'Transparency Will Help' in Private Credit: Oaktree PM

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00:00How do you feel about all this criticism that somehow, oh, private credit got it wrong,

00:04oh, the due diligence has been off, oh, there's some systemic risk out there?

00:07Yeah, it's funny. I think it's called the cockroach wars, another way that some people

00:12have talked about it. I would say, one, I agree. There was this comment about, you know,

00:17there's a lot of managers out there that don't have a driver's license. I think if you look

00:21at the industry in general in private credit, you've seen that a lot of firms actually never

00:26been through a cycle. Seventy percent of firms out there are kind of 10 years or less. But for

00:31example, someone like an Oak Tree, we've been around for 30 years. We've gone through credit

00:35cycles. And so I think transparency will help. And I also think having managers that have gone

00:40through downturns and know how to deal with underperforming credits is critical.

00:45And Oak Tree, of course, I mean, kind of the OG in this space. And then you've been there for a while,

00:492009, more or less. So you kind of started, what, kind of in the middle of the financial crisis.

00:53So you guys definitely had a little bit of a trial by fire there. I am curious. I mean,

00:57your focus for years has been on mezzanine debt, junior debt as well. I am curious as to whether

01:04we're seeing more interest in that now relative than maybe what we saw prior to the financial

01:09crisis? You're seeing mezzanine as a niche product. And where we're seeing interest right

01:13now is it's a fixed rate product. And so some investors are saying, you know, we have our direct

01:18lending, we have floating rate exposure, but where are rates likely going to go? Most likely down at

01:23this point. So mezzanine provides fixed rate and your ability to lock in those interest rates.

01:28And I think that's where our appetite is coming from.

01:30When you look at not just credit quality, but we'll just call it economic quality. And it means

01:35your job to sort of figure out, to a certain extent, I would think where the economy is going

01:38to get a read on where credit is going. Does it look positive to you?

01:42I would say like, so we're not macro investors at Oak Tree, but I would say, you know, we are in a

01:47longer for higher interest rate environment. And I think from that standpoint, it's twofold. One,

01:51it's great from a spread perspective in the current market with base rates higher. But also,

01:56if you started lending and doing a lot of deals when base rates were zero, you likely might have

02:02some cracks in your portfolio. And how are you managing that? I think from an Oak Tree perspective,

02:06we've always been judicious. Right now, what you're seeing is private credit, it's really competitive.

02:11Leverage is going up and spreads are tightening. And so from our perspective, it's proceed with caution.

02:17You still want to deploy, but you don't want to be deploying in everything at this point.

02:21I am curious about the liquidity in the market, particularly when

02:25negative things pop up. Like we've been talking a lot over the last few days about

02:30first brands, Tricolor. We know who got left holding the bag. We've also learned a lot of

02:34companies, a lot of firms out there apparently did see some trouble and either avoided it or if

02:40they were in it, they cash in their chips. And that includes Oak Tree.

02:43Yeah. So I would say, I think from the kind of lessons learned from that is what does your upfront

02:47due diligence process look like? As a bottom-up investor, you should be asking those questions.

02:51Are there any types of off-ballage sheet, financings, et cetera? So I think that those

02:57situations, again, are not necessarily endemic of the private credit market, but was it more of a

03:02due diligence miss? How do you see just private credit evolving? I mean, we talk about, I mean,

03:07obviously, Oak Tree has been doing this since the start. I mean, you know, Howard Marks gets sent out

03:11to L.A. and they kind of left him to his own devices. And he kind of helps to create an industry.

03:14But we've seen that change now. We've seen the partnerships now between private credit and

03:18private equity. And now with the traditional big money center banks, how much further does that go?

03:23Yeah. I think from a private credit standpoint, it's always like, I always say from a public

03:27versus private, it's always a V. It's not. I think public markets and private markets do have to both

03:32be healthy to coexist. I think from a private credit standpoint, it's a maturing industry,

03:37right? And so how do you generate alpha? I think from our perspective, it's really building a

03:42strong portfolio to generate enough kind of withdrawal and to make sure that you're not

03:48having an issue if you're going through a downturn. And so I think from our standpoint,

03:52from a direct lending standpoint, really, you need scale. And the way you generate alpha is really

03:57building a really strong portfolio. Well, I'm curious, but what do returns look like? I mean,

04:02everyone's talked about this sort of that golden age where you're getting, you know, mid to high,

04:06you know, teen returns on some of these investments. That's over. John Gray today over

04:12at Blackstone even kind of referenced that, saying that that kind of golden era is behind us.

04:16I mean, what does what do returns look like? Are they going to be competitive with other asset

04:20classes? I think they're still going to be competitive. Yes. Are we getting S plus 600 plus

04:25on performing borrowers? No. Right. Spreads have compressed. But if you look at the relative value

04:30between private credit versus a broadly syndicated loan, it's still about 100 to 150 basis points.

04:35And even if you were to stretch back, say, to 2019, when base rates were zero,

04:40you're still getting probably 200 to 300 basis points more.

04:44And you say you use the phrase higher for longer. And I assume you mean that in reference to the

04:49sort of zero bound that we were at. But you still have a market that at least right now seems to be

04:54pricing in the idea that we could be below or around 3 percent on the Fed funds rate within about

04:58a year, year or so time here. Does that change the fundamentals for you at Oak Tree?

05:03Yeah, I don't think that necessarily changes the fundamentals. I think even at 3 percent,

05:09it's still a good all in yield for credit. Right. I think for a long time, credit was in an

05:14environment where base rates were zero. It was kind of falling out of favor. But I think credit,

05:18I think people are saying it's great fixed income. Plus, you're still getting comparatively

05:22great all in yields.

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