00:00This is a very different milk-in from a year ago. We were still talking about the golden age.
00:04There was this promise of all these retail funds. The fears about software haven't been fully realized.
00:09How much has changed for you and how you view this industry in the past year?
00:13Well, in some ways the industry has matured in that it's accepted that there's downside to private credit
00:22and to credit in particular and that underwriting standards are critical to investing in credit as well.
00:28You know, during the period after the global financial crisis when rates declined and spreads were low,
00:33it was really hard to differentiate. There wasn't very much dispersion in outcomes in investing in high-risk credit
00:39versus lower-risk credit, and so selectivity and caution was not really rewarded.
00:45Today it is being rewarded. There is risk that is built up in the system.
00:49We saw over the course of the last 12 months cases of fraud, which some call cockroaches.
00:55Some. One person in particular, but yes.
00:57We've seen a war. We've seen reasons for true economic volatility.
01:02But against that backdrop, we've seen a market that has been quick to shrug off really meaningful changes
01:08in the fundamental economic underpinning of the globe.
01:11Is it too quick to shrug it off?
01:13I think it's been too quick.
01:14I think there are real fundamental economic issues that the markets are not appreciating right now.
01:20And I think there's a whole host of reasons why.
01:23I mean, I think one is that the fundamental backward-looking performance of companies is quite strong.
01:29I think another reason is there's tremendous liquidity in the markets following the COVID stimulus that was printed.
01:36There is a need or a desire to stay invested.
01:40And as a result of that, the market looks for reasons to look through the economic data.
01:46For example, when it comes to foreign policy or politics in general, the market believes at this point
01:54that Trump won't do anything that will really permanently damage the economy as reflected in market prices.
02:01And if you use that as your barometer, then as an investor, then you'll say,
02:06well, maybe I should just stay invested because I don't think anything that bad will be allowed to happen.
02:13And so why go to the sidelines?
02:15That's been very apparent in risk markets, for example, of equities trading at all-time highs.
02:20Where else do you see some mismatch between fundamental reality and what markets are pricing?
02:25Well, even in private credit, today, spreads have widened out.
02:29But they haven't widened to levels that would indicate a significant amount of stress.
02:33Fund flows in private credit, although a very small portion of private credit, the semi-liquid BDCs, are outflowing.
02:40We've seen a bounce off the bottom for publicly traded BDCs.
02:43We've seen really no change in the flow picture in institutional interest in BDCs, or in private credit.
02:53Excuse me.
02:54I would say there's indications, regardless of where you look, that things are at all-time tights or at all
03:02-time highs.
03:03And when you kind of overlay the Iran war, when you overlay some of the software pain that we would
03:11expect to see
03:11over the course of the next couple of years, it's a little bit of a head-scratcher as to why
03:15the markets are as robust as they are.
03:17But this is the thing.
03:17If a complete rethink about our society because of AI doesn't change things,
03:21if a closing of a strait that controls 20 percent of the world's energy flow doesn't change things,
03:27if a complete disruption to our trade regime doesn't change things, what can?
03:32Because many would argue we're just more resilient now, and that's all there is.
03:35Well, we certainly are more resilient, and I think the AI picture has both positives and negatives.
03:41It has positives when it comes to capital deployment and investment.
03:45There's real economic benefit to that.
03:47It has negatives in the form of labor.
03:49So right now, the markets are favoring capital deployment over the negative impact on labor that AI may have.
03:56I think oil is possibly one area or one factor that could tip over the markets.
04:02We have seen diesel and gasoline and jet fuel prices up 50 to 80 percent since before the war.
04:09Pain at the pump will impact consumer behaviors at some point.
04:13It won't fly as much.
04:15But then there's also a rerouting that's happening in energy markets globally.
04:19That will cause disruption as well if this war continues and if the supply disruption continues to be the status
04:27quo.
04:28Right. And I remember you told Matt and I last time you joined us that oil above $100, that that
04:32worries you,
04:32that it could mean that we're headed towards a recession.
04:34We still are around those prices.
04:37So what does that mean?
04:38I think we're getting closer and closer.
04:40Okay.
04:41And the reason I say that is if you look at stocks of refined products in Asia, for example,
04:46Asia is probably the hardest hit from the closure of the Straits of Hormuz where we can measure the stocks
04:52in weeks.
04:54And that is a problem that will reverberate throughout the global economy.
04:58Trade routes around how both crude and refined products are sold will change based on where refinery capacity is
05:07versus where the crude feedstock is.
05:09And it's beginning to happen now.
05:11I think that we are approaching the end of our capabilities to have a protracted war with Iran.
05:20And we are turning on the strategic reserves.
05:25We are opening the strategic reserves globally.
