When billionaire Mat Ishbia’s mortgage company was facing significant losses on soured hedges earlier this year, he called old friends at Oaktree for help.
Oaktree Capital Management had helped out United Wholesale Mortgage after an unsuccessful hedge in 2020 before it went public, according to people familiar with the deal, the details of which haven’t been previously reported.
Six years later, Ishbia was back. But Oaktree, long synonymous with distressed-debt investing, didn’t offer a loan. Instead, it bought $1.5 billion of preferred shares in the mortgage lender, giving it an equity interest along with generous dividend payments and a slew of protections.
For Howard Marks’ Los Angeles-based firm, the investment is both a classic contrarian bet on the struggling US housing market and a textbook execution of a debt-like strategy that’s becoming more common among private lenders, even those that have long eschewed the risks attached to equities.
Representatives for UWM and Oaktree declined to comment.
At $1.5 billion, the investment in UWM is an unusually large sum for a single lender, adding to the recent fervor. Apollo Global Management Inc., Sixth Street and Bain Capital, among others, have ramped up preferred-equity deals with companies in need of cash in recent years.
Structured equity trades are custom and the terms are often private, but packages can include preferred stock, lender protections and contractual dividends. There’s also an expectation that it isn’t forever capital: Investors typically add penalties or increase the rate of return as time goes on.
For distressed debt investors and private credit firms, preferred and structured equity deals increase the potential risks and rewards. They can capture equity-like returns pushing into the mid-teens, but if a company fails, investors get in line behind other creditors.
The opportunity is growing. Elevated interest rates and years of sluggish dealmaking have saddled private equity managers with assets they can’t or won’t sell, making it tougher to return cash to investors. A structured-equity investment can create liquidity without forcing a sale or adding debt to the balance sheet.
For Oaktree, such deals also indicate the firm’s growing openness to a risk typically associated with equities. About two decades ago, the firm established its first fund dedicated to mezzanine debt, a type of subordinated financing that typically carries a high coupon and can include warrants or other equity participation.
The hybrid nature of the investment presented a choice, Marks wrote in a 2024 memo.
“We could put our primary emphasis on protecting principal and treat the equity aspect as an attractive possible fillip, or we could be more venturesome and pursue situations where the equity is expected to pay off dramatically,” he said in the memo.
The firm chose the former. Marks lauded the group’s 9.3% average internal rate of return, calling its approach “pure Oaktree.”
While that rationale still broadly guides the firm, Oaktree has grown more creative, expanding its strategies as borrowers seek new ways to drum up liquidity and lenders ramp up their use of financial engineering.
In 2018, the firm put together a structured equity deal with Montrose Environmental Group, an environmental testing company that had exhausted its debt capacity and was shopping for private equity investments.
Instead, Oaktree suggested a preferred-equity deal with a mid-teens return that allowed Montrose’s owners to maintain their stake ahead of a planned IPO. The investment began at just under $200 million and grew to nearly $400 million before the firm went public in 2020.
Oaktree’s first deal with UWM in 2020 was a $300 million debt deal with a 15.5% coupon, guaranteed by the mortgage lender and secured by the parent’s stake in the firm, according to the people, who didn’t want to be named discussing confidential information. It was repaid roughly four months later for what appears to be 1.5 times Oaktree’s initial investment, the people said.
Broadly, preferred-equity strategies are “a creative way to stay on top of certain players in the capital stack while still staying entrepreneurial,” Zachary Darrow, Chief Executive Officer of law firm DarrowEverett LLP, said in an interview. “You get the ability to reap the benefits that traditional debt and or credit solutions might not provide.”
In 2022, Oaktree took a majority stake in 17Capital, a London-based firm specializing in preferred equity and net-asset-value lending — another rapidly growing strategy that offers an alternative source of capital for investors.
B. Riley Rescue
Oaktree’s two-part rescue of troubled Los Angeles-based brokerage B. Riley illustrates the flexibility — and potential profits — in these kinds of deals. In 2024, Oaktree bought a majority stake in B. Riley’s Great American unit, valuing the firm at $386 million. The cash infusion let the brokerage hold on to part of what it saw as a promising business but gave Oaktree a significant amount of control.
A few months later, the firm provided a $160 million loan to B. Riley, which, while technically a debt deal, also awarded Oaktree an additional 6% stake in the parent company. The terms included an unusual “first-out” provision that gave Oaktree top priority in a long line of existing creditors.
Oaktree also got warrants to buy more than 1.8 million common shares. Based on their current value, Oaktree’s profits are over $3.4 million, in addition to coupon payments on the loans, filings show.
Oaktree is eager to do more with companies set to go public in the near term, one of the people said, capitalizing on a cohort of founders who might need capital but are loath to shrink their own stakes.
It’s too soon to say how Ishbia’s UWM will contribute. Oaktree’s $1.5 billion investment confers 1.5 million shares of preferred stock designed to throw off at least $150 million in annual dividends, plus warrants with exercise prices ranging from $2 to $6 per share. Ishbia, who’s the majority owner of the National Basketball Association’s Phoenix Suns, invested $150 million alongside Oaktree.
If Oaktree still holds 25% of its investment in seven years, it can take control of a majority of board seats and seek strategic alternatives. Meanwhile, if the stock price rises, Oaktree can execute its warrants and take profits that way.
Beyond UWM’s failed hedge, there are plenty of good companies now struggling under the burden of debt taken on when interest rates were low, said Matt Wilson, a manager in Oaktree’s special situations group, on one of the company’s podcasts last year.
“The businesses are fine, maybe capital-constrained because they don’t have liquidity, because that’s going to pay down debt or going to pay off interest expense,” Wilson said. “Those are the kind of businesses we think are very unique.”
