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The transcript from this week’s, MiB: Armen Panossian, Oaktree Capital Management, is below.

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This is Masters in business with Barry Ritholtz on Bloomberg Radio

[Ritholtz] 00:00:07  This week on the podcast, what can I say? Another extra, extra special guest. Armand Posiion is head of performing credit at Oaktree Capital Management, where he works with the likes of, of Bruce Kosh and Howard Marks. He is also the incoming CO c e o A job he will take the reins at in the first quarter of 2024, helping to run oak trees. I wanna say it’s about $179 billion in client assets. I found this to be just a masterclass in everything you need to know about distressed credit investing, private credit, the role of the economy, the fed interest rates, inflation, bottoms up, credit picking, and how to manage a firm and a fund in light of just massive dislocations in your space, as well as the overall economy.

You’ve probably heard some aspects of this from the various interviews I’ve done with Howard Marks talking about the distressed asset fund they set up in 2007. That’s very much a top down view from what Howard Marks was setting up. But here you have the guy who is part of the team running the fund day-to-day, right into the teeth of the collapse of the financial markets. In the great financial crisis. There were days when they were the only bidders for any type of fixed income, putting a hundred million dollars or more to work each day. It’s really a fascinating discussion, a fascinating glimpse into history as to what was going on during the financial crisis. Hey, fast forward 15 years, and now these guys are doing the same thing in 2022 when, when fixed income is down by by double digits, and there’s a little bit of panic in that space. These are the guys that are on the other side of the trade looking to pick up dollars for 50 cents, and very often they’re the only bidder when everybody else is kind of freaked out about what’s going on. I, I found this conversation to be absolutely intriguing and fascinating, and I think you will as well. With no further ado, my interview of the incoming CO c e o of Oaktree Capital Management, Arman Pian.

[Panossian] 00:02:39 Yeah, thanks Barry. So, when I was in graduate school, I thought about all the different types of investing or advisory work I could do, and I, you know, really triangulated on distressed debt being the most interesting part of the, of the markets where I could participate in PWA Capital. Had a group based in Los Angeles that had a long and, and, and experienced team that was investing in distressed debt and really kept separate and apart from what the rest of the hedge fund at PWA was doing. But I did meet Art Sandberg, really, I, I would say a great person to, to work for, but I really learned a lot from the team doing the distressed debt investing, Rob Webster and Paul Mellinger in Los Angeles that really did a lot in the small and medium sized distressed for control space.

[Ritholtz] 00:03:30 Yeah, Sandberg is a fascinating guy. I had him on the show in 2015 and the thing that was so astonishing, 17.8% annual returns, net of fees, and that’s from 1987 to the mid 2010s. Just an incredible run. And he started, I think it’s first year drawdown was 25, 20 6% right into the 87 crash. Just an amazing track record. What was it like working with Art Sandberg and, and some of the other really, you know, storied people who worked there? Yeah,

[Panossian] 00:04:04 It was, he had a very strong team around him on the equity side. You know, they were based in Connecticut and, and doing, you know, I I would say investing that was separate and apart from the distress side, we were really focused on the distress side in small and medium sized businesses, buying their debt, looking to restructure them, taking over control, making some, you know, swift decisions around acquisitions or divestitures and, and then selling those businesses. So we were kind of kept in a little bit of a bubble on the distress side, and, and I think we were always kind of the, the negative group within, within a, an organization that was quite equity focused and always looking for the, the, the upside opportunity. So it’s kind of an interesting dichotomy to be a distressed investor in the context of an equity manager that that was always looking for, you know, looking for the glass half full rather than the glass half empty. Right. Well,

[Ritholtz] 00:04:57 Well, you know, dead investors, they just want their money back. It’s a very different philosophy. So, so now let’s talk a little bit about oak tree. Your, your timing was fortuitous. You joined in 2007. Tell us a little bit about that era. What was it like between the time when housing had already rolled over, but before stocks peaked and, and crashed?

[Panossian] 00:05:18  Yeah. I remember when I bought my first house in 2006, they, all I was asked was if I intended to repay the debt. And I, I didn’t have to show any materials about my, my income or my credit cap capacity. It was purely if I intended to repay, which, you know, if I knew how to short it back then I, I would’ve immediately, because I’m pretty sure I was not a good credit at that point in time. But, but fast forward to June of 2007, you know, oaktree in the distressed debt landscape is, is really, you know, second to none. And when Howard Marks and Bruce Karsh saw these cracks that, that, you know, I think they were, they were early to see it in the corporate credit markets, they decided to go raise a big fund and they had a lot of conviction to do that and, and stepped up with the clients to, to raise it.
00:06:15 And I was fortunate to find a seat in that group and invested, you know, very steadily in, in 2007. Not, not terribly busy in 2007 to be honest, but in 2008, 2009, 10, it was by far the busiest time in my career in investing. I’m sure Howard mentioned this to you, but, you know, after the collapse of Lehman for many months, you know, we were buying hundreds of millions of dollars of publicly traded debt globally. And frankly it took a lot of conviction to do so because everything we bought was down five points a week later. And so there were, there were more than a couple nights where I slept under my desk wondering if I had a job in the morning. And, and

[Ritholtz] 00:06:56  When you say you were buying hundreds of millions of dollars worth of publicly traded debt, that’s every day? Yeah, every day, every week. This isn’t like a hundred million dollars purchase daily. You’re going out. ’cause I recall Howard telling the story that they wanted to launch this fund in the beginning of oh seven, and the target to raise assets was they wanted 3 billion. They ended up with 14 billion. Sometimes size gets in the way of performance, not in this case. It sounds like the timing was perfect. The sector was perfect. What, what was it like having to deal with all that capital when, when you’re watching the world fall apart?

[Panossian] 00:07:35  You know, it was, it was interesting because with the way we structured that particular fund, it was a smaller a fund and then we had a very, very large B fund that was not, it wasn’t necessarily the case that it would be drawn, right. It was, it will be drawn if the opportunity presents itself. So the A fund, if I recall correctly, was about three and a half billion. The B fund was over 10 billion. Wow. And so when I started, we were investing the A fund, you know, the cracks were there, but they weren’t wide. And then very soon after, you know, bear Stearns fails, Lehman Brothers fails, the cracks were massive and there were so much for selling from the trading desks at the banks. There were so much for selling from the, something called SIVs, the special investment vehicles, right. That had mismatched assets.

