Oaktree Chairman Talks Hurdles As Fund VI Launches

  • Firm promises LPs preferred return
  • 8 percent hurdle rate
  • Interest rates are low

“You could make an intellectual case than an 8 percent preferred return is too high in this low-return world,” Howard Marks, Oaktree’s chairman, said on a conference call with analysts to discuss fourth -quarter earnings that almost tripled from a year earlier.

Under the terms on at least some of its recent funds, Oaktree promises to return 100 percent of limited partner commitments and also provide them with an 8 percent return, the “hurdle rate,” before Oaktree begins to take carried interest on the fund’s profits. In more normal times, when competing yields for, say, Treasury bonds could generate a mid-single digit return risk free, the hurdle was seen as a way to encourage LPs to take on riskier private equity commitments. But in today’s environment, with 10-year Treasuries yielding a scant 2 percent, the 8 percent hurdle rate represents a generous return for investors.

Even though an 8 percent return to LPs looks pretty rich, “I think we can clear that hurdle consistently,” Marks said. “I don’t want to be the guy to say to them, ‘We made 7.8 percent gross, and you get 4.9 percent net.’ It’s not our style.”

Marks’s comments came as Oaktree announced the launch of its marketing effort for Oaktree Principal Fund VI LP, a planned $3 billion vehicle for control investments. An investor in distressed debt, the Los Angeles firm uses its principal funds to invest in both equity and debt of mid-market companies with an eye toward gaining control of them.

Hamilton E. “Tony” James, president and chief operating officer of The Blackstone Group, had made a similar point when the firm reported its fourth-quarter results last month. “Most investors would be really happy today with 8 percent long term,” James said on Blackstone’s call, as Buyouts reported at the time. “We’re talking with LPs about it.” But, he added: “The chance of lowering that hurdle is not that high.”

In the fourth quarter, Oaktree’s adjusted net income nearly tripled to $220.4 million from $76.7 million a year earlier. Its adjusted net income of $1.36 per class A share easily topped the 92-cent average analyst estimate, as reported by Thomson Reuters I/B/E/S. The firm said its results were driven by gains in incentive and investment income.

Revenue grew 71 percent to $447.0 million from $261.4 million in the same quarter a year ago, which the firm said reflected substantially higher incentive income.