How Oaktree's Head of Sourcing Finds the Next Great Deal

Episode Summary

Executive Summary: The episode explains how private credit has evolved into a major capital-allocation business, using Oak Tree’s sourcing and origination model as a case study. Millwood Hobbs describes how relationships, speed, structure, and trust help firms get the “first call” on deals, negotiate terms, and compete with banks and public markets while managing credit risk.

Main Topics: Private credit’s rise and Oak Tree’s sourcing model (Priority: 5/5): Hobbs explains why Oak Tree created a dedicated sourcing and originations team in 2020: to act as a firmwide capital-solutions provider, develop relationships, and ensure deals are seen across the platform rather than dying in one strategy. How leveraged finance and private credit changed after Dodd-Frank (Priority: 5/5): The conversation traces the migration of financing activity from banks to private credit as post-crisis regulations reduced bank leverage and balance-sheet capacity, making banks less able to absorb risk. The mechanics of deal origination and negotiation (Priority: 5/5): Hobbs details the process from sponsor outreach and conflicts checks to diligence, committee review, and term negotiation, emphasizing that the goal is a workable structure rather than complete victory for either side. Relationships, regional sourcing, and being the 'first call' (Priority: 4/5): A major theme is that success in origination depends on trust, local market knowledge, and being someone sponsors want to keep calling. Hobbs describes a hub-and-spoke model and the value of regional hires. Risk selection, diligence, and avoiding losers (Priority: 4/5): The discussion frames credit as avoiding bad outcomes rather than hunting for upside, with heavy focus on management quality, accounting systems, fraud indicators, and understanding business-specific weaknesses. Documentation, covenants, and lender protections (Priority: 4/5): The guests discuss how legal documentation matters for governance and creditor protections, even if it cannot save a fundamentally bad deal. Private credit has increasingly emphasized tighter control over collateral leakage and structural risk. Public vs. private market arbitrage and refinancing (Priority: 3/5): Hobbs explains why some private credit deals later refinance in the public market: lower cost of capital and greater flexibility. He argues this reflects a healthy ecosystem rather than a loss for private credit.

Key Arguments: Private credit grew because banks lost balance-sheet capacity after Dodd-Frank, creating room for nonbank lenders to hold risk directly. The key competitive advantage in origination is not just pricing, but being the trusted first and last call for sponsors and issuers. A successful deal is one where both sides are only mildly dissatisfied; the relationship must survive even when a deal is declined. Credit investing is fundamentally about avoiding losers and detecting weaknesses in diligence, especially in accounting, systems integration, and management quality. Documents and covenants matter, but they are secondary to choosing the right asset; the structure cannot rescue a poor underwriting decision. Public and private markets are complementary; refinancing into the public market can be a sign that the private-credit bridge worked as intended. Regional and personal relationships matter because deals are often sourced through local trust networks, not just centralized New York decision-making.

Data Points: Length of Bloomberg Stock Movers reports: 5 minutes or less - Promotional intro describing the new Bloomberg Stock Movers podcast product. Oaktree founding year: 1995 - Hobbs notes Oak Tree was founded in 1995. Oaktree assets under management: a couple hundred billion dollars - Hobbs describes the scale of Oak Tree’s business when explaining the originations group. Year Hobbs started at Oaktree: 2013 - He says he first joined Oak Tree in 2013. Year the sourcing/originations group was created: 2020 - He says the group was formed in 2020. Pre-Dodd-Frank bank leverage: roughly 30x - Hobbs contrasts pre-crisis bank leverage with post-crisis levels. Post-Dodd-Frank bank leverage: roughly 15x - He says banks were levered about 15 times after the crisis. 2007 LIBOR level: 5% - Used to illustrate the all-in cost of leveraged loans before rates collapsed. Pre-crisis deal spread examples: 200 to 250 bps - Hobbs cites typical spreads in the 2007 era. Higher-rate-era deal spread examples: 450 to 600 bps - He says spreads widened materially in the low-rate period. Private credit market size in 2009: about $300 billion - Hobbs describes the early size of the private credit market. Private credit market current size: $1.7 to $1.8 trillion - He gives the present size of the market. Projected private credit market size: about $3 trillion - He says the market could grow to roughly this level. Private equity dry powder: $3 trillion - He cites the amount of dry powder as evidence of continued deal supply. Public vs. private review time: 2 to 3 days - Hobbs says public-market financing documents are often reviewed in a very short window. Deal size Oak Tree often targets: $300 million to $500 million checks - He says the firm typically writes large checks on major deals. One deal’s debt pricing example: SOFR + 400 with 150 bps flex to SOFR 550 - Used to explain how bank flex and private execution pricing interact. A specific hung deal purchase: $50 million at 90 - Hobbs describes buying a hung position at a deep discount.

Pivotal Quotes: "Everyone has a lot of money, but how do you get the first call and the last call?" — Millwood Hobbs: He explains the purpose of Oak Tree’s originations team and relationship-driven sourcing. "We're in the storage business. The banks are in the moving business." — Millwood Hobbs: He contrasts private credit’s role in holding risk with banks’ role in distributing it. "The goal is no one really should win. Both parties should be just mildly annoyed." — Millwood Hobbs: He describes the ideal negotiation outcome in finance and dealmaking.

Implications: Private credit now competes on relationships, execution, and risk selection as much as price. As banks retreat and public refinancing remains available, listeners should expect a more segmented, relationship-driven credit market with continuing growth and tighter structural protections.