Howard Marks got rich on distressed debt. What lesson does he see in the crash of 1929?

Oaktree Capital Management co-founder Howard Marks made his fortune, which Forbes estimates at $2.2 billion, through deals involving high-risk distressed debt. In his new note to investors, he comments on the current tensions in private lending and gives his advice to investors.

First of all, Marks calls for understanding that the strain is not related to the entire private credit market, but only to a segment of it - direct loans to companies that are usually owned by private equity funds. This segment has been growing rapidly for several years on the back of low rates, high demand for yield and an influx of money from private equity investors. What should they remember from the experience of the 1929 stock market crash?

After the collapse of the dot-com bubble in the early 2000s, investors cooled to equities for a long time, Marks writes. When central banks cut interest rates and bonds stopped yielding attractive returns, investors began looking for new ways to make money and turned to alternative investments - most notably private equity funds.

Such funds were growing rapidly and needed capital, but after the 2008 crisis, banks became more cautious and poorer and could not lend to them in the same volume, Marks writes. Non-bank lenders began to fill this need, with direct lending becoming the fastest growing segment. Later, Marks writes, the market received another strong boost as direct-loan funds began to attract not only institutional investors but also private investors and money from retirement accounts.

Against the backdrop of low rates, direct loans looked attractive: they promised higher yields and seemed less volatile than exchange-traded instruments. But that's a misconception, Marks says: the lack of noticeable price fluctuations doesn't make such assets less risky. It's just that the credit risk in them is no longer reflected in the price. As long as the economy remained stable, the vulnerabilities of this segment were not so visible.

But when there was too much money in the market, it began to change. Yields declined, lender protections weakened, and management companies competed for the right to make new loans. Marks writes that some market participants likely loosened the requirements for borrowers and loan terms in order to invest the capital raised more quickly.

Software companies have become one of the main vulnerabilities of the direct lending market. Until the mid-2000s, lenders usually avoided such borrowers, considering them too risky. But as private equity funds grew, the market decided that software developers were suitable for debt financing: they had regular subscription revenues and a stable market position.

This has changed in recent years as artificial intelligence has challenged the sustainability of software companies. Marks writes that the tipping point came in early 2026, when powerful business process automation and programming solutions hit the market (the sell-off caused by this was dubbed the "software apocalypse" by investors). After that, anxiety around the debts of such companies spilled over into the direct lending market itself: investors recognized its old weaknesses - restrictions on withdrawals and questions about asset valuation.

Two notable bankruptcies in mid-2025 - First Brands and Tricolor - caught investors off guard: they took a closer look at how thoroughly borrowers had been vetted during the boom years, Marks writes. Then the doubts shifted to funds invested in direct loans: some investors wanted to take their money out, but they couldn't do it quickly.

At the same time, questions have arisen about the valuation of the assets themselves: if a loan does not have a market price, investors inevitably begin to question whether the fund accurately reflects its value. According to Marks, all these weaknesses have been there before, but in good times investors didn't look too closely at the details.

At the end of the note, Marks reminds us that the Wall Street bubble that ended in the great crash of 1929 developed from three factors: brokerage firms sold stocks to the general public without considering whether such investments were suitable for those investors, buyers were given too much borrowed money, increasing risk, and illiquid assets were financed with short-term loans.

That bundle is still important now, Marks believes. Private investors have come into a new and untested product, where they are offered increased returns, behind which it is easy to overlook two things: loans increase risk, and withdrawal restrictions become a problem precisely when investors try to take their money out.

Marks writes that the problem is not only in the private debt market. He believes that investors always react to new instruments in the same way: too eager to believe the promises and too late to recognize the risks. History, Marks reminds us, does not literally repeat itself, but it does rhyme. And the current problems in direct lending are one such rhyme.

This article was AI-translated and verified by a human editor