S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on June 17, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Oaktree Capital Group, LLC

(Exact name of registrant as specified in its charter)

 

Delaware   6282   26-0174894
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)  

(I. R. S. Employer

Identification No.)

333 South Grand Avenue, 28th Floor

Los Angeles, California 90071

(213) 830-6300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Todd E. Molz

General Counsel and Managing Director

Oaktree Capital Group, LLC

333 South Grand Avenue, 28th Floor

Los Angeles, California 90071

(213) 830-6300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Thomas A. Wuchenich

Simpson Thacher & Bartlett LLP

1999 Avenue of the Stars, 29th Floor

Los Angeles, California 90067

(310) 407-7500

 

Patrick S. Brown

Jay Clayton

Sullivan & Cromwell LLP

1888 Century Park East, 21st Floor

Los Angeles, California 90067

(310) 712-6600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

 

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed
Maximum
Aggregate
Offering Price
(1)(2)
 

Amount of
Registration

Fee

Class A units

  $100,000,000   $11,610
 
 

 

(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, solely for the purpose of calculating the registration fee.
(2) Includes Class A units subject to the underwriters’ option to purchase additional Class A units.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated June 17, 2011.

LOGO

            Class A Units

Representing Limited Liability Company Interests

Oaktree Capital Group, LLC

 

 

This is an initial public offering of Class A units of Oaktree Capital Group, LLC.

We are offering             Class A units to be sold in this offering. We intend to use a portion of the proceeds from this offering to acquire interests in our business from Oaktree Capital Group Holdings, L.P., an entity owned by our principals, employees and other investors. The selling unitholders identified in this prospectus are offering an additional              Class A units. We will not receive any of the proceeds from the sale of Class A units being sold by the selling unitholders.

Prior to this offering, there has been no public market for our Class A units. The initial public offering price of our Class A units is expected to be between $             and $             per unit. We intend to apply to list our Class A units on the New York Stock Exchange, under the symbol “OAK.”

Investing in our Class A units involves risks. You should read the section entitled “Risk Factors” beginning on page 16 of this prospectus for a discussion of risk factors you should consider before investing in our Class A units. Among others, these risks include the following:

 

  Ÿ  

We have built our business by putting our clients’ interests first and by forsaking short-term advantage for the long-term good of our business. Our highest priority is to generate superior risk-adjusted returns for our clients. We limit our assets under management as appropriate to help us achieve that goal and do not intend to change our approach following consummation of this offering.

 

  Ÿ  

Given the nature of our business, as well as our client focus, you should anticipate that our financial results will fluctuate significantly and that we will forgo near-term profit when appropriate, in our judgment, to further our clients’ interests and the long-term good of our business.

 

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In light of the foregoing, you should plan to hold our Class A units for a number of years to maximize your opportunity to profit from your investment.

 

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Our principals will control the appointment and removal of all of our directors and will indirectly control 100% of our Class B units. Accordingly, our principals will determine all matters submitted to our board and will be able to determine the outcome of all matters submitted to a vote of our unitholders.

 

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Oaktree Capital Group, LLC is treated as a partnership for U.S. federal income tax purposes, and you may therefore be subject to taxation on your allocable share of net taxable income of Oaktree Capital Group, LLC. You may not receive cash distributions in an amount sufficient to pay the tax liability that results from that income.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

    Per Class A Unit     Total  

Initial public offering price

  $                   $                

Underwriting discount on units sold by Oaktree Capital Group, LLC

  $        $     

Underwriting discount on units sold by selling unitholders

  $        $     

Aggregate proceeds, before expenses, to Oaktree Capital Group, LLC

  $        $     

Aggregate proceeds we will retain

  $        $     

Aggregate proceeds we will use to acquire Oaktree Operating Group units from OCGH

  $        $     

Aggregate proceeds, before expenses, to the selling unitholders

  $        $     

 

 

To the extent that the underwriters sell more than             Class A units, the underwriters have the option to purchase up to an additional             Class A units from us and             Class A units from the selling unitholders at the initial public offering price less the applicable underwriting discount. Any proceeds that we receive from the exercise of the underwriters’ option to purchase additional Class A units will be used to acquire interests in our business from Oaktree Capital Group Holdings, L.P.

The underwriters expect to deliver the units against payment in New York, New York on or about                     , 2011.

 

Goldman, Sachs & Co.    Morgan Stanley

Prospectus dated                     , 2011.


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Our Business Principles

EXCELLENCE IN INVESTING

Our goal is excellence in investing. To us, this means achieving attractive returns without commensurate risk, an imbalance which can only be achieved in markets that are not “efficient.” Although we strive for superior returns, our first priority is that our actions produce consistency, protection of capital, and superior performance in bad times.

PROPRIETARY, IN-DEPTH RESEARCH

Adding value in our markets requires a “knowledge advantage” that can come only from proprietary, in-depth research. We have dedicated a staff of highly skilled specialists to each market and created a research methodology that is consistently applied. Our research revolves around enumerating the elements required for success and identifying investment candidates through which we seek to satisfy those requirements.

COMMONALITY OF INTERESTS

In order to achieve commonality of interests with our clients, we pay strict attention to potential conflicts of interests, avoiding them if possible and dealing fairly with them if not. We put clients’ interests ahead of our own and treat all clients equally. It is our fundamental operating principle that if all of our practices were to become known, there must be no one with grounds for complaint.

COMMUNICATION WITH CLIENTS

Communication with clients must meet their needs and strengthen our relationships with them. We want every client to thoroughly understand our philosophy, approach, actions and results. If what we do ever comes as a surprise to a client, then we have failed in this regard. In reporting our performance, we accurately state our achievements, neither hiding behind excuses for losses nor taking credit for serendipitous gains.

PERSONNEL PRACTICES

Our personnel practices must contribute to the achievement of our clients’ objectives. A harmonious workplace and a spirit of cooperation are indispensable; personnel turnover, office politics and unhealthy competition are to be guarded against. The fruits of our labor will always be shared broadly and equitably with our staff. Employee stock ownership and firm-wide profit participation are key in this.

MANAGEMENT FEE ARRANGEMENTS

Our management fee arrangements should compensate us fairly for the value we add and advance a constructive business relationship. Fee arrangements should motivate us to act solely in our clients’ best interests; they should be fair, competitive and explicit. All accounts of comparable size must pay comparable fees for the same service.

NEW PRODUCTS

When adding new products to Oaktree’s list of investment strategies, we consider it far more important to avoid mistakes than to capture every opportunity. In each case, our decision to create a new product is based on:

• identification of an inefficient market with the potential for attractive returns,

• conviction that the market can be exploited in a limited-risk fashion, and

• access to an investment team fully capable of producing the results we seek.

Because of the high priority placed on assuring that these requirements are met, we prefer that new Oaktree products represent “step-outs” into highly related fields undertaken with people with whom we have had extensive first-hand experience.

PROFITABILITY

Our firm’s profitability must stem from doing all of the above. Oaktree is run for the benefit of its clients and their constituencies as well as for its owners and employees. Profit without performance, bigness for its own sake and prosperity through cost cutting are all explicitly rejected. Our earnings should grow if we achieve excellence in investing . . . but only then.

“Oaktree is run for the benefit of its clients and their constituencies as well as for its owners and employees. Profit without performance, bigness for its own sake and prosperity through cost cutting are all explicitly rejected. Our earnings should grow if we achieve excellence in investing . . . but only then.”

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Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     16   

Disclosure Regarding Forward-Looking Statements

     56   

Organizational Structure

     57   

Use of Proceeds

     63   

Capitalization

     64   

Dilution

     65   

Cash Distribution Policy

     67   

GSTrUE OTC Market Price Information for Our Class A Units

     68   

Selected Financial Data

     69   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     72   

Industry

     116   

Business

     121   

Management

     152   

Certain Relationships and Related Party Transactions

     169   

Description of Our Indebtedness

     176   

Principal Unitholders

     180   

Selling Unitholders

     181   

Description of Our Units

     182   

Units Eligible for Future Sale

     195   

Material U.S. Federal Tax Considerations

     198   

Certain ERISA Considerations

     215   

Underwriting

     217   

Legal Matters

     223   

Experts

     223   

Where You Can Find More Information

     223   

Index to Financial Statements

     F-1   

Appendix A

     A-1   

 

 

Through and including                     , 2011 (25 days after the commencement of this offering), all dealers that effect transactions in our Class A units, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

In considering the performance information relating to the Oaktree funds contained herein, prospective Class A unitholders should bear in mind that the performance of the Oaktree funds is not indicative of the possible performance of our Class A units and is also not necessarily indicative of the future results of the Oaktree funds, even if fund investments were in fact liquidated on the dates indicated, and there can be no assurance that the Oaktree funds will continue to achieve, or that future funds will achieve, comparable results.

In addition, an investment in our Class A units is not an investment in any of the Oaktree funds, and the assets and revenues of the Oaktree funds are not directly available to us.

 

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This prospectus is solely an offer with respect to Class A units, and is not an offer, directly or indirectly, of any securities of any of the Oaktree funds.

The distribution of this prospectus and the offering and sale of the Class A units in certain jurisdictions may be restricted by law. We require persons in possession of this prospectus to inform themselves about and to observe any such restrictions. This prospectus does not constitute an offer of, or an invitation to purchase, any of the Class A units in any jurisdiction in which such offer or invitation would be unlawful. We are offering to sell, and seeking offers to buy, our Class A units only in jurisdictions where offers and sales are permitted.

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our Class A units.

 

 

As used in this prospectus, unless the context otherwise requires:

“2007 Private Offering” refers to the sale completed on May 25, 2007 of 23,000,000 of our Class A units to Goldman, Sachs & Co., as initial purchaser (including those Class A units sold pursuant to the exercise of the initial purchaser’s option to purchase additional units), as more fully described below in “Organizational Structure—The May 2007 Restructuring and the 2007 Private Offering—The 2007 Private Offering.”

“assets under management,” or “AUM,” generally refers to the assets we manage and equals the NAV (as defined below) of our funds, plus the undrawn capital that we are entitled to call from investors in those funds pursuant to their capital commitments and fund-level leverage that generates management fees. Our AUM amounts include assets under management for which we do not charge a management fee or earn incentive income. Our definition of AUM is not based on any definition contained in our operating agreement or the agreements governing the funds that we manage. Our calculation of AUM and the two AUM-related metrics discussed in this prospectus may not be directly comparable to the AUM metrics of other investment managers.

“consolidated funds” refers to those funds that Oaktree consolidates through a majority voting interest or otherwise, including those funds in which Oaktree as the general partner is presumed to have control.

“funds” refers to funds and, where applicable, separate accounts that are managed by us or our subsidiaries.

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

“May 2007 Restructuring” refers to the series of transactions that occurred immediately prior to the 2007 Private Offering whereby OCGH contributed our business to the Oaktree Operating Group in exchange for limited partnership interests in each Oaktree Operating Group entity, as more fully described below in “Organizational Structure—The May 2007 Restructuring and the 2007 Private Offering—The May 2007 Restructuring.”

“net asset value,” or “NAV,” refers to, as of any date, 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 “our company” refers to Oaktree Capital Group, LLC and, where applicable, its predecessor, OCM (as defined below), and the respective subsidiaries and affiliates of such entities.

 

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“Oaktree Operating Group” refers collectively to the entities that control the general partners and investment advisors of the Oaktree funds, in which we have a minority economic interest and indirect control.

“OCGH” refers to Oaktree Capital Group Holdings, L.P., a Delaware limited partnership, which holds an interest in the Oaktree Operating Group and all of our Class B units.

“OCGH unitholders” refers collectively to the principals, employees and certain other investors who hold their interest in the Oaktree Operating Group through OCGH.

“OCM” refers to Oaktree Capital Management, LLC, a California limited liability company, our predecessor.

“principals” refers collectively to Kevin L. Clayton, John B. Frank, Stephen A. Kaplan, Bruce A. Karsh, Larry W. Keele, David M. Kirchheimer, Howard S. Marks and Sheldon M. Stone.

“Relevant Benchmark” refers, with respect to:

 

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our U.S. high yield bond strategy, to the Citigroup U.S. High Yield Cash-Pay Capped Index;

 

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our European high yield bond strategy, to the BofA Merrill Lynch Global High Yield European Issuers excluding Russia 3% Constrained Index (USD Hedged);

 

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our U.S. senior loan strategy (with the exception of the closed-end funds), to the Credit Suisse Leveraged Loan Index;

 

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our European senior loan strategy, to the Credit Suisse Western European Leveraged Loan Index (EUR Hedged);

 

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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 BofA Merrill Lynch All U.S. Convertibles Index thereafter;

 

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our non-U.S. convertible securities strategy, to the JACI Global ex-U.S. (Local) Index; and

 

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our high income convertible securities strategy, to the Citigroup U.S. High Yield Market Index.

“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 returns. 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.

 

 

 

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in our Class A units. You should read this entire prospectus carefully, including the more detailed information regarding us and our Class A units, the section entitled “Risk Factors” and our consolidated financial statements and related notes appearing elsewhere in this prospectus before you decide to invest in our Class  A units.

Business

Our Company

Oaktree is a leading global investment management firm focused on alternative markets. We are experts in credit and contrarian, value-oriented investing. Over the past five years, we have more than doubled our AUM to over $80 billion as of March 31, 2011 and grown to over 600 employees in 13 offices around the world. Since our founding in 1995, our foremost priority has been to provide superior risk-adjusted investment performance for our clients. We have built Oaktree by putting our clients’ interests first and by forsaking short-term advantage for the long-term good of our business.

Unlike other leading alternative investment managers, our roots are in credit. A number of our senior investment professionals started investing together in high yield bonds in 1986 and convertible securities in 1987. From those origins, we have expanded into a broad array of complementary strategies in six asset classes: distressed debt, corporate debt, control investing, convertible securities, real estate and listed equities. We pursue these strategies through closed-end, open-end and evergreen funds.

The following charts depict our AUM by asset class and fund structure as of March 31, 2011:

 

LOGO    LOGO

Our investment professionals have generated impressive investment performance through multiple market cycles, almost entirely without the use of fund-level leverage. Our closed-end funds have produced an aggregate gross internal rate of return, or IRR, of 20.4% on over $50 billion of drawn capital, and our since-inception risk-adjusted returns (as measured by the Sharpe Ratio) for all seven of our open-end strategies have exceeded their Relevant Benchmarks.

 

 

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In our investing activities, we adhere to the following fundamental tenets:

 

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Focus on Risk-Adjusted Returns.    Our primary goal is not simply to achieve superior investment performance, but to do so with less-than-commensurate risk. We believe that the best long-term records are built more through the avoidance of losses in bad times than the achievement of superior relative returns in good times. Thus, our overriding belief is that “if we avoid the losers, the winners will take care of themselves.”

 

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Focus on Fundamental Analysis.    We employ a bottom-up approach to investing, based on proprietary, company-specific research. We seek to generate outperformance from in-depth knowledge of companies and their securities, not from macro-forecasting. Our more than 200 investment professionals have developed a deep and thorough understanding of a wide number of companies and industries, providing us with a significant institutional knowledge base.

 

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Specialization.    We offer a broad array of specialized investment strategies. We believe this offers the surest path to the results we and our clients seek. Clients interested in a single investment strategy can limit themselves to the risk exposure of that particular strategy, while clients interested in more than one investment strategy can combine investments in our funds to achieve their desired mix. Our focus on specific strategies has allowed us to build investment teams with extensive experience and expertise. At the same time, our teams access and leverage each other’s expertise, affording us both the benefits of specialization and the strengths of a larger organization.

Since our founding in 1995, our AUM has grown significantly, even as we have distributed more than $38 billion from our closed-end funds. Although we have limited our AUM when appropriate to generate superior risk-adjusted returns, we have a long-term record of organically growing our investment strategies, increasing our AUM and expanding our client base. We manage assets on behalf of many of the most significant institutional investors in the world, including 69 of the 100 largest U.S. pension plans, 36 states in the United States, over 350 corporations, approximately 300 university and charitable endowments and foundations, and over 150 non-U.S. institutional investors, including six of the top 10 sovereign wealth funds.

As shown in the chart below, AUM grew to $82.7 billion as of December 31, 2010 from $17.9 billion as of December 31, 2000 (representing a compound annual growth rate of 16.5%). Over the same period, the portion of our AUM that generates management fees, or management fee-generating AUM, grew from $16.7 billion to $66.2 billion, and the portion of our AUM that potentially generates incentive income, or incentive-creating AUM, increased from $6.7 billion to $39.4 billion.

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Our business generates revenue from three sources: management fees, incentive income and investment income. Management fees are calculated as a fixed percentage of the capital commitments (as adjusted for distributions during the liquidation period) or NAV of a particular fund. Incentive income represents our share (typically 20%) of the profits earned by certain of our funds, subject to applicable hurdle rates or high-water marks. Investment income is the return on our investments in each of our funds and, to a growing extent, funds and businesses managed by third parties with whom we have strategic relationships. Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients.

Our Competitive Strengths

We believe the following strengths will create long-term value for our unitholders:

Superior Risk-Adjusted Investment Performance Across Market Cycles.    Our primary goal is not simply to achieve superior investment performance, but to do so with less-than-commensurate risk. We believe that the best records are built on a “high batting average,” rather than a mix of brilliant successes and dismal failures. Our since-inception risk-adjusted returns have exceeded the Relevant Benchmarks for all of our strategies that have a benchmark.

Expertise in Credit.    We are experts in credit and contrarian, value-oriented investing. Many of our most senior investment professionals started working together in credit markets over 15 years ago. Today, we are recognized as an industry leader in our areas of specialty and believe that our breadth of alternative credit-oriented strategies is one of the most extensive and diverse among asset managers.

Strong Earnings and Cash Flow.    Our business generates a high level of earnings and cash flow, reflecting our substantial locked-in capital, recurring incentive income, and the variable nature of a significant portion of our expenses. This has enabled us to make equity distributions every quarter since 1996. The sustainability of this performance is enhanced by our significant accrued incentives (fund level).

 

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Consistent Profitability.     We have been consistently profitable, with positive adjusted net income for the last 15 years and 60 of the last 61 quarters (the exception being a segment loss of $6.9 million in the fourth quarter of 2008). In the year ended December 31, 2010, we generated $375.4 million of fee-related earnings from $750.0 million of management fee revenues, and adjusted net income of $763.9 million from total segment revenues of $1.3 billion.

 

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Significant Management Fees.    Our management fees have historically provided a recurring and significant source of revenues. Over 70% of our management fees are attributable to closed-end funds with terms of 10 to 11 years.

 

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Recurring Incentive Income.    We have had incentive income for 14 consecutive years, and we expect to continue earning substantial amounts of this revenue. As of March 31, 2011, the potential future incentive income to us represented by accrued incentives (fund level) totaled $2.4 billion, or $1.4 billion net of direct incentive income compensation expense. We believe our eventual realization of this revenue is highly likely, given that our funds tend to invest in securities that are structurally senior and the substantial diversification of our funds and their investments.

 

 

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Record of Long-Term Growth.    Since March 31, 2006, we have raised more than $60 billion in assets, including over $10 billion in each of the last four calendar years, despite a difficult fundraising environment. Our strong investment performance and our related success in raising capital from new and existing clients have increased our AUM from $35.6 billion as of December 31, 2006 to more than $80 billion as of March 31, 2011.

Client-First Organization.    Our clients’ trust is our most important asset, and we do everything we can to avoid jeopardizing that trust. In making decisions, we always strive to be conscious of the extraordinary responsibility of managing other people’s money, including the pension assets of millions of people around the world. As stated in our business principles: “It is our fundamental operating principle that if all of our practices were to become known, there must be no one with grounds for complaint.”

Alignment of Interests.    We seek to align our interests with our clients’ interests, even if it reduces our revenue in the short term. Since our inception, we have championed a number of investor-friendly terms, such as forgoing all transaction, monitoring and other ancillary fees; returning all capital and a preferred return to investors in our closed-end funds before taking incentive income; and adopting fair and transparent fee arrangements.

Broad Employee Ownership.     Our broad employee ownership and the resulting close alignment of interests with our clients and unitholders have been key to our success. Approximately 70% of the equity interests in the Oaktree Operating Group were indirectly owned by over 160 senior professionals.

Substantial Institutional Depth and Breadth.    Many of our senior professionals are widely recognized as industry leaders and pioneers in their respective fields. We benefit from longevity and stability among our senior management and investment professionals. For example, the original portfolio managers of our four largest and oldest investment strategies remain with us today.

Global Platform.    One quarter of our more than 600 employees are located outside of the United States. We believe this global footprint will continue to facilitate our growth over time. As of March 31, 2011, our non-U.S. investments represented $16.4 billion, or 24.3%, of our invested capital, and our capital from non-U.S. clients represented $27.3 billion, or 31.9%, of our AUM with a much larger percentage in our most recent funds.

Our Strategy

Our strategy for the future is unchanged from our inception: we will seek to deliver superior risk-adjusted returns and focus on the interests of our clients. We intend to do this by adhering to the following tenets:

Investment Excellence.    We seek to generate superior investment performance through fundamental analysis in alternative investment specialties where we believe our expertise can create a competitive advantage.

Recognition of Cycles.    We believe that successful investing requires recognition of market cycles. We adjust our fundraising in response to the investment environment, accepting more money when attractive opportunities are plentiful and less when they are not, even though this approach may reduce our AUM and profits in the short term.

 

 

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Expansion of Offerings.    We expect to continue to expand the number of our strategies and to develop new distribution channels. We have a proven record of organic growth and anticipate that as a public company we will have more opportunities to grow over time by acquiring culturally compatible investment managers and recruiting talented individuals or investment teams to our organization.

Extension of Global Presence.    Our global stature and reputation enhance our ability to source investment opportunities, recruit talented individuals and develop client relationships worldwide. We intend to further develop our global presence by opportunistically expanding into new geographic regions and growing existing ones.

Adherence to Core Philosophy and Principles.    Above all, we will adhere to our founding investment philosophy and business principles. We will remain dedicated to the achievement of superior risk-adjusted returns through fundamental analysis and avoidance of loss, and we will continue to focus on the interests of our clients. We believe that our growth has been a byproduct of our clients’ success and that we will best serve the interests of our unitholders by continuing to deliver for our clients and forsaking short-term advantages for the long-term good of our business.

Our Investment Approach

At our core, we are contrarian, value-oriented investors focused on buying securities and companies at prices below their intrinsic value and selling or exiting those investments when they become fairly or fully valued. We have a long track record of achieving competitive returns in up markets and substantial outperformance in down markets. We believe this approach leads to significant outperformance over the long term.

In our distressed debt strategy, all 15 of our funds have achieved positive gross IRRs as of March 31, 2011, resulting in an aggregate gross IRR of 23.8%.

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In our U.S. high yield bond strategy, we have produced a cumulative gross return that has outperformed its Relevant Benchmark by 262 percentage points since its inception.

LOGO

Our investment results are generally not dependent on the use of leverage to make investments or the strength of the equity capital markets to realize our investments. We invest throughout the capital structure because we seek the security that offers the best return for the risk we elect to bear. Most of our investment strategies focus on debt securities and many of our funds’ investments reside in the senior levels of an issuer’s capital structure, substantially reducing the downside risk of our investments and the volatility of our segment’s revenue and income. Debt securities by their nature require repayment of principal at par, typically generate current cash interest (reducing risk and augmenting investment returns) and, in cases where the issuer restructures, may provide an opportunity for conversion to equity in a company with a deleveraged balance sheet positioned for growth.

Our Approach to Growth

Since March 31, 2006, we have raised more than $60 billion in assets, including over $10 billion in each of the last four calendar years, despite a difficult fundraising environment. In the twelve months ended March 31, 2011, we raised over $11 billion for 15 strategies from more than 300 different clients, reflecting the breadth of our product offerings and the depth of our client base. Our strong fundraising and investment performance have driven the growth of our business. AUM has increased from $35.6 billion as of December 31, 2006, to more than $80 billion as of March 31, 2011.

 

  Ÿ  

Sizing Funds for the Investment Environment.    We neither make nor rely on macro predictions about the economy, interest rates or financial markets. However, we believe it is critical to take into account our view of where we are in the economic cycle and to size our investment capital accordingly. When we believe opportunities are scarce, we limit the amount of capital we raise to avoid jeopardizing returns. When we believe the investment environment offers substantial opportunities, we raise more capital. Our largest closed-end funds in each economic cycle have been among our best performers, demonstrating our success in appropriately sizing our funds to the investment opportunities.

 

  Ÿ  

Disciplined and Opportunistic Approach to Expansion of Offerings.    Our decision to create a new product starts with the identification of a market with the potential for attractive returns, and is dependent on both our conviction that the market can be exploited in a manner consistent with our risk-controlled philosophy and access to an investment team that we believe is capable of producing the results we seek. Because of the high priority we place on these requirements, our

 

 

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new products usually represent step-outs into related strategies led by senior investment professionals with whom we have had extensive first-hand experience.

 

  Ÿ  

Building a Scalable Platform for Global Growth.    From our founding, we have built our firm with an eye to the future:

 

   

We have reinvested a substantial portion of our profits back into our business.

 

   

We have consistently broadened employee ownership to achieve a smooth and gradual transition of ownership and management, such that today we have over 160 employee-owners.

 

   

We recognized early on that European and Asian investors were potentially significant sources of capital, hiring our first marketing representative outside the United States in 2001. Our AUM from non-U.S. clients has grown from $753.8 million, or 4.2%, of AUM, as of December 31, 2000, to $25.5 billion, or 30.8%, of AUM as of December 31, 2010.

 

   

We have been investing in Europe and Asia for many years. We opened offices in London in 1998 and Tokyo and Singapore in 1999. Since then, we have also established offices in Beijing, Hong Kong, Seoul, Frankfurt and Paris and fund-affiliated offices in Luxembourg and Amsterdam.

Structure and Formation of Our Company

We were formed as a Delaware limited liability company on April 13, 2007, in connection with the May 2007 Restructuring. Our principal executive offices are located at 333 South Grand Avenue, 28th Floor, Los Angeles, California 90071. Our telephone number is (213) 830-6300. Our internet address is www.oaktreecapital.com. Information on our website does not constitute part of this prospectus.

Oaktree Capital Group, LLC is owned by its Class A and Class B unitholders. Holders of our Class A units and Class B units generally vote together as a single class on the limited set of matters on which our unitholders have a vote. Such matters include a proposed sale of all or substantially all of our assets, certain mergers and consolidations, certain amendments to our operating agreement and an election by our board of directors to dissolve the company. The Class B units do not represent an economic interest in Oaktree Capital Group, LLC. The number of Class B units held by OCGH, however, increases or decreases with corresponding changes in OCGH’s economic interest in the Oaktree Operating Group.

We intend to preserve our current management structure with strong central control by our principals and to maintain our focus on achieving successful growth over the long term. This desire to preserve our existing management structure is one of the primary reasons why upon listing of our Class A units on the New York Stock Exchange, or NYSE, if achieved, we have decided to avail ourselves of the “controlled company” exemption from certain of the NYSE governance rules. This exemption eliminates the requirements that we have a majority of independent directors on our board of directors and that we have a compensation committee and a nominating and corporate governance committee composed entirely of independent directors.

Our operating agreement provides that so long as our principals, or their successors or affiliated entities (other than us or our subsidiaries), including OCGH, collectively hold, directly or indirectly, at least 20% of the aggregate outstanding Oaktree Operating Group units, our manager, which is 100% owned and controlled by our principals, will be entitled to designate all the members of our board of directors. We refer to this ownership condition as the “Oaktree control condition.” Holders of our

 

 

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Class A units and Class B units have no right to elect our manager. So long as the Oaktree control condition is satisfied, our manager will control the membership of our board of directors, which will manage all of our operations and activities and will have discretion over significant corporate actions, such as the issuance of securities, payment of distributions, sales of assets, making certain amendments to our operating agreement and other matters. See “Description of Our Units.”

The diagram below depicts our organizational structure after the consummation of the offering. For more information, see “Organizational Structure.”

LOGO

 

(1) Holds 100% of the Class B units and     % of the Class A units, which together will represent     % of the total combined voting power of our outstanding Class A and Class B units upon the consummation of this offering. The Class B units have no economic interest in us. The general partner of Oaktree Capital Group Holdings, L.P. is Oaktree Capital Group Holdings GP, LLC, which is controlled by our principals. Oaktree Capital Group Holdings GP, LLC also acts as our manager and in that capacity has the authority to designate all the members of our board of directors for so long as the Oaktree control condition is satisfied.
(2) Assumes the conversion into Class A units on a one-for-one basis of all outstanding Class C units held by certain directors and senior employees prior to completion of this offering.
(3) Assumes no exercise by the underwriters of their right to purchase additional Class A units.

