Marks’s Oaktree Files for IPO to Join U.S.-Listed Buyout Rivals

June 18, 2011, 12:18 AM EDT By Gillian Wee

June 18 (Bloomberg) -- Oaktree Capital Management LP, the world’s largest distressed-debt investor, filed to sell shares in an initial public offering, following private-equity rival Apollo Global Management LLC which went public in March.

The firm, which hasn’t set a price range or the number of shares it will sell, registered for an IPO of $100 million. That is probably a placeholder to calculate filing fees, and the final amount may vary. Proceeds from the sale by Howard Marks’s firm will be used to buy interests from principals, employees and investors, Los Angeles-based Oaktree said yesterday in a filing with the U.S. Securities and Exchange Commission.

Oaktree, which managed more than $80 billion as of March 31, according to the filing, is pursuing an offering after mixed results from leveraged-buyout firms Blackstone Group LP, Apollo and KKR & Co. since going public. Oaktree raised about $1 billion in May 2007 when it sold a 15 percent stake on the private exchange run by Goldman Sachs Group Inc., a transaction valuing the company at $6.3 billion.

Oaktree was started in 1995 by Chairman Marks and six partners from Los Angeles-based investment firm TCW Group Inc. Marks, 65, a billionaire who owns about one-sixth of Oaktree, named the firm for the English translation of his Santa Barbara, California, weekend home, Las Encinitas.

The firm’s 17 distressed-debt funds averaged annual gains of 19 percent after fees for the past 22 years, about 7 percentage points better than its peers tracked by Boston-based consulting firm Cambridge Associates LLC.

Blackstone, Apollo

Blackstone, the world’s largest private-equity firm, garnered $4.1 billion in its 2007 IPO, a year before the failures of Bear Stearns Cos. and Lehman Brothers Holdings Inc. jolted financial markets. The shares have fallen 46 percent below their IPO price, even after gaining 18 percent year-to- date. Apollo has declined 16 percent from its March 29 offering that generated $565 million. KKR, which gained a U.S. listing in July 2010, has risen 48 percent in New York trading.

All three competitors are based in New York.

Opportunities for making money in distressed investing dwindled in the past few years as the economy improved.

“There are times when it is important to invest cautiously, and there are times when it’s important to invest aggressively,” Marks said in an interview before the filing. “A big part of the job is knowing where we are and choosing between those two. We believe that compared to one year, two years, maybe three years ago, this is the time to invest cautiously.”

Returning Cash

In January and April, Marks returned a total of $4.4 billion to investors in his $11 billion OCM Opportunities Fund VIIB, the largest distressed-debt pool in history. Oaktree had invested about $6 billion in the most senior debt of failing companies during the 15 weeks following Lehman Brothers’ bankruptcy in September 2008, generating a gross annual return of 31 percent for the fund since its inception.

About 40 percent of Oaktree’s assets are in distressed debt, 25 percent are in corporate bonds and 18 percent are devoted to so-called control investing, under which Oaktree takes ownership of firms by buying their debt or equity. Oaktree runs 16 strategies and has invested in troubled media company Tribune Co., movie-theater chain Regal Entertainment Group and CIT Group Inc., the small-business lender that came out of bankruptcy in December 2009.

Thirty-nine percent of the money Oaktree oversees comes from public pools led by pensions and sovereign-wealth funds, and 29 percent is from corporations. The firm’s other clients include endowments, foundations, insurance companies, wealthy individuals and mutual funds.

Goldman Sachs and Morgan Stanley are listed as the IPO underwriters. The shares will trade on the New York Stock Exchange under the ticker symbol OAK.

--Editors: Josh Friedman, Christian Baumgaertel

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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Buyout Firms Seek New Horizons

Bloomberg

By Cristina Alesci and Jason Kelly

Stephen A. Schwarzman, David M. Rubenstein, Henry R. Kravis, and George R. Roberts became billionaires by engineering leveraged buyouts. Now they're transforming their companies into asset managers that run everything from hedge funds to strip malls as fresh capital and takeover targets become scarce.

Schwarzman's Blackstone Group (BX), the biggest private equity firm, is earning twice as much from owning property, including office buildings in India and seniors communities in Oregon, as from buyouts. Kravis and Roberts's KKR (KKR) owns a stake in a 5,500-mile U.S. fuel pipeline and lends to distressed companies. "The large-cap leveraged buyout business has become mature," says Colin C. Blaydon, director of the Center for Private Equity & Entrepreneurship at Dartmouth College's Tuck School of Business. In the future, private equity firms will look "more like the large money-management enterprises, with a big emphasis on assets under management."

The firms have little choice if they want to grow. For one thing, the increase in the number of buyout funds—to 470 today from 60 in 1990—has made raising money harder. "As the business exploded, more and more people rushed into private equity, which made competition for money fierce," says Richard I. Beattie, chairman of law firm Simpson Thacher & Bartlett, who helped KKR with its $30 billion takeover of RJR Nabisco in 1989 and remains an adviser to many private equity firms.

Stock prices have doubled in a two-year rally, making takeover candidates more expensive. And while deal activity is increasing, private equity firms are encountering more competition from corporate buyers with lots of cash. Blackstone, which is raising a $15 billion fund, committed only $550 million to private equity deals in the first quarter.

Blackstone's largest investment in the last 12 months was the $9.4 billion deal to buy 593 U.S. shopping centers in 39 states from Australia's Centro Properties Group. It would be the largest cash purchase of real estate in the world since the collapse of Lehman Brothers in 2008, Schwarzman, 64, said during an April conference call with investors.

Co-founder Rubenstein has steered Washington-based Carlyle Group, ranked second by assets under management, into the fund-of-funds business by taking over AlpInvest, a Dutch company that spreads money for investors among buyout funds. Rubenstein, 61, also agreed to buy a majority stake in Claren Road Asset Management, a hedge fund that trades debt. "We're building new products and adding new geographies and people to give our clients more choice and asset-diversification options," he says.

KKR, created in 1976 by Kravis, Roberts, and Jerome Kohlberg, has ventured into underwriting stock and bond offerings, investing in infrastructure deals, making and buying loans, and, most recently, operating hedge funds.

Leon D. Black's Apollo Global Management, which completed a $565 million initial public offering in March, has been scouring European banks for what it calls "stranded assets," including $2 billion of nonperforming commercial loans, President Marc A. Spilker told investors on May 12. Another $240 million is earmarked for "longevity-based assets"—a bet on the value of life insurance policies Apollo is buying from banks.

These private equity managers are trying to boost returns by going where rivals can't because they lack the firepower, or by taking advantage of distressed sellers. "In virtually all recent transactions, Blackstone has faced limited competition due to the magnitude of capital required and the complexity of the transactions," Schwarzman told investors in April.

Even so, private equity firms may not find asset management and real estate as profitable as buyouts. Private equity firms typically collect a 1.5 percent to 2 percent fee on assets under management and incentive fees equal to 20 percent of any profit. While the new businesses may produce comparable management fees, they can offer little or no incentive fees.

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