Oaktree Opportunities XII

The Oaktree Opportunities funds – and Oaktree Capital Management's co-founders Howard Marks and Bruce Karsh – are among the world’s most highly regarded and successful distressed debt investors. 

They have built their reputation over the past five decades by investing in ‘good companies with bad balance sheets’ when others were unwilling or unable to do so, seeking bargains at times of crisis. 

Over 36 years, the 26 Oaktree Opportunities funds have never delivered a negative return, with the average fund delivering an IRR after fees of 15.7% per annum, and ranging from 47% in the best-performing fund to 7% in the worst – past performance is not a guide to the future. Despite being long-term, illiquid investments, the Oaktree funds have a good track record of making distributions to investors before the end of their 10-year life although this is not guaranteed. 

Historically, Oaktree’s approach has worked best at times of market stress: for instance, immediately after the dotcom crash and global financial crisis. Whilst many investors retrenched, Oaktree invested more than $10.6 billion over 12 months after the Lehman Brothers collapse. 

Oaktree thinks the current environment could present similar opportunities. Non-investment grade debt is three times what it was on the eve of the financial crisis. With corporate defaults rising, Oaktree expects the volume of debt in default to exceed the levels of the financial crisis.

It could be an ideal hunting ground for one of the world’s leading distressed debt investors. Consequently, Oaktree is looking to raise its largest ever Opportunities fund – the Oaktree Opportunities XII Fund. 

The fund targets a return of 16% - 21% net of fees, on an unleveraged basis, not guaranteed.

The minimum investment is normally $10 million. Wealth Club investors can gain access for a minimum commitment of $150,000. 

• Traditional private equity LP/GP (Limited Partnership / General Partner or LP/GP) structure 
  
• Minimum commitment of $150,000, of which 10% to be paid upfront ($15,000) with the rest called over a period of around three years 
• Capital calls must be met within two business days to avoid being treated as a defaulting investor. Subscriptions to be paid in US Dollars: Wealth Club can facilitate this
• Long-term investment – minimum 10-15 years, with limited liquidity: the fund may, at the manager’s discretion, make distributions from investment proceeds during the life of the fund
• Deadline: 30 August 2024 (5pm, cleared funds)

The manager

Oaktree Capital Management was co-founded in 1995 by legendary debt investors Howard Marks (Oaktree Co-Chairman) and Bruce Karsh (Oaktree Chief Investment Officer). Alternative asset management giant Brookfield Asset Management acquired a majority stake in the company in 2019, although Oaktree continues to operate as a separate business.

Oaktree has always specialised in credit, with a particular emphasis on distressed debt. Today it manages $192 billon of assets, spread across credit (75%) real assets (12%), private equity (9%) and listed equities (4%), as at March 2024.

The firm employs over 1,200 staff across 17 countries, including nearly 400 investment, sourcing and trading professionals. The Opportunities funds are overseen by a dedicated team of 77 headed by Bruce Karsh. The team is spread across Los Angeles, New York, London, Hong Kong, Singapore, and Mumbai. 

The firm believes its global footprint and reputation help generate an attractive deal flow. Moreover, its size and expertise can help it lead complex transactions, especially deals which require fast execution or are too large for smaller investors.

Investment strategy

The Opportunities strategy is underpinned by six key tenets: fund sizing, an all-weather approach, risk control, intrepid deployment, disciplined sales and responsible investing. 

• Fund sizing – Oaktree caps fund size according to the market environment. It will look to raise larger funds when it expects markets to be stressed and smaller funds in more ordinary times when there are fewer opportunities.
  
• All-weather – Recently, the Opportunities team has expanded the range of investments it will consider. While in times of distress it will primarily continue to target distressed liquid credit, the addition of illiquid, private credit and other credit categories means it can now find attractive opportunities in more benign markets as well.
• Risk control – Oaktree always invests in jurisdictions that protect investors’ rights and aims to take a leadership role in any restructuring. When investing in public markets the team seeks senior and secured debt, while private opportunities should come with multiple structural protections and low loan-to-value ratios.
• Intrepid deployment – Oaktree expects to deploy the most capital when other sources of funding are scarce. 
• Disciplined sales – Oaktree has a long track record of being a net buyer in periods of crisis, and a seller when markets are healthy/buoyant.
• Responsible investing – Oaktree believes that ESG factors can directly and materially impact investment outcomes, with ESG analysis helping mitigate risks and identify opportunities.

