Oaktree Capital Group LLC, the world’s biggest distressed-debt investor, cut the $3 billion goal on its next control investing fund by about 40 percent as it struggles to find deals amid an economic recovery, according to three people with knowledge of the matter.
Oaktree told prospective clients it reduced the target to about $1.8 billion, said the people, who asked not to be identified because the information is private. The Los Angeles-based firm plans to shorten its investment period on Oaktree Principal Fund VI LP to three years from five, the people said.
Given the lack of traditional distressed opportunities, Oaktree is spending more time on European nonperforming loans, shipping, commercial real estate and energy, said Ronald Beck, a managing director at the firm, on a panel at the SuperReturn U.S. conference in Boston this week. He pointed to anemic default rates and high-yield bonds trading above par.
“You have to be very sector-specific,” Beck said.
Alyssa Linn, a spokeswoman at Sard Verbinnen & Co., declined to comment on behalf of Oaktree.
Opportunities for distressed funds are getting scarce as the Federal Reserve has held interest rates near zero and global corporate defaults remain low. Global corporate defaults fell to 66 last year from a peak of 266 in 2009, according to data from Moody’s Investors Service. A Bank of America Merrill Lynch index of U.S. high-yield bonds shows the debt trading at an average of 105.72 cents on the dollar as of yesterday, almost double the low from late 2008.
“Financing is readily available and there’s little corporate distress,” John Frank, managing principal of the firm, said in a November earnings call with analysts. “Against this backdrop and in light of generally elevated asset prices, we continued our harvesting of profitable investments across our strategies.”
Oaktree, which started marketing the fund more than a year ago, in 2013 pushed back fundraising because its 2009 pool was deploying capital slower than expected. That fund was about 79 percent invested at the end of March, according to the firm’s first-quarter earnings report.
Oaktree was originally seeking a similar-size fund to its 2009 and 2006 pools, which gathered $2.8 billion and $3.3 billion, respectively. Those funds were producing net internal rates of return of 8.5 percent and 8.2 percent as of March 31, according to the filing. That compares with returns of 17 percent and 7.7 percent, respectively, for all distressed private-equity funds in those vintage years, according to London-based research firm Preqin Ltd.
Oaktree’s fund, while global, will focus mainly on investments in the U.S., a person briefed on the matter said in February 2013. It will seek to buy equity or debt in distressed or stressed businesses with an eye toward eventually taking control of the companies.
Howard Marks founded Oaktree in 1995 with Bruce Karsh and five other partners from TCW Group Inc. The firm, which managed $86.2 billion in assets at the end of March, has raised funds devoted to non-control distressed, real estate, corporate debt and mezzanine investing.
Oaktree shares fell 1.2 percent to $50.58 at 3:04 p.m in New York, extending the drop this year to 14 percent.