Oaktree Capital Management, LLC

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Oaktree Capital Management, LLC

333 South Grand Avenue, 28th Floor
Los Angeles, California 90071
U.S.A.
Telephone: (213) 830-6300
Fax: (213) 830-6393
Web site: http://www.oaktreecapital.com

Private Company
Incorporated: 1995
Employees: 290
Total Assets: $26.86 billion (2004)
NAIC: 523920 Portfolio Management; 523930 Investment Advice; 523999 Miscellaneous Financial Investment Activities

Oaktree Capital Management, LLC is an investment firm specializing in acquiring the bad debt of financially ailing companies. Oaktree Capital, with nearly $27 billion in assets, has offices in Los Angeles, New York, Tokyo, London, Singapore, and Frankfurt.

Origins

Oaktree Capital was started by a financial analyst whom American Banker, in its April 26, 2002 issue, described as "a force in the graveyard of capitalism." Howard S. Marks, who helped pioneer a new angle of attack in the investment community, earned his reputation by pursuing what others retreated from, becoming one of the kings of high-risk, high-yield investments. Marks grew up in the New York borough of Queens in the middle-class neighborhood of Forest Hills. The son of an accountant, Marks followed in his father's footsteps, earning his degree in accounting from The Wharton School at the University of Pennsylvania. After earning an M.B.A. in accounting and marketing from the University of Chicago, Marks accepted a position as an equity analyst at Citibank, beginning his professional career in 1969.

Marks distinguished himself at Citibank, helping to steer the massive financial institution in a new direction. Within a decade, he rose from his entry position as an equity analyst to become the director of equity research. Marks had earned the promotion to director by 1978, a year that marked a turning point in his career. In an interview with American Banker on April 26, 2002, Marks explained what happened, describing the pivotal event that opened a new area of business for Citibank and determined the direction his career would take for decades to follow. "Around September," Marks said, "the bank was approached about running a high-yield bond mutual fund. Remember, this was twenty-four years ago and nobody had heard of the junk bond world—then only $2.5 billion of the total." Marks continued: "They said to me, 'There's something called high-yield bonds and the leading figure is some guy named Milken at a small brokerage firm in Los Angeles—would you take it on?' Of course I did," Marks responded. "And that was a lucky moment for me."

Michael Milken, through his exploitation of the junk bond market, became one of the dominant symbols of 1980s-style capitalism. Although Marks garnered less attention than Milken, he was involved in the earliest days of the junk bond market, registering considerable success alongside his Wharton alum, Milken. Marks headed Citibank's involvement in the junk bond market, leading the New York City-based operation even after Citibank allowed him to relocate to Los Angeles in 1980. He found the move to be beneficial from a professional standpoint, explaining in his interview with American Banker, "Many times we view New York as being preoccupied with what's going on in the financial markets at the moment, making it easy to not see the whole picture. In California, we're stepped back a bit, and I believe that gives us more perspective."

Marks found a lasting home in Southern California, but not as a Citibank executive. He left the company in 1985, frustrated that the amount of money he brought into Citibank from the junk bond market, which had developed into a $100 billion market the year he left, was not proportionate to his salary. He joined a Los Angeles institutional money manager named Trust Company of the West (TCW) Group, becoming the chief investment officer for the company's distressed debt and president of its subsidiary, TCW Asset Management Co. Marks continued to excel at TCW during the late 1980s and early 1990s—a period that saw his colleague Milken indicted and imprisoned—but he experienced the same sort of frustration at TCW as he had experienced at Citibank. In an April 26, 2002 interview with American Banker, one of Marks's colleagues explained what happened. "He (Marks) told me that for every dollar his group brought in, they were only allowed to keep 20 cents because they (TCW's senior management) were subsidizing the nonprofitable business at TCW. Howard was in line to be president of TCW, but he left and took everyone in his group with him because he wanted more control over his destiny."

