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Oaktree Capital targets up to $3bn for third special situations fund

Distress opportunities could open up in the months ahead as inflation, rate hikes and geopolitical disturbances – above all, the war in Ukraine – create more economic uncertainty.

Oaktree Capital Management, co-chaired by legendary distressed investor Howard Marks, is in the market with a third special situations offering set to raise $2.5 billion to $3 billion.

The target for Oaktree Special Situations Fund III was disclosed last month by Minnesota State Board of Investment. MSBI is committing $200 million.

The special situations strategy, launched by Oaktree in 1994, makes debt and equity investments in mid-market businesses facing adverse or complex circumstances like distress or dislocation. Key to it is a focus on control of, or significant influence over, the company.

Distress opportunities could open up in the months ahead as inflation, rate hikes and geopolitical disturbances – above all, Russia’s invasion of Ukraine – create more economic uncertainty. For businesses carrying heavy post-pandemic debt loads, this may pose fresh challenges.

In a column published Private Debt Investor, FocusPoint CEO David Conrod estimated the addressable market for distress at the end of 2021 was almost 3.7x levels in 2007.

Oaktree last November announced the close of its 11th flagship opportunistic credit fund at $16 billion, exceeding a $15 billion target. Along with being the largest pool in the firm’s history, it was the largest on record.

The flagship strategy takes a broad approach to opportunistic investing, reflecting Oaktree’s conviction that the nature of distressed debt has evolved over time. Special situations differs from it chiefly in the private equity-like emphasis on control.

Fund III investments will fit into three buckets, MSBI said. They include structured equity, targeted to opportunities involving stress or dislocation or a high degree of complexity, as well as direct equity, geared to acquiring assets at bargain prices. The third is distress-for-control, focused on secondary purchases of blocks of underpriced illiquid debt.

Recent special situations deals include last year’s refinancing of Array, an in-store merchandising solutions provider to the beauty industry. Done by Oaktree alongside existing investor Carlyle, the deal reduced Array’s net debt by more than 50 percent.

Other companies in the portfolio include engine systems maker Dayco; consumer-durable goods wholesaler Marlin Brands; railroad assets acquirer RailUSA; and brand management platform WHP Global.

Fund III is the seventh vehicle under Oaktree’s current strategy, MSBI said. Prior to 2014, it was called principal opportunities.

The offering’s predecessor, Oaktree Special Situations Fund II, was showing robust performance as of September 2021, MSBI said, with a 2x net multiple and a 142.8 percent net IRR. Fund I was earning a 1.2x net multiple and a 6.1 percent net IRR.

Oaktree was founded in 1994 by Marks – known in the market for his widely-read memos to clients – and co-chairman and CIO Bruce Karsh, another distressed pioneer. The special situations team is led by managing directors and co-portfolio managers Jordon Kruse and Matt Wilson.

Brookfield Asset Management acquired a 62 percent stake in the firm in 2019 for an initial consideration of $4.7 billion. Marks as a result became a Brookfield director.

Oaktree declined to provide a comment on this story.

This article first appeared in affiliate publication Buyouts