Brookfield Oaktree Holdings, LLC — filing identity note
The supplied filing is Oaktree Capital Group, LLC’s Form 10-K for the fiscal year ended December 31, 2019, filed February 28, 2020. The filing does not identify Brookfield Oaktree Holdings, LLC as the registrant; confirm the intended issuer before relying on this summary.
Business context and reporting period
Oaktree is an alternative investment manager focused primarily on credit, alongside private equity, real assets and listed equities. On September 30, 2019, Brookfield acquired a 61.2% interest in Oaktree; OCGH retained 38.8%. The October 1 restructuring transferred four of Oaktree’s six operating entities to Brookfield affiliates. Oaktree Capital Group’s consolidated results thereafter include only Oaktree Capital I and OCM Cayman, although 2019 includes nine months of results for the four entities that were deconsolidated. Accordingly, year-over-year comparisons are not directly comparable.
Key financial metrics
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total revenue | $929.0 million | $1,386.1 million | Down 33.0%; largely affected by the restructuring and lower incentive income |
| Management fees | $578.9 million | $712.0 million | Down 18.7%; primarily attributed to the restructuring |
| Incentive income | $350.1 million | $674.1 million | Down 48.1%; lower tax-related incentive income and restructuring were cited |
| Total expenses | $842.5 million | $1,000.6 million | Down 15.8%; merger costs contributed to higher general and administrative expense |
| Income before taxes | $397.0 million | $489.3 million | Down 18.9% |
| Net income | $387.3 million | $464.5 million | Down 16.6% |
| Net income attributable to Class A unitholders | $127.5 million | $211.1 million | Down 39.6%; basic and diluted income per unit was $1.59 versus $2.99 |
| Class A distributions declared per unit | $4.96 | $2.97 | 2019 includes a $3.13 distribution associated with the merger |
| Incentive-creating AUM | $25.3 billion | $34.6 billion | Down 26.9%; primarily reflects the restructuring |
The filing does not present a single operating-margin measure. Total revenue less total expenses was $86.5 million in 2019, versus $385.5 million in 2018; this comparison excludes other income and is affected by the changed consolidation perimeter.
Cash flow, debt and liquidity
- Consolidated operating activities used $3.13 billion of cash in 2019, compared with $617.0 million used in 2018. These figures include consolidated funds and substantial investment purchases and sales, and are not a straightforward measure of corporate operating cash generation.
- Consolidated investing activities provided $751.4 million; financing activities provided $2.73 billion. The filing reports $323.6 million of Oaktree corporate cash and cash equivalents and $9.2 million of Treasury and other securities at year-end, or $332.8 million combined. Consolidated funds held a further $518.2 million of cash, generally unavailable for the company’s general liquidity needs.
- Oaktree Capital Group reported no debt obligations on its December 31, 2019 consolidated balance sheet after the restructuring. OCM, a deconsolidated entity, had $150 million outstanding under a $650 million revolving facility; Oaktree Capital I remained jointly and severally liable with other co-obligors for $750 million of aggregate principal on their debt. These amounts should not be conflated with debt recorded on the registrant’s post-restructuring balance sheet.
- Consolidated funds reported $5.77 billion of CLO debt obligations and $158.5 million of other fund borrowings, net of issuance costs. CLO obligations are nonrecourse to the company and supported by the relevant CLO assets.
- Management stated that available liquidity sources were expected to fund working-capital requirements for at least the next 12 months. Preferred-unit distributions are discretionary and non-cumulative. The filing describes a policy to distribute at least 85% of adjusted distributable earnings from the Operating Group, subject to applicable terms and restrictions.
Material changes, outlook and risks
- The merger and restructuring substantially changed ownership, operations, consolidation and the assets supporting the registrant. The filing cautions that historical results are not necessarily indicative of future performance.
- Accrued fund-level incentives were $938.8 million at year-end 2019, down from $1.72 billion in 2018. The filing attributes a substantial part of the reduction to the restructuring; these are off-balance-sheet potential incentives, not assured or necessarily near-term cash receipts.
- Other income was $310.5 million, versus $103.8 million in 2018. It included $368.9 million of interest and dividend income, partly offset by $197.2 million of interest expense and investment and fund results. The year-over-year comparison reflects both fund performance and consolidation changes.
- No quantitative earnings guidance is provided. Management’s stated near-term outlook is limited to its liquidity assessment; revenues and cash flows remain exposed to volatile incentive income, investment valuations, fundraising and market conditions.
- Principal risks include market and investment losses, difficulty raising or retaining capital, fee pressure and competition, valuation uncertainty, leverage and financing conditions, key-person and OCM service-provider dependence, conflicts of interest, regulatory and litigation exposure, cyber and operational disruption, and the ability to fund preferred distributions.
- The filing reports no pending legal action or regulatory proceeding expected, individually or collectively, to materially affect the consolidated financial statements. It also discloses a 2018 SEC settlement concerning pay-to-play rules. The independent auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Confirm the issuer: this is Oaktree Capital Group, LLC’s filing, not a filing identified as Brookfield Oaktree Holdings, LLC.
- Assess post-restructuring earnings and cash flows using the two entities that remain consolidated, and avoid treating 2019 and prior-year totals as like-for-like.
- Verify which debt is legally attributable to the registrant versus deconsolidated OCM and nonrecourse CLOs, including the effect of joint and several guarantees and facility covenants.
- Evaluate the quality, timing and compensation costs of accrued incentives, and the sensitivity of fund and corporate investment values to market movements.
- Review preferred distribution terms and liquidity: distributions can be suspended and are non-cumulative; year-end corporate cash and securities were $332.8 million.
- Consider merger-related costs, related-party service arrangements with OCM and Brookfield, and the potential effect of key-person departures or changes to those arrangements.