WEBVTT - Oaktree Capital's Howard Marks Talks Private Equity and Real Estate 0:00:02.440 --> 0:00:07.720 Bloomberg Audio Studios, podcasts, radio news, because we've been talking 0:00:07.720 --> 0:00:11.640 about that mounting concern about how big government spending has 0:00:11.840 --> 0:00:16.600 going to create this issue here to markets, potentially upending them, 0:00:16.640 --> 0:00:19.720 making the job more challenging for central banks. Of course, 0:00:19.760 --> 0:00:22.799 as Jerome Powell, the FED Chair, has two days of 0:00:22.880 --> 0:00:26.360 testimony ahead in Congress, all in the middle of a 0:00:26.360 --> 0:00:28.680 weakening labor market here in the United States. 0:00:28.720 --> 0:00:29.640 It's the perfect storm. 0:00:29.840 --> 0:00:33.040 We are now joined by oak Tree Capital Management co 0:00:33.120 --> 0:00:35.839 founder and co chairman Howard Marks to talk all about it. 0:00:36.000 --> 0:00:38.479 We've been talking about the fiscal issues, right, We've been 0:00:38.520 --> 0:00:42.280 talking about the monetary conundrum that's been happening for now 0:00:42.600 --> 0:00:45.400 well over a year for the FED Chair. If you 0:00:45.440 --> 0:00:49.000 think about the potential for fiscal to really upend how 0:00:49.040 --> 0:00:51.960 investors think these days, how much is the government dot 0:00:51.960 --> 0:00:55.640 loads in the US and abroad really changing the calculus? 0:00:56.800 --> 0:01:01.440 Well, look, Sonali, I think it's unfortunate that the US 0:01:01.680 --> 0:01:05.200 behaves like a country that has a credit card with 0:01:05.200 --> 0:01:09.640 no credit limit, where the bill never comes. I mean, 0:01:09.680 --> 0:01:14.160 nobody can think that's a good idea. You would think 0:01:14.480 --> 0:01:17.600 that there has to be a point at which our 0:01:17.720 --> 0:01:21.399 dead or our deficits become too much reckoned as a 0:01:21.440 --> 0:01:26.440 percentage of GDP. Usually nobody will tell you that point 0:01:26.520 --> 0:01:32.880 doesn't exist. Nobody will tell you where it is. So 0:01:35.560 --> 0:01:38.920 nobody's exercising fiscal discipline in Washington these days. 0:01:40.560 --> 0:01:41.680 Last year we had. 0:01:41.520 --> 0:01:47.000 A deficit in the trillions in a period of prosperity, 0:01:47.319 --> 0:01:48.240 not supposed to happen. 0:01:49.000 --> 0:01:53.320 All very unfortunate. But A nobody can tell. 0:01:53.120 --> 0:01:58.640 You when it becomes a problem, and b nobody can 0:01:58.680 --> 0:02:02.600 tell you what to do with it. You can't eliminate 0:02:02.640 --> 0:02:07.040 the US from your portfolios. People who've said to do 0:02:07.160 --> 0:02:10.200 that in past years are now looking pretty bad. 0:02:10.360 --> 0:02:10.560 Yeah. 0:02:10.560 --> 0:02:12.920 I was going to say, if you had followed that advice, 0:02:13.200 --> 0:02:15.200 you'd be in a world hurt right now in terms 0:02:15.200 --> 0:02:17.680 of relative performance. And you said, the new one can 0:02:17.720 --> 0:02:20.120 tell you where that point is. But that's exactly what 0:02:20.120 --> 0:02:22.600 I'm going to ask you. Where do you think that 0:02:22.639 --> 0:02:24.959 point is? Is it something that we're approaching If you 0:02:24.960 --> 0:02:26.880 don't want to exactly pinpoint. 