Howard Marks – Navigating Private Credit (EP.439)
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Visit iConnections.io slash platform to learn more. Hello, I'm Ted Seides, and this is Capital Allocators.

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All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast. My guest on today's show is Howard Marks, a renowned investment thinker and the co-founder and co-chairman of Oak Tree Capital Management.

a leading global investment firm overseeing $200 billion, primarily in credit investments, that's majority owned by Brookfield Asset Management. Our conversation covers Howard's journey from his early days in finance to his current insights on the evolving credit landscape.

We dive into themes from his latest memo, Gimme Credit, exploring the pendulum swings in investor sentiment, the rise of private credit, and implications for investors. We also discuss the changing dynamics of private equity, the trend of asset manager M&A, and life as a public company. Throughout our conversation, Howard shares his timeless wisdom on risk management, market cycles, and the enduring principles of successful investing.

Before we get to the interview, investor relations pros, this one's for you. Registration is open for our next cohort of Capital Allocators University for investor relations and business development professionals happening in New York City on July 8th and 9th. Even better, we're offering an early bird discount for registrations before Memorial Day.

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Howard, thanks so much for doing this. Pleasure to be here, Ted. I'd love you to take me back. I know you grew up in Queens, but would love to hear what part of your childhood would you say has most impacted where you've come since? Well, it's hard to say. Number one, my parents were intelligent.

and kept a good home, not educated, neither went to college, but still good citizens. I went to the public schools at a time when I feel you could get a good education. I think I got good preparation for college, even though we were on triple session and

very crowded, but I had a great choice of courses and that included business law and accounting, which I took and really enjoyed. So that set me on my career direction. But the other thing that I want to mention is that I make a distinction. My parents were adults during the depression, not alive during the depression, adults during the depression, which meant you had to be born, I would say, before 1910.

and mine were. If your parents were adults during the Depression, they were traumatized, and you grew up hearing things like, don't put all your eggs in one basket and save for a rainy day. I think, if nothing else, that made me a rather, I would say, cautious person. How did you first get interested in finance? It was the accounting course in high school. It really appealed to me. I figured I'd become an accountant, which is what my father was by trade, so I applied to Wharton.

And my accounting professor helped me get in. Once at Wharton, I guess I switched my major to finance, which I found more interesting. And that was that. As you go through your career and you started in equities, turned to fixed income, what were some of the most important lessons that you learned in those early years about the structure of the markets? I started work in September of 1969.

The bank and the rest of what we called the money center banks were nifty 50 investors, which meant they bought almost exclusively the stocks of the 50, what they considered the 50 best and fastest growing companies in America.

This was a serious mania, a bubble. The ruling dicta were these were companies that were so good, nothing bad could happen, and so good that no price was too high. So the real lesson I learned was that there's always a price that's too high. If you held the stocks for five years from the day I got there, you lost about 95% of your money in great companies. Well, some weren't so great, but what were believed to be great.

So the lesson I learned was it's not what you buy, it's what you pay. Successful investing is not a matter of buying good things, but buying things well. As time passed, I rounded that into a belief that there is no asset so good that it can't become overpriced and dangerous, and very few assets which are so bad that if it's cheap enough, it can't be a good idea. That really has summarized what I've done since then.

I wrote a memo earlier this year. I talked about moving from the equity department to the fixed income department. I would actually say in the nicest possible way, I was banished to the bond department, which was Siberia at that time, because I was associated with the nifty-fifty strategy, which went so badly. It's coming more and more into focus how lucky I was because now I'm

studying some of the worst companies in America. I was asked to start Citibank's high yield bond fund in 1978. And it was the first high yield bond fund from a mainstream financial institution, as far as I know. But despite the low ratings, now I'm making money steadily and safely. And it was quite remarkable. You get to the bond department, there's this little plastic box sitting on your desk with keys. And if you punch in the coupon rate, the maturity date and the price and you push go,

It tells you what your return will be if you hold it to maturity. Now, when you buy a stock or a private equity investment or a building, there's no button you can push to find out what the return is going to be. I just thought that fixed income was so much easier. When I started buying high yield bonds, the yield to maturity was 12 and a quarter. That's better than you can do in the S&P on average contractually. So it was really eye opening for me.

