Meet the investor trusted by the world’s biggest pools of capital

There aren’t many investors who can casually reel off the 1987 crash, Drexel, the savings and loan crisis, Long-Term Capital Management, September 11, Enron, WorldCom, the GFC, European debt crisis, energy crisis and COVID as events they personally invested through.

Glenn August can.

The founder and CEO of Oak Hill Advisors (OHA) has spent 39 years investing in credit, beginning his career at Morgan Stanley before becoming a founding partner of billionaire Bass family-backed Acadia Partners in 1987.

Today, OHA manages more than US$100 billion for some of the most sophisticated pools of capital on the planet, including eight of the world's 10 largest sovereign wealth funds, seven of the largest US pension plans, major insurers and ultra-high-net-worth investors.

In other words, OHA is the credit investor that some of the world's biggest investors go to.

Yet August is surprisingly understated about it. Investing, he says, remains a humbling business. Markets change, mistakes happen and experience only matters if you learn from it.

What hasn't diminished after nearly four decades is his enthusiasm. As our conversation wrapped up after almost an hour, August was still smiling as he talked about markets.

“I love my job because I love markets and I love people. You put the two together, that's what I do every day.”

That combination of experience and enthusiasm makes his perspective on today's private credit debate worth hearing.

Four decades of change

To understand today's credit market, August believes investors first need to understand how dramatically it has evolved.

When he started, high yield was still called “junk bonds”, banks largely owned the loan market and private credit barely existed outside smaller middle-market companies.

Today, private credit is a US$1.5-2 trillion market financing some of the world's largest private equity transactions.

August sees reasonable opportunities across credit, but few areas of extreme undervaluation. Liquid loans and high-yield look broadly fairly valued, while private credit remains more interesting, in part because investors can still capture roughly a 200-basis-point illiquidity premium.

The opportunity that really interests him, however, is what comes next. August has made “enormous” amounts of money investing through periods of dislocation. Historically, those episodes have typically required two ingredients: recession and forced selling.

Right now, he sees neither.

CLOs, which own around 70% of the loan market, generally aren't forced sellers because their leverage isn't mark-to-market. Much of private credit is similarly held by long-term institutional capital. Nor does August see a US recession on the horizon.

So this isn't, in his view, a classic credit cycle... but that doesn't mean there won't be casualties.

AI's coming credit reckoning

August estimates that roughly 5% of the credit market is almost always experiencing problems. Poor management, bad acquisitions or businesses in structural decline ensure there are, as he puts it, always some “cockroaches”.

This time, however, something has been added to that normal background level of distress: artificial intelligence.

Software accounts for a significant share of leveraged lending, and August says around 25% of software loans are already trading below 80 cents on the dollar, with many requiring refinancing in 2028 and 2029.

“AI is about disruption... I think what happens to companies disrupted by AI is one of the biggest stories of the next two or three years.”

He compares it with the energy shock of 2014-18, when collapsing oil prices created widespread distress across energy borrowers.

Not every software company will lose. Some will successfully embrace AI and become stronger businesses. Others won't.

For investors with patient and opportunistic capital, that dispersion could be enormously valuable.

“Whenever there's a shock to the system - and AI is a shock to the system in the leverage finance space - it creates opportunities for those people that can choose the winners from the losers.”

That distinction potentially matters even more in credit than in other asset classes. Equity investors can tolerate mistakes if just a handful of big winners outweigh the many losers in a portfolio. Credit investors don't have that luxury.

OHA's mentality, August says, is therefore as much about avoiding losers as finding winners. Over 25 years, he says its loan business has experienced a default rate of around 30 basis points, compared with roughly 225 basis points for the market.

The investor the big investors choose

That experience also helps explain OHA's unusual client list.

August says the firm manages money for eight of the world's 10 largest sovereign wealth funds, seven leading US pension plans, major insurers and some of the world's wealthiest families.

For Australian advisers who may never have encountered OHA, he makes a simple argument: those institutions have virtually unlimited choice.

“The largest managers in the world certainly visit and solicit the largest investors in the world, and some of the largest investors in the world have chosen OHA.”

August is careful not to overplay that point. He readily acknowledges those institutions invest with OHA's competitors too. But the relationships reveal something about how he thinks investing should work.