[Panossian] 00:08:19 The liabilities, obviously the hedge funds had redemptions. It often felt like we were one of very few, or maybe the only one buying in the market, which took a lot of fortitude. And I remember Howard especially said, you know, ’cause everyone was scared that our client’s capital was at risk and, and our jobs were at risk and the, the future of the, of the world as we know it was at risk. But Howard said, you know, we are paid to catch falling knives. That’s our job. We need to do our work and, and make sure that we’ve done a very good amount of analysis to be comfortable with owning a business through a cycle at the creation value that we’re investing at. And if we do our jobs right, that this will all turn out okay. And it did. I mean, I think we, we did deliver a strong performance during that period of time. We returned a lot of capital. I think most importantly, our clients appreciated the return of capital. And we were on a footing that if we wanted to, we could have raised another $14 billion right afterwards if we wanted to. But, you know, we decided not to. We decided that the opportunity set was less attractive coming out of the global financial crisis. And we raised a fund that was less than half the size of the prior fund because we thought that, you know, just because we could raise capital doesn’t mean that we should raise capital.

[Ritholtz] 00:09:37 I recall reading, and I know you can’t say this, but I recall reading that fund return something like 19% a year, some just astounding number. I’m curious, when you’re in the thick of it and it feels like the world is going upside down, do clients start to get cold feet? Do people who committed to the beef fund say, Hey, do you guys really wanna be out here buying this as the world ends? What, what was the experience like in the midst of that?

[Panossian] 00:10:04  Yeah, I mean, I think Oaktree benefits from having really great clients long history and, and long history. And you know, Howard started investing in high-yield bonds in the seventies, right? Howard and Bruce and, and Sheldon Stone and their, and their other partners began working together in 1985. And, and in 1988 and distressed debt, we had already delivered on promises that we had made to clients around the type of investing we would do and the responsibility that we would take in, in investing their, in their, their capital. So they knew that of all the things, of all the problems that they may have in their book, we were probably the least of their problems. And so they were happy that we had the, we provided the countercyclical exposure that they needed at that time. So we really didn’t have any clients that were fleeing. We certainly had clients that were nervous.

[Panossian] 00:10:50 Yeah. And were calling us and saying, look, I mean, what’s gonna happen with my private equity book? I mean, if, if you’re buying can’t help you there, right? I mean, if you’re buying debt in, in, you name it company at 20 cents to 60 cents, and they’re owned by, you know, marquee private equity firms, what’s gonna happen with that? And we, we feel that a lot of phone calls, I think the most nervous we became was when the banks started failing. And when we were concerned or we became concerned that client capital held in those banks, you know, prime brokerages and such. We were just worried that at some point that that could become a general unsecured claim in the bankruptcies of a cascading set of banks. And that was probably the peak of when we became most nervous. But again, if that were to happen, if that had happened, we would’ve probably been the least of the worries of, of, of politicians, diplomats, investors.

[Ritholtz ] 00:11:45  But even that, you guys, so first you guys are disciplined, you’re structured, you’re not cowboys that had to make people feel pretty comfortable. And second, even those circumstances, that’s a custodian relationship, a prime brokerage. It’s not an asset that other creditors can go after. So if that’s the worst concern, yeah. You guys just had the courage of your conviction to be in the right place at the right time with the right firepower. I had no idea that you were one of, if not the only ones as buyers throughout that I, I can’t imagine what it would’ve been like if you guys weren’t there. There would’ve been no bid.

[Panossian] 00:12:21 Yeah, it would, there were times in certain companies that it really did feel like we were alone in a room. And it, and, you know, and, and at the benefit of hindsight, it was a great time to invest. It was a great time to learn. I learned a lot about what it meant to have conviction when, when others didn’t. And also how to, how to navigate or how to, how to orchestrate your organization to withstand that type of pressure. And I think Howard and Bruce especially did a great job in, in navigating Oaktree to not lose itself and to not lose its stripes when it was easy to do. So it was easy to become nervous and unhinged to

[Ritholtz] 00:13:02  Say the very least. So fast forward 15 years later, you’re now incoming c e o at Oaktree. And earlier this year you said something that caught my attention, quote, it’s a very exciting time to be in the credit markets. Tell us about what’s going on today that makes it so interesting.

[Panossian] 00:13:21  There, there’s a lot of dislocation today, which is, which has been created by a rapid increase in rates as well as some cracks in the economy, especially around borrowers that put together capital structures when, when money was easier to, to be had, when, when, when rates were lower, when when liquidity was high, when valuation multiples were stable to rising, it was easy to make money and, and easy to deploy capital. And I think a lot of investors and, and lenders and really lost their way and agreed to terms and conditions that in under today’s market environment would not be acceptable levels of leverage that would not work. And, and as a result, there is a, a condition where there’s risks and opportunities in the current market. And if you’ve done a good job of avoiding the risks, the opportunities are plentiful.

[Ritholtz] What are those risks?

[Panossian] 00:14:13 The risks are older vintage transactions that put had just too much debt when rates were low. Now they’re suffering from high rates because they have floating rate liabilities that they never hedged. And so there’s a set of investors out there that have that exposure and are challenged and the opportunities are obvious. We are now lending on a private loan basis to, to very large companies that are being bought out by private equity firms, lending them at 11 to 13% for first lien debt. It’s been a long time since we’ve seen something like that, you know, well over 6, 7, 8 years. And the equity checks being written by these private equity firms are larger than they’ve ever been as well, greater than 50% usually of the enterprise value of the transaction that they’re, they’re taking on that,

[Ritholtz  00:14:56 That, that’s big. So, so let’s talk about some of those legacy portfolio issues. Obviously when rates were near zero and money was cheap or free, a lot of people refinanced, did they refinance on, on a floating rate as opposed to locking in? I I know not everybody gets to, to do a billion dollar deal with a 30 year fixed mortgage, but when, when rates were low, you would’ve thought most companies would try and refi their debt at, at a fixed rate. You’re suggesting a lot of that didn’t happen.

[Panossian] 00:15:31  Yeah, the, the private equity owned businesses and private equity owned, private equity sponsors prefer floating rate debt. The reason they prefer it is generally speaking, floating rate debt does not have call protection. And so as the markets over the last 10 years just continued to tighten every year or every other year, having non call debt was problematic. I mean, if you had a, if you had call protection, then your, your cost of refinancing that debt would be onerous. So private equity firms were taking advantage of the tightening market conditions by taking on floating rate debt, and they decided not to hedge with enough frequency about a third of the debt, based on our estimation, about a third of the debt that’s floating rate out there has been hedged in some form or fashion to fixed. But that’s hundreds of billions of dollars that is, that is completely floating. And L I B O R has gone from 25 basis points to now converted to S O F R at over 5%. So you have almost a doubling of the interest coupon paid by some of these businesses against the backdrop of c ovid 19 inflation and some of the economic pressures that come with, with those factors.

[Ritholtz ] 00:16:35 [Speaker Changed] And you mentioned some of the, the new debt that’s out there. If SS O F R is five plus percent, what do the private credit markets look like for a reasonable borrower, reasonable corporate borrower?

