Brookfield Oaktree Holdings, LLC quarterly report, Q2 FY2022

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, 2022, filed August 12, 2022. The request metadata names Brookfield Oaktree Holdings, LLC; the filing itself identifies Oaktree Capital Group, LLC as the registrant. Oaktree is an alternative investment manager focused on credit, real assets, private equity and listed equities. Its reported results consolidate certain managed funds and CLOs, so consolidated assets, liabilities and cash flows include substantial amounts that are not freely available to the Company.

Financial Results and Liquidity

Management fees rose 9% in both comparisons, primarily from growth in sub-advisory fees. Lower incentive income drove the revenue decline: 2022 six-month incentive income included $52.6 million related to a SPAC deconsolidation, while 2021 included substantially higher closed-end fund incentive income. The filing reports no conventional profit margin metric.

At June 30, 2022, Oaktree reported $348.0 million of its own cash and cash equivalents and $6.3 million of Treasury and other securities, versus $213.8 million of debt obligations on its balance sheet. The filing separately reports $777.4 million of cash held by consolidated funds, which generally is restricted to those funds’ investment activities. Oaktree’s reported debt includes €200 million of senior notes issued by Oaktree Capital I in June. Consolidated funds also had $938.0 million of credit-facility borrowings and $7.8 billion of CLO debt; these obligations are generally nonrecourse to the Company. Total unitholders’ capital was $2.19 billion.

Material Changes Versus the Prior Comparable Period

• Six-month Class A results shifted from $380.8 million of net income to a $10.5 million net loss, reflecting much lower incentive income and weaker investment results.
• Q2 unrealized depreciation on consolidated-fund investments was $155.4 million, compared with $71.2 million of unrealized appreciation in Q2 2021. Six-month realized losses on consolidated-fund investments were $73.1 million, versus $11.2 million of gains in 2021.
• Oaktree reported a six-month investment loss of $18.9 million, versus $173.8 million of investment income in 2021. Management attributed the weaker results mainly to market conditions affecting Credit, Private Equity, Opps XI and CLO investments.
• Incentive-creating AUM was $43.2 billion at June 30, down 3.1% from March 31, reflecting $1.3 billion of market-value depreciation and $0.1 billion of net distributions; it remained up 5.6% from year-end 2021.
• Cash distributions declared per Class A unit were $0.16 for Q2 and $1.13 for the first six months, compared with $2.34 and $3.41, respectively, in 2021.

Outlook, Commentary, Risks and Unusual Items

Management stated that available liquidity sources should be sufficient for working capital needs for at least the next 12 months. It described the timing and amount of incentive income as volatile and unpredictable and expects to continue preferred-unit distributions and Class A distributions under its stated policy. No specific earnings or revenue guidance was provided. The Company plans quarterly distributions of at least 85% of adjusted distributable earnings from the Operating Group, subject to its operating agreement and other conditions.

• Market declines, interest-rate changes, currency movements and credit conditions may affect fund valuations, fees, incentive income and investment income. Management estimated that a 10% decline in consolidated-fund investment values would reduce unrealized appreciation or increase depreciation by $1.2 billion; approximately $187.3 million would affect net income attributable to Class A unitholders.
• A 100-basis-point increase in rates was estimated to raise annualized interest expense on consolidated-fund variable-rate debt by $70.8 million. The Company estimated a $3.5 million annualized increase in interest income on its cash and securities for the same rate move.
• COVID-19 and the Russia-Ukraine conflict were cited as sources of uncertainty and potential market volatility; management reported no known material impact on the financial statements as of filing.
• The Company had $525.5 million of general-partner commitments and $412.5 million of limited-partner commitments to funds, including its Opps XI investment. It had funded $337.5 million of its $750 million Opps XI commitment by June 30.
• On July 15, 2022, after quarter-end, the Company completed its acquisition of a majority interest in 17Capital. A $0.38 per-unit Class A distribution was paid August 10, 2022.
• Management reported no pending legal or regulatory actions expected to have a material financial impact and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.

Important Facts for Investors to Verify

• Confirm the registrant’s legal identity: the filing is for Oaktree Capital Group, LLC, not the company name in the request metadata.
• Assess how much reported earnings depend on market-sensitive incentive income, SPAC-related items and investment valuations, including Level III fair-value estimates.
• Distinguish Oaktree’s own liquidity and debt from consolidated-fund cash and nonrecourse fund/CLO obligations; review guarantees and covenant compliance.
• Review the timing and funding sources for the $750 million Opps XI commitment, other fund commitments and the 17Capital acquisition.
• Evaluate distribution variability, including discretionary, non-cumulative preferred distributions and the substantial reduction in Class A distributions declared versus 2021.