 

 

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(4) Oaktree Capital Group, LLC holds 1,000 shares of non-voting Class A common stock of Oaktree AIF Holdings, Inc., which are entitled to receive 100% of any dividends. Oaktree Capital Group Holdings, L.P. holds 100 shares of voting Class B common stock of Oaktree AIF Holdings, Inc., which do not participate in dividends or otherwise represent an economic interest in Oaktree AIF Holdings, Inc.
(5) Owned indirectly by Oaktree Holdings, LLC through certain entities not reflected on this structure diagram that are treated as partnerships for U.S. federal income tax purposes. Through these entities, each of Oaktree Holdings, Inc. and Oaktree Holdings, Ltd. owns a less than 1% indirect interest in Oaktree Capital I, L.P.

The May 2007 Restructuring and the 2007 Private Offering

On May 21, 2007, we sold 23,000,000 Class A units to qualified institutional buyers (as such term is defined for purposes of the Securities Act of 1933, as amended) in a transaction exempt from the registration requirements of the Securities Act, and these Class A units began to trade on a private over-the-counter market developed by Goldman, Sachs & Co. for Tradeable Unregistered Equity Securities. We refer to this private over-the-counter market as the GSTrUESM OTC market and the 2007 offering as the “2007 Private Offering.” Prior to the 2007 Private Offering, our business was operated through Oaktree Capital Management, LLC, a California limited liability company, which was 100% owned by our principals, senior employees and other investors. Immediately prior to the closing of the 2007 Private Offering, we reorganized our business so that:

 

  Ÿ  

100% of our business was contributed to the Oaktree Operating Group;

 

  Ÿ  

Our pre-2007 investors exchanged their interests in OCM for 100% of the limited partnership interests in Oaktree Capital Group Holdings, L.P., or OCGH, which received a direct economic interest in the Oaktree Operating Group;

 

  Ÿ  

Oaktree Capital Group, LLC received an indirect economic interest in the Oaktree Operating Group; and

 

  Ÿ  

OCGH received Class B units in Oaktree Capital Group, LLC.

 

 

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The Offering

 

Class A units being offered by us

                units

Class A units being offered by the selling unitholders

  

             units

Units to be outstanding after this offering

  

             Class A units

             Class B units

Use of proceeds

   We estimate that our net proceeds from this offering will be $             , assuming an initial public offering price of $             per Class A unit, which is the midpoint of the price range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses. Of these net proceeds, approximately $             million will be retained by us and approximately $             million will be used by us to purchase Oaktree Operating Group units from OCGH. We will not receive any proceeds from the sale of units in this offering by the selling unitholders, including any sale of units by the selling unitholders if the underwriters exercise their option to purchase additional units. We intend to use the net proceeds of this offering that are retained by us for general corporate purposes. See “Use of Proceeds.” Any proceeds that we receive from the exercise of the underwriters’ option to purchase additional Class A units will be used to acquire interests in our business from OCGH.

Voting rights

  

Class A units are entitled to one vote per unit.

 

Class B units are entitled to ten votes per unit; however, if the Oaktree control condition is no longer satisfied, our Class B units will be entitled to only one vote per unit.

 

Holders of our Class A units and Class B units will generally vote together as a single class on the limited set of matters on which our unitholders have a vote. As a Class A unitholder, you will have only limited voting rights on matters affecting our businesses and will have no right to elect our manager, which is owned and controlled by our principals and is entitled to designate all the members of our board of directors. Moreover, our principals, through their control of OCGH, will hold     % of the total combined voting power of our units entitled to vote immediately after the offering, and thus are able to exercise control over all matters requiring unitholder approval. See “Description of Our Units.”

 

 

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Distribution policy

   We expect to make distributions to our Class A unitholders quarterly, generally in the month following the quarter end. We intend to distribute to our unitholders substantially all of our share of the Oaktree Operating Group’s excess cash flow, as determined by our board of directors after taking into account factors it deems relevant, such as, but not limited to, working capital levels, known or anticipated cash needs, business and investment opportunities, general economic and business conditions, our obligations under our debt instruments or other agreements, our compliance with applicable laws, the level and character of taxable income that flows through to our Class A unitholders, the availability and terms of outside financing, the possible repurchase of our Class A units in open market transactions, in privately negotiated transactions or otherwise, providing for future distributions to our Class A unitholders and growing our capital base. The declaration and payment of any distributions will be at the sole discretion of our board of directors, and we may at any time modify our approach with respect to the proper metric for determining cash flow available for distribution. See “Cash Distribution Policy.”

Exchange agreement

   Subject to certain restrictions, each OCGH unitholder has the right to require OCGH to exchange his or her vested units following the expiration of any applicable lock-up period pursuant to the terms of an exchange agreement. The exchange agreement provides that such OCGH units will be exchanged into Oaktree Operating Group units; those Oaktree Operating Group units may then be exchanged for a corresponding number of Class A units; and we will cancel a corresponding number of Class B units. See “Certain Relationships and Related Party Transactions—Exchange Agreement.”

Tax receivable agreement

   Subject to certain restrictions, each OCGH unitholder has the right to exchange his or her vested units for Oaktree Operating Group units. Our Intermediate Holding Companies will deliver Class A units, on a one-for-one basis, pursuant to an exchange agreement, in exchange for the applicable OCGH unitholder’s Oaktree Operating Group units. These exchanges, our purchase of Oaktree Operating Group units in connection with the 2007 Private Offering and our purchase of Oaktree Operating Group units in connection with this offering resulted in, and are expected to result in, increases in the tax basis of the tangible and intangible assets of the Oaktree Operating Group. These increases in tax basis have increased and will increase (for tax purposes) depreciation and amortization deductions and reduce gain on sales of assets, and therefore reduce the taxes of Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc.

 

 

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   Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that payments in respect of the 2007 Private Offering under a tax receivable agreement among us, the Intermediate Holding Companies and the OCGH unitholders, which we began to make in January 2009, will aggregate to $59.9 million over the next 17 years. In addition, we expect that payments under the tax receivable agreement in respect of this offering will aggregate to $             million over a similar period. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

Risk factors

   See “Risk Factors” on page 16 for a discussion of risks you should carefully consider before deciding to invest in our Class A units.

Proposed New York Stock Exchange symbol

  

“OAK”

The number of Class A units and Class B units that will be outstanding after this offering is based on                      Class A units and                      Class B units outstanding as of                     , 2011 and excludes:

 

  Ÿ  

             Class A units issuable upon exchange of          OCGH units (or, if the underwriters exercise in full their option to purchase additional Class A units,          Class A units issuable upon exchange of          OCGH units) that will be held by certain of our existing owners immediately following this offering, which are entitled, subject to vesting and minimum retained ownership requirements and transfer restrictions, to be exchanged for our Class A units on a one-for-one basis; and

 

  Ÿ  

             Class A units issuable upon exchange of         OCGH units reserved for future issuance under the 2007 Oaktree Capital Group Equity Incentive Plan, which are entitled, subject to vesting and minimum retained ownership requirements and transfer restrictions, to be exchanged for our Class A units on a one-for-one basis.

Unless otherwise indicated, all information in this prospectus assumes:

 

  Ÿ  

the conversion of all of our outstanding Class C units into 13,000 Class A units on a one-for-one basis in anticipation of this offering;

 

  Ÿ  

the adoption of our Third Amended and Restated Operating Agreement; and

 

  Ÿ  

no exercise by the underwriters of their right to purchase up to an additional          Class A units from us and the selling unitholders.

 

 

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Summary Historical Financial Information and Other Data

The following summary historical consolidated financial information and other data of Oaktree Capital Group, LLC should be read together with “Organizational Structure,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

We derived the Oaktree Capital Group, LLC summary historical consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the summary historical consolidated statements of financial condition data for the years ended December 31, 2009 and 2010 from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived the summary historical consolidated statements of financial condition data of Oaktree Capital Group, LLC for the year ended December 31, 2008 from our audited consolidated financial statements, which are not included within this prospectus. We derived the summary historical consolidated statements of income and financial condition data of Oaktree Capital Group, LLC for the three months ended March 31, 2010 and 2011 from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our condensed consolidated financial position and results of operations.

The summary historical financial data is not indicative of the expected future operating results of Oaktree Capital Group, LLC following this offering.

 

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

March 31,
 
    2008     2009     2010     2010     2011  
    (in thousands, except per unit data or as otherwise indicated)  

Consolidated Statements of Operations Data:

         

Total revenues

  $ 100,510      $ 154,910      $ 212,801      $ 57,660      $ 47,144   

Total expenses

    (1,364,009     (1,426,318     (1,580,651     (419,000     (410,647

Total other income (loss)

    (6,357,191     13,163,939        6,675,038        1,892,041        2,159,917   
                                       

Income (loss) before income taxes

    (7,620,690     11,892,531        5,307,188        1,530,701        1,796,414   

Income taxes

    (17,341     (18,267     (26,399     (10,138     (7,010
                                       

Net income (loss)

    (7,638,031     11,874,264        5,280,789        1,520,563        1,789,404   

Less:

         

Net (income) loss attributable to non-controlling interests in consolidated funds

    6,885,433        (12,158,635     (5,493,799     (1,554,323     (1,826,401

Net loss attributable to OCGH non-controlling interest

    625,285        227,313        163,555        22,135        26,870   
                                       

Net loss attributable to OCG

  $ (127,313   $ (57,058   $ (49,455   $ (11,625   $ (10,127
                                       

Distributions declared per Class A and Class C unit

  $ 0.76      $ 0.65      $ 2.17      $ 0.75      $ 0.90   
                                       

Net loss per Class A and Class C unit (1)

  $ (5.53   $ (2.50   $ (2.18   $ (0.51   $ (0.45
                                       

Weighted average number of Class A and Class C units outstanding (1)

    23,002        22,821        22,677        22,677        22,677   
                                       

Consolidated Statements of Financial Condition:

         

Total assets

  $ 31,797,278      $ 43,195,731      $ 47,843,660      $ 45,541,105      $ 46,445,861   

Debt obligations

    536,849        700,342        494,716        686,061        839,080   

Segment Income Data: (2)

         

Management fees

  $ 544,520      $ 636,260      $ 750,031      $ 184,224      $ 185,259   

Total revenues

    567,147        1,100,326        1,312,720        374,449        369,165   

ANI

    207,278        675,587        763,878        210,015        207,354   

ANI-OCG

    20,590        88,510        95,930        24,124        25,981   

ANI-OCG per Class A and Class C unit

    0.90        3.88        4.23        1.06        1.15   

FRE

    255,933        290,231        375,362        84,506        86,697   

NFRE-OCG

    27,462        29,686        39,713        8,392        9,067   

NFRE-OCG per Class A and Class C unit

    1.19        1.30        1.75        0.37        0.40   

 

 

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    As of or for the
Year Ended December 31,
    As of or for the
Three Months Ended
March 31,
 
    2008     2009     2010     2010     2011  
    (in thousands, except per unit data or as otherwise
indicated)
 

Segment Statements of Financial Condition Data: (2)

         

Cash and cash-equivalents

  $ 141,590      $ 433,769      $ 348,502      $ 358,870      $ 597,907   

Investments in limited partnerships, at equity

    606,478        909,329        1,108,690        942,302        1,060,227   

Total assets

    913,757        1,702,403        1,944,801        1,629,189        2,111,708   

Total liabilities

    424,182        742,570        708,085        622,764        914,066   

Total capital

    489,575        959,833        1,236,716        1,006,425        1,197,642   

Operating Metrics:

         

AUM (in millions) (3)

  $ 49,866      $ 73,278      $ 82,672      $ 76,494      $ 85,691   

Management fee-generating AUM (in millions) (4)

    50,234        62,677        66,175        65,039        67,158   

Incentive-creating AUM (in millions) (5)

    22,197        33,339        39,385        34,651        37,476   

Uncalled capital commitments (in millions) (6)

    7,205        11,055        14,270        12,791        18,348   

Incentives created (fund level) (7)

    (223,328     1,239,314        889,721        248,160        433,751   

Accrued incentives (fund level) (7)

    526,116        1,590,365        2,066,846        1,688,956        2,369,708   

 

(1) See note 9 to our audited consolidated financial statements and note 9 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.
(2) Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients.

 

     Management uses adjusted net income, or ANI, to evaluate the financial performance of, and make resource allocations and other operating decisions for, our segment. The components of revenues and expenses used in the determination of ANI do not give effect to the consolidation of the funds that we manage. In addition, ANI excludes the effect of: (1) non-cash equity compensation charges, (2) income taxes, (3) expenses that OCG or its Intermediate Holding Companies bear directly and (4) the adjustment for the OCGH non-controlling interest subsequent to May 24, 2007. We expect that ANI will include non-cash equity compensation charges related to unit grants made after this offering. ANI is calculated at the Oaktree Operating Group level.

 

     ANI-OCG is a non-GAAP measure and represents ANI, including the effect of (1) the OCGH non-controlling interest subsequent to May 24, 2007, (2) expenses, such as income tax expense, that OCG or its Intermediate Holding Companies bear directly and (3) any Oaktree Operating Group income taxes attributable to Oaktree Capital Group, LLC.

 

     A summary of ANI and ANI-OCG for our segment for the respective periods is presented below. For additional information, see “Selected Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2008     2009     2010      2010     2011  
     (in thousands)  

Total segment revenues

   $ 567,147      $ 1,100,326      $ 1,312,720       $ 374,449      $ 369,165   

Total segment expenses

     (353,432     (411,668     (533,912      (157,304     (152,328

Total segment interest and other expenses, net

     (6,437     (13,071     (14,930      (7,130     (9,483
                                         

ANI

     207,278        675,587        763,878         210,015        207,354   

OCGH non-controlling interest

     (174,752     (571,219     (646,910      (177,856     (175,785

Non-Operating Group expenses

     (969     (1,008     (1,113      (198     (184
                                         

ANI-OCG before income taxes

     31,557        103,360        115,855         31,961        31,385   

Income taxes-OCG

     (10,967     (14,850     (19,925      (7,837     (5,404
                                         

ANI-OCG

   $ 20,590      $ 88,510      $ 95,930       $ 24,124      $ 25,981   
                                         

 

     A reconciliation of ANI and ANI-OCG to their respective consolidated GAAP-basis results for the periods is presented below. For additional information regarding the reconciling ANI adjustments discussed above, see note 16 to our audited consolidated financial statements and note 14 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

 

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     For a reconciliation of segment total assets to our consolidated total assets, see note 16 to our audited consolidated financial statements and note 14 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2008     2009     2010     2010     2011  
     (in thousands)  

Net loss attributable to Oaktree Capital Group, LLC

   $ (127,313   $ (57,058   $ (49,455   $ (11,625   $ (10,127

Compensation expense for vesting of OCGH units

     941,566        940,683        949,376        233,439        237,157   

Income taxes

     17,341        18,267        26,399        10,138        7,010   

Non-Oaktree Operating Group expenses

     969        1,008        1,113        198        184   

OCGH non-controlling interest

     (625,285     (227,313     (163,555     (22,135     (26,870
                                        

ANI

   $ 207,278      $ 675,587      $ 763,878      $ 210,015      $ 207,354   
                                        

Net loss attributable to Oaktree Capital Group, LLC

   $ (127,313   $ (57,058   $ (49,455   $ (11,625   $ (10,127

Compensation expense for vesting of OCGH units-OCG

     147,903        145,568        145,385        35,749        36,108   
                                        

ANI-OCG

   $ 20,590      $ 88,510      $ 95,930      $ 24,124      $ 25,981   
                                        

 

     Fee-related earnings, or FRE, is a non-GAAP profit measure that we use to monitor the baseline earnings of our business. FRE is comprised of segment management fees less segment operating expenses other than incentive income compensation expense. This calculation is considered baseline because it applies all bonus and other general expenses to management fees, even though a significant portion of those expenses is attributable to incentive and investment income. We expect that FRE will include non-cash equity compensation charges related to unit grants made after this offering. FRE is presented before income taxes.

 

     Net fee-related earnings – OCG, or NFRE-OCG, is a non-GAAP measure of FRE applicable to the Class A unitholders. NFRE-OCG represents FRE, including the effect of (i) the OCGH non-controlling interest subsequent to May 24, 2007, (2) expenses, such as income tax expense, that OCG or its Intermediate Holding Companies bear directly, and (3) any Oaktree Operating Group income taxes attributable to Oaktree Capital Group, LLC. FRE income taxes-OCG are calculated, excluding any segment incentive or investment income (loss).
(3) AUM represents the NAV of the assets we manage, plus the undrawn capital that we are entitled to call, at the end of the applicable period and fund-level leverage that generates management fees.
(4) Management-fee generating AUM reflects AUM on which we earn management fees. It excludes certain AUM, such as differences between AUM and committed capital or cost basis for most closed-end funds, the investments we make in our funds as general partner, undrawn capital commitments to funds for which management fees are based on NAV or contributed capital and capital commitments to closed-end funds that have not yet commenced their investment periods.
(5) Incentive-creating AUM refers to the AUM that may eventually produce incentive income. It represents the NAV of our closed-end and evergreen funds, excluding investments made by us and our employees (which are not subject to an incentive allocation).
(6) Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as general partner) of our closed-end funds in their investment periods. 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.
(7) Our funds record as accrued incentives 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 amount generated by the funds during the period. We refer to the amount of incentive income recognized as revenue by us as segment incentive income. We recognize incentive income when it becomes fixed or determinable, all related contingencies have been removed and collection is reasonably assured. Amounts recognized by us as incentive income no longer are included in accrued incentives (fund level), the term we use for remaining fund-level accruals.

 

 

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RISK FACTORS

We are subject to a number of significant risks inherent in our business. You should carefully consider the risks and uncertainties described below and other information included in this prospectus. If any of the events described below occur, our business and financial results could be seriously harmed. The trading price of our Class A units could decline as a result of any of these risks, and you could lose all or part of your investment.

Risks Relating to Our Business

Given our focus on achieving superior investment performance with less-than-commensurate risk, and the priority we afford our clients’ interests, we may reduce our AUM, restrain its growth, reduce our fees or otherwise alter the terms under which we do business when we deem it appropriate—even in circumstances where others might deem such actions unnecessary. Our approach could adversely affect our results of operations.

One of the means by which we seek to achieve superior investment performance in each of our strategies is by limiting the AUM in our strategies to an amount that we believe can be invested appropriately in accordance with our investment philosophy and current or anticipated economic and market conditions. Thus, in the past we have often taken affirmative steps to limit the growth of our AUM. For example:

 

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we have suspended marketing our U.S. high yield bond strategy for long periods of time and have declined to participate in searches aggregating billions of dollars since 1998;

 

  Ÿ  

from time to time, we have ceased general marketing of our funds in our convertible securities strategy and have asked The Vanguard Group to close its Convertible Securities Fund, which we sub-advise;

 

  Ÿ  

we returned $5.0 billion from our 2001 and 2002 distressed debt funds prior to the end of their respective investment periods and $4.4 billion from OCM Opportunities Fund VIIb, L.P., or Opps VIIb, prior to the end of its investment period;

 

  Ÿ  

we deferred raising a new distressed debt fund by a year from 2003 to 2004, even though a significant amount of capital had already been offered;

 

  Ÿ  

we intentionally sized Oaktree Opportunities Fund VIII, L.P., or Opps VIII, and Oaktree Opportunities Fund VIIIb, L.P., or Opps VIIIb, smaller than their predecessors even though we could have raised additional capital (i.e., we capped Opps VIII at $4.5 billion and Opps VIIIb at $2.7 billion); and

 

  Ÿ  

we have often turned away substantial amounts of capital offered to us for management, including $4.5 billion of capital offered for OCM Opportunities Fund VII, L.P. a decision that had the effect of forgoing annualized revenues of $68 million.

Additionally, we may voluntarily reduce management fee rates and terms for certain of our funds or strategies when we deem it appropriate, even when doing so may reduce our short-term revenue. For example, we decided to reduce our maximum annual management fee for Opps VIII, Opps VIIIb and Oaktree Principal Fund V, L.P. from 1.75% to 1.60%. We also, on our own initiative, waived management fees for Opps VIII with respect to capital commitments in excess of $4.0 billion and reduced the management fee rate to 1.0% with respect to capital commitments in excess of $2.0 billion for Opps VIIIb. We made these changes not because they were necessary to raise the capital we wanted, but because we deemed it important to demonstrate to our clients that we were not financially incentivized to raise more capital than appropriate for the opportunity set.

 

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While we believe that our discipline in this regard is in the long-term interest of us and our unitholders, our unitholders should understand this approach may reduce the profits we could otherwise realize in the short term, and there is no guarantee that it will be beneficial in the long term. Moreover, our refusal to accept all of the capital offered to us has undoubtedly benefited competitors who accepted it in our stead and may have damaged our relationships and future prospects with potential investors.

Our business is materially affected by conditions in the global financial markets and economies, and any disruption or deterioration in these conditions could materially reduce our revenues and cash flow and adversely affect our overall performance, ability to raise or deploy capital, financial condition and liquidity position.

Our business is materially affected by conditions in the global financial markets and economic conditions throughout the world that are outside our control, such as interest rates, availability and cost of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts or security operations). Ongoing developments in the U.S. and global financial markets following the unprecedented turmoil in the global capital markets and the financial services industry in late 2008 and early 2009 continue to illustrate that the current environment is still one of uncertainty and instability for investment management businesses. While there has been some recovery in the capital markets since then, persistently high unemployment rates in the United States, continued weakness in many real estate markets, increased austerity measures by several European governments, escalating regional turmoil in the Middle East, growing debt loads for many national and other governments and uncertainty about the consequences of governments withdrawing their aggressive fiscal stimulus measures all highlight the fact that economic conditions are still unstable and unpredictable. These economic conditions have resulted in, and may continue to result in, adverse consequences for many of our funds, each of which could adversely affect the business of such funds, restrict such funds’ investment activities and impede such funds’ ability to effectively achieve their investment objectives. For example, in 2008 and 2009, we initiated or completed restructurings of three of our evergreen funds as a result of the disruption in the global capital markets, and these restructurings resulted in some combination of the elimination or suspension of investor redemption rights, renegotiation of terms and interest rates on borrowing, investment of additional capital as the general partner and waiver or suspension of management fees.

The current economic environment has resulted in and may also continue to result in decreases in the market value of publicly traded securities held by some of our funds. Illiquidity in the market could adversely affect the pace of realization of our funds’ investments or otherwise restrict the ability of our funds to realize value from their investments, thereby adversely affecting our ability to generate incentive or other income. There can be no assurance that conditions in the global financial markets will not worsen and/or further adversely affect our investments and overall performance.

Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs and otherwise redeploy our resources within a time frame sufficient to match changes in market and economic conditions to take advantage of the opportunities that may be presented by these changes. As a result, a specific market dislocation may result in lower investment returns for certain of our funds, which would adversely affect our revenues, and we may not be able to adjust our resources to take advantage of new investment opportunities that may be created as a result of the dislocation.

 

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Our business depends in large part on our ability to raise capital from investors. If we were unable to raise such capital, we would be unable to collect management fees or deploy such capital into investments, which would materially reduce our revenues and cash flow and adversely affect our financial condition.

Our ability to raise capital from investors depends on a number of factors, including many that are outside our control. The current environment is generally a challenging period in which to raise capital for our closed-end funds that are in their marketing periods or to seek new commitments for our open-end and evergreen funds. Additionally, investors may downsize their investment allocations to alternative investments, including private funds and hedge funds, to rebalance a disproportionate weighting of their overall investment portfolio among asset classes. Poor performance of our funds could also make it more difficult for us to raise new capital. Investors in our closed-end funds may decline to invest in future closed-end funds we raise, and investors in our open-end and evergreen funds may withdraw their investments in the funds (on specified withdrawal dates) as a result of poor performance. Our investors and potential investors continually assess our funds’ performance independently and relative to market benchmarks and our competitors, and our ability to raise capital for existing and future funds and avoid excessive redemptions depends on our funds’ performance. To the extent economic and market conditions deteriorate, we may be unable to raise sufficient amounts of capital to support the investment activities of future funds. If we were unable to successfully raise capital, our revenue and cash flow would be reduced, and our financial condition would be adversely affected.

Clients may withdraw their capital from our funds or be unwilling to commit new capital to our funds as a result of our decision to become a public company, which could have a material adverse effect on our business and financial condition.

Some of our clients may view negatively the prospect of our becoming a publicly traded company, including concerns that as a public company we will shift our focus from the interests of our clients to those of our public unitholders. Some of our clients may believe that we will strive for near-term profit instead of superior risk-adjusted returns for our clients over time or grow our AUM for the purpose of generating additional management fees without regard to whether we believe there are sufficient investment opportunities to effectively deploy the additional capital. There can be no assurance that we will be successful in our efforts to address such concerns or to convince clients that our decision to pursue this offering will not affect our longstanding priorities or the way we conduct our business. A decision by a significant number of our clients to withdraw capital from our funds, not to commit additional capital to our funds or to cease doing business with us altogether could inhibit our ability to achieve our investment objectives and may have a material adverse effect on our business and financial condition.

We depend on a number of key personnel and our ability to retain them and attract additional qualified personnel is critical to our success and our growth prospects.

We depend on the diligence, skill, judgment, reputation and business contacts of our key personnel. Our future success will depend upon our ability to retain our key personnel and our ability to recruit additional qualified personnel. Our key personnel possess substantial experience and expertise in investing, are responsible for locating and executing our funds’ investments, have significant relationships with the institutions which are the source of many of our funds’ investment opportunities and in certain cases have strong relationships with our investors. Therefore, if our key personnel join competitors or form competing companies, it could result in the loss of significant investment opportunities and certain existing investors.

We have experienced departures of key investment professionals in the past and will do so in the future. Any of those departures could have a negative impact on our ability to achieve our investment

 

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objectives. Indeed, the departure for any reason of any of our most senior professionals, such as Howard Marks or Bruce Karsh, or a significant number of our other investment professionals, could have a material adverse effect on our ability to achieve our investment objectives, cause certain of our investors to withdraw capital they invest with us or elect not to commit additional capital to our funds or otherwise have a material adverse effect on our business and our prospects. The departure of some or all of those individuals could also trigger certain “key man” provisions in the documentation governing certain of our closed-end funds, which would permit the limited partners of those funds to suspend or terminate the funds’ investment periods or, in the case of certain evergreen funds, permit investors to withdraw their capital prior to expiration of the applicable lock-up date. As a part of our May 2007 Restructuring, our senior employees exchanged their direct or indirect ownership interest in OCM for a new interest in OCGH that vests over time. Eighty percent of these interests have already vested, and the remaining 20% will vest in January 2012. Once the vesting period expires, affected employees may be less motivated to remain at Oaktree.

We anticipate that it will be necessary for us to add investment professionals both to grow our team and to replace those who depart. However, the market for qualified investment professionals is extremely competitive, both in the United States and internationally, and we may not succeed in recruiting additional personnel or we may fail to effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain and attract investment professionals may also result in significant additional expenses, which could adversely affect our profitability or result in an increase in the portion of our incentive income that we grant to our investment professionals.

Our revenues are highly volatile due to the nature of our business, we do not expect steady earnings growth and we do not intend to provide earnings guidance, each of which may cause the value of interests in our business to be variable.

Our revenues are highly volatile, primarily due to the fact that the incentive income we receive from our funds, which accounts for a substantial portion of our income, is highly volatile. In the case of our closed-end funds, our incentive income is recognized only when it is fixed or determinable, which typically occurs in a sporadic and unpredictable fashion. In addition, we are entitled to incentive income (other than tax distributions, which are treated as incentive income) only after all contributed capital and profits representing, typically, an 8% annual preferred return on that capital have been distributed to our funds’ limited partners. In the case of our evergreen funds, we are generally entitled to receive an annual incentive payment based upon the increase in NAV attributable to each limited partner during a particular calendar year, subject to a “high-water mark.” The high-water mark is the highest historical NAV attributable to a limited partner’s account and means we will not earn incentive income from such limited partner for a year if its account’s NAV at the end of the year is lower than any prior year NAV, in all cases excluding any contributions and redemptions for purposes of calculating NAV. With respect to our evergreen funds, incentive income generally becomes payable as of December 31 of each year for limited partners’ accounts that are above the high-water mark. Given that the investments made by our funds may be illiquid or volatile and that our investment results and the pace of realization of our investments will vary from fund to fund and period to period, our incentive income likely will vary materially from year to year.

