Oaktree Announces Fourth Quarter and Full-Year 2017 Financial Results

As of December 31, 2017 or for the quarter and year then ended, and where applicable, per Class A unit:

  • GAAP net income attributable to Oaktree Capital Group, LLC (“OCG”) was $13.4 million ($0.21 per unit) and $231.5 million ($3.61) for quarter and full year, respectively, as compared with $59.3 million ($0.94) and $194.7 million ($3.11) for the comparable 2016 periods. Excluding the impact of the Tax Act (defined below), GAAP net income attributable to OCG was $46.6 million ($0.72) and $264.7 million ($4.13) for the quarter and full year, respectively.
  • Adjusted net income was $126.8 million ($0.21 per unit) and $701.1 million ($3.46) for the quarter and full year, respectively, as compared with $170.4 million ($0.89) and $572.4 million ($3.05) for the comparable 2016 periods. Excluding the impact of the Tax Act, adjusted net income per Class A unit was $0.72 and $3.97 for the quarter and full year, respectively.
  • Distributable earnings were $158.2 million ($0.95 per unit) and $716.3 million ($4.16) for the quarter and full year, respectively, up from $140.6 million ($0.71) and $526.6 million ($2.87) for the comparable 2016 periods, on higher investment income proceeds and, for the full year, higher incentive income.
  • Assets under management were $100.2 billion, up 1% for the quarter and down slightly for the full year. Gross capital raised was $1.7 billion and $8.9 billion for the quarter and full year, respectively. Uncalled capital commitments (“dry powder”) were $20.5 billion, of which $12.7 billion were not yet generating management fees (“shadow AUM”).
  • Management fee-generating assets under management were $80.6 billion, up slightly for the quarter and up 1% for the full year.
  • A distribution was declared of $0.76 per unit, bringing aggregate distributions relating to full-year 2017 to $3.34.

LOS ANGELES--()--Oaktree Capital Group, LLC (NYSE: OAK) today reported its unaudited financial results for the fourth quarter and year ended December 31, 2017.

Jay Wintrob, Chief Executive Officer, said, “The fourth quarter of 2017 completed another strong year for Oaktree. Distributable earnings grew 36 percent in the last twelve months, building on our solid 19 percent growth in 2016. Highlighting the last year was strong investment performance resulting in our best annual incentive income and investment income totals since 2013, as well as $303 million in net incentives created. Looking ahead, we will continue to take advantage of buoyant market conditions to sell assets and return capital and profits to our clients, while maintaining our disciplined investment process and remaining well positioned for future opportunities with over $20 billion in dry powder.”

Tax Legislation

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law, which, among other items, lowers the U.S. corporate tax rate. The fourth quarter and full-year 2017 results reflect the estimated impact from the enactment of the Tax Act, which resulted in a net reduction to the Company’s GAAP net income and adjusted net income attributable to Oaktree Capital Group, LLC of $33.2 million, comprised of $178.2 million in additional tax expense from the remeasurement of our deferred tax assets at lower corporate tax rates and a $145.1 million benefit to other income from the remeasurement of our tax receivable agreement liability, the value of which is based upon an 85% share of certain of our deferred tax assets.

Debt Issuance and Repayment

On November 16, 2017, as previously announced, the Company agreed to issue $250 million of 3.78% senior notes due 2032 (the “Notes”), which subsequently funded on December 18, 2017. In connection with the Notes offering, the Company entered into a cross-currency swap agreement to euros, reducing the interest cost to 1.95% per year. The proceeds from the sale of the Notes and cash on hand were used to redeem the $250 million of 6.75% Senior Notes due 2019 (the “2019 Notes”) and to pay the related make-whole premium to holders thereof. The redemption of the 2019 Notes resulted in a one-time, pre-tax charge of $22 million to GAAP net income and adjusted net income in the fourth quarter of 2017. For distributable earnings, the charge will be amortized through the original maturity date of December 2019.

Acquisition

As previously announced, on October 17, 2017, the Company completed a transaction in which it became the new investment adviser to two business development companies (the “BDCs”): Oaktree Specialty Lending Corporation (NASDAQ: OCSL) and Oaktree Strategic Income Corporation (NASDAQ: OCSI). Upon the closing of the transaction (the “BDC acquisition”), the Company paid $320 million in cash to Fifth Street Management LLC, net of certain transaction-related expenses. The financial results in this earnings release include the impact of the BDC acquisition beginning on October 17, 2017.

Distribution

The distribution of $0.76 per Class A unit attributable to the fourth quarter of 2017 will be paid on February 23, 2018 to Class A unitholders of record at the close of business on February 16, 2018.

Conference Call

Oaktree will host a conference call to discuss its fourth quarter and full-year 2017 results today at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time. The conference call may be accessed by dialing (844) 824-3833 (U.S. callers) or +1 (412) 317-5102 (non-U.S. callers), participant password OAKTREE. Alternatively, a live webcast of the conference call can be accessed through the Unitholders – Investor Relations section of the Oaktree website, http://ir.oaktreecapital.com/. For those individuals unable to listen to the live broadcast of the conference call, a replay will be available for 30 days on Oaktree’s website, or by dialing (877) 344-7529 (U.S. callers) or +1 (412) 317-0088 (non-U.S. callers), access code 10115424, beginning approximately one hour after the broadcast.

About Oaktree

Oaktree is a leader among global investment managers specializing in alternative investments, with $100 billion in assets under management as of December 31, 2017. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Headquartered in Los Angeles, the firm has over 900 employees and offices in 18 cities worldwide. For additional information, please visit Oaktree’s website at www.oaktreecapital.com.

The table below presents (a) GAAP results, (b) non-GAAP results for both the Operating Group and per Class A unit, and (c) assets under management and accrued incentives (fund level) data. Please refer to the Glossary for definitions.

   

As of or for the Three Months
Ended December 31,

As of or for the Year
Ended December 31,

2017   2016 2017   2016
GAAP Results: (in thousands, except per unit data or as otherwise indicated)
 
Revenues $ 311,095 $ 298,310 $ 1,469,767 $ 1,125,746
Net income-OCG (1) 13,414 59,283 231,494 194,705
Net income per Class A unit (1) 0.21 0.94 3.61 3.11
 
Non-GAAP Results: (2)
Adjusted revenues $ 327,405 $ 351,437 $ 1,727,710 $ 1,362,202
Adjusted net income 126,846 170,374 701,100 572,374
Adjusted net income-OCG (1) 13,545 56,119 221,701 190,724
 
Distributable earnings revenues 323,900 309,950 1,674,948 1,270,915
Distributable earnings 158,189 140,649 716,307 526,550
Distributable earnings-OCG 61,582 45,033 266,983 179,432
 
Fee-related earnings revenues 188,767 192,604 747,261 785,673
Fee-related earnings 63,365 70,081 223,857 255,863
Fee-related earnings-OCG (1) (5,603 ) 21,751 54,496 88,947
 
Economic net income revenues 387,079 516,726 1,633,952 1,791,082
Economic net income 147,807 244,200 675,410 707,376
Economic net income-OCG (1) 22,196 87,865 210,953 248,086
 
Per Class A Unit: (1)
Adjusted net income $ 0.21 $ 0.89 $ 3.46 $ 3.05
Distributable earnings 0.95 0.71 4.16 2.87
Fee-related earnings (0.09 ) 0.35 0.85 1.42
Economic net income 0.34 1.39 3.29 3.97
 
Weighted average number of Operating Group units outstanding 156,286 154,934 155,791 154,687
Weighted average number of Class A units outstanding 64,961 62,986 64,148 62,565
 
Operating Metrics:
Assets under management (in millions):
Assets under management $ 100,228 $ 100,504 $ 100,228 $ 100,504
Management fee-generating assets under management 80,585 79,767 80,585 79,767
Incentive-creating assets under management 32,705 33,627 32,705 33,627
Uncalled capital commitments 20,470 20,755 20,470 20,755
Accrued incentives (fund level):
Incentives created (fund level) 132,531 236,475 637,466 784,032
Incentives created (fund level), net of associated incentive income compensation expense 60,470 107,863 302,706 320,472
Accrued incentives (fund level) 1,920,339 2,014,097 1,920,339 2,014,097
Accrued incentives (fund level), net of associated incentive income compensation expense 920,852 946,542 920,852 946,542
 

Note: Oaktree discloses in this earnings release certain revenues and financial measures, including measures that are calculated and presented on a basis other than generally accepted accounting principles in the United States (“non-GAAP”). Examples of such non-GAAP measures are identified in the table above and also include measures excluding the impact of the Tax Act, identified in the table below. Such non-GAAP measures should be considered in addition to, and not as a substitute for or superior to, net income, net income per Class A unit or other financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented at Exhibit A. All non-GAAP measures and all interim results presented in this release are unaudited. GAAP results for the year ended December 31, 2017 are subject to the completion of Oaktree’s annual audit.

(1)     The table below presents GAAP and non-GAAP results attributable to OCG for the fourth quarter and full-year 2017, excluding the impact of the Tax Act:
         

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
GAAP Results, Excluding Impact of Tax Act: (in thousands, except per unit data)
 
Net income-OCG $ 46,592 $ 59,283 $ 264,672 $ 194,705
Net income per Class A unit 0.72 0.94 4.13 3.11
 
Non-GAAP Results, Excluding Impact of Tax Act:
Adjusted net income-OCG $ 46,723 $ 56,119 $ 254,879 $ 190,724
Fee-related earnings-OCG 25,449 21,751 85,548 88,947
Economic net income-OCG 55,374 87,865 244,131 248,086
 
Per Class A Unit, Excluding Impact of Tax Act:
Adjusted net income $ 0.72 $ 0.89 $ 3.97 $ 3.05
Fee-related earnings 0.39 0.35 1.33 1.42
Economic net income 0.85 1.39 3.81 3.97
(2)     Beginning with the second quarter of 2017, the definition of adjusted net income was modified with respect to third-party placement costs associated with closed-end funds and liability-classified OCGH equity value units (“EVUs”) to conform to the GAAP treatment. Under GAAP, placement costs are expensed as incurred and liability-classified EVUs are remeasured as of each reporting date. Previously for adjusted net income, placement costs were capitalized and amortized in proportion to the associated management fee stream, and liability-classified EVUs were treated as equity-classified awards. All prior periods have been recast for these changes.
 

GAAP Results

Oaktree consolidates entities in which it has a direct or indirect controlling financial interest. Investment vehicles in which we have a significant investment, such as collateralized loan obligation vehicles (“CLOs”) and certain Oaktree funds, are consolidated under GAAP. When a CLO or fund is consolidated, the assets, liabilities, revenues, expenses and cash flows of the consolidated funds are reflected on a gross basis, and the majority of the economic interests in those consolidated funds, which are held by third-party investors, are reflected as debt obligations of CLOs or non-controlling interests. All of the revenues earned by us as investment manager of the consolidated funds are eliminated in consolidation. However, because the eliminated amounts are earned from and funded by third-party investors, the consolidation of a fund does not impact net income or loss attributable to OCG.

Total revenues increased $12.8 million, or 4.3%, to $311.1 million for the fourth quarter of 2017, from $298.3 million for the fourth quarter of 2016. For full-year 2017, total revenues increased $344.1 million, or 30.6%, to $1,469.8 million from $1,125.7 million in 2016. Both increases reflected higher incentive income, partially offset by lower management fees.

Total expenses increased $29.4 million, or 14.0%, to $239.6 million for the fourth quarter of 2017, from $210.2 million for the fourth quarter of 2016, primarily reflecting increases in incentive income compensation expense, compensation and benefits expense, and general and administrative expenses. For full-year 2017, total expenses increased $236.0 million, or 29.9%, to $1,025.3 million from $789.3 million in 2016, primarily reflecting higher incentive income compensation expense, partially offset by lower general and administrative expenses.

Other income increased $112.3 million, or 114.8%, to $210.1 million for the fourth quarter of 2017, from $97.8 million for the fourth quarter of 2016. For full-year 2017, other income increased $188.3 million, or 69.2%, to $460.5 million from $272.2 million in 2016. The increase for both periods reflected the impact of, in the fourth quarter and full-year 2017, the $145.1 million of income related to the remeasurement of our tax receivable agreement liability in connection with the Tax Act and the $22.0 million make-whole premium expense related to the early repayment of the 2019 Notes, as well as variations in returns on our fund investments between periods.

Net income attributable to OCG decreased $45.9 million, or 77.4%, to $13.4 million for the fourth quarter of 2017, from $59.3 million for the fourth quarter of 2016, primarily reflecting the $33.2 million net expense related to the Tax Act and the $22.0 million make-whole premium, both expensed in the fourth quarter of 2017. For full-year 2017, net income attributable to OCG increased $36.8 million, or 18.9%, to $231.5 million from $194.7 million in 2016, reflecting higher operating profits driven by higher incentive income, partially offset by the impact of the Tax Act and the make-whole premium.

Operating Metrics

Assets Under Management

Assets under management (“AUM”) were $100.2 billion as of December 31, 2017, $99.5 billion as of September 30, 2017 and $100.5 billion as of December 31, 2016. The $0.7 billion increase since September 30, 2017 primarily reflected $2.1 billion from the BDC acquisition, $1.2 billion in market-value gains and $0.7 billion in new capital commitments to closed-end funds, partially offset by $2.6 billion of distributions to closed-end fund investors and $0.7 billion of net outflows from open-end funds. Commitments to closed-end funds included $0.6 billion for our Real Estate Debt strategy.

