“Post Lehman there was too much to do and now there is again,” Marks said Tuesday, referring to the financial crisis that followed the collapse of the investment bank in September 2008. “For the credit investor we have our first opportunities in several years. It’s been a long, long time."
?After Lehman’s bankruptcy, Oaktree deployed billions of dollars in distressed debt, reaping a handy profit. Its Opportunities Fund VII, which did the bulk of the investing, has so far distributed $22 billion to clients on $13.5 billion of drawn capital, according to its recent third-quarter earnings statement.
Oaktree’s top executives, including Marks and co-Chairman Bruce Karsh, had bemoaned a dearth of distressed-investment opportunities since at least 2013, when the Standard & Poor’s 500 index was still in the middle of a four-year run-up. That changed in August, when investor concern that China’s economic growth was slowing quicker than expected sparked a selloff in stocks and high-yield bonds. Energy companies have been hit particularly hard as oil prices continue to slide.
“What you saw in the third quarter of this year could well be a harbinger of things to come in the next year or two,” Karsh said in October. “We’re in the later stages of this credit cycle. We saw the psychology beginning to really roll over and change and people starting to get fearful. We started to see a lot of cracks.”
Private equity firms have had little trouble raising capital for energy sector acquisitions not least because it represents one of the few sectors trading at depressed valuations. With a dearth of truly high yield opportunities, investors have little choice but to look at energy and this is exacerbated by the availability of liquidity in an ultra-low interest rate environment.
The wall of money ready to invest in troubled energy assets may be delaying the necessary rationalisation process that has to happen as expensive debt taken out at high commodity prices is replaced by investors buying at lower prices. The fact OPEC is doubling down on its bid to pressure marginal supply is a reflection of their impatience with the resilience of North American supply in a comparatively low price environment.
For private equity investors there is interesting commonality between the performance of high yield bonds and listed private equity companies.
The iShares iBoxx High Yield Corporate Bond Fund (HYG) is testing its lows but a clear upward dynamic will be required to signal more than temporary support in this area.
Oaktree Capital Group, Carlyle Group and Apollo Global Management are also testing their respective lows.
This commonality suggests investors may have to wait until after investments have been made at distressed levels and begin to perform before private equity stock investors reap the benefits.