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00:00Whose idea was this anyway. Ah. Our view was that this is one of the great credit businesses in the world. And we followed them for years and Howard's obviously a legend in the markets. And so we approached them and and talked about talked about it and from there. We ended up with this transaction. It was your idea that I guess you're right. How long did it take. Took five months. The markets were a little rough in December. So yes they were . That didn't help the transaction. But I'd say in transactions you learn a lot about the other side when you go through rougher periods of time and that's probably good for the end result. We got Howard you have been telling your clients for 17 years already what it would take for Oaktree to be acquired 17 years why now. Well not for 17 17 years ago hasn't been a constant theme. But you know there was a rumor in 0 2 that we were for sale. And in my year end report I published the five criteria for a transaction and I said they've never been satisfied. I assume they never will so let's forget about it and nothing ever happened until this transaction came along. Now the criteria you set forth are being satisfied. Yes. What about the timing the now factor. You know I'm not a market timer and this is a fundamentally sound transaction. We're not our entering into it at this time has nothing to do with the timing. I mean Bruce described nobody should impugn or infer some sense of where you think we are in the credit cycle et cetera. Not at all not at all. This is a this is a forever transaction. And you know whether it were was or wasn't ideally timed which I don't have a view on. Wouldn't matter and why Brookfield some people wonder why you aren't tying up with another firm in the same industry that might use a little help and credit could be a Carlyle could be a KKR. Well number one there are no other firms with the heft of Brookfield with their list of the offerings which meshes so well with ours without significant overlap or cannibalization with the same reputation same growth record. You know it's a it's really. And also the same culture we think that the culture is is very important and we we we agree on that. And at any point recently or in the 17 years since you wrote that note to clients did you seriously entertain other offers. No we never found anything that satisfied the five criteria. Bruce you told me in December of 2017 it was unlikely Brookfield would ever buy another asset manager. What changed CAC shows have to eat your words sometimes. But look look I would just say it's it's not something we've ever really thought of too often but as our clients get bigger and the offerings need to be our offerings they need to be larger. The one area that we were lacking to be able to deliver to them is credit and this business is large enough that it can be delivered to our clients and many of the other ones. Many of the other things we could've looked out there or even building ourselves. We've been building it ourself but it just takes a long long time and given the scale of our business and the relationships so we have it just we just needed something larger. Did you were you finding yourselves losing mandates because you weren't able to satisfy that demand for credit. No I just said more positively . I think the additive nature of this to our institutional relationships will be highly positive because we're going to be able to deliver a number of these products to them on top of our private equity strategies. Private equity real estate infrastructure private strategies which are which are very large scale and this will be able to go along with it. To what degree was this a matter of being able to compete better with Blackstone. You know look there's there's room for many of us out there. This is a 30 40 50 going to 60 trillion dollar market. There's an enormous number of managers that are out there and we compete with lots of people every day. This is just about us delivering for our clients. That's it. And it's not really relevant. Who else is out there and there's some great institutions out there like Blackstone is they're an excellent institution. I ask because you compete with those other firms for a win in some cases your clients the end investors deciding to invest with you instead of with Blackstone or with Carlyle or with KKR or with Apollo or with TBD and the list goes on. Yeah I just think there's room for many. You're talking you mentioned 10 names. This is a 50 trillion dollar market. And a lot of them today are doing it themselves as well . So there are yes some are giving it to others some are given to us. Some are doing it themselves. It's a large there's a large institutional world. Howard this may be the biggest shakeup ever in the alternative asset management industry. How do you expect the other players to respond. I was asked that last week. Will this set off a wave of consolidation. What do you think. Well the challenge is who else are you going to find like Brookfield. I mean if you think about the criteria that we've been discussing the size critical mass the culture the meshing of the products. There's there's not a second candidate . So I think perhaps lots of people would like to produce combinations but I don't think there's a natural one as obvious as this one. But there are other firms and credit for example HP s Oak Hill al Iraq has become a big firm all of a sudden and just as Oaktree was for the most part they're still principally in one asset class. Do you think both of you I suppose. Do you think the future requires a full suite every scale operator to have a full suite of products. Look I would say the institutional world is large. There are specific managers that can deliver specific products and they all have their niches . There are what we're doing is is dealing in large scale with many institutions around the world and having a suite of products is very helpful. That's just different. It's not better or worse it's just different. Do you agree. Well I do agree. But what you were emphasizing in your list were the inquiries. My question is Who are the acquire rowers. And I think many of the potential acquirers today were or have already started to try to build