Oaktree raises $720m for senior debt, touts direct lending as growth area

The Los Angeles-based firm also held closes on its latest transportation and special situations funds.

Oaktree Capital Management is marshalling the firm’s resources into direct lending, raising hundreds of millions of dollars for a private fund and making continued progress on its business development companies’ portfolios, firm executives said on Thursday’s second-quarter earnings call.

The Los Angeles-based credit investment behemoth said its Oaktree Middle Market Direct Lending Fund raised $720 million for its closed-end vehicle that will invest in senior loans, chief executive Jay Wintrob said. It has already begun deploying capital.

Answering a query during the analyst question-and-answer session, Oaktree executives pointed to direct lending as an area of growth for Oaktree over the next few years.

However, the area is “primed for having real issues” in the “not-too-distant future”, co-chairman and chief investment officer Bruce Karsh said. He emphasised that it won’t “happen tomorrow” but the “seeds are there”. Private equity-sponsored deals are among the areas of concern, he continued, adding that Oaktree has been focused on deals without private equity firms.

The firm also addressed its BDCs, noting that it has rotated out many of the problematic investments the vehicles had when Oaktree purchased them last year from then-troubled Fifth Street Asset Management. Because of the frothy market, the firm was able to cycle through its loan book quicker than under normal conditions, executives said.

Oaktree also held a close on its second special situations fund at $711 million, for which it is targeting $1.75 billion. The firm expects to approach that target later in the year. The Minnesota State Board of Investment committed $100 million to the vehicle in December.

During the fund’s investment period, limited partners will pay a management fee of 1.6 percent on committed capital and a 20 percent carried interest over an 8 percent hurdle rate, according to SBI documents. The 10-year fund will have a three-year investment period and a seven-year harvest period, subject to an additional six one-year extensions.

Oaktree also held a $1.05 billion first close on the firm’s debut infrastructure fund – previous vehicles bore the name of Highstar Capital, which Oaktree acquired in 2014.

Executives acknowledge the poor performance of Highstar Capital IV, which reported gross and net internal rates of return of 5.9 percent and 1.6 percent, respectively. The performance was a result of the vehicle’s energy holdings, Wintrob noted. He also said Oaktree is not pursuing a commingled energy infrastructure fund at this point.

The firm’s incentive income in the second quarter fell to $51.4 million from $459.9 million at the same time last year, an 88.8 percent decrease. The firm attributed this to Oaktree Principal Opportunities Fund IV, which began paying incentive income then. Net accrued incentives increased to $898.6 million as of 30 June from $866.7 million as of 30 June, 2017, reflecting the potential for greater incentive income in the coming quarters.

The firm’s assets under management increased to $121.4 billion as of 30 June.