Oaktree Capital Management LP, the distressed-debt firm that was returning money to investors earlier this year, started marketing a new fund to take advantage of weakening economies in the U.S. and Europe.
“Opportunities to invest appear to be picking up, and after making an effort to avoid having too much capital, we are now concerned we could have too little,” according to a letter sent last week to Oaktree clients and prospects from Chairman Howard Marks and managing director Tony Harrington.
The Oaktree Opportunities Fund IX LP has a target of $4 billion and a limit of $6 billion, according to the letter, a copy of which was obtained by Bloomberg News. The Los Angeles-based firm said it may raise more than the maximum if it finds more places to invest. Oaktree, which oversees about $80 billion, said it could also form a supplementary fund to the new vehicle if the economic environment changes.
The firm, the biggest distressed-debt investor, isn’t alone in its growing appetite for assets, as fund managers focus on Europe’s sovereign debt crisis. Apollo Global Management LLC, the New York-based private-equity firm run by Leon Black, has been marketing a fund to purchase nonperforming loans in Europe. New York’s Avenue Capital Group has been raising a European distressed strategy fund, according to an April private-placement memorandum.
Phone messages left yesterday for Marks and John Frank, managing principal at Oaktree, seeking comment weren’t returned.
Oaktree, which oversaw more than $80 billion as of March 31, filed in June for an initial public offering to join buyout firms Blackstone Group LP, Apollo and KKR & Co. with a U.S. stock-market listing.
When the economy turned for the worse in the third quarter, the firm began deploying the $2.7 billion supplementary fund to its $4.5 billion eighth fund, according to the client letter. The supplemental vehicle is now 20 percent committed and will take priority on all deals until it is 80 percent invested.
The new fund will be able to invest in positions that exceed the supplementary fund’s capacity, Oaktree said.
“It’s quite possible that these ‘surplus’ opportunities could be substantial, and that’s particularly true if the European banks finally begin to divest their troubled loans,” according to the letter.
European banks are poised to sell more than 30 billion euros ($41 billion) of assets as they need to raise capital amid the debt crisis, KPMG LLP said last month.
Oaktree already invested $1.8 billion during the third quarter after acting as a net seller in the first two quarters of the year, according to the letter.
“Given the changes in the investment environment over the last few months, we feel there’s a good chance that opportunities will expand and Opportunities VIIIb’s capital will be invested sooner rather than later,” the firm told clients.
Even at its maximum size, Fund IX wouldn’t approach the more than $14 billion Oaktree raised to take advantage of falling prices in 2008, when the bankruptcy of Lehman Brothers Holdings Inc. roiled global capital markets.
After the “peak opportunity” passed in 2009, the firm raised less for its next funds, Oaktree said.
“We shrank the recent funds for the simple reason that the opportunities we were seeing had contracted,” according to the letter. The lack of opportunities over the past year led Oaktree to distribute $7.3 billion from its existing distressed debt funds and decide against deploying the last $1.1 billion from its $10.9 billion Opportunities VIIb.
The firm’s outlook changed when market volatility surged in August. The economic health of the U.S. and Europe is fragile and capital markets are largely closed, Oaktree said.
“Today a company with maturing debt would have a problem, and that problem would be our opportunity,” according to the letter.