Howard Marks Oaktree: Cycles, Risk and Distressed Debt

Key Takeaways

• Marks co-founded Oaktree in 1995 and grew it into a top distressed-debt and credit investor.
• His memos popularized "second-level thinking," risk control, and reading the market cycle.
• Oaktree invested about half a billion dollars a week in late 2008.
• Brookfield bought 61.2% of Oaktree in 2019, valuing the firm in the billions.

Background

Howard Marks did not start as a contrarian celebrity. After studying finance at Wharton and earning an MBA at the University of Chicago, he spent 16 years at Citicorp, where from 1978 to 1985 he ran convertible and high-yield securities, according to the Museum of American Finance and Oaktree's own biography. High-yield bonds, often called junk bonds, were then a disreputable corner of the market. That assignment shaped his career.

From 1985 to 1995 Marks led the groups at The TCW Group responsible for distressed debt, high-yield bonds, and convertible securities, and served as chief investment officer for domestic fixed income, per Oaktree and the Museum of American Finance. Distressed debt means the bonds and loans of companies in or near bankruptcy, bought at deep discounts on the bet that the recovery value exceeds the price.

In 1995, Marks and several TCW colleagues, including Bruce Karsh, left to start their own firm. Oaktree Capital Management was built around alternative and credit-focused strategies, with distressed debt at the center. The pitch was unusual for the era: a firm that talked more about avoiding losers than picking winners.

What made the Howard Marks Oaktree approach distinctive was the writing. Since 1990, first at TCW and then at Oaktree, Marks has published client memos, plain-language essays on markets, risk, and psychology. They built a following well beyond his own investors and became the public face of his philosophy.

What Happened

Oaktree grew steadily through the late 1990s and 2000s by specializing in credit nobody else wanted, then made its name in the global financial crisis.

• 1995: Marks and Bruce Karsh co-found Oaktree Capital Management, focused on distressed debt, high-yield bonds, and other alternative credit (Oaktree; Institutional Investor).
• 2007-2008: Sensing froth, Oaktree raised a record distressed fund, OCM Opportunities Fund VII, gathering roughly $10.9 billion, the largest distressed vehicle on record at the time per Preqin data cited by Institutional Investor.
• Late 2008: After Lehman Brothers failed in September, Marks deployed capital aggressively. He later said the firm invested "about half a billion a week in the last 15 weeks of 2008, following the Lehman Brothers bankruptcy," as quoted by The Globe and Mail.
• 2008-2009: Across those two years Oaktree raised about $13.3 billion for distressed strategies, roughly a quarter of the $52 billion raised industrywide, per Institutional Investor.
• 2011: Marks published The Most Important Thing, drawn from his memos, through Columbia Business School Publishing.
• 2012: Oaktree listed on the New York Stock Exchange.
• 2018: Marks published Mastering the Market Cycle, a New York Times and Wall Street Journal bestseller, per LGT.
• 2019: Brookfield Asset Management acquired a majority stake in Oaktree, completing the purchase of 61.2% of the business on September 30 (Brookfield; Torys).

The crisis trades defined the firm. The flagship 2008 distressed fund generated a net internal rate of return of about 31.5 percent from inception through the end of 2009, according to Institutional Investor. The capital Oaktree put to work while markets were in free fall, buying the debt of companies others were dumping at any price, became the textbook case for Marks's contrarian style.

Why It Happened

The engine behind the record was a philosophy, not a forecast. Marks argues that you cannot reliably predict the macro future, so the edge comes from being better prepared and better positioned than the crowd. He titled a 2001 memo "You Can't Predict. You Can Prepare.," a phrase he borrowed from an insurance company slogan and applied to investing.

The core mental tool is what he calls second-level thinking. First-level thinking says "this is a good company, buy the stock." Second-level thinking asks what everyone else already believes, what is already in the price, and what happens if the consensus is wrong. The goal is not just to be right, but to be right in a way the market has not already discounted. His 2011 book lays this out alongside the price-to-value relationship, patient opportunism, and defensive investing, per Columbia University Press.

