Business context and reporting period
The filing is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. This differs from the requested company name, Brookfield Oaktree Holdings, LLC; the filing identifies Oaktree Capital Group, LLC as the registrant. Oaktree is an alternative investment manager focused on credit, private equity, real assets and listed equities. Brookfield acquired control in 2019. After a restructuring, the registrant’s financial statements reflect only part of the broader Oaktree business. Results consolidate certain funds, so reported assets, liabilities and cash flows include substantial amounts belonging to fund investors.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $226.2 million | $45.6 million | $984.3 million | $181.8 million |
| Management fees | $58.6 million | $45.5 million | $172.8 million | $138.3 million |
| Incentive income | $167.5 million | $0.1 million | $811.5 million | $43.5 million |
| Net income (loss) | $194.5 million | $67.5 million | $920.2 million | $(187.8) million |
| Net income (loss) attributable to Class A unitholders | $90.2 million | $45.6 million | $471.0 million | $(20.8) million |
| EPS, basic and diluted | $0.91 | $0.46 | $4.76 | $(0.21) |
Class A distributions declared were $0.51 per unit for Q3 and $3.92 per unit for the nine months. Incentive income carries significant compensation expense: $82.0 million in Q3 and $396.4 million year to date. Interest expense was $33.0 million and $113.1 million, respectively; investment income was $17.0 million and $190.8 million.
At September 30, 2021, total assets were $13.12 billion and total liabilities $9.69 billion, including consolidated fund assets of $11.48 billion and fund liabilities of $9.46 billion. Oaktree-level cash was $217.9 million and U.S. Treasury and other securities were $6.5 million, or $224.4 million combined; fund cash is generally unavailable for the company’s general liquidity needs. Corporate investments were $1.04 billion. The company reported no debt obligations on its balance sheet. Separately, Oaktree Capital I was jointly liable for $850 million of notes issued by OCM; these were not reflected as company debt absent specified events. Consolidated funds had $1.03 billion drawn on revolving facilities and $7.21 billion of CLO debt, which is nonrecourse to the company.
Consolidated cash flow from operations was a use of $1.62 billion for the nine months, compared with a use of $775.7 million a year earlier; investing activities provided $161.9 million and financing activities provided $1.65 billion. These consolidated cash flows are heavily affected by fund investment purchases and sales and are not equivalent to corporate cash generation. Management stated it expected available liquidity sources to cover working capital requirements for at least the next 12 months.
Material changes versus prior periods
- Nine-month revenue and Class A earnings rebounded sharply from 2020, primarily on higher incentive income, improved fund investment performance and higher investment income.
- Management fees rose 28.8% in Q3 and 25.0% year to date, mainly from higher sub-advisory fees associated with business growth.
- Incentive income increased substantially, driven by distributions from Private Equity funds in Q3 and Private Equity and Credit funds year to date. A SPAC deconsolidation contributed $72.3 million of incentive income during the first nine months.
- Incentive-creating AUM was $37.8 billion, up 18.1% from December 2020, including market appreciation partly offset by net distributions. Fund-level accrued incentives were $1.95 billion gross and $905.6 million net of estimated related incentive compensation; these are off-balance-sheet amounts and are not assured future revenue.
- Consolidated fund investments at fair value increased to $10.25 billion from $7.80 billion at year-end 2020. Company-level corporate investments increased to $1.04 billion from $972.0 million.
- In September, the revolving credit agreement maturity was extended to September 2026, the management-fee-generating AUM covenant threshold was reset to $57.5 billion, and the maximum leverage ratio increased to 4.00-to-1.00. OCM had no borrowings under the $650 million facility at quarter-end.
Outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management described incentive income and investment income as volatile and dependent on fund performance, realizations and distributions. COVID-19 variants and possible renewed mitigation measures remained sources of economic and market uncertainty; management said it was not then aware of a material COVID-related risk to the stability of the financial statements.
Key sensitivities include market prices, interest rates, foreign exchange, financing availability, counterparty credit and illiquid or distressed investments. The filing estimates that a 10% decline in consolidated fund investment values would reduce unrealized appreciation by about $1.0 billion, with approximately $203.3 million affecting net income attributable to Class A unitholders. A 100-basis-point increase in rates was estimated to raise annualized interest expense on consolidated funds’ variable-rate debt by $61.9 million. These are sensitivity estimates, not forecasts. Significant Level III valuations involve unobservable inputs and judgment.
The company had $315.3 million of undrawn general-partner commitments and a separate $600 million limited-partner commitment to Opps XI; $150 million of the latter had been funded by quarter-end. Legal and regulatory matters were described as routine, with no pending actions expected to have a material financial impact. No material changes to previously disclosed risk factors were reported. Subsequent events included a $0.83 per-unit Class A distribution paid November 10 and OCM’s planned issuance of $200 million of 3.06% senior notes due 2037, expected to fund by January 12, 2022; the notes are guaranteed by Oaktree Capital I and certain other entities.
Most important facts for investors to verify
- Confirm the correct issuer and security being analyzed: this filing is for Oaktree Capital Group, LLC, and its Class A units were no longer publicly traded following the Brookfield transaction; the listed securities are Series A and Series B preferred units.
- Assess how much of the exceptional 2021 earnings reflects recurring management fees versus incentive income, investment gains and the SPAC deconsolidation.
- Review incentive-income realization and clawback/compensation exposures; accrued fund-level incentives are estimates, off balance sheet and subject to reversal or delay.
- Distinguish corporate liquidity and guarantees from consolidated fund cash and nonrecourse fund/CLO borrowings when assessing leverage and cash generation.
- Check the Opps XI funding obligation, related-party arrangements and post-quarter debt issuance against the company’s liquidity and distribution priorities.
- Evaluate market, valuation, COVID-19, interest-rate and foreign-exchange sensitivities, including the substantial reliance on Level III estimates.