Howard Marks is busy raising money for new credit-focused funds aimed at taking advantage of new opportunities in the investment world that haven’t been there for a long time.

In his famous investment memos, Marks has spoken of the current period being the third sea change that he’s seen in his career.

The first sea change

The first was in the 1970s when Michael Milken and others revolutionized the investment industry by issuing non-investment grade bonds to institutions. Previously, these bonds were off-limits as they were deemed too risky. Yet, that changed to investment managers buying bonds of almost any quality as long as they were adequately compensated for the associated risk.

The second sea change

The second sea change happened when then Fed Chairman Paul Volcker brought inflation under control in the early 1980s. This ushered in a declining interest rate environment for the next 40 years:

Marks says there were several factors that led to investor success over the past four decades including:

  • the economic growth and preeminence of the US
  • the incredible performance of our greatest companies
  • gains in technology, productivity, and management techniques
  • the benefits of globalization.

Yet he thinks the biggest factor may have been declining interest rates:

And obviously frustrating for Marks!

The latest sea change

Marks thinks the ball game has now transformed given the sharp rise in inflation and subsequent increase in inflation. It’s the third sea change of his career and he views it as a structural change where rates won’t go back to the low levels of pre-2022.

Source: Howard Marks, Oaktree Capital

Howard highlights the emerging stress in the business environment on the back of excess leverage and rising interest rates. And the prospect for better returns, especially in his specialty of distressed credit:

Which sectors Marks is scouring

Recently, Marks and his Oaktree offsider, Justin Miller, pitched new funds to Australian investors via partner, Spire Capital.

Marks and Miller see distressed opportunities in four sectors: enterprise software, healthcare, commercial property, and US regional banks.

They say the first three offer the best reward versus risk. The pair believes enterprise software, healthcare, and commercial property were all darlings of private equity in recent years. Private equity bought companies in these sectors and increased their leverage. Lenders agreed as they saw annuity-like revenue streams. So, more and more debt was added. Yet, much of the debt was floating rate, and as the Fed has lifted interest rates, these debts have become troublesome.

Healthcare has also had the additional issue of significant labor inflation, which has increased the cost base of many companies.

In commercial real estate, Oaktree is seeing potential deals where the equity value of buildings is essentially zero.

Marks and Miller addressed the potential competition for deals given the rise of investment managers in private credit. Miller points out that many of these competitors have only been in the game for a short time, compared to Oaktree’s 35 years. And they also have had the same exposure to complex deals such as corporate restructurings.

There’s little doubt that Howard Marks has earned his formidable reputation. Of the 26 funds raised by Oaktree, the average gross return has been 22%, and the worst has been 10%.

James Gruber is an assistant editor for Firstlinks and Morningstar