Risk control is the other pillar. Marks frames investing as the deliberate bearing of risk for profit, and insists that high prices imply high risk while low prices imply low risk, per Institutional Investor. That logic is why a crisis is an opportunity in his framework: when forced sellers crater prices, the buyer's risk goes down, not up, even though it feels more dangerous.

The cycle is the third pillar. Marks does not try to time tops and bottoms precisely. Instead he tries to judge "where we are in the cycle," whether psychology is greedy or fearful, and to lean against it. That is why Oaktree raised its biggest distressed fund before the 2008 crash hit and was ready to deploy it when prices collapsed. Patience to hold capital, then conviction to spend it fast, is the pattern.

By the Numbers

• Founded: 1995, by Howard Marks and Bruce Karsh, among other TCW colleagues. (Oaktree; Institutional Investor)
• Marks at TCW: 1985 to 1995, leading distressed debt, high yield, and convertibles. (Oaktree; Museum of American Finance)
• 2008 distressed fund: about $10.9 billion for OCM Opportunities Fund VII, described as the largest distressed fund on record at the time. Reported. (Institutional Investor)
• Crisis deployment: "about half a billion a week in the last 15 weeks of 2008," in Marks's own words. Direct quote; some accounts cite roughly $600 million a week. (The Globe and Mail)
• Distressed raise 2008-2009: about $13.3 billion, roughly 25% of the $52 billion raised industrywide. Reported. (Institutional Investor)
• Flagship fund return: about 31.5% net IRR from inception through December 31, 2009. Reported. (Institutional Investor)
• AUM, end of 2009: about $73 billion total, including roughly $27 billion in distressed assets. Reported, point-in-time. (Institutional Investor)
• AUM, mid-2019: about $120 billion as of June 30, 2019. (Brookfield)
• AUM, recent: commonly cited in the range of roughly $150 billion to $205 billion as the credit business grew. Estimates vary by date and source; treat as approximate. (LGT)
• Brookfield deal: acquisition of 61.2% completed September 30, 2019, at $49.00 per unit in cash or 1.0770 Brookfield shares; widely reported as a roughly $4.7 to $4.8 billion majority-stake deal. Per-unit terms primary; headline value as reported. (Brookfield; Torys; The Motley Fool)
• Combined AUM at close: about $475 billion across Brookfield and Oaktree. (Brookfield; Torys)

Aftermath

There was no blowup and no scandal here, which is itself the point. The Howard Marks Oaktree story is one of a firm that survived and grew through multiple cycles by refusing to chase the last dollar at the top.

The biggest structural change came in 2019, when Brookfield Asset Management agreed to buy a majority stake. Brookfield completed its purchase of 61.2% of Oaktree on September 30, 2019, with Oaktree's founders, senior management, and employees retaining the remainder, per Brookfield's press release and Torys. Crucially, Oaktree continued to run as a distinct business under its own brand and investment teams rather than being absorbed, and the combined group managed roughly $475 billion at the time.

Marks stepped back from day-to-day portfolio work over the years and now serves as co-chairman, focused on the firm's investment philosophy and client communication, per Oaktree. Bruce Karsh has long led the distressed and credit investing side. The memos kept coming, and their audience kept growing. Warren Buffett's blurb on Marks's books, "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book," cited by Columbia University Press, turned an industry newsletter into mainstream reading.

The lasting effect is intellectual as much as financial. Terms like second-level thinking and "where we are in the cycle" entered the common vocabulary of professional and retail investors alike, and Oaktree's crisis-era distressed funds became a standard example of contrarian deployment in dislocations.

Lessons for Investors

1. Risk control beats return chasing over a full cycle. Marks built Oaktree on avoiding the losers, not maximizing the winners. The firm's record came from being defensive when prices were high and aggressive when they were low, the opposite of how most money behaves. Protecting capital in bad years is what lets the good years compound.

2. Forced sellers create the best prices. Oaktree's signature move was buying distressed debt when others had to sell at any price, most visibly in late 2008. When a market is dominated by sellers who must raise cash, the buyer often gets value at a discount. The discomfort of buying into fear is exactly where the bargains hide.

