The asset management industry is a tough one to navigate. The best results come from periods in which the financial markets are performing well. Yet what sets up those strong results is the ability to pick up promising investments at attractive levels, and that usually happens only during tough market conditions. Oaktree Capital Group (NYSE:OAK) has gone through plenty of those cycles, and so it knows how to handle both of those environments.
Coming into Thursday's third-quarter financial report, Oaktree investors fully expected good results that reflected the strong markets during the period. Yet now that markets have turned lower in October, the more important question will be how Oaktree responds. So far, its response looks promising for its long-term growth prospects.
Oaktree celebrates the summer
Oaktree Capital's third-quarter results were solid. Adjusted revenue was higher by 5% to $320.2 billion, which was quite a bit better than the revenue declines that many of those following the stock had expected. Adjusted net income attributable to Oaktree Capital Group unitholders climbed a more impressive 28% to $55.6 million, and that worked out to adjusted net income per Class A unit of $0.78. That topped the consensus forecast among investors by a considerable margin.
Some of Oaktree's results were more mixed. Economic net income, which Oaktree prefers as a measure of its success, was down almost 7% from year-earlier figures in absolute terms, and per-unit economic net income dropped $0.03 over the period to $0.86 per unit. Total assets under management were up just 1% to $123.5 billion, and management fee-generating assets were actually down 2% year over year. However, incentive-creating assets under management climbed by $2 billion to $33.6 billion at the end of the quarter. The resulting gain in incentives was important, as the 23% rise offset a 3% drop in management fee revenue for Oaktree.
From a fundamental standpoint, Oaktree had to deal with considerable pressure from its customers. Despite making nearly $6 billion of new capital commitments in closed-end funds, Oaktree distributed more than $8 billion to its closed-end investors, and it took positive changes in market value to keep overall assets moving higher. Open-end funds saw net outflows, holding back asset growth from sources like business development company acquisitions.
CEO Jay Wintrob was upbeat about Oaktree's performance. "The third quarter was highlighted by strong investment performance," Wintrob said, "and solid fundraising of $3.4 billion in gross capital raised." The CEO also pointed to the factors that helped it improve incentive income as being instrumental to its overall success.
Can Oaktree survive a down market?
Oaktree knows that October has started off on a volatile note, but it's optimistic that it's in a good position to benefit from it. As Wintrob said, "We remain well-positioned, with ample dry powder across our investment funds and significant corporate balance sheet liquidity during this time of increasing market volatility."
Yet Oaktree is also aware of the dangers of the current environment. As co-founder Howard Marks observed recently, low interest rates opened the floodgates to questionable deals getting done in the financial marketplace, and that exposed investors to higher levels of risk. That requires Oaktree to have discipline in choosing potential targets, because competitors could bid up prices to such an extent that they no longer make smart investments.
Unitholders will be pleased to see their quarterly distributions rebound somewhat from a big drop in the second quarter. Class A unitholders will receive $0.70 per unit for the quarter. That's up from $0.55 per unit last quarter, but it's still less than the $0.96- and $0.76-per-unit payouts in the two periods before that.
Oaktree Capital Group unitholders took the news in stride, and the price of Oaktree units rose 2% on Thursday following the announcement. As long as Oaktree can keep operating according to its principles, bullish investors are hopeful that market volatility will present some new opportunities to drive the company's success well into the future.