We may also experience fluctuations in our operating results, from quarter to quarter or year to year, due to a host of other factors, including changes in the values of our investments, changes in the amount of distributions from our funds, the pace of raising new funds and liquidation of our old funds, dividends or interest paid in respect of investments, changes in our operating or other expenses, the degree to which we encounter competition and general economic and market conditions. This variability may cause our results for a particular period not to be indicative of our performance in a future period.

 

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As noted above, the timing and amount of incentive income generated by our closed-end funds are uncertain and will contribute to the volatility of our net income. Incentive income depends on our closed-end funds’ investment performance and opportunities for realizing gains, which may be limited. In addition, it takes a substantial period of time to identify attractive investment opportunities, to raise all the funds needed to make an investment and then to realize the cash value of an investment through resale, recapitalization or other exit event. Even if an investment proves to be profitable, it may be several years or longer before those profits can be realized in cash or other manner of payment. We cannot predict when, or if, any realization of investments will occur. If we have a realization event in a particular quarter, it may have a significant impact on our revenues and profits for that particular quarter, which may not be replicated in subsequent quarters.

A small number of our open-end funds also generate performance-based revenues based on their investment returns as compared with a specified market index or other benchmark. As a result, we may not earn a performance fee in a particular period even if the fund had a positive return. The incentive income and performance fee revenues we earn are therefore dependent on, among other factors, the NAV of the fund and, in certain cases, its performance relative to its market, which may lead to volatility in our quarterly or annual financial results.

Finally, we do not plan to provide any guidance regarding our future quarterly or annual financial results.

The historical financial information included in this prospectus is not necessarily indicative of our future performance.

The historical financial information included in this prospectus is not indicative of our future financial results. This financial information does not purport to represent or predict the results of any future periods.

The results of future periods are likely to be materially different as a result of:

 

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future growth that does not follow our historical trends;

 

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changes in the economic environment, competitive landscape and financial markets;

 

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increases in non-cash compensation charges primarily related to the vesting of OCGH units issued after this offering; and

 

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a provision for corporate income taxes on the income of two of our Intermediate Holding Companies that are taxed as corporations for U.S. federal income tax purposes.

Our funds depend on investment cycles and any change in such cycles could have an adverse effect on our investment prospects.

Cyclicality is important to our business. Weak economic environments have tended to afford us our best investment opportunities and our best relative investment performance. For example, the relative performance of our high yield bond strategy has typically been strongest in difficult times when default rates are highest, and our distressed debt and control investing funds have historically found their best investment opportunities during downturns in the economy when credit is not as readily available. Conversely, we tend to realize value from our investments in times of economic expansion, when opportunities to sell investments may be greater. Thus, we depend on the cyclicality of the market in order to sustain our business and generate superior risk-adjusted returns over extended periods. Any prolonged economic expansion or recession could have an adverse impact on certain of our funds and materially affect our ability to deliver superior investment returns or generate incentive or other income.

 

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Our failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect our business.

As we have expanded the number and scope of our strategies, we increasingly confront potential conflicts of interest that we need to manage and resolve. These conflicts take many forms. For example, the investment focus of a number of our funds overlap, meaning that we occasionally confront issues as to how a particular investment opportunity should be allocated. Though we believe we have appropriate means to resolve these conflicts, our judgment on any particular allocation could be challenged—particularly in instances (as is sometimes the case) where the affected funds have different fee structures or our employees have invested more heavily in one fund than another. Additionally, different funds that we manage may invest in different parts of the capital structure of the same company, and thus the interests of two or more funds may be adverse to each other when the company experiences financial distress, undergoes a restructuring or files for bankruptcy. While we have developed general guidelines regarding when two or more funds can invest in different parts of the same company’s capital structure and created a process that we employ to handle such conflicts if they arise, our judgment to permit the investments to occur in the first instance or our judgment on how to minimize the conflict could be challenged. Another example involves our receipt of material non-public information regarding a potential investment. Normally, our receipt of such information restricts all of our investment strategies. Occasionally, one investment group will want to obtain such information, but another will want to remain free to trade the securities of that issuer and will not want to become restricted. In such circumstances, we sometimes have to choose which group’s preference will prevail. In these and other circumstances, we seek to resolve the conflict in good faith and with a view to the best interests of all of our clients, but there can be no assurance that we will make the correct judgment in hindsight or that our judgment will not be questioned or challenged.

Our compliance and legal groups seek to monitor and manage our actual and potential conflicts of interest. We maintain internal controls and various policies and procedures, including oversight, codes of conduct, systems and communication tools to identify, prevent, mitigate or resolve any conflicts of interest that may arise. Our compliance policies and procedures address a variety of regulatory and compliance risks, such as the handling of material non-public information, personal securities trading and the allocation of investment opportunities. Our compliance and legal groups also monitor information barriers that we may establish on a limited basis from time to time between our different investment groups. Notwithstanding the foregoing, it is possible that perceived or actual conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and any mistake could potentially create liability or damage our reputation. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which in turn could materially adversely affect our business in a number of ways, such as causing investors to redeem their capital (to the degree they have that right), making it harder for us to raise new funds and discouraging others from doing business with us.

The investment management business is intensely competitive.

The investment management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, brand recognition and business reputation. Our investment management business competes for clients, personnel and investment opportunities with a large number of private equity funds, specialized investment funds, hedge funds, corporate buyers, traditional investment managers, commercial banks, investment banks, other investment managers and other financial institutions. Numerous factors serve to increase our competitive risks:

 

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a number of our competitors have more personnel and greater financial, technical, marketing and other resources than we do;

 

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  Ÿ  

many of our competitors have raised, or are expected to raise, significant amounts of capital, and many of them have investment objectives similar to ours, which may create additional competition for investment opportunities and reduce the size and duration of pricing inefficiencies that we seek to exploit;

 

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some of our competitors have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to our funds, particularly our funds that directly use leverage or rely on debt financing of their portfolio companies to generate superior investment returns;

 

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some of our competitors have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments;

 

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our competitors may be able to achieve synergistic cost savings in respect of an investment that we cannot, which may provide them with a competitive advantage in bidding for an investment;

 

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there are relatively few barriers to entry impeding new investment funds, and the successful efforts of new entrants into our various lines of business, including major commercial and investment banks and other financial institutions, have resulted in increased competition;

 

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some investors may prefer to invest with an investment manager whose equity securities are not traded on a national securities exchange; and

 

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other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

We may find it harder to raise funds, and we may lose investment opportunities in the future, if we do not match the fees, structures and terms offered by competitors to their fund clients. Alternatively, we may experience decreased profitability, rates of return and increased risk of loss if we match the prices, structures and terms offered by competitors. This competitive pressure could adversely affect our ability to make successful investments and limit our ability to raise future funds, either of which would adversely impact our business, revenues, results of operations and cash flow.

The increasing number of investment managers dedicated to our markets and the increasing amount of capital available to them have made it more difficult to identify markets in which to invest, and this could lead to a decline in our returns on investments.

The asset management market has grown at a very rapid pace during the last several years, leading to substantial growth in AUM in our industry. Our success in the past has largely been a result of our ability to identify and exploit non-mainstream markets with the potential for attractive returns. Although investment managers worldwide have expanded the range of their investments in terms of transaction sizes, industries and geographical regions, there is a finite number of available investment opportunities at any given time. Particularly in strong economic times, the most attractive opportunities generally are pursued by an increasing number of managers with increasing amounts to invest and, as a result, it is sometimes difficult for us to identify markets that are capable of generating attractive investment returns. If we are unable to identify a sufficient number of attractive investment opportunities in the future, our returns will decline. This development would have an adverse impact on our AUM and on our results of operations.

Poor performance of our funds would cause a decline in our revenues, net income and cash flow and could adversely affect our ability to raise capital for future funds.

When any of our funds perform poorly, either by incurring losses or underperforming benchmarks or our competitors, our investment record suffers. In addition, our incentive income is adversely

 

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affected and, all else being equal, the value of our AUM might decrease, resulting in a reduction of our management fees. Moreover, we experience losses on our investments of our own capital as a result of poor investment performance by our funds. If a fund performs poorly, we will receive little or no incentive income with regard to the fund and little income or possibly losses from any principal investment in the fund. Poor performance of our funds could also make it more difficult for us to raise new capital. Investors in our closed-end funds may decline to invest in future closed-end funds we raise, and investors in our open-end and evergreen funds may withdraw their investments in the funds (on specified withdrawal dates) as a result of poor performance. Our investors and potential investors continually assess our funds’ performance independently and relative to market benchmarks and our competitors, and our ability to raise capital for existing and future funds and avoid excessive redemption levels depends on our funds’ performance.

We may not be able to maintain our current fee structure as a result of industry pressure from limited partners to reduce fees, which could have an adverse effect on our profit margins and results of operations.

We may not be able to maintain our current fee structure as a result of industry pressure from limited partners to reduce fees. Although our investment management fees vary among and within asset classes, historically we have competed primarily on the basis of our performance and not on the level of our investment management fees relative to those of our competitors. In recent years, however, there has been a general trend toward lower fees in the investment management industry. For example, we reduced our maximum annual management fee for Opps VIII from 1.75% to 1.60%. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that incentivize our investors to pay our current fee rates. We cannot assure you that we will succeed in providing investment returns and service that will allow us to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations. For more information about our fees see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have experienced significant growth in our operations outside the United States, which may place significant demands on our administrative, operational and financial resources.

In recent years, the scope and relative share of our non-U.S. operations have grown significantly. We or our fund affiliates now have offices in 10 cities outside the United States, housing approximately one quarter of our personnel. This rapid growth has placed and may continue to place significant demands on our business infrastructure. Pursuing investment opportunities outside the United States presents challenges not faced by U.S. investments, such as different legal and tax regimes and currency fluctuations, which require additional resources to address. In addition, in conducting business in these jurisdictions, we are often faced with the challenge of ensuring that our activities are consistent with U.S. or other laws with extraterritorial application, such as the USA PATRIOT Act and the U.S. Foreign Corrupt Practices Act. Moreover, actively pursuing international investment opportunities may require that we increase the size or number of our international offices. Pursuing non-U.S. clients means that we must comply with international laws governing the sale of interests in our funds, different investor reporting and information processes and other requirements. As a result, we are required to continuously develop our systems and infrastructure in response to the increasing complexity and sophistication of the investment management market and legal, accounting and regulatory situations. Moreover, this growth has required, and will continue to require, us to incur significant additional expenses and to commit additional senior management and operational resources. There can be no assurance that we will be able to manage our expanding international operations effectively or that we will be able to continue to grow this part of our business, and any failure to do so could adversely affect our ability to generate revenues and control our expenses.

 

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We may enter into new lines of business, make strategic investments or acquisitions or enter into joint ventures, each of which may result in additional risks and uncertainties for our business.

Our operating agreement permits us to enter into new lines of business, make future strategic investments or acquisitions and enter into joint ventures. As we have in the past, and subject to market conditions, we may grow our business by increasing AUM in existing investment strategies, pursue new investment strategies, which may be similar or complementary to our existing strategies or be wholly new initiatives, or enter into strategic relationships, such as our current relationship with DoubleLine Capital LP or joint ventures. In addition, opportunities may arise to acquire other alternative or traditional investment managers.

To the extent we make strategic investments or acquisitions, enter into strategic relationships or joint ventures or enter into new lines of business, we will face numerous risks and uncertainties, including risks associated with the required investment of capital and other resources and with combining or integrating operational and management systems and controls and managing potential conflicts. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues, or produces investment losses, or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected, and our reputation and business may be harmed. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control.

We may not be successful in expanding into new investment strategies, markets and lines of business.

We actively consider the opportunistic expansion of our business, both geographically and into new investment strategies. Such expansion would result in adding personnel and growing investment teams. We may not be successful in any such attempted expansion. Attempts to expand our business involve a number of special risks, including some or all of the following:

 

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the diversion of management’s attention from our existing business;

 

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the disruption of our existing business;

 

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entry into markets or lines of business in which we may have limited or no experience;

 

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increasing demands on our operational systems;

 

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potential increase in investor concentration; and

 

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increasing the risks associated with conducting operations in foreign jurisdictions.

Because we have not yet identified these potential new investment strategies, geographic markets or lines of business, we cannot identify for you all the risks we may face and the potential adverse consequences on us and your investment that may result from any attempted expansion.

We often pursue investment opportunities that involve business, regulatory, legal or other complexities.

We often pursue unusually complex investment opportunities involving substantial business, regulatory or legal complexity that would deter other investment managers. Our tolerance for complexity presents risks, as such transactions can be more difficult, expensive and time-consuming to finance and execute; it can be more difficult to manage or realize value from the assets acquired in

 

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such transactions; and such transactions sometimes entail a higher level of regulatory scrutiny or a greater risk of contingent liabilities. Any of these risks could harm the performance of our funds.

Regulatory changes in the United States, regulatory compliance failures and the effects of negative publicity surrounding the financial industry in general could adversely affect our reputation, business and operations.

Potential regulatory action poses a significant risk to our reputation and our business. Our business is subject to extensive regulation in the United States and in the other countries in which our investment activities occur. The U.S. Securities and Exchange Commission, or SEC, oversees Oaktree Capital Management, L.P.’s activities as a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended, or the Advisers Act. FINRA oversees OCM Investments, LLC’s activities as a registered broker-dealer. In addition, we regularly rely on exemptions from various requirements of the U.S. Securities Act of 1933, as amended, or the Securities Act, the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, the U.S. Investment Company Act of 1940, as amended, or the Investment Company Act, and the U.S. Employee Retirement Income Security Act of 1974, or ERISA. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to be revoked or challenged or otherwise become unavailable to us, we could be subject to regulatory action or third-party claims, and our business could be materially and adversely affected.

Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular activities. A failure to comply with the obligations imposed by the Advisers Act, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, could result in investigations, sanctions and reputational damage. We are involved regularly in trading activities which implicate a broad number of U.S. securities law regimes, including laws governing trading on inside information, market manipulation and a broad number of technical trading requirements that implicate fundamental market regulation policies. Violation of these laws could result in severe restrictions on our activities and damage to our reputation.

Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of the registration of our relevant subsidiary as an investment adviser or registered broker-dealer. The regulations to which our business is subject are designed primarily to protect investors in our funds and to ensure the integrity of the financial markets. They are not designed to protect our Class A unitholders. Even if a sanction imposed against us, one of our subsidiaries or our personnel by a regulator is for a small monetary amount, the adverse publicity related to the sanction could harm our reputation, which in turn could materially adversely affect our business in a number of ways, such as causing investors to redeem their capital (to the degree they have that right), making it harder for us to raise new funds and discouraging others from doing business with us.

Some of our funds invest in businesses that operate in highly regulated industries, including in businesses that are regulated by the U.S. Federal Communications Commission, U.S. federal and state banking authorities and U.S. state gaming authorities. The regulatory regimes to which such businesses are subject may, among other things, condition our funds’ ability to invest in those businesses upon the satisfaction of applicable ownership restrictions or qualification requirements. Moreover, our failure to obtain or maintain any regulatory approvals necessary for our funds to invest in such industries may disqualify our funds from participating in certain investments or require our funds to divest themselves of certain assets.

 

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As a result of market disruption as well as highly publicized financial scandals, regulators and investors have exhibited concerns over the integrity of the U.S. financial markets, and the business in which we operate both in the United States and outside the United States is likely to be subject to further regulation. In recent years, there has been debate in the United States and abroad about new rules or regulations to be applicable to hedge funds or other alternative investment products and their managers. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. The Dodd-Frank Act, among other things, imposes significant new regulations on nearly every aspect of the U.S. financial services industry, including oversight and regulation of systemic market risk (including the power to liquidate certain institutions); authorizing the Federal Reserve to regulate nonbank institutions; generally prohibiting insured depository institutions and their affiliates from conducting proprietary trading and investing in private equity funds and hedge funds; and imposing new registration, recordkeeping and reporting requirements on private fund investment advisers. Importantly, many key aspects of the changes imposed by the Dodd-Frank Act will be established by various regulatory bodies and other groups over the next several years. Several key terms in the Dodd-Frank Act have been left to regulators to define through rulemaking authority. While we already have one subsidiary registered as an investment adviser subject to SEC examinations and another subsidiary registered as a broker-dealer subject to FINRA examinations, the imposition of any additional legal or regulatory requirements could make compliance more difficult and expensive, affect the manner in which we conduct our business and adversely affect our profitability.

For example, subject to a one year phase-in period, the Dodd-Frank Act establishes a ten-member Financial Stability Oversight Council, or the Council, a federal agency chaired by the Secretary of the Treasury, to identify and manage systemic risk in the financial system and improve interagency cooperation. Under the Dodd-Frank Act, the Council has the authority to review the activities of certain nonbank financial firms engaged in financial activities that are designated as “systemically important,” meaning the distress of the financial firm would threaten the health of the U.S. economy. Though the Federal Reserve Chairman has suggested that it would be rare for an alternative asset management firm to be designated as systemically important, if we were designated as such, it would result in increased regulation of our business, including higher standards regarding capital, leverage, liquidity, risk management, credit exposure reporting and concentration limits, restrictions on acquisitions and annual stress tests by the Federal Reserve. In connection with the Council’s work, on January 26, 2011, the SEC and the Commodity Futures Trading Commission, or CFTC, jointly issued proposed rules that would require investment advisers registered with the SEC that advise one or more private funds to provide certain information to the Council on Form PF about their funds and assets under management, including the amount of borrowings, concentration of ownership and other performance information for purposes of assessing the systemic risk posed by private funds.

In addition, the CFTC has proposed rules that would eliminate certain exemptions from commodity pool operator, or CPO, and commodity trading advisor, or CTA, registration on which we rely in operating our funds. The repeal of these exemptions and the proposed rules are designed to enhance reporting. Becoming subject to the compliance obligations of CPOs and CTAs could result in increased administrative costs and impose additional regulatory, reporting and compliance burdens on our fund-related activities.

The Dodd-Frank Act also requires increased disclosure of executive compensation and provides shareholders of most public companies with the right to vote on an advisory basis on executive compensation. Additionally, the Dodd-Frank Act empowers federal regulators to prescribe regulations or guidelines to prohibit any incentive-based payment arrangements that the regulators determine encourage covered financial institutions to take inappropriate risks by providing officers, employees, directors or principal shareholders with excessive compensation or that could lead to a material financial loss by such financial institutions.

 

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It is impossible to determine the extent of the impact on us of the Dodd-Frank Act or any other new laws, regulations or initiatives that may be proposed or whether any of the proposals will become law. Any changes in the regulatory framework applicable to our business, including the changes described above, may impose additional costs on us, require the attention of our senior management or result in limitations on the manner in which we conduct our business. Moreover, as calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and other investment activities of alternative asset management funds, including our funds. In addition, we may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. Compliance with any new laws or regulations could make compliance more difficult and expensive, affect the manner in which we conduct our business and adversely affect our profitability.

Regulatory changes in jurisdictions outside the United States could adversely affect our business.

Certain of our subsidiaries operate outside the United States. In the United Kingdom, Oaktree Capital Management Limited is subject to regulation by the U.K. Financial Services Authority, or FSA. In Hong Kong, Oaktree Capital (Hong Kong) Limited is subject to regulation by the Hong Kong Securities and Futures Commission. In Singapore, Oaktree Capital Management Pte. Ltd. is subject to regulation by the Monetary Authority of Singapore. In Japan, Oaktree Japan, Inc. is subject to regulation by the Kanto Local Finance Bureau. Our other European and Asian operations and our investment activities worldwide, are subject to a variety of regulatory regimes that vary by country. In addition, we regularly rely on exemptions from various requirements of the regulations of certain foreign countries in conducting our asset management activities.

Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular activities. We are involved regularly in trading activities that implicate a broad number of foreign (as well as U.S.) securities law regimes, including laws governing trading on inside information and market manipulation and a broad number of technical trading requirements that implicate fundamental market regulation policies. Violation of these laws could result in severe restrictions or prohibitions on our activities and damage to our reputation, which in turn could materially adversely affect our business in a number of ways, such as causing investors to redeem their capital (to the degree they have that right), making it harder for us to raise new funds and discouraging others from doing business with us.

In November 2010, the European Parliament voted to approve the Alternative Investment Fund Managers Directive, or the Directive. The Directive applies to alternative investment fund managers, or AIFMs, established in the European Union, or the EU, which would include our U.K. subsidiary, and to non-EU AIFMs, which would include certain of our non-U.K. subsidiaries, marketing their funds in the EU, subject to certain limited exemptions. Individual EU countries must then implement the Directive into domestic law within two years of publication, meaning that the Directive should come into effect at a national level starting in April 2013. From that date, AIFMs established in the EU will be required to seek authorization from their home regulators. Once authorized, the relevant AIFM can manage and market funds throughout the EU under a pan-European passport. However, the Directive will impose new operating requirements on AIFMs, including, among other things, rules relating to the remuneration of certain personnel, regulatory capital, the use of leverage employed by its fund(s) and the independent valuation of its assets under management. Non-EU AIFMs will not be eligible to apply for authorization under the Directive until at least 2015, and authorization will not be required until at least 2018. Although non-EU AIFMs may be able to continue marketing their funds under national private placement regimes, at least until 2018, those that do will be subject to certain provisions of the Directive. In particular, a non-EU AIFM will have to comply with demanding reporting obligations in

 

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relation to non-listed companies in which its fund(s) hold a controlling stake. It must also adhere to limits on the amount of capital that can be distributed by such a company within two years of its acquisition, otherwise called the asset stripping rules. The Directive could have an adverse effect on our business by, among other things, increasing the regulatory burden and costs of doing business in Europe, imposing extensive disclosure obligations on the European portfolio companies of the funds we manage, significantly restricting marketing activities within the EU, potentially requiring changes to our compensation structures for key personnel, thereby affecting our ability to recruit and retain these personnel, and potentially restricting our funds’ ability to make investments in European companies. The Directive could limit our operating flexibility, our ability to market our funds and our fundraising and investment opportunities, as well as expose us to conflicting regulatory requirements in the United States and the EU.

Failure to comply with “pay to play” regulations implemented by the SEC and certain states, and changes to the “pay to play” regulatory regimes, could adversely affect our business.

The SEC and several states have initiated investigations alleging that certain private equity firms and hedge funds or agents acting on their behalf have paid money to current or former government officials or their associates in exchange for improperly soliciting contracts with state pension funds. The SEC has also recently initiated a similar investigation into contracts awarded by sovereign wealth funds. In June 2010, the SEC approved Rule 206(4)-5 under the Advisers Act regarding “pay to play” practices by investment advisers involving campaign contributions and other payments to government officials able to exert influence on potential government entity clients. Among other restrictions, the rule prohibits investment advisers from providing advisory services for compensation to a government entity for two years, subject to very limited exceptions, after the investment adviser, its senior executives or its personnel involved in soliciting investments from government entities make contributions to certain candidates and officials in a position to influence the hiring of an investment adviser by such government entity. Advisers are required to implement compliance policies designed, among other matters, to track contributions by certain of the adviser’s employees and engagements of third parties that solicit government entities and to keep certain records in order to enable the SEC to determine compliance with the rule. Additionally, California enacted legislation in September 2010, that requires placement agents (including in certain cases employees of investment managers) who solicit funds from California state retirement systems, such as the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, to register as lobbyists, thereby becoming subject to increased reporting requirements and prohibited from receiving contingent compensation for soliciting investments from California state retirement systems. There has also been similar rule-making in New York. Such investigations may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations, thereby imposing additional expenses on us. Any failure on our part to comply with these rules could cause us to lose compensation for our advisory services or expose us to significant penalties and reputational damage.

Our participation in the Public-Private Investment Program could adversely affect our business, operations and reputation because of the increased regulation, compliance requirements and public exposure that such participation entails.

On March 23, 2009, the U.S. Department of the Treasury, or UST, in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve, announced the Public-Private Investment Program, or the PPIP. The PPIP is a part of the UST Financial Stability Plan, which was announced on February 10, 2009. The Financial Stability Plan outlined a broad approach to address the problem of troubled real estate-related assets via the formation of Public-Private Investment Funds, or PPIFs. In July 2009, we were pre-qualified by the UST to manage a PPIF. Participation in the PPIP entails increased levels of oversight of our business, and specifically of our PPIF, by the UST, the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, and the Government

 

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Accountability Office, or GAO. Additionally, our PPIF is subject to a number of reporting obligations with respect to various types of information that need to be delivered to the UST, SIGTARP and the GAO, and our PPIF is also required to comply with additional conflicts of interest policies for PPIF managers that will govern certain of our affiliates and their interaction with the UST and SIGTARP. As a result of the heightened scrutiny and additional regulations from these government agencies, we face an increased risk of governmental involvement and intervention in our business that may affect or impede the manner in which we conduct our business. Furthermore, complying with the PPIP’s reporting requirements and additional conflicts of interest policies requires a significant amount of attention and time to be spent by our personnel, which may adversely impact our ability to manage our business. A material violation of these requirements could damage our reputation and constitute grounds for removing us as the manager of the PPIF. As a participant in a government-sponsored program, we run the risk that we may become the target of adverse publicity or become subject to adverse Congressional or administrative action. Any alleged violation or contravention of the terms and policies of PPIP brought by UST or SIGTARP against us could result in severe restrictions on our activities, adversely affect our profitability or damage our reputation.

The requirements of being a public company and sustaining growth may strain our resources.

Following this offering, we will be subject to the reporting requirements of the Exchange Act and requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements may strain our systems and resources. The Exchange Act will require that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act will require that we maintain effective disclosure controls and procedures and internal controls over financial reporting, which are discussed below. In order to maintain and improve the effectiveness of our disclosure controls and procedures, significant resources and management oversight will be required. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join the firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We will also incur costs that we have not previously incurred as part of our compliance with the Sarbanes-Oxley Act and rules of the SEC and New York Stock Exchange, or NYSE, including hiring additional accounting, legal and administrative personnel and various other costs related to being a public company.

We are subject to substantial litigation risks and may face significant liabilities and damage to our professional reputation as a result.

In recent years, the volume of claims and amount of damages claimed in litigation and regulatory proceedings against investment managers have been increasing. We make investment decisions on behalf of our clients that could result in substantial losses. This may subject us to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty or breach of contract. Further, we may be subject to third-party litigation arising from allegations that we improperly exercised control or influence over portfolio investments. In addition, we and our affiliates that are the investment managers and general partners of our funds, our funds themselves and those of our employees who are our, our subsidiaries’ or the funds’ officers and directors are each exposed to the risks of litigation specific to the funds’ investment activities and portfolio companies and, in the case where our funds own controlling interests in public companies, to the risk of shareholder litigation by the public companies’ other shareholders. Moreover, we are exposed to risks of litigation or investigation by investors or regulators relating to our having engaged, or our funds having engaged, in transactions that presented conflicts of interest that were not properly addressed. Substantial legal liability could

 

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materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could seriously harm our business. We depend to a large extent on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain investors. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities or the investment industry in general, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses.

Employee misconduct, which is difficult to detect and deter, could harm us by impairing our ability to attract and retain clients and subject us to significant legal liability and reputational harm.

There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry, and there is a risk that our employees could engage in misconduct that adversely affects our business. We are subject to a number of obligations and standards arising from our investment management business and our authority over the assets we manage. The violation of any of these obligations or standards by any of our employees could adversely affect our clients and us. Our business often requires that we deal with confidential matters of great significance to companies in which we may invest or to our advisory clients. If our employees improperly use or disclose confidential information, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to deter employee misconduct, and the precautions we take to prevent this activity may not be effective in all cases. If our employees engage in misconduct, or if they are accused of misconduct, our business and our reputation could be adversely affected.

Operational risks may disrupt our business, result in losses or limit our growth.

We rely heavily on our financial, accounting and other data processing systems. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to our funds, regulatory intervention or reputational damage.

In addition, we operate in a business that is highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, particularly our growth internationally, and the cost of maintaining the systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to the information systems, could have a material adverse effect on our business and results of operations.