You've become super well-known for your memos. Before we get into this most recent one on credit that I'm excited to explore, what's your process for writing these memos? I just have to get an idea, but I get ideas all the time of something that's worth writing about. It might be something in the news. And a lot of them come from discussions with clients because their questions tell me what's on their minds and I want to be responsive to that.

If I can figure out a way to answer their questions, which is helpful, then I got the start of a memo. That's what happened with the credit memo, but it happens very often. Now, it's not always that. For example, I've written memos on big picture topics like risk and cyclicality and leverage and things like that, which did not stem from questions. But that was just because I thought I had something to add. The basic question

thing is, I have to think I have something to write, which not everybody else has been writing or talking about. Or I have to see something differently from everybody else. The last thing I want to do is put out a memo that says, me too. How do you think about the relationship with writing well and investing well? It works for me. I don't think it has to work for everybody. There's probably people who can't put together a sentence who can make good investments.

People write me and they say, you made something complex clear. I always think it's because my brain is logical. I operate largely on the left side, logical, literate, linear. That can help you invest, but I just don't think it's essential. There are lots of ways to be a good investor, but the logicality I think works for me. When you started out relatively early on in the high yield markets when they were fairly nascent,

And we've had a few pretty significant changes over your time in the way credit got provided to companies, sort of high yield and different cycles of structured credit, increasingly private credit. And we'd just love to get your thoughts on those structural changes and the impact they've had on your thinking. You're quite right. When I started, it was actually the beginning in 1976, I

I think it was impossible for a company without an investment grade rating to issue a bond. And in 77, 78 is when it became possible. A few people had the idea that regardless of the rating, if the bond paid enough interest to compensate for the risk, it might be a good investment. So at the time, it was a small universe. I think when I started, picked it up in third quarter of

I think there was $2.5 billion of bonds outstanding. That was the whole thing. They were not great companies. They were more levered than an investment-grade company would be. But you might find some recurring aspect to the cash flows, which makes them creditworthy. You're right. There's been changes. The biggest change was the blossoming of the LBO business, which really came on big in 84.5.

The LBO business, leveraged buyouts could be done if you had 50 million of capital, you could buy a billion dollar company. You could borrow 95% of the money.

That meant that lesser companies could buy bigger companies or individuals could buy billion-dollar companies. It put a lot of companies in play. That really blossomed in the mid-'80s. In 1991, we had our first crisis, and many of the prominent LBOs of the '80s went under.

Macy's, Federated, National Gypsum, US Gypsum, RJR Nabisco was the biggest of the buyouts. It almost went under, but not quite. So that changed things. It made it hard to get the capital for buyouts. The leveraged buyout business actually had to reinvent itself. And you don't hear the term LBO business anymore. Now you hear private equity.

Well, why did they change the name? Because nobody would do it if you called it leveraged buyouts because the results had been so bad. The other thing is now you couldn't get 95% financing. You could only get 75% financing. So a guy with 50 million could not

by a billion dollar company, only a $200 million company. That was a big change. So the multi-billion dollar companies were no longer in play and the industry practiced buy and build roll-ups. In the mid to late 90s, we had the inception of the senior loan business. First it was banks making loans, then it was high yield bonds being issued, then people began to issue senior loans

which took the place of the banks to some extent. Unlike high yield bonds, those were floating rate and had pretty good covenants like any good banker would request. So we had the inception of the leveraged loan market. Then we had the tech bubble burst in 2001 and two, first three-year decline in the S&P since the Great Depression. People lost interest in the stock market pretty much.

The Fed took rates down to fight the swoon and people lost interest in the bond market. Well, if you don't want stocks and you don't want bonds, what do you want? Well, let's have something else. Well, what can we call it? Let's call it alternatives. So you had the growth of the alternative investment business and they tried hedge funds. But when the hedge funds got too big, they stopped performing, most of them.

