Navigating Volatility: Oaktree’s Co-CEOs on Tariffs, Private Credit, and Bankruptcy Risks

In a world of escalating trade tensions and shifting monetary policies, Oaktree Capital Management’s leadership has emerged as a barometer of market sentiment. Co-CEOs Robert O’Leary and Armen Panossian, alongside Co-Chairman Howard Marks, have consistently outlined how tariffs, regulatory changes, and corporate leverage are reshaping investment landscapes. Their insights offer a roadmap for investors seeking opportunities amid turbulence.

The Tariff Effect: A New Era of Volatility

O’Leary has warned that tariffs and trade policy uncertainty are accelerating interest rate volatility, with implications for credit markets. “Higher and more volatile rates are here to stay,” he stated in a Bloomberg interview, emphasizing that this environment creates both risks and asymmetric opportunities. The “snow globe” effect described by Marks—where tariffs disrupt global economic stability—has amplified inflationary pressures, squeezing corporate balance sheets.

The fallout is evident in private credit markets, where assets are being sold at steep discounts. O’Leary noted that pricing has collapsed to as low as 50 cents on the dollar, with discounts starting at 90 cents and declining further. This liquidity-driven selling, he argues, is a “once-in-a-decade chance” to acquire undervalued assets in secondary markets and continuation funds.

Private Credit: A Landscape of Opportunities

Oaktree’s leadership identifies four key sectors ripe for investment:

1. Asset-Backed Finance (ABF): Panossian highlighted a $5 trillion market being abandoned by banks under Basel III regulations. Private lenders are stepping in to offer equipment leases and consumer loans, commanding high single-digit to low double-digit yields.
2. India’s Credit Gap: Gaurav Parasrampuria noted a $300 billion opportunity in India’s underpenetrated corporate debt market, post the 2018 IL&FS crisis. Lenders here benefit from creditor-friendly terms and minimal competition.
3. European Partnerships: Nael Khatoun observed that over 30% of European LBOs now involve bank-private credit collaborations, as banks retreat from risky exposures.
4. Distressed U.S. Real Estate: John Brady called out 56% declines in office values since 2020 and a looming $1 trillion maturity wall, creating “once-in-a-generation” distressed opportunities.

Bankruptcy Risks: Overleveraged Corporations and Fed Policy Crossroads

The rise in corporate defaults stems from aggressive LBOs during the post-2008 low-rate era. Jordon Kruse and Matt Wilson highlighted that 80% of LBOs by 2021 carried >6x EBITDA leverage, with 60% exceeding 7x—a recipe for distress as rates climb.

Kruse emphasized that even a 25–50 basis point Fed cut by end-2024 may not be enough to rescue overleveraged firms. If rates remain high or rise further, defaults could surge. Oaktree’s special situations team is capitalizing here, offering rescue financings to companies with “strong fundamentals but bad balance sheets.”

The “Sea Change” in Asset Allocation

Marks’ thesis—that the era of ultra-low rates (2009–2021) is over—has profound implications. With equities now overvalued (e.g., the S&P 500’s 10% historical average return now less certain), liquid and private credit are emerging as safer havens. Private credit yields, at low double digits, now rival equity returns with less volatility.

Risks and Regulatory Shifts

Despite the opportunities, risks loom large. The U.S. commercial real estate sector, for instance, faces a 20% valuation drop risk, with over half its assets concentrated in small banks (<$50B in assets). Even a modest decline could push these institutions beyond GFC-era “at-risk” thresholds.

Regulatory changes like Basel III and Solvency II are accelerating the shift from traditional lending to fee-based activities, further ceding market share to private credit firms.

Conclusion: Oaktree’s Edge in a Volatile World

Oaktree’s strategy—rooted in downside protection and sector-specific expertise—positions it to thrive in this environment. Key data points reinforce this thesis:
- $300 billion India credit opportunity and $5 trillion ABF market provide scale.
- $16 billion Oaktree Opportunities Fund XII has deployed over $7B, prioritizing senior capital and cash coupons.
- 70% of biotech innovations now come from underfunded startups, a niche Oaktree targets with tailored lending.

While risks like Fed policy uncertainty and geopolitical tensions remain, Oaktree’s leadership argues that the rewards outweigh the risks. As O’Leary succinctly put it: “Volatility is the friend of the buyer.” For investors willing to navigate the dislocations, private credit is no longer a niche play—it’s a necessity in a post-low-rate world.

In a landscape of fractured markets, Oaktree’s dual focus on opportunistic credit and disciplined risk management offers a compelling path forward—one that may define the next era of investing.