- Oaktree Capital Management bought $1.5B preferred shares in United Wholesale Mortgage, providing capital without traditional loan or founder dilution. UWM facing losses on soured hedges earlier this year; billionaire Mat Ishbia (UWM majority owner, Phoenix Suns owner) called “old friends at Oaktree” for help. Oaktree previously provided $300M debt deal to UWM in 2020 (15.5% coupon, repaid ~4 months later at 1.5x return). This time: preferred equity structure designed to throw off $150M+ annual dividends, plus warrants with exercise prices $2-$6 per share. Ishbia invested $150M alongside Oaktree (signals confidence). If Oaktree holds 25% in 7 years, can take control of board majority and seek strategic alternatives.
- Structured equity becoming norm in private credit: Investment is “textbook execution of debt-like strategy becoming more common among private lenders,” per article. Apollo Global, Sixth Street, Bain Capital ramped up preferred-equity deals recently. Strategy provides mid-teens returns (higher than traditional mezzanine debt at 9.3% per Oaktree’s 2024 memo from Howard Marks). Allows capital deployment without forcing sales or adding company debt to balance sheet. Useful for private equity managers sitting on assets they can’t/won’t sell, needing liquidity without forced dispositions. Preferred equity includes equity-like returns but investors subordinated to other creditors if company fails.
- Oaktree’s evolution: Two decades ago, firm established first mezzanine-debt fund. In 2024 memo, Marks noted choice between protecting principal (treating equity as “attractive possible fillip”) vs being “venturesome” pursuing situations where equity “expected to pay off dramatically.” Firm chose former, with 9.3% average IRR on mezzanine. But growing more creative. In 2022, took majority stake in 17Capital (London-based preferred equity/NAV lending specialist). Montrose Environmental (2018): $200M preferred-equity deal growing to $400M before 2020 IPO. B. Riley rescue (2024): majority stake in Great American unit ($386M valuation) + $160M loan with unusual “first-out” provision, warrants for 1.8M shares, current profits >$3.4M on warrants.
- Private credit landscape shifting: Elevated interest rates and sluggish dealmaking saddled PE managers with hard-to-sell assets, making liquidity without forced sales valuable. Preferred equity fills gap: custom terms can include preferred stock, lender protections, contractual dividends. Matt Wilson (Oaktree special situations): “Businesses are fine, maybe capital-constrained… don’t have liquidity to pay down debt or interest expense. Those are kind of businesses we think very unique.” Oaktree eager to deploy structured equity with companies set to go public, capitalizing on founders loath to shrink stakes.
What Happened?
Oaktree Capital Management invested $1.5B in United Wholesale Mortgage preferred shares (not loan). UWM facing losses on soured hedges; Mat Ishbia (UWM majority owner) sought help from Oaktree (prior $300M debt deal in 2020 repaid at 1.5x return). Preferred shares yield $150M+ annual dividends plus warrants ($2-$6 exercise prices). If Oaktree holds 25% in 7 years, can take board control/seek strategic alternatives. Ishbia invested $150M alongside. Structured equity strategy becoming norm in private credit: Apollo Global, Sixth Street, Bain Capital ramping up preferred deals. Oaktree evolved from pure mezzanine debt (9.3% IRR) to structured equity (mid-teens returns). Took majority stake in 17Capital (2022, preferred equity/NAV lending), Montrose Environmental ($200M-$400M preferred deal 2018-2020 IPO), B. Riley rescue (2024: Great American majority + $160M loan with first-out provision, warrants, $3.4M+ current profits). Elevated rates/sluggish dealmaking creating liquidity needs without forced sales.
Why It Matters?
For UWM investors, Oaktree’s preferred deal provides capital without traditional debt burden or founder dilution. For Oaktree/Brookfield shareholders, $1.5B UWM deal validates structured equity as permanent strategy shift enabling higher returns than pure debt (mid-teens vs 9.3%). For private equity broadly, preferred equity becoming standard tool for deployed-asset liquidity and founder retention. For mortgage sector, UWM’s ability to access preferred equity without debt validates alternative capital markets growing. For distressed investors, shift from debt to structured equity represents evolution in risk/return profile—higher upside but subordinated to creditors if bankruptcy.
What’s Next?
Monitor UWM’s financial recovery; if hedge losses resolved and liquidity stabilized, it validates Oaktree’s investment thesis. Track warrant exercise; if UWM stock appreciates above $2-$6 levels, Oaktree profits. Watch Oaktree announcements on structured equity deals; if pipeline grows, it signals permanent strategy shift. Monitor 17Capital performance; if NAV lending outperforms, it validates Oaktree’s acquisition. Also track B. Riley recovery post-Oaktree investment; if brokerage stabilizes and stock appreciates, it validates earlier deal returns. Finally, monitor regulatory/accounting treatment of preferred equity; if rules tighten, it could constrain strategy adoption.
Affected Tickers & Coins: BAM (Brookfield/Oaktree parent)
Source: Bloomberg
