Victor Khosla, founder and chief investment officer of Strategic Value Partners (SVP), said the credit market is facing significant pressure.
Khosla's outlook suggests that volatility in the equity markets is beginning to leak into debt markets. This transition could signal a broader systemic risk if private credit continues to absorb the stress from falling software valuations.
Speaking at the Milken Institute Global Conference in Beverly Hills, California, Khosla said that concerns regarding software stocks are warranted [1]. He said the recent sell-off in these stocks is creating stress within private credit markets, which in turn increases the risk of contagion [2].
Khosla, who manages roughly $20 billion in assets [3], said that the current market conditions are unsustainable. He said that credit spreads should widen substantially from this point [4]. The widening of these spreads typically indicates that investors require higher returns to compensate for increased risk of default.
Regarding the long-term stability of the current credit environment, Khosla offered a stark prediction. He said, "One day it'll really buckle" [5]. This warning underscores the fragility he perceives in the private credit sector as it grapples with the fallout from the software sector's decline.
Strategic Value Partners focuses on distressed debt and opportunistic investing. Khosla's perspective reflects a view that the market has not yet fully priced in the risks associated with the current credit cycle, a gap that he expects will close as spreads expand [4].
“"One day it'll really buckle."”
The warning from a manager of $20 billion in assets suggests that the 'hidden' risks in private credit—where loans are not traded publicly—may be surfacing. If software companies, which often rely on private funding, cannot sustain their valuations, the lenders holding that debt may face significant losses, potentially triggering a wider credit crunch across other sectors.
