Oaktree hunting China distress, Asia JVs
Oaktree Capital’s co-chairman, Howard Marks, sees more opportunities for distressed debt investors today than a year ago and has a close eye on assets in China. He also wants to raise more money through the mainland’s qualified domestic limited partner (QDLP) scheme and would like to agree more tie-ups in Asia generally.
“We’re beginning to get interested in distressed debt in China,” said Marks, but wants to see more clarity around how creditor rights will be resolved. “That will decide how interested we can be in that market.”
He expects that to become clearer in the next few years, as the number of defaults is likely to rise in China. “A lot of lending was done, a lot of building was done, and we all know that a lot of buildings were built that are not occupied. It’s hard to get money out of an unoccupied building, and some of those will default.”
Oaktree made its first distressed investment in China in May this year – a Rmb1 billion portfolio of non-performing loans – as part of a joint venture with Shoreline Capital Management.
However, Oaktree has yet to make an investment as part of its $1 billion JV with China Cinda Asset Management, set up in November 2013. “We’ve been actively looking, but we have to find a situation,” said Marks. “Our mantra is that a good company with a bad balance sheet is easier to fix than a bad company. We have to find a good company with a bad balance sheet.”
Meanwhile, Oaktree is seeing traction in China in terms of fund raising. The firm’s US- and Europe-focused Opportunities Fund X – for which fundraising is almost complete – includes Rmb1 billion ($157 million) brought in via the QDLP scheme. The scheme permits qualified domestic private funds to raise money from wealthy Chinese in renminbi for investment offshore.
Oaktree set up the Shanghai Oaktree Overseas Investment Fund for QDLP funds and sourced investors via three distributors – CreditEase Wealth Management, Harvest Capital Management and Noah Holdings.
Oaktree is the fifth of the first batch of six managers under QDLP to use up its entire initial quota of $50 million. The firm aims to raise more money via the scheme and launch more strategies, said Marks. He is also keen on entering other joint-venture partnerships in China and elsewhere in Asia.
Meanwhile, distress is on the rise today globally from a low base, said Marks. “The opportunities in the next year will be better than opportunities in the last year”, he added, citing more global opportunities in oil and gas, oil services, extractive industries and dry bulk shipping.
“It’s not like there are no opportunities” for distressed investors, noted Marks. “It’s just that they are rifle shots. The challenge today is that because there are these few rifle shots – rather than a plethora of distressed opportunities – you can’t put together a broadly diversified portfolio.”
In addition to Fund X, Oaktree is also raising money for its Opportunities Fund X-B. This strategy is being raised “on a standby basis”, noted Marks, with the view that in two to three years much better opportunities will become available. It will be the second largest fund Oaktree has ever raised and, at $7 billion, more than double the size of the $3-plus billion Fund X.
X-B will not be invested until either Fund X is tapped out or the environment of opportunities improves, said Marks.