The $0.3 billion decrease in AUM since December 31, 2016 primarily reflected $10.6 billion of distributions to closed-end fund investors and $3.0 billion of net outflows from open-end funds, partially offset by $6.6 billion in market-value gains, $2.8 billion of capital commitments and fee-generating leverage to closed-end funds, $2.1 billion from the BDC acquisition, and $1.8 billion in favorable foreign-currency translation. Commitments to closed-end funds included $1.1 billion for our Real Estate Debt strategy, $0.5 billion for Oaktree Opportunities Fund Xb and $0.5 billion for our European Private Debt strategy. Distributions to closed-end fund investors included $5.0 billion from Distressed Debt funds, $3.1 billion from Control Investing funds and $1.3 billion from Real Estate funds.

Management Fee-generating Assets Under Management

Management fee-generating assets under management (“management fee-generating AUM”), a forward-looking metric, were $80.6 billion as of December 31, 2017, $80.2 billion as of September 30, 2017 and $79.8 billion as of December 31, 2016. The $0.4 billion increase since September 30, 2017 primarily reflected $2.1 billion from the BDC acquisition, $0.4 billion in market-value gains and $0.4 billion increase from capital drawn by funds that pay fees based on drawn capital, NAV or cost basis. These increases were partially offset by $1.6 billion attributable to closed-end funds in liquidation and $0.7 billion of net outflows from open-end funds.

The $0.8 billion increase in management fee-generating AUM since December 31, 2016 primarily reflected $3.2 billion in market-value gains, $2.1 billion from the BDC acquisition, $1.7 billion from capital drawn by closed-end funds that pay fees based on drawn capital, NAV or cost basis, $1.6 billion of favorable foreign-currency translation, and an aggregate $1.3 billion increase from the start of the investment period for Oaktree European Principal Fund IV (“EPF IV”) in July 2017 and fee-generating leverage to closed-end funds. These increases were partially offset by $4.8 billion attributable to closed-end funds in liquidation, $3.2 billion of net outflows from open-end funds and $0.9 billion of distributions by closed-end funds that pay fees based on NAV.

Incentive-creating Assets Under Management

Incentive-creating assets under management (“incentive-creating AUM”) were $32.7 billion as of December 31, 2017, $31.0 billion as of September 30, 2017 and $33.6 billion as of December 31, 2016. The $1.7 billion increase since September 30, 2017 reflected an aggregate $2.4 billion in drawdowns or contributions by closed-end and evergreen funds and market-value gains, and $2.1 billion from the BDC acquisition, partially offset by an aggregate $2.8 billion decline primarily attributable to distributions by closed-end funds. The $0.9 billion decrease since December 31, 2016 reflected an aggregate decline of $11.2 billion primarily attributable to distributions by closed-end funds, partially offset by an aggregate $8.2 billion in drawdowns or contributions by closed-end and evergreen funds and market-value gains, and $2.1 billion from the BDC acquisition.

Of the $32.7 billion in incentive-creating AUM as of December 31, 2017, $21.4 billion (or 65%), was generating incentives at the fund level, as compared with $21.2 billion (63%), of the $33.6 billion of incentive-creating AUM as of December 31, 2016.

Accrued Incentives (Fund Level) and Incentives Created (Fund Level)

Accrued incentives (fund level) were $1.9 billion as of both December 31, 2017 and September 30, 2017, and $2.0 billion as of December 31, 2016. The fourth quarter of 2017 reflected $132.5 million of incentives created (fund level) and $72.9 million of incentive income recognized. The full-year 2017 reflected $637.5 million of incentives created (fund level) and $731.2 million of incentive income recognized.

Accrued incentives (fund level), net of incentive income compensation expense (“net accrued incentives (fund level)”), were $920.9 million as of December 31, 2017, $899.9 million as of September 30, 2017, and $946.5 million as of December 31, 2016. The portion of net accrued incentives (fund level) represented by funds that were currently paying incentives as of December 31, 2017, September 30, 2017 and December 31, 2016, respectively, was $237.2 million (or 26%), $274.1 million (30%) and $201.7 million (21%), with the remainder arising from funds that as of that date were not at the stage of their cash distribution waterfall where Oaktree was entitled to receive incentives, other than possibly tax-related distributions.

Uncalled Capital Commitments

Uncalled capital commitments were $20.5 billion as of December 31, 2017, $21.2 billion as of September 30, 2017, and $20.8 billion as of December 31, 2016. Invested capital during the quarter and year ended December 31, 2017 aggregated $1.8 billion and $7.1 billion, respectively, as compared with $2.2 billion and $8.5 billion for the comparable 2016 periods.

Non-GAAP Results

Adjusted Revenues

Adjusted revenues decreased $24.0 million, or 6.8%, to $327.4 million in the fourth quarter of 2017, from $351.4 million in the fourth quarter of 2016, primarily reflecting $21.8 million of lower investment income and $3.8 million of lower management fees.

For full-year 2017, adjusted revenues increased $365.5 million, or 26.8%, to $1,727.7 million from $1,362.2 million in 2016, primarily reflecting $376.0 million of higher incentive income.

Management Fees

Management fees decreased $3.8 million, or 2.0%, to $188.8 million in the fourth quarter of 2017, from $192.6 million in the fourth quarter of 2016. The decrease reflected an aggregate decline of $21.2 million primarily attributable to closed-end funds in liquidation, partially offset by an aggregate increase of $17.4 million principally from the BDC acquisition, the start of the investment period for EPF IV and closed-end funds that pay management fees based on drawn capital, NAV or cost basis.

For full-year 2017, management fees decreased $38.4 million, or 4.9%, to $747.3 million from $785.7 million in 2016. The decrease reflected an aggregate decline of $79.6 million primarily attributable to closed-end funds in liquidation, partially offset by an aggregate increase of $41.2 million principally from the start of the investment period for EPF IV, the BDC acquisition, closed-end funds that pay management fees based on drawn capital, NAV or cost basis, and market-value gains in open-end funds.

Incentive Income

Incentive income increased $1.7 million, or 2.4%, to $72.9 million in the fourth quarter of 2017, from $71.2 million in the fourth quarter of 2016. The fourth quarter of 2017 reflected incentive income from nine investment strategies, with $33.7 million arising from closed-end funds and $39.2 million from evergreen funds.

For full-year 2017, incentive income increased $376.0 million, or 105.9%, to $731.2 million from $355.2 million in 2016. The increase was primarily attributable to $427.8 million of incentive income from Oaktree Principal Opportunities Fund IV, which started paying incentive income (other than tax-related) in the second quarter of 2017. Tax-related incentive income represented $81.2 million and $72.7 million in 2017 and 2016, respectively.

Investment Income

Investment income decreased $21.8 million, or 24.9%, to $65.8 million in the fourth quarter of 2017, from $87.6 million in the fourth quarter of 2016. The decrease primarily reflected lower overall returns on our fund investments. Our one-fifth ownership stake in DoubleLine Capital LP and its affiliates (collectively, “DoubleLine”) accounted for investment income of $19.1 million and $16.8 million in the fourth quarters of 2017 and 2016, respectively, of which performance fees accounted for $0.7 million and $0.8 million, respectively.

For full-year 2017, investment income increased $27.8 million, or 12.6%, to $249.2 million from $221.4 million in 2016. Excluding the $22.7 million impairment charge taken in the first quarter of 2016 on investments in certain of our CLOs, investment income increased $5.1 million, or 2.1%. DoubleLine accounted for investment income of $71.5 million and $66.1 million in 2017 and 2016, respectively, of which performance fees accounted for $4.2 million and $4.7 million, respectively.

Adjusted Expenses

Compensation and Benefits

Compensation and benefits expense increased $0.9 million, or 1.1%, to $84.8 million in the fourth quarter of 2017, from $83.9 million in the fourth quarter of 2016. For the full year, compensation and benefits expense was $381.9 million for both 2017 and 2016.

Equity-based Compensation

Equity-based compensation expense increased $0.8 million, or 6.7%, to $12.7 million in the fourth quarter of 2017, from $11.9 million in the fourth quarter of 2016. For full-year 2017, equity-based compensation expense increased $3.5 million, or 7.0%, to $53.6 million from $50.1 million in 2016.

Incentive Income Compensation

Incentive income compensation expense decreased $3.8 million, or 10.2%, to $33.3 million in the fourth quarter of 2017, from $37.1 million in the fourth quarter of 2016, primarily reflecting differences in the applicable funds’ compensation percentages. For full-year 2017, incentive income compensation expense increased $233.1 million, or 137.4%, to $402.8 million from $169.7 million in 2016, primarily reflecting the growth in incentive income.

General and Administrative

General and administrative expense increased $2.8 million, or 7.9%, to $38.3 million in the fourth quarter of 2017, from $35.5 million in the fourth quarter of 2016, primarily reflecting higher legal fees. For full-year 2017, general and administrative expense decreased $3.4 million, or 2.5%, to $132.3 million from $135.7 million in 2016, primarily reflecting lower placement costs, partially offset by higher legal fees.

Depreciation and Amortization

Depreciation and amortization expense decreased $0.8 million, or 25.8%, to $2.3 million in the fourth quarter of 2017, from $3.1 million in the fourth quarter of 2016. For full-year 2017, depreciation and amortization expense decreased $3.0 million, or 24.6%, to $9.2 million from $12.2 million in 2016. Both decreases reflected the final amortization of certain leasehold improvements in the first quarter of 2017.

Interest Expense, Net

Interest expense, net decreased $0.8 million, or 10.8%, to $6.6 million in the fourth quarter of 2017, from $7.4 million in the fourth quarter of 2016. For full-year 2017, interest expense, net decreased $5.4 million, or 17.0%, to $26.4 million from $31.8 million in 2016. Both decreases reflected the maturity of our senior notes and, for the full year, higher interest income.

Other Expense, Net

Other expense, net increased $20.5 million, to $22.6 million in the fourth quarter of 2017, from $2.1 million in the fourth quarter of 2016. For full-year 2017, other expense, net increased $12.0 million, to $20.4 million from $8.4 million in 2016. The fourth quarter and full-year 2017 primarily reflected the $22.0 million make-whole premium expensed in the fourth quarter of 2017 in connection with the early repayment of our 2019 Notes. Full-year 2016 primarily reflected losses associated with non-operating corporate activities and an impairment charge taken on our corporate aircraft.

Adjusted Net Income

ANI decreased $43.6 million, or 25.6%, to $126.8 million in the fourth quarter of 2017, from $170.4 million in the fourth quarter of 2016, primarily reflecting the $22.0 million make-whole premium expensed in the fourth quarter of 2017 related to the repayment of our 2019 Notes and the $21.8 million decline in investment income. The portion of ANI attributable to our Class A units was $13.5 million, or $0.21 per unit, and $56.1 million, or $0.89 per unit, for the fourth quarters of 2017 and 2016, respectively. Excluding the impact of the Tax Act, ANI attributable to our Class A units for the fourth quarter of 2017 was $46.7 million, or $0.72 per unit.

For full-year 2017, ANI increased $128.7 million, or 22.5%, to $701.1 million from $572.4 million in 2016, primarily reflecting increases of $142.9 million in incentive income, net of incentive income compensation expense (“net incentive income”), and $27.8 million in investment income, partially offset by $32.0 million in lower fee-related earnings and $12.0 million in higher other expense, net. The portion of ANI attributable to our Class A units was $221.7 million, or $3.46 per unit, and $190.7 million, or $3.05 per unit, for 2017 and 2016, respectively. Excluding the impact of the Tax Act, ANI attributable to our Class A units for 2017 was $254.9 million, or $3.97 per unit.

The effective tax rates applied to ANI in the fourth quarters of 2017 and 2016 were 93% and 18%, respectively, resulting from full-year effective tax rates of 49% and 17%, respectively. Excluding the impact of the Tax Act, the effective tax rate for both the fourth quarter and full-year 2017 was 11%. In general, the annual effective tax rate increases as the proportion of ANI arising from fee-related earnings, DoubleLine-related investment income and certain incentive and investment income rises, and vice versa.

Distributable Earnings

Distributable earnings increased $17.6 million, or 12.5%, to $158.2 million in the fourth quarter of 2017, from $140.6 million in the fourth quarter of 2016, primarily reflecting $16.1 million in higher investment income proceeds. For the fourth quarter of 2017, investment income proceeds totaled $62.3 million, including $37.2 million from fund distributions and $25.1 million from DoubleLine, as compared with total investment income proceeds in the prior-year quarter of $46.2 million, of which $24.8 million and $21.4 million was attributable to fund distributions and DoubleLine, respectively. The portion of distributable earnings attributable to our Class A units was $0.95 and $0.71 per unit for the fourth quarters of 2017 and 2016, respectively, reflecting distributable earnings per Operating Group unit of $1.01 and $0.91, respectively, less costs borne by Class A unitholders for professional fees and other expenses, cash taxes attributable to the Intermediate Holding Companies, and amounts payable pursuant to the tax receivable agreement.

For full-year 2017, distributable earnings increased $189.7 million, or 36.0%, to $716.3 million from $526.6 million in 2016, reflecting increases of $142.9 million in net incentive income and $66.4 million in investment income proceeds, partially offset $32.0 million in lower fee-related earnings. For 2017, investment income proceeds totaled $196.5 million, including $128.5 million from fund distributions and $68.0 million from DoubleLine, as compared with total investment income proceeds in 2016 of $130.1 million, of which $66.4 million and $63.7 million was attributable to fund distributions and DoubleLine, respectively. The portion of distributable earnings attributable to our Class A units was $4.16 and $2.87 per unit for 2017 and 2016, respectively, reflecting distributable earnings per Operating Group unit of $4.60 and $3.40, respectively, less costs borne by Class A unitholders.

