- GP Profile: Oaktree Mezzanine Finance
- Year founded: 2001
- Investment strategy: Seek current return and long-term capital appreciation with an emphasis on fundamental credit analysis and risk control in the middle market. Provide mezzanine capital to companies with enterprise values of $150 million to $750 million.
- Key executives: Bill Casperson and Raj Makam, both managing directors and co-portfolio managers, along with 11 other investment professionals
- Office location: New York City
- Assets under management: About $1.6 billion as of March 31; Oaktree’s overall AUM is $97 bln
- Fundraising status: Currently investing from Oaktree Mezzanine Fund IV, which drew in $852 mln
- Number of active portfolio companies: More than a dozen from Fund IV
- Web address: https://www.oaktreecapital.com/strategies/corporate-debt/mezzanine-finance
Since Oaktree Capital Group launched the Oaktree Mezzanine Finance strategy in 2001, it has drawn a loyal following from middle-market private equity firms by building up long relationships in both good times and bad.
Bill Casperson and Raj Makam, both managing directors and co-portfolio managers, spoke with Buyouts in the firm’s Midtown Manhattan headquarters about the loan marketplace, deal prices and what distinguishes the firm from unitranche lenders and other competitors.
Wearing dress shirts but no ties, the two executives come across as approachable and conversational. Makam responds quickly to questions and often jumps first into a topic. Casperson would add his thoughts and speak more deliberately.
Overall, they’re working to deploy Oaktree Mezzanine Fund IV, which drew in $852 million and began investing in October 2014. It’s drawn down $186 million of capital with a target of October 2019 to end its investment period. Thus far, it’s returned 1.1x as of March 31, Oaktree’s most recent quarterly statements show.
‘We look at everything’
With an average hold of $25 million to $30 million per investment, Oaktree provides mezzanine capital to companies with enterprise values of $150 million to $750 million across the middle market. Typically, mezzanine loans are combined with senior loans from other providers to provide financing for sponsors.
“We look at everything,” Makam said. “There’s virtually not an industry we look at where somebody at Oaktree doesn’t touch it deeply or [know] it well. Oaktree’s broad platform gives us an advantage in terms of understanding industries quickly.”
Casperson and Makam have been running the Mezzanine Finance strategy at Oaktree since 2014, when Bill Sacher, the co-founder of the unit, left the firm to join Adams Street Partners. They declined to comment on Sacher’s move.
Casperson and Makam have known each other for 20 years; they met at NationsBank, before Oaktree. Since joining the firm, they’ve built the mezzanine strategy as a “step-out” business from a related high-yield debt business at Oaktree. This tradition of launching closely related businesses at the firm remains fresh in their minds, they said.
Casperson and Makam said they and their team continue to draw loyalty from their middle-market clients. The Oaktree team manages to issue more loans to existing clients than many others in the industry.
“We’ve been doing this for 15 years now at Oaktree, and to this day, 75 percent of our business is repeat deals from the same sponsor,” Makam said. “We are very, very proud of that.”
The mezzanine team also distinguishes itself from some of its competitors by including hard commitments for credit lines to sponsors for add-on acquisitions and working capital, Casperson said.
“We are relationship-based lenders,” he said. “That means we want to be good partners to the financial sponsors that show us opportunities. And ultimately when we invest with those sponsors and their portfolio companies, we want to help those businesses grow.”
While the mezzanine unit is part of a much larger firm, Oaktree Capital allows each of its business units to make its own decisions. This speeds the decision-making process for mezzanine loans, Makam and Casperson said.
“There isn’t somebody telling us we what we can or can’t do,” Casperson said. “It’s very simple. We have a team of 13 people and if a decision needs to be made, Raj and I can sit in the same room and make the decision and move on. It’s a very streamlined, fast process.”
Overall, providers of mezzanine financing have been under pressure in the face of competition from unitranche loans, which combine elements of mezzanine and senior debt into one instrument.
“They have definitely taken a share of the market, but there are a lot of deals to go around,” Casperson said.
“In many cases, a senior mezzanine type structure … offers greater capacity for add-on acquisitions because you have multiple lenders that have additional dry powder. And the blended cost of a senior-mezz financing is often less than a unitranche provider.”
Overall, the M&A pace continues to be challenged. Earlier this year volatility in the debt markets caused deal-makers to tap the brakes. Oaktree’s mezzanine unit still remains pleased with its overall investment pace.
While purchase-price multiples have climbed, equity contributions to deals have increased as well. to limit the amount of debt. Middle-market deal leverage typically remains well below 6x EBITDA.
“Most middle-market lending is done by participants who want to hold the paper,” Makam said. “There’s a natural governing mechanism to make sure the leverage is set in a range which works for you as a holder as opposed to what the market will bear.”
Impact of rates
Casperson said higher interest rates would help mezzanine lenders boost the rates on loans. Currently, flat rates are attracting investors to private debt because it provides a better return than Treasurys and other government-backed bonds.
“The search for yield has impacted pricing in the middle market and depressed yields for mezzanine credit,” Casperson said. “If rates rose, we’d probably get better pricing and that would be nice. I never thought they’d be down this long and there’s no prospect for them rising.”
Overall, Oaktree’s mezzanine unit continues to attract clients that may prefer to avoid some broadly syndicated market dynamics such as flex, a loan component that allows credit terms to change based on rising or falling demand. If flex is used, a loan may become much more expensive.
“There’s no flex” on the firm’s loans — “that’s how we compete,” Casperson said. “It’s that type of relationship. They know that if the company hits a bump in the road, we’re going to be supportive of the company and work with the sponsor and the senior lenders to do whatever waivers and amendments that are required.
“And we’re not going to charge an excessive rate, in order to get the company through the rough patch.”
Action Item: Oaktree’s Mezzanine unit, http://bit.ly/29xv9VE
Photo of Bill Casperson and Raj Makam in their New York City headquarters by Steve Gelsi