Marks launched the first distressed debt fund in 1988, investing in bonds of bankrupt or near-bankrupt companies.
“we brought out the first distressed debt fund. Now we're not investing in companies that have a risk of default. We're investing in bonds that are either in default or sure to be.”
Marks describes investing in best companies lost 90% while worst companies made most money.
“Then you go to the high yield bond business, you invest in the worst companies in America, you make the most money.”
Marks illustrates how zero yields on safe investments drive investors mindlessly into riskier assets.
“He gets a statement from Fidelity. He opens it up, and it says, the yield on your fund is now zero. He grabs the phone.”
Marks launched the first distressed debt fund in 1988, investing in bonds already in default.
“in 'eighty eight, we brought out the first distressed debt fund. Now we're not investing in companies that have a risk of default.”
Marks explains bonds as fixed contracts where all returns are identical if promises are kept.
“Fixed income, it's called, because all the events are fixed. The contract is fixed. The return is fixed, assuming the promise is kept.”
Marks reports 23% annual returns for 28 years in distressed debt without leverage by buying below intrinsic value.
“we've made about 23% a year for twenty eight years investing in distressed debt before fees without any leverage. So that's pretty astronomical. Why?”
Marks explains bonds as fixed promises where all paying bonds deliver identical returns.
“You give me $100 and I promise to give you 5% interest every year and then give you a bonding back in twenty years. Fixed income, it's called, because all the events are fixed.”
Marks recounts losing 90% buying America's best companies 1968-73 because they were overpriced at 80-90 times earnings.
“if you bought the bonds of Hewlett Packard, PerkinElmer, Texas Instruments, Merck, Lilly, Xerox, IBM, Kodak, Polaroid, AIG, Coca Cola, and Procter and Gamble, and if you bought them all in 'sixty eight and you held them until 'seventy three, you lost 90% of your money.”
Marks reports Oaktree made 23% annually for 28 years in distressed debt without leverage.
“And we've made about 23% a year for twenty eight years investing in distressed debt before fees without any leverage. So that's pretty astronomical. Why?”
Marks deployed ten billion dollars in fifteen weeks during late 2008 crisis when nerve mattered most.
“So at Oaktree, we invested $650,000,000 a week in the last fifteen weeks of 'eight, that's about $10,000,000,000 and that's really all you had to do.”
Marks says Oaktree deployed ten billion dollars in fifteen weeks after Lehman collapsed, averaging 650 million per week.
“after the global financial crisis, some people thought it represented an existential threat, we swung into action and we were able to invest $650,000,000 a week on average for fifteen weeks between Lehman's September 15 bankruptcy and the end of the year, that's $10,000,000,000”
Marks explains how the absence of prior nationwide mortgage defaults led investors to view mortgage securities as safe before 2008.
“prior to the subprime crisis, the fraudulent mortgages that gave rise to the global financial crisis, there had never been a nationwide wave of mortgage defaults.”
Marks says when any company can raise money on any basis, that's a danger signal in the market.
“I'd hold up an article from the news, I said, Look at this piece of crap that got issued yesterday. If a company can raise money on this basis, there's something wrong in the market.”
Marks says when any company can raise money on any terms, the market has failed its disciplinary function.
“If a company can raise money on this basis, there's something wrong in the market. It's as simple as that, you know?”
Marks says the Fed funds rate should exceed inflation to maintain a positive real rate.
“If inflation's two, then the Fed funds rate should be higher than that so that there's a positive real Fed funds rate.”
Marks describes Fed funds rate declining from 20% in 1980 to zero forty years later as dominant financial factor.
“Forty years later, the Fed funds rate was zero, and I had a loan outstanding from bank at two and a quarter.”
Marks illustrates how refinancing environment shifted from 800 million at 5% to 500 million at 8%.
“You went to the bank. They said we'll lend you 800,000,000 at 5%. Now the loan is up for renewal. You go in. They say, fine. We'll lend you 500,000,000 at 8%.”
