remain solid. The company has $1 billion in cash and short-term investments at its disposal, and it reported $746 million in outstanding debt. With an untouched $500 million revolving credit facility, Oaktree can consider a variety of strategic alternatives to take advantage of industry conditions if it identifies good opportunities.
Oaktree Capital shareholders responded favorably to the news, sending the stock up almost 2% in pre-market trading following the announcement. In the long run, Oaktree has shown an ability to take advantage of favorable financial market conditions, and if 2017 continues to be as strong as it has started out, then the investment manager could see continued success throughout the year.
