Biggest Distressed Debt Investor Marks Europe With 19% Returns
Howard Marks was failing miserably. It was 1977, and the research group he oversaw at Citibank had recommended Nifty 50 stocks that lost 90 percent of their value over the previous decade.
Then Peter Vermilye, Citibank’s chief investment officer, gave Marks an option: He could quit research and start a fund focusing on convertible bonds, a niche where neither the New York bank nor Marks had any experience. He jumped at the chance.
“It changed my life,” says Marks, who with his light- brown tortoiseshell glasses and spiky, sandy-colored hair looks younger than his 65 years. “If he hadn’t pushed me out of the research job, where would I be today?”
Marks is now chairman of Oaktree Capital Management LP, the biggest distressed-debt investor in the world, Bloomberg Markets magazine reports in its August issue. Oaktree oversees more than $80 billion for pension funds from Massachusetts to Florida and the world’s biggest sovereign-wealth funds, such as China Investment Corp. Oaktree’s 17 distressed-debt funds have averaged annual gains of 19 percent after fees for the past 22 years -- about 7 percentage points better than its peers tracked by Boston-based consulting firm Cambridge Associates LLC.
‘Most Important Thing’
Oaktree is likely to get even more prominent as it goes ahead with a plan to list shares on the New York Stock Exchange. The company registered today for an IPO of $100 million, without setting a price range or the number of shares it aims to sell. In May 2007, Oaktree raised about $1 billion, selling a 15 percent stake on a private Goldman Sachs Group Inc. (GS) exchange open to sophisticated investors. The transaction valued the whole company at $6.3 billion.
Marks has come so far from his days at Citibank that he’s now selling his investing philosophy in a book, The Most Important Thing, which was published in May by Columbia University Press. In an interview in his downtown Los Angeles office, from which he has a view of the iconic Hollywood sign, Marks says his strategy is to find bargains such as troubled media company Tribune Co., movie theater chain Regal Entertainment Group (RGC) and CIT Group Inc. (CIT), the small-business lender that emerged from bankruptcy in 2009.
“We don’t expect to be able to hit the bottom,” Marks says. “All we care about is that we’re buying cheap. If it gets cheaper, we buy more. Eventually, it’ll work out -- so long as we are right.”
Conflicts of Interest
Marks has built his career on choosing bargains correctly, investors say.
“The secret is having the capital and courage when things look pretty gloomy to say, ‘This will work,’” says George Siguler, whose New York-based Siguler Guff & Co. manages about $10 billion in private equity and distressed debt, including investments in Oaktree. “They raise much bigger funds when they see the timing or opportunity is great and much smaller funds at other times. It’s a discipline not everybody has.”
Once Marks takes Oaktree public, it may be harder for him to maintain that self-control, Oaktree investor James Hoover says. “There are inherent conflicts of interest when an investment firm goes public,” says Hoover, founder of Dauphin Capital Partners and chief investment officer of Elizabethtown College in Pennsylvania.
“To appease shareholders of the company, you’re going to expand the product offerings. You might be less discriminating about the size of the funds. The bigger the size, the more fees are paid.”
Private-equity stocks have a mixed record on the NYSE, too. Blackstone Group LP (BX), the world’s largest private-equity firm, went public in 2007, shortly before the global financial crisis, raising $4.1 billion. Its shares remained 46 percent below their IPO price, even after gaining 18 percent year-to-date. Apollo Global Management LLC fell 16 percent from its March 29 offering, which raised $565 million.
The exception is KKR & Co., which went public in July 2010 and rose 48 percent in New York trading. Marks declined to comment on news reports in May that valued Oaktree, of which he owns about one-sixth, at $8 billion to $9 billion.
An IPO comes at a time when opportunities for making money in distressed investing are scarcer than they were a few years ago. In January and April, Marks returned a total of $4.4 billion to investors in his $11 billion OCM Opportunities Fund VIIB -- the biggest distressed-debt fund in history.
Investing After Lehman
Oaktree had raised money for the fund in May 2008 and invested about $6 billion of it in the most senior debt of failing companies during the 15 weeks following Lehman Brothers Holdings Inc. (LEHMQ)’s bankruptcy in September of that year. Oaktree paid roughly 50 cents on the dollar for the debt and generated a gross annual return of 31 percent for the fund since its inception. Marks and Oaktree partner Bruce Karsh declined to name the companies whose debt the fund bought.
