10-Q: Brookfield Oaktree Q2 2025: Net Income Plunges 61%

Brookfield Oaktree Holdings reports a significant decline in Q2 2025 net income attributable to Class A unitholders, primarily due to unrealized investment losses and the impact of the 2024 Restructuring.

Summary

• Net income attributable to Brookfield Oaktree Holdings, LLC Class A unitholders decreased by $23.3 million (61.3%) to $14.7 million for the three months ended June 30, 2025, compared to $38.0 million for the same period in 2024.
• For the six months ended June 30, 2025, net income attributable to Class A unitholders decreased by $111.9 million (97.5%) to $2.9 million, down from $114.8 million in the prior year period.
• Total revenues for the three months ended June 30, 2025, were $121.0 million, a decrease of $34.1 million (22.0%) from $155.1 million in the comparable 2024 period.
• Total revenues for the six months ended June 30, 2025, were $264.5 million, a decrease of $145.6 million (35.5%) from $410.1 million in the comparable 2024 period.
• Investment income decreased by $7.8 million (47.3%) to $8.7 million for Q2 2025 and by $31.0 million (89.1%) to $3.8 million for YTD 2025, primarily due to foreign exchange hedging losses and decreases in publicly-traded equity investments held by Oaktree Capital I.
• Net change in unrealized appreciation (depreciation) on consolidated funds investments shifted from an appreciation of $95.2 million for YTD 2024 to a depreciation of $140.3 million for YTD 2025, a decrease of $235.5 million.
• The 2024 Restructuring led to the deconsolidation of Oaktree Capital I, changing how incentive income and certain fund-related expenses are reported; incentive income is no longer recognized directly but reflected in investment income from the equity method investment in Oaktree Capital I.
• Cash and cash-equivalents decreased from $449.9 million at December 31, 2024, to $288.2 million at June 30, 2025.
• Total assets decreased from $7,073.4 million at December 31, 2024, to $6,454.8 million at June 30, 2025.
• Total liabilities decreased from $1,603.0 million at December 31, 2024, to $1,175.1 million at June 30, 2025.

Sentiment

Score: 3

Explanation: The significant decline in net income attributable to Class A unitholders, substantial unrealized investment losses, and overall revenue decrease indicate a challenging financial period. While some changes are due to restructuring, the underlying investment performance, particularly in investment income and unrealized gains/losses, is notably negative.

Positives

• Interest and dividend income increased by $2.9 million (1.1%) to $260.7 million for the six months ended June 30, 2025, primarily due to higher income from investments in Opps XII, partially offset by the 2024 Restructuring.
• Net realized gain on consolidated funds investments increased significantly by $72.0 million to $75.1 million for the six months ended June 30, 2025, primarily due to performance in Opps XI and Opps XII.
• Consolidated fund expenses decreased by $1.6 million (6.6%) to $22.5 million for the three months ended June 30, 2025, primarily due to the deconsolidation of Oaktree Capital I's consolidated funds.
• Interest expense decreased by $10.7 million (37.0%) to $18.2 million for the three months ended June 30, 2025, primarily due to the deconsolidation of Oaktree Capital I and its consolidated funds.

Negatives

• Net income attributable to Brookfield Oaktree Holdings, LLC Class A unitholders decreased by $23.3 million (61.3%) to $14.7 million for the three months ended June 30, 2025, primarily reflecting unrealized investment losses.
• Net income attributable to Brookfield Oaktree Holdings, LLC Class A unitholders decreased by $111.9 million (97.5%) to $2.9 million for the six months ended June 30, 2025, primarily reflecting unrealized investment losses.
• Total revenues decreased by $34.1 million (22.0%) to $121.0 million for the three months ended June 30, 2025.
• Investment income decreased by $7.8 million (47.3%) to $8.7 million for the three months ended June 30, 2025, and by $31.0 million (89.1%) to $3.8 million for the six months ended June 30, 2025, primarily due to foreign exchange hedging losses and decreases in publicly-traded equity investments held by Oaktree Capital I.
• Net realized gain on consolidated funds investments decreased by $54.3 million for the three months ended June 30, 2025, from a net gain of $54.9 million in 2024 to $0.6 million in 2025.
• Net change in unrealized appreciation (depreciation) on consolidated funds investments decreased by $235.5 million for the six months ended June 30, 2025, moving from an appreciation of $95.2 million in 2024 to a depreciation of $140.3 million in 2025.
• Distributions declared per Class A unit decreased to $0.83 for the three months ended June 30, 2025, from $1.26 for the same period in 2024.
• Cash and cash-equivalents decreased by $161.7 million to $288.2 million at June 30, 2025, from $449.9 million at December 31, 2024.
• Corporate investments decreased from $1,520.3 million at December 31, 2024, to $1,317.1 million at June 30, 2025.

