Brookfield Oaktree Holdings, LLC — Filing Summary
Entity and period: The supplied filing is Oaktree Capital Group, LLC’s Form 10-K for the fiscal year ended December 31, 2013, filed February 28, 2014. This does not match the requested company name, Brookfield Oaktree Holdings, LLC, or the “2013 Q4” period; the filing is an annual report, not a quarterly filing.
Business context
Oaktree is an alternative investment manager specializing in credit and other strategies, including distressed debt, corporate debt, control investing, convertibles, real estate and listed equities. It reported $83.6 billion of AUM at year-end and one investment-management segment. Its financial statements consolidate many funds in which third-party investors hold most of the economic interests, so consolidated results and cash flows are not a direct measure of cash or earnings attributable to Oaktree.
Key financial and operating metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Segment management fees | $749.9 million | $747.4 million | +0.3% |
| Segment incentive income | $1,030.2 million | $461.1 million | +123.4% |
| Segment investment income | $258.7 million | $202.4 million | +27.8% |
| Adjusted net income (ANI), segment | $1,080.7 million | $717.3 million | +50.7% |
| ANI attributable to Oaktree Capital Group, LLC | $223.1 million; $6.38 per Class A unit | $114.4 million; $4.06 per unit | — |
| Distributable earnings, segment | $984.3 million | $672.2 million | +46.4% |
| Distributable earnings attributable to Oaktree Capital Group, LLC | $203.6 million; $5.82 per Class A unit | $107.7 million; $3.82 per unit | — |
| Fee-related earnings, segment | $260.1 million | $307.6 million | −15.4% |
| GAAP net income attributable to Oaktree Capital Group, LLC | $222.0 million; $6.35 per Class A unit | $107.8 million; $3.83 per unit | — |
Segment management fees were nearly flat: lower fees from closed-end funds in liquidation offset growth in open-end and evergreen funds. Incentive income and investment income drove the increase in ANI and distributable earnings. Fee-related earnings declined as operating expenses rose faster than management fees.
AUM: Total AUM rose 8.5% to $83.6 billion; management fee-generating AUM increased to $72.0 billion from $66.8 billion. Incentive-creating AUM fell to $32.4 billion from $34.0 billion. Uncalled capital commitments rose to $13.2 billion from $11.2 billion.
Balance sheet and liquidity: Segment cash and cash equivalents were $390.7 million, with $676.6 million in U.S. Treasury and government-agency securities; corporate debt was $579.5 million. A $500 million revolving credit facility was undrawn at year-end, and the company reported covenant compliance. Consolidated debt was $2.88 billion, including $2.30 billion of consolidated-fund borrowings described as nonrecourse to Oaktree. Consolidated cash flow from operations was $5.44 billion, but it includes fund activity and should not be read as cash freely available to the parent.
Cash distributions: The filing reports $4.71 per Class A unit declared for fiscal 2013; the fourth-quarter distribution of $1.00 was paid in February 2014. The board retains discretion over future distributions.
Material changes and unusual items
- Oaktree raised $12.5 billion of gross capital in 2013, its seventh consecutive year raising approximately $10 billion or more. It reported $12.0 billion of distributions from closed-end funds.
- Strong markets generated $1.17 billion of fund-level incentives created in 2013. Net accrued incentives after associated compensation were $1.24 billion at year-end, versus $1.28 billion a year earlier; only $494 million related to funds then paying incentives, compared with $799 million at the prior year-end.
- Management expected materially less net incentive income, and therefore lower ANI and distributable earnings, in 2014 from the year-end accrued-incentive balance than in 2013. The filing provides no specific numerical earnings guidance.
- Consolidated GAAP revenue was $194.9 million and net income was $6.21 billion, but these figures reflect consolidation and elimination of fund activity. Net income attributable to Oaktree Capital Group, LLC was $222.0 million. Consolidated unrealized and realized fund investment gains were substantial and largely attributable to third-party fund interests.
- Segment investment income included $17.1 million of market-value gains on Oaktree’s Cinda investment and $31.4 million of income from DoubleLine.
- Oaktree’s $240.9 million tax receivable agreement liability reflects an obligation to pay OCGH unitholders 85% of qualifying realized tax savings. Management estimated aggregate future distribution reductions associated with the agreement at $232.9 million, assuming sufficient taxable income and no material tax-law changes.
Outlook, commentary and risks
Management described 2013 as a strong financial-market environment, with elevated asset prices and scarce attractive buying opportunities, particularly for distress-oriented strategies. It identified selected opportunities in European middle-market companies, commercial real estate and shipping, and highlighted fundraising and growth in newer strategies. The outlook is exposed to volatile incentive income, fund performance and realizations, market values, fundraising, redemptions, fee pressure, competition, key-person departures, conflicts of interest, valuation uncertainty, leverage and counterparty risks, and changing regulation and tax rules.
The filing identifies a lawsuit, Kaplan Industry, Inc. v. Oaktree Capital Management, L.P., seeking damages in excess of $800 million. Oaktree stated that it believed the case lacked merit and that loss exposure was remote; the case was stayed pending related arbitration. The filing states that no pending legal actions were expected to have a material impact on results, cash flows or financial condition. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Most important facts to verify
- Confirm the requested issuer: the provided 10-K is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
- Review the reconciliation between consolidated GAAP results and segment measures, particularly fund consolidation, non-controlling interests and incentive-income timing.
- Assess the quality and realizability of accrued incentives, including the smaller portion currently paying incentives and the expected 2014 decline.
- Check parent-level liquidity, debt maturities, undrawn revolver availability, covenant headroom and the distinction between parent cash and fund cash.
- Evaluate the tax receivable agreement’s projected payments and sensitivity to exchanges, taxable income and tax-law changes.
- Monitor the Kaplan litigation and the valuation sensitivity of the substantial Level III fund investments.
- Verify the basis for future distributions; payments are discretionary and may vary with earnings, cash needs and tax-related obligations.