Private Equity Briefcase

October 28, 2008

The Glass Half Full

Howard Marks, chairman of Los Angeles private equity firm Oaktree Capital Management, has chosen to see the glass as half full. “In a few years we’ll reminisce together about how easy it was to take advantage of the bargains of 2008-09,” he writes in a chairman's letter published on the firm's Web site this month.

That's easy for him to say. It would also be easy to dismiss the remark, included in a recent memo that Oaktree sent to investors in its distressed debt opportunities funds, had it not been made by the private investment veteran and Bruce Karsh, who oversees Oaktree’s distressed debt investment business.

Marks instead takes a refreshing tack in his assessment of the financial crisis in the online memo titled “The Limits to Negativism.” He notes that “few of the recent sharp declines were associated with weakness in the depreciating assets or the companies behind them. Rather, they were the result of market conditions brought on by psychology, technical developments and their interconnection.”

The veteran financier acknowledges the impact of Lehman’s fall by writing it was “disastrous as the commercial paper market froze up” and intensified the existing financial crisis.

Marks, thankfully, isn’t touchy-feely in his take on the markets. Instead, he presents the idea that what is needed at the moment is a healthy sense of skepticism, a quality that he notes was lacking when assumptions about triple-A CDOs, leverage and endless liquidity were pretty much the unquestionable norm over the last few years.

Skepticism, he says, is one of the most important requirements for successful investing.

He doesn’t, however, equate a skeptical approach to the negative sentiment echoed daily almost everywhere one turns: “Skepticism and pessimism aren’t synonymous.  Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.”

For Marks, it’s the positive story that still holds the greater potential for profit. It doesn’t mean the billions being poured into US banks will make everything pleasant once again because as the investor notes “psyches have been damaged” and investor confidence taken a beating.

If there are any bright spots in the whole mess, which raise a slew of questions for the financial services industry as well as private equity, it is for one particular group of corporate advisors: M&A boutiques.

Take firms like Watch Hill Partners, Moelis & Co., Evercore Partners, Gleacher Partners and Greenhill & Co., which Marks thinks will prosper from the fallout.

“When others conduct their affairs with excessive negativism, it’s worth being positive,” the financier writes.

It’s not exactly a bad approach to keep in mind during the holiday season, when many consumers will be feeling anything but merry.