[Panossian] 00:16:49 [Speaker Changed] You know, for a private equity owned company or, or a private equity sponsor, L B O, what we’re seeing typically is 50 to 70% equity checks. We’re seeing leverage between four and a half and as much as six times debt to ebitda, which, which is a little on the high side, but the multiples that the private equity firms are paying for some of the larger businesses is, are still quite high. It’s still in the double digits. But the, the, the, the good news though is that with so much of the risks known, the economic risks, the high cost of borrowing the private equity firms as well as lenders are underwriting to a stress case scenario under which the company will continue to cash flow even if things deteriorate from here. So it’s probably the most, you know, well telegraphed recession in history, you know, if, if the recession does occur next year, I think everybody, nobody will be surprised if one does occur. And so everyone is underwriting as if that is a certainty. So credit quality as a result is quite high. The returns are quite high, and the loan to values are quite low, as evidenced by a very large equity check from these, from these val well-heeled private equity sponsors.
00:17:59 [Speaker Changed] So obviously not risk list, but pretty low risk relative to the high yields and high returns that that sector’s looking at.

00:18:06 [Speaker Changed] That’s right. And, and you don’t need to kind of bend and change your stripes and invest in cyclical businesses to get that additional return. You can invest in good companies that are, you know, have very low cyclicality, could be very stable from a cashflow generation perspective through a cycle.

00:18:25 [Speaker Changed] Quite fascinating. Let’s now talk about what’s going on in the current credit markets. You describe what you said is a sea change in markets. Tell us about that.

00:18:37 [Speaker Changed] Yeah, it’s, it’s a very different market environment today than just two years ago. You know, following the global financial crisis, we had economic stimulus, we had monetary policy that was quite accommodating easy access to capital liquidity to help bridge the problems of the global financial crisis to a new day. And that lasted until 2019, until the covid to 19 pandemic. And even after the pandemic with this, there was obviously considerable amount of stimulus that came in as well as quantitative easing. And with quantitative easing, there was a continued expansion of this easy money policy in the 2021 timeframe, specifically in the form of reserves being parked at the BA in the bank balance sheets. And that those reserves being pretty readily deployed into the markets,

00:19:29 [Speaker Changed] Meaning the Federal Reserve parks reserves that at all the major money center banks, they use that for fractional lending and out it goes into the system. Exactly.

00:19:38 [Speaker Changed] And one of the areas where the banks were very active with those reserves was buying AA securities and the widest spread AAA securities were CLOs. So C L O formation was at an all time high in 2021 after the CVID 19 pandemic actually had already occurred.

00:19:57 [Speaker Changed] So collateralized loan obligation means that there’s some underlying asset which is used as your collateral, you then break that up into different securities and different tranches and out it goes. And it’s a, a reasonable way to do financing depending on what risk level the, the bar the lender wants to assume. Sure.

00:20:15 [Speaker Changed] So in A C L O, the asset side of the balance sheet are syndicated loans that are originated by Wall Street banks and really just distributed out to investment managers like Oaktree and others who put together diversified portfolios and then lever those portfolios with rated securities starting with AAA all the way down to double B or single B, and then an equity tranche at the bottom. But the biggest part of that capital structure, about 60% of it are the AAA securities. So when you do see a sudden and dramatic increase in the buying interest or the demand for AAA securities, like what you saw in 2021, all of a sudden the equity arbitrage available to the equity investor of A C L O becomes far more attractive because the cost of borrowing becomes meaningfully lower. And so a tremendous amount of C L O issuance occurred in 2021, larger, more active than any other year on record.

00:21:11 And so the banks were originating debt to place into this C L O formation engine. What ended up happening, however, in 2022, I’m sure everybody recalls that the Fed said, you know, this inflation thing might not be transitory. The Fed decided that because inflation was not temporary, that it needed to move very swiftly and with a great magnitude. It needed to raise rates 500 basis points in 18 months. And that sudden increase in rates and the inflationary backdrop caused a significant pullback in the credit markets. By June 30th, 2022, you saw high yield bonds down 16%, you saw senior loans down 7%, huge price movements in these securities really based on the sudden increase in the yield curve.
00:22:03 [Speaker Changed] How, how significant was that big rush into AAA closs to what took place afterwards? Like what was the driver of that in 2021 and then how did that unfold into the mess in 22?

00:22:16 [Speaker Changed] So in 2021, there was about $175 billion of C L O issuance that year. And again, largely driven by this demand from the Fed infusing reserves at the banks and the banks deploying that capital through c o aaas,

00:22:30 [Speaker Changed] It seems a little circular that the Fed does qe, the Fed parks, all this cash at banks, the Fed drives C L L C L O appetite and then subsequent, oh, you know, maybe we need to take rates higher that they’re on both sides of, of shaking everything up.

00:22:46 [Speaker Changed] They’re on both sides of shaking it up. And, and you know, from a C L O investor standpoint, the CLOs have have floating rate features to them. So those investors said, wow, my, my return just went up magically, thank you very much fed. But when quantitative easing turned into quantitative tightening, that’s when the shift occurred. Because if you’re a risk manager at a bank and all of a sudden the reserve flow is not coming your direction anymore, you’re the expectation that is, it will go the opposite direction. So then you turn to your investors and you say, stop investing. And that’s what happened. The banks then said, I’m not a buyer of AAA’s at all, at any price. And at that point, the c o formation engine just halted.

00:23:27 [Speaker Changed] Is that a gradual process or is it like a, a switch gets flicked and that’s it no more betts? It,

00:23:34 [Speaker Changed] It, it felt like a switch, but that switch took about three to six months to get to really be felt. You know, the first quarter of 2022 things felt a little choppy. Second quarter they felt like the the floor was coming out. It, it, it was huge price declines. The investment banks were stuck with syndications that they had committed to, to place in the markets with price caps on the, on the coupons. They then had to move out, hung loans at meaningful discounts, resulted in big losses from the syndication of those loans. You know, historically you make fees when you syndicate. This time it was 2022 was a massive loss year for the banks. But with that volatility, as the banks experienced these losses and stopped committing to syndication to earn these fees, the direct lenders had the opportunity to step in into that void and provide capital that was secure in terms of certainty of execution.

00:24:30 And so private equity sponsors and other borrowers that wanted to have that certainty of execution said, you know, fine, I’ll pay a little bit more in my spread and I’ll have a single lender or maybe a small consortium of lenders give me the capital that I need to go buy this company. And I don’t have to worry about going through a ratings process of doing a road show and pitching this to 50 or a hundred different management or investment managers. I could talk to three or four direct lenders and get this job done. And so it resulted in a massive expansion opportunity for direct lenders and a widening of pricing for the direct lending market in addition to the floating rate going up, you know, 400 basis points, 500 basis points. So,

00:25:13 [Speaker Changed] So let’s talk about that before we get to private credit. First time in decades, treasuries and investment grade corporates, it’s, it’s an attractive yield at five 5.5%. What does this mean for what’s going on in the, in the world of privates if, if you can very relatively safely get in the fives? What does it mean for, for private credit, for CLOs, for direct lending compared to that, I I don’t wanna say risk free could cause triple A corporates aren’t, but you know, the two year, the 10 year, you’re not that far off. Yeah,
00:25:49 [Speaker Changed] It’s, it’s from an absolute return standpoint, treasuries IG corporates are high yield bonds are more attractive than they’ve been in very long time. They are, as long as an investor has the willingness to own a longer duration asset, they are very attractive investment opportunities. And we would recommend investors, you know, buy a, a basket of those types of securities. Now, in the case of private credit, you do pick up a lot more return for, in exchange for the complexity of the situation as well as the illiquidity. You know, in the case of private credit to large businesses, you know, these are companies that have a hundred million of EBITDA or more, or have an enterprise value of a billion dollars or more. Wow. And they’re being bought out by private equity firms. The pricing we’re seeing on first lien debt in those types of situations is about 12%.

