SEGMENT REPORTING

The Company’s business is comprised of one segment, the investment management segment. As a global investment manager, the Company provides investment management services through funds and separate accounts. Management makes operating decisions and assesses business performance based on financial and operating metrics and data that are presented without the consolidation of any funds.

The Company conducts its investment management business primarily in the United States, where substantially all of its revenues are generated.

Adjusted Net Income

The Company’s chief operating decision maker uses adjusted net income (“ANI”) as a tool to help evaluate the financial performance of, and make resource allocations and other operating decisions for, the investment management segment. The components of revenues and expenses used in the determination of ANI do not give effect to the consolidation of the funds that the Company manages. Segment revenues include investment income (loss) that is classified in other income (loss) in the GAAP-basis statements of operations. Segment revenues and expenses also reflect Oaktree’s proportionate economic interest in Highstar, whereby amounts received for contractually reimbursable costs are classified for segment reporting as expenses and under GAAP as other income. In addition, ANI excludes the effect of (a) non-cash equity-based compensation expense related to unit grants made before our initial public offering, (b) acquisition-related items, including amortization of intangibles and changes in the contingent consideration liability, (c) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (d) income taxes, (e) other income or expenses applicable to OCG or its Intermediate Holding Companies, and (f) the adjustment for non-controlling interests. Beginning with the fourth quarter of 2015, the definition of ANI was modified to reflect differences with respect to (a) third-party placement costs associated with closed-end funds, which under GAAP are expensed as incurred, but for ANI are capitalized and amortized as general and administrative expense in proportion to the associated management fee stream, and (b) gains and losses resulting from foreign-currency transactions and hedging activities, which under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, but for ANI unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Foreign-currency transaction gains and losses are included in other income (expense), net. Prior periods have not been recast for the change related to third-party placement costs, but have been recast to retroactively reflect the change related to foreign-currency hedging. Incentive income and incentive income compensation expense are included in ANI when the underlying fund distributions are known or knowable as of the respective quarter end, which may be later than the time at which the same revenue or expense is included in the GAAP-basis statements of operations, for which the revenue standard is fixed or determinable and the expense standard is probable and reasonably estimable. CLO investments are carried at fair value for GAAP reporting, whereas for segment reporting they are carried at amortized cost, subject to any impairment charges. Investment income on CLO investments is recognized in adjusted net income when cash distributions are received. Cash distributions are allocated between income and return of capital based on the effective yield method. ANI is calculated at the Operating Group level.

ANI ⁽¹⁾ was as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Revenues:
Management fees	$	197,450		$	190,197		$	398,720		$	380,292
Incentive income	87,647			61,148			184,235			214,027
Investment income	47,725			23,365			62,802			76,823
Total revenues	332,822			274,710			645,757			671,142
Expenses:
Compensation and benefits	(99,173		)	(104,767		)	(203,443		)	(213,648		)
Equity-based compensation	(12,445		)	(11,901		)	(23,148		)	(18,924		)
Incentive income compensation	(35,407		)	(29,554		)	(85,156		)	(119,656		)
General and administrative	(30,600		)	(30,335		)	(62,081		)	(59,902		)
Depreciation and amortization	(3,048		)	(2,105		)	(6,208		)	(3,996		)
Total expenses	(180,673		)	(178,662		)	(380,036		)	(416,126		)
Adjusted net income before interest and other income (expense)	152,149			96,048			265,721			255,016
Interest expense, net of interest income⁽²⁾	(7,977		)	(8,782		)	(16,659		)	(17,715		)
Other income (expense), net	(1,527		)	(1,987		)	(1,392		)	(1,996		)
Adjusted net income	$	142,645		$	85,279		$	247,670		$	235,305

(1)

In the fourth quarter of 2015, the definition of adjusted net income was modified to reflect differences with respect to (a) third-party placement costs associated with closed-end funds, which under GAAP are expensed as incurred, but for adjusted net income are capitalized and amortized as general and administrative expense in proportion to the associated management fee stream, and (b) gains and losses resulting from foreign-currency transactions and hedging activities, which under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, whereas for adjusted net income unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Foreign-currency transaction gains and losses are included in other income (expense), net. Prior periods have not been recast for the change related to third-party placement costs, but have been recast to retroactively reflect the change related to foreign-currency hedging. Placement costs associated with closed-end funds amounted to $2.8 million and $3.7 million for the three and six months ended June 30, 2015, respectively, and remain expensed as incurred in those periods for both GAAP and ANI purposes.