Furthermore, we depend on our headquarters in Los Angeles, where a substantial portion of our personnel are located, for the continued operation of our business. An earthquake or other disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

Finally, we rely on third-party service providers for certain aspects of our business, including software vendors for portfolio management and accounting software, outside financial institutions for back office processing and custody of securities and third-party broker-dealers for the execution of trades. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair the quality of the funds’ operations and could impact our reputation and hence adversely affect our business.

 

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We are subject to risks in using prime brokers, custodians, counterparties, administrators and other agents.

Many of our funds depend on the services of prime brokers, custodians, counterparties, administrators and other agents to carry out certain securities and derivatives transactions. The terms of these contracts are often customized and complex, and many of these arrangements occur in markets or relate to products that are not subject to regulatory oversight, although proposed rules under the Dodd-Frank Act intend to place some regulations on derivative transactions. In particular, some of our funds utilize prime brokerage arrangements with a relatively limited number of counterparties, which has the effect of concentrating the transaction volume (and related counterparty default risk) of these funds with these counterparties.

Our funds are subject to the risk that the counterparty to one or more of these contracts defaults, either voluntarily or involuntarily, on its performance under the contract. Any such default may occur suddenly and without notice to us. Moreover, if a counterparty defaults, we may be unable to take action to cover our exposure, either because we lack the contractual ability or because market conditions make it difficult to take effective action. This inability could occur in times of market stress, which are precisely the times when defaults may be most likely to occur.

In addition, our risk-management models may not accurately anticipate the impact of market stress or counterparty financial condition, and as a result, we may not take sufficient action to reduce our risks effectively. Default risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition, concerns about, or a default by, one large participant could lead to significant liquidity problems for other participants, which may in turn expose us to significant losses.

In the event of a counterparty default, particularly a default by a major investment bank, one or more of our funds could incur material losses, and the resulting market impact of a major counterparty default could harm our business, results of operation and financial condition.

In the event of the insolvency of a prime broker, custodian, counterparty or any other party that is holding assets of our funds as collateral, our funds might not be able to recover equivalent assets in full as they will rank among the prime broker’s, custodian’s or counterparty’s unsecured creditors in relation to the assets held as collateral. In addition, our funds’ cash held with a prime broker, custodian or counterparty will not be segregated from the prime broker’s, custodian’s or counterparty’s own cash, and the funds will therefore rank as unsecured creditors in relation thereto.

The counterparty risks that we face have increased in complexity and magnitude as a result of the recent disruption in the financial markets and weakening or insolvency of a number of major financial institutions (such as AIG and Lehman Brothers) who serve as counterparties for derivative contracts and other financial instruments. For example, the consolidation and elimination of counterparties has increased our concentration of counterparty risk and decreased the universe of potential counterparties, and our funds are generally not restricted from dealing with any particular counterparty or from concentrating any or all of their transactions with one counterparty. In addition, counterparties have generally reacted to the ongoing market volatility by tightening their underwriting standards and increasing their margin requirements for all categories of financing, which has the result of decreasing the overall amount of leverage available and increasing the costs of borrowing.

 

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Risks Relating to Our Funds

Our results of operations are dependent on the performance of our funds. Poor fund performance will result in reduced revenues. Poor performance of our funds will also make it difficult for us to retain and attract investors to our funds, to retain and attract qualified professionals and to grow our business. The performance of each fund we manage is subject to some or all of the following risks.

The historical returns attributable to our funds should not be considered indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A units.

The historical returns attributable to our funds should not be considered indicative of the future results of our funds, nor are they directly linked to returns on our Class A units. Therefore, Class A unitholders should not conclude that positive performance of our funds will necessarily result in positive returns on an investment in our Class A units. However, poor performance of the funds we manage will cause a decline in our revenues and would therefore have a negative effect on our operating results and returns on our Class A units.

Moreover, with respect to the historical returns of our funds:

 

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the rates of return of our closed-end funds reflect unrealized gains as of the applicable measurement date that may never be realized, which may result in a lower internal rate of return, or IRR, and ultimate return for some closed-end funds from those presented in this prospectus;

 

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our funds’ returns have previously benefited from investment opportunities and general market conditions that may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities; and

 

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any material increase in the size of our funds could result in materially different rates of returns.

In addition, future returns will be affected by the applicable risks described elsewhere in this prospectus.

Investors in some of our funds may be unable to fulfill their capital commitment obligations, and such failure could have an adverse effect on the affected funds.

Investors in our closed-end funds make capital commitments that we are entitled to call from those investors at any time during certain prescribed periods. We depend on investors fulfilling and honoring their commitments when we call capital from them in order for our closed-end funds to consummate investments and otherwise pay their obligations when due. Any investor that does not fund a capital call is subject to having a meaningful amount of its existing capital account forfeited in that fund. However, if investors were to fail to honor a significant amount of capital calls for any particular fund or funds, the affected funds’ ability to make new or follow-on investments, and to otherwise satisfy their liabilities when due, could be materially and adversely affected.

Certain of our funds invest in relatively high-risk, illiquid, non-publicly traded assets, and we may fail to realize any profits from these activities ever or for a considerable period of time.

Our closed-end funds often invest in securities that are not publicly traded. In many cases, our funds may be prohibited by contract or by applicable securities laws from selling these securities for a period of time. Our funds generally cannot sell these securities publicly unless either their sale is registered under applicable securities laws or an exemption from registration is available. The ability of many of our funds, particularly our control investing funds, to dispose of investments is heavily dependent on the public equity markets. For example, the ability to realize any value from an investment may depend upon the ability to complete an initial public offering of the portfolio company in which the investment is held. Even if securities are publicly traded, large holdings of securities often can be sold only over a substantial length of time, exposing investment returns to risks of downward movement in market prices.

 

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We make distressed debt investments that involve significant risks and potential additional liabilities.

Our distressed debt funds and certain of our control investing funds invest in obligors and issuers with weak financial conditions, poor operating results, substantial financing needs, negative net worth or significant competitive issues. These funds also invest in obligors and issuers that are involved in bankruptcy or reorganization proceedings. In these situations, it may be difficult to obtain full information as to the exact financial and operating conditions of these obligors and issuers. Furthermore, some of our funds’ distressed debt investments may not be widely traded or may have no recognized market. Depending on the specific fund’s investment profile, a fund’s exposure to the investments may be substantial in relation to the market for those investments, and the acquired assets are likely to be illiquid and difficult to transfer. As a result, it may take a number of years for the market value of the investments to ultimately reflect their intrinsic value as we perceive it.

A central strategy of our distressed debt funds is to anticipate the occurrence of certain corporate events, such as debt or equity offerings, restructurings, reorganizations, mergers, takeover offers and other transactions. If the relevant corporate event that we anticipate is delayed, changed or never completed, the market price and value of the applicable fund’s investment could decline sharply.

In addition, these investments could subject a fund to certain potential additional liabilities that may exceed the value of its original investment. Under certain circumstances, payments or distributions on certain investments may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, a preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In addition, under certain circumstances, a lender that has inappropriately exercised control of the management and policies of a debtor may have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a result of such actions. In the case where the investment in securities of troubled companies is made in connection with an attempt to influence a restructuring proposal or plan of reorganization in bankruptcy, the fund may become involved in substantial litigation.

Certain of our funds are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and the Code, and our business could be adversely affected if certain of our other funds fail to satisfy an exemption under the “plan assets” regulation under ERISA.

Some of our funds are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and Section 4975 of the U.S. Internal Revenue Code of 1986, as amended, or the Code. For example, we currently manage some of our distressed debt funds and open-end funds as “plan assets” under ERISA. With respect to these funds, this results in the application of the fiduciary responsibility standards of ERISA to investments made by such funds, including the requirement of investment prudence and diversification, and the possibility that certain transactions that we enter into, or may have entered into, on behalf of these funds, in the ordinary course of business, might constitute or result in non-exempt prohibited transactions under Section 406 of ERISA or Section 4975 of the Code. A non-exempt prohibited transaction, in addition to imposing potential liability upon fiduciaries of an ERISA plan, may also result in the imposition of an excise tax under the Code upon a “party in interest” (as defined in ERISA) or “disqualified person” (as defined in the Code) with whom we engaged in the transaction. Some of our other funds currently qualify as venture capital operating companies, or VCOCs, or rely on another exception under ERISA, and therefore are not subject to the fiduciary requirements of ERISA with respect to their assets. However, if these funds fail to satisfy the VCOC requirements for any reason, including an amendment of the relevant regulations by the U.S. Department of Labor, or another exception under ERISA, such failure could materially interfere with our activities in relation to these funds or expose us to risks related to our failure to comply with the requirements.

 

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Poor investment performance during periods of adverse market conditions may result in relatively high levels of investor redemptions, which can exacerbate the liquidity pressures on the affected funds, force the sale of assets at distressed prices or reduce the funds’ returns.

Poor investment performance during periods of adverse market conditions, together with investors’ increased need for liquidity given the state of the credit markets, can prompt relatively high levels of investor redemptions at times when many funds may not have sufficient liquidity to satisfy some or all of their investor redemption requests. During times when market conditions are deteriorating, many funds may face additional redemption requests, which will exacerbate the liquidity pressures on the affected funds. If they cannot satisfy their current and future redemption requests, they may be forced to sell assets at distressed prices or cease operations. Various measures taken by funds to improve their liquidity profiles (such as the implementation of “gates” or the suspension of redemptions, which we had implemented for three of our evergreen funds in 2008) that reduce the amounts that would otherwise be paid out in response to redemption requests may have the affect of incentivizing investors to “gross up” or increase the size of the future redemption requests they make, thereby exacerbating the cycle of redemptions. The liquidity issues for such funds are often further exacerbated by their fee structures, as a decrease in NAV decreases their management fees.

Certain of our funds have agreements that create debt or debt-like obligations with one or more counterparties. Such agreements in many instances contain covenants or “triggers” that require the fund to maintain a certain level of NAV over certain testing periods or to post additional margin on a daily basis when prices of our funds’ derivative contracts move against the fund. In addition, there may be guidelines in total return swap facilities that require reference obligations to be above a certain price level. Decreases in such funds’ NAV (whether due to performance, redemption or both) that breach such covenants, the failure to make any margin calls or meaningful decreases in the price of loans or securities that may result in defaults under such agreements and such defaults could permit the counterparties to take various actions that would be adverse to the funds, including terminating the financing arrangements, increasing the amount of margin or collateral that the funds are required to post (so-called “supercollateralization” requirements) or decreasing the aggregate amount of leverage that such counterparty is willing to provide to our funds. In particular, many such covenants to which our funds are party are designed to protect against sudden and pronounced drops in NAV over specified periods, so if our open-end or evergreen funds were to receive larger-than-anticipated redemption requests during a period of poor performance, such covenants may be breached. Defaults under any such covenants would likely result in the affected funds being forced to sell financed assets (which sales would likely occur in suboptimal or distressed market conditions) or being forced to restructure a swap facility with more onerous terms or otherwise raise cash by reducing other leverage, which would reduce the funds’ returns and our opportunities to produce incentive and investment income from the affected funds.

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity, and the values of assets established pursuant to the methodologies may never be realized.

Our funds make investments for which market quotations are not readily available. We are required by generally accepted accounting principles in the United States, or GAAP, to make good faith determinations as to the fair value of these investments on a quarterly basis in connection with the preparation of our funds’ financial statements.

There is no single standard for determining fair value in good faith. The types of factors that may be considered when determining the fair value of an investment in a particular company include acquisition price of the investment, discounted cash flow valuations, historical and projected operational and financial results for the company, the strengths and weaknesses of the company relative to its comparable companies, industry trends, general economic and market conditions, information with respect to offers for the investment, the size of the investment (and any associated

 

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control) and other factors deemed relevant. Fair values may also be assessed based on the enterprise value of a company established using a market multiple approach that is based on a specific financial measure (such as EBITDA, adjusted EBITDA, free cash flow, net income, book value or net asset value) or, in some cases, a cost basis or a discounted cash flow or liquidation analysis. Because valuations, and in particular valuations of investments for which market quotations are not readily available, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, determinations of fair value may differ materially from the values that would have resulted if a ready market had existed. Even if market quotations are available for our investments, the quotations may not reflect the value that we would actually be able to realize because of various factors, including the possible illiquidity associated with a large ownership position, subsequent illiquidity in the market for a company’s securities, future market price volatility or the potential for a future loss in market value based on poor industry conditions or the market’s view of overall company and management performance.

Because there is significant uncertainty in the valuation of, or in the stability of the value of, illiquid investments, the fair values of such investments as reflected in a fund’s NAV do not necessarily reflect the prices that would actually be obtained by us on behalf of the fund when such investments are sold. Sales at values significantly lower than the values at which investments have previously been reflected in a fund’s NAV may result in losses for the applicable fund, a decline in management fees and the loss of incentive income that may have been accrued by the applicable fund. Changes in values attributed to investments from quarter to quarter may result in volatility in the NAV and results of operations that we report. Also, a situation where a fund’s NAV turns out to be materially different from the NAV previously reported for the fund could cause investors to lose confidence in us, which could in turn result in difficulty in raising additional funds or investors requesting redemptions from certain of our funds.

We make investments in companies that are based outside the United States, which exposes us to additional risks not typically associated with investing in companies that are based in the United States.

Many of our funds invest a portion of their assets in the equity, debt, loans or other securities of issuers located outside the United States, while certain of our funds invest substantially all of their assets in these types of securities. Investments in non-U.S. securities involve certain factors not typically associated with investing in U.S. securities, including risks relating to:

 

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currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency into another;

 

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less developed or less efficient financial markets than exist in the United States, which may lead to price volatility and relative illiquidity;

 

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the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and less government supervision and regulation;

 

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differences in legal and regulatory environments, particularly with respect to bankruptcy and reorganization;

 

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less publicly available information in respect of companies in non-U.S. markets;

 

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certain economic and political risks, including potential exchange control regulations and restrictions on our non-U.S. investments and repatriation of capital, potential political, economic or social instability, the possibility of expropriation or confiscatory taxation and adverse economic and political developments; and

 

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the possible imposition of non-U.S. taxes or withholding on income and gains recognized with respect to the securities.

 

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There can be no assurance that adverse developments with respect to these risks will not adversely affect our funds that invest in securities of non-U.S. issuers.

Certain of our funds and all of our separate account agreements contain provisions that allow investors to withdraw their capital.

Our separate account agreements generally can be terminated upon notice of 30 days or less. Similarly, our commingled open-end funds permit the withdrawal of capital by our investors during certain open periods that generally occur on the first business day of each calendar month. Our active evergreen funds have withdrawal rights that, depending on the specific fund, can be exercised in intervals ranging from three months to three years. Any significant number of terminations or withdrawals could have a material adverse effect on our business and results of operations.

We have made and expect to continue to make significant principal investments in our current and future funds, and we may lose money on some or all of our investments.

Since our inception in 1995, we have increased the minimum level of our principal investments in our closed-end and evergreen funds from 0.2% of the fund’s aggregate committed capital to 1.0% starting with funds that held their initial closings in late 1998, to 2.0% starting with funds that held their initial closings in mid-2004. Subsequent to the 2007 Private Offering, we decided to further increase our principal investments in such funds that have initial closings after May 2007 to the greater of 2.5% of the funds’ aggregate committed capital or $20 million. Although we are not limited in the amount we choose to invest, in 2009 we decided that we will generally not invest more than $100 million in any one fund. We expect to continue to make significant principal investments in our funds and may choose to increase the percentage amount we invest at any time. Contributing capital to these funds is risky, and we may lose some or all of the principal amount of our investments. Any such loss could have a material adverse impact on our financial condition and results of operations.

Our funds make investments in companies that we do not control.

Investments by many of our funds include debt instruments and equity securities of companies that we do not control. These instruments and securities may be acquired by our funds through trading activities or through purchases of securities from the issuer. In addition, our control investing funds may acquire minority equity interests and may also dispose of a portion of their majority equity investments in portfolio companies over time in a manner that results in the funds retaining a minority investment. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the values of the investments held by our funds could decrease and our financial condition, results of operations and cash flow could suffer as a result.

Investments by our funds will in many cases rank junior to investments made by others.

In many cases, the companies in which our funds invest have indebtedness or equity securities, or may be permitted to incur indebtedness or to issue equity securities, that rank senior to our investment. By their terms, these instruments may provide that their holders are entitled to receive payments of dividends, interest or principal on or before the dates on which payments are to be made in respect of our investment. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a company in which we hold an investment, holders of securities ranking senior to our investment would typically be entitled to receive payment in full before distributions could be made in respect of our investment. After repaying senior security holders, the company may not have any

 

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remaining assets to use for repaying amounts owed in respect of our investment. To the extent that any assets remain, holders of claims that rank equally with our investment would be entitled to share on an equal and ratable basis in distributions that are made out of those assets. Also, during periods of financial distress or following an insolvency, the ability of our funds to influence a company’s affairs and to take actions to protect their investment may be substantially less than that of those holding senior interests.

The due diligence process that we undertake in connection with investments by some of our funds may not reveal all facts that may be relevant in connection with an investment.

Before making investments in companies that we expect to control, we undertake a due diligence investigation of the target company. In conducting these investigations, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisers, accountants and investment banks are often involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, the due diligence investigation that we carry out with respect to an investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating the investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful.

Market values of publicly traded securities that are held as investments may be volatile.

The market prices of publicly traded securities held by some of our funds may be volatile and are likely to fluctuate due to a number of factors beyond our control, including actual or anticipated changes in the profitability of the issuers of such securities, general economic, social or political developments, changes in industry conditions, changes in government regulation, shortfalls in operating results from levels forecast by securities analysts, the general state of the securities markets and other material events, such as significant management changes, financings, refinancings, securities issuances, acquisitions and dispositions. Changes in the values of these investments may adversely affect our investment performance and our results of operations.

Volatility in the structured credit, leveraged loan and high yield bond markets may adversely affect the companies in which our funds are invested.

To the extent that companies in which our funds invest participate in the structured credit, leveraged loan and high yield bond markets, the results of their operations may suffer if such markets experience dislocations, illiquidity and volatility. In addition, to the extent that such marketplace events continue (or even worsen), this may have an adverse impact on the availability of credit to businesses generally and could lead to an overall weakening of the U.S. and global economies. Any continuing economic downturn could adversely affect the financial resources of our funds’ investments (in particular those investments that depend on credit from third parties or that otherwise participate in the credit markets) and their ability to make principal and interest payments on, or refinance, outstanding debt when due. In the event of such defaults, our funds could lose both invested capital in, and anticipated profits from, the affected portfolio companies.

We enter into a significant number of side letter agreements with limited partners of certain of our funds, and the terms of these agreements could expose the general partners of the funds to additional risks and liabilities.

We regularly enter into side letter agreements with particular limited partners in the course of raising our funds. These side letters typically afford the affected limited partners assurance with respect to particular aspects of the operation of the fund. Given that these assurances often elaborate upon the provisions of the relevant fund’s partnership agreement, our affiliates could be exposed to additional risks, liabilities and obligations not contemplated in our funds’ partnership agreements.

 

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Our funds may invest in companies that are highly leveraged, a fact that may increase the risk of loss associated with the investments.

Our funds may invest in companies whose capital structures involve significant leverage. These investments are inherently more sensitive to declines in revenues and to increases in expenses and interest rates. The leveraged capital structure of these companies increases the exposure of our funds to adverse economic factors such as downturns in the economy or deterioration in the condition of the portfolio company or its industry. Additionally, the securities acquired by our funds may be the most junior in what could be a complex capital structure, and thus subject us to the greatest risk of loss.

The use of leverage by our funds could have a material adverse effect on our financial condition, results of operation and cash flow.

Some of our funds use leverage (including through swaps and other derivatives) as part of their respective investment programs and may borrow a substantial amount of capital. The use of leverage poses a significant degree of risk and can enhance the magnitude of a significant loss in the value of the investment portfolio. The interest expense and other costs incurred in connection with such leverage may not be recovered by the appreciation in the value of any associated securities or bank debt, and will be lost – and the timing and magnitude of such losses may be accelerated or exacerbated – in the event of a decline in the market value of such securities or bank debt. In addition, such funds may be subject to margin calls in the event of a decline in the value of the posted collateral. Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of operations and cash flow.

Changes in the debt financing markets may negatively impact the ability of our funds and their portfolio companies to obtain attractive financing for their investments and may increase the cost of such financing if it is obtained, leading to lower-yielding investments and potentially decreasing our incentive income and investment income.

The markets for debt financing remain contracted. Large commercial banks, which have traditionally provided such financing, have demanded higher interest rates, more restrictive covenants and generally more onerous terms (including posting additional collateral) in order to provide financing and in some cases are refusing to provide any financing that would have been readily obtained under credit conditions present several years ago.

If our funds are unable to obtain committed debt financing or can only obtain debt at an increased interest rate, such funds’ investment activities may be restricted and their profits may be lower than they would otherwise have achieved, either of which could lead to a decrease in the incentive and investment income earned by us. Similarly, the portfolio companies owned by our funds regularly utilize the corporate debt markets to obtain efficient financing for their operations. To the extent that the current credit markets have rendered such financing difficult or more expensive to obtain, the operating performance of those portfolio companies and therefore the investment returns on our funds may be negatively impacted. In addition, to the extent that the current markets make it difficult or impossible to refinance debt that is maturing in the near term, the relevant portfolio company may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection. Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of operations and cash flow.

Our funds may face risks relating to undiversified investments.

We cannot give assurance as to the degree of diversification that will be achieved in any fund investments. Difficult market conditions or slowdowns affecting a particular asset class, geographic region or other category of investment could have a significant adverse impact on a fund if its

 

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investments are concentrated in that area, which would result in lower investment returns. Accordingly, a lack of diversification on the part of a fund could adversely affect a fund’s performance and, as a result, our financial condition and results of operations.

Risk management activities may adversely affect the returns on our funds’ investments.

When managing our exposure to market risks, we may (on our own behalf or on behalf of our funds) from time to time use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative instruments to limit our exposure to changes in the relative values of investments that may result from market developments, including changes in prevailing interest rates, currency exchange rates and commodity prices. The success of any hedging or other derivative transactions generally will depend on our ability to correctly predict market changes, the degree of correlation between price movements of a derivative instrument and the position being hedged, the creditworthiness of the counterparty and other factors. As a result, while we may enter into a transaction in order to reduce our exposure to market risks, the transaction may result in poorer overall investment performance than if it had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.

The hedging of currency risk exposes our funds to other risks.

Although it is impossible to hedge against all currency risk, certain of our funds enter into hedging transactions in order to reduce the substantial effects of currency fluctuations on our cash flow and financial condition. These instruments may include foreign currency forward contracts, currency swap agreements and currency option contracts. Certain of our funds have entered into, and expect to continue to enter into, such hedging arrangements. While such hedging arrangements may reduce certain risks, such arrangements themselves may entail certain other risks. These arrangements may require the posting of cash collateral at a time when a fund has insufficient cash or illiquid assets such that the posting of the cash is either impossible or requires the sale of assets at prices that do not reflect their underlying value. Moreover, these hedging arrangements may generate significant transaction costs that reduce the returns generated by a fund. Thus, while our funds may benefit from the use of these hedging arrangements, changes in currency exchange rates (particularly unanticipated or significant changes) may result in poorer overall performance for those funds that hedge than if they had not entered into such hedging arrangements. Those funds are also exposed to the risk that their counterparties to hedging contracts will default on their obligations.

Risks Relating to Our Class A Units and This Offering

The large number of Class A units eligible for public sale could depress the market price of our Class A units.

The market price of our Class A units could decline as a result of sales of a large number of our Class A units in the market after this offering, and the perception that these sales could occur may also depress the market price of our Class A units. Based on              Class A units outstanding as of                     , 2011, we will have              Class A units outstanding after this offering (or              Class A units if the underwriters exercise in full their option to purchase additional units). This number includes all of the Class A units that are being sold in this offering, which may be resold immediately in the public market, unless they are held by our affiliates, as that term is defined in Rule 144 under the Securities Act.

Holders of              Class A units that are traded on the GSTrUE OTC market have executed lock-up agreements with the underwriters pursuant to which they have agreed not to dispose of or hedge any Class A units or securities convertible into or exchangeable for Class A units or substantially similar securities, referred to collectively as the restricted securities, during the period from the date of

 

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this prospectus continuing through (1) with respect to all of such Class A unitholders’ restricted securities not sold in this offering, the date that is 60 days after the date of this prospectus and (2) solely with respect to one half of such Class A unitholder’s restricted securities not sold in this offering, the date that is 120 days after the date of this prospectus, in each case, without the prior written consent of the representatives of the underwriters. Among other customary exceptions, the restrictions on transfer described above are subject to exceptions that permit a Class A unitholder to transfer its Class A units:

 

  Ÿ  

if such Class A units were acquired in this offering or on the open market after this offering;

 

  Ÿ  

to us;

 

  Ÿ  

following the commencement of a tender or exchange offer for Class A units that is subject to the provisions of the Exchange Act by a third party not affiliated with us; or

 

  Ÿ  

in connection with any acquisition, sale or merger of us with an unaffiliated third party in which all of the holders of Class A units are entitled to participate.

In addition, our directors and executive officers (which includes our principals), other employees and certain other investors hold Oaktree Operating Group units through OCGH and, subject to certain restrictions, have the right to require OCGH to exchange their Oaktree Operating Group units for Class A units in accordance with the terms of the exchange agreement. See “Certain Relationships and Related Party Transactions—Exchange Agreement.” Our directors and executive officers also hold a small number of Class A units. Our directors and executive officers have executed lock-up agreements with the underwriters pursuant to which each has agreed not to dispose of or hedge any of such OCGH units, any Class A units or securities convertible into or exchangeable for such OCGH units or Class A units or substantially similar securities, or to exercise their rights to exchange their Oaktree Operating Group units for Class A units, during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus, without the prior written consent of the representatives of the underwriters. Among other customary exceptions, these restrictions on transfer described above are subject to exceptions that permit a Class A unitholder to transfer Class A units:

 

  Ÿ  

if such Class A units were acquired in this offering or on the open market after this offering, provided that such transactions do not require a public filing;

 

  Ÿ  

to us, provided that such transactions do not require a public filing;

 

  Ÿ  

following the commencement of a tender or exchange offer for Class A units that is subject to the provisions of the Exchange Act by a third party not affiliated with us; or

 

  Ÿ  

in connection with any acquisition, sale or merger of us with an unaffiliated third party in which all of the holders of Class A units are entitled to participate.

With respect to all other holders of OCGH units, we and OCGH have agreed with the underwriters not to permit any disposition of any OCGH units owned by such holders, or any exchange of OCGH units owned by them into Class A units, during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus, without the prior written consent of the representatives of the underwriters. The foregoing restrictions on transfer and exchange are subject to customary exceptions.

Each of the restricted periods described in the preceding three paragraphs will be automatically extended if: (1) during the last 17 days of such restricted period, we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of such restricted period, we announce that we will release earnings results during the 15-day period following the last day of such period, in which case the restrictions for such period described in the preceding paragraphs will

 

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continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release of the announcement of the material news or material event.

In addition to the lock-up arrangements with the underwriters described above, pursuant to an amendment to our operating agreement adopted in connection with this offering, all holders of Class A units that are traded on the GSTrUE OTC market that have not executed a lock-up agreement with the underwriters described above are prohibited from transferring such Class A units during the period from the date of the prospectus continuing through the date 120 days after the date of this prospectus; provided, however that the foregoing restrictions do not apply to any Class A units acquired in this offering or on the open market after this offering.

Lastly, following the 180-day period described above, each of our directors, officers and other employees may be permitted to transfer up to one third of their then-vested holdings during each successive 12-month period; provided, however, that our Chairman may be permitted to sell up to an additional 15% of his holdings during the first 24-month period.

The following table sets forth the number of Class A units and the applicable date that they will be available for sale into the public market:

 

Date Available for Sale into Public Markets

   Number of
Class A Units
 

On the date of this prospectus (after giving effect to this offering)

  

Beginning 60 days (subject to extension) after the date of this prospectus

  

Beginning 120 days (subject to extension) after the date of this prospectus

  

At various times beginning 180 days after the date of this prospectus

  

Sales of our Class A units as restrictions end may make it more difficult for us to sell equity securities at a time and at a price that we deem appropriate. These sales also could cause the price of our Class A units to fall and make it more difficult for you to sell Class A units held by you.

