Oaktree Capital Group, LLC 6.625% PFD UT A (OAK-PA) Financial Report Summaries

Risks

• Given Oaktree’s focus on achieving superior investment performance with less-than-commensurate risk, and the priority afforded to its clients’ interests, Oaktree may reduce AUM, restrain its growth, reduce fees or otherwise alter the terms under which Oaktree or we do business when Oaktree or we deem it appropriate—even in circumstances where others might deem such actions unnecessary. This approach could adversely affect our results of operations.
• 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, earnings and cash flow and adversely affect our overall performance, ability to raise or deploy capital, financial prospects and condition and liquidity position.
• Inflation has adversely affected and may continue to adversely affect our business, results of operations and financial condition of our funds and their portfolio companies.
• Our revenues are volatile due to the nature and structure of our business, and if we experience a substantial decline in our incentive and investment income, we may not be able to pay distributions on our preferred units.
• Our failure to deal appropriately with conflicts of interest or inter-fund governance matters could damage our reputation and adversely affect our business.
• The investment management business is intensely competitive.
• Poor performance of our funds would cause a decline in our revenues, net income and cash flow and could adversely affect Oaktree’s ability to raise capital for future funds.
• We may not be able to maintain our current incentive fee structure as a result of industry pressure from clients to reduce fees, which could have an adverse effect on our profit margins and results of operations.
• We often pursue investment opportunities that involve business, regulatory, legal or other complexities.
• Extensive regulation in the United States and abroad affects our activities and creates the potential for significant liabilities and penalties that could adversely affect our business and results of operations.
• 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.
• Changes in law and government regulations may adversely affect our business, financial condition and results of operations.
• The replacement of LIBOR with an alternative reference rate may adversely affect our credit arrangements and our collateralized loan obligation transactions.
• Regulatory changes in jurisdictions outside the United States could adversely affect our business.
• SEC rules barring so-called “bad actors” from relying on Rule 506 of Regulation D in private placements could materially adversely affect our business, financial condition and results of operations.
• Oaktree’s 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.
• Oaktree’s failure to maintain the security of its information and technology networks, including personal data and client information, intellectual property and proprietary business information could have a material adverse effect on us.
• Interruption of certain information technology, communications systems or data services could disrupt our business, result in losses and/or limit our growth.
• We are subject to substantial litigation risks and may face significant liabilities and damage to our professional reputation as a result.
• Oaktree employee misconduct, which is difficult to detect and deter, could subject us to significant regulatory sanctions and reputational harm. Fraud and other deceptive practices or other misconduct at the portfolio companies of our funds could similarly subject us to liability and reputational damage and also harm our performance.
• The United Kingdom’s exit from the European Union, and the implementation of the trade and cooperation agreement between the United Kingdom and the European Union, could adversely affect us.
• Risks Relating to Our Funds
• 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 preferred units.
• Certain of our funds make investments in distressed businesses that involve significant risks and potential additional liabilities.
• Certain of our funds may be subject to risks arising from potential control group liability.
• 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.
• 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 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.
• We have made and expect to continue to make significant investments in our current and future funds, and we may lose money on some or all of our investments.
• Our funds often invest in companies that are highly leveraged, a fact that may increase the risk of loss associated with the investments.
• The use of leverage by our funds could have a material adverse effect on our financial condition, results of operation and cash flow.
• Changes in the debt financing markets and higher interest rates may negatively impact the ability of our funds and their portfolio companies to obtain attractive financing for their investments or refinance existing debt 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.
• Our funds are subject to risks in using prime brokers, custodians, counterparties, administrators, other agents and third-party service providers.
• The market price of our preferred units could be adversely affected by various factors.
• If we, including any service organizations that we use, fail to maintain effective internal controls over our financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.
• Distributions on the preferred units are discretionary and non-cumulative.
• We have an indirect economic interest in only a portion of the earnings and cash flows of the Oaktree Operating Group, which may negatively impact our ability to pay distributions on our preferred units.
• If we or any of our private 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.
• Our operating agreement contains provisions that substantially limit remedies available to our preferred unitholders for actions that might otherwise result in liability for our officers and/or directors.
• Our ability to make distributions to holders of any series of preferred units 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.
• Risks Relating to United States Taxation
• If the amount of distributions on the preferred units is greater than our gross ordinary income, then the amount that a holder of preferred units would receive upon liquidation may be less than the preferred unit liquidation value.
• Holders of preferred units who are U.S. taxpayers should anticipate the need to file annually a request for an extension of the due date of their income tax return. In addition, it is possible that holders of preferred units may be required to file amended income tax returns.
• An investment in preferred units will give rise to UBTI to certain tax-exempt holders.
• Non-U.S. holders face unique U.S. tax issues from owning preferred units that may result in adverse tax consequences to them.
• Holders of preferred units may be subject to state and local taxes and return filing requirements as a result of investing in our preferred units.
• Amounts distributed in respect of the preferred units could be treated as “guaranteed payments” for U.S. federal income tax purposes.
• Holders of preferred units who do not hold the units through the record date for a distribution may be allocated gross ordinary income even though no distribution is received.