Fee-related Earnings

Fee-related earnings decreased $6.7 million, or 9.6%, to $63.4 million in the fourth quarter of 2017, from $70.1 million in the fourth quarter of 2016, primarily reflecting $3.8 million in lower management fees and $2.8 million in higher general and administrative expenses. The portion of fee-related earnings attributable to our Class A units was a loss of $0.09 per unit and income of $0.35 per unit for the fourth quarters of 2017 and 2016, respectively. Excluding the impact of the Tax Act, fee-related earnings attributable to our Class A units for the fourth quarter of 2017 were $0.39 per unit.

For full-year 2017, fee-related earnings decreased $32.0 million, or 12.5%, to $223.9 million from $255.9 million in 2016, primarily reflecting the $38.4 million decline in management fees, partially offset by $3.4 million in lower general and administrative expenses. The portion of fee-related earnings attributable to our Class A units was $0.85 and $1.42 per unit for 2017 and 2016, respectively. Excluding the impact of the Tax Act, fee-related earnings attributable to our Class A units for 2017 were $1.33 per unit.

The effective tax rates applicable to fee-related earnings for the fourth quarters of 2017 and 2016 were 103% and 23%, respectively, resulting from full-year effective rates of 77% and 13%, respectively. Excluding the impact of the Tax Act, the effective tax rates applicable to fee-related earnings for the fourth quarter and full-year 2017 were 3% and 6%, respectively. In general, the annual effective tax rate increases as annual fee-related earnings increase, and vice versa.

Capital and Liquidity

As of December 31, 2017, Oaktree had $658 million of cash and U.S. Treasury and other securities, and $746 million of outstanding debt, which included no borrowings outstanding against its $500 million revolving credit facility. As of December 31, 2017, Oaktree’s investments in funds and companies on a non-GAAP basis had a carrying value of $1.7 billion, with the 20% investment in DoubleLine carried at $39 million based on cost, as adjusted under the equity method of accounting. Net accrued incentives (fund level) represented an additional $921 million as of that date.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, which reflect the current views of Oaktree, 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; changes in assets under management; the timing and receipt of, and impact of taxes on, carried interest; distributions from and liquidation of our existing funds; the amount and timing of distributions on our Class A units; changes in our operating or other expenses; the degree to which we encounter competition; and general political, economic and market conditions. The factors listed in the item captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017, which is accessible on the SEC’s website at www.sec.gov, 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 the statements are made. 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.

This release and its contents do not constitute and should not be construed as (a) a recommendation to buy, (b) an offer to buy or solicitation of an offer to buy, (c) an offer to sell or (d) advice in relation to, any securities of OCG or securities of any Oaktree investment fund.

Investor Relations Website

Investors and others should note that Oaktree uses the Unitholders – Investor Relations section of its corporate website to announce material information to investors and the marketplace. While not all of the information that Oaktree posts on its corporate website is of a material nature, some information could be deemed to be material. Accordingly, Oaktree encourages investors, the media, and others interested in Oaktree to review the information that it shares on its corporate website at the Unitholders – Investor Relations section of the Oaktree website, http://ir.oaktreecapital.com/. Information contained on, or available through, our website is not incorporated by reference into this document.

 

GAAP Consolidated Statements of Operations

 
 

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
(in thousands, except per unit data)
Revenues:
Management fees $ 184,146 $ 190,045 $ 726,414 $ 774,587
Incentive income   126,949     108,265     743,353     351,159  
Total revenues   311,095     298,310     1,469,767     1,125,746  
Expenses:
Compensation and benefits (88,114 ) (80,933 ) (392,827 ) (389,892 )
Equity-based compensation (13,808 ) (15,264 ) (59,337 ) (63,724 )
Incentive income compensation   (88,955 )   (75,623 )   (416,481 )   (168,276 )
Total compensation and benefits expense (190,877 ) (171,820 ) (868,645 ) (621,892 )
General and administrative (40,189 ) (32,398 ) (130,892 ) (145,430 )
Depreciation and amortization (5,911 ) (4,146 ) (15,776 ) (16,222 )
Consolidated fund expenses   (2,605 )   (1,801 )   (10,030 )   (5,792 )
Total expenses   (239,582 )   (210,165 )   (1,025,343 )   (789,336 )
Other income (loss):
Interest expense (41,091 ) (33,761 ) (169,888 ) (120,610 )
Interest and dividend income 60,027 44,841 215,119 165,066
Net realized gain on consolidated funds’ investments 18,645 18,946 20,400 27,593
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments (1,732 ) 3,289 55,061 (12,453 )
Investment income 50,671 62,921 201,289 199,126
Other income, net   123,540     1,598     138,519     13,490  
Total other income   210,060     97,834     460,500     272,212  
Income before income taxes 281,573 185,979 904,924 608,622
Income taxes   (183,742 )   (12,701 )   (215,442 )   (42,519 )
Net income 97,831 173,278 689,482 566,103
Less:
Net income attributable to non-controlling interests in consolidated funds (9,661 ) (7,303 ) (33,204 ) (22,921 )
Net income attributable to non-controlling interests in consolidated subsidiaries   (74,756 )   (106,692 )   (424,784 )   (348,477 )
Net income attributable to Oaktree Capital Group, LLC $ 13,414   $ 59,283   $ 231,494   $ 194,705  
Distributions declared per Class A unit $ 0.56   $ 0.65   $ 3.21   $ 2.25  
Net income per unit (basic and diluted):
Net income per Class A unit $ 0.21   $ 0.94   $ 3.61   $ 3.11  
Weighted average number of Class A units outstanding   64,961     62,986     64,148     62,565  
 

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. As described below, these operating metrics include AUM, management fee-generating AUM, incentive-creating AUM, incentives created (fund level), accrued incentives (fund level) and uncalled capital commitments.

 
Assets Under Management As of

December 31,
2017

 

September 30,
2017

 

December 31,
2016

(in millions)
Assets Under Management:
Closed-end funds $ 56,871 $ 57,769 $ 60,104
Open-end funds 35,441 35,793 35,105
Evergreen funds   7,916     5,953     5,295  
Total $ 100,228   $ 99,515   $ 100,504  
 

Three Months Ended
December 31,

Year Ended
December 31,

2017 2016 2017 2016
(in millions)
Change in Assets Under Management:
Beginning balance $ 99,515 $ 99,834 $ 100,504 $ 97,359
Closed-end funds:
Capital commitments/other (1) 670 1,927 2,472 5,864
Distributions for a realization event/other (2) (2,597 ) (2,485 ) (10,633 ) (7,747 )
Change in uncalled capital commitments for funds entering or in liquidation (3) 69 (1,075 ) 18 (1,084 )
Foreign-currency translation 144 (420 ) 993 (176 )
Change in market value (4) 830 1,423 3,544 3,754
Change in applicable leverage (14 ) 246 373 63
Open-end funds:
Contributions 975 2,793 5,739 5,444
Redemptions (1,691 ) (1,947 ) (8,741 ) (7,048 )
Foreign-currency translation 98 (291 ) 800 (130 )
Change in market value (4) 266 353 2,538 3,637
Evergreen funds:
Contributions or new capital commitments (5) 68 20 733 259
Acquisition (BDCs) 2,110 2,110
Redemptions or distributions (6) (311 ) (59 ) (731 ) (381 )
Foreign-currency translation 7 (1 ) (2 )
Change in market value (4)   96     178     510     692  
Ending balance $ 100,228   $ 100,504   $ 100,228   $ 100,504  
 
(1)     These amounts include capital commitments, as well as the aggregate par value of collateral assets and principal cash related to new CLO formations.
(2) These amounts include distributions for a realization event, tax-related distributions, reductions in the par value of collateral assets and principal cash resulting from the repayment of debt as return of principal by CLOs, and recallable distributions at the end of the investment period.
(3) The change in uncalled capital commitments reflects declines attributable to funds entering their liquidation periods, as well as capital contributions to funds in their liquidation periods for deferred purchase obligations or other reasons.
(4) The change in market value reflects the change in NAV of our funds, less management fees and other fund expenses, as well as changes in the aggregate par value of collateral assets and principal cash held by CLOs.
(5) These amounts include contributions and capital commitments, and for our publicly-traded BDCs, issuances of equity or debt capital.
(6) These amounts include redemptions and distributions, and for our publicly-traded BDCs, dividends, repurchases of equity capital or repayment of debt.
 
Management Fee-generating AUM   As of

December 31,
2017

 

September 30,
2017

 

December 31,
2016

Management Fee-generating Assets Under Management: (in millions)
Closed-end funds:
Senior Loans $ 8,066 $ 8,073 $ 7,504
Other closed-end funds 30,779 31,953 32,990
Open-end funds 35,188 35,570 35,034
Evergreen funds   6,552     4,574     4,239  
Total $ 80,585   $ 80,170   $ 79,767  
 

Three Months Ended
December 31,

Year Ended
December 31,

2017 2016 2017 2016
Change in Management Fee-generating Assets Under Management: (in millions)
 
Beginning balance $ 80,170 $ 78,700 $ 79,767 $ 78,897
Closed-end funds:
Capital commitments to funds that pay fees based on committed capital/other (1) 1 1,002 969 2,125
Capital drawn by funds that pay fees based on drawn capital, NAV or cost basis 394 464 1,663 1,390
Change attributable to funds in liquidation (2) (1,563 ) (857 ) (4,760 ) (4,162 )
Change in uncalled capital commitments for funds entering or in liquidation that pay fees based on committed capital (3) (382 ) (881 )
Distributions by funds that pay fees based on NAV/other (4) (170 ) (139 ) (926 ) (636 )
Foreign-currency translation 120 (365 ) 840 (242 )
Change in market value (5) 50 89 217 427
Change in applicable leverage (13 ) 220 348 184
Open-end funds:
Contributions 949 2,741 5,567 5,395
Redemptions (1,691 ) (1,947 ) (8,734 ) (7,024 )
Foreign-currency translation 98 (291 ) 800 (130 )
Change in market value 262 383 2,521 3,658
Evergreen funds:
Contributions or capital drawn by funds that pay fees based on drawn capital or NAV (6) 109 67 520 533
Acquisition (BDCs) 2,110 2,110
Redemptions or distributions (7) (316 ) (79 ) (772 ) (413 )
Change in market value   75     161     455     646  
Ending balance $ 80,585   $ 79,767   $ 80,585   $ 79,767  
 
(1)     These amounts include capital commitments to funds that pay fees based on committed capital, as well as the aggregate par value of collateral assets and principal cash related to new CLO formations.
(2) These amounts include the change for funds that pay fees based on the lesser of funded capital or cost basis during the liquidation period, as well as recallable distributions at the end of the investment period. For most closed-end funds, management fees are charged during the liquidation period on the lesser of (a) total funded capital or (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 typically declines as the fund sells assets.
(3) The change in uncalled capital commitments reflects declines attributable to funds entering their liquidation periods, as well as capital contributions to funds in their liquidation periods for deferred purchase obligations or other reasons.
(4) These amounts include distributions by funds that pay fees based on NAV, as well as reductions in the par value of collateral assets and principal cash resulting from the repayment of debt as return of principal by CLOs.
(5) The change in market value reflects certain funds that pay management fees based on NAV and leverage, as applicable, as well as changes in the aggregate par value of collateral assets and principal cash held by CLOs.
(6) These amounts include contributions and capital commitments, and for our publicly-traded BDCs, issuances of equity or debt capital.
(7) These amounts include redemptions and distributions, and for our publicly-traded BDCs, dividends, repurchases of equity capital or repayment of debt.
 
  As of

December 31,
2017

 

September 30,
2017

 

December 31,
2016

Reconciliation of Assets Under Management to Management Fee-generating Assets Under Management: (in millions)
Assets under management $ 100,228 $ 99,515 $ 100,504

Difference between assets under management and committed capital or the lesser of funded capital or cost basis for applicable closed-end funds (1)

(2,331 ) (2,920 ) (4,183 )

Undrawn capital commitments to closed-end funds that have not yet commenced their investment periods

(8,675 ) (8,675 ) (10,367 )

Undrawn capital commitments to funds for which management fees are based on drawn capital, NAV or cost basis

(4,037 ) (3,714 ) (3,109 )

Oaktree’s general partner investments in management fee-generating funds

(1,937 ) (1,883 ) (1,822 )

Funds that are no longer paying management fees and co-investments that pay no management fees (2)

  (2,663 )   (2,153 )   (1,256 )
Management fee-generating assets under management $ 80,585   $ 80,170   $ 79,767  
 
(1)     This difference is not applicable to closed-end funds that pay management fees based on NAV or leverage.
(2) This includes certain accounts that pay administrative fees intended to offset Oaktree’s costs related to the accounts.
 

The period-end weighted average annual management fee rates applicable to the respective management fee-generating AUM balances above are set forth below.

 
As of
Weighted Average Annual Management Fee Rates:

December 31,
2017

 

September 30,
2017

 

December 31,
2016

Closed-end funds:
Senior Loans 0.50 % 0.50 % 0.50 %
Other closed-end funds 1.49 1.49 1.50
Open-end funds 0.46 0.46 0.46
Evergreen funds (1) 1.22 1.17 1.22
Overall 0.92 0.91 0.93
 
(1)     Fee rates reflect the applicable asset-based management fee rates, exclusive of quarterly incentive fees on investment income that are included in management fees.
 
