Friday Letter: Holding back

Why Oaktree was right to delay the marketing of Principal Opportunities VI.

It behooves fund managers to take fund commitments when they’re offered.

The level of investor demand is a barometer of a firm’s health, as well as providing testimony to investment track record and quality of personnel (pulling in a few extra million via management fees doesn’t hurt either).

Funds belonging to top-tier managers tend to be oversubscribed. Those belonging to less auspicious firms struggle to reach their targets.

Oaktree Capital Management certainly belongs in the former camp. Howard Marks-led firm boasted $12.5 billion in gross commitments last year, including $4.1 billion in the fourth quarter. The fundraise extended across several new strategies and one-third of the capital raised came from new investors, according to director and managing principal John Frank.

From the sounds of it, that total could have been even larger. In November, Frank told analysts that Oaktree had pushed back its marketing efforts on OCM Principal Opportunities Fund VI because of the level of dry powder that remained in the 2009 vintage vehicle. Oaktree’s Principal Opportunities funds typically pursue investments in the debt or equity of distressed businesses.

“We’ve pushed back our fundraising for PF VI because we still have over $650 million available to deploy from our existing fund, Principal Fund V; and actually have more capital available to deploy taking into account recycling,” Frank said, according to a transcript of the firm’s November earnings call. “Based on that significant dry powder, we are seeking to extend the investment period of Principal Fund V for another year, until February 2015. Assuming the extension is approved, we don't expect to begin investing PF VI until well into 2014, at the earliest.”

It seems as though Oaktree extended that timeline even further during the fourth quarter.

“As I indicated on our last call, we've slowed the fundraising for Principal Fund VI given that we already have plenty of capital on hand in our existing fund. We expect we'll focus more on Principal Fund VI in the second half of the year,” Frank said during the firm’s Q4 earnings call late last week.

Oaktree’s decision to hold back on another fundraise should be commended. Instead of rushing to pull in new commitments and management fees, the firm’s decision to hold back will allow Principal Fund V to deliver returns that are more in line with predecessor vehicles. While their internal rates of return are roughly similar, Principal Opportunities Funds III and IV had generated respective multiples of 1.8x and 1.6x as of 31 December. Principal Fund V was only pulling in 1.4x as of the same date, according to Oaktree’s latest earnings report.

Even though the firm has drawn $2.23 billion on Fund V’s $2.827 billion in total committed capital – an amount that would warrant a return to market – giving that invested capital time to appreciate should boost returns, which could ease fundraising as the firm markets Fund VI.

It’s a thoughtful move, though hardly surprising considering how Oaktree has managed investor expectations in the past. With $12.5 billion in new capital locked up, why rush?