After growing at a rapid clip during its first year, Oaktree Capital Management L.L.C. is pausing to establish the staff and products.
The firm will finish fund-raising on two investment funds and cross-selling its high-yield bond product to clients while it consolidates the gains it made in its first year in operation.
Oaktree has racked up $6 billion in assets, including a $2.5 billion subadvisory assignment from Trust Co. of the West, Los Angeles. The firm was one of the few new managers hired by the State of Connecticut Trust Funds in its recent restructuring; it received two $200 million allocations: one for convertible bonds and one for high-yield bonds.
The firm also has expanded to a staff of nearly 70 people, including an international convertibles team based in New York. The five original owners have been joined by 13 other owners, and that number will grow over time, said Howard S. Marks, chairman.
The Los Angeles firm opened April 10, 1995, after the founding principals left TCW and its money management arm, TCW Asset Management Co. Mr. Marks was TCW Asset's president at the time; the others - Bruce A. Karsh, Sheldon M. Stone, Richard Masson and Larry W. Keele - were managing directors.
Oaktree offers six different product lines: high-yield bonds, convertible securities, international convertibles, distressed debt, real estate and principal activities, a type of private equity strategy.
Oaktree also manages $2.5 billion as a subadviser to the TCW Special Credits Funds, the distressed debt funds the Oaktree team had managed while at TCW. That arrangement goes on through the life of the funds, and should last until 2001 or 2002 as the funds mature, said Mr. Marks.
In the meantime, Oaktree is raising new funds under its own name. Its OCM Principal Opportunities Fund, a hybrid private equity-distressed debt fund, should have its first closing in May and a final closing by or September.
The fund is about halfway to its target of $450 million to $550 million, said Mr. Marks. The Rhode Island Retirement Systems, Providence, and Los Angeles City Employees' Retirement System are among the investors.
Another fund, the OCM Real Estate Opportunity Fund, also is expected to have its first closing in May and a final closing by September. That fund will invest in distressed mortgages, real estate equity and securities of real estate companies.
The firm has a risk-averse orientation, said Mr. Marks. He explained Oaktree's investment process relies on extensive internally generated research and microeconomic analysis and refuses to make forecasts regarding interest rates, markets or the economy.
Oaktree seeks to exploit market inefficiencies through its research and takes an almost contrarian view of investing in asset classes nobody else is thinking about, said Mr. Marks. The international convertibles product, which now has $125 million in assets, is a typical example of Oaktree's approach. That asset class has no history, no benchmarks and no databases available, "the hallmarks of an inefficient market," according to Mr. Marks.
In its high yield product, it only invests in B-rated securities, with a small component of BB-rated debt, and all the companies it invests in have to be solvent, North American companies with a near-certainty of paying their bonds.
"Under our definition, it (high yield) is true fixed income," said Mr. Marks. That contrasts with other high-yield managers, whose portfolios more closely resemble distressed-debt portfolios, and are classified as alternative investments, he said.
The product line is sufficient for now, said Mr. Marks. If Oaktree does add products later, they will be spinoffs of its existing product lines and would have to match the firm's orientation towards inefficient market niches, he said.
Starting out, Oaktree had an advantage in that its principals had all worked together for years, as well as with the clients who followed, said Mr. Marks. He noted he had worked with the other four original owners for more than 10 years and the average length of the relationship between clients and the managers was around six to seven years.
Oaktree's clients are large, sophisticated institutions and nearly 97% of them were TCW clients who followed the team to the new firm.
So far, Oaktree is concentrating its marketing on cross-selling to existing clients and may try to go after new clients in 1997, said Mr. Marks. It has signed up new clients this year, mainly through word of mouth and answering search questionnaires, but it has not done any new client marketing.
Mr. Marks said the firm has been approached by mutual fund companies for subadvisory assignments but they probably won't pursue them, because the firm wants to concentrate on a smaller, more manageable client base. The two asset generation priorities this year are to raise the funds and "go to the existing clients and convince them high yield is a good idea," he said.
"The current clientele and current product base gives us critical mass to achieve the objectives we have and critical mass to support existing staff," said Mr. Marks. "We haven't had to cut any corners for economic reasons."