Today, Howard Marks and other executives from Oak Capital held their first conference call since going public a few weeks ago. Much has been talked about the company since its IPO including a number of prominent funds disclosing ownership in the name including the Davis Funds, Maverick Capital, Scoggin, and Greenlight Capital just to name a few (some owning the equity when it traded on Goldman Sach's private exchange). The call was quite comprehensive, kicked off by Howard Marks discussing Oaktree's strategy and his thoughts on the market (my emphasis added):
In terms of the investing environment, I would characterize this as a relatively normal period. Having said that, I must say it makes me think of the guy who has his head in the freezer and his feet in the oven and, on average, feels okay. Today, the good news consist of the gradual recovery of the U.S. economy, as well as generally moderate asset prices and moderate investor psychology.
On the other hand, there are plenty of things to worry about in the macro and secular sense, including the outlook for the competitiveness of the developed world, economic growth, political leadership, deficits in debt, most immediately in Europe; and China's ability to hopefully slow its growth.
At Oaktree, we think of the market in terms of a pendulum that swings back and forth over time between unbounded optimism and limitless pessimism, and that's between prices which are too high and prices which are too low. Today we think we're in the middle of that range. We see good opportunities for most of our strategies, particularly in real estate and European distress for control. But on the other hand, distressed opportunities in the U.S. are less abundant.
As is normal for this point in the cycle, we're focused on the areas of the economy that are showing weakness. But we also are taking advantage of the more generous capital markets to exit investments and realize profits, particularly in the area of distress debt, where as of tomorrow we will have already distributed 94% of the drawn capital of Opps VIIb, our height of the crisis fund that only entered its liquidation period a year ago. But in our control funds, most of our portfolio companies are performing well and we see no need to rush realizations at anything less than full prices.So, net/net:
- Fairly valued market (pendulum in the 'neutral' state)
- Cheap assets: Real estate & European distress for control
- Overvalued asset: Distressed opportunities in the U.S.
- They have a little of $12 billion of dry powder ready to invest if markets get shaky
- They were buying positions coming out of some of the European banks and are involved with the Fitness First restructuring
- Great quote from Marks: "We don't believe in predicting the future and we especially have – if we have an inkling of what's going to happen, we never know when. So, as we sit here today, we continue to believe that real estate will provide opportunities. And we believe that one of these days, Europe and U.S. corporate distress will provide the opportunities that we've been raising money for. But none – nobody at Oaktree is going to predict that it's going to happen at any given point in time, or is going to assert unqualifiedly that it's going to happen."
- John Frank on their European operation:
"And a lot of what you read in the press is that the European banks, we all know the European banks have huge issues. And the, sort of, word on the street seems to be that the banks are going to become, to spew out this distress debt. In fact, we've not seen that to a huge degree. We've seen some of it. We haven't seen a lot of it.
So what our group in Europe is doing is working, really on a company level. There are particular companies that they follow. They have a war room where they have track a large number of companies quarter-to-quarter. And what they, the opportunity that they see is that the European banks, while they may not be willing to divest their bad loans at a low rate, what they aren't willing to do, and don't have an ability to do, is to put new money into situations.
So what our group is focused on are situations where companies have actual cash needs, have actual maturities that they have to meet or actual cash flow demands that they have to satisfy, and are in need of new capital. And our group works actively with the existing managements, with unions as necessary, with other community groups, to craft an overall solution."
- And one final quote from Marks, that I think sums up his thoughts on the credit markets: "I think that I would say that the secondary markets are healthy but not gaga. You can get deals done, it's not land office business, but it's very healthy I think. And when I talked about moderate psychology, I mean there's a desire to put money to work, but there's also some skepticism, which – and I think that, that balance is healthy. So I would describe the credit markets as healthy."