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.
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, wearing light-brown tortoise-shell glasses and spiky, sandy-colored hair. “If he hadn’t pushed me out of the research job, where would I be today?”
Marks, 65, is chairman of Oaktree Capital Management, the biggest distressed-debt investor in the world. 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.
Now Oaktree is planning to list shares on the New York Stock Exchange. The company registered 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 exchange open to sophisticated investors. The transaction valued the whole company at $6.3 billion.
From his downtown Los Angeles office, which 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 and CIT Group, 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.”
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 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, 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 its IPO price, even after gaining 18 percent year-to-date. Apollo Global Management fell 16 percent from its March 29 offering, which raised $565 million.
The exception is KKR, 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.
The IPO comes as 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.
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’s bankruptcy in September. 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 saw losses amplified following the market’s decline in 2008, forcing investors to allocate more money as their value plunged. Oaktree is liquidating those 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.
Oaktree has more than $8 billion in 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 Preqin, a research group. Aside from having 40 percent of its investments in distressed assets, it has 25 percent in corporate debt, while 18 percent comes from control investing, under which Oaktree takes ownership of firms by buying their debt or equity. In all, Oaktree runs 16 strategies.
“His investment philosophy is simple and unwavering: ‘Buy low and sell high,’ ” says bond manager Jeffrey Gundlach, who knows Marks from TCW Group, 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, Oaktree took a 22 percent stake.
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 dealmaking 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 red-brick homes in Queens, Marks was the son of an accountant and a homemaker. He attended the Wharton School of the University of Pennsylvania, where he abandoned plans to become an accountant after taking 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 University of Chicago. “The teacher required writing. And that’s when I started to care about writing.” Marks endowed a writing center at Penn 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.
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 had been a TCW client, joined TCW that year and helped to raise $100 million for its first distressed fund.
William T. Spitz, former chief investment officer of Vanderbilt University, invested in Marks’s second distressed-debt fund, 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. Annual gains on the fund before fees were more than 40 percent.
“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.”
Oaktree began investing in movie theater chains in 1999. Oaktree teamed 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,” Marks wrote. “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 telecom companies including Qwest and Nortel Networks.
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 FCC documents.
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.
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 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 thinks 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.
Oaktree’s European fund will aim to raise $2 billion to $3 billion. Oaktree is also looking at U.S. property transactions. It expects owners to sell their holdings after paying top dollar for them in the real-estate boom of 2005 to 2007. 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.”
A full version of this article appears in the August edition of Bloomberg Markets magazine.