0:02:26.400 --> 0:02:28.680 It, I don't want to exactly pinpoint it. I want 0:02:28.680 --> 0:02:30.680 to say that I'm among the people who can't tell 0:02:30.720 --> 0:02:34.359 you where it is, you know, one of the many. Yeah, 0:02:34.720 --> 0:02:38.120 you know, I think every time I come on this 0:02:38.720 --> 0:02:42.280 on Bloomberg, I quote Mark Twain who said, it ain't 0:02:42.320 --> 0:02:44.399 what you don't know that gets you into trouble. It's 0:02:44.400 --> 0:02:46.680 what you know for certain that just ain't true. I 0:02:46.840 --> 0:02:47.680 certainly don't know. 0:02:48.400 --> 0:02:51.560 Well, I wonder what kind of opportunities you're finding. I'm 0:02:51.560 --> 0:02:56.040 always interested on the distress side about how sort of 0:02:56.080 --> 0:02:58.240 target rich the environment is. I think that says a 0:02:58.240 --> 0:03:00.880 lot about our economy. All the econo surprises that we 0:03:00.960 --> 0:03:06.120 see are to the downside lately and rates remain high. 0:03:06.560 --> 0:03:09.000 Does that make this interesting for you? Well, I think 0:03:09.000 --> 0:03:09.840 it is interested. 0:03:10.080 --> 0:03:13.519 I mean, we went through a really slow period from 0:03:13.919 --> 0:03:16.639 nine when the FED took the Fed funds rate to 0:03:16.720 --> 0:03:19.880 zero to stimulate the economy, to twenty one when they 0:03:19.880 --> 0:03:23.000 started to decided to lift it to fight inflation. And 0:03:23.040 --> 0:03:25.760 in that thirteen year period there was very little distress 0:03:25.880 --> 0:03:31.040 because it was a very benign environment for companies. Now, 0:03:31.120 --> 0:03:34.320 as you know, the interest rates are higher. That gives 0:03:34.400 --> 0:03:37.840 us more of an opportunity. And importantly, there were a 0:03:37.880 --> 0:03:44.040 lot of leverage transactions done in the period I described, 0:03:45.160 --> 0:03:51.720 where companies were burdened with capital structures debt structures that 0:03:51.840 --> 0:03:54.400 did not anticipate a five hundred basis point or four 0:03:54.520 --> 0:03:56.080 hundred base point increase in rates. 0:03:56.600 --> 0:03:58.920 So, you know, to put it. 0:04:01.240 --> 0:04:04.240 In short, it was it was a great time to 0:04:04.280 --> 0:04:06.440 be a borrower because rates came down and. 0:04:06.400 --> 0:04:07.560 Business was prosperous. 0:04:08.400 --> 0:04:12.520 But right now, and I think going into the future, 0:04:14.280 --> 0:04:18.320 leveraged companies will not be able to renew their leverage 0:04:18.520 --> 0:04:21.360 as easily and the cost of doing so will be higher. 0:04:21.680 --> 0:04:25.160 So that gives us better opportunities than we've been seeing. 0:04:25.600 --> 0:04:30.200 And you know, just to put it in brief for 0:04:30.279 --> 0:04:33.440 your listeners, six years ago, you had an idea, You 0:04:33.480 --> 0:04:35.400 went at the bank, you described that, they said, fine, 0:04:35.440 --> 0:04:37.760 we'll give you nine hundred million dollars at five percent. 0:04:38.120 --> 0:04:40.279 Now it's time to renew your debt. You go in, 0:04:40.360 --> 0:04:42.760 you describe it again, and they say, good, we'll give 0:04:42.800 --> 0:04:44.440 you five hundred million dollars at nine percent. 0:04:45.360 --> 0:04:47.240 Where do you think most of that pain is going 0:04:47.279 --> 0:04:50.039 to come? Because there's a private equity universe that's clearly 0:04:50.279 --> 0:04:53.760 grappling with that refinancing pain. There's a commercial real estate market, 0:04:54.000 --> 0:04:57.520 and equity investors seem to be ignoring any leverage that 0:04:57.600 --> 0:04:58.679 might be under the system. 