Apr 7, 2025 · 51m · capital-allocators
Howard Marks – Navigating Private Credit (EP.439)
0:00 / 0:00
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, Howard Marks of Oaktree Capital Management examines the rapid growth and underwriting risks of private credit, the discipline of risk control as a 'negative art,' and how a higher interest rate regime fundamentally alters asset allocation across debt and equity.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 22.6% of the talking time here. How this is scored →
Ted as informed peer 3.6 Guest teaching 6.3 Guest disagreement 0.6 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 39:00 Rejection of exotic asset allocation claims
Howard rejects the industry notion that complex new asset classes are being invented, stating plainly that Wall Street only ever offers ownership or debt.
Hardest push from Ted ▶ 20:26 Pressing on underwriting deteriorationTed directly pushes Howard to evaluate whether aggressive capital flows have already begun eroding underwriting discipline.
Biggest teaching moment ▶ 30:20 The envelope analogy for private asset pricingHoward thoroughly deconstructs the psychological comfort of private valuations by comparing them to an investor throwing unread public market account statements into a drawer.
Ted holds their own ▶ 33:51 Connecting PE liquidity slowdown to credit inflowsTed displays sharp market synthesis by linking stalled capital return dynamics in private equity directly to the explosive demand for private credit.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Childhood Influences, Depression-Era Prudence, and Accounting Education | 3 | 6 | 0 | 0 | Ted prompts Howard on his childhood background and entry into finance. Howard delivers a foundational masterclass on the Nifty Fifty bubble and why investing success is about what you pay rather than what you buy. | |
| Howard Marks's Writing Process, Client Questions, and Logical Thinking | 4 | 7 | 0 | 0 | Ted demonstrates solid knowledge asking about the evolution from high yield to structured credit and private credit. Howard provides an expansive historical tour detailing the transformation of LBOs, senior loans, and alternatives. | |
| The Pendulum Swing, Market Sentiment, and Private Credit Growth | 3 | 6 | 1 | 0 | Ted asks how allocators should weigh opportunity versus risk in private credit today. Howard invokes his pendulum framework and quotes Buffett to show that private credit has shifted from undiscovered to fairly priced. | |
| Assessing Current Underwriting Standards and the Generous Market Environment | 4 | 7 | 1 | 0 | Ted presses on current underwriting discipline in a competitive market. Howard details Oaktree's six investment tenets and explains Graham and Dodd's concept of fixed income as a negative art where value comes from excluding losers. | |
| Comparing Public and Private Credit: Liquidity, Pricing, and Valuation | 4 | 7 | 1 | 0 | Ted asks Howard to contrast public versus private credit dynamics. Howard delivers a sharp critique of private market accounting, pointing out that muted volatility is often an illusion caused by not marking to market. | |
| Mid-Roll Sponsor Announcement: Ridgeline AI Investment Platform | 3 | 7 | 1 | 0 | Following a sponsor read, Ted asks how investment committees should handle un-marked assets and potential defaults. Howard compares private credit valuation to ignoring brokerage statements and highlights extend-and-pretend practices. | |
| Private Equity Challenges in a Higher Interest Rate Environment | 4 | 6 | 0 | 0 | Ted connects private credit dynamics to the slowdown in private equity capital formation. Howard explains how the end of ultra-low interest rates has dismantled the silver bullet narrative of private equity leverage. | |
| Asset Allocation Realities: The Fundamentals of Ownership Versus Debt | 4 | 7 | 1 | 0 | Ted asks where allocators can turn next, prompting Howard to reduce all asset allocation to just two fundamental forms: ownership and debt. Howard then argues that investors mistake hyperactivity for accomplishment. | |
| Oaktree's Partnership with Brookfield, Asset Manager M&A, and Being Public | 4 | 5 | 1 | 0 | Ted raises the broader wave of asset manager M&A and Oaktree's partnership with Brookfield. Howard offers a skeptical assessment of public M&A in asset management, comparing financial engineering acquisitions to 1960s conglomerates. | |
| Timeless Market Principles, Rhyming History, and Big Picture Risk | 3 | 5 | 0 | 0 | Ted transitions to closing questions on personal career reflections and curiosities. Howard humorously quips about industry jargon being a conspiracy against the laity and reflects on his career success as largely good fortune. |
Statements from this episode (24)
Marks: Being raised by Depression-era adults instills fundamental investment caution
“If your parents were adults during the depression, they were traumatized, and you grew up hearing things like, don't put all your eggs in one basket and save for a rainy day. I think, if nothing else, that may be a rather, I would say, cautious person.”
Marks: Nifty 50 Equities Lost 95% Over Five Years After September 1969
“If you held the stocks for five years from the day I got there, you lost about 95% of your money in great companies.”
Marks: No Asset Is Too Good to Overprice or Too Bad to Buy Cheap
“As time passed, I rounded that into a belief that there is no asset so good that it can't become overpriced and dangerous, and very few assets which are so bad that if it's cheap enough, it can't be a good idea.”
