Howard Marks, Founder of Oaktree Capital, warned that private equity (PE) firms are reducing their standards in terms of what they will invest in, and paying high prices that could impact returns for investors.
According to a report in the Financial Times, Marks said private equity firms are being pushed into accepting terms on deals that are less than stellar. He told the paper that money managers have a big need to get invested and that even means backing bad deals to do that.
“When there’s too much money around, it creates really bad things,” he said. “You’ve got to think of the markets like an auction. There is an opportunity to lend money. Who gets to make the loan? The person who will accept the least.”
Financial Times reported that, as of May 25, there was $1.08 trillion of capital that was raised but not deployed.
“The person who pays the most can also be described as the person who will accept the least for his money,” he said in the report. He likened the capital markets to how it was in 2005 and 2006 when there was more money flowing then viable ideas. What’s more, he said, buyout funds have: “FOMO [fear of missing out] and people are abandoning the standards of the past.”
The investor noted PE is expressing bubble type characteristics. He said, “It’s too easy for them to raise money. If they can place the money they have, they can raise more money and get more fees. They are paying record-breaking multiples. You’ve got to worry when we are in the 10th year of an economic recovery.”
The comments from Marks come as buyout funds are raising record amounts of money and turning away billions because they can’t handle all the demand. Marks has previously warned about the risks in the PE market, as recent as last year.
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