Oaktree Capital Group LLC (OAK) is preparing for the economic recovery to falter.
The world’s biggest distressed-debt investor is seeking $10 billion for a new fund with plans to sit on most of the capital until rising markets reverse course, three people with knowledge of the plans said. Oaktree plans to raise $3 billion that it can start investing immediately and $7 billion for a reserve pool to deploy when more distressed opportunities arise, said the people, who requested anonymity because the plans aren’t public.
Distressed-focused funds have found difficulty investing money as the U.S. Federal Reserve holds interest rates near zero and global corporate defaults remain low. Such defaults fell to 66 last year from a peak of 266 in 2009, according to data from Moody’s Investors Service. Oaktree this year cut the $3 billion goal on its control-investing fund by about 40 percent as it struggled to find opportunities.
The firm, led by Chairman Howard Marks, doesn’t expect the dry spell to last for long.
“Credit standards have dropped and non-investment grade debt issuances reached record levels,” John Frank, Oaktree’s managing principal, said July 31 on a conference call with investors and analysts. “Aggressive extensions of credit of the sort we’re seeing today have always been a precursor to a substantial distressed-debt opportunity.”
Yields on junk bonds have dropped to 5.96 percent from above 20 percent in 2009 as interest rates remain near zero, pushing investors into riskier, higher-yielding assets.
In an interview with Bloomberg News yesterday, Frank said he’s underwhelmed by the flow of bad loans being sold by European banks. The flood initially anticipated by Oaktree, which set aside $10.2 billion for European purchases, is more of a “trickle,” he said.
“A lot of folks, particularly a lot of American investment managers, raised a lot of money to take advantage of what was anticipated to be a very substantial flow of loans from those banks,” said Frank, a former lawyer who joined Oaktree in 2001. “The avalanche anticipated didn’t materialize.”
More than $1 trillion was added to global equities in August, sending the value to a record $66.2 trillion as markets soared. The Standard & Poor’s 500 Index (SPX) of large U.S. companies closed at a record 2003.37 on Aug. 29, after the Dow Jones Industrial Average index reached a record close of 17,138.20 on July 16.
Oaktree plans to waive management fees on the $7 billion pool until it’s activated, said the people with knowledge of the plans. The $3 billion fund, Oaktree Opportunities Fund X, will take non-control positions in corporate debt and seek less than the $5 billion gathered for its predecessor pool in 2012.
Alyssa Linn, a spokeswoman for Oaktree at public-relations firm Sard Verbinnen & Co., declined to comment on the plans.
In addition to corporate debt, the fund will invest in shipping, power plants and real estate, the people said. Oaktree’s Opps Fund IX, which it started deploying this year, was producing a 14.6 percent net internal rate of return and a 1.1 multiple of invested capital as of June 30, according to the firm’s second-quarter earnings statement.
Oaktree’s adjusted net income, a measure of profit, fell 40 percent in the first half of 2014 from the same period last year as it sold fewer holdings from its pre-crisis Opps VII fund. The firm is marketing a sixth control-investing fund, a seventh real estate opportunities pool and a fourth mezzanine vehicle, Frank said on the July 31 call. Next year it plans to start raising its first infrastructure fund and a fourth power opportunities pool.
Oaktree has raised funds devoted to control and non-control distressed opportunities, real estate, power and mezzanine investing since its founding in 1995. The firm, which oversaw $91.1 billion in assets as of June 30, was formed by Marks, Bruce Karsh and five other partners from TCW Group Inc.
Oaktree, which sold shares to the public in 2012, rose 0.7 percent to $50.55 at the close of trading in New York. The stock has fallen 14 percent this year.
To contact the editors responsible for this story: Christian Baumgaertel at email@example.com Mary Romano, Pierre Paulden