Brookfield Oaktree Holdings, LLC — Filing identity and period
The supplied filing is Oaktree Capital Group, LLC’s Form 10-K for the fiscal year ended December 31, 2018, not a filing identified in its text as Brookfield Oaktree Holdings, LLC. It includes unaudited quarterly data, including the fourth quarter. Oaktree is an alternative investment manager across credit, private equity, real assets and listed equities; reported AUM was $119.6 billion at year-end.
Financial and operating results
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| GAAP revenue | $1.386 billion | $1.470 billion | Down 5.7% |
| Management fees | $712.0 million | $726.4 million | Down 2.0% |
| Incentive income | $674.1 million | $743.4 million | Down 9.3%; volatile and realization-dependent |
| Net income attributable to Class A unitholders | $211.1 million | $231.5 million | Down 8.8%; diluted earnings per unit were $2.99 versus $3.61 |
| Adjusted net income (non-GAAP) | $473.6 million | $701.1 million | Down 32.4%; $2.63 per Class A unit versus $3.97 |
| Distributable earnings (non-GAAP) | $613.1 million | $719.8 million | Down 14.8%; $3.61 per Class A unit versus $4.18 |
| Fee-related earnings (non-GAAP) | $227.6 million | $291.2 million | Down 21.8%; approximately 28.8% of fee-related revenue, versus 35.7% |
| AUM / fee-generating AUM | $119.6 billion / $98.1 billion | $123.9 billion / $104.3 billion | Down 3.5% / 5.9% |
Fourth-quarter 2018 revenue was $594.2 million and net income attributable to Class A unitholders was $74.5 million, or $1.04 per unit. Quarterly results were uneven; fourth-quarter other income was a loss of $95.2 million.
GAAP consolidated cash from operating activities was a use of $617.0 million in 2018, investing activities used $493.2 million, and financing activities provided $995.0 million. These cash-flow totals include consolidated funds and therefore are not a direct measure of cash available to the management company. Oaktree and operating subsidiaries reported $460.9 million of cash and $546.5 million of U.S. Treasury and other securities, against $745.9 million of debt obligations; the $500 million revolving facility was undrawn. Management said liquidity was sufficient for operations and commitments over at least the next 12 months.
Corporate debt had $750 million of principal outstanding, largely fixed-rate, with $150 million of term debt due in 2023 and the remainder due thereafter. Separately reported consolidated-fund and CLO borrowings are generally nonrecourse to Oaktree. The filing estimates $385.8 million of Oaktree commitments to funds and $187.9 million of future tax-receivable-agreement payments. Class A distributions declared for 2018 totaled $2.97 per unit; the fourth-quarter distribution of $0.75 was paid in February 2019.
Material changes and unusual items
- AUM fell by $4.3 billion, principally reflecting closed-end fund distributions, $4.0 billion of net open-end fund outflows and unfavorable currency translation. Fee-generating AUM was also reduced by funds in liquidation and open-end outflows.
- Incentive income declined as a major prior-year contribution from OCM Principal Opportunities Fund IV moderated. Investment income also fell, primarily because of lower returns on listed-equity, credit and private-equity investments.
- 2018 GAAP results include adoption of the new revenue-recognition standard: a $48.7 million after-tax opening retained-earnings increase, and reported revenue effects including an $80.0 million increase in incentive income and a $13.3 million increase in management fees. These accounting effects complicate direct comparison with 2017.
- 2017 included significant Tax Act-related items: $178.2 million of additional tax expense and a $145.1 million benefit from remeasuring the tax receivable liability. The 2017 comparison also includes a $22.0 million make-whole expense on early repayment of senior notes.
- Oaktree issued $400.6 million net proceeds of Series A and B preferred units in 2018. Their 6.625% and 6.550% distributions are discretionary and non-cumulative. A February 2018 Class A offering generated $219.5 million, used to acquire interests from existing holders.
Outlook, commentary and risks
Management gave no formal earnings guidance. It said it did not expect management fees to grow significantly until Oaktree Opportunities Fund Xb begins its investment period, then anticipated in the second half of 2019. Of $14.2 billion in shadow AUM not yet generating fees, $7.6 billion related to that fund; most of the remainder was expected to generate fees gradually over several years. Oaktree raised $12.7 billion of gross capital in 2018 and had $19.5 billion of uncalled commitments at year-end.
Management described a difficult 2018 market backdrop, including sharp fourth-quarter equity declines, rising interest rates, trade tensions and concerns about slowing growth. Incentive-creating closed-end funds returned 8.9% gross for 2018, or 6.0% including Highstar Capital IV. Management emphasized risk control and selective deployment, while noting that weak markets can reduce fee bases and realizations even as they create investment opportunities.
- Revenue, incentive income, investment returns and distributions are volatile and depend on fund performance, realizations, fundraising and market conditions.
- Open-end fund redemptions, competition, fee pressure and closed-end fund liquidations may further reduce AUM or fee revenue. Key-person departures could affect fundraising and investment periods.
- Leverage, illiquid investments, subjective Level III valuations, derivatives, interest-rate and currency movements, and counterparty risks can affect fund values and Oaktree’s results.
- Regulatory, tax, litigation, conflicts-of-interest and cybersecurity risks remain material. The filing notes a July 2018 SEC settlement concerning employee campaign contributions under “pay-to-play” rules; the penalty amount is not stated in the supplied text.
- The tax receivable agreement generally allocates 85% of specified realized tax savings to OCGH unitholders; actual payments and timing depend on taxable income and other assumptions.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Investor verification priorities
- Confirm the registrant and filing identity: the source document names Oaktree Capital Group, LLC, despite the request metadata naming Brookfield Oaktree Holdings, LLC.
- Review the GAAP-to-non-GAAP reconciliations and the effects of revenue-standard adoption, especially on 2018 incentive income and comparisons with 2017.
- Track open-end fund flows, fee-generating AUM, the timing of Opportunities Fund Xb’s fee start, and whether shadow AUM converts to fee revenue as expected.
- Assess the quality and cash timing of incentive income, fund distributions and accrued fund-level incentives; accrued incentives are not guaranteed realizations.
- Distinguish corporate liquidity and debt from consolidated fund and CLO balances, and review commitments, preferred distributions and tax-receivable-agreement obligations.
- Monitor market, valuation, regulatory, key-person and governance risks, including the controlled-company structure and discretionary, non-cumulative preferred distributions.