Howard Marks highlights a critical issue in private equity: a massive overhang of portfolio companies needing to be sold to return capital. Higher interest rates have made exits difficult, creating a liquidity bottleneck that slows distributions to LPs and commitments to new funds.
The term 'private equity' replaced 'leveraged buyout' (LBO) after the LBO boom of the 1980s ended in a wave of high-profile bankruptcies. Howard Marks notes this name change was a deliberate marketing move to shed negative connotations and attract fresh capital to a reinvented industry.
Howard Marks uses Warren Buffett's framework—'First, the innovator, then the imitator, then the idiot'—to describe the predictable lifecycle of investment trends. A strategy begins as a good idea for a few, gets copied by the masses, and eventually becomes an overcrowded, risky trade for latecomers.
Howard Marks embraces the idea that credit investing is a 'negative art.' Since upside is capped (repayment of principal and interest), superior performance comes from successfully excluding the few investments that will default, not from identifying the absolute best-performing ones among the successes.
Howard Marks warns that during a downturn, private credit managers may avoid recognizing defaults by simply extending loan terms for struggling companies. This 'extend and pretend' strategy can mask underlying problems, keeping assets marked artificially high and delaying a painful reckoning for investors.
Howard Marks describes the downside of being a public company as receiving a constant, often arbitrary, 'report card' from the market. Daily stock price movements, driven by people with limited understanding of the company's long-term strategy, create noise and pressure that private companies can avoid.
Howard Marks argues that private credit's apparent low volatility during market downturns is not magic but an accounting feature. By not marking to market daily, it mimics the psychological trick of simply not looking at your public portfolio's value, creating a potentially false sense of security for investors.
Marks' early career experience losing 95% on 'great' Nifty Fifty stocks taught him a core lesson: no asset is so good it can't be overpriced, and few are so bad they can't be a good investment if cheap enough. This principle of 'buying things well' became his foundation.
Contrary to the industry's bias for action, Howard Marks advocates for strategic inaction, flipping the common saying to 'don't just do something, sit there.' True long-term success comes from owning good assets and letting ideas work, not from constant trading and reacting to short-term market noise.