Marks says interest rates fell 20 percentage points from 1980 to 2020, the most important financial event in fifty years.
“So the decline of interest rates by 20 percentage points over that period was a dominant factor in the financial world.”
Marks predicts Fed funds rate will normalize between two and four percent, not zero to two.
“rates are likely to be between two and four, not between zero and two, the Fed funds rate. And, you know, between zero and two is, an emergency measure.”
Marks says few recognize the shift in interest rates as a major change despite his emphasis.
“Some people come up to me and say, yes. You're right. Interest rates are are low. Nobody has said this is a major change as you say it is.”
Marks asserts risk is not a function of asset quality, opposing conventional belief about quality and safety.
“One of the most important things for every investor to learn is that risk is not a function of asset quality. This too sounds counterintuitive.”
Marks detected excessive risk-taking in 2005-06 by observing low-quality deals getting done easily, signaling inadequate prudence.
“I'd say, look at this piece of junk that got issued yesterday. There's something wrong. If a deal like this can get done, the world is exercising inadequate prudence.”
Marks raised $8 billion in early 2007, took only $3.5 billion, held rest in standby fund.
“But we would like to have the remainder of your interest in a standby fund that will implement if the stuff hits the fan.”
Marks says Oaktree had $10 billion ready when Lehman collapsed and most thought the financial world would melt down.
“We had $10,000,000,000 sitting on the shelf. Lehman goes under. Most people think the financial world is gonna melt down. Question is whether you spend the money.”
Marks says Oaktree had raised $10 billion for distressed debt by September 2008, three times the prior record.
“When Lehman Brothers went bankrupt in mid September of o eight, we had raised the biggest distressed debt fund in history by a factor of about three. We had $10,000,000,000 sitting on the shelf.”
Marks reveals Bruce Karsh invested $450 million per week for fifteen weeks during the 2008 crisis.
“Bruce and I figured out that we should spend the money. He ran the fund in question and he bravely invested an average of $450,000,000 a week for the next fifteen weeks.”
Marks describes personal borrowing rates falling from 22.25% in 1980 to 2.25% in 2020.
“And forty years later in 2020, I was able to borrow at two and a quarter fixed for fifteen years.”
Marks admits his risk aversion was costly since 1980 when optimism consistently paid off.
“And given the, if you think about it, from 1980 when the inflation was solved, essentially to date, generally speaking, the more optimistic you were, the more money you made.”
Marks's firm deployed $10 billion in fifteen weeks during the financial crisis after earlier caution.
“See, the lead up was that because we were worried in 'five and assets, we liquidated a lot of funds, if we raised funds, we raised only small funds, we increased our selectivity.”
Marks notes the global financial crisis had only one year of elevated high yield defaults versus the normal two years.
“the global financial crisis, which was probably the most destructive environment I've ever lived through, have only one year of elevated defaults on high yield bonds rather than the normal two.”
Marks traces private credit's origins to 2011 when regulated banks withdrew from buyout lending and non-bank lenders filled the gap.
“in 2011, when the banks chastened and regulated because of the global financial crisis, pulled back from lending for buyouts, so called non bank lenders stepped in and started to engage in direct lending, lending for mid sized buyouts.”
Marks argues markets have enjoyed seventeen years without a truly tough period since March 2009, despite brief disruptions.
“the stock market bottomed March 6, I think it was, of 2009, seventeen years ago, this month, and there hasn't really been a tough time in the financial market since then.”
Marks notes the global financial crisis produced only one year of elevated defaults instead of the normal two years.
“we've had seventeen years of low defaults, and the actions of the Fed made the global financial crisis, which was probably the most destructive environment I've ever lived through, have only one year of elevated defaults on high yield bonds rather than the normal two.”
Marks observes yield spreads at low end of range indicate no fear or compensation for elevated defaults.
