No distress? No problem; capital won't be called until investment cycle improves
Investors are managing the risks of private credit investment — including the big risk that the expected distressed credit cycle doesn't materialize — by investing with credit managers that offer fund strategies in which some capital isn't spent if there is no distress.
Oaktree Capital Management LP, Los Angeles, was one of the first to offer such a fund structure. Centerbridge Partners LP, New York, is now raising two funds with a combined target of $5 billion for such a “plan B” strategy.
In April, the Oregon Investment Council, Tigard, which runs the $68 billion Oregon Public Employees Retirement Fund, Salem, committed $500 million for two private credit funds — Centerbridge Special Credit Partners III and Centerbridge Special Credit Partners III-Flex. The funds would make non-control investments in distressed senior loans and high-yield bonds issued by middle- and large-market companies in North America and Europe.
The capital in the reserve fund, Fund III-Flex, will not be called and no management fees will be charged until Centerbridge executives determine there is a “robust credit cycle,” said an Oregon Investment Council staff memo.
The staff memo discussed the risks of the investment, which included that distressed credit performs best in a difficult credit environment and that Centerbridge's strategy is more tactical and “cycle reliant” than other strategies. Indeed, the returns of Centerbridge's previous fund, Centerbridge Special Credit Partners II, are lower than the firm's earlier track record — basically break-even since inception of the fund, the memo said. The staff attributed the lower returns to an atypical investment environment during the fund's investment period of mid-2012 to mid-2015, concluding that the tactical investment strategy of Fund III is “compelling.”