We also may issue our Class A units from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of Class A units that we issue may in turn be significant. In addition, we may also grant registration rights covering Class A units issued in connection with any such acquisitions and investments.

There is no existing public market for our Class A units, and we do not know if one will develop, which could impede the ability of our Class A unitholders to sell their Class A units and depress the market price of our Class A units.

Prior to this offering, our Class A units have traded on a private over-the-counter market for Tradable Unregistered Equity Securities developed by Goldman, Sachs & Co., referred to as the GSTrUE OTC market, and, as such, there has not been a public market for our Class A units. There has not been an active trading market for any meaningful volume of our Class A units on the GSTrUE OTC market. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active trading market does not develop, our Class A unitholders may have difficulty selling their Class A units. The initial public offering price for our Class A units will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following the offering. See “Underwriting.” Consequently, our Class A unitholders may not be able to sell our Class A units at prices equal to or greater than the price they paid in the offering.

 

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The market price and trading volume of our Class A units may be volatile, which could result in rapid and substantial losses for our Class A unitholders.

Even if an active U.S. trading market for our Class A units develops, the market price of our Class A units may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A units may fluctuate and cause significant price variations to occur. If the market price of our Class A units declines significantly, you may be unable to sell your Class A units at an attractive price, if at all. The market price of our Class A units may fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A units or result in fluctuations in the price or trading volume of our Class A units include:

 

  Ÿ  

variations in our quarterly operating results or distributions, which may be substantial;

 

  Ÿ  

our policy of taking a long-term perspective on making investment, operational and strategic decisions, which is expected to result in significant and unpredictable variations in our quarterly returns;

 

  Ÿ  

failure to meet analysts’ earnings estimates;

 

  Ÿ  

publication of research reports about us or the investment management industry or the failure of securities analysts to cover our Class A units after this offering;

 

  Ÿ  

additions or departures of key management personnel;

 

  Ÿ  

adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

  Ÿ  

changes in market valuations of similar companies;

 

  Ÿ  

speculation in the press or investment community;

 

  Ÿ  

changes or proposed changes in laws or regulations or differing interpretations thereof affecting our business or enforcement of these laws and regulations or announcements relating to these matters;

 

  Ÿ  

a lack of liquidity in the trading of our Class A units;

 

  Ÿ  

adverse publicity about the asset management industry generally or individual scandals, specifically; and

 

  Ÿ  

general market and economic conditions.

We have not previously been required to comply with Section 404 of the Sarbanes-Oxley Act.

We have not previously been required to comply with the requirements of the Sarbanes-Oxley Act, including the internal control evaluation and certification requirements of Section 404 of that statute, and we will not be required to comply with all of those requirements until after we have been subject to the reporting requirements of the Exchange Act for a specified period of time. Accordingly, we do not have in place internal controls over financial reporting systems that comply with Section 404. The internal control evaluation required by Section 404 will divert internal resources and will take a significant amount of time, effort and expense to complete. If it is determined that we are not in compliance with Section 404, we will be required to implement remedial procedures and re-evaluate our internal control over financial reporting. We will experience higher than anticipated operating expenses as well as higher independent auditor and consulting fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to comply with Section 404. If we are unable to implement any necessary changes effectively or efficiently, our operations, financial reporting or financial results could be adversely affected, and we could obtain an adverse report on internal controls from our independent registered public accountants. In particular, if we are not able to implement the requirements of Section 404 in a timely manner or with

 

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adequate compliance, our independent registered public accountants may not be able to certify as to the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us and lead to a decline in the market price of our units.

The tax attributes of our Class A Units may cause mutual funds to limit or reduce their holdings of Class A Units.

U.S. mutual funds that are treated as regulated investment companies, or RICs, for U.S. federal income tax purposes are required, among other things, to distribute at least 90% of their taxable income to their shareholders in order to maintain their favorable U.S. income tax status. RICs are required to meet this distribution requirement regardless of whether their investments generate cash distributions equal to their taxable income. Accordingly, these investors have a strong incentive to invest in securities in which the amount of cash generated approximates the amount of taxable income recognized. Our Class A unitholders, however, are frequently allocated an amount of taxable income that exceeds the amount of cash we distribute to them. This may make it difficult for RICs to maintain a meaningful portion of their portfolio in our Class A units and may force those RICs that do hold our Class A units to sell all or a portion of their holdings. These actions could increase the supply of, and reduce the demand for, our Class A units, which could cause the price of our Class A units to decline.

The market price of our Class A units may decline due to the large number of Class A units eligible for future issuance upon the exchange of OCGH units.

In connection with the consummation of our May 2007 Restructuring, each of our owners prior to the May 2007 Restructuring exchanged his, her or its interests in our business for units in OCGH. Subject to certain restrictions, each holder of units in OCGH has the right to exchange his or her vested units for Oaktree Operating Group units and, in turn, for Class A units. The Class A units issued upon such exchanges would be “restricted securities,” as defined in Rule 144 under the Securities Act, unless we register such issuances. Eighty percent of the units in OCGH that our employees received through the May 2007 Restructuring have already vested and the remaining 20% will vest on January 2, 2012. Vested units are subject to a lock-up that expires on July 10 of the year that such units vest. The units in OCGH held by certain institutional investors that owned interests in OCM prior to the 2007 Private Offering are fully vested but are subject to a five-year lock-up that is released 20% per year beginning July 10, 2008. In addition, the OCGH units that we grant under our 2007 Oaktree Capital Group Equity Incentive Plan, or the 2007 Equity Incentive Plan, contain vesting provisions, the length of which has been and will continue to be determined by us at our discretion. OCGH units granted under the plan on or prior to January 2008 are also subject to a lock-up that expires slightly over six months after the date that such units vest. Accordingly, subject to the other lock-up and transfer restriction arrangements described under “Description of Our Units” and “Units Eligible For Future Sale” 98,188,936 Class A units will be available to be sold by December 31, 2011 and a substantial number of additional units are expected to be available to be sold in the future by the OCGH unitholders. OCGH has the right to waive such vesting and lock-up periods in its discretion at any time.

The market price of our Class A units could decline as a result of sales of a large number of Class A units issuable upon exchange of OCGH units. These sales, or the possibility that these sales may occur, may also make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

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Additional issuances of units under our 2007 Equity Incentive Plan may dilute the holdings of our existing unitholders, reduce the market price of our Class A units or both. Additionally, our operating agreement authorizes us to issue an unlimited number of additional units and options, rights, warrants and appreciation rights relating to such units for consideration or for no consideration and on terms and conditions established by our board of directors in its sole discretion without the approval of Class A unitholders. These additional securities may be used for a variety of purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans.

We are a “controlled company” within the meaning of the NYSE listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Because our principals will continue to own units representing more than 50% of our voting power after giving effect to this offering, we will be considered a “controlled company” for the purposes of the NYSE listing requirements. As such, we may elect not to comply with certain NYSE corporate governance requirements which may include one or more of the following: that a majority of our board of directors consist of independent directors, that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. In addition, we will not be required to hold annual meetings of our unitholders. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE. See “Management—Controlled Company Exemption.”

We cannot assure you that our intended quarterly distributions will be paid each quarter or at all.

Our intention is to distribute to our Class A unitholders on a quarterly basis a significant portion of our share of the Oaktree Operating Group’s cash flow from operations in excess of amounts determined by our board of directors to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable laws, the terms of any of our debt instruments or other agreements or to provide for future distributions to our Class A unitholders. The declaration, payment and determination of the amount of our quarterly distribution, if any, will be at the sole discretion of our board of directors, who may change our distribution policy at any time. We cannot assure you that any distributions, whether quarterly or otherwise, will or can be paid.

Risks Relating to Our Organization and Structure

If we or any of our funds were deemed an investment company under the Investment Company Act, applicable restrictions could make it impractical for us to continue our business or such funds as contemplated and could have a material adverse effect on our business.

A person will generally be deemed to be an “investment company” for purposes of the Investment Company Act if:

 

  Ÿ  

it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

 

  Ÿ  

absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

 

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We believe that we are engaged primarily in the business of providing asset management services and not primarily in the business of investing, reinvesting or trading in securities. We also believe that the primary source of income from our business is properly characterized as income earned in exchange for the provision of services. We hold ourselves out as an asset management firm and do not propose to engage primarily in the business of investing, reinvesting or trading in securities. Further, because we believe that the capital interests of the general partners of our funds in their respective funds are neither securities nor investment securities for purposes of the Investment Company Act, we believe that less than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis are comprised of assets that could be considered investment securities. Accordingly, we do not believe that we are an investment company under the Investment Company Act.

The Investment Company Act and the rules thereunder contain detailed parameters for the organization and operation of investment companies. Among other things, the Investment Company Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain governance requirements. We intend to conduct our operations so that we will not be deemed to be an investment company under the Investment Company Act. Furthermore, we operate our funds so that they are not deemed to be investment companies that are required to be registered under the Investment Company Act. If anything were to happen that would cause us to be deemed to be an investment company under the Investment Company Act or that would require us to register our funds (other than Oaktree Finance, LLC) under the Investment Company Act, requirements imposed by the Investment Company Act, including limitations on capital structure, ability to transact business with affiliates and ability to compensate senior employees, could make it impractical for us to continue our business or the funds as currently conducted, impair the agreements and arrangements between and among OCGH, us, our funds and our senior management, or any combination thereof, and materially adversely affect our business, financial condition and results of operations. In addition, we may be required to limit the amount of investments that we make as a principal or otherwise conduct our business in a manner that does not subject us to the registration and other requirements of the Investment Company Act.

Our Class A unitholders do not elect our manager and have limited ability to influence decisions regarding our business, and our principals are able to determine the outcome of any matters submitted to a vote of unitholders.

Our operations and activities are managed by our board of directors. So long as the Oaktree control condition is satisfied, our manager, Oaktree Capital Group Holdings GP, LLC, which is owned by our principals, will be entitled to designate all the members of our board of directors and to remove or replace any director (or our entire board of directors) at any time. Accordingly, our principals will be able to control our management and affairs. Our Class A unitholders do not elect our manager.

While our Class A units and Class B units generally vote together as a single class on the limited matters submitted to a vote of unitholders, including certain amendments of our operating agreement, our operating agreement does not obligate us to hold annual meetings. Accordingly, our Class A unitholders have only limited voting rights on matters affecting our business and therefore limited ability to influence decisions regarding our business. In addition, through their control of our Class B units, our principals, with a 98.23% voting interest, are able to determine the outcome of any matter that our board of directors does submit to a vote.

 

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Our principals’ control of our manager and of the combined voting power of our units and certain provisions of our operating agreement could delay or prevent a change of control.

As of the date of this prospectus, our principals control 98.23% of the combined voting power of our units through their control of OCGH and have the ability to determine the compensation of our board of directors through their control of our manager. Our principals are able to appoint and remove our directors and change the size of our board of directors, are able to determine the outcome of all matters requiring unitholder approval, are able to cause or prevent a change of control of our company and can preclude any unsolicited acquisition of our company. In addition, provisions in our operating agreement make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our Class A unitholders. For example, our operating agreement provides that only our board of directors may call meetings and authorizes the issuance of preferred units in us that could be issued by our board of directors to thwart a takeover attempt. The control of our manager and voting power by our principals and these provisions of our operating agreement could delay or prevent a change of control and thereby deprive Class A unitholders of an opportunity to receive a premium for their Class A units as part of a sale of our company and might ultimately affect the market price of our Class A units.

Our principals and executive officers do not hold their economic interest in the Oaktree Operating Group through us, which may give rise to conflicts of interest, and it will be difficult for a Class A unitholder to successfully challenge a resolution of a conflict of interest by us.

As of the date of this prospectus, our principals are entitled to approximately 50.05% of the economic returns of the Oaktree Operating Group. Because they do not hold this economic interest through us, our principals may have interests that conflict with those of the holders of Class A units. For example, our principals may have different tax positions from us, which could influence their decisions regarding whether and when to dispose of assets and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement. In addition, the structuring of future transactions may take into consideration the principals’ and employees’ tax considerations even where no similar benefit would accrue to us and the Class A unitholders.

Any resolution or course of action taken by our directors or their affiliates with respect to an existing or potential conflict of interest involving OCGH, our directors or their respective affiliates is permitted and deemed approved by the Class A unitholders and does not constitute a breach of our operating agreement or any duty (including any fiduciary duty) if the course of action is (1) approved by the vote of unitholders representing a majority of the total votes that may be cast by disinterested parties, (2) on terms no less favorable to us, our subsidiaries or our unitholders than those generally being provided to or available from unrelated third parties, (3) fair and reasonable to us, taking into account the totality of the relationships among the parties involved, or (4) approved by a majority of our directors who are not employees of us, our subsidiaries or any of our affiliates controlled by our principals, who we refer to as our “outside directors.” If our board of directors determines that any resolution or course of action satisfies either (2) or (3) above, then it will be presumed that such determination was made in good faith and a Class A unitholder seeking to challenge our directors’ determination would bear the burden of overcoming such presumption. This is different from the situation with Delaware corporations, where a conflict resolution by an interested party would be presumed to be unfair and the interested party would have the burden of demonstrating that the resolution was fair.

As noted above, if our board of directors obtains the approval of a majority of our outside directors for any given action, the resolution will be conclusively deemed not a breach by our board of directors of any duties it may owe to us or our Class A unitholders. This is different from the situation with Delaware corporations, where the approval of outside directors may, in certain circumstances, merely shift the burden of demonstrating unfairness to the plaintiff. Potential conflicts of interest may be

 

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resolved by our outside directors even if they hold interests in us or our funds or are otherwise affected by the decision or action that they are approving. If an investor chooses to purchase a Class A unit, it will be treated as having consented to the provisions set forth in our operating agreement, including provisions regarding conflicts of interest situations that, in the absence of such provisions, might be considered a breach of fiduciary or other duties under applicable state law. As a result, Class A unitholders will, as a practical matter, not be able to successfully challenge an informed decision by our outside directors.

Our operating agreement contains provisions that substantially limit remedies available to our Class A unitholders for actions that might otherwise result in liability for our officers, directors, manager or Class B unitholder.

While our operating agreement provides that our officers and directors have fiduciary duties equivalent to those applicable to officers and directors of a Delaware corporation under the Delaware General Corporation Law, or DGCL, the agreement also provides that our officers and directors are liable to us or our unitholders for an act or omission only if such act or omission constitutes a breach of the duties owed to us or our unitholders, as applicable, by any such officer or director and such breach is the result of willful malfeasance, gross negligence, the commission of a felony or a material violation of law, in each case, that has, or could reasonably be expected to have, a material adverse effect on us or fraud. Moreover, we have agreed to indemnify each of our directors and officers, to the fullest extent permitted by law, against all expenses and liabilities (including judgments, fines, penalties, interest, amounts paid in settlement with our approval and counsel fees and disbursements) arising from the performance of any of their obligations or duties in connection with their service to us, including in connection with any civil, criminal, administrative, investigative or other action, suit or proceeding to which any such person may be made party by reason of being or having been one of our directors or officers, except for any expenses or liabilities that have been finally judicially determined to have arisen primarily from acts or omissions that violated the standard set forth in the preceding sentence. Furthermore, our operating agreement provides that OCGH will not have any liability to us or our other unitholders for any act or omission and is indemnified in connection therewith.

Our manager, whose only role is to appoint members of our board of directors so long as the Oaktree control condition is satisfied, does not owe any duties to us or our Class A unitholders. We have agreed to indemnify our manager in the same manner as our directors and officers described above.

Under our operating agreement, we, our board of directors or our manager are entitled to take actions or make decisions in its “sole discretion” or “discretion” or that it deem “necessary or appropriate” or “necessary or advisable.” In those circumstances, we, our board of directors or our manager are entitled to consider only such interests and factors as it desires, including our own or our directors’ interests, and neither it nor our board of directors have any duty or obligation (fiduciary or otherwise) to give any consideration to any interest of or factors affecting us or any Class A unitholders, and neither we nor our board of directors will be subject to any different standards imposed by our operating agreement, the Delaware Limited Liability Company Act, or the Act, or under any other law, rule or regulation or in equity, except that we must act in good faith at all times. These modifications of fiduciary duties are expressly permitted by Delaware law. These modifications are detrimental to the Class A unitholders because they restrict the remedies available to Class A unitholders for actions that without those limitations might constitute breaches of duty (including fiduciary duty).

The control of our manager may be transferred to a third party without unitholder consent.

Our manager may transfer its manager interest to a third party in a merger or consolidation, in a transfer of all or substantially all of its assets or otherwise without the consent of our unitholders. Furthermore, our principals may sell or transfer all or part of their interests in our manager without the

 

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approval of our unitholders. A new manager could have a different investment philosophy or use its control of our board of directors to make changes to our business that materially affect our funds, our results of operations or our financial condition.

Our ability to make distributions to our Class A unitholders may be limited by our holding company structure, applicable provisions of Delaware law, contractual restrictions and the terms of any senior securities we may issue in the future.

We are a limited liability holding company and have no material assets other than the ownership of our interests in the Oaktree Operating Group held through the Intermediate Holding Companies. We have no independent means of generating revenues. Accordingly, to the extent we decide to make distributions to our Class A unitholders, we will cause the Oaktree Operating Group to make distributions to its unitholders, including the Intermediate Holding Companies, to fund any distributions we may declare on the Class A units. When the Oaktree Operating Group makes such distributions, all holders of Oaktree Operating Group units are entitled to receive pro rata distributions based on their ownership interests in the Oaktree Operating Group.

The declaration and payment of any future distributions will be at the sole discretion of our board of directors, and we may at any time modify our approach with respect to the proper metric for determining cash flow available for distribution. Our board of directors will take into account factors it deems relevant, such as, but not limited to, working capital levels, known or anticipated cash needs, business and investment opportunities, general economic and business conditions, our obligations under our debt instruments or other agreements, our compliance with applicable laws, the level and character of taxable income that flows through to our Class A unitholders, the availability and terms of outside financing, the possible repurchase of our Class A units in open market transactions, in privately negotiated transactions or otherwise, providing for future distributions to our Class A unitholders and growing our capital base. Under the Act, we may not make a distribution to a member if after the distribution all our liabilities, other than liabilities to members on account of their limited liability company interests and liabilities for which the recourse of creditors is limited to specific property of the limited liability company, would exceed the fair value of our assets. If we were to make such an impermissible distribution, any member who received a distribution and knew at the time of the distribution that the distribution was in violation of the Act would be liable to us for three years for the amount of the distribution. In addition, the Oaktree Operating Group’s cash flow may be insufficient to enable it to make required minimum tax distributions to holders of its units, in which case the Oaktree Operating Group may have to borrow funds or sell assets and thus our liquidity and financial condition could be materially adversely affected. Our operating agreement contains provisions authorizing the issuance of preferred units in us by our board of directors at any time without unitholder approval.

Furthermore, by paying cash distributions rather than investing that cash in our business, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise.

We are required to pay the OCGH unitholders for most of the tax benefits we realize as a result of the tax basis step-up we receive in connection with the sales by the OCGH unitholders of interests held in the Oaktree Operating Group.

Subject to certain restrictions, each OCGH unitholder has the right to exchange his or her vested OCGH units for Oaktree Operating Group units. In the event of an exchange, our Intermediate Holding Companies will deliver Class A units, on a one-for-one basis, or an equivalent amount of cash in exchange for the applicable OCGH unitholder’s Oaktree Operating Group units pursuant to an exchange agreement. These exchanges are expected to result in increases in the tax depreciation and amortization deductions, as well as an increase in the tax basis of other assets, of certain of the

 

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Oaktree Operating Group entities that otherwise would not have been available. These increases in tax depreciation and amortization deductions, as well as the tax basis of other assets, may reduce the amount of tax that Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. would otherwise be required to pay in the future, although the Internal Revenue Service, or IRS, may challenge all or part of the increased deductions and tax basis increase, and a court could sustain such a challenge.

Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. have entered into a tax receivable agreement with the OCGH unitholders that provides for the payment by Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. to the OCGH unitholders of 85% of the amount of tax savings, if any, that they actually realize (or are deemed to realize in the case of an early termination payment by Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. or a change of control, as discussed below) as a result of these increases in tax deductions and tax basis of entities owned by Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. The payments that Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. may make to the OCGH unitholders could be material in amount.

Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, the OCGH unitholders will not reimburse Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc. for any payments that have been previously made under the tax receivable agreement. As a result, in certain circumstances, payments could be made to the OCGH unitholders under the tax receivable agreement in excess of Oaktree Holdings, Inc.’s and Oaktree AIF Holdings, Inc.’s cash tax savings. Their ability to achieve benefits from any tax basis increase, and the payments to be made under the tax receivable agreement, will depend upon a number of factors, including the timing and amount of our future income.

In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business combination or certain other changes of control, Oaktree Holdings, Inc.’s and Oaktree AIF Holdings, Inc.’s (or their successors’) obligations with respect to exchanged units (whether exchanged before or after the change of control) would be based on certain assumptions, including that they would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement.

Risks Relating to United States Taxation

Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available and is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.

The U.S. federal income tax treatment of Class A unitholders depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our Class A unitholders should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the IRS and UST, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in our Class A units may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made. Changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception for us to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation, cause us to change our investments and commitments, affect the tax considerations of an investment in us and adversely affect an investment in our Class A units. For example, the U.S. Congress recently considered various legislative proposals to treat all or part of the capital gain and dividend income that is recognized by an investment partnership and allocable to a partner affiliated with the sponsor of the partnership (i.e., a

 

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portion of the incentive income) as ordinary income to such partner for U.S. federal income tax purposes. See “—The U.S. Congress has considered legislation that would have taxed certain income and gains at increased rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as well as the market price of our Class A units, could be reduced.”

Our operating agreement permits our board of directors to modify our operating agreement from time to time, without the consent of our Class A unitholders, to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, the revisions could have a material adverse impact on some or all Class A unitholders. Moreover, we apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to Class A unitholders in a manner that reflects such Class A unitholders’ beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, those assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Code or UST regulations and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects Class A unitholders.

If we were treated as a corporation for U.S. federal income tax or state tax purposes, then our distributions to our Class A unitholders would be substantially reduced and the value of our Class A units would be adversely affected.

The value of our Class A unitholders’ investment in us depends to a significant extent on our being treated as a partnership for U.S. federal income tax purposes, which requires that 90% or more of our gross income for every taxable year consist of qualifying income, as defined in Section 7704 of the Code, and that we not be required to be registered under the Investment Company Act. Qualifying income generally includes dividends, interest, capital gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We may not meet these requirements or current law may change so as to cause us, in either event, to be treated as a corporation for U.S. federal income tax purposes or otherwise subject to U.S. federal income tax. Moreover, the anticipated after-tax benefit of an investment in our Class A units depends largely on our being treated as a partnership for U.S. federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other matter affecting us.

If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate. Distributions to Class A unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to them. Because a tax would be imposed upon us as a corporation, our distributions to Class A unitholders would be substantially reduced, likely causing a substantial reduction in the value of our Class A units.

Current law may change, causing us to be treated as a corporation for U.S. federal or state income tax purposes or otherwise subjecting us to entity-level taxation. See “—The U.S. Congress has considered legislation that would have taxed certain income and gains at increased rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as well as the market price of our Class A units, could be reduced.” For example, certain states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an entity, our distributions to our Class A unitholders would be reduced.

 

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Our Class A unitholders may be subject to U.S. federal income tax on their share of our taxable income, regardless of whether they receive any cash distributions from us.

As long as 90% of our gross income for each taxable year constitutes qualifying income as defined in Section 7704 of the Code and we are not required to register as an investment company under the Investment Company Act on a continuing basis, and assuming there is no change in law (see “—The U.S. Congress has considered legislation that would have taxed certain income and gains at increased rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as well as the market price of our Class A units, could be reduced.”), we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. As a result, our Class A unitholders may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on their allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow-through basis) for each of our taxable years ending with or within their taxable year, regardless of whether or not our Class A unitholders receive cash distributions from us.

Our Class A unitholders may not receive cash distributions equal to their allocable share of our net taxable income or even the tax liability that results from that income. In addition, certain of our holdings, including holdings, if any, in a controlled foreign corporation, or CFC, and a passive foreign investment company, or PFIC, may produce taxable income prior to the receipt of cash relating to such income, and Class A unitholders may be required to take that income into account in determining their taxable income. In the event of an inadvertent termination of our partnership status, for which limited relief may be available, each holder of our Class A units may be obligated to make such adjustments as the IRS may require to maintain our status as a partnership. These adjustments may require persons holding our Class A units to recognize additional amounts in income during the years in which they hold such units.

A portion of our interest in the Oaktree Operating Group is held through Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., which are treated as corporations for U.S. federal income tax purposes and may be liable for significant taxes that could potentially adversely affect the value of our Class A units.

In light of the publicly traded partnership rules under U.S. federal income tax law and other requirements, we hold a portion of our interest in the Oaktree Operating Group through Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., which are treated as corporations for U.S. federal income tax purposes. Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. could be liable for significant U.S. federal income taxes and applicable state, local and other taxes that would not otherwise be incurred, which could adversely affect the value of our Class A units. Those additional taxes did not apply to the OCGH unitholders in OCM’s organizational structure in effect before the 2007 Private Offering and do not apply to the OCGH unitholders following the 2007 Private Offering to the extent they own equity interests in the Oaktree Operating Group entities through OCGH.

The U.S. Congress has considered legislation that would have taxed certain income and gains at increased rates and may have precluded us from qualifying as a partnership for U.S. tax purposes. If any similar legislation were to be enacted and apply to us, the after-tax income and gain related to our business, as well as the market price of our Class A units, could be reduced.

Over the past several years, a number of legislative and administrative proposals have been introduced and, in certain cases, have been passed by the U.S. House of Representatives. Most recently, the U.S. House of Representatives on May 28, 2010 passed legislation that would have, in general, treated income and gains, including gain on sale, attributable to an interest in an investment

 

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services partnership interest, or ISPI, as income subject to a new blended tax rate that is higher than under current law, except to the extent such ISPI would have been considered under the legislation to be a qualified capital interest. Your interest in us, our interest in Oaktree Holdings, LLC and the interests that Oaktree Holdings, LLC holds in entities that are entitled to receive incentive income may have been classified as ISPIs for purposes of this legislation. The U.S. Senate considered but did not pass similar legislation. It is unclear when or whether the U.S. Congress will reconsider similar legislation or what provisions will be included in any legislation, if enacted.

The House bill provided that, for taxable years beginning ten years after the date of enactment, income derived with respect to an ISPI that is not a qualified capital interest and that is subject to the rules discussed above would not meet the qualifying income requirements under the publicly traded partnership rules. Therefore, if similar legislation is enacted, following such ten-year period, we would be precluded from qualifying as a partnership for U.S. federal income tax purposes or be required to hold all such ISPIs through corporations, possibly U.S. corporations. If we were taxed as a U.S. corporation or required to hold all ISPIs through corporations, our effective income tax rate would increase significantly. The federal statutory rate for corporations is currently 35%. In addition, we could be subject to increased state and local taxes. Furthermore, you could be subject to tax on our conversion into a corporation or any restructuring required in order for us to hold our ISPIs through a corporation.

The Obama administration has indicated it supports the adoption of legislation that similarly changes the treatment of incentive income for U.S. federal income tax purposes. In its published revenue proposal for 2012, the Obama administration proposes that the current law regarding the treatment of incentive income be changed for periods after December 31, 2011 to subject such income to ordinary income tax (which is taxed at a higher rate than the proposed blended tax rate under the House legislation). The Obama administration’s published revenue proposals for 2010 and 2011 contained similar proposals.

States and other jurisdictions have also considered legislation to increase taxes with respect to incentive income. For example, New York recently considered legislation under which you could be subject to New York state income tax on income in respect of our Class A units as a result of certain activities of our affiliates in New York. This legislation would have been retroactive to January 1, 2010. It is unclear when or whether similar legislation will be enacted.

Complying with certain tax-related requirements may cause us to invest through foreign or domestic corporations subject to corporate income tax or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into.

In order for us to be treated as a partnership for U.S. federal income tax purposes and not as an association or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed above on a continuing basis and we must not be required to register as an investment company under the Investment Company Act. In order to effect such treatment, we (or our subsidiaries) may be required to invest through foreign or domestic corporations subject to corporate income tax or enter into acquisitions, borrowings, financings or other transactions we may not have otherwise entered into. This may adversely affect our ability to operate solely to maximize our cash flow.

