The chairman of the world's largest distressed-debt investor on Tuesday warned that the "unsound practices" of before the financial crisis are creeping back into credit markets, with private equity firms bidding increasingly high prices for companies.
Howard Marks, co-founder and chairman of Los Angeles-based Oaktree Capital, told a conference that investors, in their search for returns, were becoming overly confident while the economic background was still gloomy.
In a presentation titled "Investing in Uncertain Times," Marks noted the ease with which lowly rated companies were issuing debt this year, how companies were paying out record dividends to their shareholders and the increasingly high debt-to-equity multiples private equity firms were paying for companies amid a resurgence in deals.
"We have a world in which nobody is thinking bullish. Everybody's worried and yet people are acting bullish," Marks told an audience at the Oxford Private Equity Forum in the English university town of Oxford.
Record demand for corporate bonds has pushed yields to multi-year lows for many companies, including in riskier high-yield debt issuance.
Meanwhile, this year has already brought the largest leveraged buyout since the financial crisis. Silver Lake partnered with technology billionaire Michael Dell to take his eponymous personal computer maker private for $24.4 billion.
Private equity firms are also reviving plans for a potential 10 billion pound buyout of the UK's biggest mobile operator, EE, in what would be the largest deal in Europe since KKR took UK pharmacy chain Alliance Boots private in 2007.
Marks also predicted a looming "shake-out" in the hedge fund industry, as poor returns and a pre-crisis proliferation of firms leaves questions over the future of many in the sector.
He said it was not clear that such a large number of managers could make outsize returns and justify their fees.
"Extraordinary people deserve 20 percent of the money but not the run-of-the-mill people", he said, referring to the typical 20 percent performance fees levied in the hedge fund and private equity industries.
"Today there are 8,000 hedge funds. Are there really 40,000 exceptional people (working for hedge funds)?" he asked.
Last year the average fund returned 6.2 percent while the S&P 500 rose 16 percent. This year the average fund is up 2.5 percent against the S&P's 8 percent gain, according to Hedge Fund Research.
"How long can that go on?" Marks asked.
Poor performance and high fees are sparking increasing criticism of hedge funds, as well as private equity firms, although many big investors have continued to put money into the largest managers as they search for returns and to diversify their assets away from traditional investments.
Oaktree manages around $80 billion in assets and is best known for its private equity-style debt investments in beaten-down companies, known as distressed debt investing.
Tight credit and slow consumer spending growth because of strained incomes would keep economic growth moderate across the developed economies, Marks said, although the U.S. economy was showing signs of recovery in comparison with Europe.
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