Brookfield Oaktree Holdings, LLC — 2023 Q1 filing summary
Filing identity: The supplied 10-Q is for Oaktree Capital Group, LLC, not a registrant named Brookfield Oaktree Holdings, LLC. It covers the three months ended March 31, 2023; financial statements are unaudited. The 2022 restructuring materially changed the Company’s scope, making year-over-year comparisons less direct.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $59.4 million | $63.0 million |
| Management and sub-advisory fees | None | $60.4 million |
| Incentive income | $59.4 million | $2.6 million |
| Investment income | $51.7 million | $11.7 million |
| Net income | $93.2 million | $113.6 million |
| Net income attributable to Class A unitholders | $38.9 million; $0.39 per unit | $10.9 million; $0.11 per unit |
| Operating cash flow | $(156.6) million | $(701.8) million |
| Cash and cash equivalents, consolidated | $462.6 million | $176.1 million at year-end 2022 |
| Debt obligations on balance sheet | $217.0 million | $212.2 million at year-end 2022 |
| Class A distribution declared per unit | $0.11 | $0.97 |
Reported consolidated cash includes $299.2 million held by consolidated funds and generally unavailable for the Company’s general liquidity needs; the Company itself reported $163.5 million of cash. Consolidated fund borrowings were $699.1 million, generally nonrecourse to the Company. Separately, Oaktree Capital I was jointly and severally liable with co-obligors for $1.05 billion of senior notes issued by OCM and other entities; those obligations are not recorded as Company debt absent specified events such as default.
Total assets were $6.11 billion and total liabilities were $1.21 billion at March 31, 2023. Non-controlling redeemable interests in consolidated funds were $2.79 billion. These consolidated balances include investment funds and should not be read as the Company’s standalone operating liquidity or debt position.
Material changes and operating context
- Following the 2022 restructuring, the Company no longer consolidates OCM Cayman or CLOs and no longer earns management or sub-advisory fees. Its reported revenue is now principally incentive income; investment income is reported separately.
- Incentive income rose by $56.8 million, primarily from larger distributions by private-equity closed-end funds. Incentive compensation rose to $58.5 million from $5.0 million, substantially offsetting that revenue increase.
- Class A-attributable net income increased to $38.9 million, primarily reflecting higher investment income. Consolidated net income declined, reflecting changes in fund-level results and consolidation scope.
- Incentive-creating AUM was $51.0 billion at quarter-end, up 9.4% from year-end, including $3.3 billion of net contributions and $1.0 billion of market-value appreciation.
- Fund-level accrued incentives were $1.82 billion gross and $1.09 billion net of estimated related compensation. These are off-balance-sheet metrics, depend on fund performance and realization, and are not guaranteed revenue.
Cash flow, outlook, and risks
Operating cash use improved from the prior-year quarter but remained negative. Consolidated cash flows are significantly affected by fund investment purchases and sales and by third-party fund contributions and distributions; they are not a direct measure of the Company’s standalone cash generation. Management stated that available liquidity sources are expected to meet working-capital requirements for at least the next 12 months. The filing gives no specific earnings or revenue guidance.
- The Company had $311.1 million of general-partner commitments to funds and a further $225.0 million limited-partner commitment to Opps XI. It had funded $525.0 million of its $750.0 million Opps XI commitment by quarter-end.
- The filing said the Company expected to commit $750 million to Opps XII around May 12, 2023, with funding provided by its sole Class A unitholder or an affiliate. Distributions from these investments are intended for the Class A unitholder; preferred unitholders should not rely on them for preferred distributions or redemption.
- A $0.72 per Class A unit distribution was paid May 10, 2023. The filing also disclosed June 2023 preferred-unit distributions of $0.414063 per Series A unit and $0.409375 per Series B unit.
- Management highlighted risks from market and investment-value volatility, uncertain timing and amount of incentive income, financing and counterparty access, and bank deposits held above FDIC-insured limits. The Company reported no direct exposure to the failed banks discussed in the filing, but noted potential risks to its cash, funds, portfolio companies, and credit-facility syndicate.
- A 10% decline in consolidated-fund investment values was estimated to reduce those investments’ value by $421.1 million, with approximately $69.2 million affecting net income attributable to Class A unitholders. A 10% decline in the Company’s fund and other investment values was estimated to reduce investment income by $218.4 million. A 100-basis-point rate increase was estimated to raise annual interest expense on variable-rate debt by $7.0 million.
- Management reported no pending legal or regulatory actions expected to have a material financial impact, no material risk-factor changes, and effective disclosure controls. It also noted that significant valuations rely on judgment, including for Level III investments.
Key facts for investors to verify
- Confirm the registrant identity and assess the effect of the 2022 restructuring on comparisons, fee revenue, reported debt, and consolidation.
- Review the source and sustainability of Q1 incentive income and investment income, as well as the associated compensation burden and timing of future incentive realizations.
- Distinguish the Company’s $163.5 million of cash from consolidated-fund cash and confirm the availability of liquidity for commitments, debt service, and distributions.
- Assess exposure to guaranteed affiliate debt, fund-level nonrecourse borrowings, and the $536.1 million of disclosed Company fund commitments, including the planned Opps XII commitment.
- Verify subsequent distributions, the status and funding arrangements for Opps XI and Opps XII, and the sensitivity of investment valuations and earnings to market movements.