Oaktree Capital Management posted gross returns of 10 percent for distressed debt and 12 percent for US private debt for 2018, besting other publicly-traded alternative asset managers in similar categories.
The Los Angeles-based asset management behemoth deployed $4 billion from its closed-end funds in the quarter, which includes the distressed, senior debt and mezzanine debt funds.
“Market psychology proved to be incredibly volatile [in the fourth quarter],” Oaktree co-chairman Howard Marks said, making a rare earnings call appearance. The market plunge was “driven by no new real concerns”, he added, noting that slower global economic growth, rising interest rates and trade tensions have been in the picture for some time.
GSO Capital Partners, Blackstone’s credit arm, posted gross returns of 8.8 percent for performing credit and a 3.2 percent loss for distressed strategies.
Apollo Global Management, which did not report distressed returns individually, posted gross returns for 2018 of 1.2 percent for its liquid and performing credit strategies (which includes hedge funds), though its MidCap lending arm produced a gross return of 19 percent.
KKR said it generated an 8 percent gross return for 2018 across its Lending Partners III, Private Credit Opportunities Partners II and Special Situations Fund II vehicles – its Alternative Credit group’s flagship funds.
Marks also addressed the sharp turnaround January produced and noted it has affected the distressed debt team’s dealflow.
“As 2019 has started off with a ‘relief rally’, the focus of the distressed debt team’s active pipeline has reverted to private deals in Europe and Asia and attractive opportunities in sectors such as telecom, healthcare and retail,” he said.
In addition, Marks returned to a theme he’s written about in his memos: the deterioration of underwriting standards and the prevalence of covenant-lite deals.
“Standards for credit issuance have been very loose,” he continued. “And so, all things being equal, the defaults will come later than they otherwise would have, but they’ll probably be worse.”
He also noted that companies may be able to continue operating after a breach of covenant. By the time they reach a payment default, the company “would tend to dissipate more of their assets” and “recoveries will be considerably less”, he added.
Management reiterated its decision to delay the activation of the investment period for Oaktree Opportunities Fund Xb, at which point the fund’s investors would begin to pay a management fee on committed capital rather than invested capital.
The firm’s assets under management fell to $119.6 billion at year-end, down from $123.5 billion as of 30 September and $123.9 billion as of 31 December 2017.
The quarter-on-quarter decrease was due to market-value declines, distributions to investors from closed-end funds and uncalled capital commitments, net outflows from open-ended funds and DoubleLine offset by $2.2 billion of new closed-end fund commitments.
The firm saw management fees of $194.4 million, down from $207.1 million as of 31 December 2017. An aggregate $29.1 million decline was due to closed-end funds in liquidation and open-ended funds, which was offset by $16.8 million from the acquisition of Fifth Street Asset Management BDC management contracts and closed-end funds that charge management fees on drawn capital, net asset value or cost basis.