Howard Marks - Further Thoughts on Sea Change
Yeah yeah...... long time first time. Curious to hear others thoughts on his remarks. How will leverage be used going forward? not in the next 3 years, but from 2026-2040 in general?
Funny I actually just linked this in another thread regarding when hiring will pick up.
I think some of the predications here have legs. Then again people are always saying this time around is different...
His take on credit bonds was really interesting, I think we generally understand that today equity investing doesn't make a lot of sense, most of the people transacting today are taking "bets" rather than finding property with good value. I think the risk of this bet isn't actually that high (assuming your investing other people's money), because there is likely no commercial real estate market for a decade+ if things don't turn around, so your track record after doesn't really matter because you will be out of a job no matter what. Even conservative investors who are creating real value will be hurt if this happens.
Yes I actually saw that link on that thread. Thanks for posting it.
A really good read. It's funny that everyone thought they were geniuses when rates fell 2000 bps. All it did was encourage further risk taking.
Appreciate you posting that too. Had a good convo with my equity partner about it.
Ah, the future of leverage, quite a fascinating topic! Based on the most helpful WSO content, it's a bit challenging to predict specifics for such a long-term period, especially from 2026 to 2040. However, I can share some general insights.
Leverage is a powerful tool in finance, particularly in investment banking, private equity, and leveraged finance. It's used to increase the potential return of an investment, but it also comes with increased risk.
In the future, the use of leverage will likely continue to be a significant part of financial strategies. However, the extent of its use may be influenced by various factors such as regulatory changes, economic conditions, and the evolution of financial instruments and markets.
For instance, in a period of high interest rates, new leveraged buyouts (LBOs) might have lower leverage so that the free cash flow (FCF) makes sense. Enterprise value (EV) multiples might also come down in such an environment, meaning new LBOs wouldn't need as much leverage to make the internal rate of return (IRR) work.
Moreover, the power of leverage can't be understated in private equity. Many times, the only time a PE firm writes an equity check is on the initial platform investment. Then every bolt-on is funded with debt.
However, these are just some possibilities based on current practices and trends. The actual future of leverage could be shaped by many unforeseen factors. So, while leverage will likely continue to be a key part of finance, its use might evolve in ways that are difficult to predict at this point.
Remember, finance is a dynamic field, and strategies can change based on the economic environment and regulatory landscape. So, stay tuned to the latest trends and keep learning!
Sources: Overview of Leveraged Finance, Hedge Funds v/s Private Equity: Which industry will survive and thrive in the next two decades?, Levfin VS Leveraged Lending?
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In 2040 debt will be 90% and interest rates will be 0.4%. Bet on it.
Seriously though I thought it was a great article that gave some good perspective on the times we live in. It really is interesting to think that I'm 36 and I've really only experienced absurdly low interest rates throughout my entire career.
Not sure if I would agree with that prediction. I believe in a reversion to the mean. I think for the first time in 40 years we are seeing that reversion happened. Low interest rates cannot stay low forever, there will be consequences. Just like how high interest have consequences.
Unless of course there is a massive global crisis where they reduce it again temporarily.
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