- Firm holds $22 bln in dry powder
- May increase size of Fund Xb
- PE firms in general have ample capital for credit investments
Oaktree Capital Group exceeded its $10 billion target for its flagship distressed debt funds. Now it’s waiting for just the right time to deploy the capital.
Howard Marks, co-chairman, said the firm sees some opportunities in Europe, but it’s holding off on big bets in the United States because debt isn’t cheap enough yet.
“While more interesting debt opportunities are on our plate now than at any point in the last five years, we plan to be patient and wait for a pickup in default rates before becoming materially more aggressive in investing our capital,” Marks said February 9 on the firm’s quarterly conference call with analysts.
About 15 percent of the high-yield bond universe is now selling below 70 cents to the dollar. It’s attracting interest from Oaktree, but it’s not cheap enough to deliver the kind of returns the firm looks for, Marks said.
Much of the struggling debt is concentrated in oil and gas, oil services and coal. Parts of the media and retail sectors are starting to look more compelling, along with energy, Marks said.
“You still couldn’t put together a highly diversified portfolio today, in a distressed debt universe,” Marks said.
Oaktree will have plenty of capital to deploy when it is ready to strike. It raised $2.8 billion in the fourth quarter for Opportunities Funds X and Xb, bringing the grand total for its distressed debt vehicles to $10.5 billion.
Oaktree said last year it would raise $3 billion for Fund X and $7 billion for Xb. It planned to invest Fund X first and then tap Xb opportunistically.
If the current trends continue “with this negative cast such as they’ve taken on since August” then the firm’s “bias would be to increase the size of Xb” beyond its $7 billion target, Marks said.
Oaktree said it has amassed a record of $22 billion in dry powder in all of its funds, even as it continues fundraising. Along with its Opportunities funds, Oaktree is raising capital for European Capital Solutions and European Principal Fund IV, as well as Infrastructure Fund I and Real Estate Opportunities Fund VII.
Oaktree reported that it pulled in $2.1 billion for Real Estate Opportunities Fund VII and $1.1 billion for Power Opportunities Fund IV in the fourth quarter.
While it is keeping an eye on the U.S. market, Oaktree is investing in Europe, where the European Central Bank’s quantitative easing is supporting credit fundamentals, Marks said.
He added that he does not expect the U.S. economy to fall into recession this year.
“We’ve been limping along for several years now with an anemic recovery, and it even seems to be losing energy from that low level,” he said. “But having said that, the consumption side is pretty good.”
Dry powder grows
Oaktree isn’t the only firm with ample dry powder for distressed investments.
All told, an estimated $55 billion of dry powder is being held by North American and European GPs for distressed debt, according to a February 16 estimate from market researcher Preqin.
Dry powder increased by $9.1 billion in 2015, as 11 North American and European funds closed on $21 billion in 2015, Preqin said.
Unlike the last period of record fundraising in 2008, credit investments aren’t being put to work as quickly as they were following the collapse of Lehman Brothers nearly eight years ago, Preqin said.
Looking ahead, 2016 appears to be another strong year for distressed debt fundraising, but “this in turn may increase pressure on managers to make use of the capital at their disposal,” Preqin said.
Action item: See Preqin study on credit funds: http://bit.ly/2178AM5
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