Brookfield Oaktree Holdings, LLC — filing summary
Registrant and period: The supplied filing is Oaktree Capital Group, LLC’s Form 10-K for the fiscal year ended December 31, 2020, filed February 26, 2021. It is an annual report, not a standalone fourth-quarter report. The filing does not identify Brookfield Oaktree Holdings, LLC as the registrant; confirm the entity before relying on this summary.
Business context and reporting period
Oaktree is an alternative investment manager focused on credit, private equity, real assets and listed equities. Brookfield acquired a 61.2% interest in Oaktree in September 2019. A related restructuring, effective October 1, 2019, left the registrant with an indirect economic interest in only two of the six Oaktree Operating Group entities. Consequently, 2020 results reflect a narrower business than earlier periods, and the 2019 comparison includes nine months of activity for the four entities subsequently deconsolidated. The company cautions that results are not directly comparable.
Oaktree-wide AUM rose 18.7% to $148.0 billion at year-end 2020 from $124.7 billion, primarily reflecting $21.0 billion of closed-end fund commitments and $9.2 billion of market appreciation and foreign-exchange effects, partly offset by $7.1 billion of closed-end fund distributions. This firm-wide AUM is not the same as the registrant’s reported economic interest.
Financial performance and liquidity
| Metric | 2020 | 2019 | Reported change / context |
|---|---|---|---|
| Total revenue | $429.1 million | $929.0 million | Down 53.8%; substantially affected by the restructuring and not directly comparable |
| Management fees | $185.7 million | $578.9 million | Down 67.9%, primarily due to the restructuring |
| Incentive income | $243.3 million | $350.1 million | Down 30.5%; lower tax-related incentive income and restructuring were cited |
| Income before taxes | $91.9 million | $397.0 million | Lower, with the periods affected by changed consolidation scope |
| Net income | $83.7 million | $387.3 million | Consolidated GAAP figure includes consolidated funds and non-controlling interests |
| Net income attributable to Class A unitholders | $138.4 million | $127.5 million | Up 8.5% |
| Basic and diluted earnings per Class A unit | $1.40 | $1.59 | Down from 2019 |
| Class A distributions declared per unit | $0.71 | $4.96 | Lower; distributions are subject to the company’s distribution policy and circumstances |
Reported consolidated total assets were $10.4 billion and total liabilities were $7.8 billion at December 31, 2020. These totals include consolidated funds; the fund assets are generally available only to settle obligations of those funds. The registrant reported $329.3 million of cash and cash equivalents plus $9.6 million of Treasury and other securities, or $338.8 million combined, and no debt obligations on its consolidated balance sheet. Its lease liabilities were $44.1 million. Separately, consolidated funds had $370.9 million of credit-facility borrowings and $6.54 billion of CLO debt obligations; these are not equivalent to parent-company debt and are generally nonrecourse to the company.
Consolidated cash from operating activities was negative $1.08 billion in 2020, compared with negative $3.13 billion in 2019; the filing explains that consolidated-fund investment activity materially affects these cash-flow totals. Management states that the company and consolidated funds have sufficient near-term cash access and that liquidity sources are expected to fund working-capital requirements for at least 12 months. The filing does not provide a standalone company operating-cash-flow figure in the presented summary.
Incentive-creating AUM for the registrant’s remaining indirect subsidiaries increased 26.5% to $32.0 billion. Fund-level accrued incentives were $1.31 billion gross and $610.2 million net of associated incentive compensation; these are off-balance-sheet metrics, depend on fund valuations and realization, and are not guaranteed future cash receipts.
Material changes, outlook and risks
- The restructuring materially changed the business and reporting perimeter. Management fees, expenses, investments and incentive-related results therefore should not be compared mechanically with 2019.
- Oaktree committed $750 million as a limited partner to Oaktree Opportunities Fund XI; $37.5 million was funded in 2020. The filing says the investment’s distributions are intended for the Class A unitholder and should not be relied on to fund preferred-unit distributions.
- The company’s stated policy is to cause the Operating Group to distribute at least 85% of adjusted distributable earnings, subject to law and agreement terms. Series A and B preferred distributions are discretionary and non-cumulative. The filing reports $27.3 million attributable to preferred unitholders in 2020.
- No quantified financial guidance or earnings forecast is provided. Management describes fundraising, incentive income, investment returns and distributions as inherently variable. Oaktree-wide closed-end commitments were strong in 2020, but this does not remove the risk of future fundraising or performance volatility.
- COVID-19 disrupted markets and portfolio companies and could continue to affect valuations, fundraising, investment activity, exits, borrower repayment, real-estate rents and liquidity. The company also highlights competition, fee pressure, reliance on OCM and key personnel, conflicts of interest, regulatory and litigation exposure, cyber risk, leverage in funds and subjective valuation of illiquid investments.
- Capital commitments shown as due on demand included $712.5 million of limited-partner commitments and $350.6 million of general-partner commitments. The filing says calls are expected over several years. It also identifies $54.2 million of operating-lease payments over time. These commitments warrant review against available and legally accessible liquidity.
- Independent auditors issued an unqualified opinion on the financial statements. The audit highlighted valuation of investments using significant unobservable inputs as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal control effectiveness.
Most important facts for investors to verify
- Confirm the registrant identity: the source filing names Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
- Review the post-2019 ownership and restructuring documents to understand which earnings, assets and cash flows support this issuer and its preferred units.
- Separate parent-company liquidity and obligations from consolidated-fund cash, borrowings and CLO liabilities; check the guarantees and covenants for OCM-issued debt.
- Assess the $750 million Fund XI commitment, remaining capital calls and other commitments against cash available to the registrant, including the stated restriction on Fund XI distributions.
- Verify preferred-unit distribution declarations and coverage. Distributions are discretionary and non-cumulative; they are not assured by the reported preferred-unit rate.
- Examine incentive income and accrued incentives for valuation sensitivity, realization timing, and compensation obligations; the filing notes that accrued incentives are not balance-sheet receivables.
- Consider the comparability caveat, COVID-19 exposures, and Level III valuation uncertainty when interpreting reported earnings and AUM.