Brookfield Oaktree Holdings, LLC — 2020 Third-Quarter Filing Summary
Filing identity: The supplied filing is Oaktree Capital Group, LLC’s Form 10-Q for the quarter ended September 30, 2020, filed November 6, 2020. The filing states that Brookfield acquired control in 2019; Oaktree’s Class A units are no longer publicly traded. Amounts below are in U.S. dollars.
Business context and reporting period
Oaktree manages alternative-investment funds, with strategies in credit, private equity, real assets and listed equities. The 2019 merger-related restructuring materially changed the reporting perimeter: since October 1, 2019, Oaktree Capital Group’s statements reflect its interests in Oaktree Capital I and OCM Cayman, rather than all six Oaktree Operating Group entities. The company cautions that 2020 results are therefore not directly comparable with 2019 results.
Key financial results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $45.6 million in 2020; $205.2 million in 2019 | $181.8 million in 2020; $785.1 million in 2019 |
| Management fees | $45.5 million; $179.8 million | $138.3 million; $524.8 million |
| Incentive income | $0.1 million; $25.4 million | $43.5 million; $260.3 million |
| Net income (loss) attributable to Class A unitholders | $45.6 million; $(16.6) million | $(20.8) million; $73.1 million |
| Basic and diluted earnings (loss) per Class A unit | $0.46; $(0.22) | $(0.21); $0.99 |
| Distributions declared per Class A unit | $0.49; $3.13 | $0.71; $4.93 |
Management attributed the sharp year-over-year declines in fees and expenses primarily to the restructuring and deconsolidation of entities. Lower incentive income also reflected fewer distributions from incentive-paying closed-end funds. For the first nine months, consolidated funds’ realized and unrealized investment results were significant: realized losses were $97.6 million and unrealized depreciation was $222.7 million, versus a $9.0 million realized loss and $18.0 million unrealized appreciation in 2019. These consolidated-fund amounts include substantial third-party interests.
At September 30, total assets were $9.12 billion and total liabilities were $6.86 billion. Consolidated CLO debt was $6.24 billion and is nonrecourse to the company. Oaktree reported $204.5 million of company cash and $9.2 million of Treasury and other securities; management cited $213.7 million of cash and securities and no company debt outstanding. The filing also reports $846.8 million of cash held by consolidated funds, which is generally unavailable for company liquidity.
Consolidated cash flow for the first nine months was $(775.7) million from operations, $32.2 million from investing and $1.06 billion from financing. These figures include consolidated-fund activity and should not be read as the standalone operating cash flow of the manager.
Material changes versus prior comparable period
- Revenue fell 77.8% in the third quarter and 76.8% for the nine-month period, principally because 2020 excludes four Operating Group entities included in 2019.
- Third-quarter Class A-attributable results improved to $45.6 million from a loss, with management citing fund performance and the restructuring. Nine-month Class A-attributable results shifted to a $20.8 million loss from $73.1 million of income, reflecting fund investment performance and the different reporting perimeter.
- Incentive-creating AUM was $29.8 billion at September 30, up 16.9% from June 30, mainly from market appreciation and net drawdowns and contributions. It was below the $35.8 billion reported a year earlier; the filing notes that the post-restructuring measure excludes DoubleLine.
- Fund-level accrued incentives were $821.6 million gross at September 30, down from $1.35 billion a year earlier. The filing estimates $381.1 million net of associated incentive compensation; these amounts are not recognized revenue or a balance-sheet receivable.
Outlook, risks, commitments and unusual items
- Management said liquidity sources were expected to cover working-capital needs for at least the next 12 months. The filing provides no earnings or revenue guidance.
- COVID-19 continued to create economic and market uncertainty. Management noted that volatility could impair portfolio valuations and operating results, while also creating investment opportunities; it reported no material COVID-related risk to the stability of the financial statements at that time.
- The company committed $750 million to Oaktree Opportunities Fund XI; $37.5 million had been funded by September 30. The filing says Brookfield or an affiliate will contribute cash as required and that distributions from the investment are intended for the Class A unitholder, not as a source preferred unitholders should rely on for distributions or redemption.
- Company-level commitments included $712.5 million as a limited partner in Opps XI and $344.3 million of general-partner commitments. These are expected to be called over time, although presented as due on demand in the contractual-obligations table.
- The filing reports Oaktree Capital I’s joint and several liability for $850 million of specified debt obligations. It also describes a $250 million OCM senior-note issuance in July 2020, guaranteed in part by Oaktree Capital I, and a $250 million Brookfield-affiliate subordinated revolving facility with no amount outstanding at quarter-end.
- Debt disclosure needs reconciliation: Note 10 says OCM had no outstanding borrowings under its $650 million revolver at September 30, while the MD&A says OCM had $150 million outstanding under that facility. The statements also distinguish obligations issued by OCM from debt recognized in the company’s post-restructuring financial statements.
- Other risks include volatile incentive income, illiquid or hard-to-value investments, foreign-exchange and interest-rate exposure, counterparty risk, and potential effects of merger-related restrictions and personnel retention. Oaktree reported no pending legal or regulatory proceeding expected to have a material financial impact and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the $150 million revolving-credit borrowing discrepancy and confirm which entities are borrowers, guarantors and obligors.
- Assess the post-restructuring economic interests and cash flows actually available to Oaktree Capital Group, including obligations guaranteed by Oaktree Capital I.
- Confirm the funding schedule and source of cash for the $750 million Opps XI commitment, and the investment’s distribution rights relative to preferred units.
- Review fund-level investment performance, valuation assumptions and the likelihood and timing of converting accrued incentives into realized company revenue.
- Separate company liquidity from consolidated-fund cash and CLO debt when evaluating liquidity, leverage and cash flow; compare periods only with the restructuring’s effects in view.