And then people fastened on private equity. And around 05 or 06, that's when private equity funds first started. They crossed the $10 billion line. And people were eager to do those. I would say from 06 or 05 to 22, private equity was really knighted as what I call the silver bullet, the can't miss strategy. Then we had the global financial crisis in 08 or 09. The banks were chastened.

lost some of their capital, were more tightly regulated, were discouraged from risk-taking. And that led in 2011 or '12 to the creation of the private credit market, which is now over a trillion and a half. In '07, I think it was a quarter of a trillion. So it's up more than 6x in 17 years. But this is the equivalent of senior loans

but issued privately without the benefit of registration, SEC, oversight, et cetera. And that leads us to where we are now. So that's the travelogue. So as you describe...

different forms of cycles. Where we sit today with private credit, and you've just written this memo about this, how do you start thinking about how investors should consider both the opportunity and the potential risk? Well, of course, the risk is the flip side of the opportunity. In my experience, and you can trace the narrative, you get the times when nobody wants to do something. I wouldn't touch that with a 10-foot pole.

Usually, if you're willing to do it and nobody else is, you can get a pretty good deal.

And I was lucky because that was high yield bonds in '78. Then I was approached by a guy named Bruce Karsh who wanted to partner with me and started the Distressed Debt Fund. And I think we were a TCW at that time. And I think we started one of the very first distressed debt funds from the financial institution. Even emerging market stocks in '98, which we went into. As I say, if you do things nobody else wants to do, you can usually get a good deal.

But then eventually other people figure out that it's a good idea. They flock in. It becomes more popular. And then, of course, like everything, it gets overdone. Then the opportunity is gone and all you have left is risk. So it's the swing of a pendulum. It's very pronounced. It was the subject of my second memo, which was written in 1991. I called it The Pendulum.

I think the memo was creatively titled second quarter performance. But to me, if you're interested in the short or even the medium term, this is the most important dimension. Do they like them or do they hate them? Buffett puts it very succinctly. First, the innovator, then the imitator, then the idiot.

The way to sum that up in just a few words is that what the wise man does in the beginning, the fool does in the end. So where are we on that continuum? And the answer is in the early years, private credit was undiscovered, unheralded, unpopular.

But it caught on because in a low interest rate environment, these loans, interestingly, they only paid about 6%. But with a private fund, the manager can deliver you a leveraged solution and get the return up to about nine. And so in the low interest rate environment of 09 to 21, this was very popular.

A lot of managers went in, a lot of clients put money in, a lot of companies borrowed. And as I say, it went from 250 billion in '07 to a trillion and a half or so today. And I would say that the aspect of being undiscovered and unloved is over. It's a reasonable thing to do if you do it carefully, but I don't think it's a special strategy. It's just fairly priced. And then the question is, do you do it carefully?

Do you do it aggressively so that you can hoover up money and put it to work fast and grow your AUM? Or do you do it patiently and insist on credit standards, which slows your growth? And that, of course, is one of the consistent questions. What are you seeing in current underwriting standards of how far the pendulum has swung towards lots and lots of interest and deteriorating of underwriting standards? It's not a bargain.

It's not languishing cheap. If the pendulum swings from hate them to love them, I would say that where the credit standards are on the somewhat to the undemanding side, not terribly. In 05, 06, 07, the reason we knew to pretty much avoid the markets in most regards was that

They were just giving money away to anybody who wanted it for any purpose. Standards were extremely low. I don't think that's the case today. Standards are lowish. That still presents a big problem because if you want to apply high standards and somebody else has lower standards, then they can bid more for a given deal.

Think of it as an auction for a painting. You want to pay $1,000 per square inch, but somebody else wants to pay $2,000 a square inch. You're not going to get it. That's the same with investing. I wrote a memo in February of 2007 called The Race to the Bottom. I said, the race is on. Too many people have too much money and they're too eager to put it to work. Bad things happen. So it's on today, but I don't think it's terrible today. It's just the markets are a little bit generous today.

