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 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 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 identifies too much money chasing too few deals as the seven worst words in investing.
“Now remember, the four worst words in the world were, it's different this time, the seven worst words in the world are too much money chasing too few deals.”
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 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 deployed $450 million weekly for fifteen weeks during financial crisis, $650 million weekly across all Oaktree funds.
“So as you say, we invested $450,000,000 a week for the next fifteen weeks in that fund, which was 7,000,000,000 and Oaktree overall invested an average of $650,000,000 a week for the next fifteen weeks.”
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 smart lending requires good visibility on repayment likelihood, not purely conjectural outcomes.
“I mean, in order to be a smart lender, you have to have good visibility on the extent to which the thing has is likely to repay interest and principal.”
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 says Oaktree raised fund targeting $3 billion but got $8 billion in orders within a month.
“And the biggest fund in history was $2,500,000,000 That was our 'one fund for. And so we went out to raise $3,000,000,000 and within a month we had orders for eight.”
Marks says AI can eliminate a huge percentage of knowledge work, citing Block laying off 4,000 people.
“Clearly, it can eliminate a a huge percentage of of knowledge work. And you we saw Friday block 10,000 employees, let 40%, 4,000 people let go”
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 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 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 says three months ago direct lending at 8.25% versus public credit at 7% represented fair equilibrium with no specialness.
“I would say that public credit was yielding about seven, and direct lending was yielding about eight and a quarter. It struck me that 125 basis points for a liquidity premium was about fair.”
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 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 dates the origin of nonbank direct lending to 2011 when banks became unable to meet private equity demand.
“And so so called nonbank lenders stepped in to make the loans that the banks weren't making.”
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 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 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 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 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 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 says 700 direct lending managers emerged to manage $1.7 trillion in a favorable environment with declining interest rates.
“I'm told that there are roughly 700 direct lending managers. 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 and with low or generally low or generally declining interest rates, which are salutary.”
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 admits he didn't foresee private credit growing from zero to $1.7 trillion in fifteen years.
“I didn't foresee the growth of private credit, which the part of private credit which loans money for mid sized buyouts we call direct lending.”
Marks says direct lending grew from essentially zero fifteen years ago to $1.7 trillion today, which he didn't foresee.
“the part of private credit which loans money for mid sized buyouts we call direct lending. It went from essentially 0 fifteen years ago to 1,700,000,000,000 today. I I didn't know that was coming.”
Marks notes only 3 percent of 700 direct lending managers existed before the financial crisis.
“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 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.”