In April, Marks finished raising about $2.6 billion for his newest distressed fund, which is 76 percent smaller than Opportunities Fund VIIB.
Not all of Oaktree’s forays have been successful. Three of its funds that used leverage had their losses amplified following the market’s decline in 2008, forcing investors to allocate more money as their value plunged. Oaktree is now liquidating the funds -- a high-yield-plus fund, one in European credit opportunities and one focused on Japan -- even after they rebounded last year, returning more than 10 percent after fees, according to Oaktree’s year-end letter to investors.
$8 Billion to Invest
Oaktree has more than $8 billion in so-called dry powder to invest, about 15 percent of the $55 billion in total capital available for distressed managers around the world, says Tim Friedman, spokesman for London-based research group Preqin Ltd. Aside from having 40 percent of its investments in distressed assets, 25 percent is in corporate debt, while 18 percent comes from so-called control investing, under which Oaktree takes ownership of firms by buying their debt or equity. In all, Oaktree now runs 16 different strategies.
“His investment philosophy is simple and unwavering: ‘buy low and sell high,’” says bond manager Jeffrey Gundlach, who knows Marks from his days at TCW Group Inc., where Gundlach was investment chief. “I’ve heard him say time and time again: ‘There’s no such thing as a bad asset. It’s a question of pricing.’” When Gundlach started his own firm, DoubleLine Capital LP, Oaktree took a 22 percent stake.
Rego Park, Queens
Marks formed his investing philosophy in the 1980s, after Vermilye approved his transfer to Los Angeles, where he ran Citibank’s convertible- and high-yield-bond funds. At the time, Michael Milken was pioneering the junk-bond market that fueled a boom in deal making based on debt. Marks moved to TCW in 1985, running two funds, one investing in high-yield bonds and the other in convertible securities.
Raised in Rego Park, a middle-class neighborhood of attached redbrick homes in Queens, New York, Marks was the son of an accountant and a homemaker. He attended the Wharton School of the University of Pennsylvania in Philadelphia, where he abandoned plans to become an accountant after taking some finance classes.
He minored in Japanese Studies, where he learned about mujo, which he defines as the acceptance of the inevitability of change, helping to form his investment philosophy.
“It was the first time I was really stimulated by what I was doing academically,” says Marks, who later obtained an MBA in accounting and marketing from the Booth School of Business at the University of Chicago. “The teacher required writing. And that’s when I started to care about writing.” Marks endowed a writing center at Penn that was named after him in 2007.
At TCW, Marks began sending out rambling memos to customers about his investing philosophy, interspersed with anecdotes about his family. In 1995, Marks and six partners, including Karsh, started Oaktree, the English translation of the name of his Santa Barbara, California, weekend home, Las Encinitas.
His first $2.5 billion came from TCW, which hired Oaktree to continue managing the funds Marks had run there. Now, 39 percent of the money Oaktree manages comes from public funds, while 29 percent is from corporations. The rest of the clients include endowments, foundations, insurance companies, wealthy individuals and mutual funds.
While Marks is the public face of Oaktree, Karsh is the “quiet secret” behind the scenes, says Ken Moelis, CEO of investment bank Moelis & Co., which worked on some Oaktree deals. “If you say the name Bruce, people know you’re talking about Bruce Springsteen,” Moelis says. “There’s one Bruce in music and one Bruce in distressed. He’s just a solid guy who does his homework and thinks through timing.”
Karsh was 31 in 1987, when he pitched the idea of a distressed fund to Marks. Karsh, a former assistant to billionaire philanthropist Eli Broad, whose insurance company SunAmerica Inc. had been a TCW client, joined TCW that year and helped to raise $100 million for its first distressed fund, which started up in 1988.
William T. Spitz, former chief investment officer of Vanderbilt University, invested in Marks’s second distressed- debt fund, which was started in 1990. Spitz saw an opportunity to buy firms’ debt that had lost value as the junk-bond market collapsed following a securities fraud scandal that sent Milken to jail for 22 months and the 1989 breakdown of a leveraged- buyout deal for United Airlines Inc. Gains on the fund before fees were more than 40 percent a year.
“He was one of the first people smart enough to look at less-efficient asset categories,” says Spitz, who worked for Marks at Citibank before investing with him. “There weren’t many managers who did it, and there weren’t many institutions investing.”
