Brookfield Oaktree Holdings, LLC — filing summary
Registrant identification: The supplied filing is Oaktree Capital Group, LLC’s Form 10-K, not a filing under the company name in the request. The fiscal year ended December 31, 2021; the report was signed March 11, 2022. Results are consolidated under U.S. GAAP and include certain investment funds and CLOs. The company’s 2021 and 2020 results reflect its interests in only two of the six Oaktree Operating Group entities following the 2019 restructuring.
Business context and reporting period
Oaktree is an alternative investment manager focused on credit, private equity, real assets and listed equities. The registrant earns management and sub-advisory fees, incentive income, and investment income. Since the 2019 restructuring, much of its management-fee revenue is sub-advisory fees paid by OCM, an affiliate that manages most Oaktree funds. The Class A units are held by a Brookfield affiliate and are not exchange-listed; the Series A and Series B preferred units trade on the NYSE.
Key financial results
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Management fees | $234.8 million | $185.7 million | Up 26.4%, principally from higher sub-advisory fees |
| Incentive income | $1,219.6 million | $243.3 million | Up 401.3%, mainly from private equity and real assets fund distributions |
| Total revenue | $1,454.4 million | $429.1 million | Up approximately 239% |
| Total expenses | $866.4 million | $311.7 million | Higher mainly because of incentive compensation and consolidated fund expenses |
| Income before taxes | $1,169.8 million | $91.9 million | |
| Net income attributable to Class A unitholders | $604.3 million | $138.4 million | Up 336.6% |
| Net income per Class A unit | $6.10 | $1.40 | |
| Class A distributions declared per unit | $4.68 | $0.71 | |
| Assets under management (Oaktree-wide) | $165.7 billion | $148.0 billion | Up 11.9%; includes Oaktree-wide AUM, not just the registrant’s consolidated businesses |
Incentive income included $643.2 million from Oaktree Power Opportunities Fund IV, compared with $133.7 million in 2020, and $160.4 million from Highstar Continuation Fund, which generated none in 2020. The filing also reports $72.3 million of incentive income related to a SPAC deconsolidation. These items and the underlying fund realizations make earnings unusually sensitive to timing and investment performance.
Cash flow, margins, debt and liquidity
- Cash and liquidity: At year-end, the company and operating subsidiaries held $167.3 million of cash and $2.1 million of Treasury and other securities, or $169.4 million combined. The consolidated balance sheet reports $1.159 billion of cash, including $991.8 million held by consolidated funds; fund cash is generally not available for the registrant’s general liquidity needs.
- Debt: The registrant reported no debt obligations on its consolidated balance sheet. However, Oaktree Capital I was jointly and severally liable with co-obligors for $905 million of outstanding principal on notes and a revolving facility, largely issued or borrowed by former indirect subsidiary OCM. The report says these obligations generally are not reflected in the registrant’s financial statements unless Oaktree Capital I borrows or an event of default occurs. OCM had $55 million drawn on a $650 million revolving facility; a separate $250 million subordinated facility was undrawn.
- Fund and CLO leverage: Consolidated funds reported $1.132 billion of debt obligations and $7.806 billion of CLO debt at year-end. These obligations are nonrecourse to the company and supported by the assets of the respective funds or CLOs. CLO debt increased from $6.537 billion in 2020.
- Cash flow: Consolidated operating activities used $2.732 billion in 2021; investing activities provided $184.8 million and financing activities provided $2.747 billion. These consolidated cash flows include funds’ investment purchases, sales, borrowings and investor flows, and are not a direct measure of cash generated by the manager.
- Margins: The filing does not present a conventional operating-margin measure. Total expenses were about 60% of total revenue in 2021, but consolidated fund accounting and incentive compensation affect comparability.
- Commitments: The company had $325.8 million of undrawn general-partner commitments and a $525 million limited-partner commitment to Opportunities Fund XI, of which $225 million had been funded. The report states that the remaining Opps XI commitment is funded by capital contributions from the sole Class A unitholder or its affiliate, and that preferred unitholders should not rely on Opps XI distributions for their payments.
Material changes versus 2020
- Revenue and Class A earnings rose substantially, driven primarily by higher incentive income from fund distributions and stronger investment results.
- Incentive income compensation expense rose to $594.3 million from $104.5 million, partly offsetting the increase in incentive income. Compensation and benefits also increased, to $162.3 million from $131.6 million.
- Investment income increased to $203.0 million from $103.8 million, primarily reflecting higher returns on credit investments. Consolidated fund investment results shifted from a 2020 realized loss of $106.0 million and unrealized depreciation of $183.8 million to a 2021 realized gain of $22.2 million and unrealized appreciation of $122.5 million.
- Oaktree-wide AUM increased $17.7 billion, supported by $14.1 billion of closed-end fund commitments, market appreciation and foreign currency translation, and $5.5 billion of net open-end inflows; closed-end fund distributions partially offset growth.
- Comparisons with 2019 are not directly comparable because the 2019 restructuring deconsolidated four Operating Group entities prospectively. The 2021 and 2020 periods are more comparable to each other under the post-restructuring structure.
Outlook, risks and unusual items
Management provided no numerical earnings or revenue guidance. It stated that described liquidity sources should be sufficient to fund cash requirements for at least the next 12 months. The company expects ongoing cash from management and sub-advisory fees, incentive income, and distributions from corporate investments; incentive income is volatile and unpredictable in amount and timing.
- Principal risks include market and economic volatility, COVID-19 and variants, rising interest rates and financing costs, fund performance and fundraising, redemptions, fee pressure, valuation uncertainty, leverage, counterparty exposure, regulation, litigation, cybersecurity, and dependence on OCM and key personnel.
- Incentive income depends on fund waterfalls, realization events and performance hurdles. At year-end, fund-level accrued incentives were $1.669 billion gross, or $800.4 million net of estimated related incentive compensation; these are off-balance-sheet operating metrics, not a receivable or guaranteed future cash flow.
- Fair value estimates are a significant source of judgment. The auditor identified valuation of investments using significant unobservable inputs as a critical audit matter. Consolidated funds held $1.928 billion of Level III investments at year-end.
- Preferred-unit distributions are discretionary and non-cumulative. The company’s ability to pay them depends on cash flows and distributions from its limited operating interests, as well as legal and contractual restrictions.
- Subsequent events included a $0.90-per-Class A unit distribution paid in February 2022, declared March 2022 preferred-unit distributions, and a January 2022 $200 million OCM note issuance. In March 2022, Oaktree Capital I received commitments for €200 million of senior notes, subject to definitive documentation and expected later funding.
- Ernst & Young issued an unqualified opinion on the financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not provide an opinion on internal control effectiveness.
Most important facts for investors to verify
- Confirm the registrant and security being analyzed: this 10-K is for Oaktree Capital Group, LLC, with publicly traded preferred units but unlisted Class A units.
- Review how the 2019 restructuring limits the registrant’s economic interest to two of six Operating Group entities and affects revenue, debt presentation and comparisons.
- Assess the sustainability of 2021 incentive income, especially major fund realizations, the SPAC-related amount and the distinction between recognized income and accrued fund-level incentives.
- Reconcile the company’s $169.4 million of available cash and zero reported debt with the $905 million of guaranteed debt exposure, undrawn commitments and consolidated-fund/CLO obligations.
- Evaluate preferred-unit distribution capacity and terms, including their discretionary, non-cumulative nature and the separation of Opps XI investment proceeds from preferred-holder payments.
- Examine valuation sensitivity and fund-level leverage: the filing estimates that a 10% decline in market values would reduce investment income by $324.6 million and affect consolidated-fund results materially.