Former TCW Executives Gathering in 1995

Marks left TCW in 1995 determined to end the problems associated with an employer-employee relationship. He founded Oaktree Capital in April, starting the company with six other executives, all of whom worked for TCW. Marks took the title of chairman at the newly formed Oaktree Capital, heading a distinguished investment team that produced a level of success that surprised Marks and the six other principal partners. Joining Marks from TCW was Bruce A. Karsh, who was appointed Oaktree Capital's president. Karsh, a graduate of the University of Virginia School of Law, was a managing director at TCW and the portfolio manager of the TCW Special Credits Funds. Karsh was credited with developing the investment approach and strategies used in TCW's distressed debt investments, possessing skills that made him the natural leader of Oaktree Capital's distressed debt effort. Oaktree Capital's investments in real estate were headed by Russell S. Bernard, a Cornell University graduate who attracted the attention of TCW executives in 1993. Bernard, who started his real estate career in 1983, managed a diversified portfolio of properties located in 40 states by the early 1990s, when he began working with members of TCW's distressed debt team to explore possible joint investments. The collaboration led to Bernard's move from Win Properties, where he served as a partner and vice-president, to TCW in 1994. In his brief stay at TCW, Bernard assembled a staff of real estate professionals, all of whom left with Bernard in 1995 to join Oaktree Capital.

The other members of the founding team added new areas of expertise and strengthened Oaktree Capital's capabilities in its main line of business, distressed debt investments. Richard Masson, a managing director at TCW and co-leader of the company's distressed debt effort, became the head of Oaktree Capital's analytical team, a team responsible for evaluating prospective investments and determining company valuation. Stephen A. Kaplan, who had helped establish TCW's principal investment strategy, took on similar responsibilities at Oaktree Capital, spearheading the firm's investments that required it to assume managerial control over a particular company. Rounding out the group of seven cofounders were Larry W. Keele and Sheldon M. Stone. Keele, who was in charge of TCW's convertible value portfolios, became the head of Oaktree Capital's convertible securities management. Stone, who directed Oak-tree Capital's high-yield bond management group, worked with Marks at Citibank, where he performed credit analysis and managed high-yield bond portfolios. When Marks left Citibank for TCW, Stone followed, and the pair established TCW's high-yield bond department, which Stone led for the ensuing decade.

The brain drain suffered by TCW because of Oaktree Capital's formation was substantial, but the loss suffered by the institutional money manager ran deeper. Within three months of Oaktree Capital's formation, more than 30 TCW clients transferred $1.5 billion in assets to Oaktree Capital. The chief investment officer for one of the clients in the initial group that switched from TCW to Oaktree Capital offered his reason for transferring to the Marks-led firm in the April 26, 2002 American Banker article on Oaktree Capital. "It was the team with whom we were investing," the Pennsylvania State Employees Retirement System's Peter Gilbert said. "Howard has the ability to make money from specialized market niches and he knows how to attract and retain very good people." Publicly, TCW officials expressed their displeasure at their loss of business and personnel, but behind the scenes they struck a deal with Oaktree Capital to avoid a complete loss. TCW contracted with Oaktree to manage and to liquidate roughly $2.6 billion in assets that Karsh and Masson had managed.

Company Perspectives:

The mission of Oaktree Capital Management, LLC is to provide highly professional, risk-averse management in a small number of sophisticated investment specialties. Oaktree is a firm involved exclusively in inefficient markets and alternative investments, and among such firms it has a solid track record, a broad product range and substantial assets under management. We are dedicated to the achievement of consistent and superior performance without accepting high risk. Our ultimate objective is investment success, the fruits of which are shared by all of Oaktree's clients and personnel.

Oaktree Capital set out with a considerable jump-start over other start-up investment companies. With the talent and assets drawn from TCW, Marks's company became a discernible force in the national investment community shortly after its formation. Within five years, Oaktree Capital came to dominate its market niche, excelling in executing the strategy formulated by Marks and his six other cofounders. From 1995 forward, Marks eschewed investing in companies that required more than a modicum of hands-on management. Oaktree Capital, through the guidance of Marks, favored companies that possessed tangible assets, setting its sights on manufacturers, retailers, and companies involved in industries such as trucking. Investing in companies whose assets consisted largely of real estate became a favorite target of Oaktree Capital. Marks focused on companies with a solid business plan, and then swooped in when the otherwise sound companies ran aground because they had incurred too much debt by overpaying for an acquisition or had faltered financially because of overly ambitious expansion. Both of these scenarios involved the outlay of capital that companies generally did not have in their coffers. They took on debt when completing an acquisition or financing an expansion plan and sometimes suffered serious consequences. A lack of cash flow or, ultimately, bankruptcy resulted from the mistakes made in pursuing growth. When the originators of the debt incurred by the troubled company started looking for an exit strategy, their anxiety piqued to the point where they were willing to accept pennies on the dollar for their debt, Oaktree Capital started looking for an entry strategy. Most fled from financial disaster, cutting their ties from corporate rot, but the misfortune of others was the fortune of Marks, "one of the biggest vulture investors," as described in the April 26, 2002 issue of American Banker.

