Contrarians Combine As Canadian Titan Brookfield Buys Credit Heavyweight Oaktree Capital

&l;figure class=&q;image-embed embed-1&q;&g;&l;div&g;&l;img src=&q;https://specials-images.forbesimg.com/imageserve/5c8983cb4bbe6f019c970ef9/960x0.jpg?cropX1=147&a;cropX2=3250&a;cropY1=224&a;cropY2=1970&q; alt=&q;Bruce Flatt, CEO of Brookfield Asset Management&q; data-height=&q;2586&q; data-width=&q;3879&q;&g;&l;/div&g;&l;figcaption&g;&l;fbs-accordion&g;&l;p class=&q;color-body light-text&q;&g;Bruce Flatt, CEO of Brookfield Asset Management.&l;small&g;FRANCO VOGT FOR FORBES&l;/small&g;&l;/p&g;&l;/fbs-accordion&g;&l;/figcaption&g;&l;/figure&g;&l;p&g;On Wall Street, there's no shortage of sharp elbows and big egos. Now comes a new power player who doesn't quite fit the bill. He's a trained accountant, raised and schooled in Winnipeg, Manitoba, and his latest move is rocking the world of finance. &l;/p&g;&l;p&g;On Wednesday, Bruce Flatt, the billionaire head of Toronto's Brookfield Asset Management, unveiled a deal to buy 62% of Oaktree Capital, a Los Angeles-based pioneer in distressed-debt investing headed by billionaires Howard Marks and Bruce Karsh. With Oaktree, Flatt adds one of the premier investors in credit markets around the world, with $120 billion in assets under management, to Brookfield's even larger scope in different markets. &l;/p&g;&l;p&g;In real estate, Brookfield manages a $188 billion stable of assets that includes city skylines from New York and Los Angeles to London and Sydney. Its infrastructure holdings of pipelines, ports, data centers and toll roads amount to $61 billion in assets, and there is no bigger institutional owner of solar, wind and hydropower plants than Flatt's $47 billion renewables business. From nuclear contractor Westinghouse to the auto battery division of Johnson Controls and real estate operators Forest City and General Growth, almost no one on Wall Street has matched Brookfield's private equity dealmaking pace over the past year. When you add the $350 billion that Brookfield oversees to Oaktree's $120 billion scope across credit markets, Flatt's closest peer on Wall Street is billionaire Stephen Schwarzman, the leader of $472 billion-in-assets Blackstone Group. In terms of fees, they earned a combined $2.5 billion last year, versus $3.2 billion for Schwarzman&s;s outfit. &l;/p&g;&l;fbs-ad position=&q;inread&q; progressive&g;&l;/fbs-ad&g;&l;p&g;"This deal makes all the sense in the world for Brookfield," says Thomas Gayner, the co-CEO of Markel Corp., an insurance holding company that's a big and long-term owner of both Brookfield and Oaktree shares. "I'm just processing it myself," he adds after picking up a phone call by &l;em&g;Forbes&l;/em&g; on Wednesday morning.&l;/p&g;&l;p&g;Founded in 1995, Oaktree is considered among the savviest distressed-debt investors on the planet, having made a fortune from downturns like the early 2000s dot.com and telecom bust, and the 2008 financial crisis, which helped a tripling of assets in a five-year span. Marks and Karsh, Oaktree's cofounders, and principals like Sheldon Stone are considered the deans of distress investing, possessing the rare demeanor to buy and help turn around businesses in falling markets. From a headquarters in Los Angeles with about $5 billion in assets to start with, the firm has seized on panic to grow by many measures into a powerhouse, with specialties not just in distress, but also private credit, emerging-market debt and senior loans. It also is a 20% owner of Jeffrey Gundlach's bond investing giant DoubleLine Capital.&l;/p&g;&l;div class=&q;vestpocket&q; vest-pocket&g;&l;/div&g;&l;p&g;It's a trajectory similar to Flatt's quiet ascent. He began rising the ranks at Brookfield's predecessor Brascan in the mid-1990s and slowly built a real estate, infrastructure and renewable energy empire largely by picking over the carcasses of ailing former giants like real estate developer Olympia &a;amp; York, Reliant Energy, Multiplex, Babcock &a;amp; Brown, General Growth, Petrobras and SunEdison. Eventually Brookfield and Oaktree's worlds even collided. In the restructuring of private equity's biggest failure, Energy Future Holdings, both Brookfield and Oaktree came out of bankruptcy courts holding board seats and the largest positions in its power producer, now called Vistra Energy.&l;/p&g;&l;p&g;This fall, Flatt initiated Wednesday's surprise tie-up by reaching out to Oaktree's Karsh to inquire about a partnership in the hope of adding a credit-investing capability to Brookfield's scale. &l;/p&g;&l;p&g;"When you look at Oaktree, it has a similar value orientation to investing as us. Our mindset is the same, but they offer products in credit that are different than ours," Flatt tells &l;em&g;Forbes&l;/em&g;. "Both of us have great businesses, and we could have carried on doing what we are doing. We could have built a credit business on our own, but it would have taken 15 years to build what Oaktree has."