Whether someone invests $1 million, $1 billion or $5 billion, he argues, that money matters enormously to them. The job therefore isn't simply to sell a product.

“It's about sharing our knowledge, our expertise, our experience, our relationships and helping a client achieve what they're trying to achieve.”

That philosophy also explains what August believes investors can learn from institutions. Large institutions have long accepted that sacrificing some liquidity can improve portfolio returns. August argues individual investors should at least consider the same trade-off.

His response to recent concerns about redemption restrictions in private credit funds is characteristically straightforward.

“Definitionally, you can't have liquidity if you're capturing a liquidity premium.”

If institutions can allocate 25% to alternatives, he argues, perhaps some individual investors might allocate 10%. The appropriate number will vary, but the principle is that an additional 150-200 basis points, compounded over decades, can make a difference.

The catch is understanding exactly what you're giving up to earn it.

Private credit isn't one trade

August also pushes back against another feature of the private credit debate - treating the asset class as though it were one homogeneous market.

OHA invests across senior direct lending, capital solutions, distressed credit, hard assets, liquid and illiquid markets, the US and Europe.

Having that flexibility is crucial, but August says it isn't the most important skill.

“The number one item is having the ability to discern credit risk.”

OHA has around 440 employees and 130 investment professionals. It also has a US$25 billion history of distressed investing, giving it the ability not merely to select credits but to deal with companies when things go wrong, including restructuring balance sheets, changing management teams, forming boards and ultimately selling or listing businesses.

Once those capabilities exist, flexibility becomes powerful.

Rather than being forced to deploy into whichever part of credit happens to sit inside a narrow mandate, August can move capital towards what he believes offers the best risk-adjusted return.

Some of OHA's institutional clients already hand it billions under precisely that arrangement: within agreed parameters, find the opportunities and allocate the capital.

Bringing the institutional playbook

That is essentially the proposition behind the T. Rowe Price OHA Flexible Credit Income Fund (OFLEX AUD).

The multi-strategy portfolio invests across areas including senior direct lending, capital solutions, distressed opportunities and hard assets.

For August, its significance is less about inventing something new than making an existing institutional approach available to a different investor.

“To deliver a product that historically was only available to investors that would give us $250 million or $2 billion or more... with a much smaller capital commitment, I think is a very exciting opportunity.”

So where does it actually fit? August is clear that it should represent only one component of a broader portfolio, with the appropriate allocation determined by what an investor is trying to achieve.

“I recognise we are but a part of a portfolio for any of our investors. Not one of our investors is 100% of what we do.”

For wholesale investors, OFLEX AUD itself targets net levered returns of 10-12% and income distributions of 8-10%, although those objectives are not forecasts or guaranteed.

And unlike a strategy confined to one corner of private credit, OHA can move across the credit spectrum as opportunities evolve.

It is essentially the same mandate some of the world's largest institutional investors have been giving August and his team for years:

“OHA, you figure it out for us and you allocate where you see the best risk-adjusted returns.”

Now, Australian wholesale investors are being offered much the same proposition.

Learn more

OFLEX AUD provides wholesale investors a single-entry point into differentiated sources of income across private and public credit markets. Find out more here.  

The information contained in this material is general information only and is intended solely for wholesale clients (as defined under section 761G of the Corporations Act).Channel Investment Management Limited ACN 163 234 240 AFSL 439007 (‘CIML’), is the responsible entity and manager of the T. Rowe Price OHA Flexible Credit Income Fund AUD ARSN 690 410 176 (the ‘Fund’). T. Rowe Price Australia Limited ABN 13 620 668 895, AFSL 503741 (TRPAU) acts as the distributor of the Fund. Neither CIML, TRPAU, their officers, or employees make any representations or warranties, express or implied as to the accuracy, reliability or completeness of the information presented and nothing contained in this material is or shall be relied upon as a promise or representation, whether as to the past or the future. This information is given in summary form, does not purport to be complete, and does not take into account the investment objectives, financial situation or needs of any person. Past performance is not a reliable indicator of future performance and returns are not guaranteed. You should obtain a copy of the Product Disclosure Statement and Target Market Determination, which is available at (VIEW LINK), before making a decision about whether to invest in the Fund.