Oaktree Pays Out $3M From $10.9M Fund VIIb

Oaktree Capital Management LP has made a $3 billion distribution to investors from its 2008-vintage OCM Opportunities Fund VIIb LP before the end of the investment period for the $10.9 billion pool.

The fund continues to hold assets with a current net asset value of some $14 billion, John Frank, the firm’s managing principal, estimated, and Oaktree has another seven years or more to try to wring higher returns out of the portfolio. (Some reports have given an impression that the fund had released investors from their commitments, unable to find investment opportunities in an improving economy.)

For Oaktree Capital, a Los Angeles specialist in distressed-asset investing, Fund VIIb was more than triple the size of its predecessor, the $3.6 billion OCM Opportunities Fund Fund VII. The firm has $40.3 billion under management, according to the Thomson One database.

“We try to size our funds to the opportunity,” Frank told Buyouts. Fund VIIb, raised during the height of the real estate boom of the last decade, focused primarily on senior secured debt, although Oaktree Capital invests in both equity and debt. “While we didn’t know the timing or the extent of the crisis, we did feel very strongly that a crisis was coming.”

The United States had been in recession since December 2007, but the crisis arrived in full force in September 2008, when Lehman Brothers Holdings Inc. collapsed, triggering a global financial panic.

While the resulting selloff pounded financial markets, it represented a buying opportunity for Oaktree Capital. Fund VIIb was 90 percent invested by the end of the first quarter of 2009, mostly in the debt of relatively high-rated borrowers.

“If we had invested in lower quality stuff, we could have made a lot more money, but we didn’t know better than anybody else whether the world was ending, so we wanted to be sure we were buying things that would be safe in any event,” Frank said.

Oaktree Capital is currently investing out of its $4 billion OCM Opportunities Fund VIII LP, which Frank said is about half deployed, and it has $1.5 billion of commitments for a follow-on OCM Opportunities Fund VIIIb LP.

Certainly the opportunity is diminished. Edward I. Altman, a credit risk expert and New York University professor, predicted this month that corporate defaults in 2011 would run at just a 2.8 percent pace, compared to a 10.8 percent default rate in 2009.