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$20 Million Bet on Gundlach Paid Off Big Time

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Oaktree Capital Group LLC co-founder Howard Marks is known as a shrewd investor. One of his best decisions was spending about $20 million in 2009 for a one-fifth stake in Jeffrey Gundlach’s upstart investment firm.

Gundlach’s DoubleLine Capital has paid out $158 million in income to Oaktree over the last five years, repaying that original investment almost eightfold. What’s more, the stake may now be worth as much as $900 million, according to estimates by analysts who follow Oaktree.

“We had no reason to expect that it would go as well as it did,” Marks said Thursday in a Bloomberg Television interview. “DoubleLine has been probably the greatest success story for a new money manager.”

Marks, a 69-year-old billionaire, made his reputation in distressed debt, scooping up assets in troubled companies and holding them as they recovered their value. His investment in Gundlach, just after the star bond manager was fired by TCW Group, paid off for Oaktree as DoubleLine’s assets surged.

“Obviously it has been a home-run deal for them,” said Michael Kim, an analyst at Sandler O’Neill & Partners. “Gundlach has had a lot of success in a short time and that success has accrued to the benefit of Oaktree.”

Surging Assets

On the strength of Gundlach’s investment performance, DoubleLine’s assets have grown to $85 billion six years after the firm was founded. Last year, the flagship DoubleLine Total Return Bond Fund reached $50 billion, the fastest an active stock or bond mutual fund ever to hit that milestone. The fund, now at more than $55 billion, beat 99 percent of peers over the past five years, according to data compiled by Bloomberg.

Gundlach, 56, has attracted attention as both a prognosticator and money manager. In January 2015, he correctly predicted that interest rates wouldn’t change much during the year, that high-yield bonds would struggle and that oil would fail to rally amid a supply glut. This January, he said junk bonds would continue to lose ground and that gold would rally.

For Los Angeles-based Oaktree, the world’s largest distressed-debt manager, Gundlach’s success has translated into a growing stream of cash and its single biggest source of investment income last year. In 2011, Oaktree received $1.8 million from DoubleLine, according to Oaktree’s earnings reports. By 2013, that number had risen to $31.4 million and in 2015 it was $55 million. The firm’s adjusted net income was $311.9 million.

The DoubleLine investment accounts for about $5.80, or 13 percent, of Oaktree’s stock value of $44.60 a share, Wells Fargo & Co. analysts Chris Harris and Robert Ryan estimated in a Feb. 10 report. That translates to a value of $893 million for Oaktree’s stake in DoubleLine.

Morningstar Inc. analyst Stephen Ellis puts the value at $600 million to $700 million. Even at that range, Oaktree’s return on investment compares favorably with the best deals ever pulled off by a private equity firm, Ellis said in an e-mailed response to questions. TCW Ouster

Marks, in December 2014, said Wall Street analysts “penuriously” estimated the value of the DoubleLine stake at $350 million to $400 million. Oaktree spokeswoman Andrea Williams declined to offer a current estimate.

DoubleLine declined to comment, according to analyst Loren Fleckenstein.

Gundlach was ousted as chief investment officer of Los Angeles-based TCW in December 2009 after a dispute with management that led to a legal tussle. The week after his dismissal, he reached out to Oaktree for help setting up his new firm, according to an account provided by Oaktree Vice Chairman John Frank at a June 2013 investment conference.

Marks and Gundlach worked at TCW during the 1980s and ’90s, with Gundlach reporting to Marks before the senior manager left to form Oaktree. Bruce Karsh, an Oaktree co-founder, and Phil Barach, DoubleLine’s co-founder, have known each other for 30 years.

“I knew the man, I knew how smart he was,” Marks said of Gundlach in the Bloomberg TV interview Thursday. “I believed that they would be successful.”

Informative Lunches

Oaktree helped Gundlach’s business acquire office space and set up accounting and trading systems, Frank said at the 2013 conference. The two companies are headquartered in the same building in downtown Los Angeles.

The relationship is more than financial.

“We have lunch periodically,” Marks said in December at a conference sponsored by Goldman Sachs Group Inc. “We bring each other up-to-date on the market — which means mostly that Jeffrey tells us what’s going to happen, which we’re very eager to know.”

Marks has called the DoubleLine venture a “great investment” but expressed one regret about the original transaction. At a 2014 Goldman Sachs conference, he said, “We should have bought more.”

— Check out Gundlach: ‘Frightening’ to See Financial Stocks So Low on ThinkAdvisor.


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