0:04:58.760 --> 0:05:00.600 Still, what should they be one reaching out for? 0:05:01.279 --> 0:05:05.920 Well, clearly now it'll be in highly levered situations, and 0:05:05.960 --> 0:05:10.080 you name two of them, private equity and real estate leverage. 0:05:10.279 --> 0:05:14.000 The use of debt to amplify your returns. It has 0:05:14.080 --> 0:05:20.360 been the lifeblood of these two asset classes and they've 0:05:20.400 --> 0:05:25.479 done extremely well as a result. It was very, very 0:05:25.600 --> 0:05:28.840 salutary for them. But that's where the pain will come 0:05:28.880 --> 0:05:35.000 in the future. And you know, you can't increase a 0:05:35.120 --> 0:05:39.760 company's debt service costs markedly without affecting his returns. And 0:05:39.880 --> 0:05:46.720 in certain sectors of the real estate world, mainly retail 0:05:45.040 --> 0:05:51.640 and office, there are fundamental questions. So you put that together, 0:05:52.080 --> 0:05:57.240 we think you'll see some disruption which will give us 0:05:57.800 --> 0:06:00.400 and people like us opportunity. You know, this has been 0:06:00.400 --> 0:06:04.000 a really tough period for lenders, which is what we are, 0:06:04.360 --> 0:06:06.640 and a really tough period for bargain hunters. 0:06:06.800 --> 0:06:09.000 Right well, I want to talk a bit more about 0:06:09.000 --> 0:06:10.800 the business of lending and what's going on in the 0:06:10.800 --> 0:06:13.480 private credit industry. Of course, a month or two ago 0:06:13.560 --> 0:06:16.720 we saw Plural Site back by Vista basically transfer its 0:06:16.720 --> 0:06:20.440 assets into a different subsidiary to obtain more financing from 0:06:20.440 --> 0:06:23.159 its sponsor. Let's become a little bit of a battle cry, 0:06:23.240 --> 0:06:26.960 you see lenders basically asking for plural site protection. Right now, 0:06:27.000 --> 0:06:30.200 I won't ask you specifically about what happened with that episode, 0:06:30.200 --> 0:06:32.880 but how do you see this evolving in the industry. 0:06:32.920 --> 0:06:34.960 Do you think that we're going to see more creditor 0:06:35.000 --> 0:06:37.080 on creditor violence as some have been calling it. 0:06:38.320 --> 0:06:42.440 Well, you know, people tend to do what they can 0:06:42.520 --> 0:06:46.680 to enhance their position financially. Most people will stick to 0:06:46.800 --> 0:06:49.720 what they can do legally. Some people will stick to 0:06:49.800 --> 0:06:53.359 what they can do ethically. I don't know, there's some 0:06:53.600 --> 0:06:57.400 question about what that means, but you know, people, if 0:06:57.400 --> 0:06:59.720 there's an opening, people will take it. For the most part, 0:07:00.080 --> 0:07:02.760 there is an opening for what you call credit or 0:07:02.800 --> 0:07:07.560 credit of violence. That is proactive, proactive efforts to enhance 0:07:07.640 --> 0:07:10.240 your situation financially at the expense of somebody else. 0:07:11.000 --> 0:07:12.400 And so. 0:07:13.720 --> 0:07:19.240 The important point is that it's up to lenders to 0:07:19.320 --> 0:07:22.320 study the documentation well enough to prevent it. 0:07:22.680 --> 0:07:23.120 That's it. 0:07:23.280 --> 0:07:27.920 Are you getting Are you active in office space right now? 0:07:27.920 --> 0:07:30.840 Because it seems like the perfect storm for anybody who 0:07:30.920 --> 0:07:35.080 has the financing. We talked to Ego Namdar, a real 0:07:35.120 --> 0:07:37.840 state investor a couple of days ago, who is getting 0:07:37.920 --> 0:07:43.480 like seventy percent off really big important office buildings in 0:07:43.720 --> 0:07:46.360 New York, the capital of the world, Like, how can 0:07:46.440 --> 0:07:47.600 that not come back? 0:07:47.800 --> 0:07:50.840 Well, the question, Matt is very simple. You're getting let's 0:07:50.840 --> 0:07:52.000 say you're getting seventy off. 0:07:52.480 --> 0:07:53.080 Is that enough? 