Howard Marks, the co-founder and co-chairman of Oaktree Capital, at his office in Manhattan, Oct. 5, 2018. Fifty years into the career, Marks still finds his work highly enjoyable. “Every day is different, and every investment is different,” he said. “The variability of investing makes it an interesting intellectual challenge.” (Joshua Bright/The New York Times)JOSHUA BRIGHT/The New York Times News Service
Brookfield Asset Management Inc. is spending nearly US$5-billion to buy 62 per cent of Oaktree Capital Group LLC. Don’t necessarily call it a “controlling” stake, however: With Brookfield taking just two of 10 Oaktree board seats, and the management of the Los Angeles-based distressed-debt investor remaining intact, the two money managers are describing the tie-up as more collaboration than takeover. It’s a US$500-billion pairing, they say, that gives their clients a wider spread of asset classes to choose from. The Globe and Mail’s David Milstead spoke to Brookfield chief executive Bruce Flatt and Howard Marks, the co-founder and co-chairman of Oaktree, to hear their takes on their new colossus.
The Oaktree letter to clients talks about the importance of Oaktree being autonomous after this transaction, but a lot of the rationale for the deal is complementary product offerings. How is that going to work going forward, the combination of independence and serving clients from both entities?
Marks: The units are not going to be integrated, but that doesn’t mean they can’t co-operate. I think there will be a high degree of co-operation and a high degree of awareness of each other’s capabilities. Nowadays, when a lot of clients want to do more things with fewer managers, having the broadest offering of alternatives will be a tremendous advantage.
Flatt: The investment strategies, and the independence of the firms that run the investment strategies, will be 100-per-cent independent, both because that’s the way we want it, but also for regulatory reasons. As we deliver Brookfield products or Oaktree products to clients, they can be delivered under one umbrella. That’s different from the actual running of the business.
Brookfield is seen as pro-cyclical and Oaktree countercyclical, so is this a big statement from Brookfield about where Brookfield thinks we are in the economic cycle?
Flatt: We’ve written that we’re eight, nine, now 10 years into an economic recovery, and at some point in time there will be an economic recession. 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 superprepared 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: 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 letters written to Oaktree clients and employees suggest a certain frustration with being a public company and investors’ treatment of it. How did that factor into the sale process?
Marks: We didn’t approach anybody. We didn’t even approach Brookfield. Brookfield approached us with the great idea of this combination. We did not have a sale process under way, and we were not considering a sale process. 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. We are cyclical opportunists, we have grown over time substantially, but we don’t have a growth raison d’être.
Flatt: The important part for the stockholder, because they’re being offered half of their shares in shares of Brookfield, is they’re getting some of the same back, but they’re getting other, very similar types of strategies in a much more liquid and broad form, as a component of a much larger business. The Oaktree team can run their business exactly the way they want to − client-centric − and it doesn’t have to be talked about in the stock price every day, month or quarter.
I read an analyst report that suggested some Oaktree public shareholders were disappointed that they won’t fully participate in an upswing if Oaktree’s style of distressed investing is poised for success in a potential downturn. Can you talk a little bit about the timing of this?
Marks: 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. We’d made a full announcement that we had an US$8.5-billion fund with dry powder for distressed-debt investing and that we had begun to invest it. We assume it was incorporated in the price of the stock. The price we got for the public shareholders reflects a premium they were paid in order [for Brookfield] to obtain me and Bruce Karsh and all the Oaktree employees.
Flatt: No. 1, the shareholders got a 16-per-cent premium. No. 2, shareholders can allocate [their consideration] if they so choose to 100-per-cent Brookfield stock. They can stay in the game if they want … and I would argue they get a better security to realize more value out of.
So, bluntly, you’re saying Brookfield made this offer, and you wanted it structured this way to give the leadership of Oaktree less incentive to leave sooner?
Flatt: No, I would say it even more definitely than that. If the management didn’t do the transaction exactly the way it came out, we were not interested in buying 62 per cent of the company. Period. The management either came with it and structured the deal the way it was structured, or we weren’t interested in buying the company. This deal is about these people and what they’re going to do with the business.
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David Milstead