(Bloomberg)—Brookfield Asset Management Inc. may never be able to make Oaktree Capital Group LLC a fully integrated part of the firm because of regulatory constraints, Chief Executive Officer Bruce Flatt said.
It comes down to potential conflicts of interest between the parts of Brookfield that buy public companies and those that trade stocks and bonds. That’s why Flatt has to maintain a so-called Chinese wall, to prevent any advance notice of pending deals from getting into the wrong hands.
The potential for conflict becomes even greater with the addition of Oaktree, because it has a bigger business in public securities.
“We have a regulated unit today that buys securities. It’s totally walled off from the other parts of Brookfield and it doesn’t share information,” Flatt said Thursday in an interview with Bloomberg Television in New York. “This will be exactly like that, and it probably will be forever.”
That could mean the combination of Toronto-based Brookfield and Oaktree, a roughly $4.7 billion deal announced on March 13, yields less of a benefit than it might otherwise.
Most targets are fully absorbed into the acquiring company, and together they can save money by sharing costs and eliminating overlap. By contrast, Brookfield and Oaktree plan on functioning as independent entities. Flatt said the objective is to provide clients with a broader range of products and, where possible, to work together on fund-raising, not cost synergies. While Brookfield invests in real estate, infrastructure, private equity and renewable energy, Oaktree’s assets are concentrated mainly in credit.
“It’s our baby to run,” Oaktree Co-Chairman Howard Marks said in the same interview. “They bought us because they thought it was a well-run company.”
Brookfield agreed to buy 62 percent of Los Angeles-based Oaktree with a combination of cash and stock. Marks, 72, his fellow co-chairman Bruce Karsh, 63, along with current and former employees, will continue to own 38 percent Oaktree for at least three more years. Brookfield can take full ownership of Oaktree by 2029.
The deal, expected to close in the third quarter, marks one of the biggest shakeups in the established order of the private equity industry. Marks said rival managers may decide they need to combine so they similarly can offer a one-stop shop for global investors.
“I think you will start seeing mergers,” Marks said.
Until now, Blackstone Group LP has been the most diversified of the private equity firms, with large businesses in credit, real estate, private equity and hedge funds. Together, Brookfield and Oaktree would rival it in size and reach.
Flatt had said as recently as December 2017 that he didn’t think Brookfield ever would buy another asset manager. But as its business grew and clients asked for more, he had to reconsider that posture. Oaktree filled a void, and Flatt approached the firm in October with a proposal.
“The one area that we were lacking to be able to deliver to them was credit,” he said. “This business is large enough that it can be delivered to our clients.”
Brookfield will acquire shares of Oaktree for $49 in cash or 1.077 Brookfield shares, a 12.4 percent premium as of March 12, according to a joint statement. Shares of Oaktree have risen about 13 percent since the day before the deal was announced. Brookfield is up about 2 percent.
Brookfield, founded 120 years ago, is Canada’s largest alternative asset investment firm. Marks and Karsh co-founded Oaktree in 1995. Their firm managed $120 billion in distressed debt, private equity holdings, real estate, infrastructure and other equity assets as of Dec. 31.
--With assistance from Sabrina Willmer.To contact the reporters on this story: Scott Deveau in New York at [email protected]; Erik Schatzker in New York at [email protected] To contact the editors responsible for this story: Margaret Collins at [email protected] Josh Friedman, Vincent Bielski
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