Odd Lots Podcast Summary: "How Oaktree's Head of Sourcing Finds the Next Great Deal"

Bloomberg's Odd Lots podcast, hosted by Joe Weisenthal and Tracy Alloway, delves into the intricate world of finance, markets, and economics. In the episode titled "How Oaktree's Head of Sourcing Finds the Next Great Deal," released on November 28, 2024, the hosts engage in an insightful conversation with Millwood Hobbs, the Head of Sourcing and Originations Group at Oaktree.

1. Introduction to the Guest

Timestamp: [03:45]

Tracy Alloway introduces Millwood Hobbs as the ideal guest to discuss the nuanced process of sourcing deals within private credit markets. Hobbs brings a wealth of experience, having led Oaktree's Sourcing and Originations Group since its inception in 2020.

Tracy Alloway: "We're speaking with someone whose day-to-day business is talking to people, sourcing and finding deals, bringing things into the world."

2. Millwood Hobbs' Professional Journey

Timestamp: [07:43] - [10:21]

Millwood Hobbs shares his extensive background in finance, detailing his progression from public accounting to leveraged finance banking. He highlights pivotal moments, including his tenure at Nations Bank (a predecessor to Bank of America), Columbia Business School, First Boston, Deutsche Bank, Goldman Sachs, and finally, joining Oaktree in 2013.

Millwood Hobbs: "When I joined Oaktree in 2013, every strategy within Oaktree kind of did its own thing. So what we decided as the market evolved... was to create my group with the real purpose of making sure we were focused on providing capital solutions versus trying to figure out what fit a particular strategy."

3. Evolution of Credit and Capital Markets

Timestamp: [10:46] - [16:41]

Hobbs discusses the transformation of the private credit market over his career. He contrasts the pre-Dodd-Frank era, where banking was the primary source of leveraged finance, with the post-crisis landscape that saw the rise of private credit markets. The reduction in bank leverage ratios from 30x to 15x post-Dodd-Frank significantly altered market dynamics, leading to increased reliance on private credit.

Millwood Hobbs: "Post Dodd Frank... more of that has just migrated to the private credit market, supplemented by the fact that there are these private equity professionals who are very efficient at looking at both markets and figuring out where they should play or where they should place their credit or their deals."

4. Sourcing and Finding Deals

Timestamp: [17:06] - [24:19]

Hobbs explains the strategic approach behind Oaktree's Sourcing and Originations Group. Emphasizing relationship-building, his team focuses on being the "first call and the last call" in deal sourcing. This involves cultivating deep relationships with private equity firms, understanding their needs, and positioning Oaktree as a trusted capital provider.

Millwood Hobbs: "The goal is the more conversations I have, the more informed I am of where the market is. ... we spend time making sure that they know who our CEO Armin is or Bob O'Leary, that they know the PMs at the different strategies."

5. Relationship Management in Finance

Timestamp: [22:33] - [31:48]

A significant portion of the discussion centers on the importance of personal relationships in finance. Hobbs shares anecdotes illustrating how personal connections—ranging from family interests to shared hobbies—facilitate trust and open communication between financiers and clients. He underscores that maintaining amicable relationships, even when deals don't materialize, is crucial for long-term success.

Millwood Hobbs: "We're always trying to make sure we're understanding relative value between public and private... We're still a trust me business."

6. Negotiation Strategies and Challenges

Timestamp: [24:24] - [36:37]

Hobbs delves into the art of negotiation within private credit deals. He recounts a memorable negotiation where he offered to buy a stake in a struggling deal at a significant discount, illustrating the delicate balance between firm decision-making and maintaining positive relationships. The discussion also touches on the complexities of deal structuring, the role of legal documentation, and the impact of add-backs on adjusted EBITDA.

Millwood Hobbs: "The art of negotiation is not the negotiating point you're discussing at the moment. It's the points that are coming two points later."

