The world’s largest distressed debt investor Oaktree Capital Group LLC (NYSE:OAK) has cut back the goal for its upcoming control investing fund, the Oaktree Principal Fund VI LP, from $3 billion to $1.8 billion and shorten its investment period for five years to three because it’s having trouble finding enough deals in the current high liquidity, low-rate environment, reports Sabrina Willmer for Bloomberg after talking to someone familiar with the matter. There hasn’t been an official announcement or acknowledgment from Oaktree on the matter.

Howard Marks Oaktree Capital - Risk

Oaktree focused on European debt, real estate, sector-specific strategies

Oaktree managing director Ronald Beck told a panel at the SuperReturn US conference that the investment firm would focus on European debt, real estate, and other specific sectors (echoing comments from Oaktree Capital Group LLC (NYSE:OAK) founder Howard Marks at the Morgan Stanley Financials conference earlier this week), because default rates were too low for their traditional distressed business and high-yield bonds are trading above par. Oaktree has already delayed the same fund, which was supposed to launch last year, because the capital raised in 2009 still hadn’t been deployed yet and was still only 79% invested at the end of the first quarter.

Default rate has been falling since 2009

While you would normally expect a recession to be the best time to be in distressed debt (and the strategy did outperform other hedge fund strategies at various points in the last few years), slow growth isn’t enough for there to be a lot of deals to choose from. As long as there is plenty of liquidity and inexpensive financing companies can rollover their debt and live to fight another day. There may have been more options for distressed debt investors in the immediate aftermath of the crisis when credit was tight, but clearly the situation has changed in recent years.

It’s possible to read the low default rate as a sign that the economy is recovering, but that could just be wishful thinking. The real test will be whether the current low rate can hold when QE finally comes to an end and interest rates start to push back up. As companies with weak balance sheets (and there are plenty) are forced to pay higher prices for financing you can expect opportunities for hedge funds like Oaktree to start expanding once again.