Oak Hill Advisors closes third distressed fund

Including dedicated investments totalling $750m, the fund met its $3bn target.

Oak Hill Advisors has closed its third flagship distressed investment fund on $2.3 billion, according to sources close to the situation. Including $750 million of dedicated investments from two sovereign wealth funds, the latest vintage has raised a little more than the $3 billion target.

The majority of the capital raised for the latest fund OHA Strategic Credit Fund III, came from existing investors. Among them are the New York State Common Retirement Fund, with a $300 million commitment, and the Baltimore City Fire and Police Employees’ Retirement System, with $30 million, per Private Debt Investor data.

The latest fund will focus on North America and western Europe, with investments across the capital structure, from senior secured debt to equity. Like its predecessor fund OHSCFII, it employs a distressed strategy that uses triggers to determine when to begin deploying capital. The triggers are market indicators related to the spreads on the high-yield bond index in both the US and Europe; the distress ratio – or percentage of the US High Yield index that trades 1,000 basis points or more above the relevant Treasury – and default rates.

“The triggers give us flexibility to determine when to start the investment period,” according to someone close to the firm. The key to the strategy is to put capital in place before events occur. “Buy your umbrella before the storm,” is a catchphrase used by Glenn August, the founder and chief executive officer of OHA.

The latest fund was launched in the autumn of 2021, and held its first close in April 2022 and its second close in August, on $1.97 billion. The predecessor fund held its final close in 2016 on $2.7 billion, surpassing its $2 billion target. As of 30 June, the second vintage had a net IRR of 12.1 percent and a MOIC of 1.43x net, according to public documents.

August said in a statement to be released later today that the firm expects the distressed opportunity set “is growing significantly as companies in the leveraged finance market are increasingly affected by higher interest rates, a more challenging macroeconomic environment, geopolitical uncertainty and other factors, including reduced liquidity and upcoming maturities”.

New York-based OHA, the private markets platform of T Rowe Price, has more than 30 years of distressed investment experience across multiple economic cycles. It has invested more than $20 billion within its distressed strategy since 1990. OHA specialises in private lending, distressed credit, structured credit, real assets, special situations, leveraged loans and high yield bonds. As of 30 June, its AUM totalled $61 billion across credit strategies in pooled funds, collateralised loan obligations and single investor mandates.