Hello and welcome to the Inside by Oaktree Capital. I'm Harry Whiteclaw and today we have a special episode featuring Oaktree co-founder Howard Marks. We'll be taking you inside Oaktree Conference 2026, playing some exclusive clips from our recent event, and getting Howard's takes along the way. Howard, great to have you here.
Nice to be here with you, Harry.
So Howard, we held our client conference earlier this month. Can you tell us a bit more about the setting for this conversation?
Well, for the 30 years since we were founded, we've been holding a conference for investors every two years. This year, the conference took place in early March in Southern California. It was very well attended and I was very proud of the work of my colleagues in explaining what we do. The real purpose is not to report data. The real purpose is to help the clients understand how we think and how we do our work. And I think we really accomplished that goal. I look forward to a chance to comment on the clips that you have selected so well, Harry.
Fantastic. Well, let's get started with Oaktree's co-CEO Armen Panossian speaking about the evolution of the private and liquid credit markets.
Another theme that I'd like to talk about is evolution, the evolution of the markets. In the '70s and '80s, if you lent to a corporate debt, you were buying investment-grade bonds. Everything else was considered uninvestable. It was called junk, in fact. But today, there's high-yield bonds, there's senior loans, there's different types of securitized products, CLOs, CMBS, and distressed credit. A similar evolution is taking place in private credit. Private credit, before the global financial crisis, was really direct lending that was junior, so in this case mezzanine, that sat behind either a syndicated bank loan or a private bank loan that was held by a consortium of banks. After the GFC, we saw the evolution of direct lending go from mezzanine to first lien as the banks stepped back from their lending activities and over time, over the last 15 or so years, we've seen an expansion in a variety of other areas of private credit. We're really excited about these areas.
Well, how would you're a good guide for us here is you were witness and indeed participant in the evolution Armen talks about. Do you recall investors' initial aversion to the likes of high yield bonds and distressed credit?
Sure, Harry. As you say, what Armen recounts is really the timeline of my involvement in the investment management. And when I joined it in 1969 at First National City Bank in the equity research department. As Armen says, companies lacking an investment grade rating, that is to say not AAA, AA, single A, or BBB, virtually could not borrow in the public bond market. I moved to the bond department at City in 1978 to manage a convertible bond portfolio. And in August of '78, I got the phone call that changed my life from the head of the bond department. He said, 'There's some guy named Milken or something in California. He deals in something called high yield bonds. Do you think you can figure out what that means?' And I was smart enough to say yes. And of course, that was the seed for everything that Oaktree and I have done since. Mike Milken's idea was that if a company offers enough interest, even though its bonds have some probability of default, people should be able to buy them and hold them in a suitably diversified portfolio. So, that's what I started doing in '78. I think the high yield bond fund we organized was the first one from a mainstream finance institution. As Armen describes, Wall Street is a very innovative place. It's constantly innovating new ways to raise money for companies and new products to sell to investors. Wall Street innovated something called the broadly syndicated loan in the 1990s. The lending that banks used to do and syndicate to one or two other banks, Wall Street saw it to do and syndicate to dozens or maybe hundreds of institutional lenders. That was a great broadening of the sub-investment grade market. Sub-investment grade companies used to borrow from banks and insurance companies with what were called mezzanine loans, which are subordinated credits that also carried some equity. We started to get involved in those in '01. The next big step, and the one Armen's talking about, came in he says 15 years ago. In 2011, the banks reduced in scope and chastened and regulated because of the global financial crisis, kind of were reticent or unable to lend enough money to meet the full demands of the private equity industry. And so, so-called non-bank lenders stepped in to make the loans that the banks weren't making. And that has grown now into a trillion and a half dollar market. Direct lending, along with asset-backed and mezzanine and some other things, together constitute private credit. But, direct lending loans for mid-sized buyouts were the biggest sector, the fastest-growing sector, and happened to be the site of all the indigestion that's taking place at the present time.
