OAK - Oaktree Cap Group LLC

[Spekulatius]

Brookfield to Acquire 62% of Oaktree Capital Management

 

https://bam.brookfield.com/press-releases/2019/03-13-2019-132118887

 

:(

 

I don't own it, but have been waiting for the right opportunity to buy it. I guess that will never come.

 

 

Sucks for anybody who has owned it long-term. Squeezes them out at a favorable price while management and Brookfield continue to benefit.

 

So that’s how BAM decided to enter credit. The tax treatment in most cases sucks for LP holders, I wonder if the exchange for shares is a taxable event.

[Peregrino]

https://outline.com/PrRMyN

 

Good piece from the Globe and Mail explaining the decision, still a disappointing outcome for OAK shareholders depending on your view of the BAM stock you can participate in.

 

Interviewer asks a question saying BAM is seen as procyclical and OAK as countercyclical, is this a statement from BAM about where it thinks we are in the cycle? 

 

Flatt answered: "We see nothing on the horizon that says it will be tomorrow morning. But we have been ensuring that all of our businesses are ultra- and super prepared for those times when they come. And there’s no doubt that having Oaktree as one of our offerings in the future could be an excellent opportunity when that time comes."

 

Marks followed up: Having said that, I’m confident that Brookfield wouldn’t have laid out the money they’re laying out to buy an interest in Oaktree to take advantage of one distressed moment. That may be icing on the cake, but I think this is primarily a strategic combination.

 

The piece also notes frustration with being a public company as a rationale for the move. 

 

Marks: If you look at the price of our stock over the 14 months prior to the announcement of this transaction, maybe the market doesn’t have an appreciation for companies that don’t have a growth story... In the fall, we have our annual dinner for Wall Street analysts, and I was very struck by the fact that nine out of 10 thought we weren’t a buy at $42.

[StevieV]

I think that OAK largely failed over the last several years.  While their competitors were expanding into a variety of different areas, including several areas where OAK would appear to have significant expertise and relationships, OAK failed to do the same.  Instead, it seems as though OAK has simply been waiting for a new distressed credit cycle.

 

OAK wasn't a growth story, while the market they were playing in has been exploding with assets.  There are significant tailwinds for alternative asset manager AUM.  Look no further than BAM itself, which has been growing AUM at a double-digit rate.  Look at BX, which is well in the double-digit growth rate.  OAK didn't just grow more cautiously or conservatively, they didn't grow at all.  Seems to me as though the buyout is a capitulation of that fact.  Either OAK couldn't or wouldn't expand into other areas, so they agreed to a buyout from BAM.

[vince]

I think that OAK largely failed over the last several years.  While their competitors were expanding into a variety of different areas, including several areas where OAK would appear to have significant expertise and relationships, OAK failed to do the same.  Instead, it seems as though OAK has simply been waiting for a new distressed credit cycle.

 

OAK wasn't a growth story, while the market they were playing in has been exploding with assets.  There are significant tailwinds for alternative asset manager AUM.  Look no further than BAM itself, which has been growing AUM at a double-digit rate.  Look at BX, which is well in the double-digit growth rate.  OAK didn't just grow more cautiously or conservatively, they didn't grow at all.  Seems to me as though the buyout is a capitulation of that fact.  Either OAK couldn't or wouldn't expand into other areas, so they agreed to a buyout from BAM.

 

Based on their historical record and stated objectives I think some more time is needed to conclude they failed.  Their strategy worked brilliantly in the past.....I would be more worried if they capitulated and operated in a way that conflicted with the way they were successful in the past.  It takes lots of discipline to turn away capital that was begging to get in and stick to your guns.  By not growing they are showing that they really do care about long term success.  If they take in capital that they cant invest wisely, future returns suffer and thats the most important aspect that creates demand for your services.  Doing what looks best in the near term (in terms of creating shareholder value) isnt always the case longer term and they have the performance to back that up.  Just my opinion.

