Mezzanine Fund Raises $808 Million

Los Angeles-based Oaktree Capital Management has raised $808 million for its first investment fund dedicated to so-called mezzanine debt.

The OCM Mezzanine Fund topped its target of $700 million when it closed to new investors in September, said Bill Sacher, Oaktree’s managing director who co-heads the fund. Oaktree plans to announce the fund-raising today.

Mezzanine financing, a form of junior debt that fills a gap between private equity investment and more conventional bank loans, increasingly is being used as an alternative to high-yield bonds in buyouts, Sacher said.

“We’re between the orchestra and the balcony,” he said.

A mezzanine loan is senior to the original equity but junior to the bank debt. It offers higher yields -- typically 10% to 14% -- than bank debt because it includes more risk. Though usually used in buyout situations, the loans can be extended directly to businesses, Sacher said.

In a $200-million buyout, a private equity firm might put up $60 million, Sacher said, and be able to borrow $100 million from a bank, thus needing $40 million in mezzanine financing. He said junk-bond investors are shying away from deals under $150 million because they can be illiquid.

With $10.6 billion in private equity under management at midyear, Oaktree was the 10th-biggest firm nationwide in that asset class and the largest in Southern California, according to Thomson Financial Venture Economics and the National Venture Capital Assn. Oaktree runs about $25 billion overall.

The OCM Mezzanine fund already has completed seven transactions and invested $109 million, Oaktree said, though it declined to reveal the companies involved. The fund has more than 50 investors, including pension plans, endowments and wealthy individuals.

Oaktree Chairman Howard Marks said the fund will try to invest conservatively because it relies on an operating company’s cash flow to get repaid.

“We’re interested in ‘old-economy,’ stable companies with steady cash flow: manufacturing, distribution, transportation, retailing,” Marks said. “None of the risky technology and telecom stuff.”

John Danhakl, managing partner at the L.A. buyout firm Leonard Green & Partners, said the Oaktree team has “shown spectacular judgment over the years.” With TCW/Crescent Mezzanine (a unit of TCW Group Inc.) and Oaktree, Southern California is home to two of the premier mezzanine firms, Danhakl said.