Oaktree to use BDCs to reach retail investors

Oaktree Capital Management expects it will take two to three years to restructure the portfolios of the business development companies it acquired from Fifth Street Asset Management, senior executives said on the Los Angeles-based firm’s second-quarter earnings call.

The firm may conduct equity raises, once the stock price improves relative to its net asset value per share, chief executive officer Jay Wintrob said, adding the vehicles’ shareholders will be a “new audience for Oaktree”. The firm plans for the BDCs to become “a new leg of its retail stool”, Wintrob said when elaborating on its products targeting retail investors.

Plans for Oaktree Specialty Lending Corporation (OCSL), formerly Fifth Street Finance Corporation, and Oaktree Strategic Income Corporation (OCSI), formerly Fifth Street Floating Rate Corporation, were detailed last week in investor presentations filed with the US Securities and Exchange Commission.

The strategy for OCSL includes bringing the firm’s book down to one with a “fewer number of high-conviction investments” and to restructure some loans and exit others, an investor presentation filed with the US Securities and Exchange Commission showed.

For its part, OCSI will dispose of the “small number of challenged investments” and add broadly syndicated loans as well as certain privately placed loans, a separate investor presentation showed.

Oaktree began deployment its European Principal Fund IV in July and has a five-year investment period, ending in July 2022. Some 43 percent of the €1.12 billion fund has been invested, while 20 percent of the capital from the vehicle has been drawn. The fund invests in special situations private equity along with distress-for-control situations and investing in new companies in out-of-favour industries.

The firm also continued to be a net seller of assets in the third quarter, pushing management fee income down. That stream of income stood at 4 percent to $186.6 million as of 30 September, down from $194.3 million in the third quarter of 2016.

The decrease stemmed from a $19 million decline due to closed-end funds in the liquidation phase, a drop partly counteracted by the activation of EPF IV and additional commitments to its seventh real estate equity fund.

The firm’s assets under management stood at $99.5 billion, a slight year-on-year decline from $99.8 billion at the end of the third quarter of last year and a small increase from the $99.3 billion as of 30 June. The firm raised $2.7 billion in the third quarter and $12 billion for the 12 months ending 30 September.

Incentive income for the firm fell $46 million from $99.7 million as of 30 September 2016 to $53.7 million as of 30 September. Investment income stood at $64.4 million as of 30 September, a 9.2 percent year-on-year decrease from $70.9 million, a drop the firm attributed to lower overall returns.