Oaktree Capital moves into leveraged buyout lending with $10bn fund

Oaktree Capital is seeking to raise $10bn for a new fund that will help finance large private equity takeovers, taking advantage of a void on Wall Street as other lenders are sidelined.

The credit investment manager co-founded by Howard Marks expects to offer loans of about $500mn or more to leveraged buyout groups, money they will use to fund corporate acquisitions, according to a letter to Oaktree clients seen by the Financial Times.

The fund launch comes when most major Wall Street banks are dramatically reducing the size and number of new loans they are willing to write to private equity firms, as stubborn inflation and sharply higher interest rates hit credit markets.

Oaktree plans to raise and invest the $10bn within the next two years, underscoring the opportunity the group believes exists in private credit, which has ballooned in size over the past half decade.

The push will also put Oaktree more squarely in competition with large private credit investors such as Apollo Global Management, Sixth Street Partners, HPS Investment Partners and Blackstone.

While Oaktree regularly interacts with these heavyweights elsewhere in credit investment, it has shied away from writing large direct loans to private equity-backed businesses — such as the $2.3bn financing led by Sixth Street for Maxar Technologies — in recent years under the belief that competition had driven down returns.

“The leverage employed in these deals spiked to pre-2008 levels, and loan covenants providing lender protection mostly disappeared,” Marks wrote in the letter to clients with Oaktree managing director Tony Harrington.

The pair said they now believed the opportunity in large-scale direct lending was “exceptional”, particularly as some of the Oaktree’s biggest rivals have pulled back from writing mammoth loans after putting billions of dollars to work over the past two years. Investors have pointed to Bcred, a Blackstone-managed private credit investment fund, as among those to curtail the pace of lending after previously providing LBO loans worth $1bn or more.

The new fund — known as Oaktree Lending Partners — could ultimately invest $20bn in sponsor-backed debt if it taps loans from banks. Oaktree and the asset manager Brookfield, which owns a majority stake in Oaktree, will invest $2bn in the new fund.

“While the need for this type of lending is enormous, we believe the competition to lend is limited,” Marks and Harrington wrote. “Moreover, we believe many are facing legacy portfolio issues because they aggressively deployed capital in sponsor-backed loans between 2019 and 2021, a period when heightened competition caused financing for leveraged buyouts to become increasingly borrower friendly, to the detriment of lenders.”

Banks on Wall Street have also pulled back from financing new deals, with leveraged loan issuance down precipitously. The market has long been one of the main sources of financing for private equity firms as they attempt to fund takeovers.

New leveraged loan issuance in the US is down 88 per cent this year from a year ago to $9bn, the lowest level in more than a decade, according to PitchBook LCD. And while high-yield bond sales are up, investors warn the market is all but closed for lower-rated groups.

Big lenders such as Barclays and Bank of America have been stuck holding loans that they initially intended to sell. Those deals, including loans to software maker Citrix, telecoms company Brightspeed and auto-parts maker Tenneco, have limited their ability to provide new debt.

That has intensified the appeal of private credit providers such as Apollo and Ares, which generally intend to hold private loans for years, not months, as is the case for banks offering bridge financings.

Private credit groups are now banding together to assemble a $5.5bn direct loan to fund Carlyle’s purchase of a stake in Cotiviti, the largest private loan ever contemplated, according to four people with knowledge of the deal. Competition among direct lenders has already led the deal to become oversubscribed.

If Oaktree hits or exceeds the $10bn fundraising target, it will rank among the largest US direct lending funds ever raised, close to vehicles by HPS and the investment management arm of Goldman Sachs, according to Preqin data.