Howard Marks is a successful billionaire investor who cofounded Oaktree Capital in 1995. As of today, Oaktree has over $170 billion in assets under management, more than 1,000 employees, and offices worldwide.

Marks is known as a shrewd investor and for sharing his insights on financial matters in widely read memos since 1990. It’s said that many notable investors, including Warren Buffett, look forward to reading these memos.

Marks recently released a new memo entitled Further Thoughts on Sea Change. The piece is a follow-up to a memo he wrote in 2022. In the most recent memo, Marks makes the point that a “significant” reallocation of capital to credit is warranted for these reasons:

• Returns on credit are competitive versus historical returns on equities
• Returns on credit exceed the returns required for actuarial assumptions (this is a big deal for pensions and insurance companies, who allocate enormous capital pools)
• Returns on credit are contractual and therefore less uncertain than equity returns

If Marks is correct and we are indeed going through a sea change resulting in significantly more capital being allocated to credit, public equities (i.e., the stock market), venture capital, and various other asset classes could be materially impacted.

More demand for credit could result in less demand for other asset classes. If there’s less demand for public equities, that could result in lower market capitalizations (i.e., valuations) of public companies.

Venture capital firms often aim to sell their companies to public investors by taking them public (i.e., listing them on the stock market). Lower public market capitalizations would mean that venture capital firms would be selling companies for lower prices. Lower sales prices would decrease the probability of venture capital funds generating returns that would justify the illiquidity and risk taken relative to other asset classes. This could make limited partners less inclined to allocate capital to venture capital firms (we’re seeing this already), which, over time, could result in less capital being allocated to high-growth start-ups. 

No one can predict the future, but it’s interesting to think about what could happen if Marks’s insights are accurate.

Marks’s memos are great reads, and I see why people look forward to them. He makes a lot of salient points in this recent memo. If you’re interested in it, you can read or listen to it here and here.