Taxable gain or loss on disposition of our Class A units could be more or less than expected.

If a unitholder sells its Class A units, it will recognize a gain or loss equal to the difference between the amount realized and the adjusted tax basis in those Class A units. Prior distributions to such unitholder in excess of the total net taxable income allocated to it, which decreased the tax basis in its Class A units, will in effect become taxable income to such unitholder if the Class A units are sold

 

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at a price greater than its tax basis in those Class A units, even if the price is less than the original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to such selling unitholder.

We may hold or acquire certain investments through entities classified as a PFIC or CFC for U.S. federal income tax purposes.

Certain of our funds’ investments may be in foreign corporations or may be acquired through a foreign subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an entity may be a PFIC or a CFC for U.S. federal income tax purposes. Class A unitholders indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences. For example, a portion of the amount a unitholder realizes on a sale of their Class A units may be recharacterized as ordinary income. In addition, Oaktree Holdings, Ltd. is treated as a CFC for U.S. tax purposes, and, as such, each Class A unitholder that is a U.S. person is required to include in income its allocable share of Oaktree Holdings, Ltd.’s “Subpart F” income reported by us.

Non-U.S. persons face unique U.S. tax issues from owning Class A units that may result in adverse tax consequences to them.

We intend to use reasonable efforts to structure our investments in a manner such that non-U.S. holders do not incur income that is effectively connected with a U.S. trade or business, or ECI, with respect to an investment in our Class A units. However, we may invest in flow-through entities that are engaged in a U.S. trade or business and, in such case, we and non-U.S. holders of Class A units would be treated as being engaged in a U.S. trade or business for U.S. federal income tax purposes, even if we do not recognize ECI from such investments. Current UST regulations provide that non-U.S. holders that are deemed to be engaged in a U.S. trade or business are required to file a U.S. federal income tax return even if such holders do not recognize any ECI. In addition, although we intend to take the position that income allocated to us from our investments is not ECI, if the IRS successfully challenged certain of our methods of allocation of income for U.S. federal income tax purposes, it is possible non-U.S. holders could recognize ECI with respect to their investment in our Class A units.

To the extent our income is treated as ECI, non-U.S. holders generally would be subject to withholding tax on their allocable shares of such income, would be required to file U.S. federal income tax returns for such year reporting their allocable shares of income effectively connected with such trade or business and any other income treated as ECI and would be subject to U.S. federal income tax at regular U.S. tax rates on any such income (state and local income taxes and filings may also apply in that event). Non-U.S. holders that are corporations may also be subject to a 30% branch profits tax on their allocable share of such income. In addition, certain income from U.S. sources that is not ECI allocable to non-U.S. holders will be reduced by withholding taxes imposed at the highest effective applicable tax rate. A portion of any gain recognized by a non-U.S. holder on the sale or exchange of Class A units could also be treated as ECI.

Tax-exempt entities face unique tax issues from owning Class A units that may result in adverse tax consequences to them.

In light of our intended investment activities, we may derive income that constitutes unrelated business taxable income, or UBTI. Consequently, a holder of Class A units that is a tax-exempt organization may be subject to unrelated business income tax to the extent that its allocable share of our income consists of UBTI. A tax-exempt partner of a partnership could be treated as earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner, if the partnership derives income from debt-financed property or if the partnership interest itself is debt-financed.

 

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We will adopt certain income tax accounting positions that may not conform with all aspects of applicable tax requirements. The IRS may challenge this treatment, which could adversely affect the value of our Class A units.

We will adopt depreciation, amortization and other tax accounting positions that may not conform with all aspects of existing UST regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our Class A unitholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of Class A units and could have a negative impact on the value of our Class A units or result in audits of and adjustments to our Class A unitholders’ tax returns.

The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our partnership for U.S. federal income tax purposes.

We will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Our termination would, among other things, result in the closing of our taxable year for all Class A unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income.

Class A unitholders may be subject to foreign, state and local taxes and return filing requirements as a result of investing in our Class A units.

In addition to U.S. federal income taxes, our Class A unitholders may be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if our Class A unitholders do not reside in any of those jurisdictions. Our Class A unitholders may be required to file foreign, state and local income tax returns and pay foreign, state and local income taxes in some or all of these jurisdictions. Furthermore, Class A unitholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each Class A unitholder to file all U.S. federal, foreign, state and local tax returns that may be required of such Class A unitholder.

Although we expect to provide estimates by February 28 of each year, we do not expect to be able to furnish definitive Schedule K-1s to IRS Form 1065 to each unitholder prior to the deadline for filing U.S. income tax returns, which means that holders of Class A units who are U.S. taxpayers may want to file annually a request for an extension of the due date of their income tax returns.

It may require a substantial period of time after the end of our fiscal year to obtain the requisite information from all lower-tier entities to enable us to prepare and deliver Schedule K-1s to IRS Form 1065. Notwithstanding the foregoing, we expect to provide estimates of such tax information (including a Class A unitholder’s allocable share of our income, gain, loss and deduction for our preceding year) by February 28 of the year following each year; however, there is no assurance that the Schedule K-1s, which will be provided after the estimates, will be the same as our estimates. For this reason, holders of Class A units who are U.S. taxpayers may want to file with the IRS (and certain states) a request for an extension past the due date of their income tax returns.

Tax consequences to the OCGH unitholders may give rise to conflicts of interests.

As a result of an unrealized built-in gain attributable to the value of our assets held by the Oaktree Operating Group entities at the time of the 2007 Private Offering and unrealized built-in gain attributable to OCGH at the time of this offering, upon the taxable sale, refinancing or disposition of the

 

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assets owned by the Oaktree Operating Group entities, the OCGH unitholders may incur different and significantly greater tax liabilities as a result of the disproportionately greater allocations of items of taxable income and gain to the OCGH unitholders upon a realization event. As the OCGH unitholders will not receive a corresponding greater distribution of cash proceeds, they may, subject to applicable fiduciary or contractual duties, have different objectives regarding the appropriate pricing, timing and other material terms of any sale, refinancing or disposition, or whether to sell such assets at all. Decisions made with respect to an acceleration or deferral of income or the sale or disposition of assets may also influence the timing and amount of payments that are received by an exchanging or selling OCGH unitholder under the tax receivable agreement. Decisions made regarding a change of control also could have a material influence on the timing and amount of payments received by the OCGH unitholders pursuant to the tax receivable agreement. Because our principals hold their economic interest in our business primarily through OCGH and control both us and our manager (which is entitled to designate all the members of our board of directors), these differing objectives may give rise to conflicts of interest. We will be entitled to resolve these conflicts as described elsewhere in this prospectus. See “—Risks Relating to Our Organization and Structure—Our principals and executive officers do not hold their economic interest in the Oaktree Operating Group through us, which may give rise to conflicts of interest, and it will be difficult for a Class A unitholder to successfully challenge a resolution of a conflict of interest by us.”

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which reflect our current views with respect to, among other things, our 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. The factors listed in the section captioned “Risk Factors,” as well as any other cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our Class A units, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have an adverse effect on our business, results of operations and financial position.

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.

MARKET AND INDUSTRY DATA

This prospectus includes market and industry data and forecasts that we have derived from independent reports, publicly available information, various industry publications, other published industry sources and our internal data, estimates and forecasts. Independent reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

Our internal data, estimates and forecasts are based upon information obtained from investors in our funds, partners, trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that this information is reliable, we have not had this information verified by any independent sources.

 

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ORGANIZATIONAL STRUCTURE

Summary

Oaktree Capital Group, LLC was formed in April 2007 in connection with the May 2007 Restructuring and the consummation of the 2007 Private Offering. After giving effect to this offering, Oaktree will have             Class A units outstanding, which will represent         % of the combined voting power of our outstanding Class A and Class B units and a             % indirect economic interest in the Oaktree Operating Group. The remaining             % economic interest in the Oaktree Operating Group is held directly by OCGH.

The Oaktree Operating Group is a group of limited partnerships through which we own and control the general partner and investment adviser of each of our historical and active funds. More specifically, the Oaktree Operating Group or its subsidiaries is entitled to receive:

 

  Ÿ  

100% of the management fees earned from each of our funds;

 

  Ÿ  

100% of the incentive income earned from each of our closed-end and evergreen funds; and

 

  Ÿ  

100% of the investment income earned from the investments by the Oaktree Operating Group in our funds and the third-party-managed funds and entities in which the Oaktree Operating Group has invested.

Though the Oaktree Operating Group or its subsidiaries receives all of the foregoing income, in certain cases we have an obligation to pay a fixed percentage of the management fees or incentive income earned from a particular fund to one or more of the investment professionals responsible for the management of the fund. These expenses are reflected in our consolidated statements of operations in the “compensation and benefits” and “incentive income compensation expense” line items. See “Management—Executive Compensation.”

All of our outstanding Class B units are held by OCGH. These Class B units do not represent an economic interest in us, but currently have 98.23% of the combined voting power of our outstanding Class A and Class B units. The general partner of OCGH is Oaktree Capital Group Holdings GP, LLC, which is controlled by our principals. As a result of their control of Oaktree Capital Group Holdings GP, LLC, which also acts as our manager, our principals control us, the Oaktree Operating Group and our funds.

Our board of directors manages all of our operations and activities and has discretion over significant corporate actions. So long as the Oaktree control condition, as described below under “—Our Manager,” is satisfied, our manager, which is 100% owned by our principals, will be entitled to designate all the members of our board of directors.

 

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The diagram below depicts our organizational structure after the consummation of this offering:

LOGO

 

(1) Holds 100% of the Class B units and     % of the Class A units, which together will represent     % of the total combined voting power of our outstanding Class A and Class B upon the consummation of this offering. The Class B units have no economic interest in us. The general partner of Oaktree Capital Group Holdings, L.P. is Oaktree Capital Group Holdings GP, LLC, which is controlled by our principals. Oaktree Capital Group Holdings GP, LLC also acts as our manager and in that capacity has the authority to designate all the members of our board of directors for so long as the Oaktree control condition is satisfied.
(2) Assumes the conversion into Class A units on a one-for-one basis of all outstanding Class C units held by certain directors and senior employees prior to completion of this offering.
(3) Assumes no exercise by the underwriters of their right to purchase additional Class A units.
(4) Oaktree Capital Group, LLC holds 1,000 shares of non-voting Class A common stock of Oaktree AIF Holdings, Inc., which are entitled to receive 100% of any dividends. Oaktree Capital Group Holdings, L.P. holds 100 shares of voting Class B common stock of Oaktree AIF Holdings, Inc., which do not participate in dividends or otherwise represent an economic interest in Oaktree AIF Holdings, Inc.
(5) Owned indirectly by Oaktree Holdings, LLC through certain entities not reflected on this structure diagram that are treated as partnerships for U.S. federal income tax purposes. Through these entities, each of Oaktree Holdings, Inc. and Oaktree Holdings, Ltd. owns a less than 1% indirect interest in Oaktree Capital I, L.P.

 

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The May 2007 Restructuring and the 2007 Private Offering

The May 2007 Restructuring

Our business was previously operated through Oaktree Capital Management, LLC, a California limited liability company, formed in April 1995, which was owned by our principals, certain third-party investors and senior employees. Prior to completion of the 2007 Private Offering, Oaktree Capital Management, LLC caused all of our business to be contributed to the Oaktree Operating Group.

Within the Oaktree Operating Group:

 

  Ÿ  

Oaktree Capital I, L.P. holds interests in our funds that generate income that is generally “qualifying income” for purposes of determining whether we qualify as a “publicly traded partnership” for U.S. federal income tax purposes;

 

  Ÿ  

Oaktree Capital II, L.P. holds interests in our funds and certain corporate activities that generate or may generate income that we believe generally is not “qualifying income” for purposes of determining whether we qualify as a “publicly traded partnership” for U.S. federal income tax purposes;

 

  Ÿ  

Oaktree Capital Management, L.P. provides investment advisory services to most of our funds and will receive most of the management fees payable by our funds;

 

  Ÿ  

Oaktree Capital Management (Cayman), L.P. holds interests in Oaktree entities which generate non-U.S.-based fee income;

 

  Ÿ  

Oaktree AIF Investments, L.P. holds interests in our alternative investment fund vehicles that generate or may generate income that we believe generally is not “qualifying income” for purposes of determining whether we qualify as a “publicly traded partnership” for U.S. federal income tax purposes; and

 

  Ÿ  

Oaktree Investment Holdings, L.P. holds interests in certain third-party strategic investments we make that generate or may generate income that we believe generally is not “qualifying income” for purposes of determining whether we qualify as a “publicly traded partnership” for U.S. federal income tax purposes.

In addition to the contribution and assignment of OCM’s business to the Oaktree Operating Group entities, in the May 2007 Restructuring the owners who held interests in OCM exchanged those interests for units in OCGH. Each OCGH unit represents a limited partnership interest in OCGH. In exchange for the assignment and contribution of OCM’s business to the Oaktree Operating Group, OCGH received limited partnership interests in each Oaktree Operating Group entity. We collectively refer to the interests in the Oaktree Operating Group as the “Oaktree Operating Group units.” Each Oaktree Operating Group unit represents one limited partnership interest in each of Oaktree Capital I, L.P., Oaktree Capital II, L.P., Oaktree Capital Management, L.P., Oaktree Capital Management (Cayman), L.P., Oaktree Investment Holdings, L.P. and Oaktree AIF Investments, L.P. An Oaktree Operating Group unit is not a legal interest.

The 2007 Private Offering

On May 21, 2007, we sold 23,000,000 Class A units to qualified institutional buyers (as such term is defined for purposes of the Securities Act) in a transaction exempt from the registration requirements of the Securities Act and these Class A units began to trade on a private over-the-counter market developed by Goldman, Sachs & Co. for Tradable Unregistered Equity Securities, referred to as the GSTrUE OTC market.

Upon the consummation of the 2007 Private Offering, we contributed the net offering proceeds to our wholly owned subsidiaries: Oaktree Holdings, LLC, a Delaware limited liability company that is a

 

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disregarded entity for U.S. federal income tax purposes, Oaktree Holdings, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, Oaktree Holdings, Ltd., a Cayman Islands exempted company that is a foreign corporation for U.S. federal income tax purposes, and Oaktree AIF Holdings, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes. We refer to these entities collectively as the “Intermediate Holding Companies.”

As a result of the May 2007 Restructuring and other transactions associated with the 2007 Private Offering, we became the owner of, and our Class A unitholders therefore had, a 15.86% indirect economic interest in the Oaktree Operating Group, while OCGH retained an 84.14% direct economic interest in the Oaktree Operating Group.

Oaktree Capital Group, LLC

We are a Delaware limited liability company owned by our Class A and Class B unitholders. After giving effect to this offering, OCGH will hold 100% of our Class B units and             % of our Class A units, together representing             % of the total combined voting power of our outstanding units. OCGH is the vehicle through which our employees and certain third-party investors hold their economic interest in the Oaktree Operating Group. OCGH is controlled by our principals through their control of its general partner, Oaktree Capital Group Holdings GP, LLC.

Holders of our Class A units and Class B units generally vote together as a single class on the limited set of matters on which our unitholders have a vote. Such matters include a proposed sale of all or substantially all of our assets, certain mergers and consolidations, certain amendments to our operating agreement and an election by our board of directors to dissolve the company. The Class B units do not represent an economic interest in Oaktree Capital Group, LLC. The number of Class B units held by OCGH, however, increases or decreases with corresponding changes in OCGH’s economic interest in the Oaktree Operating Group.

Because we were newly formed in 2007, OCM is considered our predecessor for accounting purposes, and its financial statements have become our historical financial statements. Also, because other investors who held interests in and controlled OCM before the May 2007 Restructuring now control OCGH and us, the May 2007 Restructuring was accounted for as a reorganization of entities under common control. Accordingly, the value of assets and liabilities recognized in OCM’s financial statements was unchanged when carried forward into our financial information.

Our Manager

Our operating agreement provides that so long as our principals, or their successors or affiliated entities (other than us or our subsidiaries), including OCGH, collectively hold, directly or indirectly, at least 20% of the aggregate outstanding Oaktree Operating Group units, our manager, which is 100% owned by our principals, will be entitled to designate all the members of our board of directors. We refer to this ownership condition as the “Oaktree control condition.” Our board of directors will manage all of our operations and activities and will have discretion over significant corporate actions, such as the issuance of securities, payment of distributions, sales of assets, making certain amendments to our operating agreement and other matters. See “Description of Our Units.”

Holders of our Class A units and Class B units have no right to elect our manager, which is controlled by our principals. Although our manager has no business activities other than the management of our businesses, conflicts of interest may arise in the future between us and our Class A unitholders, on the one hand, and our manager, on the other. The resolution of these conflicts may not always be in our best interests or those of our Class A unitholders. We describe the potential

 

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conflicts of interest in greater detail under “Description of Our Units—Our Operating Agreement–Conflicts of Interest.” In addition, our operating agreement provides that our manager will owe no duties to our unitholders and will have no liability to any unitholder for monetary damages or otherwise for decisions made by our manager.

Oaktree Operating Group

We are a holding company that controls all of the business and affairs of the Oaktree Operating Group through the Intermediate Holding Companies. All of the businesses historically engaged in by OCM continue to be conducted by the Oaktree Operating Group, which comprises the limited partnerships through which we hold our direct and indirect general partnership interests in and/or serve as the investment adviser of our funds and engage in certain corporate activities. We may increase or decrease the number of entities, change the jurisdiction of formation or type of entities, or make other changes in the Oaktree Operating Group from time to time based on our view of the appropriate balance between administrative convenience and business, financial, tax, regulatory and other reasons.

We believe that we will be treated as a partnership and not as a corporation for U.S. federal income tax purposes. An entity that is treated as a partnership for U.S. federal income tax purposes is not a taxable entity and incurs no U.S. federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss and deduction of the partnership in computing its U.S. federal income tax liability, regardless of whether cash distributions are made. Distributions of cash by a partnership to a partner are generally not taxable unless the amount of cash distributed to a partner is in excess of the partner’s adjusted basis in its partnership interest. However, our operating agreement does not restrict our ability to take actions that may result in our being treated as an entity taxable as a corporation for U.S. federal (and applicable state) income tax purposes. See “Material U.S. Federal Tax Considerations” for a summary discussing certain U.S. federal tax considerations related to the purchase, ownership and disposition of our Class A units as of the date of this prospectus.

We believe that the Oaktree Operating Group entities will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the holders of Oaktree Operating Group units (including two Intermediate Holding Companies) that are not entities treated as partnerships will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Oaktree Operating Group. Net profits and net losses of the Oaktree Operating Group entities will generally be allocated to their partners (including the Intermediate Holding Companies and OCGH) pro rata in accordance with the percentages of their respective limited partnership interests. Because after the consummation of this offering we will indirectly own         % of the total Oaktree Operating Group units through the Intermediate Holding Companies, the Intermediate Holding Companies will be allocated         % of the net profits and net losses of the Oaktree Operating Group. The remaining net profits and net losses are allocated to OCGH. These percentages are subject to change, including upon our issuance of additional Class A units and our purchase of Oaktree Operating Group units from OCGH unitholders.

After this offering, we intend to continue to cause the Oaktree Operating Group entities to make distributions to their partners, including the Intermediate Holding Companies, to fund any distributions we may declare on our Class A units. If the Oaktree Operating Group entities make distributions to the Intermediate Holding Companies, OCGH will be entitled to receive pro rata distributions based on its interests in the Oaktree Operating Group entities.

The partnership agreements of the Oaktree Operating Group entities provide for cash distributions, which we refer to as “tax distributions,” to the partners of these entities if we determine that the allocation of the partnerships’ income will give rise to taxable income for their partners.

 

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Generally, these tax distributions will be computed based on our estimate of the net taxable income of the relevant entity allocable to a partner multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in Los Angeles, California or New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). The Oaktree Operating Group entities will make tax distributions only to the extent distributions from these entities for the relevant year were otherwise insufficient to cover such tax liabilities.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the offering of Class A units offered by us will be approximately $             million, assuming an initial public offering price of $             per unit, which is the midpoint of the price range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters exercise in full their option to purchase additional Class A units, the net proceeds to us will be approximately $             million, after deducting underwriting discounts and commissions and estimated offering expenses. Assuming the number of Class A units offered by us as set forth on the front cover of this prospectus remains the same, a $1.00 increase or decrease in the assumed initial public offering price of $             per unit would increase or decrease the net proceeds to us from this offering by $             million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Of the net proceeds received by us, $             million will be retained by us for general corporate purposes and $             million will be used by us to acquire Oaktree Operating Group units from OCGH. We will not receive any proceeds from the sale of Class A units offered by the selling unitholders participating in this offering, including any sale of units in this offering by the selling unitholders if the underwriters exercise their option to purchase additional units.

 

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CAPITALIZATION

The following table sets forth the unaudited cash and cash-equivalents and the capitalization of our one segment, our investment management segment, as of March 31, 2011, without giving effect to the consolidation of the funds that we manage:

 

  Ÿ  

on an actual basis; and

 

  Ÿ  

on a pro forma as adjusted basis to give effect to (1) the conversion of all of our Class C units to Class A units in anticipation of this offering, (2) the completion of this offering of Class A units at an assumed offering price of $         per unit, which is the midpoint of the price range set forth on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and application of net proceeds as described in “Use of Proceeds” and (3) the adoption of our Third Amended and Restated Operating Agreement.

You should read this table together with the information contained elsewhere in this prospectus, including the information set forth under “Organizational Structure” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes included elsewhere in this prospectus.

 

     As of March 31, 2011  
     Actual      Pro Forma as
Adjusted (1)
 
    

(in thousands, except unit data)

 

Cash and cash-equivalents (excluding consolidated funds)

   $ 597,907       $                
                 

Debt obligations (excluding consolidated funds)

   $ 696,071       $     
                 

Capital:

     

Class A units, unlimited units authorized, 22,664,100 units issued and outstanding, actual; unlimited units authorized,                      units issued and outstanding, pro forma as adjusted

     —        

Class B units, unlimited units authorized, 125,786,115 units issued and outstanding, actual; unlimited units authorized,                      units issued and outstanding, pro forma as adjusted

     —        

Class C units, unlimited units authorized, 13,000 units issued and outstanding, actual; no units authorized, issued and outstanding,
pro forma as adjusted

     —           —     

Unitholders’ capital attributable to Oaktree Capital Group, LLC

     199,992      

OCGH non-controlling interest in consolidated subsidiaries

     997,650      
                 

Total capital

     1,197,642      
                 

Total capitalization (2)

   $ 1,893,713       $     
                 

 

(1) Assuming the number of Class A units offered by us as set forth on the front cover of this prospectus remains the same, a $1.00 increase or decrease in the assumed initial public offering price of $             per Class A unit would increase or decrease total unitholders’ capital and total capitalization by $             million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
(2) The unit information in the table above excludes, as of March 31, 2011:

 

  Ÿ  

            Class A units issuable upon exchange of                      OCGH units (or, if the underwriters exercise in full their option to purchase additional Class A units,                      Class A units issuable upon exchange of                      OCGH units) that will be held by certain of our existing owners immediately following this offering, which are entitled, subject to vesting and minimum retained ownership requirements and transfer restrictions, to be exchanged for our Class A units on a one-for-one basis; and

  Ÿ  

             Class A units issuable upon exchange of                      OCGH units reserved for future issuance under the 2007 Equity Incentive Plan, which are entitled, subject to vesting and minimum retained ownership requirements and transfer restrictions, to be exchanged for our Class A units on a one-for-one basis.

 

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DILUTION

If you invest in our Class A units, your interest will be diluted to the extent of the difference between the initial public offering price per Class A unit and the net tangible book value of our one segment, our investment management segment, per Class A unit immediately after this offering. Dilution results from the fact that the per Class A unit offering price is substantially in excess of our pro forma segment net tangible book value per Class A unit attributable to the existing equity holders.

Our pro forma segment net tangible book value as of March 31, 2011 was $             million, or $             per Class A unit based on              Class A units outstanding. Our pro forma segment net tangible book value per Class A unit represents the amount of our total segment tangible assets less our total segment liabilities, divided by the total number of Class A units outstanding, after giving effect to the conversion of all of our Class C units into              Class A units in anticipation of this offering and assuming the issuance of              Class A units in exchange for              OCGH units (representing all outstanding OCGH units), which are entitled, subject to vesting and minimum retained ownership requirements and transfer restrictions, to be exchanged for our Class A units on a one-for-one basis.

After giving effect to the receipt and our intended use of approximately $             million of estimated net proceeds from our sale of              Class A units in this offering at an assumed offering price of $             per unit, which is the midpoint of the price range set forth on the front cover of this prospectus, our pro forma as adjusted segment net tangible book value as of March 31, 2011 would have been approximately $             million, or $             per Class A unit. This represents an immediate increase in the pro forma segment net tangible book value of $             per Class A unit to existing Class A unitholders and an immediate dilution of $             per Class A unit to new investors purchasing Class A units in this offering. The following table illustrates this substantial and immediate per unit dilution to new investors:

 

     Per Class A Unit  

Assumed initial public offering price per Class A unit

      $                

Pro forma segment net tangible book value per Class A unit as of March 31, 2011

   $                  

Increase in pro forma segment net tangible book value per Class A unit attributable to this offering

     
           

Pro forma as adjusted segment net tangible book value per Class A unit after giving effect to this offering

     
           

Dilution per Class A unit to new investors in this offering

      $     
           

A $1.00 increase or decrease in the assumed initial public offering price of $             per Class A unit would increase or decrease our pro forma as adjusted segment net tangible book value by $             million or by $             per Class A unit and the dilution per unit to new investors in this offering by $             per Class A unit, assuming no change to the number of Class A units offered by us as set forth on the front cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional Class A units in full, our pro forma as adjusted segment net tangible book value per Class A unit after giving effect to this offering would be $             per Class A unit and the dilution per Class A unit to new investors in this offering would be $             per Class A unit.

 

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The following table summarizes, on a pro forma as adjusted basis as of March 31, 2011, giving effect to the total number of Class A units sold in this offering, the total consideration paid to us in this offering, assuming an initial public offering price of $             per unit (before deducting the underwriting discounts and commissions and estimated offering expenses payable by us) and the average price per unit paid by existing unitholders and by new investors purchasing Class A units in this offering.

 

     Units     Total
Consideration
    Average
Price

Per Unit
 
     Number      Percent     Amount      Percent    

Existing unitholders-OCGH (1)

                       $                                     $            

Existing unitholders (2)

            

New investors (3)

            
                                          

Total

                       $                      $     
                                          

 

(1) Assumes the issuance of              Class A units in exchange for              OCGH units (representing all outstanding OCGH units), which are entitled, subject to vesting and minimum retained ownership requirements and transfer restrictions, to be exchanged for our Class A units on a one-for-one basis.
(2) Includes the Class A units being sold by the selling unitholders in this offering. The average price per unit is computed based on the total Class A units of existing unitholders prior to this offering, which includes the Class A units being sold by the selling unitholders.
(3) Excludes Class A units being sold by the selling unitholders in this offering.

A $1.00 increase or decrease in the assumed initial public offering price of $             per Class A unit would increase or decrease total consideration paid by existing unitholders, total consideration paid by new investors and the average price per unit by $            , $             and $            , respectively, assuming the number of Class A units offered by us and the selling unitholders in this offering, as set forth in “Prospectus Summary—The Offering,” remains the same, and without deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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CASH DISTRIBUTION POLICY

We expect to make distributions to our Class A unitholders quarterly, generally in the month following the respective quarter end. Distributions to our Class A unitholders will be funded by our share of the Oaktree Operating Group’s distributions. We intend to distribute substantially all of our excess cash flow, as determined by our board of directors after taking into account factors it deems relevant, such as, but not limited to, working capital levels, known or anticipated cash needs, business and investment opportunities, general economic and business conditions, our obligations under our debt instruments or other agreements, our compliance with applicable laws, the level and character of taxable income that flows through to our Class A unitholders, the availability and terms of outside financing, the possible repurchase of our Class A units in open market transactions, in privately negotiated transactions or otherwise, providing for future distributions to our Class A unitholders and growing our capital base. The declaration and payment of any distributions will be at the sole discretion of our board of directors, and we may at any time modify our approach with respect to the proper metric for determining cash flow available for distribution. Class A unitholders will receive their share of these distributions by the Oaktree Operating Group net of expenses that we and our Intermediate Holding Companies bear directly, such as income taxes or payment obligations under the tax receivable agreement. Potential seasonal factors that may affect quarterly cash flow and, therefore the level of the cash distributions applicable to the particular quarter typically include, with respect to the first quarter, tax distributions made by one or more investment funds that allocated taxable income to us in the prior year, but have not yet distributed to us cash in a sufficient sum with which to pay the related income taxes, and with respect to the fourth quarter, the annual evergreen fund incentive income. We expect the amount of distributions in any given period to vary materially due to the factors described above.