Guided by those key tenets the team will invest across seven investment categories:

1. Distressed liquid credit: publicly listed debt of companies that appear unlikely to meet their contractual obligations. Oaktree typically buys debt at a significant discount and may take a sizeable equity stake as part of the bankruptcy process.
2. Rescue financing: financing distressed borrowers to help them avoid defaulting and/or bankruptcy. Oaktree seeks lender-friendly terms to limit downside if the borrower cannot avoid bankruptcy.
3. Debtor-in-possession (DIP) financing: lending to companies already in default. Oaktree usually enjoys a very high level of seniority in court-sanctioned financing so borrowers can continue to operate during insolvency proceedings 
4. Exit financing: providing capital to allow companies to exit bankruptcy
5. Portfolios of (performing and non-performing) loans bought from financial institutions. This could include personal as well as corporate loans.
6. Platforms: partnering with experienced management teams in industries that are experiencing disruption, or where capital is not freely available, to support the development of attractive platform-type businesses
7. Opportunistic capital solutions: Providing creative solutions to complex borrowers, often where speed and certainty of execution are critical.

During times of market dislocation, the fund expects to invest more in the opportunities towards the top of the above list, while opportunities lower down the list are more likely to feature in more benign market conditions. The fund does not target a particular spread between the various types of credit assets, instead it invests where it sees the best opportunities.

Portfolio

To date, the Oaktree Opportunities XII fund has raised over $11bn in closed and committed capital, and invested $2.5 billion across 37 investments (March 2024).

The fund has invested in distressed liquid credit (41%), rescue financings (28%), and opportunistic capital solutions (24%). The majority of investments (77%) were senior secured credit, providing strong downside protection.

The pipeline of future investment opportunities stands at $26 billion, and includes rescue financing (51%), opportunistic capital solutions (29%) and platform investment opportunities (11%).

Investment Categories breakdown: Oaktree Opportunities XI and Oaktree Opportunities Xb funds

Examples of portfolio holdings

The following are examples of previous investments made through the Opportunities strategy. They are for illustrative purposes only and may not reflect the investments made by the Oaktree Opportunities XII Fund.

Chesapeake Energy – Distressed liquid credit

Chesapeake Energy was an early participant in the US shale gas revolution, building up sizeable positions in some of the key unconventional gas basins in the US. However, a combination of an overleveraged balance sheet, onerous historic contracts and the dramatic fall in commodity prices during the Covid-19 pandemic meant the company ended up filing for bankruptcy in June 2020. 

Oaktree started investing in the company’s discounted secured debt in March 2020, investing a total of $579 million. When the company emerged from bankruptcy in February 2023, following a significant restructuring, Oaktree was Chesapeake’s largest shareholder. 

During bankruptcy, Chesapeake converted nearly $7 billion of junior debt into equity, restructured its historic contracts and looked to divest sub-scale positions in non-core gas fields, with creditors also installing a new board of directors. Since then, the company has benefited from a rise in global gas prices which, together with the other changes, has seen Moody’s upgrade the company’s credit ratings to one notch below investment grade. 

Oaktree has since taken advantage of the strength of Chesapeake’s shares to sell around a third of its equity stake.

Hertz – Exit Financing 

Hertz is one of three dominant US car rental businesses. It was forced to file for bankruptcy protection early in the pandemic as lockdowns caused revenue and profitability to decline dramatically. Oaktree believed Hertz represented an opportunity to fund a deleveraged company in an attractive industry at a discounted valuation.

Oaktree was able to negotiate a place in the company’s rescue package despite not holding qualifying securities prior to bankruptcy. It invested $304 million into common and Series A preferred stock, becoming the second-largest equity holder after the bankruptcy. 

During the bankruptcy, Hertz substantially reduced its rental fleet, deleveraged its balance sheet, reduced costs, upgraded its IT system and changed its corporate strategy to focus on profitability. Since exiting bankruptcy, the company has relisted on Nasdaq, repurchased its entire Series A preferred equity at a 125% premium to par, announced a $4 billion share buyback and significantly improved profitability and cash flow. Oaktree fully exited its Hertz position in April 2024.

LATAM Airlines – DIP financing, recent exit

LATAM Airlines, the largest airline in South America, was forced into bankruptcy by the travel disruption caused by the pandemic.

In October 2020, Oaktree agreed to provide $1.2 billion of debtor-in-possession (DIP) financing, with $966 million provided from its Opportunities funds. The DIP loan – a special kind of financing for companies in bankruptcy – helped fund the business during bankruptcy proceedings, with an 18-month term (+ two-month extension), attractive cash interest rate, upfront and exit fees, and first priority on LATAM’s unencumbered assets with second priority in the company’s encumbered assets. In September 2023, Oaktree helped fund a second tranche of DIP borrowing. 

Both tranches were refinanced in April 2022 once LATAM agreed a restructuring, which opened up cheaper sources of financing, with the Oaktree funds fully exiting their position. 

Vivarte – example of an unsuccessful investment

As is to be expected not all investments will work out, and Oaktree’s investment into Vivarte is one such example in its distressed liquid credit strategy. 

Vivarte is a French apparel and footwear retailer – with a brick-and-mortar business model. It operated across three divisions, branded footwear (Minelli), branded apparel (Caroll) and mass-market footwear (La Halle). 

