During his recent interview at Real Estate Luminaries 2023, Howard Marks explained why there will be significant losses throughout the economy. Here’s an excerpt from the interview:
Marks: People are gonna lose money, because when Bob talks about it requiring a half a trillion of equity capital to reequitize the real estate industry, and you know, let’s say a similar amount for the private equity industry, what he omits to say is that the old equity might be gone. Somebody’s gonna eat those losses.
Oaktree’s greatest business is investing in distress debt. And we started that in ’88 and it’s been a great business for us. But it’s mostly predicated on the fact that even good assets can get over-levered. And if they’re over-levered the probability of getting through a rough patch declines.
Your ability to get through a rough patch is all else equal, is proportionate to the amount of equity on your balance sheet. And of course, when things are going well people disregard that and they go for the highest leverage they can get.
Because, as they say in Las Vegas, the more you bet, the more you win when you win.
So what we do is we buy the debt of those over-leveraged companies when they suffer difficulty. And we do it with properties too. And because not everybody’s gonna put in their share of the half trillion.
And not everybody has it to put in and people let things go. So there’ll be losses throughout the economy, certainly throughout the investment world. And that will have a deleterious effect on everything.
And it’ll seem, you think it’s uncertain now, when that happens everybody will be certain that it’s going down the drain.
But of course it never does. And remember that I think the global financial crisis was much worse for the financial system than this is. And we got through that.
You can watch the entire discussion here:
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