Marks: distress makes me smile

In a recent interview with sister magazine Private Equity International, Oaktree chairman Howard Marks discussed his firm’s rapid expansion and expertise in profiting from troubled times.

The current credit crisis is a boon for distressed debt investors, the co-founder and chairman of Oaktree Capital Management, Howard Marks, recently said in a rare interview with sister publication Private Equity International.

The world's been a free and easy place, and that's why it's got to the state it's in now, with this credit crunch.

Howard Marks

“Our view is we’ve been going through a very tough time for a bargain hunter because prices have been elevated and there’s been very, very easy access to money. And also there’s been a total absence of distress,” he said. “So the world’s been a free and easy place, and that’s why it’s got to the state it’s in now, with this credit crunch.”

As a result of this summer’s liquidity crisis, many traditional private equity firms are shelving deals, renegotiating terms and shifting strategy, but Oaktree appears poised to profit from the cycle’s change.

“Now, we’re probably going into a period where attitudes are less positive, and capital is not so easily available, prices are not bid up so much and there’s some distress,” Marks said. “For us, that’s better times. That’s when we start to smile.”

Marks declined to comment on any fundraising matters, but an LP said Oaktree is raising a $3 billion hung bridge fund, specifically to buy LBO debt that underwriting banks were unable to syndicate, in addition to raising a $3.5 billion fund that will make both distressed-for-control investments and more traditional private equity investments.

The 12-year-old firm tends to adjust its fundraising in accordance with the markets, and doesn’t shy from shrinking funds.

Howard Marks

“Back in ‘04 there wasn’t anything to do in the distressed debt world. So we raised a $1.2 billion fund, a third the size of the previous one,” Marks recalled. He noted that having the ability to make such a decision is at least one good example as to why Oaktree chose to list a portion of its management company on Goldman Sachs’ private exchange as opposed to a public float like Fortress Investment Group’s.

“What if public shareholders started calling up and saying, ‘You idiot, you could have raised $10 billion? We’re going to vote you out if you don’t raise $10 billion.’?” Marks said.

“The right thing was to raise $1 billion, because there was little to do, even though we could’ve raised $10 billion and maximized fees in the short run. But that wouldn’t be the way to maximize Oaktree’s value in the long run,” he said. “So we thought it was compelling to stay private as long as we can solve the other problem, the one of having liquid currency. I think we have the best of both worlds.”

More of Marks’ thoughts on management IPOs, the evolution of the private equity industry and Oaktree’s unique strategy is featured in an in-depth article in the November edition of Private Equity International.