Subject: Re: Bloomberg Wealth with David Rubenstein
Howard Marks and Bruce Flatt are now making rather different arguments, with different implications for the growth of traditional alt managers.

Flatt says a fed funds rate of ~5% produces investment-grade bond yields still vastly inferior to the returns that can be expected over time from Brookfield's investments in real estate, infrastructure, renewable energy and credit, and therefore institutional investors are likely to continue pouring money into alternative assets. Hence the rosy projections of Brookfield's compound annual growth rates going forward. The only change in his sales pitch driven by the current environment is he now calls interest rates "lowish" instead of "low".

Marks says a fed funds rate of ~5% produces high single-digit returns on high-yield bonds and leveraged loans, and low double-digit returns on loans for buyouts, including the biggest, safest buyouts. He calls this a sea change that requires investors to pivot from a regime of lowering and low interest rates that has dominated for 40 years.

If you can get high single-digit or low double-digit returns from these credit instruments, which pay off long before equity holders get the remains, Marks says institutional investors are well-advised to migrate out of equities and investments that promise equity-like returns and into fixed-income investments once again. This would be good for Oaktree, which represents about 13% of Brookfield AUM given the partial ownership stake, but not necessarily good for fundraising in other Brookfield asset classes.

The case for alternative assets has been equity-like returns with less risk. This was appealing to institutional investors in the near-zero interest rate environment that produced inadequate fixed-income returns. But the volatility in prices for commercial real estate, still the biggest alternative asset class, has demonstrated to these investors that while alts may be lower-risk than equities, they are higher-risk than fixed income.

If Marks is right and sophisticated fixed-income investors can now achieve returns more than adequate to meet their mandated rates of return, what does that imply for rates of growth of assets under management for the big alt managers? In particular, what does it imply for growth of the fee business, which is based entirely on growth of AUM?

Rubenstein: So are you forecasting in effect that a lot of the money that's been in private equity or venture capital or equity-like return kind of vehicles are not going to be as popular with pension funds and endowments because they can go into fixed-income instruments which are safer in your view and, given high interest rates, that's probably what they're going to do?

Marks: Well, that's what people should do. I don't know what they're gonna do.

Marks' view reflects the movement among alt managers into direct lending. As banks have retrenched, in part because of duration risk brought on by the rapid rise in interest rates, private lending has grown to fill the gap. Blue Owl Capital, for example, a relatively recent entry into the field of publicly-traded alt managers, pitches itself as "redefining alternatives." More than half its capital base is devoted to direct lending.

Marks' view accommodates those who think the Fed will ultimately cut rates marginally if and when the inflation beast is tamed or the economy goes into the tank. He is forecasting long-term fed funds rates of 2-4% rather than the 0-2% to which investors became accustomed.

According to Marks, Oaktree clients, who generally require IRRs of ~7%, will be able to meet their objectives with credit instruments. If he's right, that has negative long-term implications for alt managers whose investments are dominated by other categories.