Struggling under the weight of interest rates, highly-levered assets within private equity and real estate are promising distressed investors some of the best opportunities in more than a decade, according to Howard Marks, co-chairman and co-founder of Oaktree Capital Management.
“The use of debt to amplify your returns has been the lifeblood of these two asset classes and they’ve done extremely well as a result,” he said in an interview on Bloomberg Television Monday. “But that’s where the pain will come in the future.”
Risky corporate borrowers, especially those backed by private equity, have seen a jump in borrowing costs as a result of rate hikes from the Federal Reserve. In the property market, the value of commercial real estate has fallen while a slow-rolling wave of maturities is underway, setting the stage for lender losses.
That’s an opening for firms, like Oaktree, which specialize in distressed lending and bargain-hunting. Roughly $199 billion of corporate debt in the US is trading in distressed territory, according to data tracked by Bloomberg.
“Right now and going into the future, leveraged companies will not be able to renew their leverage as easily and the cost of doing so will be higher,” said Marks. “That gives us better opportunities than we’ve been seeing.”
Still, those possibilities are not straightforward for creditors as the practice of pitting lenders against each other in debt restructurings has grown more popular. Such transactions, enabled by loopholes in credit agreements, have led to ugly fights in the corporate market as well as extensive and costly litigation.
“If there’s an opening, people will take it,” he said. “It’s up to lenders to study documents well enough to prevent it.”
Marks also struck a cautious tone on bargains in real estate, suggesting that valuations are difficult to gauge even as investors are finding deeply-discounted properties.
This article was provided by Bloomberg News.