Betting on Movie Theaters
Oaktree began investing in movie theater chains in 1999. Oaktree teamed up with Denver billionaire Philip Anschutz to take control of Regal Entertainment, buying $800 million of senior bank debt and then forcing the company into a prepackaged bankruptcy. Within two years, the partners earned back their original investment, along with a $715 million special dividend and a 78 percent stake in a company valued at $2.8 billion, according to the Journal of Private Equity, a trade publication. Oaktree funds also bought stakes in Landmark Theatres and Loews Cineplex Entertainment.
It was only after the dot-com bust that Marks gained notoriety for his memos. On Jan. 3, 2000, he sounded a warning in a piece entitled “Bubble.com.”
“To say technology, Internet and telecommunications stocks are too high and about to decline is comparable today to standing in front of a freight train,” wrote Marks, whose office bookshelves are peppered with investment books such as Yale University endowment chief David Swensen’s Pioneering Portfolio Management as well as copies of several books about a drug smuggler of no relation named Howard Marks. “To say they have benefited from a boom of colossal proportions and should be examined skeptically is something I feel like I owe you.” As markets crashed in March, he received his first response in 10 years.
TCW’s managers seized on the opportunity, Karsh says.
“This was a tech, telecom bubble that burst; there were a lot of power companies and bankruptcies of companies involved in corporate scandals like Enron, WorldCom and Adelphia,” Karsh says. “For two years in a row, there were double-digit default rates in the high-yield-bond market. We had a sense it was coming. We raised our biggest fund ever and took maximum advantage.” In 2002, Marks bought debt of downgraded telecommunications companies including Qwest Communications International Inc. (Q) and Nortel Networks Corp. (NRTLQ)
A few years later, as the newspaper industry faltered, Oaktree invested an undisclosed amount in Tribune’s senior loans, which the Chicago Tribune publisher had used in 2007 to buy out shareholders and go private. Oaktree is one of three lenders that hold more than a combined $3.38 billion of the roughly $8 billion in loans Tribune took out as part of the LBO, according to court documents.
Under Tribune’s proposed reorganization plan, the three lenders will trade the debt they hold for at least a 30 percent stake in the newspaper publisher once it exits bankruptcy. Oaktree’s share will be at least 10 percent, according to documents filed with the Federal Communications Commission. Marks displays a figurine of a dodo in his office, a 2009 gift from Tribune Chairman Sam Zell. “This one is obviously about survival of the fittest in a tough capital market,” Marks says of the gift.
At times, Oaktree will invest in a single company in multiple ways. In July 2009, Oaktree joined a group of investors bailing out CIT with a $3 billion emergency loan after the U.S. declined to rescue the New York lender for a second time. Oaktree also participated in an exit facility and bought CIT’s bonds.
Today, Marks divides his time between London, Los Angeles and New York, sending his investing missives to Oaktree’s 1,800 clients worldwide. He keeps in shape with calisthenics and a yoga-inspired stretching regimen. After finding the vegan diet prescribed by his wife, Nancy, to be too rigid to follow while traveling, he’s sticking with the protein, vegetables and beans suggested by his son, Andrew, who works at a hedge fund in New York. His daughter, Jane, works in New York too, in the art world.
Oaktree is targeting its newest investment pools in small and midsize deals in Europe and in real estate, the next fronts for distressed investors, two people briefed on the firm’s plans say. Oaktree believes companies in Europe, where several countries have been forced to restructure their debt, are likely to come under pressure to sell assets to raise capital, one person says. Distressed investing in Europe has been less competitive than in the U.S., the person says.
Europe, Real Estate
Oaktree’s European fund will aim to raise $2 billion to $3 billion. Oaktree is also eyeing property transactions in the U.S., where it expects owners to sell their holdings after paying top dollar for them in the real-estate boom of 2005 to 2007, the other person says. That fund will total about $1 billion. Marks declined to give details of those funds.
“There are times when it is important to invest cautiously, and there are times when it’s important to invest aggressively,” Marks says. “A big part of the job is knowing where we are and choosing between those two. We believe that compared to one year, two years, maybe three years ago, this is the time to invest cautiously.”
As Marks’s company does its IPO, bargain-hunting investors will have to make a similar decision: whether or not the time is right to buy Oaktree stock.
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