(2)	Interest income was $1.6 million and $1.2 million for the three months ended June 30, 2016 and 2015, respectively, and $2.9 million and $2.2 million for the six months ended June 30, 2016 and 2015, respectively.

A reconciliation of net income attributable to Oaktree Capital Group, LLC to adjusted net income of the investment management segment is presented below.



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015

Net income attributable to Oaktree Capital Group, LLC	$	49,047		$	19,814		$	77,125		$	58,067
Incentive income ⁽¹⁾	(54		)	(5,805		)	39,888			11,573
Incentive income compensation ⁽¹⁾	54			5,657			(39,888		)	(17,553		)
Investment income ⁽²⁾	(3,149		)	—			(13,578		)	—
Equity-based compensation ⁽³⁾	2,281			4,182			5,473			8,865
Placement costs ⁽⁴⁾	1,210			—			7,914			—
Foreign-currency hedging ⁽⁵⁾	3,665			(67		)	9,531			(5,379		)
Acquisition-related items ⁽⁶⁾	(1,889		)	1,695			(1,498		)	3,502
Income taxes ⁽⁷⁾	8,571			5,485			21,251			13,360
Non-Operating Group expenses ⁽⁸⁾	201			626			465			960
Non-controlling interests ⁽⁸⁾	82,708			53,692			140,987			161,910
Adjusted net income	$	142,645		$	85,279		$	247,670		$	235,305


(1)	This adjustment adds back the effect of timing differences associated with the recognition of incentive income and incentive income compensation expense between adjusted net income and net income attributable to OCG.


(2)	This adjustment adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting are accounted for at amortized cost, subject to impairment between adjusted net income and net income attributable to OCG.

(3)

This adjustment adds back the effect of (a) equity-based compensation expense related to unit grants made before the Company’s initial public offering, which is excluded from adjusted net income because it is a non-cash charge that does not affect the Company’s financial position, and (b) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting.


(4)	This adjustment adds back the effect of timing differences with respect to the recognition of third-party placement costs associated with closed-end funds between adjusted net income and net income attributable to OCG.


(5)	This adjustment adds back the effect of timing differences associated with the recognition of unrealized gains and losses related to foreign-currency hedging between adjusted net income and net income attributable to OCG.


(6)	This adjustment adds back the effect of acquisition-related items associated with the amortization of intangibles and changes in the contingent consideration liability.


(7)	Because adjusted net income is a pre-tax measure, this adjustment adds back the effect of income tax expense.


(8)	Because adjusted net income is calculated at the Operating Group level, this adjustment adds back the effect of items applicable to OCG, its Intermediate Holding Companies or non-controlling interests.

The following tables reconcile the Company’s segment information to the condensed consolidated financial statements:



	As of or for the Three Months Ended June 30, 2016
	Segment			Adjustments			Consolidated

Management fees ⁽¹⁾	$	197,450		$	(2,435	)	$	195,015
Incentive income ⁽¹⁾	87,647			54			87,701
Investment income ⁽¹⁾	47,725			(6,725		)	41,000
Total expenses ⁽²⁾	(180,673		)	(10,975		)	(191,648		)
Interest expense, net ⁽³⁾	(7,977		)	(18,753		)	(26,730		)
Other income (expense), net ⁽⁴⁾	(1,527		)	7,075			5,548
Other income of consolidated funds ⁽⁵⁾	—			38,519			38,519
Income taxes	—			(8,571		)	(8,571		)
Net loss attributable to non-controlling interests in consolidated funds	—			(7,319		)	(7,319		)
Net income attributable to non-controlling interests in consolidated subsidiaries	—			(84,468		)	(84,468		)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC	$	142,645		$	(93,598	)	$	49,047
Corporate investments ⁽⁶⁾	$	1,371,978		$	(335,740	)	$	1,036,238
Total assets ⁽⁷⁾	$	3,160,373		$	3,464,502		$	6,624,875

(1)

The adjustment represents (a) the elimination of amounts earned from the consolidated funds, (b) for management fees, the reclassification of $27 of net gains related to foreign-currency hedging activities to general and administrative expense, and (c) for investment income, differences of $3,149 related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting accounted for at amortized cost, subject to impairment.

