From Fitch Ratings
Fitch Ratings has completed a peer review of five rated Alternative Asset Managers (AAMs) and upgraded one of them, Oaktree Capital Group. Based on this review, Fitch has upgraded the Long-term Issuer Default Rating and unsecured debt rating of Oaktree to ‘A’ from ‘A-‘.
The upgrade of Oaktree’s ratings reflects the firm’s consistent operating performance despite the challenging economic environment. The firm’s stable cash flow generation is supported by its superior operating efficiencies, the strong blended management fee rate, given the absence of a step-down in the management fee percentage once closed-end funds enter their liquidation period and a lack of reliance on transaction and monitoring fees for revenue, all of which are credit strengths relative to the peer group. Fitch also believes the company’s investment strategy and credit focus yields a more liquid underlying portfolio than certain peers which have a greater focus on more traditional private equity (PE) investments. Additionally, Oaktree’s decision to defer incentive income recognitions until the income is fixed or determinable, all related contingencies have been removed, and collection is reasonably assured reduces clawback risk for the firm.
Oaktree’s fundraising strategy includes sizing funds based on management’s determination of investment opportunities given the global environment, as opposed to simply increasing fee-earning AUM (FAUM). As a result, new funds can be meaningfully smaller than predecessor funds, which can result in revenue and cash flow declines period-to-period. Still, the breadth of the firm’s product offering combined with the variable cost structure mitigates that concern to some extent. Furthermore, while Fitch recognizes that approximately 45% of FAUM is in open-end funds and evergreen structures which earn fees based on net asset value (NAV), these funds demand a lower fee rate, meaning that, on average, about 23% of Oaktree’s management fees have come from NAV-based vehicles over time (since 2008), which Fitch believes is manageable and comparable to similarly-rated peers.
The rating affirmations for the remainder of the space reflect relative stability in terms of core operating fundamentals, given the locked-in nature of a large portion of the fee streams. FAUM has generally been on an increasing trend with follow-on funds and expansion into other product categories through step-out strategies or acquisitions. Fitch believes these trends add diversity to the fee stream and the investor base. Fee-related earnings have generally grown across the space in recent years, although to a lesser extent than FAUM given expansion into product categories that garner lower fee rates, like hedge funds, CLOs, and certain credit funds.
The Stable Rating Outlooks reflect Fitch’s expectations that the AAMs will continue to generate stable management fees, grow/retain FAUM through the raising of new and expansion of existing funds, produce consistent investment performance which supports future fundraising, operate with relatively low leverage, and retain a solid liquidity profile in order to meet co-investment commitments to funds.