in credit. So with mixed results. Yes but you know if you're a credit manager and somebody with credit activities is looking to combine with you then you have conflicts in and overlaps and so forth which are less intra less attractive. So ultimately do you or don't you think this will or won't set off a wave of consolidation there probably. Well the wave is probably an exaggeration. I think that I think you'll start seeing mergers and Uber I think select but not that many. So credit was something you needed it didn't have. What else does Brookfield need and still look I think for what we want to do which is serve our clients the best we can deliver them the products in a multi fashion around the world we can build from here. Same thing I said to you last year we don't need to ever buy a manager to build the business that we want to have. I'll say it again with the proviso eating your word ise . Things always change. And I would just look I don't really think we need anything else but who knows what unfolds in the world in front of you. And what about the growth trajectory . I'll invoke that same name again. Blackstone has laid out a path to one trillion dollars of value. Do you have one look . Our goal has always been to deliver services to our clients that they want to do the best for them. Earn returns at an industry standard or above. And from that earn a high return for our shareholders. And if that means we're going to have higher a wham. Great if it means we're going to have lower a you . That's fine for 20 years it's meant that the firm grew and that's for various reasons. It's grown because of that but it doesn't necessarily mean it always will. So we don't have any goals. We will do what's best for our clients. Full stop. And doing this with oak tree and leaving them as a separate entity and having them run the business is about making sure we deliver for their clients and for us. By the way Eric you know Bruce mentions that if there's a time when it's wrong for them to grow they will grow. That would probably be in a sluggish period in the environment. That's our strength. So one of the beauties of this combination I think that oak tree is not known for asset growth. It's known for wringing returns out of tough periods and I think that's just illustrates the attraction of the combination. Bruce one of the shrewd things Howard and his partner Bruce Karsh were able to do in recent years was by a 20 percent stake in double line. What do you figure that's worth you know it was in the numbers our guys did it. It's obviously a great firm. They've done an incredible job with building the business and the fact is we're a non controlling investment . Bruce and Howard are gonna be running the business and they'll figure it out. Would you consider making a similar offer to Jeffrey Gundlach. It'll be up to her and Bruce. So Howard you two are both self-described value investors. You've made a career you pride yourselves on buying low selling high. How did two people like that agree on the terms of a deal like this well again Eric I think you have to understand that this transaction was not primarily price oriented. We didn't sell it because we thought we were getting away with something. They did buy because they thought they were picking us off at a bargain price. It was a fundamental combination. We had no price was. It was a matter of fairness in this case. The price was set between Brookfield and a special committee of our board of directors representing the public shareholders. We were not actively involved in it . And I think that's as it should be. Bruce who buys a majority of equity without getting a majority of board seats. It's unusual isn't it. Look this firm is really really well-run. That's why we bought it for various reasons including regulatory because we run private equity businesses that sign confidentiality agreements and this is a liquid purchasing business of of bonds. Often these businesses can't be mixed and they need to be run by a separate team and by finding a separate team and having them highly invested highly incented and highly focused on running their business. We're thrilled the fact is we're thrilled that this management team is going to be running the business. They're going to have the say and call over the business and we can't think of a better group to run it. So we will help them in any way we possibly can. But I don't there's nothing we can really do to assist them on a day to day basis and in doing the business that they run today. I didn't know about those regulatory constraints will they exist in perpetuity. Does is it does that mean it's impossible to fully integrate these firms . We have a 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 and this will be exactly like that and it probably will be forever. So you so full you know in capital letters integration is is something that all all institutional management businesses like ours that have these types of businesses have to keep walled off units for regulatory regulatory purposes. Now marketing of products can be different delivering of services can be different. But the investment management arms have to be kept separate. Howard what happens if you and Bruce don't agree on something. The buck has to stop somewhere. Where does it stop. Bruce this Bruce Rosen because you know Bruce Carter's Karsh reporter partner of 32 years. The agreement plus the nature of our relationship gives us the opportunity to run an oak tree in line with past practice autonomously. Bruce and one of his colleagues will join our board as you noted. They'll give us advice when they think we need it but it's our baby to run . And you know that's that's it. As Bruce indicated they bought us because they thought it was a railroad company. You would have to be a master of the universe to say well we were spending five billion dollars to buy your company which has been functioning so well. You can leave now. Well what would they get for the five billion. You know it's really creative people . And the other thing of course is that the transaction would not have had a chance if that were the basis. If that were you know we'll buy your company and you know you wouldn't have done that deal. No no. That was one of the criteria. So Bruce