Many investors have heard of the billionaire Howard Marks, his wonderful Memos, and the firm he co-founded in 1995, Oaktree Capital Management, alongside Bruce Karsh. Today, Oaktree has $100 Billion in AUM with over 900 employees.
In this video interview, Howard Marks and Bruce Karsh talk about their backgrounds and how they started working together before founding Oaktree. The duo successfully raised and managed four funds with A and B rounds in the late 1980’s and early 1990’s. There are some phenomenal lessons in this interview that they share from the early years. When Howard and Bruce founded Oaktree, they both decided to be equal partners. I was most impressed with how setting up the right culture was paramount for both of them. Howard wanted to make as many people partners as possible. “I want to have less and less of a growing pie.” Below is a great snippet from the interview.
Members can access the full transcript here: [MEMBER TRANSCRIPT]
Howard Marks: For fund four, on the back of this great success, we went to people and we said, “For every dollar that you had in three and 3B, you can put in 50 cents in four.” Fund four was 386 million.
Bruce Karsh: It could’ve been four times that, easily.
Howard Marks: There were not many opportunities for fund four. Having a smaller fund permitted us to take advantage of the ones that were there and we had a decent return, in the 20s, but not what it had been. The key is, there’s a great temptation if you have a great fund you make the next one bigger because the higher, the bigger the fund the more your fees, the more your potential carried interest. I think that the-
Bruce Karsh: That was a huge decision on our part.
Howard Marks: The great success of Bruce’s funds, two, 2B, three, 3B put us on the map but I think that action in four created our reputation.
Bruce Karsh: It really did, the clients stood back and said, “Wow, these guys are taking a quarter of the money they could take and they’re telling me they’re doing it because they want to keep the returns high. They’re looking out for me. They care about my interests more than their interests because their interests would be to raise the most money possible.” I think, from a business perspective, that was a huge thing. I think it helped us as we then started Oaktree. Oaktree is next, right?
Bruce Karsh: I was asked about my relationship with Howard, which is 30 years now, and I said, “Well, you know he was my boss. He hired me.” I said, “But he was the world’s greatest boss. Just so constructive, optimistic, always encouraging, and if I made a mistake, which of course everyone makes mistakes, would never get down on me for it. Just the world’s greatest boss. I would tap dance to work every day.” That culture that he set and that we ultimately set together has permeated throughout Oaktree and has really, I think, created some real business success for us. When he came to me and said, “Hey, how about being my partner in starting Oaktree?” I said, “Sure. Are we equal partners?” He says, “Yeah-”
Howard Marks: Actually, the way I tell it, Bruce said to me … he’s not such a teddy bear as he seems. I said, “Well, how about starting our own firm,” and he said, “Sure. Come with me with proposed economics.” I thought it over for a couple days and I went to him and is aid, “Look, here’s what we do, I’ll get 40%, you’ll get 25%, and our other colleagues will split 35%.” Bruce said, “No, no we should be equal.” I thought about it for a minute and I said, “Yeah, you’re right.” That was the best decision I ever made. It’s a great lesson for business because there’s a tendency for each person to want to keep more for themselves but the truth is that’s not always the right decision. Our joint decision to be equal partners was the best decision that we ever made.
Bruce Karsh: The point I wanted to make is when he was my boss and then when we were partners we’ve enjoyed the same relationship throughout. It’s been a joy and I think it really has contributed greatly to the success of our enterprise. I mentioned that earlier that in 30 years we’ve never had an argument. We have business disagreements certainly but never an argument.
Howard Marks: It’s by hashing out our business disagreements that we get to better answers than either of us could come to by ourselves. This business about keeping more for yourself, when we went out on the road to try to convince … We had 7 billion under management when we left TCW and our hope was that we would bring it over. We went around to the TCW clientele and we tried to win them over. One of the questions was, “Well, what is your attitude towards sharing the ownership of the firm with other employees?”
I told them a story that I got from a kids book when I was reading to my son that the sun and the wind are having an argument about which is more powerful and they can’t settle it. So they say, “Well, you see that guy walking along the mountain ridge? He’s wearing a coat whichever of us can get the coat off that guy is the more powerful.” The wind blows, and blows, and blows, and blows, and blows and the stronger blows the tighter the guy holds the coat. Then the sun shines his warming rays and the guy takes a coat off. It’s really just an example that business can be an incredibly positive place and we’ve had an incredibly positive experience. Sharing, and integrity, and straightforwardness, and as Bruce says putting the client first makes it incredibly rewarding. We’ve been successful professionally and monetarily but I think both of us would say that the greatest thing has been the opportunity to be successful on the higher route.
Bruce Karsh: Definitely. I guess, when we started Oaktree Howard wrote our investment philosophy and our business principles. Sharing the fruits broadly was one of our key business principles. In fact, we were one of the very first of our type firm to really broaden the ownership of the equity. We did it after our first year in business.
Howard Marks: There were five of us who owned it when we started. At the end of the first year we made that 18. Two years later we made it 26 and a few years after that 35.
Bruce Karsh: I remember you saying at the time, “I want to have less and less of a growing pie and ultimately that’s what happened.”
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