BAM - Brookfield Asset Management

[KJP]

Put it this way. 

 

If I were purely an OAK shareholder, I would not support the deal at this price.  As a big fan of BAM, though, I feel more conflicted.

 

Insiders own 60% of OAK, so fat lot of good my objections would do.

 

They even own 92% of the voting power, so we really don't have much say in this one, Peregrino... :)

 

The press release says "The Oaktree Board of Directors, acting on the recommendation of a special committee, composed of non-executive, independent directors, has unanimously recommended that Oaktree unitholders approve the transaction."  Would that vote require a pure majority, in which case it's pointless because insiders control a majority of the voting interests, or a majority of non-insider unit holders?

 

I believe the latter is much more appropriate in the circumstances where insiders are getting benefits (the right to retain a direct stake in Oaktree) that outsiders are not.

[Sportgamma]

Put it this way. 

 

If I were purely an OAK shareholder, I would not support the deal at this price.  As a big fan of BAM, though, I feel more conflicted.

 

Insiders own 60% of OAK, so fat lot of good my objections would do.

 

They even own 92% of the voting power, so we really don't have much say in this one, Peregrino... :)

 

The press release says "The Oaktree Board of Directors, acting on the recommendation of a special committee, composed of non-executive, independent directors, has unanimously recommended that Oaktree unitholders approve the transaction."  Would that vote require a pure majority, in which case it's pointless because insiders control a majority of the voting interests, or a majority of non-insider unit holders?

 

I believe the latter is much more appropriate in the circumstances where insiders are getting benefits (the right to retain a direct stake in Oaktree) that outsiders are not.

 

"The transaction is subject to the approval of Oaktree unitholders representing at least a majority of the voting interests of Oaktree and other customary closing conditions, including certain regulatory approvals. OCGH, controlled by Howard Marks and Bruce Karsh, and which represents approximately 92% of the voting interests of Oaktree, has agreed to vote all of its units in favor of the transaction. The transaction is expected to close in the third quarter of 2019."

[KJP]

Put it this way. 

 

If I were purely an OAK shareholder, I would not support the deal at this price.  As a big fan of BAM, though, I feel more conflicted.

 

Insiders own 60% of OAK, so fat lot of good my objections would do.

 

They even own 92% of the voting power, so we really don't have much say in this one, Peregrino... :)

 

The press release says "The Oaktree Board of Directors, acting on the recommendation of a special committee, composed of non-executive, independent directors, has unanimously recommended that Oaktree unitholders approve the transaction."  Would that vote require a pure majority, in which case it's pointless because insiders control a majority of the voting interests, or a majority of non-insider unit holders?

 

I believe the latter is much more appropriate in the circumstances where insiders are getting benefits (the right to retain a direct stake in Oaktree) that outsiders are not.

 

"The transaction is subject to the approval of Oaktree unitholders representing at least a majority of the voting interests of Oaktree and other customary closing conditions, including certain regulatory approvals. OCGH, controlled by Howard Marks and Bruce Karsh, and which represents approximately 92% of the voting interests of Oaktree, has agreed to vote all of its units in favor of the transaction. The transaction is expected to close in the third quarter of 2019."

 

I agree the suggestion is a pure majority.  What is the point?

[writser]

There is no point? It's just mandatory?

[racemize]

I never invested in OAK to avoid K-1 headaches.

 

I do own BAM. Does anyone know if BAM shareholders are likely to get K-1's? Or in the future once BAM's ownership exceeds a certain percentage?

 

Thanks

 

Vinod

 

I wouldn't think so, BAM is not a partnership, and it owns lots of other partnerships besides OAK.

[John Hjorth]

From the Oaktree 2018 10-K, p. 6:

 

We manage assets on behalf of many of the most significant institutional investors in the world. Our clientele (excluding DoubleLine’s clientele) includes 73 of the 100 largest U.S. pension plans, 38 state retirement plans in the United States, over 400 corporations and/or their pension funds, over 340 university, charitable and other endowments and foundations, over 15 sovereign wealth funds, and over 350 other non-U.S. institutional investors. As measured by AUM (excluding our pro-rata portion of DoubleLine’s AUM), our 25 largest clients participate in an average of three different investment strategies, reflecting the confidence engendered by our consistent firm-wide investment approach. Approximately 16% of our AUM represents high-net-worth individuals or intermediary distribution such as sub-advisory relationships with mutual funds and advisory relationships with publicly-traded BDCs, indicating both the broadening appeal of alternatives to individual investors and our heightened focus on that market.

 

This transaction makes a lot of sense to me. I hope it doesn't fall apart.

[villainx]

 

This transaction makes a lot of sense to me. I hope it doesn't fall apart.