With respect to upcoming distributions applicable to fiscal year 2011, we currently estimate that the aggregate deductions taken in arriving at the cash distribution payable per Class A unit will include approximately 12.0 cents for payment obligations under the tax receivable agreement without giving effect to this offering, to be deducted proportionately from each of the three remaining quarterly distributions. These deductions, which are subject to change as the year progresses, will be in addition to deductions for income taxes and other expenses that Oaktree or its Intermediate Holding Companies bear directly. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that payments under the tax receivable agreement in respect of our purchase of Oaktree Operating Group units in the 2007 Private Offering, which we began to make in January 2009, will aggregate to $59.9 million over the next 17 years. In addition, we expect that payments under the tax receivable agreement in respect of this offering will aggregate to $             million over a similar period.

Set forth below are the distributions per Class A unit that were paid on the indicated payment dates to the holders of record as of a date which (1) for April 29, 2011 was four business days prior to the payment date and (2) for fiscal year 2009 was four to six business days prior to the payment date.

 

Payment Date

 

          Applicable to

Quarterly Period Ended

 

Distribution
per Unit

 
April 29, 2011   March 31, 2011   $ 0.640   
January 31, 2011   December 31, 2010   $ 0.900   
October 29, 2010   September 30, 2010     0.360   
July 30, 2010   June 30, 2010     0.360   
April 30, 2010   March 31, 2010     0.700   
         

Total fiscal year 2010

  $ 2.320   
         
January 29, 2010   December 31, 2009   $ 0.750   
October 30, 2009   September 30, 2009     0.250   
July 31, 2009   June 30, 2009     0.300   
April 30, 2009   March 31, 2009     0.075   
         

Total fiscal year 2009

  $ 1.375   
         

Total fiscal year 2008

  $ 0.785   

Total fiscal year 2007 (subsequent to the 2007 Private Offering)

  $ 0.960   

 

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GSTrUE OTC MARKET PRICE INFORMATION FOR OUR CLASS A UNITS

Our Class A units currently trade on the GSTrUE OTC market under the ticker symbol “OAKTRZ.” Our Class A units began trading on May 22, 2007. The GSTrUE OTC market is limited to institutional investors who are both qualified purchasers (as such term is defined for purposes of the Investment Company Act) and qualified institutional buyers (as such term is defined for purposes of the Securities Act). The GSTrUE OTC market is based on Rule 144A-only trading procedures that facilitate prompt and efficient trade settlement. Prior to the completion of this offering, we will cease all trading on the GSTrUE OTC market.

Historically, there has not been an active trading market of our Class A units and only a limited number of investors have registered to participate on the GSTrUE OTC market. Moreover, trading volume for our Class A units on the GSTrUE OTC market has historically been limited, and during some periods, nonexistent. As a result, historical prices of our Class A units on the GSTrUE OTC market may not be indicative of our trading prices or volatility of our Class A units in the future.

The following table sets forth the high and low trading prices per unit of our Class A units for the periods indicated, as reported by the GSTrUE OTC market.

 

     GSTrUE OTC Market Price  
     2009      2010      2011 (1)  
     High      Low      High      Low      High      Low  

First quarter

   $ 19.00       $ 13.00       $ 34.50       $ 34.00       $ 42.00       $ 36.75   

Second quarter

     18.00         12.50         35.00         34.25         52.00         43.50   

Third quarter

     30.25         20.50         34.25         34.25         —           —     

Fourth quarter

     33.50         30.00         35.50         34.25         —           —     

 

(1) Through June 16, 2011

 

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SELECTED FINANCIAL DATA

The following selected historical consolidated financial and other data of Oaktree Capital Group, LLC should be read together with “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

We derived the Oaktree Capital Group, LLC selected historical consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010, and the selected historical consolidated statements of financial condition data for the years ended December 31, 2009 and 2010 from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived the selected historical consolidated statements of financial condition data of Oaktree Capital Group, LLC for the year ended December 31, 2008 from our audited consolidated financial statements, which are not included within this prospectus. We derived the selected historical consolidated statements of operations and financial condition data for the years ended December 31, 2006 and 2007 from our audited consolidated financial statements, which are not included in this prospectus. For periods prior to May 25, 2007, the financial statements represent the accounts of OCM, which is considered our predecessor for accounting purposes. We derived the selected historical consolidated statements of income and financial condensed condition data of Oaktree Capital Group, LLC for the three months ended March 31, 2010 and 2011 from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our condensed consolidated financial position and results of operations.

The selected historical financial data is not indicative of the expected future operating results of Oaktree following this offering.

 

    As of or for the
Year Ended December 31,
    As of or for the
Three Months Ended
March 31,
 
    2006 (1)     2007 (1)     2008     2009     2010     2010     2011  
    (in thousands, except per unit data or as otherwise indicated)  

Consolidated Statements of Operations Data: (2)

             

Total revenues

  $ 116,951      $ 128,628      $ 100,510      $ 154,910      $ 212,801      $ 57,660      $ 47,144   

Total expenses

    (326,248     (1,310,701     (1,364,009     (1,426,318     (1,580,651     (419,000     (410,647

Total other income (loss)

    2,665,335        2,118,009        (6,357,191     13,163,939        6,675,038        1,892,041        2,159,917   
                                                       

Income (loss) before income taxes

    2,456,038        935,936        (7,620,690     11,892,531        5,307,188        1,530,701        1,796,414   

Income taxes

    (2,950     (4,743     (17,341     (18,267     (26,399     (10,138     (7,010
                                                       

Net income (loss)

    2,453,088        931,193        (7,638,031     11,874,264        5,280,789        1,520,563        1,789,404   

Less:

             

Net (income) loss attributable to non-controlling interests in consolidated funds

    (2,187,893     (1,445,071     6,885,433        (12,158,635     (5,493,799     (1,554,323     (1,826,401

Net loss attributable to OCGH non-controlling interest

    —          599,520        625,285        227,313        163,555        22,135        26,870   
                                                       

Net income (loss) attributable to OCG (3)

  $ 265,195      $ 85,642      $ (127,313   $ (57,058   $ (49,455   $ (11,625   $ (10,127
                                                       

Distributions declared per Class A and Class C unit (4)

    N/A      $ 0.96      $ 0.76      $ 0.65      $ 2.17      $ 0.75      $ 0.90   
                                                       

Net loss per Class A and Class C unit (4)

    N/A      $ (5.00   $ (5.53   $ (2.50   $ (2.18   $ (0.51   $ (0.45
                                                       

Weighted average number of Class A and Class C units outstanding (4)

    N/A        23,000        23,002        22,821        22,677        22,677        22,677   
                                                       

 

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    As of or for the
Year Ended December 31,
    As of or for the
Three Months Ended
March 31,
 
    2006 (1)     2007 (1)     2008     2009     2010     2010     2011  
    (in thousands, except per unit data or as otherwise indicated)  

Consolidated Statements of Financial Condition Data:

             

Total assets

  $ 16,603,147      $ 23,237,953      $ 31,797,278      $ 43,195,731      $ 47,843,660      $ 45,541,105      $ 46,445,861   

Debt obligations

    417,321        582,156        536,849        700,342        494,716        686,061        839,080   

Segment Statements of Operations Data: (5)

             

Management fees

  $ 251,642      $ 378,483      $ 544,520      $ 636,260      $ 750,031      $ 184,224      $ 185,259   

Incentive income

    249,527        332,457        173,876        175,065        413,240        149,569        130,889   

Investment income (loss)

    58,801        40,898        (151,249     289,001        149,449        40,656        53,017   
                                                       

Total revenues

    559,970        751,838        567,147        1,100,326        1,312,720        374,449        369,165   
                                                       

Compensation and benefits

    (136,450     (196,672     (218,128     (268,241     (287,067     (78,606     (78,312

Incentive income compensation expense

    (92,193     (78,184     (64,845     (65,639     (159,243     (57,586     (53,766

General, administrative and other expenses

    (54,601     (62,690     (70,459     (77,788     (87,602     (21,112     (20,250
                                                       

Total expenses

    (283,244     (337,546     (353,432     (411,668     (533,912     (157,304     (152,328
                                                       

Other income (expense)

    —          —          —          —          11,243        —          (763

Interest expense, net of interest income

    (8,581     (1,175     (6,437     (13,071     (26,173     (7,130     (8,720
                                                       

ANI

  $ 268,145      $ 413,117      $ 207,278      $ 675,587      $ 763,878      $ 210,015      $ 207,354   
                                                       

Segment Statements of Financial Condition Data: (5)

             

Cash and cash-equivalents

  $ 106,020      $ 276,978      $ 141,590      $ 433,769      $ 348,502      $ 358,870      $ 597,907   

Investments in limited partnerships, at equity

    276,328        402,420        606,478        909,329        1,108,690        942,302        1,060,227   

Total assets

    489,968        957,714        913,757        1,702,403        1,944,801        1,629,189        2,111,708   

Total liabilities

    396,000        503,980        424,182        742,570        708,085        622,764        914,066   

Total capital

    93,968        453,734        489,575        959,833        1,236,716        1,006,425        1,197,642   

Operating Metrics:

             

AUM (in millions) (6)

  $ 35,554      $ 52,613      $ 49,866      $ 73,278      $ 82,672      $ 76,494      $ 85,691   

Management
fee-generating AUM
(in millions) (7)

    32,494        41,193        50,234        62,677        66,175        65,039        67,158   

Incentive-creating AUM
(in millions) (8)

    12,207        14,784        22,197        33,339        39,385        34,651        37,476   

Uncalled capital
commitments
(in millions) (9)

    3,891        14,046        7,205        11,055        14,270        12,791        18,348   

Incentives created
(fund level) (10)

    507,347        332,277        (223,328     1,239,314        889,721        248,160        433,751   

Accrued incentives (fund level) (10)

    923,500        923,320        526,116        1,590,365        2,066,846        1,688,956        2,369,708   

 

(1) The OCGH unitholders controlled OCM and control Oaktree; thus, the May 2007 Restructuring was accounted for as a reorganization of entities under common control. Accordingly, the value of assets and liabilities recognized in OCM’s financial statements were unchanged when those assets and liabilities were carried forward into Oaktree’s financial statements.
(2) On May 25, 2007, we undertook the May 2007 Restructuring for the purpose of effecting the 2007 Private Offering pursuant to Rule 144A under the Securities Act. The May 2007 Restructuring had the following significant effects on our reported financial results:
  (a) Non-cash compensation charges. Commencing in May 2007, the statement of operations includes non-cash compensation expense related to the vesting of OCGH units held by certain of our employees as of the 2007 Private Offering, amortized over the OCGH units’ five-year vesting period ending January 2, 2012.
  (b) Income taxes. Before and after the May 2007 Restructuring, we are a partnership for U.S. federal income tax purposes and therefore are not subject to U.S. federal income taxes. However, income tax expense is significantly greater following the May 2007 Restructuring because certain of the Intermediate Holding Companies are subject to federal income taxes.

 

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  (c) Different accounting treatment. After the May 2007 Restructuring, compensation expense includes certain items that previously were treated as members’ capital distributions, including special allocation payments to certain of our principals in lieu of salary and bonus.
  (d) OCGH non-controlling interest in consolidated subsidiaries. At March 31, 2011, Oaktree Capital Group, LLC owned 22,677,100 of the 148,463,215 Oaktree Operating Group units outstanding, representing an approximate 15.27% economic interest in the Oaktree Operating Group. OCGH owned the remaining 125,786,115 Oaktree Operating Group units outstanding. OCGH non-controlling interest (also referred to as “OCGH non-controlling interest in consolidated subsidiaries” in our financial statements) reflects OCGH’s 84.73% economic interest in the Oaktree Operating Group.
(3) For periods before May 25, 2007, this line item represents OCM only.
(4) Per unit amounts for 2007 are for the period May 25, 2007 through December 31, 2007. For additional information regarding per unit data, see note 9 to our audited consolidated financial statements and note 9 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.
(5) Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients.

 

     Management uses adjusted net income, or ANI, to evaluate the financial performance of, and make resource allocations and other operating decisions for, our segment. The components of revenues and expenses used in determining ANI do not give effect to the consolidation of the funds that we manage. In addition, ANI excludes the effect of: (1) non-cash equity compensation charges, (2) income taxes, (3) expenses that OCG or its Intermediate Holding Companies bear directly and (4) the adjustment for the OCGH non-controlling interest subsequent to May 24, 2007. We expect that ANI will include non-cash equity compensation charges related to unit grants made after this offering. ANI is calculated at the Oaktree Operating Group level. For additional information regarding the reconciling adjustments discussed above, see note 16 to our audited consolidated financial statements and note 14 to our unaudited condensed financial statements included elsewhere in this prospectus.

 

     For a reconciliation of segment total assets to our consolidated total assets, see note 16 to our audited consolidated financial statements and note 14 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

(6) AUM represents the NAV of the assets we manage, plus the undrawn capital that we are entitled to call, at the end of the applicable period and fund-level leverage that generates management fees.
(7) Management-fee generating AUM reflects AUM on which we earn management fees. It excludes certain AUM, such as differences between AUM and committed capital or cost basis for most closed-end funds, the investments we make in our funds as general partners, undrawn capital commitments to funds for which management fees are based on NAV or contributed capital and capital commitments to closed-end funds that have not yet commenced their investment periods.
(8) Incentive-creating AUM refers to the AUM that may eventually produce incentive income. It represents the NAV of our closed-end and evergreen funds, excluding investments made by us and our employees (which are not subject to an incentive allocation).
(9) Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as general partner) of our closed-end funds in their investment periods. 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.
(10) Our funds record as accrued incentives 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 amount generated by the funds during the period. We refer to the amount of incentive income recognized as revenue by us as segment incentive income. We recognize incentive income when it becomes fixed or determinable, all related contingencies have been removed and collection is reasonably assured. Amounts recognized by us as incentive income no longer are included in accrued incentives (fund level), the term we use for remaining fund-level accruals.

 

N/A Not applicable.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements of Oaktree Capital Group, LLC and the related notes included elsewhere in this prospectus.

Business Overview

Oaktree is a leading global investment management firm focused on alternative markets. Over the past five years, we have more than doubled our AUM to over $80 billion as of March 31, 2011 across a broad array of investment strategies, which we divide into six asset classes: distressed debt, corporate debt, control investing, convertible securities, real estate and listed equities. Across the firm we utilize a contrarian, value-oriented investment philosophy focused on providing superior risk-adjusted investment performance for our clients. This approach extends to how we manage and grow our business.

We manage assets on behalf of many of the most significant institutional investors in the world, including 69 of the 100 largest U.S. pension plans, 36 states in the United States, over 350 corporations, approximately 300 university and charitable endowments and foundations, and over 150 non-U.S. institutional investors, including six of the top 10 sovereign wealth funds. We serve these clients with over 600 employees, including more than 200 investment professionals in offices located in Los Angeles (headquarters), New York, Stamford, London, Frankfurt, Paris, Beijing, Hong Kong, Seoul, Singapore and Tokyo, with additional offices and staff members provided through fund affiliates in Amsterdam and Luxembourg.

Our business is comprised of one segment, which consists of the investment management services that we provide to our clients. See “Business—Our Sources of Revenue—Structure of Funds” for a detailed discussion of the structure of our funds. We generate three types of revenue: management fees, incentive income and investment income. Management fees are calculated as a fixed percentage of the capital commitments (as adjusted for distributions during the liquidation period) or NAV of a particular fund. Incentive income represents our share (typically 20%) of the profits earned by our closed-end and evergreen funds, subject to applicable hurdle rates or high-water marks. Investment income is the return on the amounts that we invest in each of our funds and, to a growing extent, investments in funds or businesses managed by third-party investment managers with whom we have a strategic relationship.

Impact of the Economy and Financial Markets

As a global investment manager, macroeconomic conditions and the financial markets significantly impact the value of the assets held by our funds and our investment returns, which, in turn, impact our results of operations.

We manage our business on the premise that the economy and financial markets are cyclical. Periods of economic contraction have historically resulted in a decrease in the value of the assets held by our funds, thereby reducing our investment returns and decreasing our AUM, investment income and incentives created (fund level). Similarly, depressed asset valuations limit our ability to harvest investments from these funds at attractive asset prices, thereby decreasing our proceeds from fund distributions and thus incentive income and realized investment income. However, periods of economic contraction and declining financial markets increase the availability of attractive investments for our new funds, which form the basis of future incentive and investment income. To take advantage of these attractive investing opportunities, we have generally raised larger closed-end funds in our distress-oriented strategies and accepted more capital into our open-end and evergreen funds during periods of economic contraction.

 

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As financial markets recover and asset prices increase, our investment income benefits, our incentives created (fund level) increase, and we typically shift from being a net buyer to being a net seller across our closed-end funds. This shift typically is followed by an increase in distributions across funds in their liquidation period, which leads to a decrease in their management fees, an increase in our cash flow attributable to our fund investments and, following the particular fund’s full return of capital and preferred return, an increase in our incentive income. Our risk-controlled investment approach is designed to achieve, and historically has generally achieved, superior returns relative to the Relevant Benchmark in down markets and market-competitive returns in up markets.

By way of example, from January 2007 until May 2008, in anticipation of an economic downturn, we raised $14.5 billion for two distressed debt funds, including $10.9 billion for OCM Opportunities Fund VIIb, L.P., or Opps VIIb. We commenced Opps VIIb’s investment period in May 2008 and then invested over $5.3 billion of its ultimate $9.8 billion of drawn capital in the 15 weeks following the collapse of Lehman Brothers on September 15, 2008. While that investment environment presented an outstanding opportunity for us to buy bank debt and other securities at distressed prices, the steep drop in the financial markets contributed to the $10.8 billion decrease in aggregate AUM market value in the year ended December 31, 2008. Markets recovered in 2009, resulting in aggregate appreciation of $19.1 billion and $8.7 billion in the years ended December 31, 2009 and 2010, respectively. The recovery in the financial markets continued into the first quarter of 2011, driving further aggregate market appreciation in AUM of $3.2 billion.

Fluctuations in the market value of our funds impact our segment metrics and revenues. For example, of the $8.7 billion in aggregate market appreciation for the year ended December 31, 2010, $3.3 billion was in open-end and evergreen funds where management fees are based on NAV, thus benefitting near-term revenues. Similarly, our incentives created (fund level) benefited from aggregate market appreciation of $5.7 billion for the year ended December 31, 2010 in our closed-end and evergreen funds.

The creation of incentives at the fund level usually precedes our earning the related incentive income by a number of quarters or years. For example, over the two-year recovery in the markets through March 31, 2011, aggregate incentives created (fund level) were $2.7 billion, while incentive income recognized by us totaled $676.9 million, causing accrued incentives (fund level) to grow from $487.1 million as of March 31, 2009 to $2.4 billion as of March 31, 2011 (or $1.4 billion net of incentive income compensation expense). Of the $2.4 billion in accrued incentives (fund level), 49.6% was attributable to Opps VIIb.

While the past two-year rise in market prices has provided opportunities to harvest our existing investments, it has reduced the universe of attractive investment opportunities, leading us to raise smaller funds in our largest closed-end fund strategy, distressed debt. Specifically, we capped Oaktree Opportunities Fund VIII, L.P., or Opps VIII, and Oaktree Opportunities Fund VIIIb, L.P., or Opps VIIIb, the two funds that we raised for investment during the current recovery phase of the cycle, at $4.5 billion and $2.7 billion, respectively. Coupled with the recent commencement of distributions by Opps VIIb, this phase in the market cycle is likely to cause our AUM to decrease in the second quarter of 2011 and to then possibly plateau or continue decreasing in coming quarters, subject to net asset flows in other funds and fluctuations in market value across all funds.

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 assets under management, management fee-generating AUM, incentive-creating AUM, incentives created, accrued incentives (fund level) and uncalled capital commitments.

 

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Assets Under Management

AUM generally refers to the assets we manage and equals the NAV of our funds plus the undrawn capital that we are entitled to call from investors in those funds pursuant to their capital commitments and fund-level leverage that generates management fees.

Our AUM amounts also include assets under management for which we charge no fees. Our definition of AUM is not based on any definition contained in our operating agreement or the agreements governing the funds that we manage. Our calculation of AUM and the two AUM-related metrics below may not be directly comparable to the AUM metrics of other asset managers.

AUM as of December 31, 2008, 2009 and 2010 and March 31, 2011 is set forth below. An initial distribution of $3.0 billion in January 2011 and $1.1 billion of undrawn committed capital, both relating to Opps Vllb, were not deducted from the March 31, 2011 AUM balance. These amounts are deducted from our AUM upon the end of Opps VIIb’s investment period on May 1, 2011.

 

     December 31,      March 31,
2011
 
     2008      2009      2010     
     (in millions)  

AUM:

           

Closed-end funds

   $ 30,827       $ 45,039       $ 53,381       $ 55,389   

Open-end funds

     16,231         24,588         26,122         27,239   

Evergreen funds

     2,808         3,651         3,169         3,063   
                                   

Total

   $ 49,866       $ 73,278       $ 82,672       $ 85,691   
                                   

The change in AUM for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2011 is set forth below:

 

     Year Ended December 31,     Three
Months
Ended
March  31,

2011
 
     2008     2009     2010    
     (in millions)  

Change in AUM:

        

Beginning of period

   $ 52,613      $ 49,866      $ 73,278      $ 82,672   

Closed-end funds:

        

New capital commitments

     7,687        7,913        8,590        1,672   

Distributions (1)

     (1,911     (3,723     (5,431     (1,685)   

Change in market value

     (4,729     10,223        5,362        1,995   

Open-end funds:

        

Inflows (outflows), net

     829        884        (1,385     81   

Change in market value

     (4,912     7,473        2,920        1,036   

Evergreen funds:

        

Inflows (outflows), net

     1,330        (338     (89     12   

Distributions from restructured funds

     —          (257     (780     (262)   

Change in market value

     (1,174     1,438        386        144   

Change in leverage

     133        (201     (179     26   
                                

End of period

   $ 49,866      $ 73,278      $ 82,672      $ 85,691   
                                

 

(1) Includes, as applicable, the cancellation of uncalled capital commitments at the end of a fund’s investment period.

 

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Management Fee-Generating AUM

Management fee-generating AUM reflects the AUM on which we earn management fees. Our closed-end funds typically pay management fees based on committed capital during the investment period, without regard to changes in NAV or the pace of capital draw downs, and during the liquidation period on the lesser of (1) total funded capital and (2) the cost basis of assets remaining in the fund. The annual management fee rate remains unchanged from the investment period through the liquidation period. Our open-end and evergreen funds pay management fees based on their NAV. See “Business—Our Sources of Revenue—Management Fees” for a more detailed discussion of the terms of our management fees.

Management fee-generating AUM as of December 31, 2008, 2009 and 2010 and March 31, 2011 is set forth below:

 

     December 31,      March 31,
2011
 
     2008      2009      2010     
     (in millions)  

Management Fee-Generating AUM:

           

Closed-end funds

   $ 31,486       $ 35,164       $ 37,710       $ 37,466   

Open-end funds

     16,084         24,522         26,105         27,221   

Evergreen funds

     2,664         2,991         2,360         2,471   
                                   

Total

   $ 50,234       $ 62,677       $ 66,175       $ 67,158   
                                   

The change in management fee-generating AUM for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2011 is set forth below:

 

     Year Ended December 31,     Three
Months
Ended
March  31,

2011
 
     2008     2009     2010    
     (in millions)  

Change in Management Fee-Generating AUM:

        

Beginning of period

   $ 41,193      $ 50,234      $ 62,677      $ 66,175   

Closed-end funds:

        

New capital commitments or contributions

     15,300        5,275        6,354        459   

Distributions and changes in cost basis

     (1,228     (2,482     (3,710     (887

Adjustment for change in market value

     (1,053     1,085        80        158   

Change in leverage

     132        (200     (178     26   

Open-end funds:

        

Inflows (outflows), net

     686        966        (1,335     81   

Change in market value

     (4,913     7,472        2,918        1,035   

Evergreen funds:

        

Inflows (outflows), net

     1,297        (328     (47     12   

Distributions (1)

     (69     (437     (861     —     

Change in market value

     (1,111     1,092        277        99   
                                

End of period

   $ 50,234      $ 62,677      $ 66,175      $ 67,158   
                                

 

(1) Reflects distributions from, and the waiver of management fees for, our restructured evergreen funds.

As compared with AUM, management fee-generating AUM generally excludes the following:

 

  Ÿ  

Differences between AUM and committed capital or cost basis for closed-end funds, other than for closed-end funds that pay management fees based on NAV and leverage, as applicable;

 

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  Ÿ  

Undrawn capital commitments to funds for which management fees are based on NAV or contributed capital;

 

  Ÿ  

Capital commitments to closed-end funds that have not yet commenced their investment periods;

 

  Ÿ  

The investments we make as general partner;

 

  Ÿ  

Closed-end funds that are beyond the term during which they pay management fees; and

 

  Ÿ  

Restructured and liquidating evergreen funds, for which management fees were waived commencing in 2009.

A reconciliation of AUM to management fee-generating AUM as of December 31, 2008, 2009 and 2010 and March 31, 2011 is set forth below:

 

     December 31,     March 31,
2011
 
     2008     2009     2010    
     (in millions)  

Reconciliation of AUM to Management Fee-Generating AUM:

        

AUM

   $  49,866      $  73,278      $  82,672      $ 85,691   

Difference between AUM and committed capital or cost basis for closed-end funds (1)

     1,932        (5,947     (9,374     (10,469)   
                                

Adjustments for undrawn capital:

        

Capital commitments to funds that have not yet begun to generate management fees

     —          (1,075     (2,947     (4,254)   

Undrawn capital commitments to funds for which management fees are based on contributed capital or NAV

     (566     (1,881     (1,989     (1,901)   
                                
     (566     (2,956     (4,936     (6,155)   
                                

Adjustments for other non-management fee-generating AUM:

        

General partner investments in management fee-generating funds

     (775     (899     (955     (976)   

Closed-end funds that are no longer paying management fees

     (154     (184     (471     (392)   

Funds for which management fees were permanently waived

     (69     (615     (761     (541)   
                                
     (998     (1,698     (2,187     (1,909)   
                                

Management fee-generating AUM

   $ 50,234      $ 62,677      $ 66,175      $ 67,158   
                                

 

(1) Not applicable to closed-end funds that pay management fees based on NAV and leverage, as applicable.

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

 

     December 31,     March 31,
2011
 
       2008         2009         2010      

Weighted Average Annual Management Fee Rates:

        

Closed-end funds

     1.43     1.48     1.46     1.47

Open-end funds

     0.47        0.52        0.51        0.50   

Evergreen funds

     1.65        1.35        1.85        1.86   

Overall

     1.14        1.09        1.10        1.09   

 

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Incentive-Creating AUM

Incentive-creating AUM shows the AUM that may eventually produce incentive income. It represents the NAV of our closed-end and evergreen funds, excluding investments made by us and our employees (which are not subject to an incentive allocation). 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 generating incentives. Incentive-creating AUM does not include undrawn capital commitments because they are not part of NAV.

Incentive-creating AUM as of December 31, 2008, 2009 and 2010 and March 31, 2011 is set forth below:

 

     December 31,      March 31,
2011
 
     2008      2009      2010     
     (in millions)  

Incentive-Creating AUM:

           

Closed-end funds

   $ 19,670       $ 30,117       $ 36,589       $ 34,763   

Evergreen funds

     2,527         3,222         2,796         2,713   
                                   

Total

   $ 22,197       $ 33,339       $ 39,385       $ 37,476   
                                   

Three Months Ended March 31, 2011

Our AUM increased $3.0 billion, or 3.6%, from $82.7 billion to $85.7 billion during the three months ended March 31, 2011. This growth was driven by the $3.2 billion increase in market value of our existing investments, including $1.5 billion of appreciation related to our distressed debt asset class. Our closed-end funds obtained new capital commitments of $1.7 billion and distributed $1.7 billion during the three months ended March 31, 2011. An initial distribution of $3.0 billion in January 2011 by Opps VIIb was not deducted from the March 31, 2011 AUM balance because the distribution was subject to recall until Opps VIIb’s investment period ended on May 1, 2011.

