Brookfield’s deal with Oaktree centres on credit

With the addition of Oaktree, a respected credit business, Brookfield has shown how debt investing has risen to prominence post-global financial crisis and has become crucial for being a global diversified asset manager, reports our sister title Private Debt Investor.

Brookfield Asset Management’s purchase of Oaktree Capital Management gives it, almost overnight, a foothold in the credit asset class at a time when having a robust debt platform is seen as key to being a diversified alternative asset manager, according to our sister title, Private Debt Investor.

Toronto-based Brookfield and Los Angeles-based Oaktree struck a deal on 13 March, with the latter acquiring a 62 percent stake in the former. The transaction highlights, and possibly accelerates, the value of a strong private credit franchise.

It is the latest in a string of such transactions: Franklin Templeton purchasing Benefit Street Partners from Providence Equity Partners and BlackRock acquiring Tennenbaum Capital Partners in 2018 and First Eagle Investment Management scooping up NewStar Financial in 2017.

“Their purchase of Oaktree in that context is a very logical progression of private credit through asset-gathering,” one investment banker said. “Independent private credit franchises will be very valuable in this environment.”

The combined Brookfield and Oaktree AUM base brings scale across different alternative asset classes that neither firm had achieved on its own, according to market observers.

Scale within a strategy has been quite significant for a while, another debt manager said. Now, capital base is becoming equally important, and the specialties of Oaktree and Brookfield complement each other well.

For its part, Brookfield – run by the decidedly low-profile Bruce Flatt – will now own arguably one of the most respected debt investors out there; they are “great risk assessors of credit assets”, the manager said. And it shows in Oaktree’s AUM: 70 percent of the firm’s assets lie in credit.

The investment banker noted that many viewed Oaktree mainly as a distressed debt shop.“Oaktree is heavily weighted to distressed investing,” this person said. “This transaction provides them with the ability to extend their franchise beyond private credit. They’ve had relatively less success in gathering assets because they are seen as specialists.”

The debt manager noted that the Oaktree-Brookfield deal may cause every alternative asset manager that holds particular heft in one strategy – be it private equity, private debt, real estate or another – to contemplate ways to achieve a diverse capital base.

“Scale in our industry brings significant competitive advantages,” one large credit manager noted about the transaction. Though relatively big in its own right, Oaktree’s AUM had stagnated somewhat after it went public; the firm oversaw about $114 billion in 2015 – a number that had only increased to $120 billion at the end of last year.

Another manager expressed surprise at the transaction, saying he expected Howard Marks and the company to at least ride through the next distressed debt cycle.

While its asset growth may have stagnated, Oaktree still proved its mettle as a distressed investor; it posted a gross return of 10 percent for the year. While that figure may be below some of the equity-like returns investors may hope for, some of its peers posted losses for distressed investing last year.

The market could be on the precipice of the fourth great distressed opportunity since he began managing funds dedicated to the strategy in the 1980s, Howard Marks, the firm co-chairman and market luminary, said on the fourth-quarter earnings call in February.

“In the funds that were formed in 1991, 2001-2002, 2006-2007, [we had] great opportunities,” he observed. “And we think that the pieces are in place for the fourth such opportunity, but we need an igniter, and that will probably require a recession because especially given the absence of covenants, you’re unlikely to get much of a pick-up in defaults, and thus opportunities for us, until you get a recession.”

“This deal is part of a continuing trend towards large asset managers making investments in alternative credit managers,” one mid-market direct lender said.

SHARE