Oaktree Capital Group (OAK +0.00%) reported economic net income (ENI) of -$0.02 per share in the second quarter, down from the $1.17 per share reported in the second quarter last year. Economic net income includes all income, whether realized or unrealized, and was lower largely due to quarterly losses in the company's distressed-debt funds. Adjusted net income came in at $0.44 per share, lower than the consensus estimate of $0.54 per share.
Distributable earnings (DE), which includes income that was recognized in the current quarter, came in at $0.59 per share, down from $0.64 per share in the year-ago period.
The difference between ENI and DE measures of income is largely the result of the incentive fees Oaktree realizes when its funds outperform their hurdle rates of return -- a minimum rate of return before Oaktree can collect incentive fees for good performance. Distributable earnings will fund Oaktree's announced distribution of $0.50 per share this quarter.
Growing assets under management
The second quarter of 2015 marked a new record for Oaktree's assets under management, which reached $103.1 billion, up from $91.1 billion in the second quarter of 2014. The company has grown its AUM in four of the last five quarters, and its "dry powder" now stands at $20.1 billion.
Impressively, nearly one-fourth of Oaktree's total AUM was raised in the last 12 months, helping to grow its future fee-earning power despite multibillion-dollar distributions to its fund investors in the last 12 months.
Oaktree's Opportunities Funds X and Xb (which are slated to invest in distressed debt) and its Oaktree Real Estate Opportunities Fund VII were the largest source of new assets under management. These funds were not yet generating management fees as of the end of the second quarter.
Combined, the three aforementioned new funds had total committed capital of $10.8 billion as of June 30. As of June 30, Oaktree had deployed nearly all the capital in its previously raised funds in the category, putting its freshly raised funds "on deck" for new deployments in future quarters. On the conference call, the company noted that it tends to deploy capital within 24 months, but it doesn't expect its management fees to increase until the fourth quarter of 2015, if not later.
Putting the quarter in perspective
Asset manager's results are inherently cyclical. When asset prices are high, investors should expect Oaktree to generate more in the way of distributable earnings as it realizes profits on its older fund holdings. That was certainly the case this quarter, as distributable earnings easily exceeded its economic net income and adjusted net income.
The company believes that commodities (namely, oil and gas) and European assets will remain attractive for future investments. With a record amount of both AUM and dry powder, as well as plentiful investment opportunities in select industries and geographies, Oaktree has set the stage to grow management fees and incentive fees as capital is deployed and gains are realized by its investors.
