I had the pleasure to be back on The Intelligent Investing Podcast with Eric Schleien to discuss the Brookfield-Oaktree transaction. Below are some notes on the transaction.
Q4 hedge fund letters, conference, scoops etc
Bruce Flatt from Brookfield Asset Management and Howard Marks from Oaktree Capital Management are getting tie up. Two of the brightest investment mind are coming together. This is a deal where best in class meets best in class. It’s a win-win situation for both Oaktree and Brookfield.
Howard Marks doesn’t need an introduction. Marks built a reputation for making sharp bets on undervalued assets and in the process becoming one of the most famous figures in investing. Marks is frequently seen sharing his wisdom on financial TV and is active on the public speaking circuit. His memos, full of insights, are must read material. His first book, The Most Important Thing, is outstanding and has been endorsed by Warren Buffett. Read it. Marks has a new book out, Mastering the Market Cycle, but I haven’t read it yet. As for Bruce Flatt, I’ve covered him in the past here, here, and here. Flatt might not be as well known as Marks, but his investment record speaks for itself. You can read the latest shareholder letter here. Here are BAM’s performance:
Brookfield Asset Management Performance. Source: BAM 2018 Shareholder Letter
The Deal
- Here’s the press release.
- BAM is buying 62% of OAK for $4.7b.
- 38% will remain with current management
- Brookfield will acquire all of Oaktree’s publicly traded A shares for either $49 per share or 1.077 Brookfield shares. This is a 16% premium over the 30-day value weighted average price. Or a 12.4% premium over the closing price before the announcement.
- It is also buying 20% of the privately held B shares for a total of 62 per cent of the business.
- Total consideration paid by BAM will be 50% and 50% shares.
- BAM can be a total owner at the earliest in 2029, pursuant to a liquidation plan that starts in 2022.
- OAK employees has 92% voting power.
- The combined entity will have $475 billion in assets (BAM $355b + OAK $120b). The deal will put it in the same region as Stephen Schwarzman’s Blackstone (BX).
- BAM is expected to earn $2.5b in fee related earnings.
- Both firms are expected to stay independent.
- BAM will have 2 board seats on OAK.
- Howard Marks will have a board seat on BAM.
- The entities can’t be fully integrated because they want it that way, but also for regulatory reasons.
- OAK will keep their brand, management, and investment teams.
Why?
- Aside having more asset under management and fees, this has to make sense.
- “This transaction enables us to broaden our product offering to include one of the finest credit platforms in the world, which has a value-driven, contrarian investment style consistent with ours,” said Bruce Flatt.
- The alternative asset management space is one of scale and size. The bigger you are, the more opportunities you have. This is normally the opposite of the regular asset management industry where size is an impediment. If you are a traditional fund with $100 billion in AUM, it’s very difficult to build a $2 billion position (a 2% size). You have liquidity issue and less opportunities. In the alternative asset management industry, $100b is pocket change. This is a space for the heavyweight.
- The difference is that infrastructure (as well as real estate and private equity) usually becomes more attractive as investments get larger. There are only a few companies in the world that you can turn to for building, managing, financing, and operating a hydro-dam, or world-class real estate, or ports.
- Other mega players are Blackstone and Apollo.
- The deal completes each other. BAM is a pro-cyclical company and OAK is counter-cyclical. BAM benefits when asset prices rise in a bull market while OAK benefits during a downturn. With OAK under its umbrella, 20% of BAM’s assets are now credit related.
- Both companies, even if they remain independent, will offer each other’s products.
- This is a plus for their clients, the institutions, since they are looking to deal with less people. Now they have Bruce Flatt and Howard Marks under the same roof.
- BAM has also struck a deal last year with European alternative credit firm LCM Partners, as a way to expand their credit offering.
- OAK specialized in putting money to work during a downturn. They are a premier alternative credit manager. They deal with distressed debt, corporate bonds, loans, convertibles etc…
- They do well when cash is scarce, which is not the world we live in at the moment. There’s too much money chasing too few deals. OAK/Howard Marks is a disciplined and patient. Because of the lack of deals, Oaktree has been returning cash.
- Oaktree, founded in 1995, has only been public since 2012. Marks expressed frustration about going public and it hasn’t been a great success.
- If you can’t demonstrated steady growth or profit, Wall-Street doesn’t care. Some companies are not suited for public ownership.
- “Our firms share a culture that emphasises both investing excellence and integrity, and our businesses mesh without overlapping or conflicting,” said Howard Marks.
What Does This Mean?
- Alternative asset management firm offer a unique platform which encompasses value, growth and yield but the market doesn’t often get it. There’s a disconnect.
- Private debt, infrastructure, real estate and leveraged buyouts have grown in popularity as an alternative to mainstream stocks and bonds.
- BAM believes we are in the early stages of the bulk of the infrastructure backbone of the global economy being transferred into private hands from the public sector. BAM believes that this will translate into an opportunity of many tens of trillions of dollars over the next 50 years for the private sector.
- Alternative assets can’t be replicated with ETFs/passive investing strategies because private asset investing simply cannot be done passively.
- More specifically, it takes a lot of time and skill to acquire assets, and a lot of time,
expertise and effort to operate and optimize these types of assets
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Article by Brian Langis