00:26:40 But from a relative value perspective and a risk adjusted return perspective, getting 12% to lend to that size of a business with that type of backing from a household name type private equity firm, it’s a very attractive risk adjusted return. And I would say it’s should be part of an investor’s credit appetite. And, and frankly, I I think it, it, it, it favors credit or, or the, the topic we’re discussing about favors credit over equities actually over the, over the next few years. Because if you think about the size of the corporate pie, you know, with c Ovid 19 and with inflation, the size of that corporate pie generally hasn’t changed too much over the last few years. But with a sudden increase in rates, essentially the Fed has said, well, I’m gonna slice off more of that pie for creditors than I am for equity. And that was the opposite in this easy money period following the global financial crisis and ending, you know, in the 2021 timeframe when, when QE was, was then, you know, reversed with inflation and,

00:27:40 [Speaker Changed] And that 12% you mentioned ss o r earlier, the replacement for I B O R, that sounds like s o r plus six, six point a half percent is that

00:27:48 [Speaker Changed] Exactly The typical loan today is priced at s o r plus six to six point a half percent with about two or three points of discount on origination. And again, the equity checks being written by the private equity firms, generally speaking, are over 50% of the capital needed to buy the business.

00:28:03 [Speaker Changed] So let’s talk a little bit about the spread back when rates were zero and the 10 year was 2%, or, or under, it seemed like you weren’t getting paid for duration risk, you weren’t getting paid for credit risk even, I know we don’t use the term junk anymore, but even high yield was barely above investment grade corporates. How has that spread changed now that the floor is five, five point half percent for, for fed rates? Yeah. So

00:28:31 [Speaker Changed] The spread back then when in the, in the easier times the spreads were generally 4 75 to five 50 over ss o r for the equivalent risk today that is being priced at 6 25, 6 50 over. So it’s about 150 basis points wider in just 18 months. And that’s in addition to SS O F R rising as much as it has. So,

00:28:53 [Speaker Changed] So what does that tell us when the spreads widen like that,

00:28:56 [Speaker Changed] When spreads widen it, it either means that there’s risk of default that’s higher, which I don’t think is the case in, in this new vintage. I think it’s more a technical imbalance between the demand for private credit versus a supply of private credit. And that’s what’s caused that meaningful widening. And, and there just is less competition from the banks. The banks were the, the alternative financing tool for private equity sponsors wanting to do an L B O. And with those banks TA taking a step back because of their syndication losses in 2022, it created a attractive pricing opportunity for the private credit lenders to step in where the banks were stepping away and expand those spreads pretty meaningfully. Huh.

00:29:40 [Speaker Changed] Really quite interesting. Let’s talk a little bit about that role, that kind of unusual, you don’t have a whole lot of co-CEOs. Tell us a little bit about what the process has been like getting ready for this new transition. Yeah,

00:29:55 [Speaker Changed] It’s been, you know, I’ve been at the firm for over 16 years and the firm was founded by Howard Marks and Bruce Karsh, two investors. And so the model for Oaktree, you know, has been that we would have investors overseeing the, over the, the, the firm overall, you know, we went public in 2012 and that entrepreneurial history of Oaktree since its founding, required a little bit more institutional framework. And so we did have a dedicated C e o Jay Wint who did a great job of institutionalizing Oaktree further and all of our, you know, business processes away from the investment side that Howard and Bruce continue to focus on. And so today we benefit from the efforts taken by Jay to, to have a very professional organization, that non-investment side of our business will be managed by Todd Moltz, who is a veteran of Oaktree, chief administrative officer of Oaktree and, and former general counsel of the firm. So he will be taking on a lot of those institutional non-investment areas of the firm. And Bob O’Leary and I who run the, the opportunistic credit business in Bob’s case and in the performing credit business, in my case, will take the mantle in terms of strategic leadership of the firm as co-CEOs,

00:31:13 [Speaker Changed] You’re still both gonna be PMs, you’re still gonna be running, running funds and overseeing the investment s

00:31:20 [Speaker Changed] Absolutely. I, I think to do a good job running Oaktree, we wanna be as close to our clients as possible. And to be as close to our clients as possible mean would mean that we need to be as close to the markets and actual investments as possible. When I sit down with clients, I think if I bring any value to the table, it’s giving them really on the ground knowledge about what we’re seeing in the markets from a risk and return standpoint. And, and I think it’s important as the c e o to also to have that framework.

00:31:45 [Speaker Changed] And 16 years is unusual these days staying at the same firm for that long. Tell us what makes Oaktree special. What’s, what’s kept you there for, you know, quite a while compared to most of the industry seems, seems to see people job hop from place to place. Yeah,

00:32:03 [Speaker Changed] Oaktree, culturally is a very stable organization. You’ve met Howard several times, you know that Howard is not somebody that changes his stripes and therefore Oaktree is not a place that changes its stripes, which is, which is great from a career standpoint because as a firm, you know that they’re not gonna take wild risks just because everybody else is taking wild risks and then jeopardize the firm’s existence as a result of those risks not panning out. We see that all too often in the hedge fund space and in other, with other investment managers really going a little bit too far out on the risk spectrum in their, in their investment style and therefore blowing themselves up and creating volatility in the lives of people that work at those firms. Oaktree has not been one of those places and I think personally, you know, working directly for Bruce Karsh has been part of the reason why a main, a main part of the reason why I’ve decided to stay at the firm as long as I have.

00:32:55 Because he is the type of person that I think any investor would like to be, you know, calm, cool, collected, very, very strong instincts about people and businesses and behavior and the willingness to have a tremendous amount of conviction, especially when others don’t have the conviction. I think Bruce has shown that time and again in his career. And so having the opportunity to learn from a guy like Bruce Karsh has kept the job really interesting and and I haven’t felt that 16 years has, has gone by slowly at all. I think it’s gone by very, very quickly. So I,

00:33:31 [Speaker Changed] I would imagine if you specialize in distressed debt investing, you’re not gonna be an emotional flighty cowboy. Those guys don’t survive. You have to be calm, cool, and collected. It’s what it’s like a, a surgeon, a neurosurgeon. You have to be very precise and very measured and recognize how, how the crowd has lost its mind and you’re gonna take advantage of it. I get that sense from both Bruce and Howard a little bit contrarian and not given to Overreactions.

