White Oak Eases Liquidity for Lending Fund
Asset-based lender White Oak Global Advisors is rolling out a vehicle that is likely to be more appealing to hedge fund investors than its other direct-lending funds.
The new offering, White Oak Fixed Income Fund, began investing in September with a $75 million commitment from an unidentified endowment. The subscription is split into three equal tranches, with the final $25 million scheduled to arrive in January. Based on discussions with other investors, the San Francisco firm is expected to have some $200 million in the fund by midyear 2015.
White Oak, which runs $1.4 billion overall, designed the new fund to address two concerns raised by the fund’s anchor investor. First, the endowment wanted exposure to the strategy without a multi-year lockup that applies to limited partners in the firm’s White Oak Pinnacle Fund, a typical “draw-down” vehicle that calls investor capital as investment opportunities arise. And second, it didn’t want to deal with frequent capital calls — which, even for a large endowment, can cause logistical and cash-management headaches.
White Oak’s solution: a hybrid fund that encompasses a liquid-securities portfolio alongside the core asset-based lending business. As the Fixed Income Fund takes in capital, it is immediately put to work by a liquid-credit team based in Dallas. That group invests in high-yield bonds and syndicated debt with the aim of generating annualized returns in the 4% range.
Then, as White Oak identifies direct-lending opportunities, it taps the liquid-credit portfolio to fund the investments. The mechanism not only spares investors the hassle of repeated capital calls, but also makes it easier to return capital in the event of redemptions. The lockup for the Fixed Income Fund is just one year. The portion of an investor’s capital in the liquid-credit book can be returned almost immediately, with the rest paid out as loans in the asset-based lending portfolio mature.
By comparison, White Oak Pinnacle Fund imposes a seven-year lockup. And investors in that vehicle are given 10 days to meet capital calls, which can come as frequently as 5-6 times per quarter. Unlike many other draw-down vehicles, White Oak Pinnacle doesn’t use a credit line to fund its investments between periodic capital calls. As a result, investors have to make frequent disbursements.
White Oak originates senior secured loans to companies in North America with less than $15 million of annual operating income. It takes a conservative approach to lending, with loan-to-value ratios usually less than 50% of a borrower’s assets — typically a mix of receivables and hard assets. Most loans are in the $20 million-$70 million range. The average loan term is three years.
The lending strategy is designed to generate annualized returns of about 12%. White Oak Fixed Income Fund is targeting a blended return of about 9% over Libor.
Most asset-based lending vehicles crashed and burned during the global financial crisis — the victims of a mismatch between the illiquidity of the underlying assets and the hedge fund-like liquidity terms they offered investors. White Oak, founded in 2007 by Andrew Hakkak and Barbara McKee, clearly has learned from those mistakes. Despite its long lockup, Pinnacle Fund has about $500 million under management, including a parallel separate account.
The firm now plans to launch a successor to Pinnacle called White Oak Summit Fund. The vehicle initially will be open to Pinnacle investors, with a first close scheduled for December. After that, White Oak will market the new vehicle to outside investors, with an overall equity goal of $1 billion.
Prior to starting their own firm, McKee was an executive at KKR Financial, while Hakkak was chief investment officer at Alpine Global. White Oak’s liquid-credit team is made up of three former Highland Capital traders who joined in 2011: Patrick Conner, Chetan Pai Panandiker and Nicholas Losey. The Dallas group also manages a $100 million long/short credit hedge fund called White Oak Opportunity Fund.