“if the yield spreads are at the low end of normal range, you would have to say that the fear of elevated defaults is not present and compensation for an elevated default rate is not available.”
Marks notes worst loans are made in best times, citing seventeen years of good times since March 2009 bottom.
“one of the long standing sayings in the banking business is that the worst of loans are made in the best of times, and it's for this reason.”
Marks says non-bank lenders could demand high rates and safety in 2011 when limited supply met strong private equity demand.
“And of course, since the demand for capital from the private equity industry was strong, and the supply of capital from the non bank lenders was limited, the non bank lenders could demand high interest rates and good safety.”
Marks reports 99% of Oaktree's high yield bonds paid off but warns competition periodically erodes returns and safety.
“I think it's 99% of the high yield bonds we bought paid off. So, you know, there's nothing wrong with it fundamentally, intrinsically.”
Marks says defaults have not yet revealed who made bad loans but expects that to come.
“We actually haven't had many defaults yet, so we haven't had a chance yet to see who made bad loans. That's coming too. But I think that we were reserved in 2025.”
Marks observes a 17-year period without profound low points led people to forget leverage risks.
“And from March of o nine until, let's say, January '26, there generally were not profound low points. And when good times roll on that long, people forget about the possibility of bad times.”
Marks argues private credit managers took in too much money and invested it too fast, making bad decisions.
“There's nothing wrong with lending money to companies. The question is, do you do it wisely?”
Marks notes optimists have been winning the market tug of war for forty-three months.
“The pessimist the optimists had basically been winning for the last, I think now it's, forty three months.”
Marks describes buying senior debt at 15-20% yields where company could fall 75% without loss.
“these great buyout firms bought a company for $4,000,000,000 and now we are we can buy the senior most debt at a yield of, I don't know, let's say 15 or 20%, such that if the company ends up being re worth $1,000,000,000 we won't lose any money.”
Marks bought senior debt at prices profitable even if companies worth one-fifth of buyout valuations.
“we were buying the senior most debt of these companies at prices such that if these companies ended up being worth a third or a quarter or a fifth of what these great buyout firms had bought them for a year or two ago, we would be okay.”
Marks states Oaktree's default rate over 40 years was one-third the market average of 3.6-3.7% annually.
“over the last forty years, on average, something like 3.6 or 3.7% of all high yield bonds have gone into default every year, and our default rate has been roughly a third.”
Marks reframes economic cycles as excesses and corrections around trend lines rather than simple ups and downs.
“So rather than thinking of cycles as ups and downs, which I think most people do, think of them as excesses and corrections, excesses and corrections.”
Marks reports Oaktree achieved 99% success rate in bonds paying interest and principal as promised over 48 years.
“in our experience, ninety nine percent of the bonds have paid interest in principle as promised. So I think I can say almost every time.”
Marks describes competitive pressure forcing lenders to cut loan prices to avoid losing deals.
“If I don't cut the price of this loan, my competitor will make the loan, and I'll have to look on. So these this is what happens.”
Marks characterizes current credit cycle as probably the longest in history with generous market conditions.
“It's gone on with the interruption of the pandemic, probably the longest time in history. And so market conditions in credit are generous and borrowing is easy.”
Marks argues the current credit cycle is likely the longest in history despite pandemic interruption.
“I think the credit cycle has been very strong. It's gone on with the interruption of the pandemic, probably the longest time in history.”
Marks notes declining rates made financial engineering and leverage particularly effective at generating returns.
“In this period we've been through of declining interest rates, financial engineering helped a lot, merely owning assets with leverage helped a lot, things regularly went to premium valuations.”
Marks argues making money in a favorable environment proves nothing, as it can result from luck rather than skill.
“To make money in a salutary investment environment, you can do it on the basis of good judgment and hard work and skill, or you can do it on aggressiveness and getting lucky.”
Marks says credit markets have been on a seventeen-year run since the 2009 financial crisis low.
“Well, the the credit markets have been on a tear for the most part of the last seventeen years.”