Oaktree Capital Management, the Los Angeles-based private equity firm that went public on the New York Stock Exchange last month, has been deploying cash so quickly from its recently closed $1.3 billion real estate opportunity fund that it has decided to launch the next fund and seek even greater commitments.
In its first quarter results statement released yesterday, Oaktree said Oaktree Real Estate Opportunities Fund (ROF) V closed on $1.3 billion this year, but the vehicle already is 80 percent invested or committed with some three years left remaining on the investment period clock. The “rapid pace of investment” by ROF V and “relatively large supply of potential attractive investments” has led to a decision to launch the next real estate opportunity fund, Oaktree Real Estate Opportunities Fund (ROF) VI, with an initial capital target of more than $1.5 billion, it said.
Oaktree did not divulge any more detail in its filing about the speed with which it is deploying ROF V. However, on a call with analysts, chairman Howard Marks said: “We see good opportunities in commercial real estate and Europe, while distressed US deals are less abundant.”
Marks added on the call that Oaktree is expected to hold a first close of its new fund in the summer and to begin investing almost immediately. The firm said it was confident it could raise $1.5 billion and would be delighted to reach between $2 billion and $2.5 billion.
Also contained in Oaktree’s financial results is a revealing performance chart of existing funds, including all its real estate vehicles. Its very first real estate fund, TCW Special Credits Fund VI, which raised $506 million in 1994, appears to be its best-ever property fund, showing a net IRR of 17.4 percent. The fund was managed by investment professionals employed by the Trust Company of the West prior to Oaktree being founded in 1995. When the team joined Oaktree, it continued to manage the TCW fund to the end of its term.
Subsequent Oaktree real estate opportunity funds from 1996 to 2011 that have reached the end of their investment periods – including Oaktree Real Estate Opportunities Fund IV – are showing net IRRs ranging between 6.7 percent and 12.1 percent. The data shows that the best returning fund in the 2000s so far has been Oaktree Real Estate Opportunities Fund III, which is showing a return of 2x investors’ money. That fund raised $707 million with the investment period beginning in September 2002 and ending September 2005.
ROF III was raised when former head of real estate Russ Bernard was in charge, before he and several other members of the team left in November 2005 to start Westport Capital Partners. That departure led to a court case brought by Bernard over alleged loss of fees, a ruling Oaktree eventually won.
The subsequent fund that Oaktree raised under new head of real estate John Brady is Oaktree Real Estate Opportunities Fund IV, a $450 million fund whose investment period began in December 2007 and ended in December 2011. That fund currently is showing a return of 1.4x money (a 10.1 percent net IRR).
Oaktree’s statement said that, overall, management fees at the firm across all business lines had benefited from closed-end funds started since March 2011 for the distressed debt and real estate space, as well as European principal investment strategies. Management fees produced fee-related earnings of $80.3 million, which together with net incentive income and receipts of investment income drove the quarter’s distributable earnings of $137.3 million.
Marks said: “Our diverse investment strategies and the large proportion of our assets that consists of liquid securities enabled us to capitalize on opportunities both to invest, as we did in real estate, and to sell in strong markets, as our distressed debt funds did.”
Assets under management were $77.9 billion as of March 31 as compared with $74.9 billion as of December 31, 2011 and $85.7 billion as of March 31, 2011. The $3 billion increase during the first quarter of 2012 was mainly down to a $3.7 billion gain in aggregate market values and $1.7 billion in new capital commitments to closed-end funds, which more than offset $2.6 billion of distributions to investors in closed-end funds, said the company.