Management fee-generating AUM rose $1.0 billion, or 1.5%, from $66.2 billion to $67.2 billion during the three months ended March 31, 2011, primarily as a result of market appreciation in our open-end funds. New funds Oaktree European Principal Fund III, L.P. and Opps VIIIb in our control investing and distressed debt asset classes, respectively, with aggregate committed capital of $4.2 billion as of March 31, 2011, were not included in this metric because they had yet to commence their investment periods.

Incentive-creating AUM decreased $1.9 billion, or 4.8%, from $39.4 billion to $37.5 billion during the three months ended March 31, 2011, reflecting the initial distribution of $3.0 billion by Opps VIIb in January 2011. Partially offsetting this reduction in incentive-creating AUM was $2.0 billion of appreciation in the NAV of closed-end and evergreen funds.

Year Ended December 31, 2010

Our AUM grew by $9.4 billion, or 12.8%, from $73.3 billion to $82.7 billion during the year ended December 31, 2010. This growth was driven by an $8.7 billion increase in the market value of our existing assets. Our closed-end funds received aggregate capital commitments of $8.6 billion, while making aggregate distributions of $5.4 billion, primarily from our distressed debt, U.S. senior loan and control investing strategies. Our open-end funds had net outflows of $1.4 billion, which we believe generally reflected asset rebalancing following relatively strong price gains as the market rebounded from crisis lows in early 2009. The liquidation of certain of our evergreen funds that have been restructured resulted in distributions of capital of $0.8 billion during 2010.

 

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Management fee-generating AUM rose $3.5 billion, or 5.6%, from $62.7 billion to $66.2 billion as of December 31, 2010, primarily as a result of $6.4 billion in new capital commitments or contributions to closed-end funds that had commenced their investment periods. The weighted average annual management fee rate for evergreen funds increased to 1.85% as of December 31, 2010 from 1.35% as of December 31, 2009, reflecting the inclusion as of December 31, 2009 of $800.1 million in management fee-generating AUM from a restructured evergreen fund that was not paying management fees at the time, but had the potential to generate future fees. As of September 2010, it was determined this fund no longer had the potential to pay management fees, and we removed it from this calculation as of that date.

Incentive-creating AUM increased $6.1 billion, or 18.3%, from $33.3 billion to $39.4 billion as of December 31, 2010, primarily as a result of $5.4 billion in market appreciation in our closed-end and evergreen funds, coupled with the net effect of capital invested less capital distributed during the year.

Year Ended December 31, 2009

Our AUM grew by $23.4 billion, or 46.9%, from $49.9 billion to $73.3 billion during the year ended December 31, 2009. This growth was primarily attributable to an increase of $19.1 billion in the market value of investments held by our funds. This increase was primarily the result of $7.5 billion and $6.9 billion increases in our distressed debt and corporate debt asset classes, respectively, which were primarily attributable to the rebound in the financial markets from crisis lows in the early part of the year. Capital commitments to closed-end funds totaled $7.9 billion for the year, and distributions from those funds aggregated $3.7 billion.

Management fee-generating AUM increased by $12.5 billion, or 24.9%, from $50.2 billion to $62.7 billion during the year ended December 31, 2009, reflecting both new capital commitments of $5.0 billion to closed-end funds that had commenced their investment periods and an aggregate $9.2 billion of market appreciation and net flows to the open-end and evergreen funds.

Incentive-creating AUM grew $11.1 billion, or 50.0%, from $22.2 billion to $33.3 billion during the year ended December 31, 2009, principally as a result of $10.2 billion in market value appreciation in the closed-end and evergreen funds.

Year Ended December 31, 2008

Our AUM decreased by $2.7 billion, or 5.1%, from $52.6 billion to $49.9 billion during the year ended December 31, 2008. This drop was caused by a $10.8 billion decline in the market value of investments held by our funds as financial markets plunged during the financial crisis. Largely offsetting the drop in market value were net inflows of $7.9 billion, led by $7.7 billion in new capital commitments to closed-end funds.

Management fee-generating AUM rose $9.0 billion, or 21.8%, from $41.2 billion to $50.2 billion during the year ended December 31, 2008, largely as a result of Opps VIIb and its $10.7 billion of management fee-generating AUM that commenced its investment period in May 2008. Together with new capital commitments to other closed-end funds that had commenced their investment periods, drawdowns by closed-end funds for which management fees are based on NAV or drawn capital and net inflows to our open-end and evergreen funds, the start of Opps VIIb more than offset the reduction in management fee-generating AUM caused by a decline of $6.0 billion in the market value of our open-end and evergreen funds as financial markets dropped sharply during the financial crisis.

Incentive-creating AUM rose $7.4 billion, or 50.0%, from $14.8 billion to $22.2 billion during the year ended December 31, 2008, principally as a result of the deployment of capital by Opps VIIb and other closed-end funds. Partially offsetting that factor was a reduction of $4.7 billion in the aggregate

 

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market value of closed-end and evergreen funds, primarily as a result of the sharp drop in market prices during the crisis.

Accrued Incentives (Fund Level)

Our funds record as accrued incentives 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 amount generated by the funds during the period. We refer to the amount of incentive income recognized as revenue by us as segment incentive income. We recognize incentive income when it becomes fixed or determinable, all related contingencies have been removed and collection is reasonably assured. Amounts recognized by us as incentive income no longer are included in accrued incentives (fund level), the term we use for remaining fund-level accruals.

Accrued incentives (fund level) as of December 31, 2008, 2009 and 2010 and March 31, 2011, as well as changes in the period-end balance, are set forth below. Net of incentive income compensation expense, these amounts were $285.3 million, $879.9 million, $1.2 billion and $1.4 billion as of December 31, 2008, 2009 and 2010 and March 31, 2011, respectively.

 

    Year Ended December 31,     Three Months
Ended
March  31,

2011
 
    2008     2009     2010    
    (in thousands)  

Accrued Incentives (Fund Level):

       

Beginning of period

  $ 923,320      $ 526,116      $ 1,590,365      $ 2,066,846   
                               

Incentives created (fund level):

       

Closed-end funds

    (223,544     1,090,465        836,384        413,461   

Evergreen funds

    216        148,849        53,337        20,290   
                               

Total incentives created (fund level)

    (223,328     1,239,314        889,721        433,751   
                               

Less: segment incentive income recognized
by us

    173,876        175,065        413,240        130,889   
                               

End of period

  $ 526,116      $ 1,590,365      $ 2,066,846      $ 2,369,708   
                               

The same performance and market risks inherent in incentives created (fund level) affect the ability to ultimately realize accrued incentives (fund level). One consequence of the accounting method we follow for incentives created (fund level) is that accrued incentives (fund level) is an off-balance sheet metric, rather than being an on-balance sheet receivable that could require reduction if fund performance suffers. We track accrued incentives (fund level) because it provides an indication of potential future value, though the timing and ultimate realization of that value are uncertain.

Incentives Created (Fund Level)

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 other factors, but generally equals between 40-55% of segment incentive income revenue. As of March 31, 2011, accrued incentives (fund level) amounted to $2.4 billion and the associated estimated incentive income compensation expense was $1.0 billion. In addition to incentive income compensation expense, the magnitude of the annual bonus pool is indirectly affected by the level of incentive income, net of its incentive income compensation expense. The total charge related to the annual bonus pool, including

 

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the portion attributable to our incentive income, is reflected in the financial statement line item “compensation and benefits expense.”

Incentives created (fund level) often reflects investments measured at fair value and therefore is subject to risk of substantial fluctuation by the time the underlying investments are liquidated. We earn the incentive income, if any, that the fund is then obligated to pay us with respect to our incentive interest (generally 20%) in the fund’s profits, subject to an annual preferred return of typically 8%. Although GAAP allows the equivalent of incentives created (fund level) to be recognized as revenue by us, we have always followed the method of accounting offered by GAAP that is dependent on additional factors, including the incentive allocations becoming fixed or determinable, so as to reduce by a substantial degree the possibility that revenue recognized by us would be reversed in a subsequent period. We track incentives created (fund level) because it provides an indication of the value for us currently being created by our investment activities and facilitates comparability with those companies in our industry that utilize the alternative accrual-based method for recognizing incentive income in their financial statements.

Three Months Ended March 31, 2011

Incentives created (fund level) amounted to $433.8 million for the three months ended March 31, 2011, largely as a result of continued price gains in the portfolios of Opps VII and Opps VIIb.

Year Ended December 31, 2010

Incentives created (fund level) amounted to $889.7 million for the year ended December 31, 2010, of which $470.3 million resulted from price appreciation of investments held by Opps VIIb and $234.1 million from other distressed debt funds, as credit markets continued their post-crisis rally.

Year Ended December 31, 2009

Incentives created (fund level) amounted to $1.2 billion for the year ended December 31, 2009, of which $802.2 million resulted from price appreciation of investments held by Opps VIIb, $220.4 million from other distressed debt funds and $124.0 million from our control investing funds, as credit markets rallied sharply from financial crisis lows in the early part of the year.

Year Ended December 31, 2008

Incentives created (fund level) were a negative $223.3 million for the year ended December 31, 2008, as a result of mark-to-market declines as credit and other financial markets dropped sharply during the financial crisis.

Uncalled Capital Commitments

Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as general partner) of our closed-end funds in their investment periods. 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. As of December 31, 2008, 2009 and 2010 and March 31, 2011, uncalled capital commitments were $7.2 billion, $11.1 billion, $14.3 billion and $18.3 billion, respectively.

Understanding Our Results – Consolidation of Oaktree Funds

GAAP requires that we consolidate our closed-end and evergreen funds in our financial statements, notwithstanding the fact that our equity investment in those funds does not typically exceed 2.5%. Consolidated funds consist of those funds in which we hold a general partner interest that gives us substantive control rights over such funds. With respect to our consolidated funds, we

 

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generally have operational discretion and control over the funds, and investors do not hold any substantive rights that would enable them to impact the funds’ ongoing governance and operating activities. The funds that we manage that were not consolidated as of March 31, 2011 represented 27.0% of our AUM and 20.9% and 12.8% of our segment management fees and segment revenues, respectively, for the three months ended March 31, 2011.

When a fund is consolidated, we reflect the assets, liabilities, revenues, expenses and cash flows of the consolidated fund on a gross basis, subject to eliminations from consolidation. Those eliminations have the effect of reclassifying from consolidated revenues to consolidated non-controlling interests the management fees and other revenues that we earn from consolidated funds, because interests in the consolidated funds held by third-party investors are treated as non-controlling interests. Conversely, the presentation of incentive income compensation expense and other of our expenses associated with generating that reclassified revenue is not affected by the consolidation process. The assets, liabilities, revenues and expenses attributable to non-controlling interests are presented as non-controlling redeemable interests in consolidated entities in the consolidated statements of financial condition and as net income attributable to non-controlling redeemable interests in consolidated entities in the consolidated statements of operations.

The elimination of consolidated funds from our consolidated revenues means that going forward consolidated revenues are expected to be significantly impacted by fund flows and fluctuations in the market value of our separately managed accounts, as well as the revenues earned from the two unconsolidated power opportunities funds. Among the factors expected to most affect expenses is the cessation as of January 2, 2012 of the annualized charge of $924.5 million for vesting of OCGH units held as of the 2007 Private Offering. Expenses associated with our overall size and being a public company are expected to grow. These categories of expenses primarily include compensation and benefits and general, administrative and other expenses. Incentive income compensation expense fluctuates in response to a number of factors, primarily the level of incentive income revenue recognized by our segment. That level of revenue, in turn, is expected to benefit in upcoming years from the $2.4 billion of accrued incentives (fund level) as of March 31, 2011. With regard to most components of other income (loss), the results should benefit to the extent that financial markets trend upward, though prolonged gains may cause us to accept less capital in our funds, which may negatively impact our results.

Note 16 to our audited consolidated financial statements includes information regarding our segment on a stand-alone basis. For a more detailed discussion of the factors that affect the results of operations of our segment, see “—Segment Analysis.”

Revenues

Our business generates three types of revenue: management fees, incentive income and investment income. Management fees are billed monthly or quarterly based on annual rates. While we typically earn management fees for each of the funds that we manage, the contractual terms of those management fees vary by fund structure. We also earn incentive income from our closed-end funds and evergreen funds. Our closed-end funds generally provide that our incentive allocation is equal to 20% of our investors’ profits, after the investors (including us, as general partner) receive the return of all of their contributed capital plus an annual preferred return, typically 8%. Once this occurs, we receive 80% of all distributions otherwise attributable to our investors and the investors receive the remaining 20% until we have received, in the aggregate, 20% of all such distributions in excess of contributed capital from the inception of the fund. Thereafter, all such future distributions are distributed 80% to the investors and 20% to us. Our third revenue source, investment income, represents our pro rata share of income or loss from our investments, generally in our capacity as general partner in our and third-party managed funds and businesses. See “Business—Our Sources of Revenues—Structure of Funds” for a detailed discussion of the structure of our funds.

 

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Expenses

Compensation and Benefits

Compensation and benefits reflects all compensation-related items not directly related to incentive income or the vesting of OCGH units, including salaries, bonuses, compensation based on management fees or a definition of profits and employee benefits.

Incentive Income Compensation Expense

Incentive income compensation expense includes compensation directly related to incentive income, which generally consists of percentage interests (sometimes referred to as “points”) that we grant to our investment professionals associated with the particular fund that generated the incentive income. There is no fixed percentage for this compensation expense, either by fund or strategy. In general, within a particular strategy more recent funds have a higher percentage of aggregate incentive compensation expense than do older funds. The percentage that consolidated incentive income compensation expense represents of the particular period’s consolidated incentive income is not meaningful because of the fact that most incentive income is eliminated in consolidation, whereas no incentive income compensation expense is eliminated in consolidation. For a meaningful percentage relationship, see “—Segment Analysis.” Additionally, note 12 to our consolidated financial statements contains the estimated incentive income compensation expense related to accrued incentives (fund level).

Compensation Expense for Vesting of OCGH Units

Compensation expense for vesting of OCGH units reflects the non-cash charge associated with the OCGH units held by our principals and employees at the time of the 2007 Private Offering and as a result of subsequent grants. Starting with the year ended December 31, 2007, the non-cash compensation expense for units held at the time of the 2007 Private Offering is charged equally over the five-year vesting period of the units, ending January 2, 2012, based on the units’ value as of the 2007 Private Offering. As of March 31, 2011, we had $695.9 million of unrecognized compensation expense relating to the 2007 Private Offering that we expect to recognize over the remaining vesting period of April 1, 2011 through January 2, 2012, and $70.5 million of unrecognized compensation expense relating to unit grants subsequent to the 2007 Private Offering that we expect to recognize over their weighted-average vesting period of 4.9 years.

General, Administrative and Other Expenses

General, administrative and other expenses include costs related to occupancy, accountants, tax professionals, legal advisors, consultants, travel, communications and information services, foreign exchange activity, depreciation and amortization and other general and operating items. These expenses are not borne by fund investors and are not offset by credits attributable to fund investors’ non-controlling redeemable interests in consolidated funds. In addition, we have historically operated as a private company. As we incur additional expenses associated with being a publicly traded company, we anticipate general, administrative and other expenses to increase, both in absolute terms and possibly as a percentage of revenues. Specifically, we expect that we will incur additional general, administrative and other expenses to provide insurance for our directors and officers and to comply with SEC reporting requirements, stock exchange listing standards, the Dodd-Frank Act and the Sarbanes-Oxley Act. We anticipate that these insurance and compliance costs will substantially increase certain of our general, administrative and other expenses in the near term, although its percentage of revenues will depend upon a variety of factors, including those described above.

 

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Consolidated Fund Expenses

Consolidated fund expenses consists primarily of costs incurred by our consolidated funds, including travel expenses, professional fees, research expenses and other costs associated with administering these funds. Inasmuch as most of these fund expenses are borne by third-party fund investors, they are offset by credits attributable to the fund investors’ non-controlling redeemable interests in consolidated funds.

Other Income (Loss)

Interest Expense

Interest expense reflects the interest expense of Oaktree and its operating subsidiaries, as well as consolidated funds that employ financial leverage.

Interest and Dividend Income

Interest and dividend income consists of interest and dividend income earned on the investments held by our consolidated funds, the consolidated funds’ net operating income from real estate-related activities and interest income earned by Oaktree and its operating subsidiaries.

Net Realized Gain on Investments

Net realized gain on investment consists of realized gains and losses arising from dispositions of investments held by our consolidated funds.

Net Change in Unrealized Appreciation on Investments

Net change in unrealized appreciation on investments reflects, for our consolidated funds, both unrealized gains and losses on investments and the reversal upon disposition of investments of unrealized gains and losses previously recognized for those investments.

Other Income (Expense)

Other income (expense) reflects our settlement of the arbitration award we received relating to a former principal and portfolio manager of our real estate group who left us in 2005.

Income Taxes

Prior to May 25, 2007, OCM was treated as a partnership for tax purposes, with the effects of its activities flowing through to the income tax returns of its members. Consequently, no provision for income taxes was made except for non-U.S., city and local income taxes incurred directly by OCM. In connection with the May 2007 Restructuring, Oaktree was established as a publicly traded partnership. Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., two of our five intermediate holding companies, which were established as our wholly owned subsidiaries, are subject to U.S. federal and state income taxes. The remainder of Oaktree’s income is generally not subject to corporate-level taxation

Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

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Net Income (Loss) Attributable to Non-Controlling Interests

Net income (loss) attributable to non-controlling interests represents the ownership interests that third parties hold in entities that are consolidated in our financial statements. These interests fall into two categories:

 

  Ÿ  

Net income or loss attributable to non-controlling redeemable interests in consolidated funds: the non-controlling interests that third-party investors hold in consolidated funds; and

 

  Ÿ  

Net income or loss attributable to OCGH non-controlling interest in consolidated subsidiaries: the economic interest in the Oaktree Operating Group owned by OCGH, which as of March 31, 2011 was 84.73%.

 

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Consolidated Results of Operations

The following table sets forth our audited consolidated results of operations for the years ended December 31, 2008, 2009 and 2010 and our unaudited consolidated results of operations for the three months ended March 31, 2010 and 2011.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2008     2009     2010     2010     2011  
    (in thousands)  

Consolidated Statement of Operations:

         

Revenues:

         

Management fees

  $ 95,842      $ 115,839      $ 162,051      $ 50,609      $ 38,638   

Incentive income

    1,682        37,293        44,130        7,299        5,811   

Investment income (loss)

    2,986        1,778        6,620        (248     2,695   
                                       

Total revenues

    100,510        154,910        212,801        57,660        47,144   
                                       

Expenses:

         

Compensation and benefits

    (218,148     (268,272     (287,092     (78,612     (78,312

Incentive income compensation expense

    (64,845     (65,639     (159,243     (57,586     (53,766

Compensation expense for vesting of OCGH units

    (941,566     (940,683     (949,376     (233,439     (237,157
                                       

Total compensation and benefits expense

    (1,224,559     (1,274,594     (1,395,711     (369,637     (369,235

General, administrative and other expenses

    (71,302     (78,531     (90,432     (21,303     (22,478

Consolidated fund expenses

    (68,148     (73,193     (94,508     (28,060     (18,934
                                       

Total expenses

    (1,364,009     (1,426,318     (1,580,651     (419,000     (410,647
                                       

Other income (loss):

         

Interest expense

    (73,474     (34,942     (55,921     (17,267     (12,891

Interest and dividend income

    1,385,594        1,833,509        2,369,590        622,731        734,682   

Net realized gain on investments

    763,521        251,507        2,583,676        678,296        760,261   

Net change in unrealized appreciation (depreciation) on investments

    (8,432,832     11,113,865        1,766,450        608,281        678,628   

Other income (expense)

    —          —          11,243        —          (763
                                       

Total other income (loss)

    (6,357,191     13,163,939        6,675,038        1,892,041        2,159,917   
                                       

Income (loss) before income taxes

    (7,620,690     11,892,531        5,307,188        1,530,701        1,796,414   

Income taxes

    (17,341     (18,267     (26,399     (10,138     (7,010
                                       

Net income (loss)

    (7,638,031     11,874,264        5,280,789        1,520,563        1,789,404   

Less:

         

Net income (loss) attributable to non-controlling redeemable interests in consolidated funds

    6,885,433        (12,158,635     (5,493,799     (1,554,323     (1,826,401

Net loss attributable to OCGH non-controlling interest

    625,285        227,313        163,555        22,135        26,870   
                                       

Net loss attributable to Oaktree Capital Group, LLC

  $ (127,313   $ (57,058   $ (49,455   $ (11,625   $ (10,127
                                       

 

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Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Revenues

Management Fees

Management fees decreased $12.0 million, or 23.7%, to $38.6 million for the three months ended March 31, 2011 from $50.6 million in the three months ended March 31, 2010. The decrease was largely a result of a decline in advisory, director and certain other fees received in connection with our investment advisory services to our consolidated funds. We reduce management fees by the amount of such ancillary fees so that our funds’ investors share pro rata in the economic benefit of the ancillary fees. Thus, in our consolidated financial statements they are treated as being attributable to non-controlling redeemable interests in consolidated entities and have no impact on net income (loss) attributable to OCG. Partially offsetting this decline was an increase in management fees from our separately managed accounts in our high yield bond and convertible securities strategies, reflecting the higher average AUM in the first quarter of 2011 stemming from market appreciation between the first quarters of 2010 and 2011.

Incentive Income

Incentive income decreased $1.5 million, or 20.5%, to $5.8 million for the three months ended March 31, 2011 from $7.3 million in the three months ended March 31, 2010. Nearly all of the decrease was attributable to our unconsolidated OCM/GFI Power Opportunities Fund II, L.P. and OCM/GFI Power Opportunities Fund II (Cayman), L.P., or the Power Funds II.

Investment Income (Loss)

Investment income improved $2.9 million, to income of $2.7 million for the three months ended March 31, 2011 from a loss of $0.2 million for the three months ended March 31, 2010. The change reflected gains from the Power Funds II and other investments.

Expenses

Compensation and Benefits

Compensation and benefits decreased $0.3 million, or 0.4%, to $78.3 million for the three months ended March 31, 2011 from $78.6 million for the three months ended March 31, 2010. The decrease was primarily a result of the change in our overall revenue mix, which directly impacted the amounts paid under certain compensation arrangements. Partially offsetting that decline was an increase in our annual bonus pool.

Incentive Income Compensation Expense

Incentive income compensation expense decreased $3.8 million, or 6.6%, to $53.8 million for the three months ended March 31, 2011 from $57.6 million for the three months ended March 31, 2010, as a result of lower incentive income from our segment. Partially offsetting that decline was an increase in incentive income compensation expense as a percentage of segment incentive income, to 41.1% in the three months ended March 31, 2011 from 38.5% in the three months ended March 31, 2010, primarily as a result of differences in the mix of funds that comprised the segment incentive income. See “—Segment Analysis” for an explanation of changes in our segment incentive income.

General, Administrative and Other Expenses

General, administrative and other expenses increased $1.2 million, or 5.6%, to $22.5 million for the three months ended March 31, 2011 from $21.3 million for the three months ended March 31, 2010. Excluding the impact of foreign currency-related items, general, administrative and other

 

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expenses grew $0.4 million, as the effect of overall corporate growth was offset by the payment in the prior year period of a Haitian disaster relief donation.

Consolidated Fund Expenses

Consolidated fund expenses decreased $9.2 million, or 32.7%, to $18.9 million for the three months ended March 31, 2011 from $28.1 million for the three months ended March 31, 2010. The decrease was primarily a result of lower professional fees incurred by certain of our funds, as well as non-recurring organizational costs for the Oaktree PPIP Private Fund, L.P. in the first quarter of 2010.

Other Income (Loss)

Interest Expense

Interest expense decreased $4.4 million, or 25.4%, to $12.9 million for the three months ended March 31, 2011 from $17.3 million for the three months ended March 31, 2010. The decrease resulted from lower interest expense for certain of our funds, partially offset by an increase in interest expense of $2.2 million from our $300.0 million term loan that closed on January 7, 2011 and bears interest at the fixed annual rate of 3.19%.

Interest and Dividend Income

Interest and dividend income increased $112.0 million, or 18.0%, to $734.7 million for the three months ended March 31, 2011 from $622.7 million for the three months ended March 31, 2010, reflecting higher dividend income, which was partially offset by lower interest income resulting from dispositions of certain of our investments.

Net Realized Gain on Investments

Net realized gain on investments increased $82.0 million, or 12.1%, to $760.3 million for the three months ended March 31, 2011 from $678.3 million for the three months ended March 31, 2010, reflecting the higher level of dispositions of our investments as financial markets continued their rebound from financial crisis lows in early 2009.

Net Change in Unrealized Appreciation on Investments

The net change in unrealized appreciation on investments increased $70.3 million, or 11.6%, to $678.6 million for the three months ended March 31, 2011 from $608.3 million for the three months ended March 31, 2010, reflecting a higher level of invested capital and continued financial market gains.

Other Income (Expense)

The net expense of $0.8 million for the three months ended March 31, 2011 reflected expenses incurred in managing real estate properties we received in the second quarter of 2010 in connection with the settlement of an arbitration award relating to a former principal and portfolio manager of our real estate group who left us in 2005.

Income Taxes

Income taxes decreased $3.1 million, or 30.7%, to $7.0 million for the three months ended March 31, 2011 from $10.1 million for the three months ended March 31, 2010. The decrease was principally the result of a lower estimated income tax rate of 18% in the first quarter of 2011, as compared with the effective income tax rate of 25% in the first quarter of 2010. The rate used for interim fiscal periods is based on the estimated full year income tax rate. Applied against the OCG portion of income after adjusting for the non-deductible compensation expense, the effective income tax rate is a function of the mix of income and other factors that often vary significantly within or

 

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between years, each of which can have a material impact on the particular year’s ultimate income tax expense. See “—Understanding Our Results—Consolidation of Oaktree Funds.”

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenues

Management Fees

Management fees increased $46.3 million, or 40.0%, to $162.1 million for the year ended December 31, 2010 from $115.8 million for the year ended December 31, 2009. The increase was largely a result of an increase in advisory, director and other ancillary fees received in connection with our investment advisory services to our consolidated funds. All of these ancillary fees were attributable to non-controlling redeemable interests in consolidated entities and therefore had no direct impact on net income attributable to OCG. Secondarily, management fees from separately managed accounts in our high yield bond, senior loans and convertible securities strategies increased, reflecting the higher average AUM in 2010 stemming from market appreciation during 2009. Partially offsetting these increases were decreases in management fees from OCM/GFI Power Opportunities Fund I, L.P., or Power Fund I, which became fully liquidated in early 2010 and the Power Funds II, which commenced their liquidation periods in November 2009.

Incentive Income

Incentive income increased $6.8 million, or 18.2%, to $44.1 million for the year ended December 31, 2010 from $37.3 million for the year ended December 31, 2009. The increase was primarily a result of higher incentive income from the Power Funds II, partially offset by lower incentive income from Power Fund I.

Investment Income

Investment income increased $4.8 million, or 266.7%, to $6.6 million for the year ended December 31, 2010 from $1.8 million for the year ended December 31, 2009. The increase reflected gains from the Power Fund I, Power Funds II and other investments.

Expenses

Compensation and Benefits

Compensation and benefits increased $18.8 million, or 7.0%, to $287.1 million for the year ended December 31, 2010 from $268.3 million for the year ended December 31, 2009. The increase primarily reflected a 6.0% increase in average headcount, and secondarily, increased profitability. The increased headcount principally reflected growth in non-investment areas, including marketing, client services, infrastructure services and, to a lesser extent, growth in our control investing strategy.

Incentive Income Compensation Expense

Incentive income compensation expense increased $93.6 million, or 142.7%, to $159.2 million for the year ended December 31, 2010 from $65.6 million for the year ended December 31, 2009, as a result of higher incentive income from our segment. As a percentage of segment incentive income, incentive income compensation expense increased to 38.5% for the year ended December 31, 2010 from 37.5% for the year ended December 31, 2009, primarily as a result of differences in the mix of funds that comprised segment incentive income. See “—Segment Analysis” for an explanation of changes in our segment incentive income.

 

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General, Administrative and Other Expenses