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Brookfield Place off Bay Street in Toronto, May 7, 2014.

Mark Blinch/Reuters

Brookfield Asset Management Inc. is buying a majority stake in Los Angeles-based Oaktree Capital Group LLC for US$4.7-billion, elevating the Toronto firm to nearly US$500-billion in assets under management.

The deal will combine Oaktree’s debt-focused business with Brookfield’s real estate, infrastructure and private equity holdings, while uniting Brookfield chief executive officer Bruce Flatt with Howard Marks, Oaktree’s co-chairman and one of the world’s gurus of distressed-debt investing.

By acquiring an established credit business, Brookfield is aggressively expanding its offerings in an asset class in which it currently lacks scale. Some analysts said it could also help Brookfield add protection from an eventual economic downturn. “Oaktree provides Brookfield with a strong credit platform at a point in the economic cycle where investor demand for credit products is likely to be strong,” BMO Nesbitt Burns analyst Sohrab Movahedi said in a note.

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Brookfield is set to acquire 62 per cent of Oaktree in a cash-and-stock deal that is projected to close in the third quarter, subject to an Oaktree shareholder vote, the two companies said in a statement before Wednesday’s start of trading. Brookfield’s board of directors has already given its unanimous approval.

Brookfield has recently made efforts to expand its credit offerings, as institutional investors shift money to large, fully diversified asset managers.

While credit accounts for only about 16 per cent of Brookfield’s committed capital in its private funds, distressed debt, senior loans, high-yield investments and other credit products represent 76 per cent of Oaktree’s assets under management, which total US$120-billion.

“The deal accelerates, in a low-risk way, we believe, Brookfield’s emergence as a global solutions provider,” Citigroup research analyst William Katz wrote. “We think such a deal is a strong strategic fit, wedding two strong brands across complementary businesses.”

At the helm of the world’s largest distressed-debt investment firm, Mr. Marks has become a financial celebrity, in large part by capitalizing on market turmoil after the tech bubble burst, and again during the global financial crisis. His writing and commentary on markets have a wide audience, counting Warren Buffett himself among his faithful readers.

Mr. Flatt, meanwhile, has developed a contrarian style of his own in his 17 years leading Brookfield – a tenure that has seen the company build a global presence in part by making long-term bets on out-of-favour assets and regions.

“From Brookfield’s point of view, teaming up with Howard Marks is a huge positive,” said Michael Sprung, president of Sprung Investment Management, which owns Brookfield shares.

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However, Oaktree’s results in recent years have failed to excite investors, and prior to Wednesday morning’s announcement, its U.S.-listed shares sat 24 per cent below where they were five years ago.

Mr. Marks will take a seat on Brookfield’s board of directors while remaining in his post at Oaktree. Along with co-chairman Bruce Karsh, Mr. Marks will “continue to have operating control of Oaktree as an independent entity for the foreseeable future,” the statement said.

Under the terms of the deal, Brookfield may start to acquire the remaining Oaktree shares in 2022, and could own the company outright by 2029 at the earliest. In reaction to the deal, Oaktree’s shares rose by 12.5 per cent, while Brookfield’s stock ticked up by 0.3 per cent.

As investors process the terms of the deal and the 12.4-per-cent premium paid over Oaktree’s closing share price on Tuesday, Brookfield said it expects the deal to boost its earnings even before accounting for any efficiencies that might result from the combination.

Asset management in general is undergoing a consolidation phase, amid changing investor preferences and intense industry competition.

“The deal is reflective of the current environment to bulk up [assets under management] to mammoth proportions,” Mr. Sprung said.

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