00:34:06 [Speaker Changed] Absolutely. You have to be patient, you have to be unemotional and you have to know that there’ll be times where you’re unpopular and that’s okay. Oh

00:34:14 [Speaker Changed] Really? What? Why do you say that?

00:34:16 [Speaker Changed] Because, you know, when you are investing, the rest of the world is fleeing and so you are calling capital when the, when your clients are hearing from the rest of their investment managers that it’s an absolute bloodbath out there. Right. And so answering those questions takes some fortitude. But the good news is at this point, Oaktree is so well known for, for taking that type of contrarian bet that we’re not, we’re not suffering from that as much, but, but it’s certainly is a, it certainly is an important feature of being a distressed debt investor.

00:34:48 [Speaker Changed] And, and you mentioned, you know, at times you’re unpopular, but like we talked about earlier in oh 8, 0 9, 0 7, if you are the only bid, I would think people would be grateful that hey, at least somebody’s on the other side of the trade. But for you guys, there’s no bid.

00:35:06 [Speaker Changed] Yeah, they were grateful at the time, but then when they saw our returns, they, you know, they were pretty upset about it because, you know, selling selling and

00:35:14 [Speaker Changed] You didn’t make them sell. That was their decision. Well, yeah, you were just there.

00:35:16 [Speaker Changed] Yeah, it was, it was the, the, the structures that were put in place prior to the G F C unfortunately were not conducive to that type of a, you know, something would call it a six Sigma event. I don’t know that it was, but that type of an extreme reaction in the markets and, and withdrawal from investors outta the market market so rapidly, these structures just weren’t set up for it.

00:35:38 [Speaker Changed] Human nature is what human nature is gonna be, right? If, if someone is selling a hundred dollars bills for $50, they can’t blame you if you’re a buyer who who told them to sell.

00:35:48 [Speaker Changed] Absolutely.

00:35:49 [Speaker Changed] That’s quite fascinating. So you mentioned you wanna stay close to what’s going on in the investing world to fulfill this new role as incoming co c e o. When you look at this present environment, do you think of yourselves more as bottom up credit pickers or, or do you look at the macro environment and say, Hey, we have to figure out what’s going on there? Also,

00:36:15 [Speaker Changed] You know, we’re bottoms up credit pickers. We are not macro forecasters, but we are macro aware understanding what’s happening in the economy with technicals in the markets. Those influence or can influence the, the performance of certain sectors. For example, interest rate sensitive sectors that may be impacted in a more violent way because of the, of the rapid rate increase as an example.

00:36:37 [Speaker Changed] So, so any long duration, you have to be aware

00:36:40 [Speaker Changed] Real estate that values itself based on cap rates, which is a derivative of the 10 year treasury. That’s an example. Another floating ra, another interest rate sensitive asset class or LBOs, highly levered leveraged buyouts supported by floating rate liabilities. That’s an interest rate sensitive asset class. So, you know, we are macro aware that definitely I think tips the scale in some ways in terms of, you know, is there a bigger investment opportunity coming or a smaller investment opportunity coming. But at the end of the day, the companies we invest in are bottoms up or based on bottoms up credit analytics that we have the conviction and we’ll return par plus accrued through through a cycle. And if they don’t, we’re happy to own them at the valuation that we are creating that company act.

00:37:26 [Speaker Changed] Huh. That’s really quite intriguing. So I, I like that concept of macro aware. How do you deal with the macro environment that has been forecasting recession for, I don’t know, it feels like three years now. And for most of that time there’s been a fairly inverted yield curve, especially once the Fed started really hiking rates in early 2022. Yeah,

00:37:53 [Speaker Changed] The, the indicators are sending mixed messages. Obviously inflation or control of inflation is heading in the right direction, but still not the level that it needs to be at for, for the fed to pause raising rates. The employment picture or the unemployment picture is actually quite stable. Consumer spending is stable, although credit card defaults another consumer just

00:38:16 [Speaker Changed] Starting to tick up, right.

00:38:17 [Speaker Changed] Starting to tick up. So we might be at the inflection point now. And it’s always confusing when you’re at the inflection point where when you look at historical data, backward looking data, it shows a different picture than what the forward would, would indicate. I think it’s hard to avoid a recession with such high rates and with the inverted yield curve eventually. What, what that says to me is the Fed is gonna keep rates as high as possible for as long as possible until something breaks in the economy.

00:38:46 [Speaker Changed] When you say something breaks, we’re not talking Silicon Valley Bank or those specific regionals. You’re you’re talking something broader.

00:38:54 [Speaker Changed] I’m I’m talking about something about in the actual economy itself. Growth slows down investment in certain types of capital expenditures slows down the availability of capital becomes more challenged. And there’s an increase in residential foreclosures, something that means more than just a bank failing here or there because of a duration mismatch. That’s really what Silicon Valley bank was. Silicon Valley bank’s failure is not enough for the Fed to do anything. And we saw that, I mean, they’re, they really did not pause at all. And so I think that as we look forward, I don’t know how we actually avoid a recession because I don’t think that we will, that I don’t think that the Fed will have enough data to support a decline in rates or reducing rates without a recession. And so if if rates stay higher for an extended period of time, higher for longer, then that in itself could cause a decline in availability of capital of lending and therefore recession.

00:39:52 And that’s why, you know, an inverted yield curve has historically been highly correlated or a hundred percent correlated with a recession because the cost of borrowing in the short term is higher than the long term. And that doesn’t work for banks ’cause they borrow short and lend long. So it just means that the Fed is telling banks stop lending and to corporate borrowers stop borrowing for the purpose of investing in your business. That will impact the economy. That will imp that will, that should create a recession. I think the reason I say should and not would is because we also have stimulation by the Biden administration in the form of infrastructure bills, in the form of green manufacturing capabilities, reshoring of certain types of manufacturing. And that’s stimulative.

00:40:38 [Speaker Changed] I’m, I’m so glad you brought that up, because people seem to be waiting for the CARES Act stimulus waiting for the pig to go through the Python. But between the semiconductor, the infrastructure bill, the the Inflation Reduction Act, these are decade long fiscal stimulus that are gonna get spent over time and they’re not just gonna go away. Although clearly they’re nothing like caress Act one was like 10% of G D P, but still that’s an ongoing tailwind for the economy.

00:41:09 [Speaker Changed] It it is and and we are on an, in an election cycle now too with an incumbent running for reelection. I I would expect that if there’s any pressure on more stimulus, i, if there is pressure on stimulus, it’ll, it’s to the upside, not to the downside at this point.

00:41:23 [Speaker Changed] So, so let’s bring back this recession risk back to your clients and the impact on private credit, if we do tumble into a recession somewhere in 2024, I think is the, the latest consensus. What does this mean for private credit?