Oaktree Capital invested in a number of different companies during its first decade of business. One of the first investments was the acquisition of the Mountain High Ski Resort in Wrightwood, California, a 90-minute drive from Los Angeles. Marks acquired the ski resort from an Orange County businessman named Terry Tognazzini, and began wooing snow-boarders. For years, Mountain High derived roughly 90 percent of its business from skiers, but under Oaktree Capital's management snowboarders accounted for 80 percent of the resort's business, which quadrupled the number of visitors during the first half of the 2000s. Oaktree Capital sold the resort in 2005, executing its strategy of improving an asset's balance sheet and then selling the business for a substantial profit.

Oaktree Capital and the Movie Theater Business
in the 2000s

Oaktree Capital's most notable investments in the new millennium involved its pursuit of cinema operators. The largest of the national chains were in poor financial health during the early years of the decade, racking up debilitating debt from overly rapid expansion. Oaktree Capital, in separate partnerships with Denver billionaire Phillip Anschutz and a Canadian investment firm named Onex Corp., bailed out several large movie-theater chains, gaining equity positions at an attractive price. At the beginning of 2001, Oaktree Capital began delving into the movie-theater business, acquiring, along with Anschutz, 35 percent of the bank loans belonging to beleaguered Regal Cinemas Inc., operator of the largest chain in the United States. Before the end of the year, Marks and his team furthered their position in the movie-theater business, pairing with Onex to take control of Loews Cineplex Entertainment Corp., which filed for bankruptcy in February 2001, and bankrupt GC Companies Inc., the owner of General Cinema Theatres Inc., a 73-theater chain operating in 20 states. Oaktree Capital also took control of smaller movie-theater assets, acquiring Silver Cinemas Inc., a discount movie-theater chain that also owned Landmark Theatre Corp., the largest art-house chain in the United States. After acquiring bankrupt Silver Cinemas in mid-2001, the company teamed with Onex again in August 2002 to acquire Cinemex, a Mexico-based movie-theater chain.

As Oaktree Capital completed its first decade in business, the company's investment strategy was reaping substantial rewards. The company sold Landmark Theatre Corp. in 2003, profiting on its initial $40 million investment, but registered its greatest profit with the sale of the Loews chain. Oaktree Capital and Onex restructured the chain, spending $35 million on three acquisitions, and brought the chain out of bankruptcy. In mid-2004, the two investment firms sold the chain for $1.46 billion, roughly doubling their money. In the years ahead, the execution of Oaktree Capital's investment strategy promised to see the companies under its control come and go as Marks and the other principals worked to squeeze profits from their nearly $30 billion portfolio of assets. The sale of the Mountain High ski resort in the beginning of 2005, for example, coincided with the arrival of Oaktree Capital's newest asset, a Texas-based industrial cleaning services company named HydroChem Holding Inc. Oaktree Capital's second decade of business promised to include more of the same, as struggling companies were repaired, sold for a profit, and replaced with more struggling companies, each handpicked by Oaktree Capital's squad of vulture investors.

Principal Subsidiaries

OCM Investments, LLC; Oaktree Capital Management Limited.

Principal Competitors

The Anschutz Company; Appola Advisors, L.P.; St. James's Place Capital PLC.

Key Dates:

1995:: Oaktree Capital Management is formed in April by a group of executives from Trust Company of the West.
2000:: Oaktree Capital begins acquiring bankrupt movie theater chains.
2004:: Oaktree Capital sells its stake in Loews Cineplex Entertainment Corp.