Business context and reporting period
Oaktree Capital Group, LLC’s unaudited Form 10-Q covers the quarter ended March 31, 2020. Oaktree manages alternative-investment funds, with a focus on credit, private equity, real assets and listed equities. The filing identifies Oaktree Capital Group, LLC as the registrant; the supplied metadata names Brookfield Oaktree Holdings, LLC.
Comparisons with 2019 are substantially affected by the October 2019 Brookfield merger and restructuring. The Company now consolidates only two of six Oaktree Operating Group entities; the 2020 results therefore do not represent the same business perimeter as 2019. Brookfield owns the Class A units, which are no longer publicly traded; the Series A and B preferred units remain listed.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 or prior date |
|---|---|---|
| Total revenue | $43.9 million | $266.4 million |
| Management fees | $41.5 million | $169.9 million |
| Incentive income | $2.4 million | $96.5 million |
| Net income (loss) | $(442.7) million | $184.4 million |
| Net income (loss) attributable to Class A unitholders | $(167.7) million | $47.3 million |
| Loss per Class A unit | $(1.71) | Earnings of $0.66 |
| Cash from operating activities, consolidated | $(400.6) million | $(56.5) million |
| Cash and U.S. Treasury/other securities available to Oaktree and operating subsidiaries | $245.5 million | — |
Revenue fell sharply, primarily because of the restructuring; lower closed-end fund distributions also reduced incentive income. Losses reflected $326.1 million of net unrealized depreciation and $39.2 million of realized losses on consolidated-fund investments, and a $109.7 million investment loss, compared with $62.2 million of investment income in Q1 2019. These consolidated fund results include third-party economic interests.
At March 31, 2020, total assets were $8.61 billion and total liabilities $6.18 billion; these include consolidated funds. Corporate investments were $633.9 million, down from $709.1 million at December 31, 2019. Incentive-creating AUM was $23.3 billion, down 7.9% from year-end, including a $3.8 billion market-value decline partly offset by $1.7 billion of drawdowns and contributions. Fund-level accrued incentives were $638.7 million, down from $938.8 million at year-end; this is an off-balance-sheet measure, not a recognized receivable.
Quarterly cash flow and debt totals require care: consolidated cash of $883.4 million includes $646.6 million held by funds and generally unavailable for the Company’s general liquidity. The Company reported no debt obligations on its balance sheet, but Oaktree Capital I remained jointly and severally liable for $750 million of operating-group debt; OCM separately had $150 million drawn on its revolving facility. Fund and CLO borrowings are generally nonrecourse to the Company.
Material changes versus the prior comparable period
- Revenue declined 83.5%; management attributed most of the decrease to the changed consolidation perimeter after restructuring.
- Incentive income decreased 97.5%, to $2.4 million, reflecting lower distributions from funds paying incentives and the restructuring. Q1 2019 included $45.0 million from Oaktree Opportunities Fund VIII and $19.0 million from OCM Opportunities Fund VIIb.
- Investment income moved from $62.2 million of income to a $109.7 million loss; consolidated-fund unrealized results also swung from a $57.1 million gain to a $326.1 million loss.
- Class A distributions declared were $0.22 per unit, versus $0.75 in Q1 2019. Preferred distributions are discretionary and non-cumulative.
Outlook, risks and unusual items
Management provided no quantified earnings or revenue guidance. It said COVID-19 had already negatively affected operations and revenue and expected effects to become more acute over the next few months, while the duration and full impact remained uncertain. Risks cited include lower investment valuations, fundraising and exit challenges, portfolio-company credit and liquidity stress, and operational and cybersecurity risks associated with remote work. Market volatility may also create investment opportunities.
Management stated that it believed liquidity sources would meet working-capital needs for at least 12 months. The Company had $266.6 million of undrawn commitments to funds. On May 1, 2020, OCM received commitments for $250 million of senior unsecured notes at a blended fixed rate of 3.68%, subject to definitive documentation and an expected closing by July 22, 2020; Oaktree Capital I is a guarantor, but the notes are not included in the Company’s financial statements unless an event of default occurs.
The Company reported no pending legal or regulatory matter expected to have a material impact on its financial statements. It adopted expected-credit-loss guidance in Q1, recording a $0.4 million cumulative adjustment to retained earnings, with no material overall impact.
Important facts for investors to verify
- Confirm the registrant and reporting entity: the filing is for Oaktree Capital Group, LLC, while the request metadata names Brookfield Oaktree Holdings, LLC.
- Assess the post-restructuring reporting perimeter and avoid treating the 2019-to-2020 changes as purely organic performance comparisons.
- Separate Company liquidity from cash and debt of consolidated funds; verify the status of OCM’s $150 million revolver draw, the $750 million jointly guaranteed debt, and the proposed $250 million notes.
- Review COVID-19’s subsequent effects on portfolio valuations, incentive income, fundraising, liquidity and fund commitments; management said the impact was uncertain.
- Evaluate the quality and sensitivity of Level III valuations and the realization uncertainty of the $638.7 million of fund-level accrued incentives.