00:41:42 [Speaker Changed] Well, for private credit in, in older vintage deals, especially those that were backing private equity sponsors in transactions, I think there will be elevated defaults and risk, especially in the weakest, you know, maybe 20 or 30% of private credit portfolios. We see this because we are a pub, we own a, we manage a publicly traded b d C and so do a lot of our peers. And so we watch the pressure building up in some of the publicly traded BDCs, the way they announce non-accrual or amendment activity of underlying borrowers. And my expectation is that generally speaking, if you, if if investors were to watch the publicly traded b d C market, they will see an escalation in those types of, and those types of risks that are reported by the BDCs. Now Oaktree in particular, you know, we have a lot of capabilities in terms of private credit.

00:42:36 So we have not had to rely on, you know, just lending to private equity sponsors to generate returns. We have opportunistic credit capabilities, we have non-sponsored credit capabilities lending the companies that are publicly traded that, that need capital, not for a buyout, but for some strategic growth initiative. So our particular book is quite balanced and, and, and is quite clean relative to where we think the pressures will reside, you know, over the course of the next 12 months. So we feel good about our ability to kind of lean into the market and we also manage our private credit book far less levered than, than what is ordinarily the case in the market. So we are cautiously optimistic that the cracks that we are seeing in the older vintage private credit, the older vintage broadly syndicated loans will create opportunities for Oaktree in our sort of brand or style of private credit. It’s not the case for everybody, but certainly Oaktree as a countercyclical, you know, bent manager will benefit from from the current these institutions

00:43:38 [Speaker Changed] And your clients are primarily large institutions? Our

00:43:41 [Speaker Changed] Clients are primarily large institutions global. We do have a retail client base as well in the form of our publicly traded b d C, but I, the overwhelming majority of Oaktree clients are very large institutions that have invested across a variety of oaktree strategies, not, not just a single one.

00:43:59 [Speaker Changed] Really quite interesting. So we’re talking about rates, we’re talking about debt, we really haven’t spent a whole lot of time talking about the Federal Reserve. Are you an obsessive Fed watcher? Does all of Jay Powell’s comments each month affect you? Or is it just kind of background noise and you’re watching what the market’s doing?

00:44:20 [Speaker Changed] Yeah, I’m, I’m really watching what the market and the economy are doing rather than hinging on every word that the chairman has or says. Obviously the information that the Fed has is very important in ter that is in terms of digesting what’s happening with the economy and the likelihood that they pivot or not. So I would say it goes into the same theme as being macro aware rather than, you know, really making key decisions based on every word that, that the Fed has.

00:44:51 [Speaker Changed] And, and you know, I have to give, as much as people criticize this Fed, I have to give Jay Powell credit for being transparent, saying this is what we’re gonna do and then going out and doing it. The market seems to constantly be doubting him. This is going on for a couple of years, Hey, we’re gonna do this. And they go out and do it. What is it that keeps people second guessing when the Fed says the sky is blue? They don’t seem to believe them. Yeah,

00:45:20 [Speaker Changed] It it’s, it’s odd to me too, to be honest with you because, you know, coming outta the financial crisis, there was a, a mantra that don’t fight the Fed and that nobody wanted to fight the Fed when the Fed was reducing rates. I don’t understand why people wanna fight the Fed when they’re increasing rates. I mean it’s well,

00:45:36 [Speaker Changed] You know, because they don’t wanna pay higher rates. That’s

00:45:37 [Speaker Changed] Yeah. But but, but when you don’t fight the Fed, just don’t fight ’em in both directions. Is is what I think. I mean, and I think you’re right, Powell has been very clear and I think that the fed for those, for those in the, the market that are economists, you know, there is an academic need for having the right level of rates. The reason is, is because in the future when you do have a shock and you do need monetary policy to correct for that shock, you need high rates to be able to reduce those rates and correct for that chalk and for the last 10, 12 years, the Fed has not had that lever and it finally has the opportunity to build that lever in and retain it if it’s careful about or precise about, you know, when it decides to pivot or what it says around a pivot.

00:46:21 So I think that the Fed is predisposed to leaving rates high longer because of this academic need and because the data supports it too. It’s not like, it’s not like the data supports a quick pivot or a significant decline in rates at this point in time. And I would argue that, you know, and this is consistent with Howard Marx’s c change memo, that the, we are in a period of time where rates should be ex expected to stay high for long, not longer, but long. And in the context of the last 40 years, where rates are today are, are not meaningfully out of whack.

00:46:54 [Speaker Changed] I’m so glad you brought that up because when people talk about, oh my god, 7% mortgages, hey, you know, that’s about average for the past half century. Yeah.
00:47:03 [Speaker Changed] The only time that it’s not been average is the last 10 years. I mean, you could have gotten a 30 year mortgage at three, three and quarter percent at its lows, but that was unprecedented. Right. And I don’t think we will see that anytime soon.
00:47:17 [Speaker Changed] I just read an interesting analysis from a, a mortgage research shop that, that surveys home buyers and they said 5.5% is where all these golden handcuffs come free again. All right, we’re stuck in our house, we have a 4% mortgage, we’re not paying 7%, Hey, five point a half percent we can think about moving. What are the indications that you’ll notice that this higher fed funds rate, the 7% mortgage rate is starting to, to stress the economy?

00:47:53 [Speaker Changed] Yeah, the, it’s a great question and I don’t have the crystal ball, but I would tell you right now, even though the rates have been high now for 12, 18 months and the mortgage rates have been, you know, out of the money in terms of a refi now for the better part of at least a year, we are still continuing to see home builders sell new homes. We’re not seeing as much velocity in the sale of the secondary sale of homes, but home builders are still se selling homes and that’s because there is a shortage of housing stock, there is a shortage of multifamily and single family housing and the home builders are able to charge a high enough price that they’re able to buy down the rate for their buyers. So for now, at least because of that shortage, it is cushioning what would otherwise be probably a challenging picture economically for the, for the home building industry and just housing overall.

00:48:51 Now there will come a point where the home builders will exhaust their low cost basis in land. The cost of constructing a home is higher today than it was three years ago. So there is real inflation in cost of construction. And so those margins will shrink in home building. And I think w when you combine new home sales declining and new home construction or and multifamily construction declining, that’s when I think the bite will be felt. But that’s probably not in the next 12 months is my, is is my best guess. And I can’t really point to a reason why other than I do think that there is this real shortage and there is that shortage is causing a material increase in the, in the rental rates for multi-family housing. So,
00:49:38 [Speaker Changed] So you’re, you’re going right to a, a fascinating area. Some of the pushback for hire for long, not even longer is, hey, none of this stuff is rate-based. There’s a shortage of single family and multi-family houses because of the post-financial crisis under building and moving to other commercial areas. There’s a shortage of labor that’s keeping wages high. We just don’t have enough bodies. Arguably the semiconductor shortage is why car prices both new and used have gone up and have stayed fairly high. They just can’t get enough chips for this. What do high rates do for that? And maybe higher for long gets resolved once all the supply comes back online?