(2)

The expense adjustment consists of (a) equity-based compensation expense of $2,821 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $1,635, (c) expenses incurred by the Intermediate Holding Companies of $241, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $54, (e) acquisition-related items of $1,889, (f) adjustments of $5,545 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $540 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $1,210 related to third-party placement costs, and (i) $5,168 of net losses related to foreign-currency hedging activities.


(3)	The interest expense adjustment represents the inclusion of interest expense attributable to third-party investors in CLOs, non-controlling interests of the consolidated funds and the exclusion of segment interest income.


(4)	The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $5,545 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $1,530 in net losses related to foreign-currency hedging activities to general and administrative expense.


(5)	The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income attributable to third-party investors in CLOs and non-controlling interests of the consolidated funds.


(6)	The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.4 billion of corporate investments included $1.1 billion of equity-method investments.


(7)	The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.



	As of or for the Three Months Ended June 30, 2015
	Segment			Adjustments			Consolidated

Management fees ⁽¹⁾	$	190,197		$	(139,274	)	$	50,923
Incentive income ⁽¹⁾	61,148			(60,584		)	564
Investment income ⁽¹⁾	23,365			(7,671		)	15,694
Total expenses ⁽²⁾	(178,662		)	(67,267		)	(245,929		)
Interest expense, net ⁽³⁾	(8,782		)	(43,960		)	(52,742		)
Other income (expense), net ⁽⁴⁾	(1,987		)	4,850			2,863
Other income (loss) of consolidated funds ⁽⁵⁾	—			(82,526		)	(82,526		)
Income taxes	—			(5,485		)	(5,485		)
Net loss attributable to non-controlling interests in consolidated funds	—			391,961			391,961
Net income attributable to non-controlling interests in consolidated subsidiaries	—			(55,509		)	(55,509		)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC	$	85,279		$	(65,465	)	$	19,814
Corporate investments ⁽⁶⁾	$	1,560,235		$	(1,383,557	)	$	176,678
Total assets ⁽⁷⁾	$	3,245,460		$	51,941,170		$	55,186,630


(1)	The adjustment represents (a) the elimination of amounts earned from the consolidated funds and (b) for management fees, the reclassification of $4,639 of net gains related to foreign-currency hedging activities to general and administrative expense.

(2)

The expense adjustment consists of (a) equity-based compensation expense of $4,010 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $54,920, (c) expenses incurred by the Intermediate Holding Companies of $652, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $5,657, (e) acquisition-related items of $1,695, (f) adjustments of $5,513 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $173 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $5,369 of net gains related to foreign-currency hedging activities, and (i) other expenses of $16.


(3)	The interest expense adjustment represents the inclusion of interest expense attributable to non-controlling interests of the consolidated funds and the exclusion of segment interest income.


(4)	The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $5,513 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $663 of net gains related to foreign-currency hedging activities to general and administrative expense.


(5)	The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income (loss) attributable to non-controlling interests of the consolidated funds.


(6)	The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.6 billion of corporate investments included $1.3 billion of equity-method investments.


(7)	The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.