05:27The IEA has already distributed about 100 million barrels of that 400 million barrel commitment.
05:33So that's what's smoothing over oil prices.
05:36It could be a lot worse if the strategic reserves were not released.
05:40So we're watching that very closely.
05:41But if this elevated price action in both crude and refined products continues for a few more months, it's going
05:50to be a huge problem for the economy.
05:51How does this change how you're investing, what you're doing at Oak Tree?
05:54Well, you know, Oak Tree, as you might know, we are merging with Brookfield Asset Management.
06:00And Brookfield's considerable resources globally in infrastructure, real estate, private equity, power and renewables, is touching so much of the
06:08global economy.
06:09So right now we are actually preparing and really building those pipes between Oak Tree's credit capabilities and Brookfield's asset
06:16management capabilities to really find the right opportunities globally.
06:20We're in preparation mode right now.
06:22There isn't a tremendous amount of fat pitches or very discounted either equity or debt that makes sense to buy
06:32in droves right now.
06:33But you have to prepare.
06:34And you assume that will come, it sounds like, that we will get a period of correction, of dislocation, that
06:38you can find the babies with the bathwater.
06:40I think so.
06:42I think so.
06:43We're looking for good companies with bad balance sheets.
06:45And right now we definitely see some very good companies that we would buy at the right prices.
06:50We're seeing deals as well in the AI space that are, when structured appropriately, attractive investments.
06:56We are not standing still.
06:58We certainly are investing.
06:59But we are reserving our dry powder as much as we can.
07:01Are you surprised that with all the concerns about BDCs, that there hasn't been more sold to meet liquidity needs
07:06that have been priced more attractively?
07:08Yeah, I think the initial trades happened with such high dollar prices that people said, oh, well, nothing to see
07:16here.
07:16And so there wasn't like a cascading effect of further sales.
07:20Also, the semi-liquid BDCs have a quarterly redemption queue.
07:24So we won't see the June number until sometime in May, probably early June or late May.
07:31And I think at that point we may see another round of selling.
07:34But this initial round was quite contained.
07:37The prices were quite high.
07:38I think those sellers that sold, sold their best assets in terms of, they didn't sell all their best assets,
07:45but they sold out of their best asset pool.
07:46So next round might be?
07:48Who knows?
07:49It depends on how problematic the range of redemptions are.
07:55What I'm more surprised about is that the banks have not tightened the screws as much on the lending that
08:01they provide to the BDCs.
08:02There certainly has been some tightening, but not as much as I would have thought.
08:06And there certainly is a little bit of offloading happening in banks right now with trades to the investment manager
08:12universe to really de-risk the bottom part of their exposures to those types of borrowers.
08:17Well, it also comes back around to this idea that credit spreads are quite tight.
08:20Do you think the cost of capital is going to change because of not just the economic risk, but also
08:25banks' willingness to lend?
08:26Well, it'll change because rates are, I think, pressured to the upside rather than the downside.
08:31One, just given the inflation that we are seeing already in energy prices and should expect to see going forward,
08:39I think that that alone puts pressure on rates.
08:42Spreads are at all-time tights, and I think that that is a little bit of an overcorrection.
08:47It should, I think, just given some of the risks in the economy, I think they should widen.
08:54But right now, the market with respect to spreads is backward-looking, and the performance of these businesses has been
09:01quite strong.
09:01And then when you overlay the productivity gains from AI, from instituting AI into legacy businesses that are outside of
09:08software, it's assumed that profit margins will improve.
09:11So investors are actually looking through the market and saying, well, backward-looking looks pretty good.
09:17Forward-looking AI should make profits look better.
09:19So maybe it's appropriate that these are at all-time tights.
09:22Armin, just quickly, on your BDC, because you did have redemptions that exceeded the 5 percent, have things calmed down
09:29at all?
09:29Well, it's quarterly, and I would say that the conversations that we have with our investors are a little bit
09:37different than others
09:38because Oaktree as a firm is really rooted in below-investment-grade investments on a performing and non-performing basis
09:46over a 30-year period.
09:48We are synonymous with investing in a counter-cyclical way, so our investors don't appear to be quite as concerned
09:54about excessive risk-taking in our portfolios
09:56because we have entered this period, generally speaking, at Oaktree in our performing credit strategies with either no leverage or
10:03less leverage
10:05and a lot of dry powder to actually invest into the cycle.
10:08We will be actually investing into the cycle when we see that opportunity present itself.
10:13It's just not right this second.
10:14And I think that that message actually resonates with our investors writ large across Oaktree.
10:18So when the correction happens, you know you're going to join here and tell us what you bought, right?
10:22Absolutely. After we do it.
10:24After, of course. Don't want to front.
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