Exclusive - Oaktree prepares to launch its first BDCs: sources

By Greg Roumeliotis

(Reuters) - Oaktree Capital Group LLC is working on the launch of two business development companies (BDCs), joining other alternative asset managers in an area that has seen explosive growth over the past few years, according to two people familiar with the matter.

BDCs are pools of capital that invest in different types of debt of small and middle-market companies. BDCs often trade on public markets and pay out at least 90 percent of their annual profits as dividends to avoid corporate taxation under provisions passed by Congress in 1980.

As traditional lenders face increased capital constraints and tighter lending guidelines from regulators, BDCs have seen demand rise. With interest rates near record lows, investors have also been piling into BDCs looking for yield. There were 68 active BDCs with assets totalling $53.7 billion (£32.84 billion) as of the end of June 2013, up from just $5 billion at the end of 2003, according to the U.S. Securities and Exchange Commission (SEC).

In recent years, BDCs have also gained in popularity among private equity firms looking for an additional steady stream of fees. They are attractive to such firms because, unlike private equity-type funds, BDCs do not have set maturities and therefore offer a permanent pool of capital that their managers can charge fees on.

They also give these alternative asset managers another way to attract more capital from retail investors, diversifying their investor base, which is dominated by institutional investors such as pension funds and insurance firms.

Other publicly traded alternative asset managers, such as Blackstone Group LP, KKR & Co and Carlyle Group LP, launched BDCs in the past few years. Los Angeles-based Oaktree, which had $79.8 billion in assets under management as of the end of September, would become the last among its major peers to do so. More than 10 percent of Oaktree's assets already come from retail and high net-worth investors.

The sources said Oaktree is preparing one BDC that will focus on a strategy that includes direct lending to companies and investments in the debt of "stressed" companies. The firm calls the investment strategy "strategic credit." It previously raised $2 billion from its institutional investors for that strategy through tailor-made accounts.

The second BDC will focus on middle-market lending. The firm already has a mezzanine business, which provides debt for middle-market deals, and the BDC is expected to play to that strength, the sources said.

Both BDCs will be registered with the SEC but will not be publicly traded when they launch, the sources added. They will be marketed to retail investors either through brokers or financial advisers.

Oaktree declined to comment.

Oaktree registered a BDC with the SEC in 2011 but did not go through with those plans. That BDC faced conflicts with Oaktree's $1.59 billion Mezzanine Fund III, according to a regulatory filing from the firm at the time. Mezzanine Fund III, however, has now spent most of its capital and its investment period ends in December 2014.

"You are absolutely correct in thinking that it makes sense for Oaktree," Oaktree Chief Financial Officer David Kirchheimer told Bank of America Merrill Lynch analyst Michael Carrier in November at the bank's financial services conference when Carrier asked about the possibility of Oaktree launching BDCs.

"Look, we have had our plate full, especially over the last year or two, with very exciting new development opportunities. We don't want to spread ourselves too thin. So everything in due course," Kirchheimer added.

(Reporting by Greg Roumeliotis in New York; Editing by Paritosh Bansal and Eric Walsh)