- Oaktree Capital Management
Mr. Khatoun joined Oaktree in 2005 after spending three years as a transaction executive at Terra Firma Capital Partners Ltd. Prior thereto, he spent three years in the Investment Banking division of Goldman Sachs International. Mr. Khatoun received a B.A. degree with honors in philosophy, politics and economics from Oxford University. He is fluent in French and Arabic.
Oaktree Capital Management (“Oaktree”) is a global alternative investment management firm with expertise in credit strategies. The firm was formed in 1995 and today comprises more than 950 employees with offices in 18 cities worldwide. Oaktree entered the Asian market in 1998 and today has seven offices in Beijing, Hong Kong, Seoul, Singapore, Shanghai, Sydney and Tokyo, with more than 60 employees serving our growing client base in the region.
We believe the firm’s competitive advantages include its experienced team of investment professionals, a global platform and a unifying investment philosophy. The six fundamental parts of our investment philosophy are risk control, consistency, market inefficiency, specialization, bottom-up analysis and the disavowal of market timing. Our expertise in investing across the capital structure and geography has allowed us to cultivate a diversified mix of global investment strategies.
Our team, the European Principal group (“EPG”), focuses on investing in the European middle market, covering both debt and equity via our two strategies: European Private Debt and European Principal. Both are fundamentally focused on making proprietary investments in businesses that are “dislocated” – attractive businesses with a temporary lack of access to other sources of capital. In all cases, we emphasize risk control and downside risk mitigation.
Our team’s focus lies on illiquid and proprietary transactions with potential for returns that are greater than commensurate risk. Right now we are seeing a lot of opportunity in countries like Germany, where the mainstream banks are struggling to lend capital due to the bad debt they still hold on their balance sheets, and constraints by banking regulations like Basel III. We also think political uncertainty in Britain could bring opportunities in the UK after Brexit.
We use the resources of the whole EPG, and we generate our own deal flow, without relying on financial intermediaries like investment banks or auction processes. To our knowledge, we are the only lending group in Europe with a local presence in all of our target markets and experience in completing transactions in these markets. Our investment team includes dedicated legal and operational professionals. We believe that few other (if any) debt investors possess the same specialized skills or a similar sourcing model required for successful investing in today’s dislocated European credit markets. We combine our corporate finance and private equity capabilities with expertise in distressed credit, bankruptcy/restructuring, and operational turnarounds in order to identify, evaluate and execute on dislocated credit investments.
Downside risk mitigation is key to Oaktree’s investment philosophy and business model. An important element of our efforts to preserve our portfolios is a focus on providing a capital solution by way of an instrument with strong governance provisions and negative controls. Furthermore, the team has invested through multiple capital market cycles, and we believe this experience is a competitive advantage. We have executed multiple customized solutions in each of the major geographies in Europe, and we have restructuring experience in virtually all of the markets in which our funds invest. Thus, in the event an investment underperforms, we believe we can work out distressed credits, manage restructurings and, if necessary, execute operational improvements.
Being a portfolio manager allows me to think about a lot of different sectors, geographies, legal frameworks, and investment structures. Because of the way we invest, we spend a lot of time creating customized credit solutions for borrowers that would otherwise have difficulty completing their projects, refinancing their businesses, buying out other shareholders, etc. We get to look at a lot of interesting businesses and aim to solve problems for people.
Fundamentally my job is to find attractive investments where the potential return outweighs the expected risk. To do this you need to build a team with the skills and knowledge to access markets that are ignored or dislocated by economic or regulatory change. And then you need to be able to find the best borrowers in those markets. My belief is that it takes a long time to build these relationships and expertise, which is why our team’s 15-year history of working together is so important.
There are a few things I would never do as a portfolio manager. We won’t seek higher yield by trading off downside protection. We will, for instance, always insist on having our investments backed by quality collateral. And we won’t drive returns solely through financial engineering. All our investments are fundamentally bottom-up and based on the characteristics and specifics of the borrower and the assets.
There are four things I think are most critical in seeking to preserve investor capital, and it’s hard to say which is most important since they are all “the most important!” So here they are in no specific order:
・You have to invest at the right level of the capital structure. Sometimes it is more appropriate to invest in debt that is lower in the capital structure, behind a senior lender. We will do this when we feel that the underlying asset is very attractive and has a floor of value. An example would be an office development in a major city center where office prices haven’t risen for quite some time. This means you are likely investing at the bottom, from where collateral values would potentially be more likely to go up than down.
・We conduct private equity-like due diligence on each investment. This means we go see every asset or company we lend against. We study the industry and the geographic area. We learn the borrowers’ business plans. We understand the triggers that will cause the investment to succeed, or fail. And if it fails, we work to understand how we would step in to try to get our money back. Our diligence process is very intense and comprehensive.
・We manage all our structuring, documentation and execution in-house with our own team of lawyers who have backgrounds in restructuring. As a result we know how to put together a loan with additional risk mitigators in the chance something goes wrong.
・And we monitor the loans ourselves. We stay in close contact with the borrowers through regular reporting. In some cases we have a member of our team attend the borrower’s board meetings. We get early indications of any change in how the business is performing versus the plan, so we help to minimize our chances of being surprised if something goes wrong.
The Co-Chairman and Co-Founder of Oaktree, Howard Marks, has written several excellent books on finance. For me, the best is “The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor.” I think it contains some incredibly important lessons and encompasses the principles Oaktree abides by.
“The Ascent of Money” by Niall Ferguson is a bit of a new classic of finance. The story is very well told, and I think anyone can enjoy it.
Another book that came out right after the 2008-2009 Global Financial Crisis is “The Trouble with Markets: Saving Capitalism from Itself” by Roger Bootle. It explains the crisis in a historical context. I found it very interesting.
Of course I read the Financial Times daily. Financial News (fnlondon.com) is another good outlet more focused for people who work in the industry. Every quarter, Deloitte publishes its Alternative Lender Deal Tracker, which our team finds helpful in understanding the larger direct-lending market.
Oaktree Capital Management is a leading global alternative investment management firm with expertise in credit strategies. The firm was formed in 1995 by a group of individuals who had been investing together since the mid-1980s in high yield bonds, convertible securities, distressed debt, real estate, control investments and listed equities. The firm’s competitive advantages include its experienced team of investment professionals, a global platform and a unifying investment philosophy. This investment philosophy — the six tenets of which are risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing — is complemented by a set of core business principles that articulate Oaktree’s commitment to excellence in investing; commonality of interests with clients; a collaborative and cooperative culture; and a disciplined, opportunistic approach to the expansion of offerings.
The strategy will focus on providing financing solutions for European middle-market companies in sectors where bank financing is scarce. Investments will be primarily in the form of senior or unitranche debt but the strategy may also provide second-lien financing. The vast majority of the strategy’s positions will be secured by hard assets, and the strategy intends to source deals directly and not make loans to companies owned by financial sponsors.
April 1, 2020
by Investment and Research Team