Post #551 by weatherman on the Brookfield Corporation board

Stocks A to Z / Stocks B / Brookfield Corporation (BN)

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Howard Marks's latest memo deals with private credit and direct lending, a distinction I'll let him explain, and it's worth a read in its entirety. It also contains some information about Oakfield and Brookfield's exposure to a potential blowup in private credit markets:

https://www.oaktreecapital.com/insights/memo/whats...

I never want to present Oaktree/Brookfield as the paragon of investment virtue, and I never say we’re perfect. However, superior investing doesn’t result from omniscience and perfect decision making, but rather from decisions that are better than those made by others. In truth, we’ve had defaults in our high yield bond portfolios nearly every year since I started the effort 48 years ago . . . just far fewer than most and far fewer than were allowed for by the yield spread we were paid for bearing default risk. Having said that, I want to describe where we stand with regard to private credit, direct lending, and public vehicles. I’m very proud of our performance, and I think this will be instructive.

First, we’ve been investors in high yield bonds and broadly syndicated loans since their inception decades ago, but we never went overboard in private credit. As I mentioned a year ago in my memo, Gimme Credit, whereas for a few years the most popular question has been “can we talk about private credit?” my rejoinder has been “can we talk about credit?” We insisted there was a place in portfolios for both private credit and liquid credit.

Second, we’ve been investing in private credit for decades – buying bank loans in our distressed debt funds and engaging in mezzanine lending and asset-backed lending – but we never pursued direct lending to the same extent as others. At the beginning of its existence in the early 2010s, we thought the returns from direct lending, while high in relative terms, were low in the absolute. And later, we thought the superiority in pricing and terms had been competed away by the newly arrived managers and capital, rendering it average in attractiveness, not exceptional.

For these reasons, private credit represents well under half of Oaktree’s performing credit assets, and direct lending represents less than half of our private credit book. Thus, direct lending is only around 20% of Oaktree’s investments in performing credit and less than 15% of our overall assets under management.

Third, since (a) we expanded our assets far less than many other alternative credit managers (Oaktree’s AUM “only” doubled over the last decade) and (b) direct lending was a limited part of our AUM growth, we’ve felt less pressure to invest quickly or compromise our standards. That meant we could remain highly selective, limiting the amount invested in software and restricting it to what we believe to be the best opportunities.

Our exposure to software companies across our entire credit platform is extremely small on an absolute basis and relative to peers. Most of Brookfield/Oaktree’s private credit funds operate outside of direct lending and thus have only limited holdings in software. Even our direct lending portfolios generally have limited software exposure, and over the last 12-18 months we’ve maintained a particularly high bar for participating in new software transactions.

Thus, we believe our private credit investments have been defensively underwritten and conservatively structured. Our software exposure is substantially less than that of our peers, predominantly first-lien, and with very little of it payment-in-kind.

Fourth, 80% of Oaktree’s total investment in private credit is on behalf of institutional clients, meaning very little was placed with the public. While the leading managers of public direct lending vehicles have $40-50 billion or more there, we have just over $10 billion.

Because our investment in direct lending was limited, we didn’t experience all the AUM growth some other credit managers did. That positions us well to take advantage now that investor enthusiasm has become more tempered. Investors’ newly elevated skepticism is likely to give us investment opportunities in the days ahead that are much better than those we passed up in the period just ended. Staying disciplined and resisting the latest fads isn’t the route to short-term maximization, but it’s essential for the excellence in investing we seek.

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as anyone tracking oaktree's public bdc fund ocsl knows (or their defunct vanguard fund), the record is usually bad in normal and boom times.
mostly true for oaktree in general, although not for their principals.

thus, this online snark is a little too perfect :
"Howard Marks with a memo on Private Credit.
Let me guess his view: it might be bad. It might not be that bad. We don't know. I only buy stuff every 10 years."

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