Howard Marks faces delicate balancing act with IPO

May 18, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Oaktree Capital’s plans to pursue a fully public stock listing will put one of its outspoken founder’s key philosophies to the test. Howard Marks, whose investment missives are widely followed on Wall Street, has often lamented the tradeoff fund managers make between gathering assets and maintaining performance. Balancing Marks’ preference for returns with the demands for growth among public shareholders won’t be easy.

Posted on the Los Angeles-based firm’s website are business principles that say, among other things: “Profit without performance, bigness for its own sake and prosperity through cost cutting are all explicitly rejected. Our earnings should grow if we achieve excellence in investing … but only then.”

While that may sound like an obvious commitment in theory, it’s not so easy in practice. That’s because returns often diminish as funds become larger. This is particularly the case in specialized investment strategies, such as in the market for distressed debt, where there is a finite pool of securities on which to place bets.

So far, Marks appears to have remained true to the doctrine. Indeed, Oaktree last year turned down investors wanting to place money in its last fund focused on the debts of troubled companies. Rather than matching the $11 billion in its previous fund, Oaktree raised only about half as much.

Marks felt that the more money in the fund, the harder it would be to generate decent profits. But given the economics of his own business — especially in the glare of a New York Stock Exchange listing — the principle may prove hard to stick to.

With a 2 percent management fee and a 20 percent slice of profits, a $10 billion fund that makes 10 percent returns would generate $400 million a year in fees for Oaktree, which oversees some $80 billion of assets. A fund half as large that achieves double the return would only bring $300 million of fees to the manager.

Marks will undoubtedly vow to remain true to form. When he takes Oaktree from the dark recesses of a Goldman Sachs private exchange to the public stock market he’d be wise to ensure his new investors are on board with his philosophy.

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