How do you and your team go about trying to ensure that you maintain your discipline when you see more and more people willing to pay $2,000 for the painting you think is worth a thousand? You just constantly go on and on about the importance of risk control. We have an investment philosophy, which we wrote down when we started. April the 10th will be our 30th anniversary. We started in 95.

We knew what we believed in and how we believed money should be run and how we wanted to run money. So we wrote out an investment philosophy which covered everything we would do. And it has six tenets. The first says that the most important thing is risk control. I think that's the mark of a professional. Not that you don't take risks, but you take them intelligently.

The second is consistency. Our clients don't want us going from the top of the distribution to the bottom, and neither do we. The third is less efficient markets that haven't been thoroughly picked over, where not everybody knows everything and understands everything. Number four, specialization. We don't try to do everything, just we try to do a limited number of things well. Number five, non-reliance on macro forecasting. And number six, non-reliance on market timing.

But the first one, risk control. That's really the key. People who work at Oak Creek get battered with this all the time. I describe myself as the CCO, the Chief Culture Officer.

And when I write the memos, it's not just for outside consumption. When it's in the water, you don't have to do it overtly. It's just insidious every day that the culture is reinforced. I think that people don't come to Oak Tree who want to try trick shots. Nobody comes to Oak Tree thinking that if they take a bunch of risk and they get lucky, that's the route to success.

In fact, we have this motto, which is embedded in our investment philosophy. If we avoid the losers, the winners take care of themselves. That's our official motto. And that's the right way to think about fixed income. Graham and Dodd said that fixed income is a negative art. I took insult at that. Why are you denigrating my career? Why are you so cynical? And then I realized what they were saying.

If there are 100 high-yield bonds outstanding and they're all 9% bonds, and let's say, for the sake of argument, that we know that 90 of the 100 will pay and 10 won't pay. It doesn't matter which of the 90 we buy because they all pay 9%. You can buy one of them, 10 of them. We can buy all 90. You get 100%. The only thing that matters is not buying the 10 that don't pay.

So you improve your performance not by what you buy, by what you exclude, QED, negative art. We just bang on this all the time with our credit analysts. We don't try to find tomorrow's shining star or upgrade or take over candidate. We just try to find the ones that will pay and exclude the ones that won't.

With this explosion of interest and activity in the private credit markets, I'm curious how you think about the distinctions and the similarities between private credit and public credit. In theory, it's the same question. If I lend this company money, will they pay me back? But the big differences are that, of course, if you buy a private credit and you change your mind, you shouldn't be able to expect to sell it.

As my partner, Sheldon Stone, who's been with me for 42 years now, he was my first analyst at Citibank. He says there's no eraser on the pencil, which is, I think, a very important concept. And then there's the question of marketing to market. And do they get marked to market? And do they get marked to market accurately? It depends on what you think accurately means.

Look at stock prices up and down 1% or 2% every day. That accurately tells you what some manic depressive is willing to trade at, but it doesn't accurately tell you what the company is worth. So when you mark a private credit to market, which are you supposed to do, Ted? Are you supposed to market at a price which reflects the company's credibility and creditworthiness? Or are you supposed to market at a price which reflects the psychological swings? I think it's actually unclear.

But anyway, private credit and other private assets do not mark the market in the sense of reflecting the swings of psychology. When you go through a tough period and high yield bonds are down 10% and private credits down 2%, I think that's the explanation. Which one is those is, quote, right. Hard to say. Depends on your definition of right.

But the only thing I know is that if you go into such a period and your high yield bonds are down 10% and your private credit is down 2%, and then you come out of that period and you have a recovery, maybe the high yield bonds will go from 90 to 100 and you'll make 11%. And maybe the private credit will go from 98 to 100 and you'll make 2%. So the easy thing to say in our business is without the downs, you're unlikely to have the ups.

Then there's all the questions of what does it mean to have an asset in a pension or endowment portfolio that doesn't quote actively mark to mark. Then there's a whole bunch of questions about when we finally have a recession, which I assume we haven't been completely broken of that habit. What will happen with these holdings?