 

Incentive-creating AUM

 
  As of

December 31,
2017

 

September 30,
2017

 

December 31,
2016

Incentive-creating Assets Under Management: (in millions)
Closed-end funds $ 27,322 $ 27,555 $ 30,292
Evergreen funds   5,383   3,465   3,335
Total $ 32,705 $ 31,020 $ 33,627
 
 

Accrued Incentives (Fund Level) and Incentives Created (Fund Level)

 
 

As of or for the Three Months
Ended December 31,

 

As of or for the Year
Ended December 31,

2017   2016 2017   2016
Accrued Incentives (Fund Level): (in thousands)
Beginning balance $ 1,860,665   $ 1,848,808   $ 2,014,097   $ 1,585,217  
Incentives created (fund level):
Closed-end funds 116,719 223,502 588,220 746,349
Evergreen funds   15,812     12,973     49,246     37,683  
Total incentives created (fund level)   132,531     236,475     637,466     784,032  
Less: incentive income recognized by us   (72,857 )   (71,186 )   (731,224 )   (355,152 )
Ending balance $ 1,920,339   $ 2,014,097   $ 1,920,339   $ 2,014,097  
Accrued incentives (fund level), net of associated incentive income compensation expense $ 920,852   $ 946,542   $ 920,852   $ 946,542  
 

Non-GAAP Results

Our business is comprised of one segment, our investment management business, 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 data that are presented without the consolidation of our funds. The data most important to management in assessing our performance are adjusted net income, adjusted net income-OCG, distributable earnings, distributable earnings-OCG, fee-related earnings and fee-related earnings-OCG. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented at Exhibit A.

Adjusted Net Income

Beginning with the second quarter of 2017, the definition of adjusted net income was modified with respect to third-party placement costs associated with closed-end funds and liability-classified EVUs to conform to the GAAP treatment. Under GAAP, placement costs are expensed as incurred and liability-classified EVUs are remeasured as of each reporting date. Previously for adjusted net income, placement costs were capitalized and amortized in proportion to the associated management fee stream, and liability-classified EVUs were treated as equity-classified awards. All prior periods have been recast for these changes.

The following schedules set forth the components of adjusted net income and adjusted net income-OCG, as well as per unit data:

 

Adjusted Revenues

 
 

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Revenues:
Management fees $ 188,767 $ 192,604 $ 747,261 $ 785,673
Incentive income 72,857 71,186 731,224 355,152
Investment income   65,781   87,647   249,225   221,377
Total adjusted revenues $ 327,405 $ 351,437 $ 1,727,710 $ 1,362,202
 
   
Management Fees

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Management fees:
Closed-end funds $ 127,123 $ 139,573 $ 522,338 $ 575,290
Open-end funds 40,895 39,516 162,402 156,533
Evergreen funds   20,749   13,515   62,521   53,850
Total management fees $ 188,767 $ 192,604 $ 747,261 $ 785,673
 
   
Investment Income

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
Income (loss) from investments in funds: (in thousands)
Oaktree funds:
Corporate Debt $ 7,414 $ 9,349 $ 35,656 $ 24,375
Convertible Securities 392 31 1,790 (788 )
Distressed Debt 11,744 23,143 58,649 57,605
Control Investing 7,318 14,887 22,373 34,422
Real Estate 4,992 2,672 19,511 11,025
Listed Equities 14,117 19,690 32,855 22,646
Non-Oaktree funds 657 1,004 7,080 5,665
Income from investments in companies   19,147   16,871   71,311   66,427  
Total investment income $ 65,781 $ 87,647 $ 249,225 $ 221,377  
 
 

Adjusted Expenses

 
 

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Expenses:
Compensation and benefits $ (84,817 ) $ (83,870 ) $ (381,914 ) $ (381,937 )
Equity-based compensation (12,668 ) (11,906 ) (53,639 ) (50,098 )
Incentive income compensation (33,348 ) (37,149 ) (402,828 ) (169,683 )
General and administrative (38,298 ) (35,508 ) (132,340 ) (135,654 )
Depreciation and amortization   (2,287 )   (3,145 )   (9,150 )   (12,219 )
Total adjusted expenses $ (171,418 ) $ (171,578 ) $ (979,871 ) $ (749,591 )
 
 

Adjusted Interest and Other Expense, Net

 
 

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Interest expense, net of interest income (1) $ (6,580 ) $ (7,387 ) $ (26,375 ) $ (31,845 )
Other expense, net (22,561 ) (2,098 ) (20,364 ) (8,392 )
 
(1)     Interest income was $2.1 million and $8.8 million for the quarter and year ended December 31, 2017, respectively, and $2.0 million and $6.6 million for the quarter and year ended December 31, 2016, respectively.
 
 

Adjusted Net Income

 
 

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
(in thousands, except per unit data)
Adjusted net income $ 126,846 $ 170,374 $ 701,100 $ 572,374
Adjusted net income attributable to OCGH non-controlling interest (74,122 ) (101,111 ) (412,593 ) (340,718 )
Non-Operating Group income (expense) (1)   144,692     (529 )   144,143     (1,176 )
Adjusted net income-OCG before income taxes 197,416 68,734 432,650 230,480
Income taxes-OCG (1)   (183,871 )   (12,615 )   (210,949 )   (39,756 )
Adjusted net income-OCG $ 13,545   $ 56,119   $ 221,701   $ 190,724  
Adjusted net income per Class A unit $ 0.21   $ 0.89   $ 3.46   $ 3.05  
Weighted average number of Class A units outstanding   64,961     62,986     64,148     62,565  
 
(1)     The fourth quarter and full-year 2017 include the impact of the Tax Act, which had the effect of increasing income taxes-OCG by $178.2 million and increasing non-Operating Group income by $145.1 million, resulting in a net reduction to adjusted net income-OCG of $33.2 million. Excluding the impact of the Tax Act, ANI attributable to our Class A units for the fourth quarter and full-year 2017 was $0.72 and $3.97 per unit.
 
 

Distributable Earnings and Distribution Calculation

 

Distributable earnings and the calculation of distributions are set forth below:

 
 

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
Distributable Earnings: (in thousands, except per unit data)
 
Adjusted net income $ 126,846 $ 170,374 $ 701,100 $ 572,374
Investment income (65,781 ) (87,647 ) (249,225 ) (221,377 )
Receipts of investment income from funds (1) 37,204 24,753 128,468 66,390
Receipts of investment income from companies 25,072 21,407 67,995 63,700
Equity-based compensation 12,668 11,906 53,639 50,098
Other (income) expense, net (2) 21,962 21,962
Operating Group income taxes   218     (144 )   (7,632 )   (4,635 )
Distributable earnings $ 158,189   $ 140,649   $ 716,307   $ 526,550  
 
Distribution Calculation:
Operating Group distribution with respect to the period $ 134,390 $ 122,265 $ 609,222 $ 458,584
Distribution per Operating Group unit $ 0.86 $ 0.79 $ 3.90 $ 2.96
Adjustments per Class A unit:
Distributable earnings-OCG income tax expense (0.01 ) (0.08 ) (0.21 ) (0.20 )
Tax receivable agreement (0.09 ) (0.08 ) (0.33 ) (0.32 )
Non-Operating Group expenses           (0.02 )   (0.03 )

Distribution per Class A unit (3)

$ 0.76   $ 0.63   $ 3.34   $ 2.41  
 
(1)     This adjustment characterizes a portion of the distributions received from funds as receipts of investment income or loss. In general, the income or loss component of a fund distribution 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. Additionally, any impairment charges on our CLO investments included in ANI are, for distributable earnings purposes, amortized over the remaining investment period of the respective CLO to align with the timing of expected cash flows.
(2) For distributable earnings purposes, the $22 million make-whole premium charge included in ANI in the fourth quarter of 2017 in connection with the early repayment of our 2019 Notes is amortized through the original maturity date of December 2019.
(3) With respect to the quarter ended December 31, 2017, a distribution was announced on February 6, 2018 and is payable on February 23, 2018.
 
 

Units Outstanding

 
 

Three Months Ended
December 31,

 

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Weighted Average Units:
OCGH 91,325 91,948 91,643 92,122
Class A 64,961 62,986 64,148 62,565
Total 156,286 154,934 155,791 154,687
Units Eligible for Fiscal Period Distribution:
OCGH 90,969 91,756
Class A 65,298 63,010
Total 156,267 154,766
 
 

GAAP Statement of Financial Condition (Unaudited)

 
  As of December 31, 2017

Oaktree and
Operating
Subsidiaries

 

Consolidated
Funds

  Eliminations   Consolidated
(in thousands)
Assets:
Cash and cash-equivalents $ 481,631 $ $ $ 481,631
U.S. Treasury and other securities 176,602 176,602
Corporate investments 1,691,549 (681,918 ) 1,009,631
Deferred tax assets 202,460 202,460
Receivables and other assets 790,423 (2,670 ) 787,753
Assets of consolidated funds     6,356,819   (100 )   6,356,719
Total assets $ 3,342,665 $ 6,356,819 $ (684,688 ) $ 9,014,796
Liabilities and Capital:
Liabilities:
Accounts payable and accrued expenses $ 428,297 $ $ 5,403 $ 433,700
Due to affiliates 177,873 177,873
Debt obligations 746,274 746,274
Liabilities of consolidated funds     4,907,039   (131,255 )   4,775,784
Total liabilities   1,352,444   4,907,039   (125,852 )   6,133,631
Non-controlling redeemable interests in consolidated funds 860,548 860,548
Capital:
Unitholders’ capital attributable to OCG 868,984 233,537 (233,537 ) 868,984
Non-controlling interest in consolidated subsidiaries 1,121,237 325,299 (325,299 ) 1,121,237
Non-controlling interest in consolidated funds     890,944   (860,548 )   30,396
Total capital   1,990,221   1,449,780   (1,419,384 )   2,020,617
Total liabilities and capital $ 3,342,665 $ 6,356,819 $ (684,688 ) $ 9,014,796
 
 

Corporate Investments

 
  As of

December 31,
2017

 

September 30,
2017

 

December 31,
2016

Investments in funds: (in thousands)
Oaktree funds:
Corporate Debt $ 553,897 $ 550,888 $ 422,330
Convertible Securities 28,537 28,134 1,735
Distressed Debt 354,843 370,152 426,108
Control Investing 247,546 250,244 265,919
Real Estate 263,732 133,129 141,234
Listed Equities 137,941 139,628 116,988
Non-Oaktree funds 39,802 94,262 71,682
Investments in companies   42,294     24,242     34,932  
Total corporate investments – Non-GAAP 1,668,592 1,590,679 1,480,928
Adjustments (1)   22,957     17,403     4,263  
Total corporate investments – Oaktree and operating subsidiaries 1,691,549 1,608,082 1,485,191
Eliminations   (681,918 )   (553,095 )   (361,459 )
Total corporate investments – Consolidated $ 1,009,631   $ 1,054,987   $ 1,123,732  
 
(1)     This adjusts CLO investments carried at amortized cost to fair value for GAAP reporting.
 

Fund Data

Information regarding our closed-end, open-end and evergreen funds, together with benchmark data where applicable, is set forth below. For our closed-end and evergreen funds, no benchmarks are presented in the tables as there are no known comparable benchmarks for these funds’ investment philosophy, strategy and implementation.

 

Closed-end Funds

 
      As of December 31, 2017
Investment Period Total Committed Capital   % Invested (1)   %

Drawn (2)

  Fund Net Income Since Inception   Distri-

butions Since Inception

  Net Asset Value   Manage-

ment Fee-gener-

ating AUM

  Incentive Income Recog-

nized (Non-GAAP)

 

Accrued
Incentives
(Fund
Level) (3)

 

Unreturned
Drawn
Capital Plus
Accrued
Preferred
Return (4)

  IRR Since Inception (5)   Multiple of Drawn Capital (6)
Start Date End Date

Gross

  Net
(in millions)
Distressed Debt
Oaktree Opportunities Fund Xb (7) TBD $8,872 —% —%

$—

$— $— $— $— $— $— n/a n/a n/a
Oaktree Opportunities Fund X (7) Jan. 2016 Jan. 2019 3,603 81 54 703 81 2,556 3,450 136 2,029 41.2% 25.3% 1.5x
Oaktree Opportunities Fund IX Jan. 2014 Jan. 2017 5,066 nm 100 545 1,671 3,940 4,116 4,994 5.5 2.9 1.2
Oaktree Opportunities Fund VIIIb Aug. 2011 Aug. 2014 2,692 nm 100 771 2,020 1,443 1,631 52 1,832 8.4 5.5 1.4
Special Account B Nov. 2009 Nov. 2012 1,031 nm 100 590 1,441 256 248 16 165 13.5 11.1 1.6
Oaktree Opportunities Fund VIII Oct. 2009 Oct. 2012 4,507 nm 100 2,456 5,843 1,121 1,123 165 313 538 12.8 9.0 1.6
Special Account A Nov. 2008 Oct. 2012 253 nm 100 309 514 48 47 52 9 28.0 22.7 2.3
OCM Opportunities Fund VIIb May 2008 May 2011 10,940 nm 90 8,973 17,844 973 828 1,554 190 21.9 16.6 2.0
OCM Opportunities Fund VII Mar. 2007 Mar. 2010 3,598 nm 100 1,472 4,742 328 411 85 491 10.2 7.5 1.5
Legacy funds (8) Various Various 12,495 nm 100 10,461 22,923 33 1,557 7 23.6 18.5 1.9
22.0% 16.2%
Real Estate Opportunities
Oaktree Real Estate Opportunities Fund VII (9)(10) Jan. 2016 Jan. 2020 $2,921 63% 15% $232 $236 $434 $2,604 $— $45 $220 nm nm 1.8x
Oaktree Real Estate Opportunities Fund VI Aug. 2012 Aug. 2016 2,677 nm 100 1,282 1,780 2,179 1,676 22 226 1,703 15.5% 10.5% 1.6
Oaktree Real Estate Opportunities Fund V Mar. 2011 Mar. 2015 1,283 nm 100 985 1,968 300 153 130 57 17.4 12.9 1.9
Special Account D Nov. 2009 Nov. 2012 256 nm 100 203 378 89 4 16 14 14.9 12.8 1.8
Oaktree Real Estate Opportunities Fund IV Dec. 2007 Dec. 2011 450 nm 100 392 759 83 64 58 17 15.9 10.8 2.0
Legacy funds (8) Various Various 2,341 nm 99 2,010 4,324 2 232 15.2 11.9 1.9
15.6% 11.9%
Real Estate Debt
Oaktree Real Estate Debt Fund II (9)(11) Mar. 2017 Mar. 2020 $1,237 47% 13% $6 $9 $153 $584 $— $1 $150 nm nm 1.1x
Oaktree Real Estate Debt Fund Sep. 2013 Oct. 2016 1,112 nm 81 157 507 552 594 6 17 425 24.9% 18.8% 1.3
Oaktree PPIP Fund (12) Dec. 2009 Dec. 2012 2,322 nm 48 457 1,570 47 28.2 n/a 1.4
 
