After raising seven opportunistic real estate funds, Oaktree Capital Group has set its sights on another strategy: value-add real estate.
The Los Angeles-based private equity firm is planning to launch a value-add strategy this year, executives said on the fourth-quarter earnings call Tuesday. The move comes as the firm, and the private equity business in general, saw lower profit in the end of 2015 with market volatility hitting areas of the business outside private real estate.
On the earnings call, Oaktree executives cited investor demand as a primary driver for the new strategy. Limited partners who have invested in the firm’s opportunistic funds want to continue investing in real estate, even with lower anticipated returns in a value-add vehicle than the expected returns for opportunistic funds.
“One of the reasons we’re focused on value-add is that it’s very complementary to what we’re doing,” said Jay Wintrob, Oaktree’s chief executive officer, on the investor call. “It’s fair to say the market is significantly larger than the addressable market for opportunistic real estate. That’s one of the reasons we’re enthusiastic about this area.”
In the firm’s seven opportunistic funds, he said deals have come largely from banks and borrowers, rather than brokers. Wintrob anticipated that these relationships will continue to provide deals for the firm’s latest fund in the strategy, Oaktree Real Estate Opportunities Fund (REOF) VII. Aside from the upcoming value-add strategy, however, Oaktree is unlikely to expand into other real estate return strategies, chairman Howard Marks said.
“Value-add is still higher up the alpha trail than core-plus,” he said. “We are unlikely to get into any asset classes which are beta-oriented. We consider ourselves to be artisans who spend our time adding a lot of value to our investment activities. Real estate for us is a moderate-sized asset class with very, very good performance and modest risk, given that our strategy isn’t dependent on high leverage.”
The firm is still collecting commitments for REOF VII after holding a $1.3 billion first close in the second quarter of 2015. The opportunistic fund was launched in September 2014, according to filings with the US Securities and Exchange Commission, and has a $3 billion target. Oaktree began investing the vehicle’s capital last month and committed $2.1 billion as of December 31, according to the earnings report. Oaktree closed the investment period for its sixth fund in August. The vehicle was generating a 14.5 percent net internal rate of return and a 1.4x multiple as of year-end 2015.
Commitments for the seventh fund buoyed Oaktree’s real estate assets under management (AUM), which jumped to a record $9.1 billion as of December 31. Oaktree’s overall AUM were $97.4 billion, up 7 percent year-over-year and down 3 percent from the end of the third quarter.
The firm’s overall economic net income dropped to $49.6 million in the fourth quarter, down from $98.7 million in the same year-ago period.