Victor Khosla19 September 2024

Building a Global Private Credit Firm and 'Trading' Planes with Victor Khosla

1Frameworks

11Insights

Listen

Frameworks in this episode

Strategy8 steps

Special Situations Private Equity

Buy troubled businesses well, recapitalize them, and transform operations

Read →

Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster38:28

Infrastructure Is Not Safe When Debt Leaves No Margin for Error

Toll roads, ferries, and waste-to-energy assets are often treated as stable, low-risk investments. Khosla explains that financing these assets with 80–90% debt can turn even monopolistic or contract-backed infrastructure into distress when traffic falls, recession arrives, or COVID shuts activity down.

Asset stability does not neutralize capital-structure risk
Some infrastructure buyers used 80–90% debt
COVID and recessions exposed the fragility of highly leveraged assets
Infrastructure demands specialized valuation, operations, and government-relations skills

“they should be really strong, they should be good growers, and they should be steady. Eddy”
Victor Khosla · 38:42

“it's really hard to dig yourself out of eighteen ninety percent debt.”
Victor Khosla · 39:34

#infrastructure#leverage#risk#toll roads

Hot Take· 1

Hot Take49:54

The Commercial Real Estate Crisis Is Large but Not Systemic

Khosla characterizes commercial real estate distress as a slow-moving wave driven by debt maturities and lender foreclosures. He expects serious office losses and repricing in other sectors such as multifamily, but distinguishes the problem from 2008 because the banking system is not comparably leveraged.

US and European commercial mortgage debt totals roughly $8 trillion
Office represents about 22% of that debt pool
Higher cap rates can cause severe valuation declines even in stable multifamily assets
Credit losses may persist for years without becoming an economy-wide systemic crisis

“There is a tsunami working its way through parts of the commercial real estate sector.”
Victor Khosla · 49:54

“What's in the cards is just this very gnarly all these kind of credit issues which will keep biting for the next three years, and…”
Victor Khosla · 53:18

#commercial real estate#office#cap rates#systemic risk

Explainer· 3

Explainer11:36

Why Banks Sell Defaulted Loans Below Investment Value

Banks and dedicated distressed investors operate under different incentives. Regulatory reserves, balance-sheet optics, limited local knowledge, and pressure to remove nonperforming loans can make selling rational for a bank even when the market price understates eventual recovery value.

Defaulted loans force banks to recognize losses and reserve capital
Nonperforming assets can weigh on balance-sheet assessments
Foreign lenders may lack restructuring expertise or local context
A distressed buyer can accept complexity and time that a bank wants to avoid

“They have a very different set of priorities than a pure invested buyer.”
Barry Ritholtz · 13:31

“they will sell the debt they'll sell it at a price which is probably too low. But there's a very sound economic reason for the…”
Victor Khosla · 13:16

#banks#nonperforming loans#regulation#distressed investing

Explainer32:30

Why Falling Policy Rates Will Not Eliminate the Credit Squeeze

Companies that borrowed when base rates were near zero now face sharply higher interest costs and a large maturity wall. Khosla argues that modest rate cuts will help slowly, but refinancing near 8.5% remains far more burdensome than the prior 4–5% environment, especially for slow-growing old-economy companies.

All-in borrowing costs rose from roughly 5% to 10–12% for some companies
Slow-growing businesses cannot easily outgrow their debt burdens
About $2 trillion of high-yield debt was expected to mature within three and a half years
Lower short-term rates do not restore the former ultra-low long-term-rate regime

“there's almost two trillion of that five trillion of high yield matures in the next three and a half years.”
Victor Khosla · 34:15

“things will improve slowly right as short term rates kind of come in. But the problems which we've set up, they're here.”
Victor Khosla · 59:20

#interest rates#refinancing#high yield#maturities

Explainer54:07

Why Europe Is Disproportionately Important to SVP

Although Europe represents about one-quarter of the broad high-yield market, it contributes between one-third and one-half of SVP's portfolio. Slower growth, frequent regional crises, older industries, and fewer competing specialists create a recurring opportunity set for the firm.

Europe has slower economic growth and recurring political or financial disruptions
Older companies and industries produce more restructuring situations
Fewer competitors possess SVP's specialized capabilities
Strong market positioning makes Europe more attractive than its market weight suggests

“we find that Europe just gives us more frequent opportunity, right, just the way it's set up.”
Victor Khosla · 55:20

“You look at a market which is big, which gives you constant opportunity. You look at the marketplace positioning we have. You take that together…”
Victor Khosla · 56:03

#europe#distressed debt#competition#portfolio allocation

Story· 4

Story03:13

How the Modern Distressed-Loan Market Began

Khosla describes entering distressed debt when secondary loan trading barely existed. Bankruptcies such as Bloomingdale's and SCITV created motivated bank sellers, forcing early traders to develop prices for loans with little market history and few buyers.

