Brookfield Oaktree Holdings, LLC — Q1 2021 Form 10-Q Summary
Entity note: The supplied filing is for Oaktree Capital Group, LLC, not an entity named Brookfield Oaktree Holdings, LLC. It reports the quarter ended March 31, 2021; amounts below are in U.S. dollars.
Business context and reporting period
Oaktree is an alternative investment manager focused on credit, private equity, real assets and listed equities. Since the 2019 Brookfield transaction and restructuring, the registrant’s financial statements reflect its interests in two of six Oaktree Operating Group entities; some Oaktree businesses and related assets and liabilities are outside the registrant’s consolidated statements. Consolidated fund balances include substantial third-party investor interests and are not equivalent to corporate resources.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $607.8 million | $43.9 million |
| Management fees | $56.3 million | $41.5 million |
| Incentive income | $551.4 million | $2.4 million |
| Income before taxes | $505.6 million | Loss of $440.9 million |
| Net income attributable to Oaktree | $285.5 million | Loss of $160.9 million |
| Net income attributable to Class A unitholders | $278.7 million; $2.82 per unit | Loss of $167.7 million; loss of $1.71 per unit |
| Operating cash flow | $66.7 million provided | $400.6 million used |
Incentive income compensation expense rose to $265.9 million from $0.4 million. Total expenses were $326.9 million, versus $59.1 million. The filing does not present a conventional operating margin measure; the unusually large incentive income makes simple period comparisons less representative of recurring performance.
At March 31, 2021, the company reported $504.7 million of its own cash and cash equivalents and $9.4 million of Treasury and other securities, or $514.1 million combined. It reported no debt obligations on its consolidated balance sheet. Separately, Oaktree Capital I was jointly and severally liable for $850 million of operating-group debt, although the related borrowing entities and debt are generally not reflected in these statements absent a default. Consolidated funds had $525.8 million of credit-facility borrowings and $6.42 billion of CLO debt, both generally nonrecourse to the company.
Total assets were $11.26 billion and total liabilities were $8.27 billion. These figures include consolidated funds; fund cash of $872.8 million is generally restricted to fund investment activities and is not available for corporate liquidity. Total unitholders’ capital was $2.18 billion.
Material changes versus the prior comparable period
- Revenue and earnings rebounded sharply from Q1 2020 losses, led by incentive income from higher distributions by private equity closed-end funds and a SPAC deconsolidation.
- The SPAC deconsolidation generated $72.3 million of incentive income. Investment income improved to $113.2 million from a $109.7 million loss, while consolidated-fund unrealized investment results improved to a $53.9 million gain from a $326.1 million loss.
- Management fees increased 35.7%, primarily because of higher sub-advisory fees. Incentive-creating AUM rose 9.7% from year-end to $35.1 billion, reflecting $4.8 billion of market appreciation and $1.7 billion of net drawdowns and contributions.
- Cash from operating activities improved to a $66.7 million inflow. Company and unitholder distributions declared were $1.07 per Class A unit, compared with $0.22 a year earlier.
Outlook, risks and contingencies
Management said it expected available liquidity sources to cover working capital requirements for at least the next 12 months. It provided no specific earnings or revenue guidance. The company’s stated distribution approach contemplates quarterly distributions of at least 85% of adjusted distributable earnings by the Operating Group, subject to the operating agreement and other conditions; preferred-unit distributions are discretionary and non-cumulative.
Market and investment performance, incentive-income timing, fund realizations, fundraising, AUM, and COVID-19-related economic uncertainty may materially affect results. Management noted that markets had rebounded but uncertainty remained; it was not then aware of a material COVID-19-related risk to the stability of the financial statements. A hypothetical 10% decline in fund investment values was estimated to reduce quarterly management fees by about $0.1 million and investment income by $300.8 million; the effect on incentive income was not readily quantifiable.
Commitments included $750 million to Oaktree Opportunities Fund XI, of which $75 million had been funded by March 31, 2021; $337.8 million of general-partner fund commitments; and $675 million of limited-partner commitments. The company reported no pending legal or regulatory matter expected to have a material financial impact and no material changes to previously disclosed risk factors. A $2.28 per Class A unit distribution was paid May 10, 2021. On May 7, 2021, two intercompany revolving credit notes were entered into, each with a $250 million maximum principal amount and a May 2024 maturity.
Important facts for investors to verify
- Confirm the correct issuer and security: the supplied 10-Q is for Oaktree Capital Group, LLC; its Class A units were no longer publicly traded, while Series A and Series B preferred units remained listed.
- Assess how much of Q1’s earnings came from the $551.4 million of incentive income, including the SPAC-related item, and how repeatable fund realizations are.
- Distinguish corporate liquidity from consolidated-fund cash and debt; review the $850 million of joint-and-several operating-group obligations and the guarantees and covenants.
- Track the timing and funding of the $750 million Opps XI commitment and other fund commitments, and whether distributions remain supported by cash generation.
- Review valuation sensitivity and realization uncertainty, particularly the substantial Level III holdings and off-balance-sheet accrued incentives, which are not guaranteed receivables.