With its latest real estate fund nearing a first close and its predecessor vehicle almost entirely invested, Oaktree Capital Management views real estate as the most robust of its businesses in terms of deploying capital.
“Pound for pound, the deal flow is the strongest in real estate,” said Howard Marks, Oaktree’s chairman, during a call today announcing its first earnings as a public company. While the firm’s real estate funds are smaller in size relative to its other funds, “the process of putting the money to work goes extremely well,” he added
For example, the Los Angeles-based investment manager – whose other closed-ended funds include those targeting distressed debt, principal investments, power opportunities and mezzanine finance – launched its current real estate fund, Oaktree Real Estate Opportunities Fund (ROF) VI, during the second quarter. That is just 18 months after the start of fundraising for its $1.3 billion predecessor, ROF V, which began investing in March 2011 and now has committed almost all of its capital.
The pace of investment for ROF V “was unusual for us,” Marks added. “Usually, the process is you raise the money, and then you invest it. ROF V was largely invested with each closing.”
Managing principal John Frank, who also participated in the call, said he expects Oaktree to hold a first close for ROF VI, which has a capital target of more than $1.5 billion, late next month, and for fundraising to continue into next year.
Marks said ROF VI will adopt a similar investment strategy to its predecessor, with the possible difference that the firm will be less active in the residential real estate market. “We made several investments in the last two to three years on a resumption of homebuilding activity,” ranging from buying land for residential construction and purchasing nonperforming residential loans to acquiring Taylor Morrison, the largest private homebuilder in North America, he noted. “That was an unusual, substantial contrarian opportunity.”
However, the current opportunity in residential is much less, given the general consensus that a housing recovery now is underway. “I always say that we like to make investments when everybody says, ‘No way,’ and then we eventually sell them when everybody says, ‘No sweat.’ Well, they’re not saying ‘No way’ anymore,” Marks said.
While Oaktree expects to be less focused on the residential market for ROF VI, Marks anticipated the fund would be investing heavily in commercial real estate, particularly rescue financing. “One of the great advantages that we have is that the ROF funds are small enough to be able to benefit from moderate-sized investments,” he said. However, with backing from its distressed debt or principal investments funds in a secondary or tertiary position, “we also can do very big deals and write very big cheques. Rescue financing is still needed in the real estate industry, and we’re attracted to that.”
Oaktree, which went public in April, reported economic net income of $103.6 million during the second quarter, up from $98 million during the same period one year ago. Assets under management (AUM) as of June 30 were $78.7 billion, of which $66.3 billion was fee-generating AUM. Overall AUM declined from $79.5 billion at the end of the second quarter 2011, but fee-earning AUM rose $2.4 billion from the same period one year ago, primarily as a result of $7.4 billion in capital commitments to new closed-ended funds, including ROF V, which brought in $800 million of additional capital during the second quarter.