Oaktree sets its sights overseas

Oaktree’s management, like Blackstone’s, is seeing more opportunities in Europe both for direct lending and distressed situations.  

Oaktree Capital Management’s executives said they are raising two new European credit vehicles, as they’re seeing more imminent opportunities across the pond for both direct lending and distressed opportunities. Blackstone’s president Tony James expressed similar views on European opportunities on his firm’s earnings call earlier this month, as PDI reported.

On Oaktree’s second quarter earnings call on 28 July, chief executive Jay Wintrob (pictured) said the firm began raising its second European Capital Solutions Fund, a successor to the first European Private Debt Fund, this month. “The fund will primarily target proprietary direct loans to middle-market companies requiring a customized financing solution,” Wintrob said.

Just that morning, the firm also began fundraising for the European Principal Fund IV, “which will target control investing opportunities where dislocation or distress creates attractive investment propositions”, Wintrob said. The firm’s existing European funds have also posted some of the strongest returns at Oaktree lately. The European Principal Funds generated a 4 percent gross return in the second quarter, bringing the one-year gross return to 31 percent. The first European Private Debt Fund posted a 4 percent gross return in the quarter and 24 percent for the 12 months. The Los Angeles-headquartered firm has 100 investment professionals across Europe in cities including London, Frankfurt, Paris, Milan, Madrid and Warsaw. Oaktree has been investing in Europe for 16 years and its European assets have grown to $16.7 billion in that time, and now account for 20 percent of holdings in all Oaktree funds.

Overall, Oaktree’s performance was flat. Aggregate gross return sat at around zero in the second quarter and 4 percent for the last 12 months, with the US distressed debt results posting negative returns, Wintrob said. According to the earnings report, the Oaktree Opportunities Fund IX has lost 50 basis points in net IRR since inception in January 2014.

The firm is still in the process of raising its distressed Oaktree Opportunities Fund X, for which it has collected $9.4 billion of the $10 billion goal. Though management expect this and other capital to take time to put to work, as distressed opportunities in the US aren’t as plentiful. The firm’s assets have reached a record $103 billion as of June 30, up 13 percent from a year ago, while its fee-earning assets under management have remained relatively flat year-on-year, as some of the new capital waits to be deployed (Oaktree is only charging fees on invested capital). The firm raised $6.3 billion in new assets in the quarter, with the largest chunks  going toward the Opportunities Funds X, at $2.3 billion, and a first close of its Real Estate Opportunities Fund VII with $1.3 billion.

“While our distressed debt returns over the past 12 months have been below historical norms, we remain patient. Throughout our 27-year history, many of our most profitable Opportunities Fund investments, particularly those in cyclical industries like shipping, have shown mark-to-market losses early in their lives,” said Bruce Karsh, co-chairman at Oaktree.

He also mentioned that the firm is seeing opportunities in the energy sector, though. “We expect dislocations in the energy and commodity market to continue, providing further opportunities for attractive risk adjusted returns in credit. We may invest in this area by making new secured or priority loans to financially distressed companies or by purchasing existing energy and commodity related securities at deep discounts,” Karsh said.

Though with negative performance on some of the distressed strategies and inability to yet charge fees on the newly committed capital, Oaktree has seen some of its financials decline. “With almost nothing yet to show in management fees from the newest capital, the second quarter saw a slight drop in fee related earnings. Together with significantly lower investment income amid the quarter’s weaker financial markets, this drove a decline in adjusted net income to $0.44 cents per Class A unit from $0.75 in the year-ago quarter,” said chief financial officer, David Kirchheimer.

Adjusted net income declined by 36.7 percent to $85.3 million in the second quarter of 2015 and from $111.2 million in the second quarter of 2014 due to lower fee-related earnings.

Total assets under management grew to $103 billion, with Oaktree raising a record $24 billion in the last 12 months prior to June 30. Fee-generating assets under management have hovered around the $77 billion to $78 billion mark over the past year.