Real Estate Income (13)
Special Account G (9)(11) Oct. 2016 Oct. 2020 $615 66% 66% $39 $40 $405 $384 $— $8 $387 nm nm 1.1x
 
European Principal (14)
Oaktree European Principal Fund IV (7)(9) Jul. 2017 Jul. 2022 €1,119 77% 54% €(15) €2 €584 €1,090 €— €— €610 nm nm 1.0x
Oaktree European Principal Fund III Nov. 2011 Nov. 2016 €3,164 nm 85 €2,200 €1,104 €3,845 €2,682 €— €427 €2,603 19.4% 13.3% 1.9
OCM European Principal Opportunities Fund II Dec. 2007 Dec. 2012 €1,759 nm 100 €399 €1,866 €264 €599 €29 €— €715 8.4 4.3 1.4
OCM European Principal Opportunities Fund Mar. 2006 Mar. 2009 $495 nm 96 $454 $927 $— $— $87 $— $— 11.7 8.9 2.1
13.6% 9.1%
 
 
      As of December 31, 2017    
Investment Period Total Committed Capital   % Invested (1)   %

Drawn (2)

  Fund Net Income Since Inception   Distri-

butions Since Inception

  Net Asset Value   Manage-

ment Fee-gener-

ating AUM

  Incentive Income Recog-
nized (Non-GAAP)
 

Accrued
Incentives
(Fund
Level) (3)

 

Unreturned
Drawn
Capital
Plus
Accrued
Preferred
Return (4)

  IRR Since Inception (5)   Multiple of Drawn Capital (6)
Start Date End Date Gross Net
(in millions)
Power Opportunities
Oaktree Power Opportunities Fund IV Nov. 2015 Nov. 2020 $1,106 65% 65% $53 $1 $770 $1,078 $— $— $777 13.3% 7.0% 1.1x
Oaktree Power Opportunities Fund III Apr. 2010 Apr. 2015 1,062 nm 66 505 650 559 369 24 73 268 22.5 14.5 1.8
Legacy funds (8) Various Various 1,470 nm 63 1,689 2,616 123 35.1 27.4 2.8
34.5% 26.3%
Special Situations (15)
Oaktree Special Situations Fund (7) Nov. 2015 Nov. 2018 $1,377 88% 48% $174 $159 $675 $1,262 $— $34 $552 43.0% 23.8% 1.4x
Other funds:
Oaktree Principal Fund V Feb. 2009 Feb. 2015 $2,827 nm 91% $481 $1,674 $1,393 $1,621 $50 $— $2,099 7.6% 3.5% 1.3x
Special Account C Dec. 2008 Feb. 2014 505 nm 91 200 413 247 276 21 268 10.6 7.4 1.5
OCM Principal Opportunities Fund IV Oct. 2006 Oct. 2011 3,328 nm 100 3,068 5,887 509 450 148 12.6 9.1 2.1
Legacy funds (8) Various Various 3,701 nm 100 2,710 6,404 7 405 1 14.4 11.1 1.8
13.1% 9.4%
Infrastructure Investing
Highstar Capital IV (16) Nov. 2010 Nov. 2016 $2,000 nm 100% $498 $696 $1,802 $1,329 $— $2 $1,939 12.1% 7.7% 1.4x
 
European Private Debt (14)
Oaktree European Capital Solutions Fund (7)(11) Dec. 2015 Dec. 2018 €703 77% 58% €19 €155 €247 €264 €— €2 €243 10.1% 6.3% 1.1x
Oaktree European Dislocation Fund Oct. 2013 Oct. 2016 €294 nm 57 €39 €182 €39 €24 €2 €4 €18 20.5 14.6 1.3
Special Account E Oct. 2013 Apr. 2015 €379 nm 69 €63 €295 €29 €13 €4 €6 €7 14.2 11.0 1.3
14.8% 10.8%
U.S. Private Debt (17)
Oaktree Mezzanine Fund IV (11) Oct. 2014 Oct. 2019 $852 64% 64% $78 $90 $535 $511 $— $11 $519 11.9% 8.5% 1.2x
Oaktree Mezzanine Fund III (18) Dec. 2009 Dec. 2014 1,592 nm 89 437 1,542 318 339 15 28 270 15.0

 

10.4 / 8.6

1.4
OCM Mezzanine Fund II Jun. 2005 Jun. 2010 1,251 nm 88 488 1,504 91 166 10.9 7.4 0.6
OCM Mezzanine Fund (19) Oct. 2001 Oct. 2006 808 nm 96 302 1,075 38 15.4

10.8 / 10.5

 

1.5
13.0% 8.7%
Emerging Markets Opportunities
Oaktree Emerging Market Opportunities Fund Sep. 2013 Sep. 2017 $384 nm 78% $112 $212 $198 $140 $— $20 $149 16.4% 11.0% 1.5x
Special Account F Jan. 2014 Sep. 2017 253 nm 96 74 187 129 127 15 95 16.0 11.4 1.4
30,576

(14)

1,901

(14)

16.2% 11.2%

Other (20)

8,114 2

Total (21)

$38,690 $1,903
 
(1)     For our incentive-creating closed-end funds in their investment periods, this percentage equals invested capital divided by committed capital. Invested capital for this purpose is the sum of capital drawn from fund investors plus net borrowings, if any, outstanding, under a fund-level credit facility where such borrowings were made in lieu of drawing capital from fund investors.
(2) Represents capital drawn from fund investors, net of distributions to such investors of uninvested capital, divided by committed capital. The aggregate change in drawn capital for the three months ended December 31, 2017 was $1.2 billion.
(3) Accrued incentives (fund level) exclude non-GAAP incentive income previously recognized.
(4) Unreturned drawn capital plus accrued preferred return 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.
(5) 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 contributions/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. To the extent material, gross returns include certain transaction, advisory, directors or other ancillary fees (“fee income”) paid directly to us in connection with our funds’ activities (we credit all such fee income back to the respective fund(s) so that our funds’ investors share pro rata in the fee income’s economic benefit). Net IRRs reflect returns to non-affiliated investors after allocation of management fees, expenses and any incentive allocation to the fund’s general partner.
(6) Multiple of drawn capital is calculated as drawn capital plus gross income and, if applicable, fee income before fees and expenses divided by drawn capital.
(7) Fund data include the performance of the main fund and any associated fund-of-one accounts, except the gross and net IRRs presented reflect only the performance of the main fund. Certain fund-of-one accounts pay management fees based on cost basis, rather than committed capital.
(8) Legacy funds represent certain predecessor funds within the relevant strategy that have substantially or completely liquidated their assets, including funds 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.
(9) The IRR is not considered meaningful (“nm”) as the period from the initial capital contribution through December 31, 2017 was less than 18 months.
(10) A portion of this fund pays management fees based on drawn, rather than committed, capital.
(11) Management fees during the investment period are calculated on drawn capital or cost basis, rather than committed capital. As a result, as of December 31, 2017 management fee-generating AUM included only that portion of committed capital that had been drawn.
(12) Due to differences in the allocation of income and expenses to this fund’s two primary limited partners, the U.S. Treasury and Oaktree PPIP Private Fund, a combined net IRR is not presented. Of the $2,322 million in capital commitments, $1,161 million related to the Oaktree PPIP Private Fund, whose gross and net IRR were 24.7% and 18.6%, respectively.
(13) Effective August 2017, the Real Estate Value-Add strategy was renamed Real Estate Income.
(14) Aggregate IRRs or totals are based on the conversion of cash flows or amounts, respectively, from euros to USD using the December 31, 2017 spot rate of $1.20.
(15) Effective November 2016, the Global Principal strategy was renamed Special Situations. The aggregate gross and net IRRs presented for this strategy exclude the performance of Oaktree Special Situations Fund.
(16) The fund follows the American-style distribution waterfall, whereby the general partner may receive an incentive allocation as soon as it has returned the drawn capital and paid a preferred return on the fund’s realized investments (i.e., on a deal-by-deal basis). However, such cash distributions of incentives may be subject to repayment, or clawback. As of December 31, 2017, Oaktree had not recognized any incentive income from this fund. The accrued incentives (fund level) amount shown for this fund represents Oaktree’s effective 8% of the potential incentives generated by this fund in accordance with the terms of the Highstar acquisition.
(17) Effective April 2017, the Mezzanine Finance strategy was renamed U.S. Private Debt, and includes our Mezzanine Finance and Direct Lending funds.
(18) 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. The net IRR for Class A interests was 10.4% and Class B interests was 8.6%. The combined net IRR for Class A and Class B interests was 9.6%.
(19) 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. The net IRR for Class A interests was 10.8% and Class B interests was 10.5%. The combined net IRR for the Class A and Class B interests was 10.6%.
(20) This includes our closed-end Senior Loan funds, CLOs, a non-Oaktree fund and certain separate accounts and co-investments.
(21) The total excludes one closed-end fund with management fee-generating AUM aggregating $155 million as of December 31, 2017, which has been included as part of the Strategic Credit strategy within the evergreen funds table.
 

Open-end Funds

 
    Manage-

ment Fee-gener-

ating AUM

as of

Dec. 31, 2017

Year Ended
December 31, 2017

  Since Inception through December 31, 2017
Strategy Inception Rates of Return (1) Annualized Rates of Return (1)   Sharpe Ratio
Oaktree   Rele-

vant Bench-

mark

Oaktree   Rele-

vant Bench-

mark

Oaktree
Gross

  Rele-

vant Bench-

mark

Gross   Net Gross   Net
(in millions)
 
U.S. High Yield Bonds 1986 $ 16,428 6.1 % 5.5 % 6.9 % 9.3 % 8.7 % 8.3 % 0.81 0.57
Global High Yield Bonds 2010 4,377 6.7 6.2 7.5 7.4 6.9 7.0 1.17 1.14
European High Yield Bonds 1999 1,012 7.5 7.0 8.2 8.1 7.6 6.4 0.73 0.46
U.S. Convertibles 1987 2,668 9.1 8.6 13.7 9.4 8.8 8.3 0.50 0.38
Non-U.S. Convertibles 1994 1,468 8.9 8.3 3.7 8.4 7.8 5.5 0.80 0.41
High Income Convertibles 1989 1,091 7.6 6.8 7.0 11.3 10.5 8.2 1.07 0.61
U.S. Senior Loans 2008 1,311 4.6 4.1 4.2 6.1 5.5 5.2 1.12 0.66
European Senior Loans 2009 1,753 2.9 2.4 3.3 7.8 7.3 8.5 1.69 1.69
Emerging Markets Equities 2011 4,024 34.7 33.7 37.3 3.2 2.4 2.6 0.16 0.14
Multi-Strategy Credit (2) 2017 702 nm nm nm nm nm nm nm nm
Other   354
Total $ 35,188
 
(1)     Returns represent time-weighted rates of return, including reinvestment of income, net of commissions and transaction costs. The returns for Relevant Benchmarks are presented on a gross basis.
(2) Performance is not considered meaningful (“nm”) as the period from the initial capital contribution through December 31, 2017 was less than 18 months. As a result, returns for the relevant benchmark and the Sharpe Ratio have been excluded.
 
 

Evergreen Funds

 
    As of December 31, 2017   Year Ended

December 31, 2017

  Since Inception through
December 31, 2017
AUM   Manage-

ment

Fee-gener-

ating AUM

 

Accrued Incen-

tives
(Fund Level)

Strategy Inception Rates of Return (1) Annualized Rates

of Return (1)

Gross   Net Gross   Net
(in millions)
 
Strategic Credit (2) 2012 $ 5,087 $ 4,672 $ 1

(3)

14.2 % 11.1 % 9.4 % 6.9 %
Value Opportunities 2007 1,102 1,028

(3)

10.7 8.5 9.6 5.8
Emerging Markets Debt (4) 2015 896 315 5

(3)

19.0 14.9 16.6 13.0
Value Equities (5) 2012 461   430  

(3)

34.3 25.3 22.0 16.0
6,445 6
Other (6) 262 6
Restructured funds     5
Total (2) $ 6,707 $ 17
 
 
(1)     Returns represent time-weighted rates of return.
(2) Includes our publicly-traded BDCs and one closed-end fund with $135 million and $155 million of AUM and management fee-generating AUM, respectively. The rates of return reflect the performance of a composite of certain evergreen accounts and exclude our publicly-traded BDCs.
(3) For the year ended December 31, 2017, gross incentive income recognized by Oaktree totaled $14.2 million for Strategic Credit, $5.5 million for Value Opportunities, $8.4 million for Emerging Markets Debt and $15.6 million for Value Equities.
(4) Includes the Emerging Markets Debt Total Return and Emerging Markets Opportunities strategies. The rates of return reflect the performance of a composite of accounts for the Emerging Markets Debt Total Return strategy, including a single account with a December 2014 inception date.
(5) Includes performance of a proprietary fund with an initial capital commitment of $25 million since its inception in May 2012.
(6) Includes the Emerging Markets Absolute Return strategy and evergreen separate accounts in the Real Estate Debt strategy.
 