Yeah, I was going to make the point that as these asset classes become more mainstream, direct lending is now very mainstream, very competitive. The ability to generate alpha gets a lot harder than the early days, and I think that's why you see people interested in something a little bit more complex, the likes of asset-backed finance, distressed credit.
Well, and this is absolutely a standard cycle. In the beginning, there were a few people who would make direct loans and a lot of people who wanted to borrow money. And when there's an imbalance of demand for money over supply of money, the people who will offer the money can demand high rates of return and very good safety. And that was what was available at the beginning of the direct lending era, as I say, around 2011. But then, people see that it works. People with money clamor to put it into the direct lending market. More managers join the direct lending market. And as the incremental capital and the incremental players get active, they compete to make deals. And the competition to make deals in the lending market takes the form of reduced demand for interest rates and reduced demand for safety through strong documentation and protective terms. And that took place in direct lending, as is normal and as should be expected. I would say that as of a year or so, maybe two years ago, direct lending was, as you say, you used the term alpha. It was no longer special. The returns available in direct lending, I think, were adequate, but nothing more. What Oaktree and I and my colleagues want to find are returns that are higher than is appropriate for the risk involved, so-called excess returns. And I think that in the last year or so, excess returns disappeared from direct lending. Direct lending was fine, was fair. You got a 100 or 125 basis points of incremental interest over public credit. That's adequate, but it's not a lush liquidity premium. So, we now have a very broad spectrum of credit, both liquid and private. And with that, I want to bring in Danielle Polley, co-portfolio manager for our global credit strategy, speaking about constructing multi-asset portfolios.
Whether it's liquid or private or a combination of both, when we're constructing multi-strategy credit portfolios, we're doing it with the objective of income and return with risk under control. And we're striving to do that in two key ways. The first is through credit selection. That's based on our bottom-up fundamental research, and the second is through asset allocation. That's dynamically deploying capital across credit strategies based on our assessment of relative value.
So, how would I think Danielle touches on another enduring theme in the markets? That's clients wanting a multi-asset solution rather than just an individual product off the shelf. How do you think about combining multiple asset classes in a single portfolio?
Well, eight or so years ago Bruce Karsh had the idea of taking our liquid credit strategies and combining them into one product. We combined US high yield, European high yield, US senior loans, European senior loans, convertibles, emerging market debt, real estate debt, and structured credit. So, I think as you say, Harry, that the investment industry is moving into a phase where less and less we sell one product at a time, and more and more we combine products into solutions and deliver solutions to clients. We're trying to meet investors' needs in ways that will have a high probability of delivering the return they're after. I think this is a very valid approach, and of course, given the fact that we've been in non-investment grade credit for 48 years, I think we have the most experience and a very diverse lineup of strategies, and I think we can do the job for the clients who want that job done. And on the point about blending liquid and private credit, I think we think we should be really viewed as complements. Some people see it as a very binary liquid credit or private credit. I think we see the value of actually combining the both of them to optimize for where you want to get to as an investor.
Well, I think that's right.
In all my years in the investment business, every once in a while a certain product gets kind of knighted, anointed the solution du jour. In the last, let's say, 10 years, that's been private credit. I wrote a memo a year ago called Give Me Credit, and I said in there that at a given point in time most of the people asked me one or two questions. The question they've been asking at that point for the last few months was, let's talk about private credit, and I would say, let's talk about credit. Why do you skip all the way from zero to private credit, glossing over public credit which can help provide the solution? So, we advocate a balance between the two. Private credit, if well selected, should give you a higher rate of return if everything goes well, but public credit might give you a lower rate of return for a given level of creditworthiness, but it also provides liquidity and the ability to restructure the portfolio and exclude a name where you change your mind. And that's valuable, too. We advocate balance.
We mentioned briefly the topic of alpha and excess returns earlier. Now we have a clip from one of my favorite segments from the conference, Steve Tesserari, PM for value opportunities, talking about mispricings in the credit markets.