00:50:21 [Speaker Changed] Yeah, I I don’t think high rates help debottleneck these, these issues that you, that you pointed out. I I in fact, they, they definitely hurt and that’s why I do think that there is a reasonable chance of a recession because I think that the Fed will all else being equal keep rates higher until that, until something material breaks. So I, I don’t think that we’re gonna see the de bottlenecking. I do think that, you know, if I only had a dollar to bet on a recession or not a recession, it would be for a recession really next year. But again, we’re not macro forecasters here. It’s more about, you know, the, it’s more based on the conviction that with or without a recession we’re gonna see elevated defaults with or without a recession, we’re gonna see a tightening of the availability of capital and those two factors defaults and tightening availability of capital should at some point cause a recession. Alright.

00:51:16 [Speaker Changed] I only have you for a limited amount of time. Before I get to my favorite question, I have to throw a couple of curve balls at you. Starting with, you mentioned grad school and I wanted to ask which grad school, so in addition to a BA in economics from Stanford, you have an MS in health services from Stanford Medical School, a JD from Harvard Law School and an M B A from Harvard Business School. A what led to so much school and B, Stanford Medical School, Harvard Law School, how does that apply to what you do in the world of credit? Yeah,

00:51:54 [Speaker Changed] Well, I, I wish there I could say that it was all intentional and it’s absolutely not. You know, I, I entered college not knowing what I wanted to do. My oldest brothers were surgeons or are surgeons, so I thought naturally I should be a surgeon. And then when I was a freshman in college and taking pre-med courses, I visited my brother at the emergency room and at U S C in Los Angeles doing trauma surgery. And I passed out seeing him treat a, a bullet wound. And when I came to, he said, you’re not cut out for this. And, and he was right. I’m not, I was not, I am not cut out for being a doctor, but I still valued healthcare, life sciences, biotechnology as important areas of the economy and things I’ve just found naturally interesting and, and curious. And so I kind of pivoted and became effectively a health economics major and my, and so I was an econ major, but my advisor was Mark McClellan, who headed the F D A as well as the centers of Medicare and Medicaid at different points in his career.

00:52:58 And so he straddled being a professor at Stanford Medical School as well as a professor in Stanford economics department. Huh. And I thought that multidisciplinary approach to his career was interesting and could be of interest in my career. So when I decided to go to, to Morgan Stanley and work in the m and a department there in the late nineties, a good portion of the deal flow I did or worked on was healthcare related biotech, pharma related. And, and I find that to continue to be an area of interest for me, I’ll get to the law and law and business in a moment. But

00:53:31 [Speaker Changed] Did, did you do them at the same time, the JD M b A, the

00:53:34 [Speaker Changed] JD in the M B A I did. After I worked at Morgan Stanley, I started at the law school, but then that’s around the time or right after the time that the.com bubble burst. And so I thought, you know, now’s about as good a time as any to stay in school. And so I, I applied to the business school, to Harvard Business School when I was a first year in the law school and, and was lucky enough to get in. And that was a fantastic opportunity to learn from a lot of great classmates, some great professors, a lot of guest lecturers that came in that were, you know, captains in in their particular industries and learned a lot there. But when I emerged from the J D M B A, you know, I thought about what did I, what did I enjoy in school the most?

00:54:12 And frankly, it was bankruptcy and reorganization and interesting tidbit. My bankruptcy professor in law school was Elizabeth Warren. Huh. And you know, the, the, the, the same penetrating questions that she asked to people, you know, in, in senate hearings is the way I felt every day in bankruptcy class. And, and I learned a lot. And, and, but, and that it kind of left a mark. And, and that’s, I would say, you know, that experience was one of the reasons why I gravitated towards distressed debt, as you know, early in my career when I joined P Quad in the Distress Group.

00:54:43 [Speaker Changed] And you also serve on the advisory board of Stanford Institute’s Economic Policy Research Group. Te tell us a little bit about what that group does. So,

00:54:52 [Speaker Changed] So that group is an advisory group attached to the economics department at Stanford and supports graduate research and undergraduate research in, in, in economics for a variety of different types of studies. It allows me to stay close to the university and talk with, you know, economists and academicians that, you know, look at the world differently and, and I think, you know, helped to give me a different lens. It also helps me kind of stay in touch with some of the other members of that advisory board that are in the investment management industry and other industries that also help kind of expand my universe. I don’t, I think in investment management, you, it, it’s a, it’s a negative. If you become too myopic and have too many blinders on, it’s kind of good to look to your left and to your right and think about what other people are seeing,

00:55:38 [Speaker Changed] And that’s the latest and greatest economic research coming up. So I’m sure there’s, there’s some benefit from that. Absolutely. All right. So in the last 10 minutes, I have let, let’s jump to our speed round and, and run through our, our favorite questions. We ask all of our guests, starting with what have you been streaming during the lockdown and afterwards, what are you either listening to or, or watching?

00:56:00 [Speaker Changed] Well, I’m absolutely listening to your podcast for sure. So thank you. Stop. Stop. But in terms of streaming, no. I really like the more documentary oriented streaming content. For example, the Formula One, you know, drive to survive. Looking forward to the next, to the next series there. I i, it’s

00:56:21 [Speaker Changed] Been, it’s been really absolutely fascinating. And it’s caused all of America or half of America to become f one fans.

00:56:28 [Speaker Changed] Absolutely. Well, and they’re, they’re bringing a Formula One race to Las Vegas for the first time in November. And so from a, just a business standpoint, seeing the impact that media can have on, on a brand like Formula One that was underpenetrated in the us, I think there, there are, there are lessons to be learned from a business standpoint by, by focusing on content that is unrelated to finance. I mean, I know there are folks that love to watch billions or love to watch, you know, or love to read about finance or, or invest in, or investing. I tend to not like watching shows or reading books about investing. I like kind of going the opposite direction and, and spending time with content that is completely unrelated to my life.

00:57:15 [Speaker Changed] Right. You don’t wanna be a, a, a foot wide and a mile deep. Yeah. It, it’s going wide. It’s always interesting. Tell us about your mentors who helped shape your career. Well,

00:57:24 [Speaker Changed] Absolutely. Bruce Karsh is at the top of that list. You know, I’ve had great mentors over my life, and Mark McClellan was a mentor for me in, in college. And I, again, the multidisciplinary approach to his life opened my eyes to also being multidisciplinary and between law, business, medicine, and, you know, we, as a result of that multidisciplinary approach, you know, a, a year or so ago, we launched a very large life sciences lending fund, which I, I found personally gratifying because it gave me a conduit and it gave Oaktree a conduit to use our skills, our hard work in investing in a very difficult space in, in biotech and pharma, to change the lives of people, to save the of people’s lives. And I think that’s, I think, the pinnacle of how investing can be positive in impacting the community and society. So I’m, I’m very grateful for having done that.