Marks: Oaktree memos require differentiated viewpoints rather than consensus commentary
“The basic Thing is, I have to think I have something to write, which not everybody else has been writing or talking about, or I have to see something differently from everybody else. The last thing I want to do is put out a memo that says, me too.”
Howard Marks: Non-investment grade bond issuance was impossible until 1977
“In 1976, I think it was impossible for a company without an investment grade rating to issue a bond. And in 77, 78 is when it became possible.”
Marks: LBOs rebranded to private equity due to poor past results
“The leveraged buyout business actually had to reinvent itself, and you don't hear the term LBO business anymore. Now you hear private equity. Well, why did they change the name? Because nobody would do it if you called it leveraged buyouts because the results …”
Marks: Hedge funds stopped performing once they grew too large
“So you had the growth of the alternative investment business, and they tried hedge funds, but when the hedge funds got too big, they stopped performing, most of them, and then people fastened on private equity.”
Marks: Private credit grew over 6x to $1.5T since 2007
“The banks were chastened, lost some of their capital, were more tightly regulated, We're discouraged from risk taking, and that led in 2011 or 12 to the creation of the private credit market, which is now over a trillion and a half. In oh seven, I think it was…”
Marks: When neglected assets become popular, opportunity vanishes and risk remains
“As I say, if you do things nobody else wants to do, you can usually get a good deal. But then eventually other people figure out that it's a good idea. They flock in. It becomes more popular. And then of course, like everything, it gets overdone. Then the oppo…”
Marks: Private credit is no longer special and is now fairly priced
“And I would say that the aspect of being undiscovered and unloved is over. It's a reasonable thing to do if you do it carefully, but I don't think it's a special strategy. It's just fairly priced.”
Marks: Lower Underwriting Standards Allow Competitors to Outbid Disciplined Investors
“That still presents a big problem because if you want to apply high standards and somebody else has lower standards, then they can bid more for a given deal.”
Marks: Current credit markets are slightly loose but not dangerously compromised
“So it's on today, but I don't think it's terrible today. It's just, the markets are a little bit generous today.”
Marks: In fixed income, avoiding losers makes winners take care of themselves
“If we avoid the losers, the winners take care of themselves. That's our official motto. And that's the right way to think about fixed income.”
Howard Marks: Private credit offers no liquidity once an investment is made
“If you buy a private credit and you change your mind, you shouldn't be able to expect to sell it. As my partner, Sheldon Stone, who's been with me for 42 years now, he was my first analyst at Citibank. He says there's no eraser on the pencil, which is, I think…”
Marks: Daily stock price swings reflect trader psychology, not intrinsic value
“Look at stock prices up and down one or two percent every day. That accurately tells you what some manic depressive is willing to trade at, but it doesn't accurately tell you what the company is worth.”
Marks: Private credit draws down less because valuations ignore market psychology
“Private credit and other private assets do not mark to market in the sense of reflecting the swings of psychology. When you go through a tough period and high yield bonds are down 10% and private credits down two percent, I think that's the explanation.”
Howard Marks: Private credit managers like avoiding mark-to-market accounting during downturns
“The people who run these funds Pretty much like the fact that they don't mark the market, because then in the bad times when the headlines in the papers are so negative, they don't have to go to the treasurer of the organization and say, we're down 10%. They c…”
Howard Marks: Oaktree records remedial debt exchanges as defaults
“When we do what Sheldon Stone called a remedial exchange, we mark that down as a default.”
Howard Marks: SEC doesn't scrutinize private credit valuations and LPs prefer it
“And by the way, the SEC doesn't look at these things, because these are private investments, so they don't require accuracy. And the investors in the fund are mostly happy without accuracy, because as I said, they don't have to report problems to their higher …”
Marks: PE amassed $2.5T in dry powder and most remains uninvested
“The money gushed into private equity, and they got up to two and a half trillion or so of what we call dry powder, money waiting to get invested, and I think most of that is still dry, if I'm not mistaken.”
Marks: Leveraged buyout math breaks down when borrowing costs hit 10%
“In the 20 teens, you could borrow money at six percent to do private equity deals. Now you have to pay it probably a nine to 10. Well, if you're going to buy a company and make 10 or 11% a year, you have to pay nine to 10% for the money, then a leveraged acqui…”
Marks: Private equity funds hold roughly $3T in unsold portfolio companies
“And by the way, the private equity funds, I think they're sitting on about three trillion dollars worth of companies that they have to sell. To pay off the investors.”
Marks: The post-2022 higher interest rate regime is structural and long-lasting
“I wrote a memo in December, 22, called The Sea Change, and it talked about the change in the interest rate climate, which I think is structural and long-lasting.”
Marks: Public markets grade companies daily without understanding them
“We were semi-public from O seven to 12, and then public from 12 to 19, and people would say, how is that? I'd say, well, it's fine, except that every day you get a report card from somebody who doesn't know your business that well, called the market.”