Business context and reporting period
Filing identity: The supplied filing is Oaktree Capital Group, LLC’s Form 10-K for the fiscal year ended December 31, 2022, filed March 21, 2023. This differs from the request metadata naming Brookfield Oaktree Holdings, LLC.
Oaktree is an alternative investment manager focused on credit, private equity, real assets and listed equities. On November 30, 2022, an internal restructuring separated the registrant from OCM Cayman and its non-U.S. fee business. The registrant now has an indirect economic interest in only Oaktree Capital I; it no longer consolidates OCM Cayman or CLOs, and no longer earns management or sub-advisory fees. Accordingly, year-over-year financial comparisons are affected by a material change in consolidation and business structure.
Key financial metrics
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total revenue | $492.6 million | $1,454.4 million | Down 66.1%; primarily lower incentive income |
| Management fees | $224.1 million | $234.8 million | Down 4.5%; these fees ceased after the restructuring |
| Incentive income | $268.5 million | $1,219.6 million | Down 78.0%; fewer closed-end fund realizations, while 2021 included large private-equity distributions |
| Net income | $463.1 million | $1,157.4 million | Consolidated result includes funds and non-controlling interests |
| Net income attributable to Oaktree Capital Group, LLC | $203.6 million | $631.7 million | Down 67.8% |
| Net income attributable to Class A unitholders | $176.3 million; $1.73 per unit | $604.3 million; $6.10 per unit | Down 70.8% in attributable income |
| Class A distributions declared per unit | $1.86 | $4.68 | Lower alongside earnings |
| Assets under management | $169.6 billion | $165.7 billion | Up 2.4% |
Revenue less reported expenses was approximately $145.5 million, compared with $588.0 million in 2021; this is not a conventional operating-profit or margin comparison because the filing’s consolidated results include fund activity and the restructuring changed the consolidation perimeter. The filing does not provide a directly comparable post-restructuring operating margin.
Cash flow and liquidity: Consolidated operating activities used $1.9 billion in 2022, largely reflecting securities activity of consolidated funds; consolidated investing activities used $228.7 million, and financing activities provided $2.0 billion. These consolidated cash flows include funds whose cash is generally not available for the registrant’s general liquidity needs. At year-end, registrant and operating-subsidiary cash was $9.5 million; consolidated funds held a further $166.6 million. Management stated available liquidity sources should fund working capital needs for at least 12 months.
Debt and commitments: The balance sheet reported $212.2 million of debt obligations, net, relating to Oaktree Capital I’s 2022 euro-denominated senior notes. Oaktree Capital I was also jointly and severally liable, with other Oaktree entities, for $1.05 billion principal of other senior notes; those obligations are not recorded as registrant debt unless applicable conditions arise. Consolidated funds had $1.0 billion of debt, generally nonrecourse to the Company. The revolving credit facility had no borrowings at year-end. The Company had $275.4 million of general-partner fund commitments and a $375.0 million unfunded commitment to Opportunities Fund XI.
Other operating metrics: Incentive-creating AUM rose 13.9% to $46.6 billion. Fund-level accrued incentives were $1.81 billion gross, or $856.5 million net of estimated related incentive compensation; these are off-balance-sheet metrics and realization and timing are uncertain. AUM growth reflected commitments, the 17Capital acquisition and net inflows, partly offset by lower DoubleLine AUM and closed-end fund distributions.
Material changes versus the prior comparable period
- Incentive income fell by $951.2 million, largely because 2021 included $643.2 million from Oaktree Power Opportunities Fund IV and $160.4 million from Highstar Continuation Fund, compared with $8.1 million and $4.4 million, respectively, in 2022.
- Investment income declined 74.7% to $51.3 million, attributed primarily to less favorable market conditions affecting credit and private-equity investments.
- Interest expense rose 60.0% to $248.4 million, primarily due to additional CLO issuances and higher rates on consolidated-fund debt; interest and dividend income increased 43.3% to $557.8 million, primarily from higher rates.
- The 2022 restructuring removed OCM Cayman and CLOs from consolidation, reducing reported assets by $10.0 billion and liabilities by $9.5 billion. It also ended management-fee and sub-advisory-fee revenue and changed entitlement to incentive income on newer funds.
- Class A distributions declared fell from $4.68 to $1.86 per unit. Preferred-unit distributions were $27.3 million, unchanged from 2021.
Outlook, commentary, risks and unusual items
- The filing gives no quantitative earnings, revenue or AUM guidance. Management describes incentive income as volatile and dependent on fund performance, realizations and distribution waterfalls. The Company will generally receive only one-third of incentive income attributable to Oaktree Capital I for closed-end funds established in 2022 or later and evergreen-fund incentive income earned after January 1, 2023.
- Management cites inflation, higher interest rates, economic slowdown and recession risk, geopolitical uncertainty including the Russia-Ukraine conflict, potential financial-system disruption and continuing COVID-19 uncertainty as factors that may affect fund and portfolio-company values, fundraising and realizations.
- Key business risks include reliance on OCM for advisory and administrative support, competition and fee pressure, conflicts of interest, regulatory change, litigation, cyber and technology disruption, leverage and financing-market risk, and subjective valuations of illiquid investments.
- Incentive income included $52.6 million primarily related to a SPAC deconsolidation. Level III investments of consolidated funds totaled $2.39 billion at year-end and require significant unobservable inputs. The auditor identified valuation of investments using significant unobservable inputs as a critical audit matter, while issuing an unqualified opinion on the financial statements.
- Distributions on Series A and Series B preferred units are discretionary and non-cumulative. The Company paid March 2023 distributions of $0.414063 per Series A unit and $0.409375 per Series B unit; future distributions are not assured.
Important facts for investors to verify
- Reconcile the 2022 restructuring’s effects and confirm which post-restructuring revenue streams and incentive interests accrue to the registrant.
- Distinguish registrant-level cash and debt from consolidated-fund balances and from debt guaranteed jointly with other Oaktree entities; assess the practical exposure under guarantees and covenants.
- Evaluate whether the $1.81 billion of accrued fund-level incentives can be realized, when distributions may occur, and the related compensation burden.
- Review valuation assumptions and sensitivity for illiquid and Level III investments, including whether subsequent transactions corroborate year-end marks.
- Track fundraising, redemptions, market performance, interest costs and portfolio-company credit conditions, as these influence AUM, fees, investment income and realizations.
- Assess preferred-unit distribution capacity independently of Class A distributions and the Opportunities Fund XI investment, whose proceeds are intended for the Class A unitholder.