3. Use second-level thinking. A good company is not automatically a good investment if everyone already agrees and the price reflects it. Ask what the consensus expects and what happens if it is wrong. Edge comes from a correct view that differs from the crowd, not from a correct view the crowd already shares.

4. Prepare instead of predict. Marks's "you can't predict, you can prepare" captures a humble stance on forecasting. Rather than betting the portfolio on a macro call, position so you can withstand a range of outcomes and act when opportunity appears. Readiness, not prophecy, is the goal.

5. Patience is part of the strategy. Oaktree raised its largest distressed fund before the 2008 crash and waited, then spent it fast when prices broke. Holding capital while others are fully invested feels like a cost, but having dry powder when assets are cheap is where outsized returns are made. Being early can look wrong for a long time before it looks brilliant.

Frequently Asked Questions

What is the Howard Marks Oaktree story in simple terms? Howard Marks Oaktree refers to Howard Marks and the firm he co-founded in 1995, Oaktree Capital Management, which became one of the world's largest distressed-debt and credit investors. He is known for risk-focused investing and his widely read investor memos.

Why is Howard Marks so influential? Marks turned his client memos, published since 1990, and two books into a clear philosophy of risk control, "second-level thinking," and reading market cycles. Investors including Warren Buffett have praised the memos, which spread his ideas far beyond Oaktree's own clients.

How much did Oaktree invest during the 2008 crisis? Marks has said Oaktree invested "about half a billion a week in the last 15 weeks of 2008," after Lehman Brothers failed, with some accounts citing roughly $600 million a week. Its flagship distressed fund of about $10.9 billion later posted a net IRR near 31.5% through the end of 2009, per Institutional Investor.

What happened with Brookfield and Oaktree? Brookfield Asset Management acquired a majority stake in Oaktree, completing the purchase of 61.2% of the business on September 30, 2019, at $49.00 per unit in cash or Brookfield shares. Oaktree's founders and employees kept the rest, and the firm kept operating under its own brand and teams.

What is the main lesson from Howard Marks and Oaktree? The core lesson is to control risk and lean against the crowd: be cautious when prices are high and willing to buy when others are forced to sell. You cannot predict the cycle precisely, but you can prepare for it and act with discipline.

Sources

1. Oaktree Capital Management. Howard Marks (leadership biography). https://www.oaktreecapital.com/about/leadership/bio/howard-marks
2. Brookfield Asset Management. Brookfield Completes Acquisition of 61.2% of Oaktree Capital Management (press release, 2019). https://bn.brookfield.com/press-releases/brookfield-asset-management-completes-acquisition-612-oaktree-capital-management
3. Torys LLP. Brookfield Completes Acquisition of 61.2% of Oaktree Capital Management (deal record, 2019). https://www.torys.com/work/2019/03/35a8f5e6-3218-49d3-bed8-2796bbbb377d
4. Columbia University Press. The Most Important Thing by Howard Marks (book page). https://cup.columbia.edu/book/the-most-important-thing/9780231153683/
5. Institutional Investor. Howard Marks: The Distressed-Debt King. https://www.institutionalinvestor.com/article/2btgc08ca1yjgus3sms5c/portfolio/howard-marks-the-distressed-debt-king
6. The Globe and Mail. Invest Like a Legend: Howard Marks. https://www.theglobeandmail.com/report-on-business/rob-magazine/invest-like-a-legend-howard-marks/article37716588/
7. Museum of American Finance. Howard Marks. https://www.moaf.org/about/people/marks_howard
8. LGT. Howard Marks and Oaktree: insights from Buffett's favourite. https://www.lgt.com/global-en/market-assessments/insights/financial-knowledge/howard-marks-250410
9. The Motley Fool. Why Shares of Oaktree Capital Surged Higher. https://www.fool.com/investing/2019/03/13/why-shares-of-oaktree-capital-surged-higher-wednes.aspx

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.