Howard likes to say that mistakes cause mispricings. In other words, emotion and misinformation create these mispricings. We're looking for these moments of misunderstanding to buy assets. I've listed here on screen some elements of mispricings. First, value obscurity. This is situations where the assets might be off balance sheet. They might be hard to value. The company may lack or have messy disclosure. The second example would be a lack of buyers. There might be mandate limited buyers or institutional biases against certain assets or asset classes. You might have assets that are difficult to source. Motivated sellers can also cause mispricing. Either time pressure or liquidity pressured selling. Sometimes assets are just misunderstood. The situation is too complex or the market's relying on mental models that are outdated. And then finally, technical disconnects. These are related to market plumbing.
Well, Steve actually references you there, Howard. When we say mispricings equals mistakes or derived from mistakes, what do we actually mean there?
Well, Steve did a great job of introducing one of my favorite subjects, Harry. Back at our conference in I'm going to say 2012, Bob O'Leary, who was one of the leading analysts in our distressed debt or what we now call our opportunities group, talked about what he was doing in his fund. Bob is now co-CEO of Oaktree. And Bob said essentially, what we do is take advantage of the mistakes of others. And that caused me to write a memo shortly after entitled 'It's All a Big Mistake.' And this is an important concept that I almost never hear about from others. There's a school of thought in the investment world that talks about market efficiency. And market efficiency basically means that every security is awarded a price. And if you buy it at that price, you get a fair risk-adjusted return, no more, no less. That's why you can't beat the market in terms of the efficient market hypothesis. Now, we're not happy with that. We want to get what I described a few minutes ago as excess return. We want to get returns that are more than commensurate with risk. And to do that, you have to buy assets not at fair prices, but at unfair prices. We want to buy things for less than they're worth. That sounds totally straightforward. It's understandable that that's how we do our job. There's only one catch. It requires cooperation for someone who's willing to sell something for less than it's worth. And who volunteers for that job? We want to buy from sellers who are making mistakes. And a lot of these in the history of Oaktree have also stemmed from people who bought companies and made mistakes. They overestimated the growth potential, overestimated the solidity of the earnings, overestimated the ability to survive or thrive in a negative economic environment, levered up too much, and eventually became distressed as a result. So, it's all about taking advantages of mistakes. And Steve catalogs some of the reasons why it might be possible to buy a security for less than it's worth. What are some of the sources of the bargains we seek? First, he mentions complexity. People don't understand something, and they're a little turned off or scared by its complexity. And we understand that. Difficult to source. Some of these things are held deep in portfolios in the bowels of institutions, and we have to go find them and get somebody to sell them to us. Supply demand. There are a lot of people who want to sell something at a given point in time. Fewer people want to buy it. That pushes the price down, hopefully to unreasonably low levels where we can pick it up. Misunderstanding. That's related to complexity. And finally, he talks about technical reasons. And technical reasons are, for example, I'll give you a great example. There was a rule for a while that if a bond was downgraded below investment grade, certain holders had to sell it, which is to say, they had to sell it regardless of price. So, if there are people on the other side who have to sell something regardless of price, we're willing to buy it if the price is unreasonably low. Now, they might not want to sell it if the price is unreasonably low, but the rules required them to do so. That's technical. That works in favor of the bargain hunter. So, when you look for exceptions from the efficient market hypothesis, and we want to find them.
You mentioned that the catch is you need to find somebody on the other side of the trade to make a mistake. I guess the other catch is that Steve makes it sound quite easy, but finding and executing on these mispricings it's really quite difficult, and that's why you can achieve alpha in the first place.
Well, they sell things that they think should be sold, and most of the time, absent the technical reasons I just discussed, they sell them at prices they think are fair. You have to be a superior thinker, you might even use my term second-level thinker, to conclude that the price they think is fair and they want to sell at we think is too low and we want to buy at. So, you're right, these things have to exist, we have to be able to find them, and then we have to think better than the seller, which is to say we have to take advantage of the seller's mistake.
