When it comes to alternative investments, Oaktree Capital Management remains the most bullish about deploying capital in real estate. “This is the opportunity we’re most excited about in the marketplace,” said John Frank, the firm’s managing principal, during an analyst call yesterday. “We see very substantial opportunities in all areas of real estate.”
To put this in perspective, Frank said that, while Oaktree’s private equity business was focused mostly on realisations during the third quarter, “in real estate, we’re investing away.” Along with senior loans, real estate is an asset class where the firm is looking “to grow its investment footprint significantly.”
As part of this investment drive, Oaktree has begun marketing a new real estate debt fund that primarily will target performing commercial mortgage-backed securities, first mortgages, junior secured debt, unsecured debt and mezzanine debt. The firm currently is finalising a $100 million commitment to the strategy and has just started to market the fund to other clients, said Frank. He did not provide additional details on the vehicle, such as its name and capital-raising target.
Frank called the fund “a natural successor” to Oaktree PPIP Fund, which the firm launched in 2009 as part of the US Treasury’s Legacy Securities Public-Private Investment Program (PPIP) to buy toxic securities from banks. Of the nine fund managers selected to participate in PPIP, Oaktree generated the highest internal rate of return with its fund, with an annual gross return of about 27 percent as of 30 September, he noted.
Additionally, Oaktree held a first close on its latest real estate opportunity fund, Oaktree Real Estate Opportunities Fund (ROF) VI, during the third quarter, with committed capital of $255 million. ROF VI, which began investing in September, is expected to reach its target of $1.5 billion in commitments by the time fundraising concludes next year.
There’s a “breadth and depth of distressed opportunities across the real estate sector,” Frank said. “Overleveraged properties from the last real estate cycle continue to build a deal pipeline in commercial, residential and bank loan portfolios, both in the US and Europe.”
Indeed, Oaktree has been executing transactions in all areas of real estate, including residential, land, industrial and offices, as well as nonperforming loan portfolios, and found attractive opportunities providing capital to buyers with assets that are overleveraged or otherwise underwater. The firm has been acquiring properties at 40 percent discounts to peak values and loan pools at 50 percent discounts to peak principal balances.
Oaktree’s real estate funds held nearly $2.1 billion in fee-earning assets under management as of 30 September, according to the firm's third-quarter earnings report. The funds had an average gross IRR of 15.3 percent and a net return of 11.9 percent.
Overall, the firm reported adjusted net income (ANI) of $157.7 million during the third quarter, a sharp increase from ANI of $3.3 million during the third quarter of 2011. Assets under management were $81 billion as of 30 September, of which $66.2 billion was fee earning – up from $73 billion and $63.4 billion, respectively.