Distressed debt guru Howard Marks – founder of Oaktree Capital Management – expressed amazement on Thursday that “the market is wide open again,” so soon after the financial crisis.
“I’m shocked by the extent to which the market has come back,” said Marks, addressing delegates at the 2010 EVCA Buyout Forum in Copenhagen, Denmark, adding that he was surprised at “how rapidly the lessons were forgotten”.
The comments came at the end of a keynote speech in which Marks outlined 13 lessons learnt from the market cycle. Marks penned the lessons back in 2008, he noted, but realised that they applied not only to the current cycle, but to all preceding cycles.
“Human behaviour does not change. Market behaviour does not change. Cycles repeat,” he said. “When people think ‘this time it’s different’, this is when we get into trouble.”
Marks pointed to the return of “drive-by” deals in the high yield bond market – in which bonds can be sold “blind” to eager investors after the markets have closed in advance of the following day – as indicative of the rapid return of the capital markets. Investors, for fear of missing out on the opportunity, commit to buying without undertaking the proper due diligence.
The 13 lessons included insight into the human condition as well as market behaviour. “Widespread disregard for risk creates risk,” he said. “Too much capital availability makes money flow into the wrong places.”
Too much capital availability makes money flow into the wrong places
Low interest rates around the world are currently forcing investors to make riskier investments to generate returns, warned Marks.
When asked to relate his thoughts more directly to the private equity industry, Marks urged those present to “be alert to what’s going on around you with regard to the supply-demand balance for investable funds … and the eagerness to spend them”.
With an estimated total of between $400 billion and $500 billion in committed private equity capital waiting to be deployed and prices being pushed up by hotly contested sale processes, Marks spelled out the very simple options to the private equity GPs in the audience: either join in or wait carefully on the sidelines.