Brookfield Oaktree Holdings, LLC — 2020 Q2 filing summary
Filing identity: The supplied 10-Q is filed by Oaktree Capital Group, LLC (OCG), not Brookfield Oaktree Holdings, LLC. It covers the quarter and six months ended June 30, 2020; financial statements are unaudited. Oaktree manages alternative investment funds, with a focus on credit and other opportunistic strategies.
Business context and comparability
Brookfield acquired 61.2% of Oaktree’s business in September 2019, followed by a restructuring effective October 1, 2019. OCG’s financial statements now include only its interests in Oaktree Capital I and OCM Cayman, rather than all six Oaktree Operating Group entities. Consequently, 2020 results are not directly comparable with 2019 results; large year-over-year declines in revenue and expenses principally reflect this change in reporting scope, as well as business performance.
Key financial metrics
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 |
|---|---|---|---|
| Total revenue | $92.3m | $136.2m | $313.5m Q2; $579.9m six months |
| Management fees | $51.3m | $92.8m | $175.1m Q2; $345.0m six months |
| Incentive income | $41.0m | $43.4m | $138.4m Q2; $234.9m six months |
| Net income (loss) attributable to Class A unitholders | $101.4m | $(66.3)m | $42.4m Q2; $89.7m six months |
| Basic and diluted earnings (loss) per Class A unit | $1.03 | $(0.67) | $0.57 Q2; $1.23 six months |
| Operating cash flow, consolidated | Not stated separately | $(722.9)m | $(986.1)m six months |
Q2’s $187.4m consolidated net income included $102.8m of unrealized appreciation on consolidated-fund investments, partly offset by $38.8m of realized losses. For the first six months, consolidated net loss was $255.3m, including $223.3m of net unrealized depreciation and $78.0m of realized losses on consolidated-fund investments. OCG Class A unitholders’ six-month loss also reflects allocations to non-controlling interests.
At June 30, total assets were $8.62bn and total liabilities $6.65bn, including $6.00bn of CLO debt. CLO debt is nonrecourse to OCG and supported by the respective CLOs’ assets. Unitholders’ capital was $1.58bn. OCG reported $245.1m of its own cash and cash equivalents and $67.0m of Treasury and other securities—$312.1m combined—versus $332.8m at year-end 2019. A further $547.5m of cash was held by consolidated funds and is generally unavailable for OCG’s general liquidity needs. OCG reported no debt on its consolidated balance sheet.
Operating metrics: incentive-creating AUM was $25.5bn at June 30, up 9.4% from March 31 but down from $36.0bn a year earlier; the restructuring affects the comparison. Net accrued incentives at fund level, after estimated related compensation, were $281.0m, an off-balance-sheet metric whose timing and realization are uncertain.
Material changes, outlook, and risks
- Q2 revenue and expenses fell sharply year over year, primarily due to the restructuring. Incentive income also declined because of lower distributions from closed-end funds; Q2 2019 included $118.7m from Oaktree Opportunities Fund VIII.
- Six-month investment income shifted to a $42.3m loss from $95.0m of income in 2019, principally reflecting lower returns on Credit and Real Asset investments. Incentives created at fund level were negative $202.5m for the six-month period.
- Management gave no specific earnings or revenue guidance. It said COVID-19 continued to create economic uncertainty and market volatility, which could affect investment valuations, realizations, fees, and portfolio companies. The company reported no known material COVID-related threat to the stability of its financial statements at the filing date, while cautioning that impacts remained uncertain.
- OCG stated that its available liquidity sources were expected to cover working-capital requirements for at least 12 months. It had $259.0m of undrawn commitments to funds. A $250m subordinated revolving facility with a Brookfield subsidiary was entered into in May and had no borrowings at June 30.
- After quarter-end, Oaktree Capital I committed $750m to Oaktree Opportunities Fund XI; the filing says OCG’s sole Class A unitholder or an affiliate would contribute cash as needed, and distributions from that investment are intended for that unitholder’s benefit—not preferred holders. Also after quarter-end, OCM closed a $250m senior-note offering at a blended fixed rate of 3.68%; Oaktree Capital I is a guarantor, but the notes are not recorded as OCG debt unless a default occurs.
- COVID-19, volatile investment values and incentive income, liquidity and fundraising conditions, key-person retention, and post-merger business and affiliate arrangements are identified risks. OCG reported no pending legal or regulatory matters expected to have a material financial impact and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Compare results on a consistent post-restructuring basis; reported 2019 figures include businesses no longer consolidated by OCG.
- Distinguish OCG’s $312.1m of cash and securities from consolidated-fund cash, which is generally restricted to fund activities.
- Review the scope and guarantees of operating-group borrowings: OCG reports no balance-sheet debt, but Oaktree Capital I is jointly and severally liable for $675m of specified outstanding obligations; separate OCM debt is generally excluded from OCG’s statements.
- Assess the quality and sensitivity of investment valuations, incentive income and off-balance-sheet accrued incentives, including the effects of COVID-19 and market movements.
- Confirm the funding and economic terms of the $750m Opportunities Fund XI commitment, the post-quarter-end note issuance, and distributions. The filing reported a subsequent $0.49 per Class A unit distribution and quarterly Series A and B preferred distributions.