Will the managers extend and pretend? That is to say, when a bond comes due, somebody says, I can't pay you, I'm going to default. And you say, well, it's okay, take another year. That's called the extend and pretend. You keep it on your books at maybe 98 or something like that, and you may believe it's good. Maybe things get better in that year and they can pay you, or maybe not. And then in that case, it was probably mismarked for the intervening year. What are the implications of that?

The important structural things about private credit are the things that I've been discussing. Liquidity, mark the market, and are you compelled to face reality with regard to the credit at some point in time? When you're sitting on an investment committee and people are talking about private credit, what are your views about how investors should think about these challenging issues? Well, the people who run these funds

pretty much like the fact that they don't mark the market, because then in the bad times, when the headlines in the papers are so negative, they don't have to go to the treasurer of the organization and say, we're down 10%. They can say, oh, great news, we're only down 2%. So it's just reality. But the point is, you shouldn't deceive yourself. If they're at 98, you should not feel that you've taken the full pain.

In a way, it's a really interesting question, Ted, and I'm glad you're exploring it. It kind of relates to the old question we used to say when we were kids. If a tree falls in the forest and there's nobody there to hear it, did it make noise? Noise is sound waves hitting your ear. If there's no people there to hear it, maybe it didn't make noise. Likewise,

If there's no public market to price things at and you ignore the psychological swings, is there anything wrong with that? I wrote in the credit memo that in the public markets, stock market, bond market, you can accomplish the same thing. Just don't read the paper. If you get your statement from the broker, just throw it in the drawer. And then you say, well, I'm glad my stuff didn't go down because you didn't open the envelope.

But that's, in a way, what private credit investors are doing. When the statement comes, not from the fund, but from the economy, they don't open the envelope. And they say, boy, I'm glad my stuff didn't go down.

What do you think happens when there is so much money that continues to come into the space? We haven't, at least on a headline basis, had a default cycle, but companies are certainly having problems from time to time. How does this play out? Are we going to see a default cycle again? When I was a boy, that's what we used to call the $64 question. Then with inflation, it became the $64,000 question. You remember, TV show. But I think we'll have another recession someday.

I think cyclicality in a person-driven thing like the economy can't be avoided because you have excessive optimism and then corrections. So I think we'll have another recession. I think when we have a recession, it'll get harder on some companies. And then the question is, will they default? I would assume so. In the public bond market, they can come in and ask for an exchange.

to push the problem down the road and they often get it. When we do what Sheldon Stone called a remedial exchange, we mark that down as default. And then what's going to happen in the private credit market when the companies go to the loan holders and say, look, we can't pay you on time. And the loan holder says, that's fine. You're a great guy. I think you're terrific. Take another year.

And then what happens if they can't pay after another year? Let me just put one thing on the table. What happens if Oak Tree has two investments in a company and public bonds and private credit? And the company has some difficulties in a tough period. And the public bond gets marked down from par to 80%.

And the valuation guy who works on the private side says, "Well, I think it's not worth 98." Then you have two loans to the same company, one at 80, one at 98. Is that okay? These are some of these deeper questions that have yet to be resolved. And by the way, the SEC doesn't look at these things because these are private investments, so they don't require accuracy. And the investors in the fund are mostly happy

without accuracy, because as I said, they don't have to report problems to their higher ups. So we don't really know what's going to happen. That's the key, I think. What if these things were bought in funds that have a 10-year life and stuff hits the fan right around year 10, and they can't raise the money to liquidate the fund and give the investors their money back, and it stretches on a couple of years? What will happen then? We just don't know.

Buffett says it best all the time. He says, it's only when the tide goes out that you find out who's swimming naked. So right now, we don't know who's swimming naked. We don't know what it's going to look like when the tide goes out. A lot of this is very tied into private equity. And you've had the beginning of slowdown and capital formation and private equity while you still have significant inflows into private credit. We'd love to get your thoughts on situation private equity as compared to all credit.