00:58:19 But I think I, I look back on my mentors and I think Mark, for sure was, was one of them. And then, you know, one of my mentors, he was one of the first employees at Providence Equity Partners. His name’s Al Dobra, he was my associate at Morgan Stanley. He was the one that actually convinced me to delay going to law school and work in Morgan Stanley for two years and work a hundred hours a week. But it exposed me to a, an industry, a career path, the possibility of investing as a career path that I otherwise would not have seen. And so I think that when you look at your mentors, even though, you know, maybe time with them has been short, the impact can be material if you interacted with them at a point where their, a critical decision had to be made in your life. Hmm. Either personal life or career life.

00:59:04 [Speaker Changed] Really interesting. Tell us about what you’re reading. What are some of your favorite books? What are you reading right now?

00:59:09 [Speaker Changed] Yeah, I, I’m reading Genis Khan and The Making of the Modern World. I know that’s not a new book, but I really like the, the books about periods in history and people in history that have made an impact that, that you can actually with withdraw or you can garner some lessons in life out of, and in the case of Gh Khan, you know, there were some, obviously some tremendous accomplishments that he made. But, you know, I think that he probably did too much too fast, and it was not a lasting empire as a result of its, as a result of its reach. So there are some takeaways for business that you get from there. And, you know, I also enjoy kind of Soviet history as someone, as an Armenian, the part of the Armenian history that was under the Soviet Union I is, is interesting to me. So, you know, I’ve read Mikhail Gorbachev’s. I enjoyed reading Mikhail Gorbachev’s autobiography as well. And, and you know, that sort of thing. I’m not, I’m not really into fiction or, or entertaining reading. It’s more about nonfiction.

01:00:15 [Speaker Changed] Hmm. I’m trying to remember who was the author of the Genghis

01:00:19 [Speaker Changed] Strickland

01:00:20 [Speaker Changed] Conn book? I, I read Strickland.

01:00:22 [Speaker Changed] Oh, Strickland is the one that I’m reading, but I, there could be another one.

01:00:25 [Speaker Changed] Jack Weatherford.

01:00:26 [Speaker Changed] Oh, Weatherford. Sorry, Weatherford. So

01:00:28 [Speaker Changed] Maybe it was the same, maybe

01:00:29 [Speaker Changed] Weatherford. It was Weatherford. Yeah. I’m thinking Strickland was enemy at the gates. What,

01:00:32 [Speaker Changed] What’s astonishing about the whole Genis Khan story is he like conquers most of Asian half of Europe by the time he’s 25. Some, some, yeah. Crazy number. Just steamrolled everybody.

01:00:46 [Speaker Changed] He controlled more of the world in 30 years than the Roman Empire did in its entire history.

01:00:51 [Speaker Changed] It’s astonishing.

01:00:52 [Speaker Changed] Yeah. But I think that the, the stretch was probably too much. And eventually, you know, his children and descendants became cons as well, and they fought with each other. And, and there, there was, their end was the creation of other countries. The takeaway for businesses, you know, if you wanna build a, a sustained empire, you have to do it more carefully and maybe over a shorter period of time.
01:01:15 [Speaker Changed] Make makes a lot of sense. Let’s jump to our last two questions. What sort of advice would you give to a recent college grad interested in a career in distress, assets, finance, credit? What, whatever you would like to tell them. Yeah.
01:01:30 [Speaker Changed] I, I think it’s a couple things. And I know others have said this on your show before, but it’s be patient. I, I think that that’s very important because I always took the early part of my career as education or an opportunity for education as much as it was employment. And I think my employers appreciated it because I wasn’t trying to, you know, be a portfolio manager before my time. So I, I think that’s, that’s advice number one. Advice number two is remember that you have it good. If you have a job as a young person in finance, whether it’s in investment banking or consulting or, or buy side, sell side, you have it really good. You have it good in, in that you’re learning a lot. You have the opportunity to learn from good people, smart people, and you are not, there’s a lot worse of, of a, of a job that you could have.
01:02:18 Like for example, medical residency. You could have gone to eight years of school then make a fraction of what you’re making after doing eight years of school, learning the same surgery over and over and over again, to be able to repeat it over and over, over again as a, as a professional and not really innovating as much as you thought you would. Whereas in finance, you got, you actually do have the opportunity to innovate even in a place like medicine. And I think that that’s an important way to, to kind of contextualize finance as a career versus other things where you have the opportunity to be flexible and you have the, the ability to, to make a change if, if you, if you so desire.

01:02:57 [Speaker Changed] Huh. Quite interesting. And our final question, what do you know about the world of distressed investing credit debt today? You wish you knew 20 plus years or so ago when you were first ramping up your career?

01:03:12 [Speaker Changed] Yeah. You know, 30 or 20 years ago, 25 years ago, when I thought about a career, I, I thought that investing was monolithic. I thought that it was, you know, you just kind of invest in stocks and that’s about it. And, and you have to think about, you know, brands that do well and growth. But I think that what I know now is that, and again, this is consistent with some of my, my other comments today has been that if you do take a multidisciplinary approach, if you do marry investing in finance with knowledge of an industry, then you are able to generate or, or, or drive change, change that it can be quite meaningful and positive change that could save lives or change lives. I’d never expected that I would feel that way about investing. I thought investing was just a means to an end.

01:04:11 It was a means to just generate an income and live a live a comfortable life. I, I remember my father is a blue collar worker. He is a contractor. And he would always kind of tell me when I, when I first told him I wanted to go into either law or business, he said, you know, you’re not really building anything. You’re not, you’re, you’re, what, what good is that if you’re not really building anything? And I think that I’ve realized that I am building something I, I, or I can be building something in finance. I didn’t appreciate that before. I certainly appreciate it. Now, I do think it’s a fantastic industry for those who wanna do well by, you know, by doing good as well. I think that that is the, I think there’s an opportunity there for people if they have, if they choose to go down that path. Hmm.

01:04:55 [Speaker Changed] Really quite interesting. Armand, thank you for being so generous with your time. We have been speaking with Armand Posiion, head of Performing Credit and incoming Co c e o at Oaktree Capital Management. If you enjoy this conversation, well be sure and check out any of our previous 500 discussions we’ve done over the past nine years. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcasts. Sign up for my daily reading list at ritholtz. Follow me on Twitter at Barry underscore ritholtz. Follow all of the Bloomberg family of podcasts on X at podcast. I would be remiss if I did not thank the correct team that helps put these conversations together each week. Paris Wald is my producer, Sam Danzinger is my audio engineer of Val Run is my project manager. Sean Russo is my researcher. I’m Barry Reholtz. You’ve been listening to Masters of Business on Bloomberg Radio.




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