Oaktree invested in the company’s senior debt in 2008 in the middle of the financial crisis. At that point, the company had a leading market position and a well diversified store portfolio, with Oaktree able to enter at an attractive price relative to what the company’s PE owner had paid back in 2006.

However, the company continued to struggle. Weaker consumer spending, increased competition and a flawed premiumization strategy combined with the significant secular change happening within the digitalizing retail sector. The company underwent three restructurings in 2014, 2017 and 2019 – resulting in significant distraction for the management team and Oaktree’s debt position being fully equitized. 

Today Oaktree holds 14% of the company’s equity.

Performance

The fund has only recently launched, so it does not have a track record. However, it intends to apply the same investment strategy as the Oaktree’s historic stable of Opportunities funds. 

The performance track record shown below captures both the Oaktree Opportunities funds from 1995 and the Special Credit Funds managed by Oaktree co-founders Bruce Karsh and Howard Marks under the same strategy between 1988 – 1995. 

Annualised returns (IRR after fees) on these funds have historically ranged from 7% to 47%, with an average of 15.7% per year since 1988 – past performance is not a guide to the future.

Despite being long-term, illiquid investments, the Oaktree funds have a good track record of making distributions to investors before the end of their 10-year life although this is not guaranteed. For instance, Oaktree Opportunities X, which launched in 2015, received capital commitments of $3.24 billion, $2.69 billion of which has been called. It has since returned $2.6 billion to investors, and has a balance of $1.6 billion, achieving a net IRR of 9.2%.

Oaktree Opportunities track record – net IRR %

Performance per $100 of contributed capital, by fund vintage

Tax treatment

There are no tax reliefs associated with this investment. 

S64 has confirmed that it will make the 2U Class of the access fund an approved reporting fund. This means for UK taxpayers, any realised gains from the fund should be subject to Capital Gains Tax. Any income generated by the fund (whether distributed or not) will, however, be subject to income tax. S64 will publish the amount of income earned within the fund within ten months of its annual reporting period. This should then be reported on your self-assessment return.

Any capital gains or income should be reported in your tax return.

Remember, tax rules can change and tax benefits depend on your circumstances.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. 

Distressed credit investments are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. 

This is a long-term, very illiquid investment and you should expect to remain invested for the life of the fund (10-15 years). The fund invests in companies or instruments denominated in currencies other than the fund’s currency, so is exposed to currency fluctuations.

The fund invests in unlisted investments, which can be difficult to price and value. Certain investments are valued based on estimated prices and therefore subject to potentially greater pricing uncertainties than listed securities.

Given the fund’s structure, investors will be subject to capital calls. Failure to meet these capital calls within five business days could be considered a default and may result in penalties including, but not limited to, interest rate of 10% on outstanding contributions and ultimately investors forfeiting their stake in the fund. Investors may also be subject to clawbacks on any distributions.

Before investing, you must be an elective professional client of Wealth Club. You must be able to understand the fund’s strategy, characteristics and liquidity profile. You must also be comfortable with the potential for periods of illiquidity.

Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

Charges 

A summary of the main charges for the fund is shown below: please note, any underlying investments may have additional charges. These will not be paid directly by you but will have an impact on returns. Wealth Club investors will invest using a nominee structure. 

This service is provided by Wealth Club’s subsidiary companies Wealth Club Asset Management Limited (authorised and regulated by the FCA) and Wealth Club Nominees Limited and is governed by the Terms and Conditions of the Wealth Club Services. Please refer to the Offer documents for more details on the charges.

Deadlines and how to apply

The fund is currently raising money for its third and final close. 

The fund is looking to raise a total of $18 billion. To date, the fund has raised more than $11bn in committed capital (March 2024). 

The fund will close when it reaches its target fundraise, which could be at any time and may be without warning.

Wealth Club will be running fortnightly closes. 

The minimum commitment is $150,000, of which 10% plus a $10 processing fee should be paid upfront. The initial subscription and future capital calls must be made in USD. We have partnered with Currencies Direct, enabling you to make payment at a competitive exchange rate and without bank routing fees. If you wish to use your own currency service, please contact us.

Before you invest, please read the Offer documentation carefully, including the Additional Declarations for the fund.

Our view

Oaktree Capital Management and its founder Howard Marks are amongst the most highly regarded distressed debt investors in the world. A track record stretching back 36 years covers a wide range of market conditions, and the manager’s Opportunities strategy has historically been able to deliver positive returns in all environments – past performance is no guide to the future and your capital is at risk, you may get back less than you invested.

The strategy has historically delivered its best returns at times of market stress, when other investors abandon the market, allowing Oaktree to snap up appealing investments at attractive valuations. Oaktree believes we may be looking at one of those times now – although of course there are no guarantees. 

Distressed debt is inherently risky and some investments will fail. However, for the most experienced investors willing and able to tolerate the higher level of risk, extended investment period with limited liquidity and high minimum investment, this could prove an opportune moment to consider adding a distressed debt investment to a portfolio.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.