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Oaktree Capital Chairman Howard Marks has firm looking to invest in Europe

By Gillian Wee,June 25, 2011

Howard Marks was failing miserably. It was 1977, and the research group he oversaw at Citibank had recommended Nifty 50 stocks that lost 90 percent of their value over the previous decade.

Peter Vermilye, Citibank’s chief investment officer, gave Marks an option: He could quit research and start a fund focusing on convertible bonds, a niche where neither the New York bank nor Marks had any experience. He jumped at the chance.

“It changed my life,” says Marks, wearing light-brown tortoise-shell glasses and spiky, sandy-colored hair. “If he hadn’t pushed me out of the research job, where would I be today?”

Marks, 65, is chairman of Oaktree Capital Management, the biggest distressed-debt investor in the world. Oaktree oversees more than $80 billion for pension funds from Massachusetts to Florida and the world’s biggest sovereign-wealth funds, such as China Investment Corp. Oaktree’s 17 distressed-debt funds have averaged annual gains of 19 percent after fees for the past 22 years — about 7 percentage points better than its peers tracked by Boston-based consulting firm Cambridge Associates.

Now Oaktree is planning to list shares on the New York Stock Exchange. The company registered for an IPO of $100 million, without setting a price range or the number of shares it aims to sell. In May 2007, Oaktree raised about $1 billion, selling a 15 percent stake on a private Goldman Sachs exchange open to sophisticated investors. The transaction valued the whole company at $6.3 billion.

From his downtown Los Angeles office, which has a view of the iconic Hollywood sign, Marks says his strategy is to find bargains such as troubled media company Tribune Co., movie theater chain Regal Entertainment and CIT Group, the small-business lender that emerged from bankruptcy in 2009.

“We don’t expect to be able to hit the bottom,” Marks says. “All we care about is that we’re buying cheap. If it gets cheaper, we buy more. Eventually, it’ll work out — so long as we are right.”

Marks has built his career on choosing bargains correctly, investors say.

“The secret is having the capital and courage when things look pretty gloomy to say, ‘This will work,’ ” says George Siguler, whose New York-based Siguler Guff manages about $10 billion in private equity and distressed debt, including investments in Oaktree. “They raise much bigger funds when they see the timing or opportunity is great and much smaller funds at other times. It’s a discipline not everybody has.”

Once Marks takes Oaktree public, it may be harder for him to maintain that self-control, Oaktree investor James Hoover says. “There are inherent conflicts of interest when an investment firm goes public,” says Hoover, founder of Dauphin Capital Partners and chief investment officer of Elizabethtown College in Pennsylvania.

“To appease shareholders of the company, you’re going to expand the product offerings. You might be less discriminating about the size of the funds. The bigger the size, the more fees are paid.”

The IPO fizzle

Private-equity stocks have a mixed record on the NYSE, too. Blackstone Group, the world’s largest private-equity firm, went public in 2007, shortly before the global financial crisis, raising $4.1 billion. Its shares remained 46 percent below its IPO price, even after gaining 18 percent year-to-date. Apollo Global Management fell 16 percent from its March 29 offering, which raised $565 million.

The exception is KKR, which went public in July 2010 and rose 48 percent in New York trading. Marks declined to comment on news reports in May that valued Oaktree, of which he owns about one-sixth, at $8 billion to $9 billion.

The IPO comes as opportunities for making money in distressed investing are scarcer than they were a few years ago. In January and April, Marks returned a total of $4.4 billion to investors in his $11 billion OCM Opportunities Fund VIIB — the biggest distressed-debt fund in history.

Oaktree had raised money for the fund in May 2008 and invested about $6 billion of it in the most senior debt of failing companies during the 15 weeks following Lehman Brothers Holdings’s bankruptcy in September. Oaktree paid roughly 50 cents on the dollar for the debt and generated a gross annual return of 31 percent for the fund since its inception. Marks and Oaktree partner Bruce Karsh declined to name the companies whose debt the fund bought.

In April, Marks finished raising about $2.6 billion for his newest distressed fund, which is 76 percent smaller than Opportunities Fund VIIB.