GLOSSARY

Accrued incentives (fund level) represents 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 gross amount of potential incentives generated by the funds during the period. We refer to the amount of accrued incentives recognized as revenue by us as incentive income. Amounts recognized by us as incentive income are no longer 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 many factors.

Adjusted net income (“ANI”) is a measure of profitability for our investment management business. The components of revenues (“adjusted revenues”) and expenses (“adjusted expenses”) used in the determination of ANI do not give effect to the consolidation of the funds that we manage. Adjusted revenues include investment income (loss) that is classified in other income (loss) in the GAAP statements of operations. Adjusted revenues and expenses also reflect Oaktree’s proportionate economic interest in Highstar, whereby amounts received for contractually reimbursable costs are classified for ANI as expenses and under GAAP as other income. In addition, ANI excludes the effect of (a) non-cash equity-based compensation expense related to unit grants made before our initial public offering, (b) acquisition-related items, including amortization of intangibles and changes in the contingent consideration liability, (c) income taxes, (d) other income or expenses applicable to OCG or its Intermediate Holding Companies, and (e) the adjustment for non-controlling interests. Moreover, gains and losses resulting from foreign-currency transactions and hedging activities under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, but for ANI, unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Additionally, for ANI, foreign-currency transaction gains and losses are included in other income (expense), net. Incentive income and incentive income compensation expense are included in ANI when the underlying fund distributions are known or knowable as of the respective quarter end, which may be later than the time at which the same revenue or expense is included in the GAAP statements of operations, for which the revenue standard is fixed or determinable and the expense standard is probable and reasonably estimable. CLO investments are carried at fair value for GAAP reporting, whereas for ANI, they are carried at amortized cost, subject to any impairment charges. Investment income on CLO investments is recognized in ANI when cash distributions are received. Cash distributions are allocated between income and return of capital based on the effective yield method. ANI is calculated at the Operating Group level.

Beginning with the second quarter of 2017, the definition of ANI was modified with respect to third-party placement costs associated with closed-end funds and liability-classified EVUs to conform to the GAAP treatment. Under GAAP, placement costs are expensed as incurred and liability-classified EVUs are remeasured as of each reporting date. Previously for ANI, placement costs were capitalized and amortized in proportion to the associated management fee stream, and liability-classified EVUs were treated as equity-classified awards. All prior periods have been recast for these changes.

Adjusted net income–OCG, or adjusted net income per Class A unit, a non-GAAP performance measure, is calculated 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) other income or expenses, such as income tax expense, applicable to OCG or its Intermediate Holding Companies and (c) any Operating Group income taxes attributable to OCG. Two of our Intermediate Holding Companies incur federal and state income taxes for their shares of Operating Group income. Generally, those two corporate entities hold an interest in the 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 and investment income arising from our one-fifth ownership stake in DoubleLine generally have been subject to corporate-level taxation, and most of our incentive income and other 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 and DoubleLine-related investment income 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.

Assets under management (“AUM”) generally refers to the assets we manage and equals the NAV of the assets we manage, the leverage on which management fees are charged, the undrawn capital that we are entitled to call from investors in our funds pursuant to their capital commitments. For our CLOs, AUM represents the aggregate par value of collateral assets and principal cash, and for our publicly-traded BDCs, gross assets (including assets acquired with leverage), net of cash. Our AUM includes amounts for which we charge no management fees.

  • Management fee-generating assets under management (“management fee-generating AUM”) is a forward-looking metric and reflects the beginning AUM on which we will earn management fees in the following quarter. Our closed-end funds typically pay management fees based on committed capital, drawn capital or cost basis during the investment period, without regard to changes in NAV, and during the liquidation period on the lesser of (a) total funded capital or (b) the cost basis of assets remaining in the fund. The annual management fee rate generally remains unchanged from the investment period through the liquidation period. Our open-end and evergreen funds typically pay management fees based on their NAV, our CLOs pay management fees based on the aggregate par value of collateral assets and principal cash, as defined in the applicable CLO indentures, and our publicly-traded BDCs pay management fees based on gross assets (including assets acquired with leverage), net of cash. As compared with AUM, management fee-generating AUM generally excludes the following:
    • Differences between AUM and either committed capital or cost basis for most closed-end funds, other than for closed-end funds that pay management fees based on NAV and leverage, as applicable;
    • Undrawn capital commitments to closed-end funds that have not yet commenced their investment periods;
    • Undrawn capital commitments to funds for which management fees are based on drawn capital, NAV or cost basis;
    • Oaktree’s general partner investments in management fee-generating funds; and
    • Funds that are no longer paying management fees and co-investments that pay no management fees.
  • Incentive-creating assets under management (“incentive-creating AUM”) refers to the AUM that may eventually produce incentive income. It generally represents the NAV of our funds for which we are entitled to receive an incentive allocation, excluding CLOs and investments made by us and our employees and directors (which are not subject to an incentive allocation), and gross assets (including assets acquired with leverage), net of cash, for our publicly-traded BDCs. With respect to BDCs, only the incentive fee on capital gains can be generated from incentive-creating AUM. 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 above their preferred return or high-water mark and therefore generating incentives. Incentive-creating AUM does not include undrawn capital commitments.

Consolidated funds refers to the funds and CLOs that Oaktree is required to consolidate as of the respective reporting date.

Distributable earnings is a non-GAAP performance measure derived from our non-GAAP results that we use to measure our earnings at the Operating Group level without the effects of the consolidated funds for the purpose of, among other things, assisting in the determination of equity distributions from the 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.

Distributable earnings and distributable earnings revenues differ from ANI in that they exclude investment income or loss and include the receipt of investment income or loss from distributions by our investments in funds and companies. Additionally, any impairment charges on our CLO investments included in ANI are, for distributable earnings purposes, amortized over the remaining investment period of the respective CLO, in order to align with the timing of expected cash flows. In addition, distributable earnings differs from ANI in that make-whole premium charges related to the repayment of debt included in ANI are, for distributable earnings purposes, amortized through the original maturity date of the repaid debt. Finally, distributable earnings differs from ANI in that it is net of Operating Group income taxes and excludes non-cash equity-based compensation expense.

Distributable earnings–OCG, or distributable earnings per Class A unit, a non-GAAP performance measure, is calculated to provide Class A unitholders with a measure that shows the portion of distributable earnings attributable to their ownership. Distributable earnings-OCG represents distributable earnings, including the effect of (a) the OCGH non-controlling interest, (b) expenses, such as current income tax expense, applicable to OCG or its Intermediate Holding Companies and (c) amounts payable under a tax receivable agreement. The income tax expense included in distributable earnings-OCG represents the implied current provision for income taxes calculated using an approach similar to that which is used in calculating the income tax provision for adjusted net income-OCG.

Economic net income (“ENI”) is a non-GAAP performance measure that we use to evaluate the financial performance of our business by applying the “Method 2,” instead of the “Method 1,” revenue recognition approach to accounting for incentive income. ANI follows Method 1, except incentive income is recognized when the underlying fund distributions are known or knowable as of the respective quarter end, as opposed to the fixed or determinable standard of Method 1. The Method 2 approach followed by ENI recognizes incentive income as if the funds were liquidated at their reported values as of the date of the financial statements. ENI is computed by adjusting ANI for the change in accrued incentives (fund level), net of associated incentive income compensation expense, during the period.

Economic net income revenues is a non-GAAP measure applying the Method 2, instead of the Method 1, approach to accounting for incentive income, and reflects the adjustments described above and under the definition of ANI.

Economic net income–OCG, or economic net income per Class A unit, a non-GAAP performance measure, is calculated to provide Class A unitholders with a measure that shows the portion of ENI attributable to their ownership. Economic net income-OCG represents ENI, including the effect of (a) the OCGH non-controlling interest, (b) other income or expenses, such as income tax expense, applicable to OCG or its Intermediate Holding Companies and (c) any Operating Group income taxes attributable to OCG. The income tax expense included in economic net income-OCG represents the implied provision for income taxes calculated using an approach similar to that which is used in calculating the income tax provision for adjusted net income-OCG.

Equity value units (“EVUs”) represent special limited partnership units in Oaktree Capital Group Holdings, L.P. (“OCGH”) that entitle the holder the right to receive a one-time special distribution that will be settled in OCGH units based on value created during a specified period (“Term”) in excess of a fixed “Base Value.” The Base Value will be reduced by certain distributions and profit sharing payments received by the holder and the full value of certain OCGH units granted. The value created will be measured on a per unit basis, based on Class A unit trading prices and certain components of quarterly distributions with respect to the period during the Term. EVUs also give the holder the right, subject to service vesting and Oaktree performance relative to the accreting Base Value, to receive certain quarterly distributions from OCGH. EVUs do not entitle the holder to any voting rights.

Fee-related earnings (“FRE”) is a non-GAAP performance measure that we use to monitor the baseline earnings of our business. FRE is derived from our non-GAAP results and is comprised of management fees (“fee-related earnings revenues”) less operating expenses other than incentive income compensation expense and non-cash equity-based compensation expense. FRE is considered baseline because it excludes all non-management fee revenue sources (such as earnings from our minority equity interest in DoubleLine) and applies all cash compensation and benefits other than incentive income compensation expense, as well as all general and administrative expenses, to management fees, even though those expenses also support the generation of incentive and investment income. FRE is presented before income taxes.

Fee-related earnings–OCG, or fee-related earnings per Class A unit, is a non-GAAP performance measure calculated to provide Class A unitholders with a measure that shows the portion of FRE attributable to their ownership. Fee-related earnings–OCG represents FRE including the effect of (a) the OCGH non-controlling interest, (b) other income or expenses, such as income tax expense, applicable to OCG or its Intermediate Holding Companies and (c) any Operating Group income taxes attributable to OCG. Fee-related earnings–OCG income taxes is calculated excluding any incentive income or investment income (loss).

Intermediate Holding Companies collectively refers to the subsidiaries wholly owned by us.

Invested capital reflects deployed capital, whether involving drawn or recycled equity capital, or borrowings from fund-level credit facilities. This metric is used in connection with incentive-creating closed-end funds and certain evergreen funds.

Net asset value (“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.

Oaktree, OCG, we, us, our or the Company refers to Oaktree Capital Group, LLC and, where applicable, its subsidiaries and affiliates.

Oaktree Operating Group (“Operating Group”) refers collectively to the entities in which we have a minority economic interest and indirect control that either (i) act as or control the general partners and investment advisers of our funds or (ii) hold interests in other entities or investments generating income for us.

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 Global High Yield Bond strategy, to an Oaktree custom global high yield index that represents 60% ICE BofAML High Yield Master II Constrained Index and 40% ICE BofAML Global Non-Financial High Yield European Issuers 3% Constrained, ex-Russia Index – USD Hedged from inception through December 31, 2012, and the ICE BofAML Non-Financial Developed Markets High Yield Constrained Index – USD Hedged thereafter;
  • our European High Yield Bond strategy, to the ICE BofAML Global Non-Financial High Yield European Issuers excluding Russia 3% Constrained Index (USD Hedged);
  • 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 ICE BofAML All U.S. Convertibles Index thereafter;
  • our non-U.S. Convertible Securities strategy, to an Oaktree custom non-U.S. convertible index that represents the JACI Global ex-U.S. (Local) Index from inception through December 31, 2014 and the Thomson Reuters Global Focus ex-U.S. (USD hedged) Index thereafter;
  • our High Income Convertible Securities strategy, to the Citigroup U.S. High Yield Market Index; and
  • our Emerging Markets Equities 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.

Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as general partner) of our closed-end funds through their investment periods and certain evergreen funds. 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.

EXHIBIT A

Use of Non-GAAP Financial Information

Oaktree discloses certain non-GAAP financial measures in this earnings release. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are presented below. Management makes operating decisions and assesses the performance of Oaktree’s business based on these non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, net income, net income per Class A unit or other financial measures presented in accordance with GAAP.

Reconciliation of GAAP to Non-GAAP Results

The following table reconciles net income attributable to Oaktree Capital Group, LLC to adjusted net income, fee-related earnings and distributable earnings.