I think that's a big topic. It hasn't become a public topic inside baseball, I think. I mentioned that private equity was latched onto as the silver bullet. By the way, you remember the Lone Ranger? Yeah, sure. When Ted and I were kids, there was a cowboy who rode around on a white horse.

called silver. And he wore a mask and he carried a gun and in the gun were silver bullets. And because the bullets were silver, he never missed. Everybody wants a silver bullet. The private equity was knighted as the silver bullet around the middle of the first decade of this century. But then from '09 to '21, the Fed funds rate was zero most of the time and I think averaged about a half a percent.

That was great for private equity. That was great for anybody who owned assets using borrowed money. Then we had the COVID pandemic, rescue finance, big distributions of relief money, which goosed the economy and brought on inflation at about 9.5% at the high. And then the Fed had to raise interest rates to cool off the economy to fight the inflation. And they did that starting in early 2022.

And the Fed funds rate went from zero to a quarter where it had been to five and a quarter, five and a half. It's one of the fastest increases in history. So the point is, many companies were levered up in the intervening period with capital structures that did not anticipate a 500 basis point increase in rates. And as those loans came due, it presented a problem. Leverage became more expensive and harder to get.

So, could they replace all the leverage and could they afford it? The answer clearly is it's not as easy to get and it's more expensive. So, investing based on borrowed money is a little less effective these days. The money gushed into private equity and they got up to two and a half trillion or so of what we call dry powder, money waiting to get invested.

And I think most of that is still dry, if I'm not mistaken. But it's hard because until recently, there were no bargains to buy and you had to pay full prices. And if you pay full prices, levering up with more expensive money is not a magic elixir. So I think that a lot of private equity sales of companies are to other private equity funds.

And they had problems. And then the ultimate exits became more difficult because the market slowed down a little bit. We had some sand thrown in the gears of private equity. In the 20 teens, you could borrow money at 6% to do private equity deals. Now you have to pay it probably a 9 to 10%.

Well, if you're going to buy a company and make 10 or 11% a year, you have to pay 9 to 10% for the money, then a leveraged acquisition is not some miracle. And by the way, the private equity funds, I think they're sitting on about $3 trillion worth of companies that they have to sell to pay off the investors. The investors expect to get their money back at some point in time, usually around the 10th anniversary, and their profits.

But to do that, they have to sell the companies and there aren't so many buyers for the companies these days because the magic of private equity is diminished. So the investors in the funds, the endowments and pension funds and foundations and insurance companies and sovereign wealth funds and the like aren't getting the cash distributions they expected to get. So they're not committing to new funds and the whole thing somewhat slows.

The interesting thing about economies and markets is how there's always, and then what? This gets back to this question of what else. In the past, when equities and bonds in the 2000, 2002, it turned to alternatives, later turned to private equity. Private equity doesn't look so great. Credit markets aren't at the cheapest. Where do you think people are looking in terms of what else is going to be attractive to meet their spending needs going forward? I don't have that fertile mind.

I'm lucky that I've been able to adapt to the changes, but I don't think I predicted or even caused any of the changes. I just don't consider myself a futurist. And one of my favorite oxymorons, Ted, is that we're not expecting any surprises. Surprises are by definition unexpected, and I don't feel that I anticipate the changes. I think that there are so many bright people on Wall Street. You have these fertile minds, they'll think of something. However,

I wrote a memo in around October about asset allocation. And I said in there that I think there are really only two basic forms of assets, ownership and debt. I don't think Wall Street's going to be able to think of a third, but they'll certainly try. Wall Street has a very good record of accommodating people's desires to put money to work.

I'd love to turn on the 30th anniversary of Oak Tree and some of the aspects of challenges in the business. One of those is when the pendulum has swung to an extreme that looks very good, you can get excited and buy. When it's an extreme that's tough, you want to be very, very cautious. Most of the time you spend in the middle. How have you gone about sustaining an organization that for the most part isn't playing at one extreme or the other?

It's a very important question. There's not always something exciting to do. I wrote a memo in October of '22 called "What Really Matters?" We had a conference and everybody was asking me, "When is the Fed going to start cutting rates and how much? When's the recession going to start and which month?" I said, "These are all short-term questions and they don't matter. What really matters is can you buy interests in companies that grow and can you lend money to companies to pay you back?"

