Marks reports roughly 700 direct lending managers now manage $1.7 trillion in a favorable economy that made many extremely successful.
“So the the the And the availability of that $1,700,000,000,000 put a lot of people into business and made a lot of people extremely successful along with a very favorable economy”
Marks notes only 3% of 700 direct lending managers existed before the financial crisis, questioning their ability to handle adversity.
“I'm told that of the 700, roughly 3% were in business before the global financial crisis. So we don't know how many of them are have what it takes to deal with a harsh environment.”
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 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 quotes Jamie Dimon saying when you see one cockroach there are probably more.
“Jamie Dimon of JPMorgan says a lot of things best. He said, you know, when you see one cockroach, there are probably more. So, people started to say, well, maybe there's something wrong here.”
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 argues private asset valuation is fundamentally ambiguous with no clear standard for what constitutes fair value.
“Am I supposed to value these things at what they're worth? What I could sell them for? What I could sell half for?”
Marks defines proper private asset valuation as the price an intelligent, unemotional buyer would pay today.
“I think it should be valued at what an intelligent, unemotional buyer would pay for it today.”
Marks says direct lending stopped offering excess returns one to two years ago, delivering only adequate returns.
“I would say that as of a year or so, maybe two years ago, direct lending was, as you say, you use the term alpha, it was no longer special.”
Marks reports direct lending now offers only 100 to 125 basis points over public credit.
“Direct lending was fine. It was fair. You got a 100 or a 125 basis points of incremental interest over public credit.”
Marks questions why investors focus exclusively on private credit while ignoring public credit alternatives.
“And I would say, let's talk about credit. Why do you skip all the way from zero to private credit, glossing over public credit,”
Marks says private credit's yield advantage over public credit recently narrowed to just 125 basis points, eliminating its specialness.
“It struck me that 125 basis points for a liquidity premium was about fair. It was probably adequate, but certainly not lush, and so, in my opinion, the specialness had gone away.”
Marks argues lending to high-risk activities creates unlimited downside with limited upside, making it the wrong risk-reward combination.
“You certainly shouldn't do that in in in activities that have a high probability of not paying off at all because then you have unlimited downside and limited upside.”
Marks says credit instruments now offer equity-type returns with high single to low double digit yields.
“Today, you can get equity type returns from what we call credit instruments, loans, corporate corporate loans, loans for buyouts.”
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 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 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 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 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 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?”