[StevieV]

I think you are being a bit too kind to OAK, at least from a unit holder's perspective.

 

I think that OAK slipped from patience into complacence at some point.  OAK would seem to be well positioned to offer more non-distressed credit products, and deliver good results.  Not the same returns as distressed, but not everything needs to be those types of returns.  Plus, the distress isn't there in huge bulk at the moment.  I think that would have been beneficial for their clients, who are looking for places to get return even outside of distressed periods, and of course the unit holders.

 

OAK IPO'd in 2012 at $43.  In 2019 they've agreed to a buyout at $49.  A good bit of distributions along the way, but not a rousing success.

 

I'm not sure what you mean by "I think some more time is needed to conclude they failed".  There is no more time.  OAK is being sold for $49.

 

OAK may not have failed, but they certainly weren't a great success.  I think they weren't a great success because they failed to sufficiently innovate and expand into categories where they should have had success.

[Broeb22]

Does anyone think its a little seedy that management retains the upside for themselves while sticking minority shareholders with a pretty minimal premium? It's astounding to me that someone revered so much by the value investor community, a group probably more concerned with good corporate governance than most, can sell minority shareholders out. I get these folks are distressed investors, so competing interests in a capital structure is not new to them, but it seems somewhat unethical for management to sell the part of the company it didn't own without getting any consent from those shareholders, since Marks et al control the vote. But I'll certainly be watching Marks' memos to look for signs of hypocrisy. This tarnishes his reputation somewhat in my opinion.

[Cigarbutt]

The previous posts reminded me of a previous memo:

https://www.oaktreecapital.com/docs/default-source/memos/2006-03-27-it-is-what-it-is.pdf

OAK increased AUM ++ shortly after that memo.

 

Takeaways:

-How they would try to cope with cycles made it clear that they would grow their capital opportunistically, when it made sense for them, which, typically, meant when capital had become less abundant otherwise.

-An argument could be made that their results would have been different if they had looked outside their circle of competence but that was not the laid-out plan.

-With the IPO, it was explicit that the entity was a "controlled company" with an operating agreement leaving a lot of discretion to those holding control.

-To participate in the upside (or the downside), capital transfer can be maximized to BAM.

 

Their long-held vision:

"Oaktree tries hard to take note of prevailing market conditions, communicate what’s going on and behave as contrarians.  We try to raise bigger funds and buy more aggressively when we think others are leaving bargains on the table and do the opposite when they’re not.  It doesn’t always work, but it usually beats the alternative."

The market does not have to agree.

It just is what it is.

 

 

 

[vince]

I think you are being a bit too kind to OAK, at least from a unit holder's perspective.

 

I think that OAK slipped from patience into complacence at some point.  OAK would seem to be well positioned to offer more non-distressed credit products, and deliver good results.  Not the same returns as distressed, but not everything needs to be those types of returns.  Plus, the distress isn't there in huge bulk at the moment.  I think that would have been beneficial for their clients, who are looking for places to get return even outside of distressed periods, and of course the unit holders.

 

OAK IPO'd in 2012 at $43.  In 2019 they've agreed to a buyout at $49.  A good bit of distributions along the way, but not a rousing success.

 

I'm not sure what you mean by "I think some more time is needed to conclude they failed".  There is no more time.  OAK is being sold for $49.

 

OAK may not have failed, but they certainly weren't a great success.  I think they weren't a great success because they failed to sufficiently innovate and expand into categories where they should have had success.

 

Well you certainly describe well the negative aspects of their strategy, I don't necessarily disagree with you, it may turn out to have been a mistake.  And it is frustrating, from a unit holders perspective, that they may have put too much weight on potential macro outcomes which is not consistent with true bottom up analysis.  But unit price does not capture the probability of significant value creation if and when the economy tanks.  The fact that they sold out, at the wrong time and in a way that seems to favor the control position is the issue, but that is a different argument than concluding their operational strategy has failed. As a long term bam owner I like the acquisition and am very confident that Oak's future returns (without synergy) will compensate for this no growth period. I'm not an Oak owner so it's maybe unfair of me to predict how I would feel if I was but if they didnt sell the place I would be very confident of my future returns.  And I would be pissed as hell now. 