if Howard Marks and Bruce Karsh for the foreseeable future as your companies have said publicly maintain operating control where do the synergies come from. This was not about expense synergies this is about delivering greater numbers of products to institutional clients globally that want these type of products and and the I'll call it revenue synergies are the fact that we think we can help them expand the base of businesses and clients that they have and they'll help us in various ways and that's it . So you can fundraise together. We can facilitate fundraising in the future. On separate accounts it could involve products from both strategies. Yes. Can you share other expenses in the back office for example. There's no intention as Bruce said this is not about cost savings or what the world calls synergies are synergistic attributes will be positive attributes of contributing to each other's growth not cutting each other's expenses. So let's talk about that do you think the growth in the alternative asset management industry is going to come from. Well where it's going to come from in its in some is easy. You know I just went on a non-profit investment committee and took the chair and had my first meeting last week and these institutions the pension funds we we deal with etc. need returns of 7 to 8 percent. Nobody thinks you can get 7 to 8 percent in the coming year from stocks and bonds. It's as simple as that. That leaves alternatives the flow of capital into the alternative markets will number one a car as the investment market grows but number two will occur because the percentage investment in alternatives will increase inexorably. So there's a lot of growth ahead for everybody for everybody. Absolutely yes. Does it. Would it help you. Let me ask you this question. Are there Brookfield EV PS who aren't Oaktree or. And if that's the case do you expect that to change . I'm positive there are both ways and and there are new institutions every day around the world investing into alternatives and the combined marketing heft and branding of these two brands that we bring to the table is going to be extremely important going forward as we enter the end of the cycle whenever that is. Where do you think flows into alternatives are going to be strongest. Look I would just say to reiterate the point this is a 30 40 50 trillion dollar market in institutional money. Greater percentage is growing from 20 to 30 to 40 probably 50 percent of these pools are going to be invested into alternatives. It's increasing very significantly and therefore all these products infrastructure real estate credit private equity they're all growing. And for what I would say is for good managers who have a product that can be delivered to these clients they will get funding. That doesn't mean everyone will get funding it means for good managers but scale matters look scale matters with a lot of institutions because the size of dollars if you have no. Most people can't invest more than 10 percent of a fund. So if you have a large institutional mandate to put money to work and a fund is a billion dollars all you can put to work is one hundred million . And therefore scale matters to those types of institutions. Now did Brookfield scale matter to you Howard is that one of the reasons we're part of the rationale if you will for Oaktree to want to be part of Brookfield effectively. Erik I would say not the numbers themselves but what it connotes the EV scale is the result of their excellence. And you know again one of the criteria is the excellence of the partner and the other thing is a hard one to satisfy. Yes the hard ones satisfy. And then the other thing is that you know we're one of the largest alternatives firms based primarily on credit. Clearly we couldn't combine with Peewee. They are one of the largest firms ultra firms and not based on credit. So I think that the combination was obvious. You're 70 to Howard. If I'm not mistaken yes. How much longer do you plan on being involved as long as I can make it to the office Erik. One of the things that this deal does is it settles the question of our ownership . A week ago before this deal was announced or maybe nine days I could have sold all my stock that day in theory there were no restrictions. Same is true of Bruce Karsh etc. Now my stock is locked up. The part that I'm selling 20 percent in this deal the other 80 percent is locked up for three years and then it can only be sold on a certain schedule at my option. I may hold it longer but I can't sell it quicker which means I have to be a holder in 2026. When I turned 80 so I'm only planning in in that increment right now but I'm willing to go further. I said in my letter to our clients that that Bruce wants us to manage Oaktree forever. I said I'm not sure I can sign on for forever but I'm willing forever obviously is impossible as much as any of us would. I saw it like well like the alternative to be the case. I saw on TV the other day somebody said I know we're all going to die but I wish there could be one old one. What what in your mind. Who who is a better way of asking you this question. Who are the next generation of leaders at Oak tree . There will come a time when it's not you and it's not Karsh it's not Jay Weintraub. Who is it. We have what we call the second generation. We have a group of people who've been with us 15 to 25 years. And you know embody the Oaktree values have proved their investment bona fides and their integrity and their straight as culture carriers. And you know are there's no paucity. The only question will be choosing among them. Bruce what what do you think ultimately will define the success the metrics that that you're going to use to evaluate success and if there are how how will we know what they are. Look I think we want to make the oak tree brand. We want it to be extremely successful in the marketplace. And that means clients have to embrace that this is a good thing for them entering in and five years from now this business is better than it was when we got it. And that will be success. So we're highly obviously now highly incented to assist Howard Bruce in any way we can and help them grow the business. Do you measure that on. I mean there's a number of ways you could measure it. I