   

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Net income attributable to Oaktree Capital Group, LLC $ 13,414 $ 59,283 $ 231,494 $ 194,705
Incentive income (1) (55,607 ) (38,474 ) (13,653 ) 1,407
Incentive income compensation (1) 55,607 38,474 13,653 (1,407 )
Investment income (2) (5,983 ) (2,081 ) (30,613 ) (21,814 )
Equity-based compensation (3) 1,140 3,358 5,698 13,626
Foreign-currency hedging (4) 2,413 (9,341 ) 1,453 1,496
Acquisition-related items (5) 3,294 827 1,838 (924 )
Income taxes (6) 183,742 12,701 215,442 42,519
Non-Operating Group (income) expenses (7) (144,692 ) 529 (144,143 ) 1,176
Non-controlling interests (7)   73,518     105,098     419,931     341,590  
Adjusted net income 126,846 170,374 701,100 572,374
Incentive income (72,857 ) (71,186 ) (731,224 ) (355,152 )
Incentive income compensation 33,348 37,149 402,828 169,683
Investment income (65,781 ) (87,647 ) (249,225 ) (221,377 )
Equity-based compensation (8) 12,668 11,906 53,639 50,098
Interest expense, net of interest income 6,580 7,387 26,375 31,845
Other (income) expense, net   22,561     2,098     20,364     8,392  
Fee-related earnings 63,365 70,081 223,857 255,863
Incentive income 72,857 71,186 731,224 355,152
Incentive income compensation (33,348 ) (37,149 ) (402,828 ) (169,683 )
Receipts of investment income from funds (9) 37,204 24,753 128,468 66,390
Receipts of investment income from companies 25,072 21,407 67,995 63,700
Interest expense, net of interest income (6,580 ) (7,387 ) (26,375 ) (31,845 )
Other (income) expense, net (599 ) (2,098 ) 1,598 (8,392 )
Operating Group income taxes   218     (144 )   (7,632 )   (4,635 )
Distributable earnings $ 158,189   $ 140,649   $ 716,307   $ 526,550  
 
(1)     This adjustment adds back the effect of timing differences associated with the recognition of incentive income and incentive income compensation expense between adjusted net income and net income attributable to OCG.
(2) This adjustment adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs which under GAAP are marked-to-market but for ANI are accounted for at amortized cost, subject to impairment.
(3) This adjustment adds back the effect of equity-based compensation expense related to unit grants made before 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) This adjustment adds back the effect of timing differences associated with the recognition of unrealized gains and losses related to foreign-currency hedging between adjusted net income and net income attributable to OCG.
(5) This adjustment adds back the effect of acquisition-related items associated with the amortization of intangibles and changes in the contingent consideration liability, which are excluded from adjusted net income.
(6) Because adjusted net income and fee-related earnings are pre-tax measures, this adjustment adds back the effect of income tax expense.
(7) 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 non-controlling interests.
(8) This adjustment adds back the effect of equity-based compensation expense related to unit grants made after our initial public offering, which is excluded from fee-related earnings because it is non-cash in nature and does not impact our ability to fund our operations.
(9) This adjustment reflects the portion of distributions received from funds characterized 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.
 

The following table reconciles net income attributable to Oaktree Capital Group, LLC to adjusted net income-OCG, fee-related earnings-OCG and distributable earnings-OCG.

   

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Net income attributable to Oaktree Capital Group, LLC $ 13,414 $ 59,283 $ 231,494 $ 194,705
Incentive income attributable to OCG (1) (23,113 ) (15,641 ) (6,004 ) 407
Incentive income compensation attributable to OCG (1) 23,113 15,641 6,004 (407 )
Investment income attributable to OCG (2) (2,487 ) (846 ) (12,608 ) (8,807 )
Equity-based compensation attributable to OCG (3) 474 1,365 2,341 5,512
Foreign-currency hedging attributable to OCG (4) 1,003 (3,797 ) 618 572
Acquisition-related items attributable to OCG (5) 1,369 336 759 (372 )
Non-controlling interests attributable to OCG (5)   (228 )   (222 )   (903 )   (886 )
Adjusted net income-OCG (6) 13,545 56,119 221,701 190,724
Incentive income attributable to OCG (30,283 ) (28,939 ) (300,718 ) (143,595 )
Incentive income compensation attributable to OCG 13,861 15,102 165,669 68,609
Investment income attributable to OCG (27,342 ) (35,631 ) (102,644 ) (89,698 )
Equity-based compensation attributable to OCG (7) 5,266 4,841 22,089 20,267
Interest expense, net of interest income attributable to OCG 2,934 3,246 10,720 13,002
Other (income) expense attributable to OCG 9,378 853 8,474 3,400
Non-fee-related earnings income taxes attributable to OCG (8)   7,038     6,160     29,205     26,238  
Fee-related earnings-OCG (6) (5,603 ) 21,751 54,496 88,947
Incentive income attributable to OCG 30,283 28,939 300,718 143,595
Incentive income compensation attributable to OCG (13,861 ) (15,102 ) (165,669 ) (68,609 )
Receipts of investment income from funds attributable to OCG 15,464 10,062 52,923 26,879
Receipts of investment income from companies attributable to OCG 10,421 8,703 28,041 25,784
Interest expense, net of interest income attributable to OCG (2,934 ) (3,246 ) (10,720 ) (13,002 )
Other (income) expense attributable to OCG (145,313 ) (853 ) (144,409 ) (3,400 )
Non-fee-related earnings income taxes attributable to OCG (8) (7,038 ) (6,160 ) (29,205 ) (26,238 )
Distributable earnings-OCG income taxes 1,618 (6,467 ) (5,394 ) (11,939 )
Tax receivable agreement (5,415 ) (5,151 ) (21,608 ) (20,469 )
Income taxes of Intermediate Holding Companies   183,960     12,557     207,810     37,884  
Distributable earnings-OCG (6) $ 61,582   $ 45,033   $ 266,983   $ 179,432  
 
(1)     This adjustment adds back the effect of timing differences associated with the recognition of incentive income and incentive income compensation expense between adjusted net income-OCG and net income attributable to OCG.
(2) This adjustment adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs which under GAAP are marked-to-market but for ANI are accounted for at amortized cost, subject to impairment.
(3) This adjustment adds back the effect of equity-based compensation expense attributable to OCG related to unit grants made before 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.
(4) This adjustment adds back the effect of timing differences associated with the recognition of unrealized gains and losses related to foreign-currency hedging between adjusted net income-OCG and net income attributable to OCG.
(5) This adjustment adds back the effect of (a) acquisition-related items associated with the amortization of intangibles and changes in the contingent consideration liability and (b) non-controlling interests, which are both excluded from ANI.
(6) Adjusted net income-OCG, fee-related earnings-OCG and distributable earnings-OCG are calculated to evaluate the portion of adjusted net income, fee-related earnings and distributable earnings attributable to Class A unitholders. These measures are net of income taxes and other income or expenses applicable to OCG or its Intermediate Holding Companies. Reconciliations of fee-related earnings to fee-related earnings-OCG and distributable earnings to distributable earnings-OCG are presented below.
 
           

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands, except per unit data)
Fee-related earnings $ 63,365 $ 70,081 $ 223,857 $ 255,863
Fee-related earnings attributable to OCGH non-controlling interest (37,026 ) (41,589 ) (131,622 ) (152,347 )
Non-Operating Group income (expense) 144,891 (286 ) 144,005 (1,051 )
Fee-related earnings-OCG income taxes   (176,833 )   (6,455 )   (181,744 )   (13,518 )
Fee-related earnings-OCG $ (5,603 ) $ 21,751   $ 54,496   $ 88,947  
Fee-related earnings per Class A unit $ (0.09 ) $ 0.35   $ 0.85   $ 1.42  
Weighted average number of Class A units outstanding   64,961     62,986     64,148     62,565  
 
           

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands, except per unit data)
Distributable earnings $ 158,189 $ 140,649 $ 716,307 $ 526,550
Distributable earnings attributable to OCGH non-controlling interest (92,438 ) (83,469 ) (421,401 ) (313,534 )
Non-Operating Group expenses (372 ) (529 ) (921 ) (1,176 )
Distributable earnings-OCG income taxes 1,618 (6,467 ) (5,394 ) (11,939 )
Tax receivable agreement   (5,415 )   (5,151 )   (21,608 )   (20,469 )
Distributable earnings-OCG $ 61,582   $ 45,033   $ 266,983   $ 179,432  
Distributable earnings per Class A unit $ 0.95   $ 0.71   $ 4.16   $ 2.87  
Weighted average number of Class A units outstanding   64,961     62,986     64,148     62,565  
 
(7)     This adjustment adds back the effect of equity-based compensation expense attributable to OCG related to unit grants made after our initial public offering, which is excluded from fee-related earnings-OCG, because it is non-cash in nature and does not impact our ability to fund our operations.
(8) This adjustment adds back income taxes associated with incentive income, incentive income compensation expense or investment income or loss, which are not included in the calculation of fee-related earnings-OCG.
 

The following table reconciles net income attributable to Oaktree Capital Group, LLC to the GAAP and non-GAAP financial measures included in this earnings release, excluding the impact of the Tax Act.

   

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Net income attributable to Oaktree Capital Group, LLC $ 13,414 $ 59,283 $ 231,494 $ 194,705
Impact of the Tax Act   33,178         33,178      
Net income attributable to Oaktree Capital Group, LLC, excluding the impact of the Tax Act 46,592 59,283 264,672 194,705
Reconciling adjustments (1)   131     (3,164 )   (9,793 )   (3,981 )
Adjusted net income-OCG, excluding the impact of the Tax Act 46,723 56,119 254,879 190,724
Impact of the Tax Act (2,126 ) (2,126 )
Reconciling adjustments (1)   (19,148 )   (34,368 )   (167,205 )   (101,777 )
Fee-related earnings-OCG, excluding the impact of the Tax Act $ 25,449   $ 21,751   $ 85,548   $ 88,947  
 
(1)     Please refer to the table on page 30 for a detailed reconciliation of adjusted GAAP net income attributable to OCG to adjusted net income-OCG and fee-related earnings-OCG.
 

The following table reconciles GAAP revenues to adjusted revenues, fee-related earnings revenues and distributable earnings revenues.

   

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
GAAP revenues $ 311,095 $ 298,310 $ 1,469,767 $ 1,125,746
Consolidated funds (1) 27,229 30,761 100,920 57,737
Incentive income (2) (55,607 ) (38,474 ) (13,653 ) 1,407
Investment income (3)   44,688     60,840     170,676     177,312  
Adjusted revenues 327,405 351,437 1,727,710 1,362,202
Incentive income (72,857 ) (71,186 ) (731,224 ) (355,152 )
Investment income   (65,781 )   (87,647 )   (249,225 )   (221,377 )
Fee-related earnings revenues 188,767 192,604 747,261 785,673
Incentive income 72,857 71,186 731,224 355,152
Receipts of investment income from funds 37,204 24,753 128,468 66,390
Receipts of investment income from companies   25,072     21,407     67,995     63,700  
Distributable earnings revenues $ 323,900   $ 309,950   $ 1,674,948   $ 1,270,915  
 
(1)     This adjustment adds back the amounts attributable to the consolidated funds that were eliminated in consolidation, the reclassification of gains and losses related to foreign-currency hedging activities from general and administrative expense to revenues, and the elimination of non-controlling interests from adjusted revenues.
(2) This adjustment adds back the effect of timing differences associated with the recognition of incentive income between adjusted revenues and GAAP revenues.
(3) This adjustment reclassifies consolidated investment income from other income (loss) to revenues and adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs between adjusted revenues and GAAP revenues.
 

The following table reconciles net income attributable to Oaktree Capital Group, LLC to adjusted net income and economic net income.

   

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Net income attributable to Oaktree Capital Group, LLC $ 13,414 $ 59,283 $ 231,494 $ 194,705
Reconciling adjustments (1)   113,432   111,091   469,606     377,669
Adjusted net income 126,846 170,374 701,100 572,374
Change in accrued incentives (fund level), net of associated incentive income compensation (2)   20,961   73,826   (25,690 )   135,002
Economic net income (3) $ 147,807 $ 244,200 $ 675,410   $ 707,376
 
(1)     Please refer to the table on page 29 for a detailed reconciliation of net income attributable to Oaktree Capital Group, LLC to adjusted net income.
(2) The change in accrued incentives (fund level), net of associated incentive income compensation expense, represents the difference between (a) our recognition of net incentive income and (b) the incentive income generated by the funds during the period that would be due to us if the funds were liquidated at their reported values as of that date, net of associated incentive income compensation expense.
(3) Please see Glossary for the definition of economic net income.
 

The following table reconciles net income attributable to Oaktree Capital Group, LLC to adjusted net income-OCG and economic net income-OCG.

   

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Net income attributable to Oaktree Capital Group, LLC $ 13,414 $ 59,283 $ 231,494 $ 194,705
Reconciling adjustments (1)   131     (3,164 )   (9,793 )   (3,981 )
Adjusted net income-OCG (2) 13,545 56,119 221,701 190,724
Change in accrued incentives (fund level), net of associated incentive income compensation attributable to OCG 8,713 30,013 (10,572 ) 54,928
Economic net income-OCG income taxes (183,933 ) (10,882 ) (211,125 ) (37,322 )
Income taxes-OCG   183,871     12,615     210,949     39,756  
Economic net income-OCG (2) $ 22,196   $ 87,865   $ 210,953   $ 248,086  
 
(1)     Please refer to the table on page 30 for a detailed reconciliation of net income attributable to Oaktree Capital Group, LLC to adjusted net income-OCG.
(2) Adjusted net income-OCG and economic net income-OCG are calculated to evaluate the portion of adjusted net income and economic net income attributable to Class A unitholders. These measures are net of income taxes and other income or expenses applicable to OCG or its Intermediate Holding Companies. A reconciliation of economic net income to economic net income-OCG is presented below.
 
