Brookfield Oaktree Holdings, LLC quarterly report, Q1 FY2022

Brookfield Oaktree Holdings, LLC — filing summary

Registrant and period: The supplied filing is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the quarter ended March 31, 2022, filed May 13, 2022. It describes Oaktree’s alternative investment management business across credit, real assets, private equity and listed equities. Following the 2019 Brookfield transaction and restructuring, Brookfield owns the Company’s Class A units; the public securities identified in this filing are its Series A and Series B preferred units. Consolidated results include investment funds and CLOs, whose assets and liabilities are largely attributable to third-party investors.

Financial performance and liquidity

Metric	Q1 2022	Q1 2021 / comparison
Management fees	$60.4 million	$56.3 million; up 7.3%
Incentive income	$2.6 million	$551.4 million; sharply lower
Total revenue	$63.0 million	$607.8 million
Consolidated net income	$113.6 million	$503.3 million
Net income attributable to Class A unitholders	$10.9 million; $0.11 per unit	$278.7 million; $2.82 per unit
Cash flow from operations	$(701.8) million	$66.7 million provided

Management fees increased primarily on higher sub-advisory fees. Incentive income fell because closed-end fund distributions were limited in 2022; the prior-year period included large private-equity fund distributions and $72.3 million related to a SPAC deconsolidation.
Other income was $135.3 million, including $123.6 million of interest and dividend income, a $89.2 million realized investment loss and a $128.4 million unrealized investment gain. Investment income was $11.7 million, down from $113.2 million.
Operating expenses were $81.0 million, including $24.8 million of consolidated fund expenses. Consolidated fund expenses and the investment-related gains and losses include fund-level items and should not be read as direct measures of the manager’s standalone operating performance.
At March 31, 2022, cash and cash equivalents held by Oaktree were $121.3 million, and U.S. Treasury and other securities were $6.6 million: $127.9 million combined. The Company reported no debt outstanding on its own balance sheet. Cash held by consolidated funds is generally not available for the Company’s general liquidity needs.
Total consolidated assets were $15.0 billion and total liabilities $10.5 billion. These totals include consolidated fund assets and liabilities, including $8.0 billion of CLO debt obligations, which are nonrecourse to the Company. Separately, Oaktree Capital I was jointly and severally liable with co-obligors for $1.05 billion of operating-group debt, although those obligations were not recorded as Company debt absent a default under the described arrangements.
Management stated that available liquidity was expected to cover working-capital requirements for at least the next 12 months. The Company had funded $338 million of its $750 million Opps XI commitment by quarter-end; $412.5 million remained undrawn as a limited partner commitment.
Class A distributions declared were $0.97 per unit for the quarter, versus $1.07 a year earlier. A subsequent $0.27 per-unit distribution was paid May 10, 2022. Preferred distributions remain discretionary and non-cumulative under their terms.

Material changes and operating indicators

Incentive-creating AUM rose 9.0% from December 31, 2021 to $44.6 billion, reflecting $2.1 billion of market-value appreciation, including foreign-exchange effects, and $1.6 billion of net drawdowns.
Fund-level accrued incentives were $1.67 billion at quarter-end, but are an off-balance-sheet operating metric, not a Company receivable; their timing and realization are uncertain. The filing estimates $800.8 million net of associated incentive compensation.
Class A-attributable income declined 96.1% year over year, principally reflecting lower incentive income. The 2021 comparison was unusually high and included SPAC-related incentive income.
The Company’s March 2022 financing agreement provided for €200 million of senior notes in three tranches, with maturities from 2032 to 2037 and stated coupons of 2.20%–2.58%; issuance and funding were expected by June 8, 2022, subject to customary closing conditions. The quarter-end statements do not show proceeds from this issuance.
The subordinated revolving facility with a Brookfield subsidiary was amended in March to extend its maturity to September 14, 2026; no amounts were outstanding at quarter-end. Oaktree reported compliance with applicable financial maintenance covenants.

Outlook, risks and contingencies

The filing gives no specific earnings or revenue guidance. Management noted that management fees, incentive income and investment income are affected by fund structures, market performance, realizations, fundraising and asset values; incentive income is particularly volatile and uncertain in timing.
Management identified COVID-19 and variants, the Russia-Ukraine conflict and related sanctions, market and economic conditions, interest and foreign-exchange movements, financing availability, competition, key-personnel retention, fundraising and fund distributions as risks. As of filing, it reported no known material effect from COVID-19 uncertainty or the conflict on the stability of its financial statements or operations.
A 10% decline in consolidated fund investment values was estimated to reduce unrealized appreciation by $1.2 billion, of which approximately $243.3 million would affect net income attributable to Class A unitholders. A 10% decline in fund and other investment fair values was estimated to reduce investment income by $351.4 million. A 100-basis-point rise in rates was estimated to increase annualized interest expense on consolidated funds’ variable-rate debt by $70.5 million.
Company and fund investment valuations include significant judgment, particularly for Level III assets; actual proceeds may differ materially from reported fair values. Funds also face credit, liquidity, concentration, currency and counterparty risks.
Oaktree reported no pending legal or regulatory actions expected to have a material financial-statement impact, no material changes to annual-report risk factors, and no material changes in internal control over financial reporting. The Company had $288.4 million of general-partner commitments and $412.5 million of limited-partner commitments; these should be distinguished from nonrecourse fund obligations.

Most important facts for investors to verify

Confirm the registrant and security being analyzed: this filing is for Oaktree Capital Group, LLC, and its Class A units are held by a Brookfield affiliate rather than publicly traded.
Reconcile the filing’s share counts: the March 31 financial statements report 99.1 million Class A units, while the cover reports 102.7 million Class A units outstanding as of May 10, 2022.
Track actual funding and terms of the €200 million note issuance expected by June 8, 2022, and distinguish Company-reported debt from obligations guaranteed by operating subsidiaries or attributable to consolidated funds.
Assess the quality and realizability of the $1.67 billion fund-level accrued incentive metric, the $2.41 billion of consolidated-fund Level III investments, and the unusually high 2021 comparison for incentive income.
Separate the Company’s $127.9 million of cash and securities from consolidated-fund cash and debt, and monitor remaining Opps XI commitments, distributions and covenant compliance.