Marks’s Oaktree Returns $2 Million Fees to Treasury After Slow PPIP Start
Oaktree Capital Group LLC, the distressed-debt firm preparing to go public, agreed to refund more than $2 million in fees received under Treasury Secretary Timothy F. Geithner’s plan to help banks dump toxic assets.
The Los Angeles-based money manager retroactively cut fees charged to the Treasury Department under the $29.4 billion Public-Private Investment Program after investing 16 percent of the capital committed to its fund. All other managers in the program, known as PPIP, had put at least 68 percent of their capital to work, according to a July report by the Treasury.
Oaktree’s PPIP fund, the only one investing solely in bonds backed by commercial mortgages, generated a 19 percent internal rate of return through June 30, ranking it sixth among PPIP managers. While private-equity firms usually reduce management fees once they are done finding investments, it’s much rarer to retroactively return such fees, said Thomas Bernhardt, an analyst at Pacific Corporate Group in La Jolla, California.
“Managers generally rebate fees when they haven’t been able to deploy capital as quickly as expected,” Bernhardt said in a telephone interview, adding that he had no specific knowledge on Oaktree’s PPIP fund. Oaktree “is disciplined, so if they can’t find the right price, they sometimes slow their investing.”
Mark Paustenbach, a spokesman for the Treasury Department, declined to comment. Oaktree doesn’t comment on its activities, said a spokeswoman who asked that her name be withheld.
Oaktree, headed by billionaire Howard Marks, filed with the U.S. Securities and Exchange Commission in June for an initial public offering. The firm, which oversaw about $79.5 billion in assets as of June 30, said in an amended IPO filing Sept. 2 that it will voluntarily reduce management fees and limit a fund’s size when necessary “to demonstrate to our clients that we are not financially incentivized to raise more capital than appropriate.”
Under PPIP, announced by Geithner in March 2009, the Treasury and private investors ultimately committed $14.7 billion in equity to funds run by eight money management teams. The Treasury agreed to provide $14.7 billion in low-cost loans to the funds, whose managers include BlackRock Inc. (BLK), Wellington Management Co. and Legg Mason Inc. (LM)’s Western Asset Management.
The Treasury is entitled to half of each fund’s profits and holds warrants that entitle it to some excess gains that would otherwise go to private investors, according to the agency’s website. The Treasury had received $714 million in distributions as of June 30. PPIP funds that generate profits or receive income during a quarter generally must pay out the money within 30 days of that quarter’s end.
‘Changed the Basis’
As is customary in private equity, Oaktree and the others initially charged the Treasury Department an annual management fee based on the amount of money the agency had pledged, rather than the actual capital invested. The Treasury set the fee at 20 basis points, or 0.2 percent, of committed capital, compared with the 100 to 200 basis points that institutional investors typically pay hedge and buyout funds.
In the second quarter, Oaktree’s $4.6 billion fund “changed the basis” on which it charges the Treasury from committed capital to the amount actually drawn and invested, according to the Sept. 2 filing. The documents disclosed a $2.1 million reduction in management fees for the “retroactive application” of the new arrangement, cutting Oaktree’s second- quarter fee revenue by about 4 percent to $31.4 million, the firm said.
The revision also cut the firm’s fee-generating assets by about $1 billion, according to the filing. Rather than immediately refund the full $2.1 million, Oaktree will credit that amount toward future fees due from the government, according to a July 7 letter to the firm from Timothy Massad, the Treasury’s assistant secretary for financial stability.
Oaktree’s fund has been buying CMBS more recently because the market has offered better opportunities, said a person familiar with the matter, who asked not to be identified because the purchases weren’t made public. The firm initially was slow to invest because government efforts to revive the economy, led by the Federal Reserve’s initiative to buy $600 billion in U.S. Treasuries, lifted bond prices, the person said.
PPIP managers had acquired residential mortgage-backed securities valued at $16.9 billion as of June 30, compared with $4.4 billion of CMBS, according to the Treasury’s July report. A lack of opportunity in commercial property last year led to an $86 billion build-up in uncalled capital commitments among private equity real estate funds, said Geoffrey Dohrmann, chief executive officer of Institutional Real Estate Inc., a San Ramon, California, consulting and publishing firm.
Angelo Gordon Fund
“All of the private-equity real estate funds have been slow to draw down money,” Dohrmann said in a telephone interview. “In a lot of cases, investors said, ‘We will extend our commitments if we get certain concessions’,” such as fee reductions, according to Dohrmann.
Angelo, Gordon & Co. and General Electric Co.’s GE Capital have generated a 32 percent net internal rate of return through a jointly managed PPIP fund that invests in both CMBS and RMBS, according to the Treasury. That was the highest return among the eight PPIP managers as of June 30, the agency’s report said.
Angelo Gordon’s fund started on Nov. 12, 2009, while Oaktree’s partnership opened on Feb. 19, 2010. The CMBS market rallied in the interim, reducing the additional yield the safest commercial mortgage bonds paid above Treasuries to 308 basis points from 452 basis points, based on the BarCap CMBS AAA Super Duper Index.
“Those were dark, dark days,” said Hugh Balloch, a managing principal in the Stamford, Connecticut, office of Goff Capital Partners LP, a real estate private-equity firm. “Now we all wish we had invested more.”
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