 

With the concerns about number fudging, it's a plus that OAK did some due diligence to be comfortable with holding BAM or being a part of BAM for near to long term?  And OAK expertise might make credit business a higher return business too?

 

I guess due diligence by proxy isn't the best way to go, but some of the stuff about concerns about BAM being conservative or too big or too aggressive is subjective anyway.

[vinod1]

I never invested in OAK to avoid K-1 headaches.

 

I do own BAM. Does anyone know if BAM shareholders are likely to get K-1's? Or in the future once BAM's ownership exceeds a certain percentage?

 

Thanks

 

Vinod

 

I wouldn't think so, BAM is not a partnership, and it owns lots of other partnerships besides OAK.

 

Thank you. You are right! All their subs issue K-1's and that is why I have not invested in the subs even when some of them got really cheap. Brain freeze :)

 

Vinod

 

[Spekulatius]

I never invested in OAK to avoid K-1 headaches.

 

I do own BAM. Does anyone know if BAM shareholders are likely to get K-1's? Or in the future once BAM's ownership exceeds a certain percentage?

 

Thanks

 

Vinod

 

I wouldn't think so, BAM is not a partnership, and it owns lots of other partnerships besides OAK.

 

Thank you. You are right! All their subs issue K-1's and that is why I have not invested in the subs even when some of them got really cheap. Brain freeze :)

 

Vinod

 

BOR is a Reit and does not issue a K-1. It’s equivalent to BPY otherwise.

[John Hjorth]

... BOR is a Reit and does not issue a K-1. It’s equivalent to BPY otherwise.

 

BOR, Spekulatius?

 

-I'm a bit confused here, -perhaps a typo for your part? [i suppose you mean BAM, but I'm not totally sure.. ] Thank you for elaboration in advance here.

[villainx]

... BOR is a Reit and does not issue a K-1. It’s equivalent to BPY otherwise.

 

BOR, Spekulatius?

 

I spoke for you upthread, and now for Spekulatius.  BPR?

[EricSchleien]

obviously he means BPR since that's the BPY equivalent that doesn't issue a K1 because it's a REIT ;)

 

... BOR is a Reit and does not issue a K-1. It’s equivalent to BPY otherwise.

 

BOR, Spekulatius?

 

I spoke for you upthread, and now for Spekulatius.  BPR?

[John Hjorth]

Ha!, the only thing I didn't look at was near-by key strokes! ... Thank you Og & villainx. - Finally got it!

[EricSchleien]

Ha!, the only thing I didn't look at was near-by key strokes! ... Thank you Og & villainx. - Finally got it!

 

happily :)

 

also fyi....

BPY was engaged in a tender offer that expires the 25th. I ended up selling my shares today to make a pretty nice arb profit in a week. The upper range on the tender is $21. My thinking was i'd be happy to own the stock regardless if I was tendered out or not.

[Spekulatius]

... BOR is a Reit and does not issue a K-1. It’s equivalent to BPY otherwise.

 

BOR, Spekulatius?

 

I spoke for you upthread, and now for Spekulatius.  BPR?

 

Yes BPR. Phat finger when using the phone.

[vince]

I know it's a tough question but anyone with good analysis of OAK wish to share what you think a good range is for their current earning power?  Not necessarily their current distributable earnings but normalized for what they should be earning assuming we are at a different point in the cycle and maybe also a growth rate going forward?  Do they give investors a model to calculate their intrinsic value simlar to how bam does? Thanks in advance

[vinod1]

... BOR is a Reit and does not issue a K-1. It’s equivalent to BPY otherwise.

 

BOR, Spekulatius?

 

I spoke for you upthread, and now for Spekulatius.  BPR?

 

Yes BPR. Phat finger when using the phone.

 

:) Thanks!

[Spekulatius]

Anyone feels that OAK was selling out because they stagnated and losing ground relative to peers liked BX or Ares. They weren’t growing their AUM as fast than many others, probably because they were mostly confined to their distressed credit niche - but what do you do where there is little distressed debt? Their bran is aprobably a bit stale now. BAM gave the founders a way out, a broader platform, yet leave them in control for a while. I could be wrong, but this is my hunch.

[Cigarbutt]

I know it's a tough question but anyone with good analysis of OAK wish to share what you think a good range is for their current earning power?  Not necessarily their current distributable earnings but normalized for what they should be earning assuming we are at a different point in the cycle and maybe also a growth rate going forward?  Do they give investors a model to calculate their intrinsic value simlar to how bam does? Thanks in advance

Fascinating question.

1st @ Spekulatius: I don't agree as OAK has an entrenched contrarian culture and the way that the deal evolves over time underlines the long-term nature of their thinking. I think the combination is impressive and highly complementary.