&l;/p&g;&l;p&g;When Karsh conferred with Marks about the possible deal, they both decided Brookfield's style and Flatt's fuss-free leadership and long-term orientation could be a good home. All three met in L.A. and a deal was quickly hashed out. &l;/p&g;&l;p&g;"We are partnering with Brookfield. This is not a financing transaction, this is a long-term partnership," Marks tells &l;em&g;Forbes&l;/em&g;. "We wouldn't do something if it wasn't something for the long run," he adds, further stating, "The threshold consideration is these are two great companies run by similar people of high repute and integrity. These are the keys." &l;/p&g;&l;p&g;For Oaktree, Marks believes Brookfield's size and scale will bring in new clients and capabilities around the world. "We will add a credit capability to their product world, which is extremely important. I believe we will have the broadest of offerings in the alternative investing world," he says. &l;/p&g;&l;p&g;Global scale, and a one-stop offering of top quality alternative strategies, has been Flatt's ambition for years. "The alternatives industry keeps getting larger, and institutional clients want a greater number of strategies from managers who can deploy capital for them in size," he says.&l;/p&g;&l;p&g;Brookfield is paying $49 a share to buy out the public holders of NYSE-listed Oaktree in a deal that's most likely to be split evenly between cash and Brookfield stock. Brookfield's purchase price is a 16% premium to Oaktree's trading price over the past month. While offering an exit for public shareholders, Oaktree will remain independently run by its cofounders and CEO Jay Wintrob out of their current offices. Flatt is joining Oaktree's board, and Marks will join Brookfield's. &l;/p&g;&l;p&g;Beginning in 2022, employees at Oaktree will have the option to sell their shares to Brookfield, as will top brass. However, Brookfield won't be able to take full control of Oaktree until 2029, and Marks and Karsh are selling just 20% of their holdings in Wednesday's deal. &l;/p&g;&l;p&g;Sean Thorpe, a longtime Brookfield shareholder at Aristotle Capital Management, is a fan of the deal Flatt has orchestrated. "They are both wonderful companies and there is not a ton of overlap," he says each firm&s;s respective strengths, while also pointing out similarities in their approaches. "Their styles are incredibly similar, neither are gunslingers or are into flash. I could see Bruce Flatt and Howard Marks agreeing most of the time and having a similar vision." &l;/p&g;&l;p&g;There could be some tax consequences for Oaktree holders. Robert Willens, an independent tax expert, expects Wednesday's deal to be a taxable event, partially taxed at a 37% ordinary income rate, not a 20% capital gain. For some holders, he raises an analogue of security roll-ups in the master limited partnership space, like Williams and Kinder Morgan. &l;/p&g;&l;p&g;Gayner of Markel is circumspect about the tie-up between two of his favored holdings. &l;/p&g;&l;p&g;Marks and Karsh, he says, have battled a 30-year decline in interest rates and a postcrisis decade of central bank accomodation that has limited work for distressed gurus, but Oaktree's upside was an eventual turn in the cycle. "I was a very patient Oaktree shareholder because I thought the time would come when there was more distress, and that would be when Oaktree would shine. I still expect it to happen in the future, and I was hoping to participate as a shareholder," he says, before reiterating, "It's a great deal for Brookfield."&l;/p&g;&l;p&g;Marks sympathizes. "There has been this long dragging period when there hasn't been much distress. Our ability to add assets has been limited because things to do have also been limited," he says. But he stresses the merit of Brookfield's offer and the potential growth opportunities ahead for Oaktree. &l;/p&g;&l;p&g;"We are not getting out of the game at all. I intend to keep working," says Marks. Brookfield's cash and stock offer is a significant premium for Oaktree shareholders, which comes with continued stock participation in the form of Brookfield's outperforming stock. He adds, "The bottom line is: I think we got &a;lsqb;shareholders&a;rsqb; a very good price."&l;/p&g;&l;p&g;&l;em&g;For more on Brookfield:&l;/em&g;&l;/p&g;&l;p&g;&l;a href=&q;https://www.forbes.com/sites/antoinegara/2017/05/02/brookfields-bruce-flatt-billionaire-toll-collector-of-the-21st-century/#1af0b0a0792d&q; target=&q;_blank&q; class=&q;color-accent&q;&g;&l;strong&g;See Forbes&s; 2017 Cover Story On Bruce Flatt Titled: "World Builder&l;/strong&g;&l;/a&g;&l;strong&g;"&l;/strong&g;&l;/p&g;&q;,&q;bodyAsDeltas&q;:&q; a very good price."\n&q;},{&q;attributes&q;:{&q;italic&q;:true},&q;insert&q;:&q;For more on Brookfield:&q;},{&q;insert&q;:&q;\n&q;},{&q;attributes&q;:{&q;bold&q;:true,&q;color&q;:&q;&q;,&q;link&q;:&q;https://www.forbes.com/sites/antoinegara/2017/05/02/brookfields-bruce-flatt-billionaire-toll-collector-of-the-21st-century/#1af0b0a0792d&q;},&q;insert&q;:&q;See Forbes&s; 2017 Cover Story On Bruce Flatt Titled: "World Builder&q;},{&q;attributes&q;:{&q;bold&q;:true},&q;insert&q;:&q;"&q;},{&q;insert&q;:&q;\n&q;}]