Secondary loan trading was largely undeveloped before the early 1990s
Bankruptcies created a growing supply of unwanted bank debt
Investors had to estimate restructuring value without reliable market prices
The market expanded alongside high-yield bonds and leveraged loans

“I was there at the beginning, at the creation of a loan trading business.”
Victor Khosla · 03:21

“There was no price. You had to kind of analyze it to come up with a price, and at the same time there were very…”
Victor Khosla · 04:06

#distressed debt#loan trading#bankruptcy#market history

Story15:19

From $100 Million and One Employee to a Global Trading Desk

Merrill Lynch recruited Khosla in 1993 to build a distressed proprietary-trading business. Initial success earned additional resources, enabling expansion into London and Tokyo and growth to roughly $2 billion of proprietary capital and 40 employees by early 1998.

Merrill supplied $100 million of initial proprietary capital
Profitable execution unlocked larger teams and capital allocations
The operation expanded early into European and Japanese debt
The platform reached about $2 billion and 40 employees within five years

“So when I started at Meryl, it was one of me and they said, okay, Victor, here's one hundred million dollars.”
Victor Khosla · 16:17

“by the time I left in early ninety eight, we had about two billion dollars of proprietary capital and I had forty people four zero…”
Victor Khosla · 17:35

#merrill lynch#scaling#proprietary trading#global expansion

Story20:57

Launching SVP with One Anchor Investor During a Crash

Khosla founded Strategic Value Partners in 2001 after deciding he wanted to work for himself. Moore Capital supplied $100 million of the firm's $110 million launch capital, and the market crash reduced the planned raise but created an unusually rich distressed-investment environment.

The founding motivation was independence after years inside larger firms
Moore Capital provided approximately 90% of launch capital
The crash reduced the expected launch from $300–400 million to $110 million
The difficult fundraising environment produced attractive investment opportunities

“when I really cut through it, I really wanted to work for myself.”
Victor Khosla · 21:55

“we think we are going to launch with three four hundred million, and we launched with one hundred and ten million.”
Victor Khosla · 22:43

#entrepreneurship#svp#fundraising#market crash

Story44:55

How SVP Bought, Repaired, Leased, and Sold Distressed Aircraft

COVID collapsed flying demand and aircraft lease prices while major airlines entered bankruptcy. SVP bought debt secured by 23 aircraft, foreclosed on the planes, leased many back to LATAM, and repaired and sold four large A350s to Lufthansa, supported by its specialist aircraft-management company.

Airline bankruptcy allowed existing leases to be reset at lower prices
SVP acquired aircraft by purchasing secured debt and foreclosing
Some planes were leased back while others were repaired and sold
Deucalion supplied the technical ability to park, repair, lease, and finance aircraft

“We actually bought the debt. We've foreclosed on the planes, so now we own the planes.”
Victor Khosla · 46:55

“You don't want to do this business just as a paper investor. You need those operating skills.”
Victor Khosla · 48:50

#aircraft#aviation#covid#asset investing

Q&A· 1

Q&A1:04:43

What It Takes to Build a Career in Distressed Investing

Khosla describes a demanding entry path through investment banking, private equity, and potentially business school. Technical investing ability is only part of the requirement because modern special-situations professionals must also work credibly with management teams and portfolio companies.

Typical hires have investment-banking and private-equity experience
Business school provides a second common entry route
The profession is highly selective and workload-intensive
EQ, presence, and communication matter alongside financial analysis

“This is a tough, incredibly demanding profession. Just be ready for that.”
Victor Khosla · 1:05:58

“You've got to have the EQ You've got to have the presence and the communication skills too.”
Victor Khosla · 1:06:37

#careers#distressed investing#private equity#communication

Takeaway· 1

Takeaway1:07:09

Leadership Requires an External Circle That Challenges You

Reflecting on decades of growth, Khosla says neither his firm's eventual scale nor the leadership capabilities required were foreseeable at the start. His central lesson is to keep learning and evolving while maintaining trusted relationships inside and outside the firm that provide candid guidance and challenge.

Investing and leadership expertise develop through accumulated mistakes and adaptation
Past success can become a trap if it prevents continued evolution
Trusted outsiders can provide perspective unavailable inside the firm
Growing an organization requires parallel growth from its leader

“you've just got to constantly be ready to learn, to evolve. You can't get stuck.”
Victor Khosla · 1:08:45

“you are in an evolutionary journey to grow up to be a leader in this business.”
Victor Khosla · 1:09:17

#leadership#learning#mentorship#self-development