 

For valuation and earning power, one can dissect the asset management fees, the incentive income (typically above 8%) and the investment income and also one could adjust for accrued carry. An interesting aspect is that, despite a relatively poor environment for their specialization for the last few years, they have been able to produce a net income average of 2.80$ per share over the last 5 years, which (using a PE of 15) shows that BAM paid a slight premium on that valuation measure for the first installment.

 

The Oaktree team describes themselves as bottom-up and cycle-agnostic (interesting given the content of Mr. Marks' memos) but AUM went from 36 in 2006 to 73 in 2009. AUM has remained flat for some time and what happens to earning power and valuation has a lot to do with where we are in the credit cycle.

 

I think they have now around 20B of uncalled capital commitment and typically raise capital before and during downturns in order to complete opportunisitc deployments.

 

The following may be useful in elaborating scenarios where OAK could potentially scale up their business (AUM size and profitability):

http://www.oecd.org/corporate/Corporate-Bond-Markets-in-a-Time-of-Unconventional-Monetary-Policy.pdf

 

The current credit environment is unique and this will be fun to watch, over time.

 

I also thought the following presentation by the CEO to be useful for vision, strategy and potential complementarity with BAM:

http://ir.oaktreecapital.com/phoenix.zhtml?c=212597&p=irol-eventDetails&EventId=5271846

 

[chrispy]

Where do you guys/gals think the credit, real assets, and private equity from OAK will end up? BAM? Or will the respective parternships get each piece? Does BBU get credit or does it end up in a separate partnership?

[villainx]

Anyone feels that OAK was selling out because they stagnated and losing ground relative to peers liked BX or Ares. They weren’t growing their AUM as fast than many others, probably because they were mostly confined to their distressed credit niche - but what do you do where there is little distressed debt? Their bran is aprobably a bit stale now. BAM gave the founders a way out, a broader platform, yet leave them in control for a while. I could be wrong, but this is my hunch.

 

From what I know of OAK, they famously either turned away or returned money at some point.  They probably could have expanded more aggressively but stuck to what they do best as well as being fair to their investors.  I think maybe even at the expense of shareholders?  You don't want to expand recklessly, but coming out of 2009, they certainly could have turned into more of a full offering type of asset manager, and they didn't do so aggressively.

 

 

[John Hjorth]

Chrispy,

 

From what I am able to derive from the press release of yesterday, this BAM investment is - as of now - a "strategic" minority interest in Oaktree, constituting an ownership interest of approx. 62 percent, but not a controlling interest. The operational control over Oaktree remains at the B unit holders of Oaktree.

 

So I would expect [short term]- from an accounting perspective - one line consolidation of the Oaktree stake owned by BAM in BAM's group balance sheet, combined with BAM not adding all the Oaktree Funds in BAM's specification and list of Brookfield Funds [because BAM has no operational control over these funds].

 

Longer term, how the whole Oaktree/Brookfield current structure will amalgate into a fully integrated structure over some years I have no idea - the only thing I feel reasonable confident about is that it will be a frigging nightmare to follow and understand. [ : - D]

[chrispy]

John,

 

Ok that makes sense. Thanks for the clarity.

[Peregrino]

Distributable earnings peaked in 2013 at $5.8/unit.  Last year they were $3.61/unit.  The bottom was $2.4/unit.  Mid-cycle level is anywhere from $4-5/unit. 

 

So they sold anywhere from 10-40% below cyclically adjusted levels.

 

Think they just got tired of being public.

[walkie518]

Chrispy,

 

From what I am able to derive from the press release of yesterday, this BAM investment is - as of now - a "strategic" minority interest in Oaktree, constituting an ownership interest of approx. 62 percent, but not a controlling interest. The operational control over Oaktree remains at the B unit holders of Oaktree.

 

So I would expect [short term]- from an accounting perspective - one line consolidation of the Oaktree stake owned by BAM in BAM's group balance sheet, combined with BAM not adding all the Oaktree Funds in BAM's specification and list of Brookfield Funds [because BAM has no operational control over these funds].

 

Longer term, how the whole Oaktree/Brookfield current structure will amalgate into a fully integrated structure over some years I have no idea - the only thing I feel reasonable confident about is that it will be a frigging nightmare to follow and understand. [ : - D]

Marks likely is aiming for a succession plan but he doesn't want to unravel all of his hard work.

 

Brookfield is a great tie-up, however, as it isn't a distressed debt shop and Flatt is much younger than Marks. 

 

I think there will be greater benefits given Trump's tax act... there are all kinds of rules in place regarding who and how qualified opportunity zone funds work, and one of the odd rules is that at time of sale, the buyer needs to buy the equity interest to get to the asset rather than buying the asset outright.  This requires inside knowledge of the entity to avoid long-tail risks and now that this can be done in-house using the distributions on distressed bonds, Brookfield can create the ultimate tax efficient fund without material market risk or tax liability despite realization of assets...