Howard Marks: Oaktree’s Performance In China Graded C+

In this episode of China Money Network, guest Howard Marks reveals his thoughts on China’s economy and its investing environment. He also gives a surprisingly frank evaluation of Oaktree Capital Management’s performance in China. Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt. Q: You’ve just completed a trip in China, and Oaktree has had an office in Beijing since 2007. How would you rate China’s investment environment? A: I have a lot of respect for China’s long-run economic outlook. But this is a period when (China’s economy) is slowing. There are some questions about how it will land – whether it’s hard or soft – of course you know I don't claim to know the answers. Also, China’s customers – the U.S. and Europe – have been growing very slowly themselves. So that will have a retardant effect on China’s economy as well. The combination of the two suggests that China is in for a slow period. On the other hand, valuations in China have corrected quite a bit from two or three years ago when everybody assumed China’s outlook was flawless for eternity. Prices have come down considerably both relative to valuations in other countries and in absolute terms. That’s very healthy for the investment outlook. Q: What unique challenges do you face investing in China? A: A controlled economy probably has the ability to do better in the short term. In the long run, there is not much experience with that. Many (such experiments) in the past haven’t lasted. Of course, China is making a compromise between a controlled economy and a less controlled one. The world has yet to see how it is to do business in China dealing with issues such as property rights: whether foreign private investors can do well as owner of businesses. It’s important that people do not assume that business-as-usual in China is the same with business-as-usual elsewhere. So if you don’t know how property rights will be treated, then you should try to avoid situations that pivot on that issue. For example, in our distressed debt investing, we often invest in the debt of the companies that fail to pay for their debts because we have creditor rights that can give us access to the value of the company. We don’t know how creditor rights will be treated in China, so we probably won’t invest in (this method). Q: Is that why Oaktree’s operations in China has been in private equity? A: (Yes,) in private equity and slow going. We raised a fund a few years ago. We invested slowly. It’s not fully invested yet, and probably won’t get fully invested. It did not invest in distress-for-control or loan-to-own situations for the reasons we discussed. We will continue to move carefully. Q: So can we look at Oaktree’s presence in China as first, to be there, secondly to learn how to handle those challenges? A: We of course try to make money. But you are right, it’s important for Oaktree to plant its flag and learn the way. As we gain experience in China, hopefully, we will perfect our methods. One thing I want to stress is that we are not going to go in and assume that the methods we applied in U.S. and Europe will work there.