Avenue Capital Chairman, co-founder and CEO Marc Lasry spoke to Bloomberg TV’s Stephanie Ruhle on “Market Makers” this morning. Lasry is one of the largest distressed debt investors in the world, managing just under $13 billion.
Lasry told Bloomberg TV that banks will have a “very hard time” over the next five years and that he sees a “huge” amount of distressed debt investing opportunities in Europe. Lasry also says that he doesn’t believe Europe will “blow up.”
Excerpts from the interview can be found below, courtesy of “Market Makers” on Bloomberg Television.
On investing in Europe:
“The great thing about Europe today is you’ve got a huge amount of supply and very little demand. So you’re not really bumping into everybody. I think that’ll change over time.”
On whether the best opportunity is in Europe or in the United States:
“I think in Europe today, you’re getting overpaid for the risk. For us, we can buy senior debt in Europe for around 50 cents, 60 cents and here in the U.S. you’re paying 70 cents or 80 cents for it. The question is, where do you want to be investing? A lot of it goes to, if you look at investing today, the risk-free rate is 20 basis points, so where are you getting paid to take the risk? For us to make 15% to 20%, we think we can do it in Europe a lot easier than here.”
On the lack of liquidity in the markets:
“We believe the liquidity will occur over the next two or three years, so if you’re buying something you believe you got at a great price, you’ll get paid out a much higher price two or three years from now. There’s a huge discount…people are paying a huge premium today to have liquidity. So, if you can invest in things which aren’t liquid, you’re going to get overpaid.”
On whether investing in illiquid products today will lead to the same profits that investors experienced in ’08:
“I think things are not as bad. It’s exactly as you said. But the problem you have today, is everybody’s worried about the European risk. Switch it around. What do you believe the risk of Europe blowing up is? Do you believe it’s 10%, 20%, 30%, 40%? Do you believe that Greece will pull out of the euro and do you believe that if that happens, the euro itself falls apart? What’s that risk?”
“If you believe [Europe will blow up], you shouldn’t be an investor there. That’s really it. Because if you really believe that is going to happen, your ability to invest in Europe, you will be able to buy at much lower prices a year or two years from now. We don’t believe that Europe will blow up. I think there’ll be a number of issues but we think over time things will work themselves out, and because of that you’re able to buy that debt – because everybody is worried about it – so you’re able to buy it at a much lower price.”
On where Avenue Capital has been investing:
“We have been investing the capital about 5% a month. The reason for that if we think over the next year or year and a half, there’s a huge amount of opportunities and the question is, is the better time to invest three months ago or three months from now? Our view is to invest over time. And we think we’ll just average in the prices.”
On the opportunities:
“I think there’s phenomenal opportunities, more than enough – that’s not the issue. The issue is, is now the right time? That was the same question three months ago, the same question a year ago and it’s going to be the same question six months from now. What you have in Europe today, over and over, is just headline risk. Constantly every week, every month there’s a new headline.”
“Time will take care of everything. We try not to invest on what’s happening today but over what will occur over the next couple of years. So, that’s why we keep investing about 5% a month.”
“We have a fund where investors give us time to invest and in Europe, you need that. In Europe, everybody understands you do need time because it’s over time you’ll end up making money. I think Europe today, exceptionally hard to make money on a daily basis or weekly basis. You can’t trade on what’s going on.”
On the competitive environment for smaller funds:
“I think it’s very hard for the small guys today, because really what you can invest if you’re small is equities, and there you have a lot of volatility and a lot of risk. What we’re investing in is senior debt so we think we’re able to invest in companies at three or four times, so we think we’ve got our downside protected and a lot of upside.”
“We have 25 investment professionals on our team…I think you need to have folks who are there and who are able to do it and you need to have access to different debt. For us, the ability to buy senior secured debt at a huge discount, that is an extreme positive. Very few people are able to do that.”
On the importance of becoming a creditor:
“It’s extremely important. We want to be a senior creditor. Today in Europe, it’s very hard to be an equity player. Because in Europe if everything works out, it’s great and you bought cheap equity but if things don’t work out you’re going to lose quite a bit of money. But if you are a senior creditor, you’ve got your downside protector.”
On whether Lasry worried about Europe in the short-term:
“It matters but our long-term view is over the course of the next two or three years, everything is going to work itself out, and whether it’s George Soros or it’s somebody else, which you constantly keep hearing every week and every month that Europe has problems. We all know that. I think it’ll work out. If you believe that and you invest, you’ll do well.”
On whether the big banks should be broken up:
“I don’t know if [the big banks] should be broken up….I think at the end of the day, the shareholders will end up making the decisions. If that stock stays flat for five or 10 years, you’ll find the banks will have to do something to bring up the value. Right now everybody believes that the problems have been much more because of what’s happening in the economy. So everybody’s giving the CEOs the benefit of the doubt.”
On whether Citigroup and other banks are running their businesses for clients or for shareholders:
“I think they are running it for shareholders, but the difference is they just have more time. So their shareholders will give them a lot more time….Because in the environment that we’re in, the larger you are, the more everybody believes it’s more complicated.”
“The bank stocks are trading down, but you still have other people coming in and buying those stocks every day. The more the stock goes down, the more pressure on the CEO and the more pressure the board will have, so I think over time you’ll find some of this happening but it may take five years or and little bit longer.”
On bank profits and when banks will start making money:
“I think for banks it’s very hard. For the next five years they’re going to have a very difficult time. If you look back, the reasons banks made a lot of money is they used a lot of leverage and now that they can’t use the leverage, they’re not going to be able to make as much money. So it’s very hard.”
On the impact of the Volcker rule on boutique banks:
“I think [the boutique banks] are going to have an easier time because it used to be that you needed to have capital to own the product…today, that’s less and less. So, I think if you are a boutique firm you’re going to have an easier time getting started and an easier time competing against the big banks.”
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