It's not always something exciting to do. The memo got very little attention as far as I can tell. I see what people write me and I didn't get many notes on that one. I think it was really important. I listed five things that I think don't matter, Ted. Short-term events, short-term trading, short-term performance, hyperactivity, and volatility. These are not things that matter. What matters?

Are you better than the other person at finding growing companies and finding companies that will repay their debts? I think I said in there that when I was a kid, there was a saying, don't just sit there and do something. Well, in the investment business, I think a lot of times what's important is don't just do something, sit there. Sit there and wait for your ideas to work.

If yesterday you did what I said, which is to say you bought interest in companies that'll grow and made loans to companies that'll pay back, then there's not that much to do today or tomorrow. It's not what you buy. It's not what you sell. It's what you own determines how much money you make. And people just don't understand that. People mistake high levels of activity for

for accomplishment. Now, you asked how you keep a business together, and it can be tough. I wrote a memo in December '22 called The Sea Change, and it talked about the change in the interest rate climate, which I think is structural and long-lasting. It's already two and a half years. So far, it's right. But I'd said in there that at the beginning of '09, the Fed took the Fed funds rate to zero to fight the global financial crisis.

Then at the end of 21, it gave up on keeping rates low because it had to fight the inflation. But for the 13 intervening years, we had a low interest rate environment and we're lenders. So if you're a lender in a low interest rate environment, that means you're not getting paid much. And I used to title my speeches in that period, investing in a low return world. That's where we were. How do you get a high return in a low return world? The answer is you probably don't.

But in order to try to do it, the main way is by taking more risk. And I don't think that's a great idea. So rather than do an average buyout loan at 6%, you could do a really crappy one at 7%. But that means you have to sit still and you have to be rather inactive. We were. We didn't add much to our assets under management. We didn't take risks. But there are times in the business when the best thing you can do is keep it together.

And we did. And the people who work at Oak Tree, I think, are at Oak Tree because they agree with what I just said to you. And so they were not impatient. We don't pay people radically differently from year to year. We don't boom in compensation when Wall Street booms and we don't zero it out when Wall Street busts. So people were happy to stay at Oak Tree and be paid on a steady basis. Since we've had the sea change in the

roughly third quarter of 22, it's been a better time to be a lender and a better time to work at Oak Tree. In the long process over these three decades of just sitting there, not trying to do too much, you did one very interesting thing in selling Oak Tree into Brookfield.

There's so much more activity on the corporate side in a lot of these businesses. I think managers didn't originally think even had enterprise value. And we'd just love to get your thoughts on that decision and your perspective on it for the industry at large. We still exist as an autonomous freestanding business. Brookfield happened to own about 70% of Oaktree now.

But they had an idea that they wanted to round out their product offering and they didn't have credit. They had real estate, private equity, renewables and infrastructure. They wanted to be able to give their clients credit. And so they thought that partnering with Oak Tree was the best way to do that.

And it's working out well, I think, for all parties. It's funny that you should raise that question because in the last few months, I've been talking about my friends who run peer organizations, other leading alternative investment firms, most of which have gotten big into the private credit business now. They spend a lot of time doing M&A for themselves. And that was not

the norm in the past. I think Oak Tree, 30 years, I think we've made two acquisitions, maybe three. Some people are doing it all the time. Just buying and selling companies doesn't add value unless you can do something better.

There are usually some cultural challenges in integrating companies. They shouldn't be underestimated. But if you have a high-flying stock, and the stocks in our group have been very strong, you can use the stock to make accretive acquisitions and add to your EPS. When I started in this business 56 years ago, I was an analyst studying the conglomerates. And that's what Lytton did at the time. It had a high-flying stock, and it could buy companies at

grow its EPS just through acquisitions. But of course, that's not creating any real value in the economy. But I think you're right to say that M&A is a big part of the investment business now. People trying to round out their capabilities and maybe make accretive acquisitions. And the proof is in the pudding, and it usually takes a little time for that to bake. What have you found in being a public company

We were semi-public from 07 to 12, and then public from 12 to 19. And people would say, how is that? I'd say, well, it's fine, except that every day you get a report card from somebody who doesn't know your business that well, called the market. They say your stock's up a buck or down a buck. It sounds like it should be a commentary on how you're doing, but the people who are making that decision, as I say, don't know your company that well.

