Oaktree values patience amid challenging markets

The distressed specialist saw its earnings drop in the third quarter, but is happy to wait for distressed opportunities as it builds up dry powder reserves.  

Oaktree Capital Management reported declining earnings in its third quarter results, driven by difficult market conditions in recent months.

The firm had $1.9 million in net income in the third quarter, down from $18.9 million in the same period last year. It also saw its distributable earnings fall to $90.6 million in Q3 from $137.2 million in the third quarter of 2014. These declines were primarily driven by lower incentive income and fee-related earnings, the firm said.

Oaktree’s assets came in at $100.2 billion as of 30 September, a 3 percent decline from the prior quarter but an 8 percent rise year-on-year. The quarterly declines were due to weaker financial markets, the firm said.

“The third quarter generated divergent investment performance similar to the prior two quarters, with some strategies doing well and others not, and with European-based assets generally outperforming the US markets,” said chief executive Jay Wintrob (pictured) on Oaktree’s earnings call.

The aggregate gross return of Oaktree’s closed-end funds was negative 3 percent in the third quarter and positive 1.5 percent for the last 12 months.

The firm’s real estate and European strategies were bright spots. Real estate gross returns were 21 percent over the past year and the European principal funds posted 24 percent over the same period.

Declines in public equity holdings, meanwhile, have continued to weigh on US distressed debt returns, with these holdings making up about $4 billion of $13 billion in distressed debt assets.

Total funds raised in the quarter were $2.7 billion, bringing Oaktree’s 12-month gross capital raised to $22.6 billion, of which about $16.8 billion went to closed-end private funds.

The largest amounts of closed-end capital raised in the third quarter were an additional $400 million for Opportunities Funds Xa and Xb, bringing total commitments in those funds to approximately $9.9 billion, just under Oaktree’s $10 billion target.

An additional $300 million went to the Real Estate Opportunities Fund VII, bringing total commitments for that fund to $1.6 billion. The firm also brought in $600 million for senior loan products, its new enhanced income fund and CLOs, bringing total AUM across all senior loan products to $12 billion.

Oaktree is also raising money for two new European funds, European Capital Solutions and European Principal Fund IV, though management has declined to share targets for these funds.

The firm has so far only invested 25 percent of the Oaktree Fund X capital, which is meant for US distressed opportunities, and expects it will wait some time longer to put it to work. Management said waiting for better opportunities was the right decision even though it meant Oaktree will not be able to collect management fees on these funds for some time.

Chief financial officer David Kirchheimer said that of the $16.8 billion in closed-end fund capital the firm raised over the past 12 months, only about 10 percent has generated any management fees.

“We believe the prudence and patience that we apply to the sizing of our funds, our decision on when to begin fund investment periods and, most importantly, when and how to deploy capital, reflects our primary focus on our clients and the long-term risk-adjusted investment performance we seek to achieve for them,” Wintrob said.