Capital Allocators – Inside the Institutional Investment Industry
Episode: Howard Marks – Navigating Private Credit (EP.439)
Release Date: April 7, 2025
Host: Ted Seides
Introduction
In Episode 439 of Capital Allocators – Inside the Institutional Investment Industry, host Ted Seides engages in a comprehensive conversation with Howard Marks, the co-founder and co-chairman of Oaktree Capital Management. With over $200 billion in assets under management, primarily in credit investments, Oaktree stands as a titan in the global investment landscape. The discussion delves into Howard Marks' extensive career, insights on the evolving credit markets, the rise of private credit, and the intricacies of managing an investment firm in changing economic climates.
Howard Marks' Background
Early Life and Education (05:28 - 07:03)
Howard Marks reflects on his upbringing in Queens, emphasizing the influence of his parents, who were adults during the Great Depression. This environment instilled in him principles like diversification and caution. Despite his parents not holding college degrees, they provided a stable and intellectually stimulating home. Marks credits his high school accounting course for sparking his interest in finance, leading him to apply and attend the Wharton School, where he eventually switched his major to finance.
Notable Quote:
"My parents were adults during the Depression, which meant you had to be born before 1910, and mine were. If your parents were adults during the Depression, they were traumatized and you grew up hearing things like, 'Don't put all your eggs in one basket and save for a rainy day.'"
— Howard Marks [05:39]
Early Career Lessons
Transition from Equities to Fixed Income (07:15 - 09:50)
Marks recounts his entry into the investment world in September 1969, during the height of the Nifty50 mania—a bubble centered around investing in the top 50 growing American companies. He highlights a pivotal lesson from this period: "There’s always a price that's too high." Holding these supposedly great companies led to substantial losses, teaching him that successful investing hinges not on selecting good assets but on purchasing them at prudent prices.
He further explains his move to the fixed income department, which he humorously describes as being "banished to the bond department" due to the failures associated with the Nifty50 strategy. This transition proved fortuitous as he began studying high-yield bonds, finding them more predictable and safer compared to equities. Marks cites the introduction of Citibank's high-yield bond fund in 1978 as a significant milestone in his career.
Notable Quote:
"Successful investing is not a matter of buying good things, but buying things well."
— Howard Marks [07:15]
Memo Writing and Investment Philosophy
The Art of Memo Writing (09:50 - 11:36)
Marks is renowned for his insightful memos, which have become a staple for investors seeking deep market analysis. He explains that his memos often originate from ideas sparked by news events or client discussions, ensuring relevance and responsiveness to stakeholders' concerns. However, he also emphasizes that some memos stem from broader reflections on enduring investment principles, such as risk and cyclicality.
He believes that effective memo writing and investing are interconnected through logical and disciplined thinking. While not everyone may excel in both, Marks attributes his success to his logical and linear approach to both writing and investing.
Notable Quote:
"The basic thing is I have something to write which not everybody else has been writing or talking about or I have to see something differently from everybody else."
— Howard Marks [10:01]
Evolution of Credit Markets
From High-Yield Bonds to Private Credit (11:36 - 16:52)
Marks traces the evolution of the credit markets over several decades. Beginning with the nascent high-yield bond market in the late 1970s, he describes how leveraged buyouts (LBOs) in the mid-1980s expanded the market but were later tempered by the 1991 crisis, leading to more stringent financing standards.
The early 2000s saw the rise of senior loans and the alternative investment boom, particularly after the tech bubble burst and the 2008 financial crisis. Marks highlights how regulatory changes post-crisis curtailed bank risk-taking, paving the way for the explosion of the private credit market—from $250 billion in 2007 to approximately $1.5 trillion by 2017.
Notable Quote:
"The biggest change was the blossoming of the LBO business which really came on big in '84, '85... That was a big change."
— Howard Marks [12:01]
Private Credit vs. Public Credit
Understanding the Distinctions (24:29 - 27:27)
Marks delves into the fundamental differences between private credit and public credit markets. In private credit, assets are not readily tradable, and there is no daily mark-to-market pricing, which contrasts sharply with the volatility seen in public markets. He raises critical questions about the accuracy and transparency of valuing private credit assets, especially during economic downturns when defaults may rise.
Marks also discusses the implications of private credit's lack of regulatory oversight, leading to uncertainties in how defaults are handled and how accurate the valuation of these assets truly is. He stresses that without strict mark-to-market practices, investors may be unaware of the real-time performance and risks associated with their private credit holdings.
Notable Quote:
"If you go into such a period and your high yield bonds are down 10% and your private credit is down 2% and then you come out of that period... maybe the private credit will go from 98 to 100 and you'll make 2%."
