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Build the ark before the flood
Raise before the flood
That is how Oaktree raised $11 billion for distressed debt ahead of the 2008 financial crisis, about twenty years after starting the business in 1988. A favorite movie, Spy Game, has Robert Redford ask when Noah built the ark, and the answer is before the flood. It takes some sense that a flood may be coming.
Why investors agreed
Investors went along for several reasons. Two decades of managing a lot of money with very good results for many people had built a reservoir of goodwill. The strategy also suits crises, and the firm had come through crises in 1991 and again in 2001 and 2002 and done exceptionally well. So it could argue that portfolios set up for prosperity could be hedged with an investment that does particularly well if things go wrong.
A market that stopped refusing
The firm could also point to flaws in the environment that gave rise to the crisis. The market was not acting as a disciplinarian, and that is its main job: when someone asks for money for a stupid idea, the market is supposed to refuse. When it doesn't, dumb ideas get financed, and when they turn out dumb, people lose money. There was also great respect for Bruce Karsh's investing over the years.
How do funds raise money before investing it?
Distressed debt funds are usually private closed-end partnerships. Investors commit a set amount up front, and the manager draws that money down only as investments are found. Investors cannot withdraw on demand, so the manager is not forced to sell when prices fall. Funds in this structure typically run for around ten years.
Why did risky mortgages get financed in the 2000s?
Mortgage lenders in the mid-2000s often sold their loans to be packaged into securities, which passed any losses to the securities' buyers. Rating agencies gave many of those securities high grades, which made them easy to sell. Lenders that kept no risk had less reason to check whether a borrower could repay. The U.S. Financial Crisis Inquiry Commission, in its 2011 report, listed failures in lending standards and in credit ratings among the causes of the crisis.
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