Oaktree Seeks Hidden Gems in a World of Low Returns, Marks Says

(Bloomberg) -- Howard Marks, co-founder of distressed debt firm Oaktree Capital Management LLC, says he’s looking to find “hidden gems” in a world where too many buyers are driving returns down.

“Ever since the Fed and the Treasury and the world’s central banks rescued the global economy,” and the Fed injected trillions of dollars into markets, investors have became “forced buyers,” Marks said in a video interview Wednesday afternoon. That turned bargain hunting into a “very challenging” activity, he said.

Oaktree is one of the largest specialists in distressed debt, with about $37 billion committed to credit and private equity from troubled companies. The Los Angeles-based fund has thrived in times of economic stress, when bonds of companies in danger of defaulting fall to deep discounts.

Right now, the firm is trying to find “hidden gems” in “hairy” situations in private markets and outside the U.S., in places such as India, China, Europe, Latin America and emerging markets, Marks said. 

A $15 billion fund raised last year “is not going to have a high return comparable to the returns we made in the three previous crises that we managed through,” he said.

“The whole world is in this low return environment and the question is how do you behave in a low-return environment and the answer is that there’s no easy answer,” he said.

In Latin America, Oaktree was among creditors from Argentine oil producer YPF SA in a debt restructuring earlier this year. It offered a $1.3 billion debtor-in-possession financing last year to the Chile-based Latam Airlines Group, which filed for Chapter 11 bankruptcy protection in the U.S. in May 2020. 

Famous for his memos to investors, Marks is set to speak during an online event Thursday organized by Brazil’s biggest brokerage firm XP Inc., which is distributing Oaktree funds to Brazil’s investors.

“Distressed debt investing takes advantage of the difficulties that some companies have in financing their operations in tough times, and the fact that in tough times other people become too worried and decline to make financing available”, he said, adding that “that’s not a very good description of today.”

Oaktree in the past 12 months invested in what he called “rescue financing”, or lending to firms which are not bankrupt or in debt default but “need money quickly or confidentially,” Marks said.

Marks said he sees opportunities in sectors such as airlines, hotels, resorts,  movie theaters, sporting events, concerts. “All of these are the kinds of things that people are worried about and worrying transforms into lower asset prices,” he said.

Oaktree avoids investing in debt from governments, cities or states, because companies have assets that can be more easily seized by creditors in the case of a default, he said. 

In March 2019, Brookfield Asset Management acquired 62% of Oaktree. Marks and other members own 38% of the company and have full control of Oaktree’s day-to-day operations. 

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