— Howard Marks [27:27]
Investment Discipline and Risk Control
Maintaining Discipline Amid Market Swings (16:52 - 21:25)
Howard Marks emphasizes the cyclical nature of investment opportunities and risks, likening them to a pendulum swing. He notes that when an asset class is unpopular, it presents opportunities, but as interest grows, the potential for overvaluation and increased risk elevates. Marks underscores the importance of adhering to disciplined investment philosophies to navigate these swings effectively.
At Oaktree, Marks and his team prioritize risk control above all else. Their investment philosophy, established in 1995, is anchored by six tenets, with risk control being paramount. This disciplined approach ensures that even as private credit becomes more popular, Oaktree remains cautious, avoiding the pitfalls of rapid growth driven by lower credit standards.
Notable Quote:
"The most important thing is risk control. I think that's the mark of a professional."
— Howard Marks [21:25]
Private Equity Insights
Challenges and Dynamics in Private Equity (32:24 - 36:44)
Marks offers an insightful analysis of the private equity landscape, highlighting its rise as the "silver bullet" investment strategy in the early 21st century. However, he points out the challenges arising from unprecedented rate hikes by the Federal Reserve, which have made leveraged acquisitions more expensive and harder to sustain. With private equity firms now managing around $3 trillion in dry powder, Marks observes a slowdown in capital formation as exiting investments becomes more difficult amidst higher financing costs.
He explains that the inflated cost of debt has diminished the magic formula of private equity returns, making it challenging to meet investor expectations. This has led to a contraction in new fund commitments from traditional investors like endowments and pension funds.
Notable Quote:
"The private equity was knighted as the silver bullet... but now you have to pay it probably 9 to 10%. Well, if you're going to buy a company and make 10 or 11% a year, you have to pay 9 to 10% for the money."
— Howard Marks [32:24]
Oaktree's Acquisition by Brookfield and Corporate Structure
Strategic Partnership and Autonomy (41:52 - 44:17)
Discussing Oaktree's acquisition by Brookfield Asset Management, Marks clarifies that Oaktree operates autonomously despite Brookfield holding about 70% ownership. The partnership was strategic, allowing Brookfield to expand its offerings into credit, complementing its existing strengths in real estate, private equity, renewables, and infrastructure. Marks appreciates the autonomy retained by Oaktree, which enables them to maintain their disciplined investment approach without external interference.
He also reflects on Oaktree's experience as a public company prior to the acquisition, noting the challenges of public market scrutiny and regulatory burdens. The transition back to a privately held entity has restored much of their operational freedom and reduced the pressures of daily market evaluations.
Notable Quote:
"We still exist as an autonomous, freestanding business... they wanted to be able to give their clients credit, and so they thought that partnering with Oaktree was the best way to do that."
— Howard Marks [42:21]
Future Perspectives
Navigating Upcoming Challenges (37:37 - 38:06)
Looking ahead, Marks expresses a focus on balancing work and personal life while continuing to deepen his understanding of the investment process. He acknowledges the ongoing nature of market cycles and investor psychology, emphasizing the importance of maintaining a disciplined approach amidst continual changes. Marks remains optimistic, finding excitement in the intellectual challenges posed by evolving markets.
He also touches upon the potential for new asset classes to emerge but remains skeptical, asserting that existing categories like ownership and debt will continue to dominate investment strategies.
Notable Quote:
"These phenomena rhyme from cycle to cycle every day. I feel I understand that a little better. It's exciting, and it still keeps me happily going."
— Howard Marks [45:20]
Personal Insights and Closing Remarks
Hobbies, Reflections, and Legacy (46:42 - 49:45)
In the final segment, Marks shares personal anecdotes and reflections. He reveals a passion for architecture and design, driven by an appreciation for beauty alongside his logical mindset. Reflecting on his career, he attributes his successes to a combination of luck, early learning, and disciplined investment strategies rather than an overly driven personal ambition.
Marks also contemplates the enigma of fraudulent investment schemes, like Ponzi schemes, expressing perplexity over the motivations and thought processes of individuals who perpetrate such frauds.
Looking forward, he aspires to balance his professional endeavors with personal fulfillment, emphasizing the importance of family, hobbies, and philanthropy.
Notable Quotes:
"I have a side that makes me so happy to see beautiful things and try to create them."
— Howard Marks [46:54]
"If yesterday you did what I said... then there's not that much to do today or tomorrow."
— Howard Marks [38:06]
Conclusion
Howard Marks' dialogue with Ted Seides offers a profound exploration of the intricacies of private credit markets, the significance of disciplined investment philosophies, and the challenges of managing large-scale investment firms amidst evolving economic landscapes. His emphasis on risk control, understanding market cycles, and maintaining organizational discipline provides invaluable lessons for investors and asset managers alike. Marks' insights underscore the enduring principles that guide successful investing, making this episode a must-listen for those navigating the complex world of institutional investment.