Oaktree Capital Group (OAK) has a strong reputation in the asset management business, and its expertise is highly valued among many investors. As it turns out, Brookfield Asset Management (BN -1.44%) put an even higher value on Oaktree, as its takeover bid for a controlling stake in the asset manager will potentially take away investors' ability to invest directly in Oaktree.
Coming into Thursday's second-quarter financial report, Oaktree investors expected that the company would continue to make progress toward consummating its acquisition, and that was definitely the case. In addition, though, Oaktree seemed to take advantage of more-favorable conditions in the financial markets to boost its fundamental success, and even if shareholders won't necessarily benefit directly from that improved performance, those who take Brookfield stock in exchange for their Oaktree stakes could still share in that future success.
Oaktree's swan song
Oaktree Capital's second-quarter results marked a nice recovery from what had been a tough first quarter. Revenue of $313.5 million was up by more than $100 million from the year-ago period, which was a lot nicer than the big year-over-year decline in the first quarter. Net income attributable to Oaktree Capital Group unitholders climbed by more than a third to $42.4 million, and that produced net income per Class A unit of $0.57, up from $0.44 per unit a year ago.
Oaktree saw more-mixed performance in many of its fundamental metrics. Assets under management picked up $1.8 billion over the past three months to come in at $120.4 billion, but that was still down from where it was 12 months ago. Net outflows to open-end funds continued to weigh on asset levels, and distributions to closed-end fund shareholders also outweighed the market gains that the company's investments produced. Management fee-generating assets picked up $1.1 billion from three months ago to come in at $101.4 billion, and were up a more modest $0.9 billion from year-ago levels, with some new transportation infrastructure and power investment vehicles helping to bring in new business. Incentive-creating assets got an even bigger boost of $1.6 billion to $36 billion, adding to gains over the preceding nine months.
Distributable earnings revenue jumped 32% to $378.4 million, which was even stronger than its growth rate during the first quarter. Incentive income once again was the primary contributor to that gain, as the Oaktree Opportunities Fund VIII was single-handedly responsible for more than 30% of its overall distributable earnings revenue.
The latest status on Brookfield
Oaktree also laid out the current status of the company's planned merger with Brookfield Asset Management. On June 25, Oaktree got written consent for the adoption of the merger agreement from Oaktree Capital Group Holdings, which is primarily owned by Oaktree's founders and certain other members of management and employees both current and former. Oaktree still believes that the deal will close in the third quarter of 2019, setting about a two-month window for getting the rest of any necessary regulatory approvals.
However, Oaktree investors need to understand that because the Brookfield deal is pending, they won't get any more quarterly distributions. That's a big hit, especially given the $1.05 per unit that they received last quarter.
Oaktree Capital Group unitholders didn't have a strong reaction to the news, with the unit price rising just a fraction of a percent at the open Thursday morning following the announcement. For those who take the stock election rather than just cashing out when the Brookfield acquisition closes, though, the opportunity to keep some exposure to Oaktree's business looks like one that might be worth taking.