	As of or for the Six Months Ended June 30, 2016
	Segment			Adjustments			Consolidated

Management fees ⁽¹⁾	$	398,720		$	(5,152	)	$	393,568
Incentive income ⁽¹⁾	184,235			(40,597		)	143,638
Investment income ⁽¹⁾	62,802			7,645			70,447
Total expenses ⁽²⁾	(380,036		)	3,204			(376,832		)
Interest expense, net ⁽³⁾	(16,659		)	(37,776		)	(54,435		)
Other income (expense), net ⁽⁴⁾	(1,392		)	12,741			11,349
Other income of consolidated funds ⁽⁵⁾	—			57,518			57,518
Income taxes	—			(21,251		)	(21,251		)
Net loss attributable to non-controlling interests in consolidated funds	—			(2,375		)	(2,375		)
Net income attributable to non-controlling interests in consolidated subsidiaries	—			(144,502		)	(144,502		)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC	$	247,670		$	(170,545	)	$	77,125
Corporate investments ⁽⁶⁾	$	1,371,978		$	(335,740	)	$	1,036,238
Total assets ⁽⁷⁾	$	3,160,373		$	3,464,502		$	6,624,875

(1)

The adjustment represents (a) the elimination of amounts earned from the consolidated funds, (b) for management fees, the reclassification of $689 of net gains related to foreign-currency hedging activities to general and administrative expense, and (c) for investment income, differences of $13,578 related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting accounted for at amortized cost, subject to impairment.

(2)

The expense adjustment consists of (a) equity-based compensation expense of $6,066 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $2,676, (c) expenses incurred by the Intermediate Holding Companies of $536, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $39,888, (e) acquisition-related items of $1,498, (f) adjustments of $11,346 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $593 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $7,914 related to third-party placement costs, and (i) $10,237 of net losses related to foreign-currency hedging activities.


(3)	The interest expense adjustment represents the inclusion of interest expense attributable to third-party investors in CLOs, non-controlling interests of the consolidated funds and the exclusion of segment interest income.


(4)	The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $11,346 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $1,395 in net losses related to foreign-currency hedging activities to general and administrative expense.


(5)	The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income attributable to third-party investors in CLOs and non-controlling interests of the consolidated funds.


(6)	The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.4 billion of corporate investments included $1.1 billion of equity-method investments.


(7)	The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.



	As of or for the Six Months Ended June 30, 2015
	Segment			Adjustments			Consolidated

Management fees ⁽¹⁾	$	380,292		$	(278,550	)	$	101,742
Incentive income ⁽¹⁾	214,027			(213,463		)	564
Investment income ⁽¹⁾	76,823			(48,447		)	28,376
Total expenses ⁽²⁾	(416,126		)	(65,777		)	(481,903		)
Interest expense, net ⁽³⁾	(17,715		)	(81,596		)	(99,311		)
Other income (expense), net ⁽⁴⁾	(1,996		)	9,553			7,557
Other income of consolidated funds ⁽⁵⁾	—			1,422,716			1,422,716
Income taxes	—			(13,360		)	(13,360		)
Net income attributable to non-controlling interests in consolidated funds	—			(744,704		)	(744,704		)
Net income attributable to non-controlling interests in consolidated subsidiaries	—			(163,610		)	(163,610		)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC	$	235,305		$	(177,238	)	$	58,067
Corporate investments ⁽⁶⁾	$	1,560,235		$	(1,383,557	)	$	176,678
Total assets ⁽⁷⁾	$	3,245,460		$	51,941,170		$	55,186,630


(1)	The adjustment represents (a) the elimination of amounts earned from the consolidated funds and (b) for management fees, the reclassification of $6,684 of net gains related to foreign-currency hedging activities to general and administrative expense.

(2)

The expense adjustment consists of (a) equity-based compensation expense of $8,605 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $72,430, (c) expenses incurred by the Intermediate Holding Companies of $987, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $17,553, (e) acquisition-related items of $3,502, (f) adjustments of $11,103 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $261 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $13,613 of net gains related to foreign-currency hedging activities, and (i) other expenses of $55.


(3)	The interest expense adjustment represents the inclusion of interest expense attributable to non-controlling interests of the consolidated funds and the exclusion of segment interest income.


(4)	The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $11,103 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $1,550 of net gains related to foreign-currency hedging activities to general and administrative expense.


(5)	The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income attributable to non-controlling interests of the consolidated funds.


(6)	The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.6 billion of corporate investments included $1.3 billion of equity-method investments.


(7)	The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.