0:07:54.240 --> 0:07:57.000 And you know, the mere fact that the price of 0:07:57.040 --> 0:07:59.600 something is down doesn't make it a bye. It has 0:07:59.680 --> 0:08:03.600 to be that the price is down more than it 0:08:03.640 --> 0:08:05.560 should be given the fundamentals. 0:08:06.160 --> 0:08:10.880 And you know, I think it's going to be up to. 0:08:12.400 --> 0:08:15.960 The experts, people who've made their life in that world 0:08:16.600 --> 0:08:19.480 and with success, to make that assessment. 0:08:21.720 --> 0:08:22.680 You know, I think that. 0:08:25.000 --> 0:08:27.400 If there is a bunch of real estate funds formed 0:08:27.400 --> 0:08:29.760 this year, somebody who puts all their money into office 0:08:30.520 --> 0:08:32.400 and somebody who puts none of their money into office, 0:08:32.520 --> 0:08:34.000 one of them will be the best performer. 0:08:34.760 --> 0:08:35.760 I just don't know which one. 0:08:35.920 --> 0:08:37.520 You know, if you have these struggles that are still 0:08:37.559 --> 0:08:39.920 under the surface, we are just about, you know, five 0:08:40.000 --> 0:08:43.439 days away really from bank earnings, and the question is 0:08:43.440 --> 0:08:45.920 is we enter this era where they're about to meet 0:08:45.960 --> 0:08:49.679 new capital rules as well? Are there still just tremendous 0:08:49.720 --> 0:08:52.200 stresses under the system that people are not noticing. 0:08:52.880 --> 0:08:57.120 Well, it's the it's the small to mid size banks, 0:08:57.120 --> 0:09:00.920 the community and regional banks that are that are heavily 0:09:01.679 --> 0:09:07.079 weighted toward real estate loans. The biggest banks over two 0:09:07.120 --> 0:09:09.600 hundred and fifty billion in assets don't have much of 0:09:09.640 --> 0:09:10.320 a concentration. 0:09:10.480 --> 0:09:11.280 They're not at risk. 0:09:11.840 --> 0:09:15.679 But some of the smaller banks, you know, I think 0:09:15.720 --> 0:09:17.880 on average, the banks under two hundred and fifty billion 0:09:17.920 --> 0:09:22.000 in assets, loans on real estate make up one hundred 0:09:22.000 --> 0:09:24.960 and sixty percent of their regulatory capital. So some of 0:09:25.000 --> 0:09:28.480 them will find pain, especially the ones who lent above 0:09:28.520 --> 0:09:32.079 average and concentrated in regions that are troubled and so forth. 0:09:32.120 --> 0:09:35.520 So you know, I don't think it's a systemic risk 0:09:35.640 --> 0:09:38.560 that's going to put us in the sink, but I 0:09:38.600 --> 0:09:41.920 do think that you'll see some companies in trouble, and 0:09:42.440 --> 0:09:46.920 you know, one by one the authorities may have to 0:09:46.960 --> 0:09:49.720 bail them out, and may well. 0:09:49.480 --> 0:09:51.920 Do so, all right, Howard, Unfortunately we have to leave 0:09:51.960 --> 0:09:53.920 it there. Great to have you, of course on our 0:09:54.000 --> 0:09:56.880 launch day are big banks, of course, to Howard. Marxie 0:09:57.000 --> 0:09:59.880 is the co founder and co chairman of oak Tree Capital.