Oaktree grows in Asia

With the acquisition of Singapore-based Pangaea Capital, Howard Marks adds Asian real estate vet Robert Zulkoski to the Oaktree team. By Sharon Lim

In September, Los Angeles-based private investment firm Oaktree Capital Management announced plans to buy Singapore-based Pangaea Capital management, a pan-Asian investment firm that focuses on corporate restructurings as well as real estate.

Pangaea's chairman and founder, Robert Zulkoski, will become Oaktree's managing director and head of real estate in Asia. Before that, Zulkoski launched the Asian investment business of Colony Capital in 1998 along with current Oaktree real estate head John Brady.

Asia has been home for Zulkoski since he first arrived in 1994 with GE Capital as managing director of the company's Asian commercial real estate finance and services group. The American morphed into a founding member of Oakwood Asia Pacific, a service apartment manager, which in 1998 was acquired by Colony Capital, the private equity firm led by legendary real estate investor Tom Barrack. As part of the deal, Zulkoski changed jobs to lead Colony's activities in Asia.

After Colony became one of the largest private equity real estate operators in the region, a “desire to do something on our own” spurred Zulkoski and a few of his colleagues to set up their own business, he recently told sister publication PEI Asia. In 2005, a team of largely real estate investment professionals created Pangaea Capital Management to venture into distressed and special situations investing. Fundraising for an ambitious $1.5 billion debut vehicle began.

“Our whole approach is based on local empathy and respect. Local sellers prefer to deal with local buyers. We are not out to make a killing on each deal, we're offering acceptable solutions based on long-term greed rather than short-term greed.”

Marketing the fund was not easy, as Pangaea experienced the kind of challenges many first-time funds have to face. During its first year in business, the firm was formed and then had to dissolve a fundraising joint venture with Pequot Capital, a US hedge fund, after the latter came under investigation for insider trading. Zulkoski declined to disclose how much the maiden fund has raised. Market sources say the fund has not reached target and by 2006 had attracted approximately $300 million.

All told, Pangaea has invested $760 million in equity, Zulkoski says, including significant co-investment from the firm's limited partners. A sidecar fund through which the firm's backers were able to participate directly in the firm's investments was a success, he says: “Every single investment presented a co-investment opportunity, so every LP was provided a fairly robust description of every deal. And all LPs like more information.”

Earlier this year, big changes beckoned once again, with the announcement of the Oaktree acquisition. Under the deal, Pangaea's 25-strong team will be integrated into Oaktree's operations. The Pangaea team is spread across Singapore, Shanghai, Seoul and Tokyo and includes Steven Choi, chief executive officer of Korea; Steven Lee, CEO of Greater China; and chief financial officer Kenneth Tang.

The friendly guys
Zulkoski and his partners now find themselves back in the fold of yet another large investment firm with global ambitions. The move may seem like a personal exit, but Zulkoski unsurprisingly points to the transaction's synergistic benefits for the business going forward.

During an interview with PEI Asia at Pangaea's offices in Singapore, Zulkoski says: “My vision for Pangaea was to build a pre-eminent Asia-based focused alternative investment management platform with a number of synergistic funds founded on certain core principles. In my view, being part of Oaktree can accelerate achievement of the vision as Bruce Karsh and Howard Marks have created the kind of firm I'd envisioned – one that is multi-faceted, multi-dimensional, global, and yet collaborative and collegial.”

At the outset, Pangaea was built on the belief that Asia continued to generate attractive special situation opportunities and corporate spinouts despite the rescue and reform measures that had followed the region's 1997 currency crisis.

Added to the formula was an emphasis on what Zulkoski describes as “truly local deals” in order to effectively compete for deals in countries such as South Korea where nationalistic and sometimes xenophobic tendencies have started to arise.

Says Zulkoski: “Our whole approach is based on local empathy and respect. Local sellers prefer to deal with local buyers. We are not out to make a killing on each deal, we're offering acceptable solutions based on long-term greed rather than short-term greed.”

Zulkoski also insists that Pangaea is the “complete opposite” of an activist investor: “We are the friendly guys and we want local companies to come to us because we can be empathetic to their needs and be part of the local solution.”

Zulkoski points to the importance of property in Asian investment portfolios. “In most of Asia, there is a lack of social safety nets. Asians save more for this reason, and real estate is a primary vehicle for these savings.”

The Colony connection
In addition to offering strategic benefits, Oaktree's purchase of Pangaea has brought some former colleagues back together. Oaktree, which has about $50 billion under management, has been pushing hard into Asia in recent months. The firm already has offices in Beijing, Singapore and Hong Kong, where Ralph Parks, a former CEO of JP Morgan Asia Pacific, overseas Asian activities as chairman. An Asia-specific private equity fund, OCM Asia Principal Opportunities, closed in the summer on $577 million. The launch of a separate real estate fund for Asia is expected. And earlier this year, the firm hired John Brady, previously a principal at Colony responsible for the firm's North America acquisitions, as global head of real estate. This is key to understanding the tie-up of Oaktree and Pangaea, because Brady and Zulkoski go back many years.

They first met during America's savings and loan crisis in the early 1990s when Colony and GE Capital partnered to invest in one of the first Resolution Trust Corp. transactions in the US – a deal that involved $1 billion of non-performing loans secured by real estate collateral.

In 1998, the pair crossed paths again after the collapse of the Thai baht, as well as a number of other Asian currencies, prompting Tom Barrack to take Colony into Asia. Brady was assigned to lead the charge and oversaw the investment into Oakwood Asia Pacific, the deal that ultimately led to Zulkoski becoming a full-time Colony employee.

After joining Oaktree in 2007, Brady began looking for likeminded investors in Asia. “The first call I made at Oaktree was to Bob Zulkoski, to see how we can get the old band back together,” he told PEI Asia.

Having made the initial approach to his old colleague, who at the time was fundraising in the US, Brady followed up by introducing him to Oaktree president Bruce Karsh.

Zulkoski met Karsh as well as a number of senior partners at Oaktree, and the day's discussions ended with “Oaktree deciding they did not want to collaborate, but they quickly followed up on an expression of desire to buy Pangaea instead,” Zulkoski recalls. A handshake over a meal in Los Angeles some time in early summer sealed the deal.

Closing the fundraising gap
Now that a new ownership structure is in place – Brady declined to disclose the financial details of the takeover, but said cash and shares in Oaktree's publicly listed management company were part of the deal – the challenge is to get the new machine humming.

Zulkoski is confident results will come soon and says the firm's investors are looking forward to things to come: “Ultimately, our investors saw the same thing we did. If we were good before, this will make us better. Universally, our LPs have seen the benefits of this integration. To have a firm like Oaktree recognize Pangaea is testimony of our investment capability and validation of our approach.”

The timing could prove smart as well: at a time of widespread uncertainty in global credit markets and Asian real estate high on the agenda of investors globally, the Colony Capital veterans and their Oaktree colleagues have plenty to aim for.