Business Context and Reporting Period
This is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The filing identifies Oaktree Capital Group, LLC as the registrant; it does not identify Brookfield Oaktree Holdings, LLC as the registrant. Oaktree is an alternative investment manager focused on credit, real assets, private equity and listed equities. Brookfield acquired a majority interest in Oaktree in 2019; following a restructuring, this registrant’s financial statements reflect only certain Oaktree operating entities and consolidate certain funds and CLOs.
Unless otherwise noted, financial statement amounts below are in millions of dollars. Consolidated results include fund assets, liabilities and activity that largely belong economically to third-party investors; consolidated totals should not be read as equivalent to the company’s standalone operating cash or debt.
Financial Results and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Management fees | $57.9 | $51.3 | $114.2 | $92.8 |
| Incentive income | $92.5 | $41.0 | $643.9 | $43.4 |
| Total revenue | $150.4 | $92.3 | $758.2 | $136.2 |
| Income before taxes | $225.6 | $190.9 | $731.2 | Loss of $250.0 |
| Consolidated net income (loss) | $222.5 | $187.4 | $725.7 | Loss of $255.3 |
| Net income (loss) attributable to Class A unitholders | $102.1 | $101.4 | $380.8 | Loss of $66.3 |
| Basic and diluted earnings (loss) per Class A unit | $1.03 | $1.03 | $3.85 | Loss of $0.67 |
Quarterly management fees rose 12.9%, primarily from higher sub-advisory fees. Incentive income increased mainly because of higher distributions from private equity and credit closed-end funds. First-half incentive income also included $72.3 million associated with deconsolidating a SPAC. Incentive-income compensation expense rose to $314.5 million for the first half, largely reflecting the greater incentive income.
For the six months, operating cash flow was a use of $795.5 million, compared with a use of $722.9 million in 2020; investing cash flow provided $67.3 million versus a use of $10.6 million; and financing cash flow provided $940.2 million versus $786.7 million. These consolidated cash flows include fund investment purchases, sales and financing, so they do not represent corporate cash generation alone.
At June 30, 2021, Oaktree reported $237.1 million of company cash and $2.2 million of U.S. Treasury and other securities, or $239.3 million combined, and no debt obligations recorded on its consolidated balance sheet. It also disclosed $850 million of outstanding principal on debt for which Oaktree Capital I is jointly and severally liable with other Oaktree entities; the filing explains that this debt is generally not reflected in this company’s statements because other entities issued or borrowed it. Consolidated funds separately had $946.5 million of credit-facility borrowings and $7.07 billion of CLO debt, described as nonrecourse to the company.
Total assets were $12.10 billion at June 30, versus $10.39 billion at December 31, 2020; total liabilities were $9.28 billion versus $7.80 billion. Much of the increase relates to consolidated funds. Standard operating margins are not separately presented; reported results include substantial fund investment gains and losses and non-controlling interests.
Incentive-creating AUM was $36.3 billion, up 13.4% from December 31, 2020, reflecting $7.5 billion of market-value appreciation, including currency effects, partly offset by $3.2 billion of net distributions. Fund-level accrued incentives were $1.86 billion gross and $859.1 million net of estimated related incentive compensation. These are potential, performance-dependent amounts and are not recognized company revenue until recognition criteria are met.
Material Changes Versus Prior Period
- First-half revenue increased to $758.2 million from $136.2 million, driven by higher incentive income, including the SPAC deconsolidation item.
- Class A unitholders’ first-half result shifted from a $66.3 million loss to $380.8 million of income. Consolidated results also benefited from improved realized and unrealized investment performance versus the first half of 2020.
- Consolidated fund investments rose to $9.29 billion from $7.80 billion at year-end; consolidated fund credit-facility borrowings rose to $946.5 million from $370.9 million.
- Class A distributions declared were $2.34 per unit for Q2 and $3.41 per unit for the first half, compared with none in Q2 2020 and $0.22 for the first half of 2020.
Outlook, Risks and Unusual Items
Management stated that available liquidity sources are expected to fund working-capital requirements for at least the next 12 months. The company’s stated distribution policy is to cause the Oaktree Operating Group to distribute at least 85% of adjusted distributable earnings quarterly, subject to governing documents, applicable law and consent rights. Preferred-unit distributions are discretionary and non-cumulative. A $0.50-per-unit Class A distribution was paid August 10, 2021; subsequent September preferred distributions were also disclosed.
Management discussed continuing uncertainty from COVID-19 and variants, market and economic conditions, investment valuations, fundraising and AUM changes, timing and receipt of incentive income, and dependence on key personnel. It noted that market volatility can both impair portfolio values and create investment opportunities. The filing reports no material change to previously disclosed risk factors and no pending legal or regulatory action expected to materially affect the financial statements. Management’s market-risk sensitivity analysis estimates that a 10% decline in consolidated fund investment values would reduce net income attributable to Class A unitholders by approximately $191.8 million; estimates are subject to assumptions and fund leverage.
Material commitments include a $750 million limited-partner commitment to Opps XI, of which $75 million had been funded by June 30, 2021, and $326.2 million of general-partner commitments to funds. The filing says the Opps XI cash is to be contributed by the company’s sole Class A unitholder or an affiliate and is intended for that unitholder’s benefit. The company also disclosed $1.86 billion of fund-level accrued incentives before estimated related compensation, which remains contingent and unrecognized as revenue.
Important Facts for Investors to Verify
- Confirm the registrant and the post-restructuring economic interests represented in these statements; the filing is for Oaktree Capital Group, LLC.
- Assess how much of the sharp first-half earnings increase is recurring versus incentive income and the $72.3 million SPAC deconsolidation item.
- Reconcile company-level liquidity and the $850 million of jointly and severally guaranteed debt with debt issued outside the reporting entity; distinguish both from nonrecourse consolidated-fund borrowings.
- Review the funding arrangements, timing and economic implications of the Opps XI commitment and other fund commitments.
- Evaluate the realizability and volatility of fund-level accrued incentives, consolidated-fund fair values and the effects of leverage, including the disclosed sensitivity analysis.
- Check the sustainability of Class A distributions against distributable cash, the stated distribution policy and the non-cumulative terms of preferred distributions.