Risks

• Global economic conditions and financial markets can significantly impact the values of fund investments and the ability to make new investments or sell existing ones.
• The ongoing Russia-Ukraine conflict, Middle East conflict, and changes in trade policies create continued uncertainty and volatility in global financial markets and the economy, potentially impacting businesses and funds.
• The impact of evolving generative artificial intelligence technology cannot be fully determined at this time.
• Ability to retain and hire key service providers.
• Continued availability of capital and financing.
• Changes in anticipated revenue and income, which are inherently volatile.
• Changes in the value of investments.
• The pace of Oaktree's raising of new funds.
• Changes in assets under management (AUM).
• The timing and receipt of, and impact of taxes on, carried interest.
• Distributions from and liquidation of Oaktree's existing funds.
• The amount and timing of distributions on preferred units.
• Changes in operating or other expenses.
• The degree to which the company encounters competition.
• Credit risk, including potential loss from counterparty or issuer failure to make payments.
• Interest-rate risk, affecting variable-rate debt and fixed-rate securities.
• Foreign exchange-rate risk from unhedged non-U.S. dollar denominated investments.
• Investments in entities undergoing reorganization, debt restructuring, or liquidation involve substantial risk of principal loss.
• Investments in thinly traded, illiquid, or restricted securities are subject to concentration and industry risks.
• Risks associated with real property and real estate-related investments, including commercial mortgage-backed securities (CMBS) and non-performing real estate loans.

Future Outlook

The company expects to continue making distributions to preferred unitholders per contractual terms and to Class A unitholders per its distribution policy. It may issue additional units or debt and other equity securities to increase available capital and may repurchase preferred units or OCGH/OEP units. Distributions from corporate investments, including Oaktree Capital I, are expected to provide ongoing cash inflow. Management believes current liquidity sources will be sufficient for working capital requirements for at least the next twelve months.

Management Comments

• Our results are largely driven by the performance of certain funds and other investments held directly or indirectly by Oaktree Capital I, which is one of the key operating entities of Oaktree, and managed by Oaktree.
• Historically, Oaktree's diversified nature, of both investment strategies and revenue mix, has generally allowed it to benefit from both strong and weak economic environments.
• Weak economies and declining financial markets tend to dampen revenues from asset-based management fees, investment realizations or price appreciation, but their prospect can present opportunities to raise relatively larger amounts of capital for certain strategies, especially opportunistic credit.
• Conversely, strong financial markets generally increase the value of fund investments, which typically create favorable exit opportunities that enhance the prospect for incentive income and fund-related realized investment income proceeds for Oaktree and enhance the prospect for investment income for us.
• As of the date of this filing, we are not aware of any material risk to the stability of our condensed consolidated financial statements caused by the Russia-Ukraine conflict, the conflict in the Middle East or changes in U.S. and global trade policies, or the materiality of any effect such uncertainties may have on our business and operations.
• There has been significant recent progress and developments in the area of generative artificial intelligence, such as ChatGPT, but the impact to our business of such evolving technology cannot be fully determined at this time.

Industry Context

The company operates in the alternative asset management industry, which is significantly influenced by global economic conditions and financial market performance. While strong markets generally boost investment values and incentive income, weak markets can create opportunities for opportunistic credit strategies. The company acknowledges ongoing geopolitical conflicts and trade policy changes as sources of market uncertainty and volatility, consistent with broader industry concerns. The potential impact of generative AI is noted as an evolving technological development.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• The company and Oaktree are currently not subject to any pending actions or regulatory proceedings that either individually or in the aggregate are expected to have a material impact on the condensed consolidated financial statements.

