Oaktree Says High-Rate Era Is Opening Special Situations Opportunities

Macro Uncertainty Creates Favorable Conditions for Special Situations

Opportunities Emerge in Private Credit Stress and Private Equity Liquidity Shortages

This article was published on Market Insight on May 27 at 2:12 p.m.

"This is exactly the kind of environment that favors special situations strategies, with high interest rates, inflation and macro uncertainty all persisting."

Jordon Kruse, a managing director and co-portfolio manager in Oaktree Capital's Special Situations Group, made the remarks on May 27 at the ASK 2026 global alternative investment conference hosted by the Korea Economic Daily at the Conrad Seoul in Yeouido, Seoul.

Since 2022, high rates have become the new normal, exposing cracks in debt accumulated during the era of low interest rates, he said. Those cracks are opportunities for special situations investors. Special situations refers to investments tailored to unusual corporate circumstances such as restructurings, rather than traditional private equity.

Oaktree Capital is a global alternative asset manager with $224 billion in assets under management. The firm was founded in 1995 by Howard Marks. Its special situations unit centers on an "all-weather" strategy that can deploy debt purchases, structured equity and direct acquisitions of businesses depending on the circumstances. Kruse said there are always four to six companies each year that need capital because of management failures, misguided mergers and acquisitions, or customer losses, and that forms the foundation of the strategy.

He also highlighted deterioration in the private credit market. Large amounts of capital flowed into the sector after the pandemic, loosening underwriting standards, and several large defaults have emerged over the past six months. Kruse estimated that so-called bad PIK, in which companies unable to cover interest effectively mask default by adding the interest to principal, accounts for about 6% of the market. That creates opportunities to offer a range of solutions to lenders holding troubled loans.

Another area Oaktree is focused on is the approaching maturity wall in high-yield debt. About $900 billion of US high-yield debt will mature over the next three years, and much of it was raised with heavy leverage during the zero-rate era, making refinancing difficult in the current high-rate environment. Kruse said Oaktree's role is to provide rescue-style capital to companies shut out of refinancing.

The firm is also finding opportunities in liquidity shortages at private equity funds. Many funds acquired companies at high valuations during the low-rate era, but are now struggling to raise new funds as M&A activity slows and distributions to paid-in capital, or DPI, slump. Kruse said providing liquidity to private equity funds through convertible preferred stock can protect the downside while preserving equity upside.

Da-eun Choi, Korea Economic Daily reporter max@hankyung.com