‘Brook-tree’ is an outcome of what the money wants

Both institutional investors and equities shareholders have been pushing for consolidation in private markets in a bid to stabilize profits.

If you were looking for evidence the world’s institutional markets continue to demand fewer relationships with which to commit greater sums of equity, you need look no further than Brookfield Asset Management’s takeover of Oaktree Capital Management. Their bosses, Bruce Flatt and Howard Marks, both considered ‘visionaries’, are confident their combination is their best play at giving institutional investors just that.

At first glance, it is hard to fault the logic: the $475 billion AUM combined business drags it closer to New York private equity real estate giant Blackstone (though, on an apples for apples basis considering portfolio company debt too, Blackstone’s asset base still notably exceeds it) the two firms now sitting comfortably ahead of their private market peers.

The critical piece of the deal, which starts with the $4.7 billion purchase of a 62 percent stake and should end with the whole of Oaktree being acquired before the 2020s are out, is the bolting on of Oaktree’s dominant credit business. This accounted for 70 percent of Oaktree’s $120-odd billion of assets and will account for about 14 percent of the conjoined proposition. Elsewhere in the portfolio, Brookfield is massive in real estate and infrastructure, Oaktree far less.

At circa $64 billion, their combined private equity portfolio remains smaller than Blackstone’s exposure, though it is still sizable enough, and that must be the critical point: like Blackstone, ‘Brook-tree’ now has credible vehicle series, track records in tow, in all the major private market food groups to offer their merged investor pools – a step towards being a one-stop shop in the broadest sense.

Certainly, their ambitions are backed by the data, demonstrating how institutional capital is supporting private markets through ever decreasing numbers of managers. In private real estate, we saw 166 closed-end funds had final closings last year, 35 percent less than the 257 to close just one year earlier. It was the same story in other asset classes: private equity dropped 29 percent from 787 funds to 556 funds; infrastructure was down 27 percent from 82 funds to 60 funds and; private debt funds fell 31 percent from 243 funds to 166 funds. All four assets classes have seen year-on year falls since 2016, and the trendlines are continuing as we eat into 2019.

While that happens, investors are congregating with their favorite champion managers. As fund numbers dissipated, average fund sizes notably increased. Real estate funds, for example, increased by an average of 58 percent, while each of the other three asset classes saw a range of increases, too.

“The name of the game is covering the alternatives space,” one senior executive at one of the private real estate sector’s biggest managers told PERE, especially those with shareholders to think about, he added. In fact, look across the world’s biggest listed private equity firms and you would be hard-pressed to find one that has fewer business lines today than it had even as recently as five years ago. For them, the days of being singularly great at one business are a memory. As the executive said: “having diversified fee streams, with multiple different funds that can play different cycles occurring in the various strategies should make profits less lumpy and more robust” – precisely what your typical equities investor wants to hear.

Indeed, most private equity share prices have been trading at levels likely to be disappointing to their senior echelons of late; Brookfield is buying into Oaktree at a 16 percent premium to its 30-day volume-weighted average price – hardly gobsmacking for a privatization valuation. Little wonder, proliferating their business lines is being seen as a method to help firms combat that issue. And with investors encouraging the same, it would not be a complete guess to predict further consolidation by the world’s private markets titans, particularly those with obvious gaps in their offerings.