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| Howard Marks of Oaktree Capital Management |
There are a number of managers of distressed assets who are able to take a medium-to-long-term macro view about the viability of the opportunity set in front of them. Successful distressed investing is a cyclical phenomenon, such that there are better times than others to apply fresh capital to the investment strategy.And there are times to back away from it – when there are too few securities trading at distressed prices to give managers a proper choice, and too much capital committed to the strategy. For example, Steve Persky of Dalton Investments LLC of Los Angeles managed a low volatility Distressed Credit strategy for the first seven years of the firm, but in 2006 he decided to return approximately $350 million of capital to investors, leaving the strategy completely. He started taking in fresh investor capital for distressed investing in 2009, after the Credit Crunch had created gross opportunities.
It is interesting in this context that Persky’s neighbour in Los Angeles, Howard Marks of Oaktree Capital Management, the world’s largest manager of distressed assets with $75bn in AUM, has just raised €3bn for a new fund to take control of distressed companies in Europe. Oaktree too has closed funds – it closed three in the second half of last year, a high-yield-plus fund, a European credit opportunities fund, and a Japan fund. Unlike Dalton Investments LLC, Oaktree has a global reach, with offices in New York, Stamford, Conn., Amsterdam, Frankfurt, London, Luxembourg, Paris, Beijing, Hong Kong, Seoul, Singapore and Tokyo, as well as the headquarters in L.A. That is, of all the opportunities available globally and through the 16 investment strategies utilised by Oaktree, the new fund is focused on European companies using control investing strategies.
Oaktree’s control investing strategies combine traditional private equity and distress-for-control activities, investing at any level of the capital structure, and seeking equity positions that result in substantial influence, control or total ownership. Oaktree’s approach is to use strategic partners and intermediary relationships, which enables the sharing of essential industry knowledge and global investment experience. According to Caleb Kramer, the European Principal Group’s portfolio manager, “we focus on business sectors where Oaktree has prior experience and expertise, or we partner with individuals or groups that have industry expertise but lack capital or other resources.” The Oaktree investment professionals dedicated to European Principal investing also tap into the specific knowledge of their colleagues in the high yield debt, real estate and distressed debt teams in Europe.
For the new fund, European Principal Fund III, Oaktree Capital particularly favours cross-border opportunities that benefit from European integration or provide opportunity for global distribution. They are seeking potential in the divestiture of assets of large companies, and from enhancing the strategic and operational expertise of family-owned businesses to drive profits. Recent, unprecedented debt issuance in Europe suggests a coming increase in distress-for-control opportunities, and that is the trigger for the asset raising.
Oaktree believes companies in Europe, where several countries have been forced to restructure their debt, are likely to come under pressure to sell assets to raise capital. In addition, the Oaktree view is that distressed investing in Europe has been less competitive than in the U.S. However, the principals of Oaktree Capital don’t look to have fine timing in their investment strategies: “We don’t expect to be able to hit the bottom,” Howard Marks says. “All we care about is that we’re buying cheap. If it gets cheaper, we buy more. Eventually, it’ll work out – so long as we are right.”
Oaktree Capital Management has done a fine job in marketing the new fund. Against a target of €2.5bn the firm have actually raised €3bn. This is evidence that the end institutional investors share the view on the richness of the opportunity, and share the Oaktree expectations of outsize returns from being proved right.