It's okay. Look, first of all, there's a lot of paperwork, legal work and all that stuff. And that's onerous. But if you go public to get liquidity, that's a reasonable price to pay. So you get the liquidity and hopefully you can use your stock for hiring and stock options and maybe acquisitions and so forth. So maybe that's a good idea.

And then you have to see it go up and down. But if you're not thick skinned, you shouldn't be an investor anyway. But I didn't mind when Brookfield invested in Oak Tree, they took out the public. And I didn't mind being non-public again. What's exciting to you over the next couple of years? I'm at the stage, Ted, where I'm just drilling down intellectually and just trying to understand it better.

The things we've been talking about, the cycles, the swings of the pendulum, investor psychology, the quest for the new, these will always go on. Mark Twain said, history doesn't repeat, but it rhymes. These phenomena rhyme from cycle to cycle. Every day, I feel I understand that a little better. It's exciting and it still keeps me happily going.

What are the aspects that you feel like you don't understand enough? Mark Twain described the profession as a conspiracy against the laity. And they're always inventing new terminology. And I have to ask the young people what stuff means. If somebody says, what do you do for a living? I'm a rates trader. The hell was that? I'm not as involved in throwing the levers every day. I can sit back and look at the bigger picture. And I think the bigger picture never changes.

It's understanding riskiness and the interplay of riskiness and capital structure and figuring out how that changes value and then watching what price does. I think that's what it's all about. Howard, I want to make sure I get a chance to ask you a couple of fun closing questions. This has all been fun. What's your favorite hobby or activity outside of work and family? I love houses, architecture, and design.

What draws you to that? I love beauty. I talked earlier about being logical, linear, and literal, but I have a side that makes me so happy to see beautiful things and try to create them. What was your first paid job? Well, I think when I was...

Five, I tried to get my relatives to buy drawings for two cents a piece. I had a job for the local hardware store putting circulars under people's doors at around age 11 or 12. So that was my start.

How's your life turned out differently from how you expected it to? I wasn't that driven. My goals were not so pronounced. I would say I accomplished more than I planned or thought I would. Why do you think that happened? I just think that I was lucky. I got into this business, which turned out to be a good business.

I learned some lessons early. It's very desirable to learn your key lessons early. And then I stumbled on markets like high yield bonds in '78 and distressed debt in '88. That was remarkable. And then I run a company which is called an alternative investment firm. And we didn't have that term. We didn't predict that alternatives would be hot. And then God made the alternative investment business hot.

We're the beneficiaries. So when we left TCW, my colleagues and I, we were earning $7 billion. We asked a lot of questions, but we never asked ourselves, do you think we'll ever get back to $7 billion? We just thought if we continue to do a good job for the clients, we'd be successful and that would be enough. And then the things that I described happening happened. And today we manage over $200 billion. So who would have imagined that? What's a mystery that you wonder about?

When you watch these people who run these Ponzi schemes, Madoff, for example, puts out fictitious statements and we see a Ponzi scheme every once in a while or what Galbraith used to call a good bezel. How do they think it's going to end? If you make up account values and send out false statements and pay off departing investors by bringing in new investors, how's it going to end?

I'm not very good at understanding the criminal mind. All right, Howard, last one. If the next five years are a chapter in your life, what's that chapter about? It's about balancing work and non-work. It's about continuing to understand the investment process better while at the same time

having a really good time, fun with my wife and my kids and my grandchildren and my non-investment pursuits, my philanthropy, all at the same time. And it would be great if I could stay healthy. Well, Howard, always appreciate your keen insights. Thanks so much for taking the time. My pleasure, Ted. Thanks a lot.

Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.