7. Handling Rejections and Maintaining Position as First Call

Timestamp: [44:20] - [46:51]

Hobbs emphasizes the importance of gracefully handling rejections to preserve Oaktree's reputation as a reliable first call. Instead of outright saying no, his team offers alternative pathways to agreement, ensuring that relationships remain intact even when specific deals don't proceed.

Millwood Hobbs: "We don't say no. We say, here's how we can get to a yes."

8. The Interplay Between Private and Public Credit Markets

Timestamp: [46:51] - [48:35]

The conversation shifts to the dynamic between private credit and public markets. Hobbs explains that refinancing private credit deals in public markets often stems from cost reduction motives and the pursuit of greater flexibility. He reassures that the growing private credit market, bolstered by substantial dry powder, can accommodate these shifts without compromising Oaktree's position.

Millwood Hobbs: "There's $3 trillion of dry powder at private equity firms. There's enough for us all to do and be happy."

9. Legal Considerations and Documentation

Timestamp: [40:29] - [42:36]

Addressing the role of legal teams, Hobbs highlights the necessity of thorough legal documentation in safeguarding deals. He notes that while legal costs have risen, effective documentation ensures clarity in transaction intentions and governance, which is paramount in protecting investors and managing risks.

Millwood Hobbs: "Lawyers are very valuable in our process. We spend a lot of time making sure we have the right counsel who can understand and be able to move with us if this goes sideways."

10. Reflections and Key Takeaways

Timestamp: [42:47] - [51:05]

In wrapping up, Hobbs reflects on his career's successes and challenges, emphasizing the human element in finance. The hosts commend his ability to balance analytical rigor with interpersonal skills, underscoring the multifaceted nature of sourcing and negotiating deals in private credit.

Joe Weisenthal: "That was very interesting... I really enjoyed hearing him describe how he negotiates those implicit negotiations."

11. Conclusion

Timestamp: [51:05] - [52:45]

The episode concludes with the hosts expressing appreciation for Hobbs' insights, highlighting the valuable lessons on relationship management, negotiation, and strategic deal sourcing in the evolving private credit landscape.

Tracy Alloway: "Millwood Hobbs, thank you so much for coming on Odd Lots."

Notable Quotes

• Millwood Hobbs [04:30]: "I have a lot of Lucites... It's like an actual glossy picture book of the deal."

• Tracy Alloway [24:37]: "You're Oak Tree. And so I have the market as one. As one firm."

• Millwood Hobbs [25:15]: "Our job is to protect our investors. That's our job."

• Joe Weisenthal [44:20]: "Talk to us about saying no, but still maintaining the first sometimes."

• Millwood Hobbs [46:51]: "You're Oak Tree. And so I have the market as one. As one firm."

Insights and Conclusions

• Relationship Building is Paramount: Success in private credit sourcing hinges on cultivating deep, trust-based relationships with private equity firms and sponsors. Personal connections facilitate smoother negotiations and enhance Oaktree's reputation as a reliable capital provider.

• Adaptability to Market Evolution: The private credit market has significantly evolved post-Dodd-Frank, necessitating a strategic shift from traditional banking to specialized private credit solutions. Oaktree's structured approach ensures they remain competitive and responsive to market demands.

• Strategic Negotiation: Effective negotiation requires forward-thinking and the ability to anticipate future points of contention. Offering flexible solutions rather than outright refusals helps maintain positive relationships even when specific deals don't proceed.

• Importance of Legal Documentation: Comprehensive legal documentation is crucial in safeguarding deals, managing risks, and ensuring clarity in transaction intentions. Collaboration with adept legal counsel is essential for seamless deal execution.

• Balancing Flexibility and Efficiency: While private credit offers cost efficiencies and flexibility, maintaining a balance between these and the need for thorough due diligence is vital for long-term success and risk management.

Final Thoughts:

This episode of Odd Lots provides a comprehensive look into the strategic and interpersonal facets of sourcing deals in the private credit market. Millwood Hobbs' experience and insights offer invaluable lessons for professionals navigating the complexities of modern finance, emphasizing that success is as much about relationships and strategic thinking as it is about financial acumen.