He Invested $7 Billion in 15 Weeks While Doubting Every Step
Marks said he was not confident, and invested anyway because staying out would have meant failing at the job.
My First Million · If I was 21 again, this is what I’d do different - Howard MarksOn the morning Lehman Brothers collapsed in September 2008, Howard Marks, the veteran investor who helped build Oaktree Capital, faced a stark question. His firm was sitting on an $11 billion fund for distressed debt, meaning loans and bonds of troubled companies bought at steep discounts, raised because trouble seemed to be coming. Now trouble had arrived, and, as Marks put it, people were "talking about the end of the world," with every bank melting down and everything connected to money falling apart.
The stockpile was no accident. Oaktree's largest distressed fund before that had been $2.5 billion raised in 2002. In 2007 and 2008, sensing bigger distress ahead, the firm raised $11 billion and kept it on the shelf, waiting for the moment when markets broke.
When that moment came, Bruce Karsh, Marks's longtime partner who ran those funds, put an average of $450 million to work every week for 15 weeks, about $7 billion in total, even though Marks says he was absolutely not confident.
There was, Marks said, no way to be sure. A Harvard epidemiologist, as retold by Marks, said decisions rest on "data, analogies to past experience, and supposition," and Marks said that on the day Lehman went under, Oaktree "had no data and no prior experience" with a global financial collapse. It had only supposition.
Their reasoning was plain. If the financial world melted down and they invested, it did not matter. If the world did not melt down and they stayed out, they would have failed at their job. So they had to invest.
The math on buying the discounted debt of buyout-backed companies looked easy if the world survived. They were buying the debt of companies that private equity firms, companies that buy other businesses, had purchased two, three, or four years earlier. Even if those businesses ended up worth only a fourth or a fifth of what had been paid for them, Oaktree would still break even.
Yet Marks said he was absolutely not confident. That answer surprised the person asking. He said all five of his major market calls over 26 years were made with doubt. He read the same papers, watched the same programs, and saw the same terrible news, and it looked terrible to him too. As Marks put it, "I overcome it in some way" and conclude he should invest. He said investors who think in odds and admit what they do not know are bound to feel nervous when they act.
Questions people ask
What is distressed debt?
It is the debt of companies in trouble, or feared to be in trouble, that trades for far less than its face value. Buyers accept the risk that the company may fail, betting that even a partial recovery will cover their low purchase price and leave a profit.
Why raise an $11 billion fund before the crisis instead of after?
Once a crisis hits, fear makes most investors pull back rather than commit new money. Marks says you have to build the ark before the flood, raising cash when times are calmer so it is ready to spend when prices collapse.
What did he mean by breaking even at a fifth of the price?
Private equity firms had bought companies at high prices with borrowed money. Oaktree bought that borrowed debt so cheaply that the companies could lose 75 to 80 percent of their value and Oaktree would still get its money back. Anything better than a 75 to 80 percent loss was upside.