[villainx]

Yes.  OAK stock/company wasn't likely going to transform and grow as is. If OAK was to grow in any meaningful way, it would be a betrayal of their core competency.  And at that point, it wouldn't be OAK anymore but some hybrid of BX/BAM but with much greater risks.

 

However OAK shareholders participate in BAM, it could be viewed (tax aside) as OAK growing the asset business by x folds (by adding BAM's business).  I know it's tough for folks who bought above 49, but OAK + BAM is the better opportunity for OAK shareholders to see long term growth, versus whatever OAK would have done remaining solo. 

 

That's my take. 

 

 

[TwoCitiesCapital]

Yes.  OAK stock/company wasn't likely going to transform and grow as is. If OAK was to grow in any meaningful way, it would be a betrayal of their core competency.  And at that point, it wouldn't be OAK anymore but some hybrid of BX/BAM but with much greater risks.

 

However OAK shareholders participate in BAM, it could be viewed (tax aside) as OAK growing the asset business by x folds (by adding BAM's business).  I know it's tough for folks who bought above 49, but OAK + BAM is the better opportunity for OAK shareholders to see long term growth, versus whatever OAK would have done remaining solo. 

 

That's my take.

 

I disagree. There's a saying in cable - there's only two ways to make money, bundling and unbudling.

 

This just seems like a bundling. Yes - it diversifies OAK's business (bundling) and 'adds value' from that perspective. But it probably won't be more than 10-years before it's argued that a pure-play in distressed credit would achieve a market premium and then they'll spin-it back-off (unbundle).

 

As a pure-play on distressed credit that is counter-cyclical, OAK was an incredibly valuable exposure to have among the publicly traded asset managers.

[StevieV]

Although OAK unit holders can choose BAM shares rather than cash (potentially, as the ratio is set at 50/50), I don't think the structure changes this much from a buyout in the $49 range.

 

Sure, OAK unit holders can choose to take the $49 in BAM shares, but they were always able to buy BAM if they were to so choose.  If they take cash, they can still go and buy BAM.    OAK unit holders aren't getting any type of special access or deal.

 

Given that, I see this as simply a sale of the company.  Nothing fancier.  No special participation in the combined BAM/OAK (again, anyone could have participated in BAM before or after this). 

[rkbabang]

Although OAK unit holders can choose BAM shares rather than cash (potentially, as the ratio is set at 50/50), I don't think the structure changes this much from a buyout in the $49 range.

 

Sure, OAK unit holders can choose to take the $49 in BAM shares, but they were always able to buy BAM if they were to so choose.  If they take cash, they can still go and buy BAM.    OAK unit holders aren't getting any type of special access or deal.

 

Given that, I see this as simply a sale of the company.  Nothing fancier.  No special participation in the combined BAM/OAK (again, anyone could have participated in BAM before or after this). 

 

True except for the differing tax consequences of taking BAM shares vs. taking cash then buying BAM shares or had the deal not taken place, selling OAK and buying BAM.

 

[Peregrino]

https://www.forbes.com/sites/antoinegara/2019/03/13/contrarians-combine-as-canadian-titan-brookfield-buys-credit-heavyweight-oaktree-capital/#6a8968e1af15

 

From the Article:

 

Gayner of Markel is circumspect about the tie-up between two of his favored holdings.

 

Marks and Karsh, he says, have battled a 30-year decline in interest rates and a postcrisis decade of central bank accommodation that has limited work for distressed gurus, but Oaktree’s upside was an eventual turn in the cycle. “I was a very patient Oaktree shareholder because I thought the time would come when there was more distress, and that would be when Oaktree would shine. I still expect it to happen in the future, and I was hoping to participate as a shareholder,” he says, before reiterating, “It’s a great deal for Brookfield.”