           

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands, except per unit data)
Economic net income $ 147,807 $ 244,200 $ 675,410 $ 707,376
Economic net income attributable to OCGH non-controlling interest (86,370 ) (144,924 ) (397,475 ) (420,792 )
Non-Operating Group expenses 144,692 (529 ) 144,143 (1,176 )
Economic net income-OCG income taxes   (183,933 )   (10,882 )   (211,125 )   (37,322 )
Economic net income-OCG $ 22,196   $ 87,865   $ 210,953   $ 248,086  
Economic net income per Class A unit $ 0.34   $ 1.39   $ 3.29   $ 3.97  
Weighted average number of Class A units outstanding   64,961     62,986     64,148     62,565  
 

The following table reconciles net income attributable to Oaktree Capital Group, LLC to the GAAP and non-GAAP financial measures included in this earnings release, excluding the impact of the Tax Act.

   

Three Months Ended
December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
Net income attributable to Oaktree Capital Group, LLC $ 13,414 $ 59,283 $ 231,494 $ 194,705
Impact of the Tax Act   33,178       33,178      
Net income attributable to Oaktree Capital Group, LLC, excluding the impact of the Tax Act 46,592 59,283 264,672 194,705
Reconciling adjustments (1)   131   (3,164 )   (9,793 )   (3,981 )
Adjusted net income-OCG, excluding the impact of the Tax Act 46,723 56,119 254,879 190,724
Reconciling adjustments (2)   8,651   31,746     (10,748 )   57,362  
Economic net income-OCG, excluding the impact of the Tax Act $ 55,374 $ 87,865   $ 244,131   $ 248,086  
 
(1)     Please refer to the table on page 30 for a detailed reconciliation of net income attributable to Oaktree Capital Group, LLC to adjusted net income-OCG.
(2) Please refer to the table on page 33 for a detailed reconciliation of adjusted net income-OCG to economic net income-OCG.
 

The following table reconciles GAAP revenues to adjusted revenues and economic net income revenues.

   

Three Months
Ended December 31,

Year Ended
December 31,

2017   2016 2017   2016
(in thousands)
GAAP revenues $ 311,095 $ 298,310 $ 1,469,767 $ 1,125,746
Consolidated funds (1) 27,229 30,761 100,920 57,737
Incentive income (2) (55,607 ) (38,474 ) (13,653 ) 1,407
Investment income (3)   44,688     60,840     170,676     177,312  
Adjusted revenues 327,405 351,437 1,727,710 1,362,202
Incentives created 132,531 236,475 637,466 784,032
Incentive income   (72,857 )   (71,186 )   (731,224 )   (355,152 )
Economic net income revenues $ 387,079   $ 516,726   $ 1,633,952   $ 1,791,082  
 
(1)     This adjustment adds back the amounts attributable to the consolidated funds that were eliminated in consolidation, the reclassification of gains and losses related to foreign-currency hedging activities from general and administrative expense to revenues, and the elimination of non-controlling interests from adjusted revenues.
(2) This adjustment adds back the effect of timing differences associated with the recognition of incentive income between adjusted revenues and GAAP revenues.
(3) This adjustment reclassifies consolidated investment income from other income (loss) to revenues and adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs between adjusted revenues and GAAP revenues.
 

The following tables reconcile GAAP consolidated financial data to non-GAAP data:

 

As of or for the Three Months Ended
December 31, 2017

Consolidated   Adjustments   ANI
(in thousands)
Management fees (1) $ 184,146 $ 4,621 $ 188,767
Incentive income (1) 126,949 (54,092 ) 72,857
Investment income (1) 50,671 15,110 65,781
Total expenses (2) (239,582 ) 68,164 (171,418 )
Interest expense, net (3) (41,091 ) 34,511 (6,580 )
Other income (expense), net (4) 123,540 (146,101 ) (22,561 )
Other income of consolidated funds (5) 76,940 (76,940 )
Income taxes (183,742 ) 183,742
Net income attributable to non-controlling interests in consolidated funds (9,661 ) 9,661
Net income attributable to non-controlling interests in consolidated subsidiaries   (74,756 )   74,756      
Net income attributable to Oaktree Capital Group, LLC/Adjusted net income $ 13,414   $ 113,432   $ 126,846  
 
(1)     The adjustment (a) adds back amounts earned from the consolidated funds, (b) for management fees, reclassifies $966 of net losses related to foreign-currency hedging activities from general and administrative expense, (c) for incentive income, includes $55,607 related to timing differences in the recognition of incentive income between net income attributable to OCG and adjusted net income, and (d) for investment income, includes $5,983 related to corporate investments in CLOs, which under GAAP are marked-to-market but for ANI accounted for at amortized cost, subject to impairment.
(2) The expense adjustment consists of (a) equity-based compensation expense of $1,140 related to unit grants made before our initial public offering, (b) consolidated fund expenses of $3,534, (c) expenses incurred by the Intermediate Holding Companies of $173, (d) the effect of timing differences in the recognition of incentive income compensation expense between net income attributable to OCG and adjusted net income of $55,607, (e) acquisition-related items of $3,294, (f) adjustments of $433 related to amounts received for contractually reimbursable costs that are classified as other income under GAAP and as expenses for ANI, and (g) $3,983 of net losses related to foreign-currency hedging activities.
(3) The interest expense adjustment removes interest expense of the consolidated funds and reclassifies interest income from other income of consolidated funds.
(4) The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $433 that are classified as other income under GAAP and as expenses for ANI, (b) the reclassification of $604 in net losses related to foreign-currency hedging activities from general and administrative expense, and (c) $145,064 related to the remeasurement of our tax receivable agreement liability in connection with the Tax Act.
(5) The adjustment to other income of consolidated funds removes interest, dividend and other investment income attributable to third-party investors in our consolidated funds, and reclassifies investment income to revenues and interest income to interest expense, net.
 
 

As of or for the Three Months Ended
December 31, 2016

Consolidated   Adjustments   ANI
(in thousands)
Management fees (1) $ 190,045 $ 2,559 $ 192,604
Incentive income (1) 108,265 (37,079 ) 71,186
Investment income (1) 62,921 24,726 87,647
Total expenses (2) (210,165 ) 38,587 (171,578 )
Interest expense, net (3) (33,761 ) 26,374 (7,387 )
Other income (expense), net (4) 1,598 (3,696 ) (2,098 )
Other income of consolidated funds (5) 67,076 (67,076 )
Income taxes (12,701 ) 12,701
Net income attributable to non-controlling interests in consolidated funds (7,303 ) 7,303
Net income attributable to non-controlling interests in consolidated subsidiaries   (106,692 )   106,692      
Net income attributable to Oaktree Capital Group, LLC/Adjusted net income $ 59,283   $ 111,091   $ 170,374  
 
(1)   The adjustment (a) adds back amounts earned from the consolidated funds, (b) for management fees, reclassifies $678 of net losses related to foreign-currency hedging activities from general and administrative expense, (c) for incentive income, includes $38,474 related to timing differences in the recognition of incentive income between net income attributable to OCG and adjusted net income, and (d) for investment income, includes $2,081 related to corporate investments in CLOs, which under GAAP are marked-to-market but for ANI accounted for at amortized cost, subject to impairment.
(2) The expense adjustment consists of (a) equity-based compensation expense of $3,358 related to unit grants made before our initial public offering, (b) consolidated fund expenses of $609, (c) expenses incurred by the Intermediate Holding Companies of $286, (d) the effect of timing differences in the recognition of incentive income compensation expense between net income attributable to OCG and adjusted net income of $38,474, (e) acquisition-related items of $827, (f) adjustments of $4,907 related to amounts received for contractually reimbursable costs that are classified as other income under GAAP and as expenses for ANI, and (g) $9,874 of net gains related to foreign-currency hedging activities.
(3) The interest expense adjustment removes interest expense of the consolidated funds and reclassifies interest income from other income of consolidated funds.
(4) The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $4,907 that are classified as other income under GAAP and as expenses for ANI, and (b) the reclassification of $1,211 in net gains related to foreign-currency hedging activities from general and administrative expense.
(5) The adjustment to other income of consolidated funds removes interest, dividend and other investment income attributable to third-party investors in our consolidated funds, and reclassifies investment income to revenues and interest income to interest expense, net.
 
 

As of or for the Year Ended
December 31, 2017

Consolidated   Adjustments   ANI
(in thousands)
Management fees (1) $ 726,414 $ 20,847 $ 747,261
Incentive income (1) 743,353 (12,129 ) 731,224
Investment income (1) 201,289 47,936 249,225
Total expenses (2) (1,025,343 ) 45,472 (979,871 )
Interest expense, net (3) (169,888 ) 143,513 (26,375 )
Other income (expense), net (4) 138,519 (158,883 ) (20,364 )
Other income of consolidated funds (5) 290,580 (290,580 )
Income taxes (215,442 ) 215,442
Net income attributable to non-controlling interests in consolidated funds (33,204 ) 33,204
Net income attributable to non-controlling interests in consolidated subsidiaries   (424,784 )   424,784      
Net income attributable to Oaktree Capital Group, LLC/Adjusted net income $ 231,494   $ 469,606   $ 701,100  
 
(1)     The adjustment (a) adds back amounts earned from the consolidated funds, (b) for management fees, reclassifies $1,332 of net gains related to foreign-currency hedging activities from general and administrative expense, (c) for incentive income, includes $13,653 related to timing differences in the recognition of incentive income between net income attributable to OCG and adjusted net income, and (d) for investment income, includes $30,613 related to corporate investments in CLOs, which under GAAP are marked-to-market but for ANI accounted for at amortized cost, subject to impairment.
(2) The expense adjustment consists of (a) equity-based compensation expense of $5,698 related to unit grants made before our initial public offering, (b) consolidated fund expenses of $9,284, (c) expenses incurred by the Intermediate Holding Companies of $1,059, (d) the effect of timing differences in the recognition of incentive income compensation expense between net income attributable to OCG and adjusted net income of $13,653, (e) acquisition-related items of $1,838, (f) adjustments of $14,180 related to amounts received for contractually reimbursable costs that are classified as other income under GAAP and as expenses for ANI, and (g) $240 of net gains related to foreign-currency hedging activities.
(3) The interest expense adjustment removes interest expense of the consolidated funds and reclassifies interest income from other income of consolidated funds.
(4) The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $14,180 that are classified as other income under GAAP and as expenses for ANI, (b) the reclassification of $361 in net gains related to foreign-currency hedging activities from general and administrative expense, and (c) $145,064 related to the remeasurement of our tax receivable agreement liability in connection with the Tax Act.
(5) The adjustment to other income of consolidated funds removes interest, dividend and other investment income attributable to third-party investors in our consolidated funds, and reclassifies investment income to revenues and interest income to interest expense, net.
 
 

As of or for the Year Ended
December 31, 2016

Consolidated   Adjustments   ANI
(in thousands)
Management fees (1) $ 774,587 $ 11,086 $ 785,673
Incentive income (1) 351,159 3,993 355,152
Investment income (1) 199,126 22,251 221,377
Total expenses (2) (789,336 ) 39,745 (749,591 )
Interest expense, net (3) (120,610 ) 88,765 (31,845 )
Other income (expense), net (4) 13,490 (21,882 ) (8,392 )
Other income of consolidated funds (5) 180,206 (180,206 )
Income taxes (42,519 ) 42,519
Net income attributable to non-controlling interests in consolidated funds (22,921 ) 22,921
Net income attributable to non-controlling interests in consolidated subsidiaries   (348,477 )   348,477      
Net income attributable to Oaktree Capital Group, LLC/Adjusted net income $ 194,705   $ 377,669   $ 572,374  
 
(1)     The adjustment (a) adds back amounts earned from the consolidated funds, (b) for management fees, reclassifies $408 of net gains related to foreign-currency hedging activities from general and administrative expense, (c) for incentive income, includes $1,407 related to timing differences in the recognition of incentive income between net income attributable to OCG and adjusted net income, and (d) for investment income, includes $21,814 related to corporate investments in CLOs, which under GAAP are marked-to-market but for ANI accounted for at amortized cost, subject to impairment.
(2) The expense adjustment consists of (a) equity-based compensation expense of $13,627 related to unit grants made before our initial public offering, (b) consolidated fund expenses of $4,428, (c) expenses incurred by the Intermediate Holding Companies of $1,051, (d) the effect of timing differences in the recognition of incentive income compensation expense between net income attributable to OCG and adjusted net income of $1,407, (e) acquisition-related items of $924, (f) adjustments of $21,194 related to amounts received for contractually reimbursable costs that are classified as other income under GAAP and as expenses for ANI, and (g) $1,776 of net losses related to foreign-currency hedging activities.
(3) The interest expense adjustment removes interest expense of the consolidated funds and reclassifies interest income from other income of consolidated funds.
(4) The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $21,194 that are classified as other income under GAAP and as expenses for ANI, and (b) the reclassification of $688 in net losses related to foreign-currency hedging activities from general and administrative expense.
(5) The adjustment to other income of consolidated funds removes interest, dividend and other investment income attributable to third-party investors in our consolidated funds, and reclassifies investment income to revenues and interest income to interest expense, net.
 

Contacts

Investor Relations:
Oaktree Capital Group, LLC
Andrea D. Williams
(213) 830-6483
investorrelations@oaktreecapital.com
or
Press Relations:
Sard Verbinnen & Co
John Christiansen
(415) 618-8750
jchristiansen@sardverb.com
or
Sard Verbinnen & Co
Alyssa Linn
(310) 201-2040
alinn@sardverb.com

$Cashtags

Contacts

Investor Relations:
Oaktree Capital Group, LLC
Andrea D. Williams
(213) 830-6483
investorrelations@oaktreecapital.com
or
Press Relations:
Sard Verbinnen & Co
John Christiansen
(415) 618-8750
jchristiansen@sardverb.com
or
Sard Verbinnen & Co
Alyssa Linn
(310) 201-2040
alinn@sardverb.com