Related Party Transactions

• The Company advances certain expenses on behalf of Oaktree funds, with $364 thousand due from affiliates as of June 30, 2025 (up from $227 thousand at December 31, 2024).
• OCM, an affiliate, provides administrative services to the Company under a Services Agreement, for which the Company reimburses OCM $750,000 annually, payable quarterly in equal installments. For the three and six months ended June 30, 2025, the Company incurred $0.2 million and $0.4 million, respectively, in administrative services expense.
• The Company has a $750.0 million capital commitment to Oaktree Opportunities Fund XI, L.P. (Opps XI), with $637.5 million funded as of June 30, 2025. The Class A unitholder or an affiliate contributes cash to fund this commitment, and distributions are solely for the benefit of the Class A unitholder.
• The Company has a $796.2 million capital commitment to Oaktree Opportunities Fund XII, L.P. (Opps XII), with $218.9 million funded as of June 30, 2025. The Class A unitholder or an affiliate contributes cash to fund this commitment, and distributions are solely for the benefit of the Class A unitholder.
• In June 2023, the Company indirectly acquired 100% of the interests in certain REIT Entities, including an indirect ownership in Brookfield Real Estate Income Trust Inc. (Brookfield REIT), for $307.0 million plus a $13.9 million true-up. The carrying value of NTR (a wholly-owned subsidiary holding these interests) was $304.1 million as of June 30, 2025.
• Brookfield Corporate Treasury Ltd. (the sole Class A unitholder) has the right to make up to $200.0 million of additional capital contributions to the Company for its indirect ownership of Brookfield REIT or NTR operations.
• BP US REIT LLC agrees to defend, indemnify, and hold harmless the Company and its members from third-party claims related to the ownership, management, or operation of the REIT Entities.
• BOH transferred portions of its indirect interests in Opps XI and Opps XII to special purpose subsidiaries (SPV I, SPV II, SPV III) which are pledged as collateral for non-recourse credit facilities of an affiliate. BOH's potential exposure is limited to the carrying value of its pledged interests: $183.5 million (SPV I), $188.7 million (SPV II), and $102.0 million (SPV III) as of June 30, 2025.

Stakeholder Impact

• Shareholders (Class A unitholders) experienced a significant decrease in net income attributable to them and a lower distribution declared per unit for the quarter, primarily due to unrealized investment losses.
• Preferred unitholders continue to receive their declared distributions, which are non-cumulative.
• Employees (Oaktree's investment professionals) are impacted by the restructuring, as incentive compensation expense is no longer directly recorded by the Company, with economics now flowing through investment income from Oaktree Capital I.
• Investors in consolidated funds (non-controlling interests) saw a decrease in net income attributable to them, reflecting the consolidated funds' performance.

Next Steps

• The company will continue to make distributions to preferred unitholders and Class A unitholders.
• Management may issue additional units or debt and other equity securities in the future to increase available capital.
• The company may repurchase preferred units or OCGH/OEP units.
• The company will adopt ASU 2023-09, Improvements to Income Tax Disclosures, on a prospective basis for its annual income tax disclosures for the year ending December 31, 2025.
• The company is currently evaluating the effects of adoption of ASU 2024-03, Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures, which will be effective for annual periods beginning January 1, 2027, and interim periods beginning January 1, 2028.

Key Dates

Recommendation

The significant decline in net income and investment income, coupled with substantial unrealized investment losses, presents a challenging picture. While the 2024 Restructuring impacts comparability, the underlying performance metrics are concerning. However, the company's strategic investments in opportunistic credit funds (Opps XI, Opps XII) and real estate, along with its strong affiliation with Brookfield, suggest long-term potential. The increase in net realized gains for the six-month period also offers a glimmer of positive performance. A 'hold' recommendation is appropriate, advising investors to monitor future quarters for signs of improved investment performance and the full integration effects of the restructuring, rather than reacting solely to the current quarter's sharp declines.

Keywords

Alternative Asset Management, SEC Filing, Financial Results, Investment Income, Unrealized Losses, Private Equity, Credit Funds, Real Estate, Oaktree Capital I, Brookfield, 10-Q, Financial Reporting, Asset Management