Oaktree Capital Group (OAK) has been a giant in the asset management arena for a long time, and it's developed a reputation for being an expert in the field. That expertise is a big part of what got Brookfield Asset Management (BN 0.75%) interested in Oaktree. With Brookfield having made an offer in March to acquire 62% of Oaktree's business -- including all outstanding Class A units owned by ordinary investors -- many Oaktree investors wondered what the impact of the transaction would be, and whether they should elect to take cash or Brookfield shares in exchange for their units.
Coming into Thursday's first-quarter financial report, Oaktree investors had hoped to see nice gains in earnings from the company. Oaktree's results were solid, but it was also interesting to see the extent to which the asset manager is keeping things "business as usual," even as it looks forward to some of the opportunities that teaming up with Brookfield will provide.
Springtime for Oaktree
Oaktree Capital's first-quarter results showed some of the strain the asset manager has been under lately. Revenue fell 21% to $266.4 million, disappointing those who had expected modest gains on Oaktree's top line. Net income attributable to Oaktree Capital Group unitholders was down 10% to $47.3 million, and that produced net income per Class A unit of $0.66. That was better than the consensus forecast, but still represented a sizable drop from year-earlier levels.
Oaktree's financial press release wasn't quite as thorough as it's been in the past, perhaps because of the coming acquisition. Yet even though it didn't report its favored "economic net income" metric, Oaktree did say that total assets under management were down about $2.8 billion from the year-ago period, to $118.6 billion. The $1 billion drop in just the past three months was particularly disappointing, as outflows of $3.3 billion from open-end mutual funds more than offset the $3.1 billion in market gains during an extremely favorable period for financial markets.
Oaktree also saw mixed performance in other asset-based measures. Management-fee-generating assets were down $1.7 billion over the past 12 months to $100.3 billion on net outflows, but incentive-creating assets picked up $1.4 billion, to $34.4 billion.
Oaktree did see nice performance on its distributable-earnings revenue, which climbed more than 26% to $602.7 million. The asset manager pointed to a huge increase in incentive income as driving the bulk of the gains, offset in small part by reduced management fees and proceeds from realized investment income.
What's ahead for Oaktree and Brookfield?
CEO Jay Wintrob kept a longer-term view of the state of the business. "We believe partnering with Brookfield will be a powerful combination of two complementary, world-class asset management businesses," Wintrob said, and "we will work together to offer exceptional solutions to our clients, leverage our combined strengths, and generate strong returns across all points in the economic cycle." The CEO also highlighted the boost to distributable earnings.
Because of that last point, investors should get a healthy distribution of income before the Brookfield deal closes. Class A unitholders will receive $1.05 per unit in distributable income for the quarter, up from $0.75 per unit in the previous period.
Meanwhile, Oaktree investors will have to decide whether they'll accept $49 in cash or 1.077 shares of Brookfield stock in exchange for their Class A units. Following the deal, Brookfield will own 62% of Oaktree, while Oaktree Capital Group Holdings L.P. -- which includes Oaktree co-founders Howard Marks and Bruce Karsh, among others -- will retain the remaining 38%. Oaktree will continue to be run independently, with Marks and Karsh continuing as co-chairs of the board and Wintrob staying on as CEO.
Oaktree Capital Group unitholders didn't react strongly to the news, and the unit price for Class A Oaktree units remained at a level that suggests investors will choose to convert their interests into Brookfield shares. It could be the end of 2019 before the deal gets done, but in the interim, Oaktree hopes to take greater advantage of recovering markets, and to start seeing assets under management move in the right direction again.