guess it could be a um could be revenue could be your profitability could be at people I've been in this industry talk about a whim. It's not really the most important thing because oh I just I mean I'm has little fees some EV AM has big fees. It's not a whim it's not really important. The bottom line is profitability in any business is the only thing that makes it grow and thrive. So that's how you do it. We measure everything on profitability and what the cash comes out of it. And that's in the investments we make for our clients and for the business that we run as a manager. Do you think Howard distressed debt is a growth business or an episodic one. It grows episodically. I mean you know I mean in the financial world trends are are positive. On balance in the world of distressed debt the cyclicality is extreme. The opportunities are either nonexistent as they have been in recent years or rife. So it's very episodic but there's an underlying growth trend. The the leveraged finance market is now twice as large as it was before the global financial crisis. So I'm convinced that the next opportunity will be much larger. We just will have waited a long time for it to come. Bruce Brookfield has a different capital structure from pretty much every other large firm in the industry. Do you both have any plans to adapt that to the Oaktree model creating for example permanent capital vehicles or any of the other things that that you've done some of which have been deliberate and some of which are the consequence of Brookfield unique history. Yeah I would look I would say well our great strengths is we've had enormous amounts of capital that we've built up over the past twenty five years that allowed us to create these partnerships which give us on the plus side are private funds which everyone else creates. They've given us another angle to be able to deliver for our clients and deliver things that other people can't. To the extent that we can adapt those strategies into the Oaktree business and they make sense for the clients there and the strategies there and for Howard and Bruce we will we will do that. Any of those things make sense to you Howard. Well I I I'm very attracted to it to the way they've been doing business. I think it's been very clever . We have an asset light approach. They've had an asset heavy approach. They've accomplished great things that there may be ways in which that's attractive for us. Do you see the value in in in raising a public equity funding vehicle the likes of which Brookfield has. But it's you know it's far too early to be conclusive but I mean there it's certainly worth studying it's worked very well for them. We shouldn't turn our noses up at it or fail to consider it. I couldn't put you in a chair Howard and perhaps you now as well Bruce without asking you both the question that continues to dog financial markets notwithstanding how how well some of them have recovered since December. What's the outlook particularly for credit the economy continues to do OK. We've seen the Fed now back off its behavior because it's less optimistic about the future and less believes that interest rates increases. No one are unnecessary and the number 2 could be withstood. But it goes along and there have not been great excesses in this economic recovery which means that there is not a need or a likelihood of a profound adjustment to the downside anytime soon. You know it looks like it's going to limp along when we next week will be talking about the fact that this has become the longest economic recovery in history. The challenge is that nobody wants to invest in money market or cash or treasuries or even high grade bonds because the returns are so low. The money has flowed out to the high risk part of the spectrum and the inflow of money to smallish asset classes disrupts those asset classes. And when things slow down we'll see who did a good job of putting the money out who's you know Buffett says it's when the tide goes out do we find out who is swimming naked when the economy slows down . We'll find out who made good credit decisions I read yesterday about a fund that is shutting down and well maybe not the fund but the head man resigned. They have twenty five percent of their capital in one loan. A lot of people have received access to capital in this last 10 years. Given the need of investors to make money and some of them will be shown not to have done a good job. That in turn will create much bigger opportunities for the distressed investor. Would you add anything to that for look on a more broad basis I'd just say there will there always are downturns and there always are upturns and the the world is getting wealthier every day the money is building and institutional funds and and and the economies are getting better and people are getting brought out of poverty and around the world and the world gets better and better. So if you look through the short term noise which is what you're talking about the world is a very positive place and it'll be a good investment market in the long term. One last question for you both the deal isn't done yet. Doesn't close. Unless I'm mistaken until September whether it's between now and then or after September what could go wrong in the world or with the deal with your deal. No I don't think that anything is going to go wrong with the deal. We have to clear regulatory hurdles. We have to convince large numbers of regulators that we'll be a good citizen and that there are no excesses of concentration due to putting us together. But I think that's a clear hurdle because we don't overlap. We're not in the same businesses and other than that I think I think that I think that this is a deal that can be depended on to go through and Bruce longer term what are the downside risks. Look everything's about people and we need to make sure that we all drive the business. But this is what we've always done. All right. This is our business is running investor managers so I don't really think that should be an issue it's just something you always have to pay attention to .

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Brookfield's Flatt, Oaktree's Marks Talk Industry M&A, Credit Markets (Video)

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