The best trades in history… buying in a panic
Howard Marks was born in New York City in 1946 and went on to study finance and Japanese studies at the Wharton School of the University of Pennsylvania, then for an MBA at the University of Chicago Booth School of Business. Between 1969 and 1985 he worked for Citigroup, rising to vicepresident. He then joined TCW Partners and ran a fund focusing on distressed debt, ie, bonds in firms that were either bankrupt or close to it. In 1995 he left TCW with several of his colleagues and founded Oaktree Capital Management, which specialises in bonds and private equity.
What was the investment?
Marks persuaded his partners to get Oaktree to raise an additional $10.9bn in capital in early 2008, believing that the global financial crisis was making distressed debt very cheap, and began making large investments of around $500m to $600m a week following the failure of Lehman Brothers. One of his investments was in nearly all the debt and loans of Pierre Foods, which specialised in pre-cooked food, which was growing strongly but facing bankruptcy due to a spike in the price of raw materials and from taking on too much debt.
What happened?
Oaktree ended up owning around 80% of the company after the restructuring that took place in 2008. Over the next few years the company continued growing, merging with Advance Company and Advance Brands to enable it to reinforce its dominance in the distribution of convenience-food products. The new company, renamed AdvancePierre, would in turn buy other food manufacturing companies. In 2016 the company floated and Oaktree reduced its stake to 42% before the entire company was bought by Tyson Foods a year later for $4.2bn.
Lessons for investors
Buying a company’s debt with a view to taking it over is an unusual strategy – most distressed-debt holders aim simply to profit from a rise in the value of the bonds – and could have backfired had the restructuring process been more complicated than envisaged. In the event, however, Oaktree made a profit of $2.2bn, a 23-fold return on the capital that it invested. Oaktrees’s other investments during the financial crisis were also highly profitable, making $9bn. It can pay to buy when everyone else is panicking.