Oaktree Capital Management: In Control?

October 2014
A report by UNITE HERE
Contact: Jim Kane, 617-838-6099,
jkane@unitehere.org
Oaktree Capital Management: In Control?
While Oaktree Capital Management has a history of limiting downside risk for
client principal, subpar performance across Principal Investments strategies raises
questions about fees.
Questions for Limited Partners:
n
iven that the Principal Investments’ funds have, on average, been 3rd quartile
G
performers, can Oaktree justify the fees it currently charges LPs?
n
Will Oaktree need to reduce the fees charged on the funds?
n
id Oaktree reduce the fundraising target for Principal Opportunities Fund VI
D
because of limited opportunities to deploy capital or because of limited demand
driven by the subpar performance of previous Principal Opportunities Funds?
n
Were Principal Fund VI LPs offered fee breaks?
Los Angeles-based Oaktree Capital Management is a global, credit-focused alternative asset
manager with approximately $91 billion in assets under management as of June 30, 2014.
Oaktree manages investment across three primary fund types: Closed-end, Open-end, and
Evergreen.
The firm was founded in 1995 and, since April 2012, Oakree is publicly listed on the NYSE.
Oaktree Principal Investments – Long on History, Short on
Performance
Oaktree Capital Management’s Control Investing strategies combine more traditional private
equity with distress-for-control investing. Within Control Investing, Oaktree has deployed
three Principal Investments strategies: Global Principal, European Principal and Asia
1
Principal. As of the end of 2013, the various Principal Investments strategies accounted for
approximately 16% of Oaktree’s AUM.
Oaktree’s first Global Principal Investments fund was launched about 20 years ago as a stepout from the manager’s core distressed debt strategies. Global Principal funds have typically
engaged in capital infusions into distressed or stressed firms, the acquisition of securities of
distressed firms with a debt for equity conversion expectation, or private equity investments
in targeted industries. The European Principal Investments and Asia Principal Investments
strategies were added in 2006.
Oaktree recently held its first close on Principal Fund VI, its latest Global Principal
Investments offering. The target size was cut from $3 billion to about $1.8 billion as Oaktree
admitted that it saw limited opportunities to deploy capital in the current economic
environment.1 The 2009 Principal Fund V has also deployed capital more slowly than
expected and Oaktree had to seek an extension of the investment period ahead of its
February 2014 expiration date.2
While the decision to reduce the fund size may make sense in the current low distress
environment, the full track record of the Principal Investments funds suggests that Oaktree
has struggled to beat the appropriate benchmarks across the history of these strategies.
Over the 20 year history of Principal Investments strategies:
n
n average, the 10 closed funds trailed their benchmark IRR by 4.3 percentage
O
points.3
nOnly 1 of the 10 closed funds within these strategies was a top quartile
performer.
nOnly 3 of the 10 closed funds were above their benchmark IRR.
n4 of the 10 funds ranked in the 4th quartile.
nFor the 10 funds that have closed, the mean quartile ranking was 3.1.
nOn a committed capital weighted basis, the mean quartile ranking was 3.3.4
2
The following table summarizes the performance of Oaktree’s Principal Investments funds5
using the most recent Preqin data:
Fund Name
Vintage
Global Principal
Committed
Capital (mn)
Mutliple
(x)
Bench
IRR
-
-
IRR %
Quartile
As of
Oaktree Principal Fund
VI
2013
(target)
$1,800
-
-
-
Oaktree Principal
Opportunities Fund V
2009
$2,827
1.21
8.4%
17.3%
4th
31-Dec-13
OCM Principal
Opportunities Fund IV
2006
$3,328
1.46
8.1%
8.0%
3rd
31-Dec-13
OCM Principal
Opportunities Fund III
2004
$1,400
1.53
10.3%
7.2%
2nd
31-Mar-14
OCM Principal
Opportunities Fund II
2001
$1,275
1.61
18.3%
24.5%
4th
31-Dec-13
OCM Principal
Opportunities Fund
1996
$625
1.45
5.4%
13.1%
3rd
30-Jun-14
TCW Special Credits V –
Principal Fund
1994
$93
1.74
14.8%
18.6%
3rd
30-Jun-14
European Principal
Oaktree European
Principal Opportunities
Fund III
2011
$3,164
1.19
11.4%
17.7%
3rd
31-Dec-13
OCM European
Principal Opportunities
Fund II
2008
$1,759
1.32
7.2%
15.6%
4th
31-Dec-13
OCM European
Principal Opportunities
Fund I
2006
$495
n/a
8.9%
7.4%
1st
30-Jun-14
$578
n/a
1.1%
7.4%
Asia Principal
OCM Asia Principal
Opportunities Fund.
2006
4th
30-Jun-14
Questions for LPs:
Given that the Principal Investments’ funds have, on average, been 3rd quartile
performers, can Oaktree justify the fees it currently charges LPs?
Will Oaktree need to reduce the fees charged on the funds?
3
Did Oaktree reduce the fundraising target for Principal Fund VI because of
limited opportunities to deploy capital or because of limited demand driven by
the subpar performance of previous Principal Opportunities Funds?
Were Principal Fund VI LPs offered fee breaks?
Endnotes
1
2
3
4
5
Willmer, Sabrina. “Oaktree Said to Cut Fund as Distressed Deals Diminish.” Bloomberg. June 11, 2014. http://bloom.
bg/SzeV4h (last viewed on September 26, 2014)
Canada, Hillary. “For Oaktree, Raising Money May be Easier Than Deploying It.” Wall Street Journal Private Equity
Beat. November 1, 2013. http://blogs.wsj.com/privateequity/2013/11/01/for-oaktree-raising-money-may-be-easierthan-deploying-it/ (last viewed on September 26, 2014)
Calculated as (Net IRR – Preqin Benchmark IRR)/(Number of closed funds)
Quartile rankings from Preqin; committed capital weighted mean calculated as Σ((fund commited capital/total
commited capital all closed Principal Investments funds) x Preqin quartile ranking)
Excludes Special Account C.
4